The guaranteed investment “There are zero grantees in life and in the world of investing there are even less.” I have no idea where that quote came from but I always found it amusing. Especially since I found a way to make a guaranteed rate of return. There is absolutely no risk. In fact you lose by not acting on this lesson. In fact by not acting on this information everything else that I teach you will be in vain.
I’m talking about debt. Now there are some of you who have heard this old spiel before but bear with me. I intend to add on it and maybe show some options that you haven’t thought of before.
I know many here have read some of Robert Kiyosaki’s books. “Rich Dad Poor Dad” has always been a favorite of mine. In his writings Mr. Kiyosaki explains the difference between good debt and bad debt. Good debt is used to buy assets that will make you money. Bad debt is used to buy stuff and will fiscally bleed you to death.
Our goal is to get rid of the bad debt. It is imperative that we start out with this before we start to sink every spare penny into the awesome companies that we find. Now this will require a shift in our perception of making money. Making money in stocks just sounds a lot sexier than paying off your consumer debt. But think hard about that. But if you pay down a credit card bill that is charging you 22%; that is the same as making 22% in your investments. Now lets suppose we take those same dollars and make our minimum 16% gain in the market. You wind up with a net loss of 6% before taxes. This part on investing is literally a no-brainer. There is no financial analysis involved. You don’t have to track any complex numbers. Your investment return doesn’t even go down. The only down side to this issue is that there is a limit to the amount of money that you can invest…your current balance due on your loans.
OK you are motivated to do something about this. But where to start? If you are like most people out there with debt problems, there are just so many and with the finance charges you don’t think you will ever be able to pay everything off soon. The truth is you’re right. If you just make the minimum payments, even a $1000 retail account can take 5 years and another $400 in interest charges to pay off; and that is if everything goes according to plan. If you are late on a payment interest charges, penalty fees can crush your wallet so fast that the picture of Lincoln on your last five spot would cry. Luckily Through the miracle of compound interest you can reverse the cycle. You can actually turn the tables around and let the interest work for you. In fact it can work so well you could easily look at being debt free in about 4-5 years. This includes your car loan, business loan and mortgage (yes even a 30 year loan).
A quick note…this debt program involves motivation and discipline. Before it can work, you need to have enough of a handle on your finances to incur no more debt; This includes “emergencies” (I will explain how to address emergencies later). If you cannot resolve to not incur any more debt during this time or you have one or more “emergencies” in a month, you might have a bigger problem. Please, if this is the case, seek professional help. Credit counselors can help. But beware, some are merely services that will charge you and not really help you in the long run. Run the numbers when and after you talk with them. Be sure that your situation is addressed as it should be. You are the only one that can look out for you. Debtors Anonymous is also another source for help. They model the 12 step program to address the emotional issues of money. I would venture a guess that they saved many marriages that were strained due to finances. Please do not be ashamed to ask for help. The majority of people are just as bad if not worse off than you. I have met people that made me feel like dirt for complaining about my own problems after I heard about theirs. If you need it, get help! If you think you need it, talk to someone and make your decision. If you tried and failed, ask for help. You might be surprised. Weather you need to seek help or not you can still use this program.
Alright, enough preaching, lets get to the nitty-gritty. First we need to get organized. Get every piece of paper and receipt of every debt you owe. Mortgage, bank loans, credit cards, friends that you owe lunch money to…everything! Now either write on a sheet of paper or run on a spread sheet the pertinent information of each lender and your account with them. This information should include:
Lender’s name
Your account number with them
Contact phone number
Person responsible for your account (try to deal with the same person every time)
Balance due
Minimum monthly payment
Interest rate
Length of loan (not always possible for some unsecured loans)
Now I cannot stress having this critical information on all of your debts especially having a single point of contact, one person that you deal with from that institution. If, in your dealings, you find someone that is particularly helpful and pleasant over the phone or in person, get their name and extension. Some times there is no choice. Some poor sap who likes to kick cats in his spare time might get assigned your account. Usually you can request another rep assigned to your account. Always be polite as possible but stand your ground and never put up with abuse or rudeness.
If you can’t find the information call the institution and ask for the information. Many times this is the case where you let an account go unattended for a period of time and lending institution charges it off as an uncollectible debt. It is a good idea to request your credit report at this time and review it (you should do this every year anyways) to find any discrepancies as well as some accounts that you may have forgotten. Your report will have the points of contact. If you find anything that should not be there or is over 7 years old, ask the credit reporting agency to remove it and provide your reasoning and any documentation.
Now that we have our ducks in a row, it’s time to call all of our creditors and ask them if they will reduce the monthly payment and interest charges. This may not be possible with some forms of credit. Car loans and the mortgage require a refinancing. Unless you can drop at least 2% or more on your mortgage and 5% or more on your car loan, it isn’t worth cost and trouble. But you will be amazed at what credit cards will do to keep your business. If they refuse to lower the interest rate or the monthly payment, politely ask them to close the account and continue to send you your statements. Watch them hop when they see that you are serious. They would rather make half the interest from you rather than no interest. If calling the people you owe money to seems intimidating, just remember that the worst thing that they can say is “NO”…if you don’t ask, that is just like they said “NO.” Ask everyone to send you current statements for your records and note any changes in status of your accounts. If you have any doubts as to whether this is worth your time, keep in mind that a friend of mine reduced his payments by over $400 per month by calling his creditors. (my father saved $300) It only took him an hour and a half. Can you make $400 for 90 min of your time? And this is month after month. Yea…it’s worth it!
