Thursday, January 28, 2016

Did You Notice Any Debt?

The one thing that you did not see in our minimum spending plan yesterday was debt.  If you are aiming for financial independence or retirement, you want any outstanding debt that you have paid off.

Actually any money goal that you want to reach should be done only after all debt is paid. Debt will prevent you from reaching your goals.

When you are paying interest on a Visa, Mastercard, Discover or any other credit card, you are actually sabotaging your goals. You can't be financially independent if you owe money to anyone. That interest accumulates 24 hours a day. Getting rid of it as fast as you can should be your only goal.

So how do you start?  Take a look at all of your credit cards. Make a list with the highest interest card at the top of the list and the lowest interest card at the bottom of the list. Pay the highest interest card off first. On the highest interest card, make the minimum payment plus all the extra money you can accumulate that month by being very, very frugal. Do this every month on the highest interest card and just pay the minimum on the other cards. When the highest interest card is paid in full, work your way down the list doing the same thing until they are all paid off.

What else do you have to do? Vow to never use a credit card again until all of your credit card debt is paid in full. Then cut up all but one or two cards. No one needs more than a Visa and a Mastercard or a store card. Then vow to never use a credit card again for anything unless you can pay the bill in full every month. If you do, you are derailing any goals that you finally are able to set now that you are debt free.

Next I would work on paying off your mortgage, a home equity loan, college debt, an auto loan, personal loan or any other debt you owe. Do the same thing paying the highest interest loan first, with the exception of your mortgage. Pay that off last because it at least gives you an income tax deduction. Although lawmakers are trying to get rid of that tax deduction. If that happens, then use the formula of paying off the highest interest loan first, etc.

Some people feel that they can make more money investing than paying off their mortgage early. Good luck with that especially with the market today. I have seen people's nest eggs dissolve in the stock market. They have visions of making a fortune in the market and so they turn their money over to a broker who is more interested in making a large commission than what happens to your little nest egg. They lose your money and you still have your mortgage. 

We paid off our mortgages as fast as we could knowing that we would never be financially independent until we actually owned our home. We have paid for the last two with cash.  In retirement especially, you do not want to be owing a mortgage. Paying property and school taxes is enough of a burden.

So without owing any debt, it would cost us  $27520.44 yearly on a bare bones budget. If we had debt you could see how that could add hundreds even thousands to how much we would need to have to just live in retirement and keep our home. So be sure to add in your debt payments to your bare bones budget when you are figuring it out. Then see how much better off you would be if they were paid off. You would be so much less stressed if you lost an income or had some other kind of emergency.

I am not in any way scolding you for having debt. I just want you to realize what that debt is doing to your life. Wouldn't you rather be able to set life goals and be able to work toward them than be burdened by your debt?

We are not rich. We are comfortable and live well below our means so that we can always stay comfortable. We will be retired 15 years this year.  Costs have gone up over 33% in those years and they will continue to go up. By saving every month and investing wisely, we make sure that our money will outlive us.  We have almost no stress in our lives and that is because we owe no debt. Our money belongs to us. That is what you should be aiming for.

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