Okay Dream Catcher, it’s time to tackle a common mindset misconception (and sometimes major barrier) to building wealth.
It’s about debt…*nervous chuckle*.
True or false statement: “I must pay every single cent of debt before I do anything else with my money”?
Many of us would say “absolutely true” (myself included… before I got hip).
But, here’s why “survey says”… NO!
Debt freedom does not equal wealth.
And, before you panic…
I am PRO-debt-freedom.
I mean, who doesn’t love when you owe absolutely NO ONE?!
As someone who has been on both sides of the debt/no debt coin… there are few greater feelings than not owing “dem people.”
Seriously, every single time a Dream Catcher runs into our private Facebook group (where we work together to solve financial issues and share wins) to post a debt-free testimony, we ALL celebrate! Join us here (500K strong) for free.
So what ARE you saying, Tiff?
I’m saying that as much as I love and value tackling debt, it’s important to remember that doing so will NOT build wealth.
This has to be addressed because I’ve seen how a hyper-focus on debt (combined with zero focus on wealth-building) can lead to devastating consequences down the road.
You know, like when you’re ready to retire and kick your feet up, but you can’t because you’re not in the position to stop working?
I like to call my future sassy senior self “Wanda”. I need to act now… to make sure she’s living large later. And, you must do the same… act now!
I actually started a wee bit of static in these personal finance streets recently (lol), when I joined my friends Rashad Bilal and Troy Millings of the Earn Your Leisure Podcast to talk about my favorite subject –– money.
>>It was EV-ERY-THING; you MUST check out our podcast episode #80 right here. *grab your popcorn*<<
When I dropped this important “debt truth”, I could see the comments roll in on social media full of “say what(s)?” and confusion:
“Wait… so I shouldn’t pay off my debt?”
“This is NOT what I’ve heard.”
“OMG, I’ve been going about this totally wrong.”
Now, here’s the deal: I’m not your “financial advisor,” but I definitely fancy myself to be your “financial girlfriend” –– meaning I’m going to keep it real with you. ALWAYS!
And, there is no time like the present to come together to start talking about shifting our money mindset.
To start thinking about a more balanced approach to paying debt… and… investing in yourself.
I like to use my nephew Roman as an example to break the debt “ice”.
Roman has NO credit card debt, NO student loans, NO vehicle payments, NO mortgage payment… doesn’t owe a penny… to anyone.
He’s four years old and 100% debt-free.
Now, what can he do with all this freedom?!
Absolutely, nothing. Because, besides being 4… he has NO money. Roman is dead broke, lol!!!
This is a super simple example showing that being debt-free doesn’t lead to wealth… unless you combine it with some other critical actions.
My wealth-mindset lightbulb actually turned on during the previous recession…
My recession lesson
During the 2008 Recession, all of my financial wins (great credit, money in savings, a cozy condo purchase) came to a screeching halt.
I lost my good, “stable” job as a preschool teacher when my school lost the funding necessary to keep running.
I also ended up losing my condo to foreclosure and had to move back into my parents’ house and stay in my childhood bedroom at age 30. (Whew, child… that was a time)
The recession left me totally shell-shocked for quite a long while.
When I finally managed to get myself on the road to financial recovery, I started to throw all of my money toward my debt.
ALL. OF. IT.
I climbed my way out of $35,000 in high-interest credit card debt within a few years.
Note: That was a GREAT debt to get rid of because the interest charges on it were eating me (and my pockets) alive!
When I sent the last payment out to my creditor, I was on cloud nine.
That fluffy, blissful cloud lasted about one week before it evaporated into thin air.
Because reality set in… I WAS STILL BROKE.
Soooo, when I turned my attention to my whopping $52,000 student loan bill, I took another route.
Instead of aggressively putting every cent towards that low-interest debt (that was going to take another 5-7 years to pay off), I chose to focus on building wealth as the numero uno priority.
I created a moderate debt payoff plan for my large, low-interest student loan debt (basically paid the minimum due monthly)… and then used my excess cash to learn, earn and grow wealth via my business, The Budgetnista.
Guess what? My investment of time and money into my business and other investment vehicles paid off!
I was eventually able to write one single check to pay off my entire $52,000 student loan bill.
And, I also had enough money to pay off my parent’s house… to purchase my dream home… and to purchase a money-making investment property… all in cash.
The Recession really taught me that debt-free does not equal wealth.
It finally clicked that I couldn’t afford to waste any more time NOT investing my money in a way that would allow it to grow and compound to build wealth.
Speaking of compounding…
Compound Interest: A.K.A. “Money Magic”
Let me tell you about the beauty and sheer wizardry of compound interest. It’s like, “Alakazam, make my coins multiply.” And, boom!
Compound interest happens when you park your cash somewhere (e.g. stocks, bonds, mutual funds, and exchange-traded funds) that earns interest on both the money you put in and on your growing interest.
In other words, your interest earns interest.
As a result, money has the ability to grow exponentially over time. Let’s read that last part again… OVER. TIME.
The best way to gain from compound interest is to leave your money where it is and let it grow long-term. It’s important to let compound have as much time as possible to mature and grow.
Moral of the investment story: there’s NO time to waste!
Want to know how to shift your mindset to wealth-building mode?
Your Wealth-Building Plan
Here’s how you can balance the quest for debt freedom with the benefits of investing in yourself.
1. Pay off high-interest debt first
If you have high-interest debt, focus on paying that off because it’s EXPENSIVE.
For example, a credit card with an interest rate of 30%, will cost you $.30 per dollar spent. Yikes!!!
Here’s a great question to ask yourself when looking at a debt: Can I make more money than I would owe from this debt?
For instance, annually the stock market produces a 7% to 8% positive return on investment. In the example above, the debt costs you $0.30 per dollar, but the investment would only make you $0.08 per dollar. NAH! Not a smart move.
On the other hand, if you have a student loan at 5%, the story is a bit different. The market may return $0.07, while you would pay $0.05. BINGO! This is a gain.
2. Save six months of living expenses.
If you’ve been here for any time, you know I love to tell you to save!
Because things happen. Life events happen. Recessions happen. Coronavirus happens. Job changes happen. Emergencies happen.
It will be important for you to have savings to lean on during these times.
But, savings alone won’t get you to wealth either…
3. Invest in yourself.
Once you’ve paid off high-interest rate debt and established some savings… it’s important to get serious about investing in yourself.
This is the ONLY way to grow your money. I like to think of it as playing offense instead of defense.
I chose to invest in myself by creating and growing my business to get my income streams going… and have since been able to be an active participant in the stock market, real estate, and other money-earning endeavors.
Research each of your options and make the smartest move that would exponentially grow your wealth instead of decreasing it.
Your wealth tree
Debt freedom should be the byproduct of wealth.
Think of it like this… there’s a hole in your backyard.
You can either fill it with more dirt, or you can plant seeds.
If you fill the hole with dirt, you have a smooth backyard surface — nice!
If you fill the hole with (investment) seeds as well, you watch it grow and bear fruit — even better!
(I got this analogy from one of my Dream Catchers, and I screamed, “YASSSS. She gets it!” Thanks!)
So am I saying forget your debt?
Nope. I’m saying be strategic about it.
Learn about high- and low-interest rates to figure out if you can outearn what your debt costs you.
As “The Budgetnista”, I all too often hear from people who pay off all their debt without also saving for retirement.
Unfortunately, there is no way to catch up on compound interest because it literally… takes time.
The great news: When you focus on building wealth, you get debt freedom… you get savings… and you get money to carry you through retirement… all in one!
SIDEBAR: Let me know in the comments what your sassy senior name is going to be? I wanna know, lol…
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