I have some awesome possibilities for people to start an online business. I also have opportunities to learn to earn. All my friends tell me that the opportunities are great, but they do not have the money to start. Sometimes it is fear that is holding them back. But sometimes it is the huge debt they have. They really can not afford anything else. What can they do? Where to get help to get out of debt? Robert Kiyosaki is today one of the richest men on earth, but he once had debts too. His experience led him to make a list to help for getting out of debt. What are all those things, good and bad debt, …?
I will go through some things that are important to help someone to get out of debt.
Good Debt vs Bad Debt
When you are really in financial trouble, bankruptcy is always an option. For some people it is a viable alternative. It is still possible to obtain credit in some countries even if you do have a bankruptcy and/or a foreclosure on your record, This however will be different in different countries.
I grew up hearing that it is good to have a debt so will pay less in taxes. This is true, but you will have less every month too. They forgot to explain the part of good debt and bad debt.
Let’s take an example. I buy a house and live in it and pay my mortgage every month. This mortgage is a bad debt, because I am paying for.
Buying that same house but renting it out, will make the mortgage a good debt. The tenant will pay rent and the rent will cover mortgage and expenses.
Got it? A good debt is a debt on which someone else makes your payments. A bad debt is a debt you pay for.
In the financial world they call good debt often leverage. If you have developed a high financial intelligence, you will know that having good debt is something you want. When someone else is paying for your debt, you will become rich. So from now on when you hear people simply say, ‘Get out of debt”, you know better and now it really means “Get out of bad debt”.
Most banks will lend you money to buy a house or a building, but they will not lend you money to buy stocks or so. Why? Because stocks are riskier than a building.
This does not mean that you should have a lot of good debt. The economy moves as waves up and down. Sometimes a good debt can change to a bad change. So be careful.
If you have a problem managing your personal finances, please do not get any more debt, good or bad. It is important that you have your finances in order before you can become a successful investor. As soon as it is possible: buy real estate.
In my case just getting out from under bad debt is enough to make my financial situation sunnier even without investing.
Help for getting out of debt in 10 steps
Step 1. Tell Yourself the Truth
Tell yourself exactly how your situation is. Don’t tell yourself and others that you have everything under control. Write all your expenses down. But most of all write your debts and the people and institutions you own money down.
Who are the people (family and friends included) and institutions that you do owe money? Write them all down. There are a lot of possible debts. Think about credit cards, school loans, car loans, boat loans, IOUs, store credit accounts, home shopping and online balances due, vacation home, and your personal residence.
These are all bad debts. Do not include your good debt, meaning debts for rental properties and business investments.
Step 2. Stop Accumulating Bad Debt
Do you know the saying,
“When you found you’ve dug yourself into a hole
… stop digging.”?
Do not take another loan. Anything you purchase you pay immediately or by the end of the month. Don’t use your credit cards anymore. When you do this you will realize how many times you buy something just for the sake of buying, without really needing it. You will also realize that probably you are living above your means.
Step 3. Pay yourself first
You need to think about the bad debts, but also about the future. Robert Kiyosaki has a strategy he calls the “three piggy banks”. This is so simple and yet so powerful. I am using this and I am feeling so good about it.
Set up three piggy banks: one for savings, one for tithing or charity and one for investing.
Any money that comes into your house is not to be used fully to pay debts and to buy things. From every dollar that comes in, put 10% in each of the piggy banks for a total of 30% of all your income.
For example, you earned $100, put $10 for savings, $10 for charity and $10 for investing. Keep doing this over and over and when you are getting financially stronger you increase your %. With time you will be living from only 30% and be putting 70% in your piggy banks. That would be awesome.
In some situations, this 30% is too much. Start with the money you can afford; as long as you are consistent. It should become a habit. It is a good way to change from the bad habit of creating debt to the good habit
The steps are simple:
- Set up three piggy banks: savings, charity, investing
- Decide what percentage of your income will go into each bank each month.
- Hold yourself accountable to “pay yourself first” with every dollar that comes into your home.
Step 4. Hire a bookkeeper
I can hear you asking “Why should I hire a bookkeeper when I have little-to-no money?” Well, a bookkeeper keeps you focused and forces you to face truth every month over and over again.
Bookkeepers keep accurate records, can be of great emotional support when dealing with your financial situation and all rich people have bookkeepers.
