Provision #191: Pay Down your Debts

Laser Provision

Do you work hard for your money and have a lot of debts? If so, you may be poor even if your income is high. Financial independence begins with paying down your debts, and there’s a simple strategy to get it done.

LifeTrek Provision

Before you can start acting like you’re rich you have to stop acting like you’re poor. That sounds obvious, but there’s a lot to learn from this simple wisdom.

Two things are true about poor people: they work hard for their money and they frequently go into debt. Unfortunately, many people maintain this pattern even after they move up the ladder and start making a decent income.

Robert Kiyosaki speaks about both dynamics in his book The Cash Flow Quadrant (1998, 1999,Click). The Quadrant refers to four different ways of making money:

  • E = Employee. Most people make their money here: working for someone who promises to pay them for their time. The pay is typically in the form of wages and benefits, although there are other forms of payment such as profit sharing and stock options. People in this quadrant are attracted to the security of having a steady paycheck, although the security of the “E” quadrant is decreasing rapidly.
  • S = Self-Employed. This quadrant covers many professional people such as doctors, lawyers, and accountants. Going into business for themselves is often the next step for successful employees. It’s not uncommon for these people to work even harder than employees, but they enjoy being in control of the operation. The “S” quadrant attracts do-it-yourself perfectionists.
  •  B = Business Owner. People in the “B” quadrant make money from the work of others. They hire people to make the product, provide the service, and control the operation for them. If they go into debt, they rely on the labors of others to pay off the debt. True “Bs” love to delegate. Owning a company does not make someone a “B” unless they get out of the business of running the company.
  •  I = Investor. This is the one quadrant where it takes money • or at least the knowledge of money • to make money. Whereas the “B” makes money off of other people’s time, the “I” makes money off of their own and other people’s money. There is no way to convert money into wealth without moving into the “I” quadrant. Kiyosaki also acknowledges other forms of investment, such as education and IRAs, as a prelude to wealth building.

Kiyosaki encourages people to understand the four quadrants and how they work in order to make decisions about how much time and energy we spend in each one. The poor spend most of their time in the “E” or “S” quadrants, while the rich spend most of their time in the “B” and “I” quadrants. Being poor is not about how much money we make; it’s about how we make our money.

In addition to working hard for their money, poor people frequently go into debt. These two make for a vicious cycle. The harder we work the more money we make, the more money we make the more we can borrow; the more we borrow the harder we have to work to keep up with the payments.

There is no way to move from the “E” and “S” quadrants to the “B” and “I” quadrants if we do not break this cycle. And the only way to break this cycle is to pay down and eventually eliminate all debt that depends upon our work for payment. This includes consumer debt as well as mortgages on a primary residence.

Kiyosaki suggests the following plan for debt elimination. First, craft a lifestyle that generates at least an extra $150 to $200 per month. Be creative here. Vicki Robin, co-author of Your Money or Your Life, paid cash to purchase a large house along with three other people. This enables her to have the benefits of home ownership at a fraction of the cost.

Second, never buy anything on credit that you cannot pay for in the current month. Tear up all your credit cards except for 1 or 2, and use those only for convenience rather than for buying on time.

Third, pay the minimum due on all consumer debts except for the one with the highest interest. On this one put down that extra $150 to $200 per month until the debt is paid off. When that debt is paid off, move on to the next one • adding what you were paying on the first one to the minimum payment you were making on the second. Continue this way until all debts are paid off. The payments quickly snowball and Kioysaki believes that most people can be debt free in 5 to 7 years.

Once your debts are paid off, the considerable monthly payment you were making on the last debt becomes available for investment. Start with simple savings instruments, such as Certificates of Deposit and Money Market funds, before trying anything fancy. Once you put money into savings, never take it out until you’re ready to invest in something else.

That may sound like an impossible dream, but it’s not impossible if we craft an affordable lifestyle in the first place. There’s an old formula that suggests we save 10%, give 10%, and live on 80% of what we make. Anyone who crafts a lifestyle based on 80% of what they make • rather than 100% or 120% • will be able to quickly pay down their debt, improve their circumstances, and share their wealth with others.