A typical
family will spend approximately sixty percent of their monthly
income servicing debt. This makes debt the number one financial problem for families irrespective of whether they are high or low income earners.
The more money we are encouraged to borrow, the more interest we end up paying
and the less disposable income we have at the end of each month. By falling into
debt, many trivial personal problems can become insurmountable personal
problems as the amount of debt begins to escalate. It is not uncommon to see
couples divorcing one another because of debt. Tragically, many have also taken
their own lives because they couldn’t see their way out of their mounting debt.
If we have firsthand knowledge of people who are close to us and who have had
their lives affected adversely by debt, we are not likely to be convinced that
embracing debt is the pathway to financial riches even if there is other
evidence to show that it works very well.
At various times in our lives many of us may have fallen
into the debt trap and many of us may know how difficult it is to get out of
debt and to become debt free. In fact, there are so many people who cannot
extricate themselves from their debts. These debts just grow larger and larger
as their monthly income (their financial means) is exceeded by their monthly
expenses. I am constantly asked by my readers “How do I get out of this debt
spiral?” This is what this blog is about. But it will not only look at your
financial well being, because there are other factors at work that often keep
us psychologically trapped in the financial Gridlock. The financial Gridlock is
that place that we find a significant portion of the population (around 95% of
us) trapped in the so-called ‘rat-race’.
These psychological factors would include our perceptions of our self
worth, our expectations, our personal attitude, our passion and many other
factors that will be discussed in this book.
Now I
understand that not everyone wants to become or is ready to become a business
owner or a property magnate which would usually mean that the individual must embrace
debt somewhere along the pathway to financial freedom as a means to achieving financial
freedom faster. As those of you who may have read my books ‘Financially Free”
and ‘Create an Income for Life’ will know, I am big on leverage. Getting
yourself into good debt to acquire
assets that will produce a higher monthly income than those assets would cost you
in monthly expenses is called gearing. This entails using other people’s time
and other people’s money to accelerate your wealth far faster than you could by
only using your own time and money. You will appreciate that if you have 24
hours in the day and you never sleep, you could only exchange these 24 hours
for a fee, a wage or salary or similar. But you only have 24 hours of your time
to exchange. Leverage entails you employing other people to assist you by giving
up their hours in exchange for a fee, a wage or salary. In this way you can
push past only having 24 billable hours in a day depending on how many people
you employ. By employing people you would have to become an entrepreneur at some
stage which would also entail registering your business as a legal entity, with
all the reporting requirements of Pay as you Go (PAYG), GST, etc.
Similarly,
with property investments, it is much easier to go to a mortgagor and obtain
finance to buy a property for say $500.000 than it would be for you to save up
this $500.000 especially if 60% of your salary is being used for debt
repayments. Indeed, it might take you several years of major sacrifice to save
up $500.000. It is far easier to acquire this $500.000 property through a
mortgagor in which case the property could be transferred into your name after
a payment of $10.000 is made to have that property transferred into your own
name. This $10.000 would represent your ‘once-off’ capital investment amount as
the mortgagor would have financed the rest. Provided the rental you receive is
covering the monthly bond interest costs and the levies or rates and
maintenance that you incur on the property, any growth in the value of the
property would be leveraged. Hence, if your property’s value increased by 10%
from $500.000 to $550.000 your investment value would have increased by $40.000
from $10.000 to $50.000; in other words by 400%. That’s some return on
investment!
Now there are
a whole bunch of rules that the investor would need to follow to make all this
work and these rules are contained in my books ‘Financially Free” and ‘Create
an Income for Life’ so I’m not going to go into these rules now because this
blog is not about creating wealth through leverage. No, this blog is about
creating wealth without leverage which is harder to do but as some might argue
can be done with much less risk. So when we say we want to create wealth with
less risk, we are saying we want to create wealth without embracing debt as an
entrepreneur or as a property investor.
You may be in
debt right now, and I’m assuming you are, otherwise you must have other reasons
for acquiring and reading this blog. Your current debts might include your
mortgage, your motor vehicle, speed boat, caravan, motor bike, credit cards, bank
overdraft, loans from your parents, clothing accounts, personal loans from
micro-lenders, medical bills, etc.
Some of the key questions
I will cover are:
·
“How do you break this cycle of never ending debt and become
debt-free?”
·
“Is it possible to live debt free?”
·
“How do I begin?”
·
“Does this process depend on my monthly income?”
·
“Do I have to compromise and make sacrifices?”
·
“Will it hurt?”
·
“Will it improve my marriage?”
·
“Can I do it on my own or do I need help?”
·
“How long will it take to become debt free?”
I have good and bad news.
First the bad news; it’s going to hurt. You may have some classical ‘lemons’
that are stopping you from getting out of debt. Some of these items appear on
your ‘list of assets’ and you probably will not like my advice in respect of
these ‘assets’. But you might also need
to face up to the fact that YOU, YOURSELF are likely to be the major problem in
this equation. After all, who keeps getting YOU into debt? I accept your spouse may be partly to blame.
I’ll get to this later.
The really good news is that you can live debt-free if you
follow the plan I have set out for you in this blog. You could significantly
improve your life in the very near future if you are willing to break free from
debt and only buy what you can afford to pay cash for. Forget trying to impress
your neighbours and family. The truth is they are probably among the 95% who
are destined to be broke at retirement age anyway. Some may never be able to
retire, ever.
For many of you the challenge will be to ‘grow up’ and
accept responsibility for your own actions, especially for some of your poor
past financial decisions that threaten to keep you financially gridlocked and
hence financially poor. Your solution might mean that you have to forego the
current human desire of instant gratification that we have come to expect. This
‘instant gratification’ condition has been encouraged by the advertisers in all
forms of media. You need to remember that this advertising is undertaken to
make suppliers of goods and services rich at your expense. Sometimes you need
to learn to say no. Sometimes you might only need to delay this gratification
until later when it is affordable. By
affordable, I mean that you can pay cash for it rather than brandishing and
extending the limits of your credit cards!
If you take responsibility and commit yourself to the
process of living debt free then you will be able to diminish your debt and
turn your life around. It’s not your debts that control your life but your
creditors to whom you owe money. When you are debt free, you get to take back
control of your life!
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