Invest in Your Debt

Twelve Facts You Must Know About Debt
If You are Serious about Getting rid of Your Debt
by Dave Ireland
Hello, I’m Dave Ireland, a retired corporate executive and currently a Professional Speaker, Author and Educator. I have been speaking on the subject of debt elimination for over 10 years. People who have heard me speak know that I have a problem with conventional wisdom. Not all of it is bad but most of it contains ideas that people blindly accept without thinking them through. I encourage people to challenge conventional wisdom as part of developing a True Financial Freedom plan. With the goal of encouraging people to think conventional wisdom through, I present some of my favorite “unconventional” thoughts.
Do not waste your time and energy trying to manage your debts.
Credit cards (and most debt) are just like drugs; they make you feel good in the beginning. But for some of us, there is a high price to pay in the long run. In the beginning, it feels like free money and we are joyous and happy about all the new stuff we have bought. However, 30 days later, the bill comes in and the pain begins. If you are $70,000 in credit card debt like I was, the pain can become overwhelming!
I’m not addressing people with debt problems. There are consumer debt counseling services available for those people. What about middle class American’s paying their bills but feel like they are just treading water; making no real progress and getting sick and tired of being sick and tired of their debt? I’m talking about people making $50,000 a year and spending $55,000; making $20,000 and spending $25,000; or making $200,000 a year and spending $220,000 and trying to figure out; what is wrong with this picture?
What’s wrong is the fact that being in debt is a brand new phenomenon of the last 30 to 40 years and it does not have to be this way.
What should you do?
Don’t just settle for managing your debts. That is just a short-term approach. Start eliminating your debts today, and begin building true financial freedom! And if you can’t do it yourself, hire a debt elimination expert to do it for you. I’m not referring to consumer credit counseling or debt negotiation/settlement companies that have programs that dramatically reduce your credit score. They may be appropriate for someone who has a major debt problem and already has a low credit score, but they are not appropriate for the typical middle class Americans like you.
I’m referring to someone just like you; someone who actually has the “Great American Debt Opportunity”; that is the opportunity to turn their debt into real wealth for themselves and their family. I’m referring to companies that manage your liabilities in such a way that credit scores immediately improve and debts are rapidly eliminated; systematically, one at a time, until all consumer debt is gone in about 3 to 4 years and most 30-year mortgages are eliminated in another 4-5 years.
You’re smart enough to hire a stock broker or financial planner to mange your assets or an insurance expert to make sure you’re properly protected, so don’t think you have to go it alone with respect to your debts. Most Americans are spending $30, $40 or more a day on interest fees. If you ever want to be financially secure, you absolutely must break this viscous cycle of debt management and start eliminating your debt. Think about it, over the past 2 to 3 months you have probably spent three to four thousand dollars on interest fees.
You must start now, today; you can’t afford not too.
Do not fall for the “Interest Rate Trap”
Conventional wisdom has all of us trying to improve our financial situation by pursuing a strategy of getting as low an interest rate as possible. We are scrambling to get lower interest rates by doing expensive balance transfers or expensive refinancing in order to save a miniscule amount of interest cost or get a useless tax deduction, while the creditors are robbing us blind.
There are times when it makes sense to restructure high interest debt into low interest rates, but that should be the exception not the rule. It is all smoke and mirrors and here is why.
Studies have shown that people who consolidate loans are worse off than they would be if they had just left everything alone. This is what typically happens. They get a consolidation loan, let’s say a Home Equity Line of Credit; they pay off their credit cards and car loans and now they are told that they just eliminated their debts. What a joke. They owed $170,000 before and now they still owe $170,000 after consolidating; no change. However, the argument is that it’s good because their interest rates are lower, monthly payments are lower and it all tax deductible; and that is good. NO! NO! NO!
Why do I say it’s not good? You just created a 15 or maybe even a 30 year car loan. And government studies show that within a matter of days the typical American will be maxing out new credit cards and within a year or two deciding to buy new expensive cars; and they still have the consolidation loan on top of all the old debt, which has come back as new debt.
See number five below for a discussion of the tax deduction and find out what a farce that is.
Nothing fundamental has changed, except they are further in debt and more frustrated than ever. Consolidation Loans are a financial disaster for most people, unless they have a plan to pay them off rapidly.
A 13 percent mortgage that is better than a 7%?
The creditors understand the “time value of money” and so will you after you read the following.
Did you know that a 13% mortgage can be far better than a 7% mortgage? Now that is more than unconventional thinking, that is down right controversial. But hear me out. Let’s say you go out and get a $100,000 mortgage at 7%. You will pay about $150,000 in interest cost over the 30 year life of the loan. You say, Dave, that’s normal, everyone knows that a $100,000 house (if you could buy a decent house for a 100k in this day and age) will cost you about two to three hundred thousand dollars, depending on the interest rate. That’s where conventional wisdom goes astray again. It’s not dependent on just the interest rate. As a matter of fact, the “time value of money” is much more important to the total cost of interest than the interest rate itself.
