Debt Is Your Enemy – 3 Strategies To Get Rid of It and Get on the Road to Wealth
The sooner you get out of debt, the sooner you can achieve freedom.
“Debt is the slavery of the free.”
— Publilius Syrus
There are many meaningful quotes about the danger of debt, but I like this one from Publilius Syrus. It poses well the problem of debt being the equivalent of slavery to freedom.
Unfortunately, too many people don't fully understand that debt is something negative, and even dangerous, for their future regarding money.
In the United States, consumer debt is at an all-time high. A survey by Experian has just revealed some edifying figures. US consumer debt increased by 6% in 2020 to reach $14.88T. In 2010, this debt was $11.32T, an increase of +31% in a decade.
Seeing consumer debt increase to this extent over the last decade is not surprising when you consider that we are facing great monetary inflation. The Fed has printed more than 30% of the U.S. dollars in circulation over the past 18 months while keeping interest rates at zero.
Under these conditions, consumers have an incentive to take advantage of easy money. The problem is that this is only a short-term illusion, and the bill will have to be paid sooner or later.
Not all debts are created equal
When talking about debt, I think it is important to distinguish between two types of debt:
Debt that can help you build wealth and achieve your financial goals. This is the right way to use debt to your advantage. However, this is reserved for people who know what they are doing, and who have been able to get rid of the second type of debt.
This second type of debt is consumer debt. It is the most common type of debt. People go into debt to buy unnecessary things that they don't really need. I'm thinking here of products like the latest Apple smartphones.
Getting rid of this second type of debt is essential to putting you on the path to wealth. A Marcus by Goldman Sachs survey just showed that 28% of Americans had a goal of getting rid of bad debt in the next few months.
This is great news, and to help you speed things up while putting yourself on the path to wealth, I'm offering 3 all-too-familiar strategies.
Focus on your emergency fund and retirement accounts first
After becoming aware of the problem of debt, many people become obsessed with paying off their debts immediately. While paying off your debts to free yourself from this burden is important, there is something more important to do before that.
You need to focus on building your emergency fund.
This emergency fund must allow you to last six months without work. The COVID-19 pandemic that hit the world reminded us how essential having such an emergency fund is. Before you even think about paying off your debts, build that fund.
At the same time as you build this emergency fund, you can start a retirement savings account. The sooner you start, the better for you. Starting small will make a big difference over time if you are consistent.
Once these two elements of your plan for a better financial future are in place, you can move on.
Pay off the highest interest rate debt first
The next step is to start paying off your debts. One mistake many people make is not prioritizing debt repayment based on an obvious criterion: the associated interest rate.
Not all debts are created equal.
You must distinguish between high and low-interest-rate debt. It is obviously in your interest to pay off the high-interest debts first. These are the ones that cost you the most money. Often, you will find that the highest interest rate debts are associated with your credit cards.
These debts hurt your financial future by reducing your ability to save and invest. The sooner you get rid of them, the better for your future.
Take back control of your budget by defining a plan to stay out of debt in the future
Paying off your debts is only the beginning of the road to wealth and a controlled financial future. The next step is to take control of your budget. Once you're out of debt, you need to do everything you can to avoid falling back into the trap that only makes you poorer.
Having a plan is key here.
Sticking to your plan will be the hardest part. By accurately defining your budget and the different allocations of your money, you will be able to meet this challenge with flying colors. You will be able to focus on how to make the fruits of your labor grow through investment.
Better yet, defining such a budget will allow you to become aware of the unnecessary expenses you were making until now. You will then be able to stop giving in to what the consumer society expects of you: spending more and more of your money on useless things.
Final Thoughts
Taking back control of your financial situation by tackling the problem of debt is not an easy thing to do. It is, however, a necessary evil for anyone who wants to get on the path to wealth.
The sooner you realize that consumer debt is the worst thing for your financial future, the better for you. Once you've learned to control your budget properly, it's time to turn your attention to the second type of debt I mentioned earlier: debt that is used to reach your long-term financial goals more quickly.
Some reading
6 Essential Things to Remember From the Book “A Promised Land” by Barack Obama - A fascinating book about an extraordinary man.
The Oldest Climate Refugee Has Been Discovered — It Is a Mammoth Named Kik That Lived 17,100 Years Ago - Will humans be able to cope better with the climate change challenge than Kik?
Three Months After the China Ban, Bitcoin Shines Brightly While Being Rid of Its Biggest Handicap - China will regret its decision in the future.
Lethal Weapon — The 4 Rules the NBA Had To Change To Limit Wilt Chamberlain’s Dominance - No other player in history has forced the NBA to adapt its rules more than Wilt Chamberlain.
Governments Debt Around the World Is Out of Control — How Long Before a Major Crisis Occurs? 32 countries now have a debt to GDP ratio above 100%.