A lot of people avoid looking, thinking and especially talking about their finances. One thing I always preach is to never hide from the truth. Nothing will change if you just act like nothing is there. That being said, you need to become hyper-aware of your financial situation in order to improve it.
One major factor affecting almost every adult (in America at least) is debt. If you are in debt, I want to help improve your situation.
In order to improve something, you must first understand the core principles. In this weekly sauce, we are going to talk about the ultimate slave creator: DEBT.
1) Is debt normal?
2) The psychology of debt
3) What is debt and how is it created?
4) How do we measure debt?
5) What to do if you are in debt?
Is debt normal?
In America, 220 million adults out of 242 million are in debt and this is not including mortgages! That is a ridiculous proportion! Most of these people will be in some form of debt their entire lives.
If you are in debt, don't worry, there is a light at the end of the tunnel. But first, it is important to understand the psychology of debt.
To break out of debt you must first understand the psychology of it.
"To the degree an individual is unfulfilled in his highest values, he will chase immediate gratifications and escapisms to cope with the pain of an unfulfilled life"
When you are living an unfulfilled life, you will naturally reach for other things to fill that void in your life.
A very common filling of that void is to buy things and stuff. Many people believe that if they buy more things, they will be happier. This couldn't be further from the truth.
If an individual cannot find a way to create a product, service or develop a skill that provides more value than what he/she spends, debt will naturally manifest in their life.
"Debt is the symptom of paying others before paying yourself."
Debt is a symptom of paying others before paying yourself. When you are in debt, that means you are a net consumer. If you are a net consumer, that means you are spending more money than you create.
A great comparison is weight loss.
How do you lose weight? You burn more calories that you take in.
The same principle exists with debt.
If you want to get out of debt, you must save more money than you spend.
Just as being obese makes you a slave to your body, serious debt makes you a slave to your bills and ultimately to your lifestyle.
So, how do you know if you are obese financially?
Debt is actually normal and can be healthy if kept under a certain level. It is difficult to place an umbrella over every human on earth and say that a certain amount of debt is unhealthy for all.
A good way to track and gauge if your debt has gotten out of control is to compare it to your income. This ratio will be described as the debt-to-income ratio.
To calculate this ratio, you must add up your monthly debt payments and divide by your monthly income.
If you have...
$2,000 in debt payments
$4,000 monthly income
Debt-to-income = 50%
This is a dangerous level of debt.
Ideally you want your ratio below 10%, but under 20% is likely more realistic for most people.
If you are over 20%, it is time to take this debt thing a bit more serious and take action in getting that number below that threshold.
What do I do if I am in debt?
Debt is a symptom of paying others before paying yourself. If you are in debt, that means you are buying other people's products and services and paying bills before investing in your own financial independence.
A major mindset change needs to take place that may seem hard to wrap your head around.
You must pay yourself before ANYTHING else.
Delay the bills, the meal at the steak house and the 39 subscriptions you have that you aren't even aware of.
You absolutely have to pay yourself first. Ideally, you want to be saving and investing (wisely) 10% of your income before spending a dime on anything else.
Let's make the comparison to weight loss again.
If you wait to start saving and investing until you are out of debt, that is like saying: I will go to the gym after I lose weight. You can't put the cart before the horse. You must start creating a nest egg that compounds over time to get to a healthy spot financially.
How do you do that if seemingly all of your income goes to bills and debt payments? You call the companies and say: "I am going through financial hardship and I need to get on a payment plan or else I will have to declare bankruptcy."
You will be surprised at how many companies will lower your interest, lower your principal payments and work around your budget in order to keep you as a customer. They would much rather you pay the debt off slowly than collect pennies on the dollar after you declare bankruptcy and the account goes to collections.
In regards to actually paying off the debt in a specific order, you need to take care of the highest interest debt first. Make that a priority to first try to lower the interest rate with that institution, then pay it off before all other debts.
If you have two debts that have the same interest rate, pay off the smaller one first. It helps tremendously to see progress by crossing things off the list.
If you want your life to change, you have to change.
How does change occur?
Take action on this newsletter.
You will thank yourself later.
See you next Friday!
P.S. If you want to learn more about debt and how to leverage credit to improve your lifestyle, join the Credit Secrets course here (price goes up every Monday at 12:00 pm EST)