By Tamra Lee Ulmer
It is not a beautiful thing nor a celebratory event to have a debt. It can be heavy and worst fact of all, it is a burden, a beast taking its ride on your shoulders. Warning, live with the debt for so long and you will start experiencing a major stoop on your shoulders. You will grow weary and even though you are young, you will appear so old. That is the major effect why sometimes I fear to be on the debt brackets.
Being free from the debt is surely the best financial freedom that one can get but that starts the moment you let go off this deriding beast. And even though I have searched for the best advice to set myself free from this beast for so long, truth is, I have never come across a better one. However when I think about this issue, one question keeps coming back…Can someone be really free from a debt? Theoretically speaking, YES! Practically….
Is It So Bad? To Be In A Debt
Any debt, however big or however small it may be has its own uses. Even the professional field players in real estate industry understand that debt has its own value of leverage. Generally, people do not understand that there are two kinds of debt, there is the good debt and the bad debt. Difference is, the bad will make you poorer and when you get your monthly income, it swoops almost everything leaving you with absolutely nothing to be proud of. Credit cards serve the best example of the bad debts.
Mortgage on rentals is another case but on a different dimension, this is a category of good DEBT it makes you richer and well off financially with an assurance that at the end of every month, there is a steady cash flow in your account. It serves like a kind of a passive income.
Therefore, to answer the question, is it so bad to be in a debt? That depends on whether it is a good or a bad debt.
Tackling Your Debt
There are important steps that you need to be cautious of when tackling any debt. Basically, this serves a stepping stone to start your wealth accumulation strategy.
Step One; Have an Automated Budget
Have you ever wondered why most of the debts fail despite you having good intentions? Well, the simple reason for that is, you’ve been over budgeting a common problem that not only you are facing it, but most people all around the globe.
Accompanied by the fact that most people set the budget out of willpower and leaving it up to- do what’s right-without any intention to overspend.
You want your budget to work? Not this month only but every month, then you have to remove failure as an option. Real wealth accumulation starts the moment when you take away your “Possible” ability to overspend.
To effectively achieve this, you need to calculate your monthly debt payments. That’s the first integral position you have to play towards settling your debt. If possible, set aside an additional amount to the debt, the two will serve as your investment towards settling your debt.
Will this work with your credit card on board? Ooh NO! It won’t, therefore, you have to leave your credit card at home to warm your drawer. It is as simple as that. Investing in real estate requires commitment and sacrifice.
Step Two; Higher-Interest Debts- You Have To Prioritize Them
Do you have a savings account? If not, you need to get one. But if you do, I am quite sure that money is flowing safely into it. So, what do you do with this money- in your savings account? The best way to use this money is to start off by paying higher-interest debts which for most people is their credit card debt. To avoid confusion, the payments to the higher-interest debts should be automated. Any time cash flows in to your saving account, part of it should cater for your higher-interest debts.
Perhaps, you might be wondering, will your savings account ever have a “pretty” balance? Well for now, that should not be a primary concern, as a matter of fact, you should have a permanent balance of less than a dollar.
The good thing with this, though many people may not see the positive effect in it, you will be putting a fatal dent in you debt.
Step Three; It Is Time to Accumulate Your Payments
Before you even realize it, you’ll have already paid your credit card debts. Perhaps, all you have left right now are some of the minor debts. After paying the higher-interest debts, next is to use the same formula as we have used before to pay up the next higher-interest debts.
You will realize that with the second one, you will be able to pay it up very fast since there is more money flowing into your savings account and less going out. The whole process is recurrent until you have paid every last of your debt. The process is made simpler because with every debt you’ll be able to concentrate more and more money towards each remaining debt.
Step Four; When To Start Wealth Accumulation and When To Stop Debt Payments
This is the step towards stepping on higher savings platform. Not all debts created are equal and therefore, for a fact, some are worth keeping. However, before starting to accumulate your wealth, you should know that all credit card debts should have been paid for.
Real estate is a market for consideration when it comes to wealth accumulation since it can earn you substantially higher returns for experienced investors. However, at this point, returns on investments are not certain but a mere projection. One thing is for sure, paying off the debts provides you with absolute certainty a good return on investment.
I have worked with people and helped them to solve their debt issues and one thing I have realized is that after paying the debt (expensive debts) most of them cut their operating saving rates, something I strongly advise people not to follow, you shouldn’t cut off the rate, rather start investing with the same rate instead of paying the debt.
Let’s Develop a Defensive Cycle and an Acquisition Cycle
Do not be lied to, even the good debts have a downside. Look at this, you’ve borrowed money and decided to buy rental property, the fact is, from the day of acquisition of the loan, it will start eating off your cash flow. As a strong means to acquisition, think of a leverage, paying off that debt as a means to multiply your passive income and basically, never forget, if you are borrowing to acquire, then the second step is to pay off the debt.
One thing you’ll have realized is that real estate cycles are a bit longer and slower and as an investor, you may decide it best to add more rentals to your profile or simply pay down the mortgages on your already existing properties.
As a defensive mechanism investment option, it is best to pay off your mortgages one at a particular time, like we did with your personal debts.
But by the end of it all, you’ll have saved a lot and start on a beautiful savings plan and real estate investment serves the best example.