Did you know that the methods for paying off debt actually slow you down? Did you know you could do it faster and be happier doing it? No more “getting intense and angry” when it comes to paying off your debt. Instead, find out how to do it where you can free up cash flow AND love your life in the process! Be sure to tune in and join us!
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Pay Off Debt The Right Way
We’ve got a great show here for you right now. We’re going to be talking about a topic that sometimes can be a little bit controversial with people. When you hear the whole story behind this, you will understand the context behind this. It’s been rare. I’ve had anybody disagree with me to make this work. This is a big part. The topic of debt is such an emotionally charged topic for people. It’s one I get asked often, but it’s also one of those topics that people have some of the best results into one of those areas.
I’m excited for this show. This is one of the shows for weeks I do for you guys. I recommend you to read some of these previous episodes because a lot of the things that I’m teaching now tie right back into some of the previous shows, like The Principles of Creating Wealth. Both parts are critical. If you want to understand debt properly, you have to understand the whole role of it. One thing I want to mention too is to make sure you go visit our website, MoneyRipples.com. You can check us out. We’ve got great blogs each week. I’ve got events we have going on. There are great things and information on there. If you want to keep your study going and learning, this is a great place to be.
Let’s talk about debt. It’s an emotionally charged topic. I want to put this into the right perspective because we see and are taught out there that debt is bad and evil. You cannot ever be financially free with debt. You can never ever be able to be in a good place or enjoy life, a lot of times unless the debt is gone. The only time that some people might enjoy while having debt is because they’re using a way to have fun.
I want to bring this in the proper context to make the theme of this entire show that debt is not good or bad. It’s like money. It’s not good or bad. It’s a tool for good, or it’s a tool for pain, one way or the other. What I want you to understand what this too is that paying off debt is not a principle. It’s a strategy. If you recall from our previous show, there’s a difference between principles and strategies. Principles for change, but strategies do. Strategies can change the time and circumstances. Paying off debt is a strategy, not a principle. One perspective you need to understand emotion with this is that you got to understand that debt is not to be feared. It’s to be respected.
You get a lot of financial experts out there that teach you that debt is bad. It’s evil. Get rid of it. You can’t enjoy life. It’s usually about something to the effect that you’re going to see them say things like, “You got to get angry and pay off that debt.” You got to get angry with yourself and say, “Enough is enough.” You got to be sick and tired of it and all that stuff.
We talked about scarcity and abundance mentality. That mentality is to be angry, fear, and hate debt. Is that the emotion of scarcity or abundance? When you get into that mindset, do you make more money? Do you get yourself in a better financial position when we get emotional like that? Of course not. Scarcity takes money out of your pocket. It pays you nothing. It costs you money to be in scarcity. We’ve got to respect debt for what it is. It’s neither good nor bad. However, it can either be a help or hurt. It will help or hurt you, depending on how it’s used.
The Principle Of Debt
Let’s get to the principle of debt. If you were to ask yourself what the definition of debt is in your own words, what would you say? If you’re like most people, you would probably say something to the effect that it’s when you owe anybody money. It’s like, “I owe somebody money. When I owe money, that’s debt.”
I want you to think about that definition a little bit, and where else can that be applied? Would you ever stop owing money? Do you ever stop owing money for groceries or taxes? How about utilities? Do you ever stop owing money for even simple things such as gasoline or even keeping your house? Even if you have a house that’s completely paid off, isn’t it ever paid off?
You may not owe any money on the house itself, but you have to pay for the upkeep of it, property taxes, and a lot of sense for replacing things inside that house because they do wear down over time. You’re always owing money. What happens when the fundamental flaws that people have when it comes to debt is even when it’s paid off, they do feel elated for a moment, but they start to realize pretty quickly that in life, they’re not financially free. They don’t feel much better.
