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How We Got Out Of
Debt - By Kim Kiyosaki
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More and more people are getting swallowed up
by debt. I'm sure you've read and heard many of the statistics and stories in
the news.
One of the keys to financial independence is to
get rid of your bad debt and acquire good debt. Bad debt is debt
that makes you poor, such as credit card debt, car loans, school loans - this
is consumer debt. Good debt is debt you acquire that actually works for you.
The best example of good debt is a mortgage loan on a rental property that
throws off positive cash flow every month. Good debt is money that you borrow
to purchase assets that puts money in your pocket.
In 1985, Robert and I had a good deal of bad
debt. And even though we kept making payments every month, we never seemed to
make a dent in the amount of debt we owed. Each month we paid a little over
the minimum on each one of our credit cards as well as on our car loan.
Obviously, there had to be a better way to get ourselves out from under our
creditors. And sure enough there was.
"Stick with the Formula"
This is the formula that Robert and I followed to pay off our debt. You'll
find that if you follow this formula you will be out of debt much quicker than
you imagined. Most people find themselves "bad" debt-free within 5
to 7 years. The key is to stick with the formula. You will not get ahead if
you say, "I'll just skip this one month," and then two, and then
three. If you stick with the formula it then becomes a habit you follow for a
lifetime.
Here is the formula we used:
Step 1 - Stop accumulating bad debt. Whatever
you purchase via credit cards must be paid off in full at the end of each
month. No exceptions.
Step 2 - Make a list of all your consumer (bad)
debts. This includes each credit card, car loans, school loans, home
improvement loans on your personal residence, and any other bad debts you have
acquired. (One item on our list was an outstanding debt to a partner from one
of Robert's past businesses.) You can even include your home mortgage in this
list.
Step 3 - Next to each items listed make 3
columns:
- Amount
Owed
- Minimum
Monthly Payment
- Number of
Months
Enter the appropriate numbers into each column.
To arrive at the number of months, simply divide the amount owed by the
minimum payment.
Step 4 - Based solely on the Number of Months
begin ranking each debt. Put a "1" next to the lowest number of
months, a "2" next to the 2nd lowest number and continue up to the
highest number of months. This is the order that you will be paying off your
various debts.
Get Your First Win!
The reason you will start with the debt with the lowest number of months is
that you want to have your first "win" or success in this process as
soon as possible. Once you get that first credit card (or debt) paid off,
you'll begin to see the light at the end of the tunnel.
Step 5 - Come up with an additional $150 to
$200 per month. If you are serious about getting out of debt - and, more
importantly, becoming financially free - then generating this extra money will
not be difficult. To be candid, if you cannot generate an additional $150 per
month then your chances of becoming financially independent are slim.
Step 6 - Pay the minimum amount on every debt
you have listed EXCEPT for the one you've marked with a "1." On this
first debt to be paid off, pay the minimum amount due plus the additional $150
to $200. Keep doing this each month until your first debt is paid off. Scratch
that first debt off your list.
Step 7 - Congratulate yourself!
Step 8 - Pay the minimum amount due on
every debt you have EXCEPT for the one you've marked with a "2." On
this debt, pay the minimum amount due, PLUS the entire amount you had been
paying on debt #1. For example if on debt #1 your minimum amount due was $40
and you added the additional $150 then you were paying a total of $190 each
month. On debt #2, if the minimum amount due is $50, you will now pay $50 plus
$190 or a total of $240 per month.
After a debt is paid off then take the total
amount you were paying on that debt and add it to the minimum amount due on
your next debt to get your new monthly payment. You will be amazed at how
quickly this amount adds up and how quickly your credit cards, car loans, etc.
are paid off.
Continue this process until all the bad debts
on your list are paid off.
Step 9 - By this time the monthly amount you
are paying on your last debt is likely to be quite substantial. Keep paying
that amount every month. Except now - instead of paying it to creditors - you
pay it to yourself for only one type of purchase: assets that
give you positive cash flow each month. You will be out of the Rat Race faster
than you ever dreamed!
Kim
Kiyosaki (Mrs. Rich Dad Poor Dad)
