Be Relevant

Relearning everything we've forgotten.

Tuesday, July 13, 2010

Getting Out of Debt

I have to admit here that this is something that I have been working on since January of this year.  That's when I first realized that the debt I had was actually imprisoning me.  I didn't have credit card debt but I did have 2 car payments, school loans, two mortgages and two second mortgages.    I started off the year a little over $330K in debt.  As of today I have less than $10K in debt and the rest of that should be gone by the end of the year!

I'm not saying that to make myself seem great or to brag.  I'm saying it because if ME, I that is, can do it anyone can do it.  I "studied" biology in school not finances.  I'm also the first person to just buy something because its easier (I really am not a big fan of that quality.)

Each person's situation will be slightly different.  I was able to sell the houses and the BMW and in the end I came out a little ahead.  I say a little ahead because the complex math to figure out what I have paid in interest for those houses and that car is something I just don't want to do.  I don't want to get depressed. But consider that after 30 years of paying on a 30 year mortgage at 6% for $100K house you have paid  roughly 3X times what the asking price was.  That math was done by Jacob over at Early Retirement Extreme.  His suggestions are extreme (hence the name) but he's spot on.

So even though I could afford the payments I was living beyond my means.  Rather I was mortgaging my future on my current possessions.    Having debt doesn't just prevent you from buying something else that you want, it prevents you from being able to do what you want.  I used to say that not all debt is bad.  As long as it wasn't revolving debt its okay.  Besides, you need some debt to get good credit right?.

You know what?   That's a bunch of BS.  All debt is bad.  Your credit score is a number the darn credit agencies cooked up.  They've managed to work it so deep into everyday life that it seems integral to living. Man (the proverbial man) now needs good credit, water, food, and shelter in that order.  BS I tell you.

Is a realtor going to turn you away if you have no credit but can pay cash for the home?  How about a car salesman?  No way.  In fact that makes you an even stronger buyer.  You start holding all of the cards because you are offering tangible cash - guaranteed income to them.  Not numbers flying around the internet to be paid over X number of years.

All debt is bad.  You should only go into debt if the money you are borrowing is used to generate capital that can pay the debt off and you.  Did you catch the important part of that?  The capital generated needs to pay off the debt AND you.  Budgets are wonderful but its easy to trick yourself into saying you'll cut money here and cut money there and be bare bones here.  Reality is if you can't pay yourself you won't be paying your debt and that causes all sorts of problems.  Not having to owe someone money allows you to be more flexible and it creates breathing room.  Also, the house you are living in doesn't fall under that definition of allowable debt.  It doesn't matter how much your house might be worth, as long as you are living in it, it is a liability.  Besides when most people sell they upgrade so all the money you made goes into the next home.

Here's the catch though.  It means you have to wait to buy things.  You have to save up.  You may even have to downgrade to get out of debt.  More than likely you'll have to tighten the monthly budget to pay off things earlier.  It's worth it.  Over the last few months as I shed the debt I had, I found that money didn't bother me as much.  I had enough to cover my bills (which I am continually lowering and is whole other post.) I actually have increased my monthly income much faster than working for my company for the next 5 years because those payments are gone.

Bottom line all debt is bad.  Don't be fooled into thinking its part of doing business.  Debt is a big reason people don't follow their dreams.  Shed it and be free.


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