| Whenever the topic of finance is discussed, it is | | | | creditors, attempt to lower your interest rates. |
| important to note that everyone's situation is | | | | This involves calling your creditors and asking for |
| different and that financial advice should be | | | | lower rates, transferring balances to lower |
| tailored to an individual's particular circumstances | | | | interest rate credit cards, or more aggressive |
| with the help of a professional advisor. | | | | tactics such as home refinancing, to turn liabilities |
| Everyday our mailboxes are flooded with | | | | into lower interest-bearing, tax-deductible debt. |
| advertisements, catalogues, and "pre-approved" | | | | Next, create a realistic budget and eliminate |
| credit card offers hoping to deplete our savings | | | | unnecessary expenses. Take any free cash flow |
| and draw us deeper into debt. In the latest | | | | and use it to pay more toward your highest |
| Survey of Consumer Finances conducted by the | | | | interest, non-tax deductible debt. On all other |
| Federal Reserve, concern has been expressed | | | | debt, pay only the minimum. Do this every month |
| that the rising level of debt may become | | | | until that particular high-rate debt is paid off. Once |
| "excessively burdensome to families." Similarly, the | | | | that account has a zero balance, use the money |
| American Bankruptcy Institute reports personal | | | | you normally would have expended on your |
| bankruptcies are near an all-time high and in 2004, | | | | monthly debt payment, plus any free cash flow, |
| more than 1.5 million were declared. | | | | to pay toward your next highest interest rate |
| Debt is a scary place to be; it is emotionally and | | | | debt. Continue this process until all your debt is |
| financially threatening. It limits our ability to meet | | | | paid off. |
| daily expenses, invest for the future, and creates | | | | It is important to note that if you have savings, |
| a long chain of financial difficulties. The strains put | | | | you should use it to pay down your highest |
| on our relationships due to these financial | | | | interest rate non-tax deductible debt. It makes |
| pressures make it imperative that we find ways | | | | more sense to pay off debt at interest rates of |
| to effectively deal with debt. Like all problems, it | | | | 12-18%, than earn less than 2% interest in a |
| will dangerously compound if we ignore it, so we | | | | money market or savings account. Also, |
| must confront it head on to positively change the | | | | remember the interest rate on your debt is |
| condition of our lives. | | | | equivalent to the after-tax return on an |
| Permanently resolving our debt situation involves | | | | investment. So, if you are not outperforming on |
| three things: gaining an awareness of the different | | | | an after-tax basis the interest rate being charged |
| types of debt, understanding the psychology and | | | | on your debt, it is more advantageous to pay off |
| circumstances that led to the current situation, | | | | your debt. |
| and devising an effective debt reduction, savings, | | | | The second aspect of your debt transformation |
| and wealth acquisition plan. | | | | involves investing. In order to effectively manage |
| Put simply, debt falls into two categories: | | | | and overcome your debt, make investments that |
| investment debt and consumer debt | | | | have a return that outweighs the interest rate on |
| Investment debt is an obligation that one takes | | | | your obligation or that generates cash flow in |
| on in order free up funds, generate cash flow, | | | | excess of your monthly debt payment. Because |
| and build wealth. It is the leverage of other | | | | investing can be rather complicated and volatile, it |
| people's money (OPM) to purchase assets that | | | | is important that you have as much education as |
| substantially increase in value or produce income. | | | | possible in this area. Your first thought may be, "I |
| A few examples of investment debt include | | | | don't know much about investing, and I don't have |
| mortgages for rental properties, business loans, | | | | the time to learn." Well, you must decide if you |
| and stock margin loans. The best forms of | | | | are willing to make the time, or choose to work |
| investment debt produce positive cash flow. | | | | the rest of your life to pay off your financial |
| When debt produces positive cash flow, it | | | | commitments. Budgeting alone is a much slower |
| generates more money to invest and does not | | | | solution, so you would be wise to develop a |
| reduce your existing income. | | | | mastery of investing or partner with people who |
| Consumer debt is a financial commitment used to | | | | possess such knowledge in order to expedite the |