Here is the rest of the story as Paul Harvey would say. Get that same $100,000 mortgage at 13% and pay it off in 7 years or so. Your cost of interest has dramatically been reduced to $50,000. Now that you have been told the rest of the story, I ask you this simple question; which would you rather have, a 7% mortgage that costs you $150,000, or a 13% mortgage for only $50,000? It’s not a trick question. Think about it. And as you do, you may say, “hey Dave, what’s wrong with a 7% mortgage that I pay off in 7. And I say, “Not a bad idea”. Now your cost of interest drops to about $30,000, saving you another $20,000. However, here is the point of the story. Reducing the interest rate from 13% down to 7% only saves you about $20,000, while cutting the term of the loan by 23 years saves you about $100,000; about 5 times more. Folks, chasing lower interest rates for whatever reason is a waste of time and energy compared to reducing the time you are in debt. The “time value of money” trumps the interest rate, every time.
Point two: How does one pay off a mortgage in 7 years? It’s easy; just increase your mortgage payment by about 3 times its normal amount. How does one do that? Get rid of all your consumer debt and add those monthly payments to the principal payment on your regular monthly mortgage. How does one get rid of the consumer debt? Use a roll up process where you payoff the debt with the smallest balance first, and when it’s paid off, you roll that payment into the next smallest debt. Using this systematic approach will eliminate your consumer debt in about 3 to 4 years and your 30-year mortgage in another 4-5 years for most middle class Americans. However, I will worn you, it’s a lot easier said, than done. Why did I suggest using a competent company that has an automatic debt elimination service? Simple; get all the competent help you can. Don’t take any chances that you may not have the time; energy, discipline or wherewithal to get rid of your debt ASAP, especially if it is high interest, such as a 13% mortgage or high credit card debts with a long loan payment schedule. At 30 years, your cost of interest for the 13% mortgage will be an astonishing $300,000 in interest cost on a $100,000 house.
Even a low 5% student loan, paid off over 30 years, will cost you twice as much as you originally borrowed. It’s important to automate the process and make sure it happens. If not you will be in debt forever, as many of the baby boomers are realizing.
The analogy that makes the most sense to me is losing weight. The concept is easy; just burn more calories than you take in! You do that and I guarantee you will lose weight; I’ll stake my life on it. Getting out of debt is the same way. Just prioritize your debts (and the highest interest rate is not the best way to pay off debt) and roll one debt into the other and I guarantee you will be debt free. However, like losing weight, it’s a lot easier said than done. We are faced with offers for consolidation loans, new toys to try, new things to buy. Like losing weight, the marketers are constantly bombarding us with new “Twinkies”, new restaurants to visit, etc.
Thus, it is almost impossible for us to lose weight or get out of debt.
If creditors could, they would keep you in debt forever; and they are doing it with interest only loans. Many Americans are retiring with six, seven, eight hundred dollar mortgage payments. Are you now seeing what you are up against? Getting out of debt is not going to be easy, so get all the help you can; you are going to need it!
With all the corporate downsizing and layoffs, it may be a good idea to own your home.
To determine if you own your home, skip two mortgage payments and you will quickly realize who actually owns your home. You may think interest rates are low and you can do better by investing your money someplace other than your house. Please, look closely at your mortgage statement. For most of you, more than 90% of your payment goes to the bank in the form of interest. That’s 90% interest, not 7%. Your actual mortgage payment is a minuscule 10% or less of your total monthly payment.
Don’t payoff your mortgage; it’s the last tax deduction we have left.
If you have a tax planner, financial planner or friend giving you this advice, get a new one...FAST! Yes, while you have a mortgage, it may be appropriate to take the tax deduction, but the deduction is not a reason to keep your mortgage. While you are paying out tens of thousands of dollars in interest over a 30-year period, you are only getting back from the IRS, 15, 25 or 35 percent at most, depending on your tax bracket. And if you only have the mortgage you may be better off taking the standard deduction in place of itemizing. The standard deduction is now over ten thousand dollars for a married couple. To beat that you must be paying a lot of interest on the mortgage.
Why give away dollar bills to the bankers just to get back pennies from the IRS? It makes no sense if you really look at your options and think it through.
Pay yourself first.
No way! Government studies show that 96% of Americans do not achieve financial freedom by the time they retire at age 65 (or is it 66 or 67 for some of us). Conventional wisdom wants you to pay yourself first, but it just doesn’t seem to work for most people.
Here’s why: A $2000 credit card balance at 17.9% interest will cost you $6827 to pay off over the 30-year and 5 month payment plan your friendly credit card company has you on. That’s right, by paying the minimum monthly payment that the bank offers you each month, you will pay nearly $5000 in interest and about 3 ½ times more than you originally borrowed. That’s worse than a 30-year mortgage.
Why not pay your bankers first and in the long run keep more of your money for yourself and your family!
Give yourself a 46% raise by eliminating all your debts.