Now you have all you debts line up in front of you time to put them in order of priority. It is always easiest to start by picking the fruit from the tree that is on the lowest branches. So we will start with the debts that have the lowest balances on them. There are some that will advocate some crazy math formula to identify the debts that will be paid off the fastest based on your balance, interest rate, movement of the economic tides and the position of Scorpio in relation to the sun at the time of the lunar eclipse in the southern dawn sky. I, however prefer to keep things simple…so we will start by focusing our efforts on the account with the least amount. That will be #1. Next we will focus on the next highest balance and that will be #2. I’m sure you can figure the pattern from here.
Here is how this works. Every month you will make your regular minimum monthly payments to all of your debtors. Treat these like your utility bills. Chances are you are already paying them anyhow so this should not be a problem. Especially if you actually did what I said and picked up the phone, took some action and got your payments dropped. (remember my ground rules) In addition to your minimum monthly payment you will take your monthly “investment” and apply it toward your #1 debt. (the lowest fruit on the tree) By applying the extra amount to paying down that balance you are beating the creditors to the punch on the interest. Since there is less principle due after each payment there are fewer interest charges.
Every month you will continue this until your first debt is paid off. When this happens you will take the entire payment that you placed toward debt #1 and apply it to debt #2. So you will have your minimum monthly payment to debt #2 , your payment to debt #1 and your monthly investment all going to debt #2. We continue this every month until #2 is paid off. Then we roll all this over to #3…etc. etc. until all debts are paid.
Using this method you should be completely debt free, regardless of your situation, in 3-5 years. This includes your car loan, student loans, mortgage, credit cards, etc. If you are good with Excel you can easily run the numbers and see how they work out. It absolutely amazing!
Now, I am already hearing the naysayer stating that this won’t work. I say run the numbers if you want but the math doesn’t lie. The next issue that is usually thrown out there is “What if there is an emergency?” That is simple; just make your regular minimum monthly payments on all your debts and apply your excess toward your “emergency.” Hey, I understand that life happens and Murphy’s Law is always in full effect. Just make sure that it is a true emergency and get on with your financial life. (And the after X-mas sale at Macy’s is NOT an emergency!!!)
Now you are probably wondering how much extra $$$ you need to put into this program for it to work. Obviously $1 won’t do. But not everybody can cough up an extra $900 a month either. There are several schools of thought on this. One source that I have researched states the minimum should be $300 a month, another $150 to $200 per month. Obviously the more money you shuck into this program the faster you will get out of debt. But you can only eat so many meals with spam, tuna and, macaroni & cheese. I personally like the program outlined in George S Clason’s “The Richest Man in Babylon.” (That is recommended reading by the way) Where the individual in an effort to pay his debts down, saved 10% of his income for himself, and applied 20% toward his debts. I also like the adjustment to that formula where as the individual pays himself 10%, applies 10% toward his debts, and tithes 10% to charity. We live in a world of what goes around, comes around and I honestly believe that when you give of your resources they will come back to you multiplied in the most unexpected ways. Now I suppose that it would be possible for you to flat out apply 30% of your income to debts and pay them off faster but don’t risk your own ability to function in reality. Walking 10 miles to a massage appointment because you couldn’t buy gas is counter productive. Use some common sense. Use what ever combination you figure will work for you; this is personal and only you can decide what is best for your situation.
Now a word about “Good Debt”. If you have a business loan, usually that would be considered good debt. Depending on your business structure, interest rate and debt obligation paying this debt down immediately may or may not be a good idea. It is important to keep in mind that a business with no debt cannot go bankrupt and not having to pay down a loan can free up a lot of cash flow for paying down your personal debts. However, pulling more cash out of your business rather than plowing it in for growth could kill it prematurely. Also keep in mind that with a business loan many times the interest charges are tax deductible. That affects the practical interest paid. Again you need to take an honest look at your situation and make that decision. This is where the advice of a skilled bookkeeper or tax professional would be invaluable. Just remember that these folks have been trained in conventional wisdom and may just spout off the canned answer of what you should do. They way to handle these guys is to keep them focused. If you are paying them…they work for YOU. Keep them to the numbers. Pin them down on what the numbers are, what they mean, and how they got that way; then you make the decision that is best for you. If they throw a fit…fire them. This is your baby and nobody can tell you how to raise it.
Hang in there. I know that I gave you a lot of info and we haven’t touched stocks yet but I feel that this is important enough to address in the beginning to allow you to start aligning your finances during the learning processes. When you feel you are ready to take the plunge into the dynamic world of ethical investing you will thank me for all of this prep work to your wallet. It’s like warming up the muscle group before you dive in to deep tissue work. The energy flow is the same.
Now go and warm up those finances.
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Contributor's Note
Now for my legal disclaimer…
These lessons are designed to provide accurate and authoritative information in regard to the subject matter covered. All investing involves risk. One must be aware of the risks and be willing to accept them in order to invest in the stock and options market. This information will be provided for educational purposes only and no warranties are given or implied. As I am not a licensed legal, accounting or financial advisor, nothing I give will be a recommendation or solicitation to buy or sell the securities mentioned. Why are you reading this? Everything shown will be solely for illustration purposes only. If legal advice or other expert assistance is required, the reader is encouraged to seek the services of a competent professional. As always one should conduct your own research prior to any trading decision. Any decision to place a trade is one’s own responsibility. The author and the owners/moderators of this forum are not liable in any form for independent trade decisions. Why are you still reading this?
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