I’ve seen a few extreme cases out there where people say, “I’m living the life that I love. I’m traveling. I’m doing this.” That’s fantastic. Great for you. The majority of Americans, even when they become debt free, never get to that place. If they do, I wonder if some of the times that those people have their own hidden agendas, and that’s why they show that stuff. They’re showing you that they’re enjoying life because they’re probably telling you, “Here’s how I teach you to become debt free.” They have their own program. That’s what they pay for those vacations, not because they became debt free. There’s a big difference.
Debt is not good or bad. It's just like money. It's either a tool for good, or it's a tool for pain, one way or the other. Click To TweetFrom an abundance mentality, you don’t look at it that way. You don’t look at it as something that’s evil. Granted, there is loan money to pay for something. If you look at debt as something when you always owe money, you will always feel in bondage. You will never become financially free because you’ll always have to pay out money.
The reason I know this is because I’ve had hundreds of clients that have done this. All of a sudden, they come to me, and they say, “I don’t feel much better. I got to zero, debt free, but I have nothing to show. I have no assets and savings. Therefore, I feel like I’m still stuck that I have to keep working.” That’s why. It’s not about the debt. Debt can be good or bad. Depending on who you are and who you’re being will make a big difference.
I mentioned before about being a good steward. Usually, you can’t bless them with enough money. There’ll be why for whatever they’re given. People that aren’t wise stewards, those that are in scarcity, those I refer to as the consumer mentality, those people are going to be more broke with or without debt.
Let’s use debt as an example. We can go forever on this, and we’ve already covered a few shows on this topic. Let’s talk about how you react to debt. In the scarcity spectrum, you’ve got spenders and savers. On the spender side, you also have a gambler. On the saver side, you even have hoarders, who hoard money that they can never save or accumulate enough. If you give a saver or a hoarder debt, they’re going to freak out. They’re going to feel like that’s going to stop them from accumulating more money. They feel like you’re taking money out of their pocket. It becomes an emotion of fear for them. That does not become a good thing for them.
On the other end of the spectrum, the spenders, they want to blow it. They’re not using it for good purposes, and they’re going to feel in bondage, guilt, and bondage with it. In steward, they understand that you’re always in debt. From the definition most people have, you’re always owning money. The question is, what’s the most powerful use of your money? Do you use the cash you have on hand that possibly could put you in a bad spot, or do you use somebody else’s money? Do you loan it for yourself, or do you loan it from somebody else? There are good times. There are bad times for it.
Stewardship
When it comes to someone who was a steward, they realize the debt itself is not the bad part. It’s how it’s being used. I got a $25,000 loan from the bank. I remember that payment was $126 a month. If I would use that and blow it, it never got used for anything productive. That would be bad. I’m owing $126 a month. I have nothing to show for it. What if that $25,000 was used for your schooling and education to get you a better job and higher pay? Would that be worth it?
Was that $25,000 like what I use it for is put into my business and use that to increase it? As long as I can make at least $126 a month, I’ve won. Even if I have to owe the $25,000, why wouldn’t I want to leverage someone else’s money, put their money at risk and be able to use that money? Especially if I know I can get a good return on it, why not use somebody else’s money and leave my money free and clear to use if I can’t get access to more money?
Thinking about it this way, if the debt were evil, why do banks have so much of it? Why would they even take your money in savings if it were bad? Have you ever had a bank call you up and say, “You have been a great client of ours for the last few decades, we’ve loved having you as a client, but we hate being in debt to you? We hate having to pay you interest in your savings account each and every month. Do you know how much we have to pay over your lifetime and interest? It’s horrible. We can’t sleep at night. We feel like we’re in bondage and stuck. We’re getting mad and angry by owing you money. We feel like we’re in bondage to you because you’re a master. Therefore, take your savings account back. We can’t handle it anymore. Take it back. We’re done. We don’t want it.”
Have you ever had a bank tell you that? Have you ever had a bank say, “We hate debt, and people told us on the news that debt was bad we were paying all back, we don’t take any more in savings anymore?” Have you ever heard a bank tell you that? Have they ever called you up and said that? Of course not. Why would they? It’s because they know how to be a good steward of their money.
