| Resolution Eliminate debt |
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New Year’s Resolution No. 1: Eliminate debt The New Year often corresponds with a holiday that allows us a valuable opportunity to assess where we are in many areas of life, reconnect with our dreams, and make some plans for the forthcoming year to help us achieve them.
It is a valuable opportunity, before the mad rush of ‘normal’ working life resumes, during which time we seldom get the chance to think about where we are going or why. It’s crazy – but true – that we will then spend the next 11 months of the year focusing all our best thought and mental energy on someone else’s goals (our employer’s, or the bank’s). This is a truly precious moment during which we can focus on our own goals and set them in motion. So if you haven’t yet taken the time to reconnect with the things you really care about in life ... consider how to steer your ‘ship’ in the right direction in 2009. Now, before things are back at full pace, I strongly suggest you do so. In the next series of newsletters I am going to support you on your “New Year Quest” New Year’s Resolution No. 1: Eliminate debt
New Year’s Resolution No. 2: Create a surplus
New Year’s Resolution No. 3: Follow the Formula for Riches
New Year’s Resolution No. 4: Apply time and effort
New Year’s Resolution No. 1: Eliminate debt
1. Why does this qualify as such a high priority?
2. What if you have debt but not a debt problem?
4. Can you do it in 2009?
5. What is the first step?
1. Debt elimination: why does this qualify as such a high priority?
Because debt – any debt that is not more than offset by the income it produces, (such as a bond on a rental property with a great IRR) – is seriously eroding your wealth. And yet 99% of people are not aware of it. It’s like a cancer that you don’t know about until it is far advanced.
Debt is the silent cancer of wealth creation. Debt is the single biggest reason why most people do not achieve their dreams, or retire in comfort. And I am talking about debt that is not an onerous struggle to repay every month. Debt that is at ‘normal levels’. Yes, I’m talking about the bond on your house. I’m talking about your car instalments. I’m talking about anything else you owe, from a credit card to a personal loan. The Exception. The only exception to the rule is if you understand and know HOW to apply the Formula For Riches™ to minimize the risk and optimize the growth by applying it to an income generating opportunity.
Even if you are not finding the monthly repayments tough ... this debt is an enemy of wealth creation.
We no longer have a savings culture. I won’t go into the reasons why here. For now I am just going recommend that you go and talk to an older family member or friend who remembers when people used to save up for something they wanted to buy but could not buy immediately for cash. Someone who remembers the days before credit cards were widespread and used to pay for everything from impulse purchases to lunches to groceries. That person may even remember the days when people did not have bonds, but saved to buy houses that were very much more modest than the kind we expect to live in today. Many an indebted middle class person is living today in a far smarter house than some of the great statesmen of yesteryear – from American presidents to Jan Smuts. Go and visit their houses if you can. You will see that a house you can really afford is so much more modest than a house that you borrow for. Yet that is what we expect to live in and we pay the price accordingly. A price which is simply too high. This same older person may also remember that up until very recently, one of the reasons your own home was considered a good investment was that by the time you came to retire, you could live ‘rent-free’, having repaid your bond by then. That was before the very recent habit of withdrawing from your access bond came along – withdrawing the equity and buying a new car, putting in a new kitchen, or taking an overseas trip. Because the generation that has recently begun doing this has for the most part not yet reached retirement age, they haven’t yet been hit with the fact that they may still owe a lot of money on their bond when they do retire – but no longer have the job to make the repayments. Withdrawing the equity on your house to spend is a new phenomenon, brought about by massively increasing house prices which meant people no longer had to save – they could just live in their house and wait for it to appreciate, then borrow the amount it had appreciated by, and spend it, expecting to be able to repay in full when they sold the house. I just want to leave you with one thought: on a micro level, on an individual level, we have the same problems with debt that the American economy is struggling with now – but we are not individually TBTF – Too Big To Fail. No bailouts for us. In fact the problems on a micro level have actually led to the huge financial problems and bailouts we’ve seen recently. It is part of the same system. So next time you hear about federal bailouts of many billions, see it as a reminder that for most people, their own debt situation also needs some attention. |
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