Paying off debt is one important step to financial freedom. The more consumer debt that you owe, the less money that is available to increase your Net Worth. Consumer debt is any debt that does not go up in value such as student loans, auto loans, credit cards and payday loans.
Consumer debt handcuffs your ability to increase your net worth. According to studentloanhero.com, the average student loan payment for borrowers aged 20-30 yrs of age is $351. An article on cars.com states that the average monthly new car payment in the 1st quarter of 2017 was $509 ($410 lease). The average household debt (credit card debt), as reported by valuepenguin.com, is $5700.
In other words, having consumer debt, would make it very difficult to save/invest your money into an Emergency Fund, Retirement Account or College Fund. I recommend paying off your debts smallest to largest, regardless of the interest rate. For example. if you have an extra $300 per month to add toward paying off debt and your consumer debt is as follows:
- $3,000 credit card bill ($50 minimum monthly payment)
- $10,000 car loan ($200 minimum monthly payment)
- $20,000 student loan ($400 minimum monthly payment)
My recommendation for paying off debt is below:
- Pay your $50 minimum credit card payment + $300 every month until it is paid off
- Add the $350 to your $200 minimum car loan payment until it is paid off
- Add the $550 to your $400 minimum student loan payment until it is paid off
You need to see yourself winning and build on it. In the example above, most people will look at the $20,000 student loan and will feel overwhelmed and defeated. On the flip side, if you see yourself making progress toward the $3,000 credit card bill, you will be more motivated to accomplish it. The interest rate is a non-factor. This is about motivation!!! The goal is to stay on the program and continue to win.
I have no consumer debt such as car loans, student loans and credit card debt. Since I graduated college 20 years ago, I have come across a few situations where I took on some consumer debt but then realized I made a mistake and paid it off.
To be clear, I am completely against consumer debt because it restricts my ability to increase my Net Worth and it elevates risk to my family. However, no one ever told me that I should not do it. I know it is becoming more and more acceptable to take out loans on every thing from cars to couches to cell phones. I am here to tell you that if you can not pay cash, you can not afford it.
In my 20s, I took out a car loan on a used black Saturn. However, a monthly car payment did not sit well with me. Rather then continue making a car payment, I sold the Saturn and began to drive my Grandpop’s maroon Buick Skylark. I choose to be debt free over a nicer looking car (look for a debt free car buying article in the future).
In 2002-2003, I initially borrowed money to pay for my Masters of Business Administration (MBA) degree. However, I never accepted the student loan and cash flowed this degree, so I was still debt free. In 2010, we traded in our ’98 Buick Century (my wife’s grandfather’s car) because it was too small for our family. We borrowed money to buy a used 2008 Toyota Sienna (yes, a minivan). We completely paid off our Toyota Sienna in 2012 and we still drive it today (5 years later).
My wife and I were able to increase our Net Worth by $1,000,000 in our first 10 years of marriage by not taking on consumer debt and following my Net Worth Millionaire Plan.
If you want to become Debt Free, you can!!!
PAYING OFF DEBT-ACTION STEPS
1-Pay off your smallest debt
2-Take that payment and pay off your next smallest debt
3-Repeat steps 1-2 until all your consumer debt is paid off (excluding home/real estate)
4-Review my Net Worth Millionaire Plan and move to the next step
5-Stop borrowing money and avoid debt
6-Continue on the path to financial freedom
In summary, paying off your debt smallest to largest is the best path toward being debt free. It is important to realize that you need to stop borrowing money and avoid debt to lead yourself to financial freedom.
