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More and more people are ge ing 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 li le over the minimum on each one of our credit cards as well as on our car loan.
Obviously, there had to be a be er way to get ourselves out from under our creditors. And sure enough
there was.
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
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businesses.) You can even include your home mortgage in this list.
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.
Step 5 – Come up with an additional $150 to $200 per month. If you are serious about ge ing 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.
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!
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