Living debt-free is a great idea if you are middle-income in middle-America and you intend to stay that way. Under those circumstances you will definitely be happier and have more money if you live debt free. However, if you are a business owner or if you aspire to wealth, debt is a necessary reality of your life. Building wealth or growing a business requires leverage. Leveraging is using other people’s money to purchase assets while keeping all of the growth on the asset or enterprise.

Example: You buy a house for $100,000. You borrow $80,000. The value of the house grows to $210,000. You still owe only the $80,000 plus interest. That’s how you grow wealth. It works the same in business – borrow, buy product, sell at a profit and pay back what you borrowed. If you were to take on investment partners, they’d be entitled to a percentage on the growth. Leverage is better

.Poorly managed debt will cost you…

So, yes you need debt. What you don’t need is poorly managed debt service. Paying $.40 out of every earned dollar is a real strain on your cash-flow. You can’t do much else when you have that level of debt service. $.20 of every dollar doubles your available cash. The obvious concern will be that at $.20 it will take you much longer to pay off debt and the interest will grow exponentially and cost much more over the long term. But, that argument misses the fact that the additional free flow of cash can and should get you a return much in excess of the interest on your debt.

Example: $4000 per month to service a loan of $200,000 at 6% or $2000 per month to service the same debt and $2000 per month re-invested in your business or purchasing an investment property that will bring you a return on your investment of 15% or greater over the same term

. That math is exactly why I tell clients not to hurry to over-pay their mortgages. Take those extra mortgage payments and really make that money do what you want it to. With mortgage rates under 6%, it’s not hard to find better ways to put that money to work for you. Why give it to the bank so they can make the additional profit instead of you? (Split payments are different. Your cash-flow remains the same, but you make semi-monthly payments and save a lot in interest over the term of the loan.)

Discipline…

…is critical to this or any financial strategy. It is not unusual to see people adjust and improve their cash-flow and a year later not know where the additional money went. You need a strategy to re-direct that additional free cash-flow so that it’s used productively to improve your overall position. For a lot of people, determining how much they will pay to debt service is not an option. It should be. By protecting your credit score you greatly improve your ability to negotiate your rates.It’s Business…

It’s important to remember that you are not powerless with your creditors. It’s not like asking your parents for money. Banks and Credit Unions profit by lending you money. Their business model is predicated on you borrowing and re-paying money. It doesn’t feel like that when you owe money, I know. But the fact is that creditors need you as much as you need them. It’s business. You’re not asking for favors. Protect your credit. Keep your options open.

Consolidating accounts to an institution where you have a good relationship is another good way to improve your negotiating position. Your leaving with your $2000 is not as threatening as you taking your $400,000 and looking for a bank that’s willing to talk to you about the rate you want to pay. There are a lot of places you can take your debt if you are a good credit risk. Make the calls. Re-negotiate your interest rate and terms. If you don’t get what you want, get another loan or credit card from someone who’s saying what you want to hear and pay off the uncooperative debt. Lenders don’t want you paying stuff off. They want you to stretch it out. Tell them they need to meet your terms or you’ll take your business elsewhere. If you’re not a business owner, disciplined debt management is even more important. You’re targeting 6% growth in your qualified retirement plan. If your debt is growing by 19%, you are going backwards fast.  

Cash-Flow Structure…

How you pay matters to your overall cost of debt service. If overall debt reduction is your goal, pay the high-rate stuff first. It will save you thousands. Even better, consolidate all of your debt to the card or bank with the best rate. Tell them all what you intend to do and watch them fight over your business.

If your credit score doesn’t support this strategy, fix it. This is simple, but really not easy. It requires meticulous credit maintenance, a lot of phone calls, and intestinal fortitude. Remember, the first two people you talk to can’t help you and don’t care. They’re paid by the hour. Go deeper. Get a supervisor, Get a manager. Never take “no” from someone who’s not in a position to give you a “yes”. (Thanks Joe Rags.) A better idea might be to seek professional help.

Disclosure:

Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS)

Securities products/services and advisory services offered through PAS, a registered broker/dealer and investment advisor.

Financial Representatives, The Guardian Life Insurance Company of America (Guardian), New York, NY, PAS is an indirect, wholly owned subsidiary of Guardian. Strategies for Wealth is not an affiliate or subsidiary of PAS or Guardian.

PAS is a member of FINRA, SIPC.

Similar Posts:

• Consolidate Credit Card Debt even with a Bad Credit Record
• Bad Credit Car Loan Budget Requirements
• Motor Car Finance for People with a Bad Credit Record
• Debt settlement may be your path to financial freedom
• Is Consolidation The Answer To Your Debt Problem?