There are few banks that don’t know how to be good stewards, and they have become overleveraged. A lot of banks can legally loan out anywhere from 6 to 10 times the amount of money you give them. They’re still in business and doing pretty well, even without bailout money. Why? It’s because they know how to be good stewards of that money and be wise with it.
The normal consumer mentality, not the creator or steward mentality, was the people that spend or save. Those are the people in scarcity that will do poorly with it and will have a hard time. Maybe they’ll do okay with it or get lucky, but for the most part, it becomes a thing of bondage. When you come from a steward mentality, it’s not as money as you were in the first place.
Do you realize any asset that you have is not yours? Do you realize your house is not yours? You do not own your house, but you want to pay it off. You don’t own your car or anything because once you leave this life, it’s gone. It’s not yours. It never was. If that were the case, why do the pharaohs of Egypt all of a sudden say, “I am awesome?” They might have said that before they were dead. What happens to their wealth afterward? Did they get to keep it? Do they take it with them? No, your money will end up in somebody else’s hands.
Therefore, you’re borrowing money while you’re alive. You are a steward of the money that you’re given. You’re in debt constantly for anything that you owe or own, for that matter. Do you understand that? None of it’s yours anyways. The real question is, what are you going to do with the money to have while you’re here on this planet? Are you going to use it in a wise way that helps increase and make the world a better place?
It’s better to consume it because even if you become debt free and your whole focus is living off it and consuming it, not using it in productive ways to add more value to the world. It increases your means rather than decreasing it by putting down your money over time because you live off the rest of your life. That’s not how it’s meant to be. It was meant to be used in a way to bless people’s lives. How are you going to create a legacy on this planet? I bring this up because you’ve got to understand that you’re always in debt. This is why people never become financially free when they’re debt free because it’s not principle. It’s a strategy.
I’m not saying you shouldn’t pay off your debt. I want you to understand the real context of why you pay off your debt is more important than paying off your debt in general, doing it, or getting mad or angry about it. It’s about the purpose behind it. Is it helping you become more productive and a better steward? If so, it’s awesome. Let’s pay it off.
My personal goal is to pay off all my loans and debt. I might change my mind and opinion because I might say, “I’m too productive with that money otherwise than to try to pay it off all because it would cost me more money than make me.” That might be a good reason. Even though my goal might be to do that, it is a strategy, not a principle. I might stay with that plan and pay off all my loans and debt at some point. I’m going to do it a different way than what’s taught out there. I like to do it where there’s a lot more in savings than using all my savings to pay off debt. I don’t like that strategy at all. It’s a dangerous strategy, in my opinion, from what I’ve seen in my experience.
Living Within Your Means
The thing is, I might say, “I don’t want to go debt free because things might change.” You got to be open to the fact that it’s a strategy, not a principle. Here’s the real principle behind debt and why to pay it off. I mentioned stewardship. The thing is that there’s a principle behind debt, which is live within your means. You’ve heard this time and time again. What does that mean? It means that you have more income than expenses. You go and produce more money than what you’re consuming of that money. You’ve produced more than what you spent. You bring more money and income than what you spend out. That’s why we’re always talking about cashflow and positive cashflow.
When people start using debt or using money, and it gets them to not within their means, it becomes a bondage, it doesn’t not. I think about it. What’s the thing you fear about debt? Is it the debt or more of the payments that you’re obligated to each and every month? If you don’t make those payments, there are threats of wages and taking money away or whatever it might be. Isn’t that what you’re worried about?
If you’re paying a loan of $1 a month, and that’s all they require of you, would you care much about paying it off? Would you probably take your time and pay it off? It’s more about the cashflow, the payment, and the balance. That’s why that can be a wise thing to do when you go and pay it off. It’s got to make sense and be able to put you in a better situation. It’s to help you to live within your means.
