Contrary to popular belief, not all debt is bad. In fact, leveraging "good debt" can be a powerful strategy to build wealth and secure your financial future. Let's explore how you can use good debt to your advantage and avoid the pitfalls of bad debt.
Understanding Good Debt vs. Bad Debt
Yes, Dave Ramsey is absolutely right in suggesting that more Americans should eliminate all the debt in their lives, but all of it? My answer is emphatically no! I believe there are two types of debt: ‘Good debt’ and ‘Bad Debt’. Good debt makes us money, while bad debt can destroy us financially or at least hold us back from our full financial potential.
Steps to Financial Freedom
Step 1: Maintain Minimum Payments and Build an Emergency Fund
For now, make minimum payments on your credit cards. Don’t worsen your credit score by missing payments. The reason is simple: create an emergency fund before tackling your bad debt. Life's unexpected events often lead to credit card debt. Start with an emergency fund of $1,000, $5,000, or whatever makes sense for your situation. This buffer will prevent you from relying on credit cards during emergencies.
Step 2: Implement the Debt Snowball Method
After establishing an emergency fund, start a Debt Snowball. List all your debts, balances, and minimum payments. Focus on paying off the smallest debt first, then move on to the next smallest. This method creates momentum and motivation. For a free Debt Snowball template and instructional video, email me at Mark@markjkohler.com with the subject line “Debt Snowball.”
Step 3: Generate Additional Revenue
While Dave Ramsey and I agree on many points, this is where we differ. It’s challenging to get out of debt on a fixed income. Consider starting a side business to create additional income. This could be selling products online, offering services in your spare time, or any other passion-driven venture. This extra revenue will help you pay off bad debt faster and build wealth once you're debt-free. For guidance, check out my “8 Steps to Start & Grow Your Small Business” Workbook.
Step 4: Maintain and Use Credit Cards Wisely
Once out of bad debt, use your credit cards strategically. Don’t cut them up! Keeping open lines of credit and making small purchases, then paying them off immediately, will improve your credit score. This responsible usage will prepare you for leveraging good debt.
Step 5: Leverage Good Debt
Now that you’re out of bad debt, it’s time to use good debt to your advantage. Good debt includes borrowing to buy rental real estate, start or expand a business, or purchase a modest home if you’re currently renting. Good debt helps you build wealth by creating additional cash flow and financial stability.
Conclusion
Embracing good debt while eliminating bad debt is a powerful strategy for achieving financial freedom. Build reserves, use debt strategically, and create additional income streams to secure your financial future. This balanced approach will help you live your American dream and take your life to the next level.
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