| purchase items that have no substantial resale | | | | process. Seeking the advice of competent |
| value or depreciate after they are bought. | | | | professionals is a sound way to shorten your |
| Examples of consumer debt include: automobile | | | | learning curve and prevent costly mistakes. If you |
| loans, personal loans, personal lines of credit, credit | | | | encounter an emergency during this period, you |
| card debt, and more. It can be wise to buy an | | | | may use your credit accounts as your cash |
| item using consumer credit, if the after-tax return | | | | reserve. |
| on your investments is greater than the interest | | | | There are many strategies for investing your |
| rate on your debt. With this approach, you have | | | | way out of debt. Some include starting or |
| more money available to invest at a higher rate | | | | investing in businesses and buying assets that |
| of return. This is a riskier strategy and should only | | | | appreciate in value or generate cash flow. The |
| be employed by sophisticated investors. It is also | | | | issue becomes, how do you take advantage of |
| important to note that one person's consumer | | | | opportunities with little cash and poor credit? The |
| debt is another's investment debt. The money | | | | answer to most questions of lack is through |
| one expends servicing debt goes to help another | | | | partnerships. Though we may not view ourselves |
| build their wealth. Over time, your goal should be | | | | as entrepreneurs, we all have viable business |
| to turn the tables. | | | | ideas inside us. It is up to us to develop those |
| The Psychology of Debt | | | | ideas and approach enough people until we find |
| To change your financial condition, you must | | | | partners who believe in us and are willing to |
| understand the factors that have led you into | | | | finance or actively participate in our venture. For |
| debt and position yourself so that you will never | | | | those who like the idea of owning their own |
| return to similar circumstances. Common | | | | business, but not the hard work it takes to |
| expenditures leading to excessive debt include | | | | develop one from scratch, there are a number of |
| automobile purchases, education expenses, | | | | direct sales organizations that will provide you with |
| vacations, gambling, medical expenses, | | | | business opportunities for low startup up costs |
| unsuccessful business ventures, and the frequent | | | | and lots of guidance. All of these add up to ways |
| purchases of consumer goods and services. | | | | of generating excess cash flow to help pay off |
| In general, we must become better planners and | | | | your debts and build wealth. |
| begin to stop thinking of debt as the first solution | | | | The mentality that created your current financial |
| to our problems. If our debt situation stems from | | | | situation will not suffice to solve your debt issues. |
| overspending, we must address the emotional | | | | For most, the financial difficulties we face have |
| state that drives us to live beyond our means. If | | | | taken years to develop, so they will not be solved |
| it is due to unsuccessful business ventures, we | | | | overnight. As much as we would like to believe, |
| must learn to move our enterprise forward | | | | there are no incantations or magical formulas for |
| through stock offerings, or creative means like | | | | ridding ourselves of financial obligations, only the |
| partnerships and the bartering of services. If it is | | | | disciplined strategies of sound money |
| from necessary expenditures or emergencies | | | | management and investing. We must remember |
| then we must develop the discipline to create | | | | to deal with the issues that drove us into debt |
| special savings accounts and cash reserves. Once | | | | before attempting to implement any strategy. If |
| we change the way we think about debt, we are | | | | we do not start with our own thought process, |
| prepared to implement life-changing solutions. | | | | any plan of action will not be effective in the |
| The most expedient way to deal with debt is | | | | long-run and may put us in a worse financial |
| through a two-tier approach of budgeting and | | | | position. To transform our lives, we must change |
| investing. | | | | the way we think about finance and obligations. |
| Begin your financial turnaround by writing down | | | | On the occasions that we do use debt, it should |
| the monthly payment, interest rate, and total | | | | be for the purpose of buying assets, not |
| amount owed for each of your debts. Once you | | | | consumer goods that depreciate or have no value. |
| know where you stand with each of your | | | | |