“A Note from Robert Kiyosaki: This is a step many people in financial trouble want to avoid. They often think they will save money by not hiring a professional bookkeeper. I know I thought that way. Yet after my rich dad reminded me that I was thinking like a poor person, thinking I could not afford something vital to my success, Kim and I bit the bullet and hired a bookkeeper.”
Saying it another way: “Poor and middle-class people do not have bookkeepers. Rich people do. So, find a way to afford a bookkeeper.”
Step 5. Make A Visual Picture of Each Debt
Visual and graphical information helps us best to understand a situation. In step #4 we made a list of all the debts. In this step, we are going to create a visual drawing of each debt. This will help us to determine in which order in which order we are going to paying our debt off. Draw a quadrant for each debt just like this one:
“In the top left-hand corner is the name of the debt, such as Visa. In the top right-hand corner write in the total balance owed. In the bottom left-hand corner write the minimum monthly payment due. Now, divide the total balance owed by the minimum payment due. For example, if you owe $2,000 on your Visa and your minimum amount due each month is $100, then $2000/$100 = 20. Write that number in the bottom right-hand corner and circle it in red. It would look like this:”
Sometimes you owe an individual money with no minimum monthly payment. Here you are going to decide what that amount is going to be.
When you are ready with this exercise (for all your debts) you will have something like this.
Step 6. Determine the Order for Paying Off each Debt
To determine the order, we are going to look only at the numbers that are circled. Which debt is number 1? Number 1 is the debt with the lowest number that is circled. Write number 1 next to the quadrant.
Find now number 2. This is the one with the next lowest number. And so on. Do this until all debts have a number.
Finally, you will get something like this:
Now you have your ordered list for paying your debts off. Doing it this way you will soon see results and this will encourage you to keep going until you are done.
Step 7. Find an extra $100-$200 per month
“Where am I going to find an extra $100 to $200 a month?” will probably be your thoughts. But realize that if you cannot find a way to have an additional $100 each month, your situation is really really …… It will be nearly impossible to achieve financial freedom.
But you can find a way. One that is legal and ethical. Can you bake cakes? Can you tutor a child? Something with your hobby? Affiliate Marketing? Wealthy Affiliate? Maybe work some extra hours? Try it, you will be surprised. It is easier than you think.
Having said that, there’s nothing stopping you from creating more than $200 per month either.
Step 8. Except for your #1 debt, Pay only the minimum payment required of each of your debts
The strategy mentioned here will work only if you pay the minimum payment due on each debt and only pay $100 to $200 more towards debt #1. You are only paying extra on debt number 1.
Keep on doing this each month until debt number 1 is completely paid off.
Go to the chart of debt number 1 and place a big red “X” through debt number 1.
Step 9. Move On To Debt #2
The first obstacle is taken. Congrats! Up to debt number 2.
Here we are going to do the same as before: pay only the minimum monthly payment required for all other debts. For debt number 2 pay the minimum payment required PLUS the full amount you were paying on debt #1.
Here is an example: the amount you will be paying each month on debt number 2 will be the sum of:
- The minimum monthly payment required on debt #2.
- The minimum monthly payment you were paying on debt #1
- The additional $100 to $200 per month.
This way you will be accelerating your payments on each debt you tackle.
Continue to do this each month until debt number 2 is paid off. Then put a red “X” through debt #2 — and celebrate!
Move onto debt number 3. Pay the following towards debt number 3:
- The minimum monthly payment required on debt number 3.
- The total amount you were paying on debt number 2, which included:
- The minimum monthly payment you were paying on debt number 1
- The minimum monthly payment you were paying on debt number 2
- The additional $100 to $200 per month.
Continue each month until debt number 3 is paid off. Put a red “X” through debt number 3.
If you use this strategy you will not believe how fast you can become debt free. Some people will be free in 3 years others in 5 to 7 years.
Step 10. The Monthly Amount You Paid on Your Final Debt –
This is an ongoing process. Once you are debt free, you will use the amount you were paying monthly on your last debt to invest! Not only once, but each month over and over again. This amount will be substantial because of the accumulation over the different debts. You will be really surprised how much money you will have available to build the life you have always dreamed of. A life with no money issues anymore! YES!!
This will put you on the road from debt-free to becoming rich!!