Benjamin Franklin once said that he would rather go to bed without dinner than rise in debt. Dave Ramsey, Author of the New York best-seller ‘The Total Money Makeover’ said that there are no shortcuts to getting out of debt. Last week I used the analogy of TWSG being like building a two-story mansion where Steps #1, #2 and #3 were the foundation and Step#4 was the ground floor. This week step#5 is the reinforcement. Without which we cannot build the second floor, and if we do attempt to build the second floor without this crucial reinforcement, it would be on unstable ground which could at any time cause our financial mansion to crumble unceremoniously to the ground! Step#4 would have been the turning point where you started to build real wealth. Step#5, combined with the previous steps is where we will start to build long-term sustainable success.
What is the definition of debt? For the purposes of this article, debt is simply any money owed to a person, bank or company.
Good Debt vs Bad Debt. You are probably puzzled by the term ‘good debt’ as generally we view debt as being something negative. Debt, as the definition above states is money owed and therefore whether it is good or bad debt it is money we owed to a person, bank or company. Good debt is an investment that will grow in value or you will reap long-term benefits.
Bad debt on the other hand is quite the opposite of good debt. Anything that loses its value immediately or quickly after purchasing is considered as bad debt. That is, if it will put you in a worse off financial position whether in the short or long run, this is bad debt. Some examples include; mismanagement of your credit card, high interest loans, payday loans and buying furniture and appliances on credit.
Step #5 – Get the F#@K out of Debt!!
How the hell did I get here!? – There is no nice way to put this. Debt is a monster that we have to slaughter with merciless discipline and fervent determination. It is literally a fight for your life, we have to bury it before it buries us. Luckily we are here to show you how. As was said in Step#4, we as human beings have endless desires. There is literally and infinite number of things that we can find an interest in and that can influence us to part with our income. In an attempt to fulfill as much of the desires we have, we spend all our disposable income and fail to follow one of the fundamental principles of Step#4 – live below your means. In fact, we tend to do the opposite and live above our means. We try to live up to the proverbial ‘Jones’s’. We do things that will grant us immediate gratification. Where our income can no longer afford to, we seek out loans/credit to satisfy our ever-growing desires which we start to classify and justify as needs. Pretty soon when the bank is no longer willing to lend to us, we turn to the Micro Loans institutions. When the Micro Loan institutions are no longer willing to lend to us we start borrowing from friends and family. When they will no longer lend to you, you start striking up random conversations with not-so-close acquaintances in hopes of ‘begging dem(them) a ting(something)’. We have destroyed our credibility with the banking institutions and have soured a lot of friendships with close friends and family members, who dodge your calls like a thief hiding from the bad dog in a Jamaican Ackee tree. You are now in debt up to your eyeballs and the way forward looks glum. You feel like you are suffocating, you feel like you have a bag of bricks on your shoulders. To borrow a phrase from the award-winning movie Get Out, ‘you are in a sunken place’.
Help! How do I get out of this dark place? – Lucky for you, you are willing to do the work and TWSG is here to guide you along. You have by this stage already read step#4 and is now putting aside 10% of your take home pay to savings. You have made sacrifices and you realize that these sacrifices are necessary but they are not forever. You have found out that you can survive on the 90% of your salary that is left after you have saved the 10%. Some may have found that after the initial cutting and slicing to save 10% they were actually able to free up more than the 10%. Which is good because Step#5 requires you to free up another 20% of your take home pay. Before you say you can’t do it, think of the negative consequences if you don’t slay this debt monster. When you are shackled by debt;
- You will never be able to build wealth.
- You will never exit the rat race
- You will never be able to live your dreams
- If you don’t address the issue now, you will likely have to work throughout your retirement years, not because you want to, but because you are still in the rat race.
- And did I mention unfulfilled dreams?
I realize that you have made sacrifices to save the 10% from step#4. However you will have to dig deep and make further sacrifices to save the 20% for step#5. It wont be easy, I will never tell you that it will. However it took you some time to get into this debt situation in the first place and it will take you some time to Get Out. Realize that these measures wont be forever, however failure to do them now will result in living the rest of your life in misery!
