How to Succeed When You're in Massive Debt
by Vicky Therese Davis, William R. Patterson, and D. Marques Patton
Whenever the topic of finance is discussed, it is important to note
that everyone's situation is different and that financial advice
should be tailored to an individual's particular circumstances with
the help of a professional advisor.
Everyday our mailboxes are flooded with advertisements, catalogues,
and "pre-approved" credit card offers hoping to deplete our savings
and draw us deeper into debt. In the latest Survey of Consumer
Finances conducted by the Federal Reserve, concern has
 been
expressed that the rising level of debt may become "excessively
burdensome to families." Similarly, the American Bankruptcy
Institute reports personal bankruptcies are near an all-time high
and in 2004, more than 1.5 million were declared.
Debt is a scary place to be; it is emotionally and financially
threatening. It limits our ability to meet daily expenses, invest
for the future, and creates a long chain of financial difficulties.
The strains put on our relationships due to these financial
pressures make it imperative that we find ways to effectively deal
with debt. Like all problems, it will dangerously compound if we
ignore it, so we must confront it head on to positively change the
condition of our lives.
Permanently resolving our debt situation involves three things:
gaining an awareness of the different types of debt, understanding
the psychology and circumstances that led to the current situation,
and devising an effective debt reduction, savings, and wealth
acquisition plan.
Put simply, debt falls into two categories: investment debt and
consumer debt.
Investment debt is an obligation that one takes on in order free up
funds, generate cash flow, and build wealth. It is the leverage of
other people's money (OPM) to purchase assets that substantially
increase in value or produce income. A few examples of investment
debt include mortgages for rental properties, business loans, and
stock margin loans. The best forms of investment debt produce
positive cash flow. When debt produces positive cash flow, it
generates more money to invest and does not reduce your existing
income.
Consumer debt is a financial commitment used to purchase items that
have no substantial resale value or depreciate after they are
bought. Examples of consumer debt include: automobile loans,
personal loans, personal lines of credit, credit card debt, and
more. It can be wise to buy an item using consumer credit, if the
after-tax return on your investments is greater than the interest
rate on your debt. With this approach, you have
 more money
available to invest at a higher rate of return. This is a riskier
strategy and should only be employed by sophisticated investors. It
is also important to note that one person's consumer debt is
another's investment debt. The money one expends servicing debt goes
to help another build their wealth. Over time, your goal should be
to turn the tables.
The Psychology of Debt
To change your financial condition, you must understand the factors
that have led you into debt and position yourself so that you will
never return to similar circumstances. Common expenditures leading
to excessive debt include automobile purchases, education expenses,
vacations, gambling, medical expenses, unsuccessful business
ventures, and the frequent purchases of consumer goods and services.
In general, we must become better planners and begin to stop
thinking of debt as the first solution to our problems. If our debt
situation stems from overspending, we must address the emotional
state that drives us to live beyond our means. If it is due to
unsuccessful business ventures, we must learn to move our enterprise
forward through stock offerings, or creative means like partnerships
and the bartering of services. If it is from necessary expenditures
or emergencies then we must develop the discipline to create special
savings accounts and cash reserves. Once we change the way we think
about debt, we are prepared to implement life-changing solutions.
The most expedient way to deal with debt is through a two-tier
approach of budgeting and investing.
Begin your financial turnaround by writing down the monthly payment,
interest rate, and total amount owed for each of your debts. Once
you know where you stand with each of your creditors, attempt to
lower your interest rates. This involves calling your creditors and
asking for lower rates, transferring balances to lower interest rate
credit cards, or more aggressive tactics such as home refinancing,
to turn liabilities into lower interest-bearing, tax-deductible debt.
Next, create a realistic budget and eliminate unnecessary expenses.
Take any free cash flow and use it to pay more toward your highest
interest, non-tax deductible debt. On all other debt, pay only the
minimum. Do this every month until that particular high-rate debt is
paid off. Once that account has a zero balance, use the money you
normally would have expended on your monthly debt payment, plus any
free cash flow, to pay toward your next highest interest rate debt.
Continue this process until all your debt is paid off.
It is important to note that if you have savings, you should use it
to pay down your highest interest rate non-tax deductible debt. It
makes more sense to pay off debt at interest rates of 12-30%, than
earn less than 2% interest in a money market or savings account.
Also, remember the interest rate on your debt is equivalent to the
after-tax return on an investment. So, if you are not outperforming
on an after-tax basis the interest rate being charged on your debt,
it is more advantageous to pay off your debt.
The second aspect of your debt transformation involves investing. In
order to effectively manage and overcome your debt, make investments
that have a return that outweighs the interest rate on your
obligation or that generates cash flow in excess of your monthly
debt payment. Because investing can be rather complicated and
volatile, it is important that you have as much education as
possible in this area. Your first thought may be, "I don't know much
about investing, and I don't have the time to learn." Well, you must
decide if you are willing to make the time, or choose to work the
rest of your life to pay off your financial commitments. Budgeting
alone is a much slower solution, so you would be wise to develop a
mastery of investing or partner with people who possess such
knowledge in order to expedite the process. Seeking the advice of
competent professionals is a sound way to shorten your learning
curve and prevent costly mistakes. If you encounter an emergency
during this period, you may use your credit accounts as your cash
reserve.
There are many strategies for investing your way out of debt. Some
include starting or investing in businesses and buying assets that
appreciate in value or generate cash flow. The issue becomes, how
do you take advantage of opportunities with little cash and poor
credit? The answer to most questions of lack is through
partnerships. Though we may not view ourselves as entrepreneurs, we
all have viable business ideas inside us. It is up to us to develop
those ideas and approach enough people until we find partners who
believe in us and are willing to finance or actively participate in
our venture. For those who like the idea of owning their own
business, but not the hard work it takes to develop one from
scratch, there are a number of direct sales organizations that will
provide you with business opportunities for low startup up costs and
lots of guidance. All of these add up to ways of generating excess
cash flow to help pay off your debts and build wealth.
The mentality that created your current financial situation will not
suffice to solve your debt issues. For most, the financial
difficulties we face have taken years to develop, so they will not
be solved overnight. As much as we would like to believe, there are
no incantations or magical formulas for ridding ourselves of
financial obligations, only the disciplined strategies of sound
money management and investing. We must remember to deal with the
issues that drove us into debt before attempting to implement any
strategy. If we do not start with our own thought process, any plan
of action will not be effective in the long-run and may put us in a
worse financial position. To transform our lives, we must change the
way we think about finance and obligations. On the occasions that we
do use debt, it should be for the purpose of buying assets, not
consumer goods that depreciate or have no value.
ABOUT THE AUTHOR
Vicky Therese Davis, William R. Patterson, and D. Marques Patton are
co-authors of the acclaimed business and personal finance National
Bestseller, THE BARON SON: VADE MECUM 7. Vicky Davis is Founder and
Chief Executive Officer of Indulgence Jewelry Corp. William
Patterson is Co-founder and Chief Executive Officer of the Warcoffer
Capital Group, LLC. D. Marques Patton is Co-founder and President of
The Warcoffer Capital group, LLC. To receive their breakthrough book
and over $3,631 in FREE success gifts, visit:http://www.baronseries.com
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