In Robert Kiyosaki’s book, “Rich Dad, Poor Dad”, he talks about good debt and bad debt. Good debt is any type of debt that purchases an asset that puts money in your pocket every month. Bad debt is any type of debt that purchases a product that takes money out of your pocket every month. For example, if you purchase a two family home with a mortgage, but at the end of every month the rental income pays all the debt and leaves you with a profit that is good debt. Conversely, if you go out and buy a car with a loan from your bank, that is bad debt.
In order to become financially free, the first place you have to start is by eliminating your debt. Once you eliminate your debt, you can begin to invest a majority of your income into assets that put money into your pocket each month. Michelle, author of the blog “Making Sense of Cents”, talks about the amount of money you should be putting into savings or investing each month. She suggests a significantly large portion of your paycheck should go to savings and I agree. Many readers will be shocked when we suggest half your paycheck should go to savings. However, if you break down your budget for the month, and you see that a majority of your budget goes to servicing debt, then it won’t be difficult to save that amount once you free yourself of that debt. If you were to eliminate all of your bad debt, how much money would you need from your paycheck to pay the necessities? After paying those, how much would you have left? It could be as much as 50% if not more.
Where do you start?
First, you need to know where you are spending all your money. List out all of your debt and create a budget. Don’t get overly technical; the goal here is to know where you spend your money Don’t worry about taxes yet. Once you know your cash flow situation, list all your debt in order by interest rate, and enter the minimum monthly payment for each debt. There are spreadsheets you can Google to help you. This will not only help you manage your debt, but it will pinpoint the date you will be debt free. After you have entered all the information in the spreadsheet, imagine what life will be like without any of that debt. Once you start the process, you will see each month how much less you worry about money. Once you are debt free and a majority of your paycheck is going into savings, you won’t even think about money except when you are looking to make a big purchase.
There are several programs out there that will help you get out of debt. Dave Ramsey has a program my mentor uses and it works. It isn’t difficult to do the calculations and figure out how to get out of debt. Typically the first habit you need to change is how you spend money. If you are one to walk into a store and buy something you see for the first time, we refer to that as impulse shopping. Impulse shopping can get you into serious trouble and you need to work on stopping this bad habit. Regardless of the price tag, when you see something you want, don’t buy it unless you can afford to pay cash for it. A rule of thumb I like to use is that I have to have twice the amount in my savings account in order to purchase it.
As time goes on, once you are debt free, your world will open up to many new opportunities. You will begin to appreciate your financial health and you will find that you won’t want to spend your hard earned income on just anything. At this point, you will be able to adopt a new policy we at JPCashflow are working on and that is to spend a majority of your income on assets that will generate income. For example, suppose you are looking to purchase a rental property and you need $20,000 to put down. When you have no debt and you have been able to save a large portion of your income, this number will not seem so large. That is easy to achieve in one year once you eliminate all of your bad debt. We will always have expenses, such as electric bills, food, gas for our cars and so forth; however, you will find that these are small in comparison to your bad debt. To change your bad habits and be able to pay off all your debt, you are going to have to change your lifestyle, but eventually you will replace it with a much better lifestyle. Using the example above, if you utilized some of your savings to purchase assets that generate income; it won’t take long before you are truly wealthy. You will have acquired enough assets that generate a positive monthly income that covers all your expenses. That would mean you wouldn’t have to go to work anymore, or the income earned from your job would be all savings. Can you picture what your life would be like? Being debt free allows you to do so much more in life and it is a possibility for anyone. Just understand that it won’t happen overnight and that it will be difficult at first. However, the payoff for your hard work will be more than money can buy. It’s a strange feeling to wake up one day and get a little nervous that you didn’t do any of your monthly bills, only to realize, you don’t have any. If you want to be financially free, you must be debt free!
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