Debt in America is big. Credit is one of the biggest industries in the United States. And for many, the biggest source of stress and discomfort.
The US consumer debt is about to cross a whopping $15 trillion in the near future, with as many as a couple hundred million Americans living in debt.
The average American household has nearly $92,000 in debt, including mortgage, student loan debt, auto loan, and credit card debt.
To make it even worse, about 40% of the people can’t pay more than the minimum in repayments, while 13% think they will never be able to repay their debt.
Clearly, things need to change. And the only way change can happen is by educating people about debt management and how to use debt.
Because while there is something called a good debt, very few people know what it even means and how to use it for the good.
Today, let’s learn from one of the greats in personal finance and debt management, Suze Orman, how to manage debt and use it to your advantage.
Before we begin, this is our third installment in a series featuring Suze Orman. Before this, we’ve done blogs on the Ultimate Retirement Planning Guide and 5 Tips to Achieve Financial goals. You can read them too.
Your Money Reflects You
First, before you understand what is debt, you have to understand what money is. The goal of money is to make you feel secure. That’s it. Nothing more.
Money is the greatest teacher when it comes to teaching you about who you are. Because money cannot do anything by itself, it does what you make it do.
You’re the one who has to go out and get a paycheck. You’re the one who decides what to do with that paycheck, whether to invest it, spend it, or waste it.
The idea is that you control your money. So, if you find that you are in a total financial chaotic mess, then that is because you yourself are a chaotic mess. Your money is just a mirror reflecting back at you who you are. Your money doesn’t have issues, you do.
So when you have debt, it is because, in Suze’s words, “when you feel less than, you spend more than.” What that means is when you feel like you’re nobody, or you don’t have anything, or you deserve this because you’ve struggled a lot or whatever you tell yourself, that feeling suddenly translates into you buying something that you can’t afford.
When you look at debt, the first thing that should come to your mind is, this is a statement of how you feel about who you are. A mirror that you’re looking at. A mirror that you hate to look at and pay attention to.
The reason behind talking this much about a seemingly unrelated topic is that anybody qualified can tell you how to get out of debt, but if you can’t figure out why you got into debt in the first place, you’ll get out of debt and get right back in it again.
It is like diagnosing a disease just by acting against its symptoms. Until you don’t act on the root cause, the symptoms will keep coming back.
Here, the root cause is you and your behavior with your money. Find out what are you doing in your life to be an obstacle in your path to financial freedom.
3 Internal Obstacles to Wealth
For most people, this internal scrutiny to find the root cause for why you get into debt will come down to the three internal obstacles to wealth: Fear, shame, and anger.
In almost all cases, these are the three emotions that cause you to spend more money than you know you should be spending.
You get angry at your neighbor for showing off his new car, so you decide to buy a better one to teach him a lesson. It is anger.
You’re at a store, and you see a sale, and the sale is ending today. You are afraid that you’re going to miss out on it, so you buy something that you take home and never wear it again. It is fear.
You’re at a party, and you feel that you don’t belong there because everyone around you is wearing a fancy, expensive dress, and you’re not. So you decide to buy a similar dress for yourself. It is the feeling of shame that you experience.
Next time, whenever you buy something on credit that you couldn’t afford otherwise, ask yourself which emotion led you to make this purchase and accumulate further debt.
Remind yourself that when you buy something on credit, you are paying for your present-day desires, but your costs will be your future day needs.
There will be things when you get older you’ll need, but you wouldn’t be able to pay for them because you paid for your desires when you were younger.
How to Pay Off Debt Fast
Whatever we talked about till is not what your typical financial advisor would say. The typical answer would hover around good debt and bad debt and the different methods of paying the debt fast, like the snowball method and avalanche method, etc.
But, as said, the most important thing is figuring out why you got into debt in the first place. What are you trying to fill up within yourself with the things that you are buying that are putting you in debt? That is the question at hand.
Now, talking about how to pay off debt fast, we have a full-fledged blog post about it that lists out all the methods out there, including the snowball, avalanche, and more, that’ll practically help you pay off your current debt faster. You can read it here.
However, if you want to be always debt-free, then the only long-term fix is becoming the kind of person who’s never in debt. It might sound like some cliche law of attraction advice, but it works.
Debt vs Getting Funded
The most-heard definition of good debt is the debt you take to invest in something that’s going to generate you more money, like a business or startup.
But, is it really a good idea to raise debt, or is it better to go for other options such as getting funded in exchange for equity.
In Suze’s opinion, there are multiple benefits of getting funded by investors. First, it validates your idea when smart people invest their money in you.
Secondly, while it is also debt, so to speak, it is not the kind of debt you’re personally responsible for. You’re only responsible for doing the best you can to make this idea a success, so you win big and so do investors.
When you go for debt while starting your business, it adds extra pressure as to what happens if it doesn’t work out?
If you don’t wanna sell a stake in your business for money, then a better idea would be to save your own money and fund your business instead of going into debt.
Also, before you put any money into a business, whether your own or someone else’s, make sure you’re starting it because you have a passion and a desire, along with a great idea and a business plan, and you know what it’s going to cost and how long until you make profits.
Just because you can’t find a way to make a living doesn’t mean you start a business. The last thing you want is to invest hundreds of thousands of dollars in something that generates nothing in return.
So, for most people, raising debt to do a business is not a good idea. Only go for it when you’re absolutely sure that whatever you’re doing will generate you enough profits with certainty.