Ok, lets break it down. – Say you take home USD $1000 per month. 10% ($100) is going towards your saving and 90% ($900) towards your debts and living expenses. Now for simplicity and the purpose of this article, say you have five major debts;
|Debt Type||Principal Balance||Monthly Payment Amount||Percent Interest Rate||# of years to repay|
|Car Loan||$17,050||$250||9%||8 years|
|Personal unsecured Loan||$4,450||$100||18%||6 years|
|Credit Card*||$3000||$120**||48%||Indefinite period of time.|
|Micro Loan*||$1500||$75||40%||3 years|
|Borrowed from Friend/Family||$150||$20||0%||Indefinite period of time.|
*Credit Card and Micro Loans usually have a lot of hidden and not so hidden fees. Which often result in these debts spiraling out of control. For example – Very high interest rates, Annual fee, late payment fee, over limit fee, near cash fee, return payment fee, loan processing fees and prepayment fees among others.
**This $120 is the monthly minimum payment that is typical on an outstanding credit card balance of USD equivalent $3000.
So from the $1000 that you take home you have to pay all those bills in the table above on a monthly basis. Therefore its $1000 – $100(10% savings) = $900. Then;
-$250 – (Monthly Car Loan payment)
-$100 – (Monthly Unsecured Loan payment)
-$120 – (Monthly Credit Card Minimum payment)
-$75 – (Monthly Micro Loan payment)
-$20 _ – (Monthly payback to family member/Friend)
So therefore after subtracting all your liabilities you only have $335 left to work with to get you out of the deep hole that you are currently buried in. As you can see it’s not much left to live on and get yourself out of debt. In a quest to fulfil your desires you lived above your means and got into a lot of debt, now you cant even fulfil your basic desires, and no one else is willing to lend you anymore money. As I stated in the introduction, there are no shortcuts to getting out of debt. Therefore you will have to decide that you are tired of living in this bondage, you want to be free.. you will have to swallow your pride and decide to make radical changes. The strategy we are going to use in this step is to pay off the smallest and easiest debt first. Then the highest interest and ones with lots of penalties.
Lets break it down further. – Now remember the aim is to ‘free up’ another 20% to tackle the debt problem. In the previous step, Step#4 you may have freed up more than the required 10%. The extra percentage freed up in step#4 can go towards the needed 20% in Step#5. So for example, if you manged to free up 20% in step#4 then then the extra 10% could be put towards step#5 and you will now need to find only another 10%. So 30% ($300) will be set aside from your salary of $1000; 10% towards savings and 20% towards paying down debts.
Help!! How do I set aside another 20%? – Short Answer, Drastic Changes! Remember this is only temporary however it must be done in order to slay the debt monster. Life is not like a video game where you can press reset and start back at the beginning. You can’t go back in the past and correct all your bad financial choices, but you can start from today to make the rest of your life a TWS. A proverb in the number one selling book the Bible, which to date is estimated to have sold 5 billion copies, says that ‘Pride goeth before destruction, and a haughty spirit before a fall’. Never let your pride stand in the way of your Success! So this is what you may have to do to carve out that additional 20% that step#5 of TWSG requires; You may have to move back home with your family or a relative to save on rent and utilities. You would of course make your contribution to the household, however you would be saving a lot by this one move alone. You may have to close your Cable, Satellite, Netflix and Internet accounts for a few months (lots of free wi-fi around). Get rid of your mobile plan and limit the credit you top up your cell phone with – make emergency calls only (for a few months). Hitch a ride with a friend/family member or co-worker to work. Contribute a little towards the petrol on a weekly basis. Even better if you can walk to work. Stop eating out, plan and cook your meals! Get up half hour earlier and always make breakfast and lunch for work. If not provided, keep your personal coffee/tea stash at work. Conserve on personal and household items. Buy used/refurbished items like books for children school supplies. Doing it all by yourself? Which other family member or relative can contribute, no matter how small, to that disabled uncle who is now a dependent. Learn to cut your own grass and other chores around the house. Besides, the exercise will be beneficial. For the next several months, your social life and parties will be limited to ‘free’ events. Even so, limit these events as well, because we tend to go overboard even when the event started out as free – as Jamie Foxx says, blame it on the alcohol! You may have to ask a relative to adopt your pet until you are back on your feet. I know you want to help the world, but do I need to tell you not to give to everyone that begs for money during this transition phase? You may have to sell one or all of your vehicles. Cut up all credit cards except one, for true emergencies. New clothes? Not at this time! Stop the impulsive buying of useless things online. Holiday gifts? Haha! don’t make me laugh! However try to give a small token to let the significant people in your life know you are thinking of them. Let them know you are going through a process, ask for their understanding and support. Those who were not understanding and supportive, I hope they don’t want to share in your success when you become a TWS.