If you’re living outside your means and going into debt, that’s bad. It’s horrible. Don’t ever think I’m ever promoting that. If you’re using debt in a way that increases income and cashflow so you could even pay it off faster, it’s awesome. That could be a good use of it. If people that were anti-debt, especially those that follow certain people in the media, if they were against it, why don’t they become debt free? Here’s a definition of debt. Debt is when you have negative equity. If you look at accounting terms of debt, that is when you have more liabilities or money that you owe than what you own in assets. When you owe more than what you own, that much isn’t debt.
Debt is not to be feared. It's to be respected. Click To TweetIf you have a house that’s worth $300,000, but you only owe $200,000 on the mortgage, you have $100,000 of equity. What if it was like a few years ago when we were upside down in our homes? You owe $300,000, but it’s only worth $200,000. You wouldn’t say you have negative equity, but you would say you have $100,000 of debt, not $300,000. That’s not the loan balance. That’s not what you have.
How much would you have to owe if you sold off all your assets? If you stuffed everything, what would be the bill that’s left over? That is debt. If you sold off all your assets and everything you had, and you’d have no money left to owe, you have equity. Therefore, you would be technically debt free. Let me explain that again. When you have equity, you are debt free because if you can sell all of your assets at any time and pay off all your debts, you technically, on a balance sheet, are debt free. You’re not liability free. You still have loans, but you are debt free.
Many people don’t understand that a lot of Americans are debt free but still feel like they’re in bondage to debt. If it’s that situation of debt is bad, why don’t you sell off everything? Once you sell off all your cars, go and rent everything. Why don’t you live and rent? Why don’t you sell all your furniture and everything? If it’s that bad, you should be getting mad and evil, why aren’t you selling off every single asset you have to become debt-free?
Is that possible? Maybe becoming debt free isn’t as important to you as you thought, or there are some things that are worth more to you than being debt free. The problem is you’ve been applying common sense subconsciously, and the people that are financial experts are making you feel guilty for using common sense. You probably don’t pay off your house because you know that you get great advantages by having your own home. That house will be paid off anyways, potentially. What’s the big stress? It’s always coming back to cashflow.
The Balance Point
I hope it’s sinking in. Please don’t think this is an either-or that it’s about Living La Vida Loca here and going into debt. Remember that you got to have the balance point, the saver mentality, which you hear in the media. The scarcity mentality is, “Pay off your debt. It’s bad. Get rid of it.” On the flip side, you might have a few people out there, not in the media as much, maybe in commercials but not so much in financial media, that say, “Blow it. You deserve it. Live life.”
I’m not talking about that extreme either. Come in the middle. That middle path is where there is abundance. That’s where you come in as a wise steward saying, “I know that debt. I don’t fear it. I respect it for what it is. It can become a tool for good. It can be a tool for slavery or personal bondage. I’m only going to choose to use it for purposes that are going to improve my situation and the world around me.” That’s it.
I hope you understand I’m not encouraging debt. I want you to understand what that is. That’s the only way to become financially free. Even if you become debt free, it is to understand from this perspective. The cool thing is when you’re paying down your debt, at least you’re going to enjoy the ride. I hope you don’t mind. Now that I’ve defined what debt is, I want to start calling liabilities or loans, paying off your loans and those liabilities. That is where it makes sense.
Which Loans To Pay Off And Which Not To
In this last segment of the show, let’s talk about what loans you do pay off and which ones you don’t because there is a balance point. Who you are as a steward depends. Everybody is different. Everybody has a different potential for how they can make and use money. Some people who work the 9:00 to 5:00 jobs might have different options than someone who works in the business. That’s fine.
I mentioned the thing that creates the most fear. Of the hundreds of clients that I worked with, half had debt, hadn’t loans, or liabilities. It’s not the loan balances that they fear. They might say it is, but in reality, it’s the payments that stress them out, not the balances. One way you can manage and control it is by refinancing. It is the only way to get your loan payments down.
