Is it possible to be debt free? You hear, “You’ll always have a car payment!” This is not in a celebratory voice, so it’s not like people want to have these payments. But we buy the new car on payments anyway, and then after 3-5 years we need a different one, so we buy another one on payments and roll a few thousand dollars of debt into the new vehicle loan. We refinance our mortgage and “take out equity” to pay off some other debts we have. We think we are getting ahead, but all we are doing is moving debt around to try to manage our debt, maybe hide our debt or worst case we free up credit, so we have room for more debt. It’s an endless cycle that most people cannot get out of.
Nothing New Under the Sun
Debt isn’t a new concept. It’s been around awhile. Moses mentions debt in the Bible (1450 BC) and the Code of Hammurabi (1700s BC) mentions debt. Even before either of those, the Sumer civilization (3000 BC) issued commercial credit and agricultural loans. In the 1700s, credit was available at grocers, doctors, and supply houses. Debt isn’t new. It’s been used in America since the country was founded. Debt was used to purchase necessities. Today debt is used to purchase luxuries. People don’t just take on debt to keep them from starving, but they use debt to finance the latest iPhone, clothes, and new cars. Not only do we not need these to survive, but some of the stuff we are financing depreciates in value! We buy it and pay interest on it, and it’s not worth anything when we are done making payments on it.
When you use debt for necessities you are using it to sustain your life. When you use debt for luxuries you are mostly buying depreciating assets. Those depreciating assets are losing you money, and you are not building wealth. The poor person who is using debt for necessities stays poor, but the person who is using debt for luxuries becomes poor. The latter have an income that could be used to build wealth, but instead, they choose to stay or become poor because of their spending habits.
Debt Makes You Broke
On average, people under 35 years old have about a 35% lower net worth than a 35-year-old had in the 1990s. If debt is a tool for building wealth, why are people broke? I won’t tell you that debt is wrong or that there is never a place for debt, but we need to wake up here. Why is consumer debt at its highest when the economy is on fire? People today are using debt to buy things to show off wealth. Debt decreases your wealth! It makes you broke! It even takes away from your biggest wealth-building tool—your income. Your income ends up going to debt payments and not to building wealth. It’s a cycle that gets hard to break. 78% of people in 2017 lived paycheck to paycheck. They can’t get ahead. It’s not because they don’t have an income; it’s because they have so much debt that their paycheck goes to.
Have a Plan
The only way to get rid of your debt is to have a plan and stop spending more than you make and start applying your income toward your debt. Eventually, you will get rid of your debt and then your income is freed up to build wealth. Don’t think that by increasing your income you will get yourself out of debt. It can help, but if you are already buying luxuries on debt, what will cause you to stop doing this? A higher income? We all know that in order to save or pay off debt you need to spend less than you make, but since this is not happening, why do you think it’ll happen when your income increases? Don’t wait for the future when your income increases to pay off debt. Start paying off debt now. Then when your income increases in the future, you will have more to pay off debt with and more to build wealth with.
Some ways to save money include not having a car payment, not buying more house than you need, cutting your grocery bill, cutting your cable bill, cutting your subscription bill, cutting your entertainment bill, and cutting the interest you pay on your debt. Most people can pay off their debt in less than three years if they are focused on paying it off. It starts with having a budget and becoming current on your bills and cutting your budget to the necessities. Follow the plan to get out of debt, save, and build wealth. If you have already been borrowing for all your luxuries, you need to change your behavior and learn how to live without those luxuries. You cannot afford them! Once you’re out of debt and have an emergency fund you will be able to afford those luxuries and more because your income will not be going to debt.
It is possible to be debt free! In the next post, I will go over a plan for you to become debt free and build wealth.