And still, lets break it down even further. – Yes this shows how serious we are about slaying this debt monster. You have made it this far, read on if you are tired of mediocre and ready to become a ThirdWorldSuccess(TWS). So now that you have taken these drastic measures and you have carved out another 20% in addition to the 10% you already carved out for savings, let us see what to do now. So assuming that we are still working with the monthly salary of $1000, 20% of that would be $200. Please look at the table above for the list of the five debts that we currently owe. As I stated earlier our strategy will be to pay off firstly the easiest debts, then the debts with highest interest and penalties. This is how we are going to do it;
- Month #1 – Save $200 (20%). $150 goes toward paying off the loan from friend/family member. $50 goes toward Credit Card. Since you only owed $150 to the Friend/Family member, that debt is now cleared and you have only four debts going forward.
- Month #2 – Save $200(20%). $150 goes toward the Micro Loan and $50 towards credit card. Please note that when paying these extra payments, you should make it clear to the lending institution that you need these extra sums to go towards the Principal and the principal only. In just 8 months you will have paid off the Micro Loan facility and have $75 left over in month 9 (8 months after you started to paying the extra $150 to the Micro Loan). Now you have 3 debts outstanding after only 9 months of starting this TWSG plan.
- Month #10 – Save $200(20%). $150 goes toward the credit card and $50 towards the personal unsecured loan. N.B. that for the credit card you were still paying the minimum payment of $120 in addition to the extra $50. So after 9 months lets assume that the credit card debt has now moved from $3000 as stated in the table above to $2000. After a total of one year and eight months (20 months) you will finish paying off the credit card. Now you will have only two debts remaining.
- Month #21 Save $200 (20%). $150 goes toward the unsecured loan and $50 towards Car Loan. After another 14 months this Unsecured loan Facility will be cleared. Now you have only one debt left tackle.
- Month #35 Save $200 (20%). $200 goes toward the car loan principal. All the other debts were cleared so therefore our only focus now is on clearing the car loan. After about another 28 months you will finish paying the car loan. That is a total of about 63 months since the start of your journey to getting rid of debt. Its been about five years and three moths and you are now debt free. Don’t forget also that each time you knocked out a debt you freed up that amount you used to pay in monthly payment for that debt. Therefore you had more to spend towards your living expenses. Don’t forget also that you have been saving another 10% toward your savings over this period of time. Assuming you earn a 7% return on your savings, in addition to being debt free, you now have $8216 in your savings.
So now what? – You are now debt free. You have $8216 and growing in the ‘bank’. You have $100 (10%) that is still going towards your savings and $200 (20%) that used to go towards paying down your debt now available. $700 (70%) free and clear to live on. Is it time to get wild and go on a spend drift? Hell no!! Now that you have that extra 20%, put half of that (10%) towards your savings and investment. The other 10% left, split in half and 5% goes towards an account you should open and label your ‘emergency funds’. The other 5% should go towards another account you label ‘Fun account’. Use the money in the fun account to do whatever the heck you want!! Use it to enjoy life! You see the irony is that now that we have a structure to how we do things, we can use the money in the fun account to fulfill our desires without going overboard and into debt and without feeling guilty. It’s a paradox, structure gives us freedom.
Soaring with the eagles – Now you are in the top 10% of people globally and now set for building your long-term wealth with TWSG. You are not yet completely out of the rat race but you are now a young eagle taking its first flight. You now have an eagle’s eye view of the rat race. You are now ready for Step#6. This is where we are going to start building the top floor of our metaphorical two-story mansion of success. From hence forth you will no longer be burden by debts, we will only utilize ‘good debts’ from now on. The best time to have made these sacrifices was yesterday, the second best time is today. Now that you have completed Step#5 of TWSG you have made the hard choices already and you are already on the road to success. If you are still dithering and on the fence – don’t delay! Five years from now you will be five years older whether or not you work on these TWSG Steps. Time will pass anyway you take it. Wouldn’t it be better for the time to pass while you are getting financially better? Life is not a Netflix movie that you can put on pause, nor is it a video game that you get to go back in time and reset. Time will continue chugging along whether you are working on your financial freedom or you are holding you head down in the rat race. TWSG choose freedom. If you choose the same type ‘freedom’ in the comments. Please share these articles with a friend or someone you know could benefit from reading this. Who knows, that same person may one day become very successful and may thank you in a big way for pointing them in the right direction.
Stay tuned next week as I will publish step six of the ten steps on how to make it in the third world.
Our actions now will determine future results.