By: Molly M Grubb, AIF®
Part of financial independence is getting rid of bad debt. What is bad debt? It is a personal loan that has a high interest rate and greatly affects your monthly cash flow, and it tends to be a loan for a depreciating asset (an asset that declines in value over time). Here are some steps to increase your cash flow by getting rid of bad debt.
There are several tricks that you can use once you begin to pay yourself first by becoming the bank and paying yourself interest when you need to borrow money. Use these tricks when borrowing from your 401(k), on your life insurance, or from a family bank and if you own your own business.
Grubb Wealth tidbit: If you are thinking about getting a mortgage, you can take out a 30-year mortgage (with, let’s say, $1,000 monthly payments) but pay on it according to a 10-year amortization schedule (let’s say a $1,500 monthly payment). However, instead of paying the bank the full 10-year amortization schedule payment of $1,500, you continue to pay the bank $1,000 and pay yourself $500 a month, ideally into an investment account that grows at a better interest rate than you are paying the bank. Over the next seven to nine years, your savings should equate to what is needed to pay off your mortgage. However, rather than putting yourself in the bondage of a higher monthly payment, you now have a savings account in case you lose a job or have a major health issue. By doing this, you can ensure that you will still make your mortgage payment and not risk losing your home because you chose a higher monthly payment.
Be diligent about the process of paying off your debt. Continually monitor and strategize as your finances and life change. These four steps are not something you do once; they are a process that you implement to gain and keep financial independence.
This blog is a publication of Grubb Wealth Management. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of any subjects discussed. A professional advisor should be consulted before any investment decisions are made. All expressions of opinion reflect the judgment of the author on the date of post and are subject to change.