From Debt to Wealth

The bad news: You have debt.

The good news: You have debt.

I know it’s hard to believe that debt is good news for anyone other than the credit card companies and their customers. (Don’t you wish you spent your money buying their stock instead of paying them interest?)

But there is, in fact, a golden light at the end of this tunnel and I’ll show you what it is, as well as how you can get there.

Here’s how it works. Each month you’re paying and paying on your debt. And if you’re like most of us, your balances seem to stay pretty much the same, or maybe even go up instead of down. But in a way that’s good news. Why? Because you’ve already disciplined yourself to pay that fixed amount each month. So if you can pay off your balances, you will have freed up a significant chunk of money that you can turn into wealth – often even more quickly than you thought possible.

Let me give you an example. A few years out of college, when I first started working in the credit education field, I found myself with about ten grand in credit card debt. For a young working person, that was a lot of money, and paying the bills each month got pretty depressing. But when I worked my way out of that credit card hell (in about 18 months) suddenly I had all this “extra” money I was able to save and use to boost my retirement funds. It felt like a windfall!

The same principles that worked for me then can work for you too, so let me tell you how they work:

1: Fess Up
Not knowing how much debt you have is sort of like refusing to step on the scale or check your blood pressure. You can fool yourself for a while, juggling bills and expenses, but one day it’s going to catch up to you. In fact, Harvard law professor Elizabeth Warren – the country’s leading bankruptcy researcher – says in her book The Two Income Trap that false optimism is the single greatest danger for families in financial distress. Consumers who refuse to face the facts, so to speak, are likely to get sucked into high interest loans, scams etc. Recently, I have spoken with two consumers who lost over $6000 each to debt elimination scams. They both ended up filing bankruptcy, which they had hoped desperately to avoid. If they had tried to find a legitimate solution sooner, they may have better options.

So take some time now to write down all your credit cards, what you owe, the interest rates and your monthly payments. I know this may be a scary step for you, but hang in there. There’s still that light at the end of the tunnel to work toward!

2: Create Your Plan
Write it down and you’ll be more successful. That’s the result of behavioral research in a variety of fields, and it certainly applies to paying off debt. I have had the opportunity to interview consumers who are out of debt, or on working their way out, and they all say the same thing: Seeing the numbers in black and white is really motivating, especially when you know exactly when they will be down to zero.

That’s where a pay-off plan comes in. Once you have your list of debts, then it is time to create a plan for paying your debt off as quickly as possible. Most people do not pay their debts in the most effective way. But the right plan can literally save you thousands of dollars!

An accelerated payment plan allows you to turn the tables on your credit card companies. These days, with penalty fees, universal default, and all kind of other traps, it can be hard to stay ahead of the credit card companies. A rapid repayment plan shows you how to pay your debts back in the most efficient and least-expensive way possible, and because you have a clear debt-free date, you’re more motivated to succeed.

The beauty of a do-it-yourself solution like this is that it’s confidential, you don’t have to cut up your credit cards, and once you get started you can create tremendous momentum.

Here’s an added bonus: As you start paying off your debt using a rapid repayment program, your credit rating may improve. Better credit means lower rates on your debts, and may lower your insurance premiums too. That means even more money in your pocket to pay toward your debts!

3: Turn Your Debt Payments Into Wealth
Fantasizing about all the stuff you’ll buy when your debts have disappeared is fine, but if you really want to make a difference, start daydreaming about the ultimate goal – financial freedom. Phil Laut, money psychologist and best-selling author of Wealth Without A Job, says that there is a fundamental difference between ways the wealthy and the not-so-wealthy think. Most people in the latter group think, “I’ve got xx amount of dollars – how can I make them stretch until payday? The wealthy think, “I’ve got xx amount of dollars, how can I use them to make more money?” Which group would you rather fall into?

After your debts are paid off, you can start saving and investing the money you’ve been throwing away on monthly payments. And it can add up quickly.

For example, let’s say you’ve been paying $350 a month on all your credit cards. When you pay them off, you start investing that same amount of money with a 5% return. In five years, you’ll have almost $25,000, and in ten you’ll have over $55,000! Would you rather be paying that $350 a month, or investing it?

The Bottom Line

Those are the basic three steps: Fess Up, Create Your Plan, and then Turn Your Debt Payments Into Wealth

If it’s that easy, why is it so hard?

In a minute I’ll talk about the four major obstacles consumers have when they come to me for advice: high interest rates and minimum payments, too many monthly expenses, and not enough income to get ahead. But first, let me tell you what you need to succeed: a clear plan and the support to make it happen.

Problems and Solutions

Problem 1: Your interest rates are too high
These days credit card issuers can raise your interest rate for virtually any reason (or what seems like no reason). These “default” rates are often 20 – 30% or higher. With those kinds of rates, it’s nearly impossible to dig out. My advice if you’re stuck like this: call (and call) your issuers and try to get a lower rate. If you’re persistent, there’s a good chance you can get a better deal. If not, and your debt is manageable enough that you can stick with a rapid repayment plan, you may well see your credit rating improve simply as a result of paying down your debt. When your credit rating improves, so does your negotiating power. I’ll tell you about a real-life example in just a moment.

If you can’t get your rates down and you’re not able to make headway on your debt alone, consider talking with a counseling agency about a debt management plan.

Problem 2: You can’t afford the minimums
If you’re struggling with minimum payments you may find things getting worse. Many issuers, who have led consumers along with minimum payments so low that they hardly made a dent in the balances, are being warned by the banking regulators to raise those minimums by the end of 2005.

Problem 3: Your expenses are too high
If you’re just barely squeaking by, coming up with another $10 or $50 a month to put toward your debt may seem impossible. So take a good look at where your money goes. What expenses could you painlessly cut back on for a while? Although I hate the exercise of writing down every penny I spend, whenever I do it, I find where those holes in my pockets are. In my book Slash Your Debt, I wrote about how Karen Varcoe, a consumer economics specialist at the University of California had one client who started writing down his daily expenses and discovered he was spending $160 a week in vending machines! David Bach of Finish Rich fame calls it your “latte factor.” Jean Chatsky says you can pay it down with just $10 a day. The truth is that most people find there’s something they can temporarily cut back on in order to get on track.

Problem 4: You don’t make enough
It’s true that most people’s expenses rise with their incomes. Start making more and suddenly you need a new car, wardrobe, computer, whatever. But if you are monitoring your expenses and living carefully then it may simply be that you don’t earn enough. Karen McCall, founder of the Financial Recovery Institute once told me that people with a lot of debt also tend to be “underearners.” Part of your debt elimination plan should include boosting your income – starting a small (inexpensive) side business, selling your old items on ebay, asking for that long overdue raise, changing careers, or finding other ways to raise your income. Then put that extra money toward…you guessed it…that debt!