The typical American family uses about 40 to 50 percent of their paycheck to service their debts; mortgages, car loans, student loans credit card and etc. If you did not have these monthly payments, you could increase your monthly cash flow by the same amount without begging your boss for a raise. Take charge and give yourself a raise by eliminating this unnecessary and burdensome debt.
Get out of debt now!
According to the best selling book, The Millionaire Next Door, by Bill Danko and Tom Stanley, millionaires in our society do not have consumer debt and they own their own cars, homes and their lives. The idea of using other people’s money is a new phenomenon of the last 30 or 40 years. My grandmother did not have credit card debt and she lived a lot less stressful life than I did when I was a quarter million dollars in debt. In the old days, they had the audacity to pay cash for their cars (no leases) and some even paid cash for their homes or at most, had a 5-year mortgage; not the 15, 30 and 40 year or interest only mortgages of today.
Speaking about credit cards. I’m not an advocate of doing total plastic surgery on yourself. How are you going to rent cars, reserve hotel rooms, buy stuff off the internet without a credit card? It’s nearly impossible. So here’s my advice, if you have 18 credit cards go ahead and cut up 16 or 17 of them. You probably only need one or two at the most. Now don’t close the accounts. That will hurt you credit score. But then again, have you ever heard the saying, “Good credit is equivalent to good bondage”. So don’t be putting all your energy into having a perfect credit score. Whether you have a 700 score or an 800 score is not as important to your financial well being as being debt free. Eliminate your debt and you will have a great credit score no matter what.
Also, I don’t think that debt is bad either. I don’t even think debt is good. It just “is”. It’s like fire. Fire can heat your house, heat your body, but what else can it do to your house? See my point.
As you looking for ways to pay off your debt, focus on the smallest debt first.
Put all your energy into eliminating your smallest balance debt first, regardless of its interest rate. Do this by investing any extra funds into the smallest balance and get a real sense of accomplishment when you eliminate that debt in a matter of months, in place of years. Then go onto the next smallest debt and achieve real confidence and self-esteem as you eliminate one debt after the other in a matter of month in place of years.
I know that conventional wisdom wants you to pay off the debt with the highest interest rate first, but debt is paid off so fast, that the interest rates become irrelevant. Remember it’s the time value of money that counts, the term of the loan is what’s important, not the interest rates
Another point, the smallest debt method may actually be more cost effective in some cases. However, the psychological advantage is huge.
To achieve True Financial Freedom, invest extra funds into your debt before
you put money into traditional investments (stock market, etc).
Do this by making extra payments on your smallest balance first. Do this easily, by using the funds that you are currently putting into traditional investments. When you have the first debt paid off, put all the money you had been investing into your first debt, into the next smallest debt. Continue this debt elimination process until you reach your mortgage which usually will be your largest debt and the last one you will eliminate.
Following this process you will eliminate most consumer debt in 3 to 4 years and then eliminate most 30-year mortgages in another 4-5 years.
To get a guaranteed, risk free, tax free and commission free double digit
return, you do not have to be a Wall Street Financial Wizard.
Just invest in your debt. It’s risk free because I don’t know of any banker who will not take your money and stop charging you 7%, 18%, 29% or whatever interest you are paying on your debts. It’s guaranteed to happen. And it is tax free, not just tax deferred.
Why? Because if you agree with Ben Franklin that a penny saved is a penny earned, when you pay off your debt ahead of schedule, you are going to save (earn) a lot of money and no one from the IRS is ever going to come to take any of that earned (saved) money. It is truly tax free.
In the textbook, Invest In Your Debt, it is shown that the typical American family will receive an equivalent 37.13% return by investing 10 percent of their monthly gross income into their debt. Unless you have 2.64 children and 2.98 cars in the garage, you probably will not get a 37.13 percent return. With my ADE® Students, I’ve seen as high as 55%, and as low as 15%. However, the point is, you will get a substantial double digit equivalent return on your debt investment, which will be a guaranteed, risk free, tax free return. And you will not need to pay a sales person or stock broker any commissions.
When you are debt free, take the money you were wasting on debt, typically
30 to 40 percent of your gross pay, and put it into more traditional
investments.
You are now paying one, two, three thousand dollars or more each and every month on your debts. When you are debt free, you will no longer have to make any debt payments, this money is all yours and you can invest this same money into traditional investments. Because you are out of debt 15 to 25 years sooner, you can easily accumulate a million dollars or more of future wealth for yourself and your family. You now have the “time value of money” working for you, not against you. You can do all this on your current income, while most Americans are still struggling just to get out of debt and pay off their mortgage.
If this type of thinking resonates with you,
visit http://www.investinyourdebt.com/ for more information.
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Dave Ireland is Founder, CEO of IYD Inc. and co-author of Invest In Your Debt. He is co-creator of the Automatic Debt Elimination® program offered by IYD, Inc. He can be reached at iyd@investinyourdebt.com and http://www.investinyourdebt.com/ or call his direct line 512 447 1990 or 888 913 8786. This article is copyright (c) 2007 by Dave Ireland, and may be reprinted in it's entirety as long as this byline and copyright statement is included.