Sunday, February 28, 2016

Why Eliminating Debt Should Be the First Step on Your Road to Riches

If you ever want to become wealthy one day, you should first put in place a debt elimination plan - if you don’t already have one!! Eliminating debt may just be the most important step you ever take in your quest for riches. Allow me to explain:

The first realization of rich people is the difference between an asset and an expense. So, I have two questions for you:
  1. What is the greatest financial asset in your life?
  2. What is the largest financial expense in your life?
Your greatest financial asset
What was your answer for your greatest asset? If you’re like most people, you might have said, “My house or my IRA or my 401(k).” Those are all wrong. The best definition of a true asset that I’ve seen comes from Robert Kiyosaki, from his book Rich Dad, Poor Dad, in which he says, “An asset is anything that puts money in your pocket. And an expense is anything that takes money out of your pocket.” Does your house put money in your pocket or take money out of your pocket? Unless you sell your house, in which case, you wouldn’t have a place to live; your house takes money out of your pocket. It costs you money every month for your mortgage, property taxes, interest, furnishing it, fixing it, maintaining it, etc. Your primary residence is not an asset then, is it? It’s a huge expense!

Your single greatest financial asset is your ability to earn income. So, what you need to be doing is, figuring out a to grow your skill sets, is to become more valuable, so people or companies will want to pay you more money and so you can grow your income. In other words, the money you make from your job or your work or your business is your greatest asset. You will probably not make more money from an investment than you will from your personal income when you are first starting out on your road to building wealth.

Freeing up your earnings, and working to build up your ordinary income then are the most impactful investments that you can make. So, the problem is that your overspending and your debts may have taken control of your greatest asset. Your real reason why getting out of debt is such a critical part of being rich is because the moment you don’t have any monthly payments – debts, bills, etc. – your greatest asset – your earnings – starts to pile up and you start to get rich.

I want you to think – How much extra cash would you have every month if you did not have a car payment; if you did not have a house payment; if you did not have any credit card payments or any student loan payments; any debt whatsoever? How much extra cash would you have each month? Well, for the average person, it’s going to be about $2000, $3000, maybe $5000. Some people who make significant income, it could be anywhere between $5000 and $10,000 a month additional income coming in that you have control over – that you can now start investing. And when you start investing like that, your earnings can start to pile up like crazy. This is the smartest thing you can do.

Big return on investment
You do not need a get rich quick Real Estate scheme or initially to learn how to play the stock market. Those are things that might, if you are lucky, make you a 10-15% return. Once you are out of debt, your regular income will stop accumulating only by the amount you have to pay for ongoing bills like cable, utilities, phone and you have some fixed expenses that you need to have right? But, they are relatively low, when you take out your car payments and your house payment and any other debts you might have like furniture payment or student loan payments. You take all that out and all of a sudden you have a lot of extra cash every month – which means as an investment strategy, getting out of debt is huge!

It’s huge because the income you get to keep as a result of being debt free functions like the return you get on that investment. So, since you get to keep 80% of your earnings, after becoming debt free, it’s like an 80% return on your money! If you make $50,000 per year after taxes, then getting to keep, $40,000 of it because you don’t have any debt, is much better, not to mention more secure and more guaranteed, than taking a financial risk to make $10,000 - $20,000 on some side real estate project or startup venture.

Can you see, all of a sudden, you have an extra $40,000 that you didn’t have before that you could do whatever you want with. You can go on some vacations; you can invest it; you can put your kids in private school or whatever you want to do; you can do a lot of things, right? If you make more than that, it’s even more profound.

If you want to get rich, the first and best investments you can make are learning to work your tail off to grow your ordinary income and getting out of debt. Start a business; get a part time job or something where you can make more money.

Your largest financial expense
By the way, how did you answer the question, “What’s your greatest expense?” You might have said college, or the wedding, or kids or retirement or the house. Again, you’d be wrong. The single greatest expense you will ever have in your life is taxes.

Taxes, at least in the US, they can take as much as 40% of your money out of your pocket before it even reaches your pocket, depending on what you earn. And then if you live in a tax state like California, where the top income tax rate is 13.3%, you add that to the 40% and you are at 53%. 53% of everything you make goes to the government. So, learning to manage your taxes becomes a key part to becoming rich in the long term, but in the short term, getting out of debt is more powerful, and that is what you should be focusing on.

Getting rich isn’t as hard as you think when you know how to think about it in the right way. If you wanted to plan to get debt free and you got really aggressive, the smartest thing you can do is to really work hard to grow your income and start taking that additional income and start paying down that debt as quickly as possible.

I'm so excited to share this information with you. If you have enjoyed the information or feel that it would benefit someone else, please share it. If you have any comments, please post them below, otherwise, feel free to contact me.
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