Getting out of debt is difficult! Living in debt becomes an environment of always trying to catch up and never getting ahead. Lets get ahead and slowly pull into the lead. Debt is a lifestyle and we can change our lifestyle. Are you ready to make positive changes to your habits to build your wealth and not feed your debt?
Wealth is a mindset!
Growing wealth, just like everything else that we want to do in life, begins with a mindset. We are impatient creatures, that are so willing to sacrifice tomorrow for today, but by sacrificing tomorrow all the time we have created a habit, lifestyle and mindset of letting future us deal with the problem. We have these great tools known as credit cards and over-draughts that we can use in an emergency to elevated financial stress until we figure out a solution to our financial situation or to help us increase security against fraud. The only problem is we aren’t taught how to use these debt tools correctly. There is good debt and bad debt and the rich are rich because they know the difference.
The focus for now is how bad debt is created. Once we know how it is created we can get rid of it and then we can start studying good debt. First we need to establish good habits and a good mindset to grow our wealth then we will be able to learn how to leverage it and secure it using good debt.
How is wealth a mindset? Wealth like most everything is how much value we perceive someone has. We analyze other peoples wealth based on what they have now, not what we think they may have in 5 years time. When we think of our own wealth it usually consists of how much do we get in our paycheck each week and what can I get for this. We look at our wealth in terms of, our paycheck will pay for one months rent, another paycheck is worth three weeks groceries and all of these things. We then have a perception of how much we are going to earn in the coming months and years so we believe that even though we don’t have the money right now, we spend it against what we think we will have in the future. This in essence means that we are borrowing from our future earnings.
A typical example of when we begin to borrow from our future earnings is when we are on vacation. We are off having the time of our life and we start to have thoughts such as, when we come back from the vacation we can just live a little bit stricter and pay off the extra activity that we really want to go on. This is a once in a lifetime opportunity. We’re on vacation after all. We will be full off life and refreshed when we get back and earning money will be easy.
This is a brilliant idea if we do the things that we know we should do such as actually being stricter when we get back from the vacation. In reality when we get back we get the post vacation blues which cause us to order an extra mid-week take away rather than being stricter and we meet up for drinks on the weekend to have a recap of all the fun that you had. “I’ve already got this on the credit card sure a few more things can’t hurt” is the next thing that you begin to tell yourself. The next week rent is due and your entire paycheck is gone. This means the entire next weeks living expenses goes on the credit card.
After a few weeks or months of paying off a little debt and it growing every time rent is due or something breaks you are almost clear of the debt but your spirits are getting low and you need another break. It only takes a few conversations from that friend who can convince you to do anything to go on another get away and the debt is piled on the credit card again.
Five years later you’re in a debt situation that you don’t even know how you got into but the habit of just sticking it on the credit card is hard-wired into your system. Now instead of being able to pay off a little bit of the debt before adding more you are just managing to pay the interest and the debt is just growing.
This hardwiring of sticking things on the credit card has become your mindset. You’ve created a habit of sacrificing tomorrow for today and now your living in a partially sacrificed day while sacrificing tomorrow to hold things together.
It’s time to choose!
The choice is yours here! You can continue to sacrifice tomorrow and eventually run out of them, or you can change your mindset, change your actions, change your lifestyle and begin investing into yourself so that you can become financially independent and thrive.
The first thing to focus on is your basic standard of living as we discussed in part 1 of this series. Now is the time to start making sacrifices today for tomorrow rather than tomorrow for today.
It’s the numbers round!
We can’t look at finance without looking at numbers so lets break it down as simply as possible.
Lets start by assuming a yearly salary of $20,000 after tax.
Essentials for living is assumed as $10,000 per year. This is for rent plus food and other utilities.
Lets assume no student loan debt, but there is a personal loan of $15,000 for a car which has 5% interest per annum and a credit card debt of $7,500 which has 15% interest per annum.
Monthly interest on the car loan is (15,000 x 0.05)/12 = $62.5. Which is $750 per year.
Monthly credit card interest is (7,500 x 0.15)/12 = $93.75. Which is $1,125 per year.
This means that just to pay for your essential living cost and the interest on your debt you are paying $11,875, just to survive. $1,875 on interest to the bank alone. That’s over 9% of your years take home earnings is gone to the bank. Are you paying too little tax so you want to pay more money to the banks? No. Ok then its time to start making the sacrifices you know you should be making and get ahead of the game.
If those expenses were the end of it we wouldn’t be too bad but we also have all the other expenses such as car maintenance, social activities, take away, vacation, birthday gifts, Christmas gifts, and all the other things we don’t plan for.
It’s time to take action, not just sit and complain about it, or stressing in silence about it. If we have a car loan at 5% interest and a credit card debt at 15% interest the first thing is to wipe out the credit card debt ASAP.
The first thing is to look at our lifestyle expenses as was the exercise in the first part of this series. Now it’s time to make some choices. What are the things that you use the least out of your subcription services? Cancel the contract for these immediately and either deal with the free ad filled version or look up a different free source with less ads. You barely use these anyway so it doesn’t really matter. Prioritize your leisure activities into the ones you actually use and enjoy.
Make a deep cleanse of as much stuff that you can live without for a while and look for a free alternative. It may be worse quality but you’ll get them back sooner than you think (that is if you’ll even want them back).
Is your car costing you too much? Take some time to look at your car situation and figure out if it is worth the financial liability that it is costing. Do you need to downgrade or look for an alternative plan.
If you can allow yourself to downgrade (stop caring what other people think) this could work massively in your favor. Selling the overpriced, modern car and paying off the credit card debt would make a massive dent in your debt even if you needed to increase your car loan by the amount of the $7,500 that the credit card was. This is due to the substantially lower interest rates.
Lets assume you sell the car and downgrade very slightly. Your car loan is now $20,000 and your credit card is zero. Cut up the credit card and don’t use it until you are debt free and understand how to use it to your advantage.
So if your living costs are 50% of your yearly earnings that means we have 50% left to work with for paying off the loan and also having some fun (we need to have fun or what’s the point). Make a point to pay off the loan and with every paycheck use a percentage to pay it off. If you find it extremely difficult to cut expenses start with 5% of each paycheck where it goes straight to paying off the loan as soon as it lands in your account (This is money you borrowed from your future self so its time to pay it back). After you have begun to get comfortable with that amount, increase it to 7.5% and continue to increase the amount by 1% each week.
Lets assume you start at 5% of a weekly paycheck and increase the amount by 1% each week. At first this is just covering the interest but after the first increase you are now finally eating away at your debt rather than it eating away at you.
The next challenge after you have begun making regular payments into clearing the debt is to look for extra jobs here and there that you can do for friends, family, or work collogues for some extra cash. You could try freelance work or many other methods for creating extra income. Use this extra income to pay off the car loan.
In future posts we will look at ways to cut costs in our lifestyle while still living a fun and creative life. We will look at what good debt is and how to use it. We will look at how we can increase our income. It’s not all about debt so we will also look at ways that we can make our money grow once we are out of debt and have begun to build our savings.
In this post we looked at how wealth is a mindset and how the mindset of being stuck in debt can be created. We recognized that we have to stop sacrificing tomorrows for today and start sacrificing today to raise our standard of living for tomorrow. We looked at some numbers on how much our debt is costing just to maintain. We looked at the surface level of the strategy to getting out of bad debt.
Start by getting rid of the debt that has the highest interest rate. If possible, consolidate your debt into a lower interest loan. Properly analyze your lifestyle and stop spending money on things you don’t regularly use.