This is a wise thing for anybody unless you’re in that scarcity mentality, especially if you’re a spender. If you’re a spender, I probably would prefer you to pay it off after. If you’re a steward, you want to get those payments down. Why? Have you ever had months where maybe there was a month that wasn’t so good in income, or you had a lot of expenses, especially if you’re in business, you’ve seen income go up or down? I don’t know any business owner that ever has an income going up in a straight line. It doesn’t happen, but we do have ebb and flow. We have had good months. We have had bad months sometimes.
Think about a line that goes up or down as your income. It’s going up and down month to month. On the flip side, your expenses might go up or down. Ideally, we want the income higher than your expenses. What we don’t want is when your income dips that your expenses are higher, and that creates stress and worry. Doesn’t it? When you owe $500 more that month than what you’re making or bringing in, it’s not a fun place to be. It’s even worse, like in my example, where I was in the whole $16,000 a month.
When I use that example, that wasn’t all debt payments. Even if I were debt free, I would have still been in the whole thousands of dollars a month, but between my business and personal life. I want you to understand that it’s the payment that caused the stress. When we talk about refinancing, people say, “Why would I make my loan term longer? Why would I do a 30-year mortgage instead of a 15-year?” For the same reason, we want to have control and freedom.
If you’re a wise steward, you’re not going to go and blow the money and make it worthless. You’re going to use that money productively. You might use it to put back into your business and make more money so that you can pay off the debt faster. You might use it to go and do some real estate stuff. Even if you’re an employee, you might think of doing real estate investing is a good thing. You might use it to apply to your loans anyways.
The cool thing is you can put it back on your loan. For example, let’s say you want to make a 10 or 15-year payment on a mortgage, and maybe you want to do that mortgage. I would usually recommend going from a 30-year mortgage and paying a teeny bit more in interest, but turn around and make a 10 or 15-year payment in that mortgage, presuming you’ve got plenty of savings in. Don’t buy into that stuff that says, “You don’t have to have $1,000 in savings to go and keep in savings before you pay off your debt.” That’s way too low.
That might have worked in 1950 when the $1,000 meant something. Nowadays, $1,000 is not even enough for baby stuff. Most likely, you need at least $3,000 or $5,000 even to get started. Sometimes I have people that because of where their peace of mind is, might need more than that before they get aggressive in paying off their loans. I personally believe you should have a lot more in savings the way a lot of people teach out there before you get aggressive paying off all those loans.
Getting back to loans, you can always make a 10 or 15-year payment, but at least you’re not committed to it because if you run into a bad month, what if you get laid off from your job? What if you have some unexpected expenses that arise? Imagine that. If you had expenses that came up and maybe there were a lot more than you expected, it was one of those surprises because that never happens in life.
If one of the surprises comes up, you do not want to be committed to a 10 or 15-year high mortgage payment. You want something to lower mortgage payments so that if you had a cashflow crunch, you could still say, “I’m not going to have to charge up a credit card because my payments are high. I’m going to turn around and make a minimum payment this month and go right back to the next month or so to make those high payments again.” Does that make sense? You could still pay the way you pay, but you might want to refinance.
Outside of that, one of the things to do is if I’m looking at what debt pays off and what to prioritize, I use a method called Cashflow Index. I don’t have a ton of time to go into the mechanics of that. I’d rather show it to you. That’s why I do events because I can show it to you a little bit better and more effectively.
Here’s the basic premise. This is something I learned when I was going through my big cashflow crunch. If I want to pay off a loan, I want to pay off the one that has the lowest balance with the highest payment ratio. For example, if I’ve got two loans, both at $5,000 a piece, one of them is I’m paying $100 a month. The other I’m paying $400 a month. If I only have $5,000, I’m going to pay off the one that’s $400 a month. If I can only pay off one, I’m going to pay off that one instead of the $100 a month one.
