Step 4 to Financial Freedom
Clear Your Bad Debts
The fourth step to financial freedom is clearing your bad debts as quickly as possible. Before going into more detail on this it is imperative to understand that there is a fundamental difference between 'Good Debt' and 'Bad Debt'
Good Debt – makes you money
Some debt is actually considered to be an investment. I know, you are probably wondering how on earth anything as bad as debt could be considered an investment, but think about this for a moment. If you took on the debt to purchase something that will increase in value and will contribute to your overall financial wellbeing, would you not consider this to be a good debt?
Let's have a look at a few examples to help clear this up.
1. Buying a house to rent out. The tenants pay the rent that covers the mortgage costs. Houses nearly always go up in value over the long term. The mortgage loan you take out to pay for the house is an investment.
2. Taking out a loan to help get a business idea / venture off the ground. If adequate due diligence has been done and you have done your market research and you know that there is a real opportunity for your business to succeed, this is a good idea. By taking the loan, you can start your profitable business.
If good debts make you money, how much good debt would you like to be in? Me personally, I would want to be in millions of dollars of good debt.
Bad Debt – costs you money
Conversely to good debt, there is also bad debt, debt that costs you money every month. When you use debt to finance things that are consumed and will never appreciate in value, it is considered bad debt. This is the kind of debt that creates an unhealthy financial situation.
There are many, many examples of Bad debt and I am sure you will recognise all of them and even think of a few more yourself, but here is just a sample list.
1. Credit card debt – where credit cards are used to purchase everyday items like clothes or food.
2. Loan for a new car – cars nearly always depreciate
3. Loan for new sofas, or wardrobes, or washing machine
4. Loan for a holiday abroad
5. Load for a wedding
Clear your Bad Debts
First and foremost, if you have enough bad debts that it seems unmanageable, you probably need help. Speak to a financial advisor as soon as you can and come up with a plan to pay off your debts as soon as you can, preferably within 2 – 5 years. Once you have come up with this plan, be disciplined enough to stick to it, don't stray from it or you will never get yourself out of the whole you find yourself in now. Set aside money each and every month to clear your bad debts. You will never have financial freedom if you continue to fork out on high interest rates every month.
As you begin to settle your debts, don't just spend the money that you were paying out or you will just find yourself in the same situation in time to come. Save this money. Save it for investment purposes as mentioned in Step 2 and have your money begin working for you.