By Steve Faber
Being debt free is a dream for some, reality for others. What separates those that live life without debt from those that just can’t seem to ever quite escape from debt hanging over their heads? To make matters even more perplexing for those that seem to be forever indebted, some of those that are able to leave debt behind actually seem to be able to make debt work for them. Those folks actually make debt profitable! What’s the secret? How can you not only overcome debt, but actually triumph to the extent that you’re using your debt to your advantage? What do those people who can turn debt on their heads know that you don’t?
It’s pretty simple, really. There are only three ways that you can eliminate debt. Well, actually there are five, but two of them, bankruptcy and debt or credit counseling will have a negative impact on your credit rating, and you surely don’t want that. A little clarification is in order here. Bankruptcy can stay on your credit report for 10 years. Credit counseling can be a great choice for some people, however, you need to be extremely careful, because in recent years, there have been many disreputable credit counseling agencies attracted to the industry. Do your due diligence here, or you may find yourself out substantial money and still over a credit barrel.
With most credit counseling programs all your credit accounts are closed and the payments are renegotiated by the agency. During the period you are actually participating in the debt repayment program, your credit rating will be a bit, shall we say, depressed. The good news is that, because you’ll have repaid all your debts at the end of the program, your credit should end up being really good in 3 to 4 years.
What are the other three ways to eliminate your debt? Well, before we take a look there, you’ve got to take a big step. You absolutely, positively must correct your spending habits. If you’re deeply in debt due to circumstances beyond your control, such as divorce or medical problems, that’s different, but many people wind up deep in debt due to excessive spending, this brings us back to the three ways to eliminate debt. All debt elimination is a combination of these three things.
1- Increase your income. It really doesn’t matter how you go about this, as long as it’s legal and ethical. You can get another job if you’ve got the time. You can start your own business. If you are an expert in a specific area, you might make a decent income doing part time consulting. You could jump into an online business. The possibilities here are really endless. It’s up to you.
2- Reduce your expenses. If you’re unable to increase you income, you need to free up additional cash to repay your debts. In the absence of additional income, another option is to minimize your outgoing cash. There are countless ways you can accomplish this, many of which will minimally impact your lifestyle. You may have to cut back however, even if it turns out only to be a temporary situation.
3- Increase your leverage. You need to make your money work harder. Leverage is using a small amount of an asset to control a larger one. Leverage is one of the two key principles in generating wealth (the other is compounding). For most people the best example of leverage is their residence. Using only a 3% - 20% down payment, they are able to take advantage of all the appreciation and tax benefits of their residential real estate. So, for example, when their humble abode they purchased for $150,000 appreciates to $300,000, they made a 100% profit, correct?
Not so fast. Remember, they only invested maybe $15,000. So, to gain $150,000 in pretax profits (which are actually tax exempt if you’ve lived in the property as your primary residence for 2 of the last 5 years), you only invested $15,000. You actually received a 1,000% profit, to say nothing of the federal income tax deduction for mortgage interest. Any asset can be leveraged, weather it’s a business leveraging its’ employees time, or you leveraging your residence.
The people that use their debt understand how to apply these three principles better than you do, for one thing. You need to understand them, and then do what ever you can in order to maximize them. There are thousands of strategies you can apply that will bring these principles to bear on your debt, and eventually you’ll be debt free too.
Steve Faber has written about many topics including business, finance, electronics, and construction. He's been published in several magazines, both online and off. He has been a principal in a bricks and mortar business that grossed over $1.5 million annually, and been involved in several e-commerce ventures. See his blog at Find Financial Freedom for much more information, some commentary about finance, governement, and politics, and methods you can use to achieve your objectives.
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