Why? It’s because we create cashflow. When you free up cash, cashflow creates options, and options create more freedom. Even if that was $100 a month, which is normal for a credit card at $5,000, $100 a month is typical for a credit card payment. Even if it was a higher rate of 16%, 18%, and 20%, and the other loan was maybe 3% or 4% like a car loan, I’m going to go with that car loan. I’m going to go pay that car loan off if it’s $400 a month versus a $100 a month credit card.
You're always owning money. The question is, what's the most powerful use of your money? Click To TweetThe reason being is because if I can pay that off, now, I’ve got $400 to choose what to do. One, it creates more safety that if there is a bad month of higher expenses or lower income, I’m okay. Imagine if you had to keep paying that $400 a month payment in those months. Common sense will tell you, “No, I don’t want to pay off $100 a month one because if I do, it has a higher interest rate, but what happens if all of a sudden I don’t have the cashflow to pay for it? I’m going to have to go to a credit card anyways.”
I will deplete all my savings and my peace of mind, which in business, especially if you get rid of your savings and peace of mind, you also lose money in your business. Whenever you lose peace of mind and get more into scarcity, it costs you money in your business, sometimes thousands of dollars. It kills you. You don’t want to do that. Pay off the one that’s $400 a month, and you can always apply that $400 extra onto that credit card and make a $500 a month payment.
Either way, if you were going to roll it down to the next loan, you would be paying $500 a month. The difference is that if you have a bad month now, you’re only committed to $100, not $400 a month. Does that make sense? You want to pay off the one that has the highest payment with the lowest balance. That’s the ratio I use when I look to pay off loans.
I’ve had some people that they’re paying on loans or trying to spread out to all the different loans don’t pay extra payments to all of the loans. Focus on one at a time. A quick little extra bonus tip here. If you have things like a mortgage or a car loan, maybe that’s the next one you want to pay off. Don’t pay extra payments to them. Save it up in savings. When you have more than enough in savings to pay it off, I would say even more than when it requires to pay it off, pay it off in one check.
The reason being is that when you pay extra for a mortgage or a car loan, the payment doesn’t go down. You don’t free up any cashflow. All you’re doing is you put your money back in the bank’s hands. If you ever want that money again, you can’t get it. You can’t go into a bank and say, “I paid an extra $500 last month. I need that. Can I get it back?” The bankers will laugh at you and say, “No, it’s our money. Thank you.” You’re going to apply for a loan to get more cash out. You don’t want to do that.
Credit cards are great. I love credit cards because if you pay them down, the payments go down too. I do like paying extra to those each month, but not to installment loans or loans that don’t go down in their payments if you pay them down. Student loans are another good example. How I decide what to pay off is what one’s going to give me the most if we have the most cash, the least amount of dollars invested for me. Sometimes if you’re in business, it might make more sense not to pay it off.
I mentioned with my $25,000 business loan I got $126 a month. I didn’t want to pay that one off early because I knew I could make more than $126 a month in my business with $25,000. Technically, if you can’t make more than $126 a month in your business from $25,000, you probably shouldn’t be in business, or that was a bad business idea. The difference is all about cashflow.
What about you do to free up that cash and have more options? Debt is not good or bad. It’s a tool. It can either help you or hurt you. If you use it properly as a wise steward, none of the spender or saver, where it creates more scarcity in life. When if you can use it wisely, it can be great. Also, at the same time, as a wise steward, you also know that there are loans that cost you a lot of money, cash out of pocket. You want to pay those off first. Those can sometimes be your best investments to pay off.
We’ve freed up thousands of dollars a month for people from doing that. The cool thing is that when you start to see the power of it and how it works in life, it’s amazing. When you create more cashflow, cashflow creates options. If you have more options, you have more freedom. Financial freedom is possible when you do live within your means and have greater cashflow. I’m telling you to live, love your life, enjoy it, and be a wise steward. Thank you for your time.