The Carr Report: Invest in your debt

There’s a difference between being rich and being wealthy. Being rich means you earn a high income. How much money do you have to earn to be rich? That’s a relative question. Ask a person earning $45,000 per year that question, they’ll say $100,000. Ask the person earning $100,000 per year they’ll say $500,000. Ask a person earning $500,000 per year they’ll say $1,000,000.00.

It’s widely recognized that if your household income is more than double the national average, you’re considered upper class or rich. According to “The US Census Bureau”, the average household income in America is $59,039. If your income is double that—$118,078, consider yourself blessed and rich! According to “Yahoo Finance”, just 9 percent of households earn more than $100,000 per year. Does that mean those earning less than $100,000 will never amass wealth? Are those earning more than $100,000 guaranteed to become wealthy? Short answer to both questions—NO. I suffice it to say that according to the “Everyday Millionaire” book written by Chris Hogan, 62-percent of Everyday Millionaires earned less than $100,000 annually.

It is true that the higher your income, the faster you can build wealth. High income alone doesn’t guarantee wealth. Think of all the high earning celebrities who have filed bankruptcy. Think of all these large companies and state governments who struggle financially—some of which go bankrupt? Surely, celebrities, large companies and state governments receive a larger income than what most of us can imagine. To fully understand how that can happen. Let’s dive into wealth.

Although some people use rich and wealthy as interchangeable words, they are not the same. True wealth is about amassing assets such as businesses, stocks, bonds, real estate, investments, and other property that can be converted to cash. Like rich, if asked how much do you have to hold in assets to be considered wealthy? That’s a relative question. For most, the idea of a million-dollar net worth is considered wealthy. But those who amassed a million-dollar net worth think $5,000,000 is wealthy. Those with a $5,000,000 net worth or more tend to be seeking billionaire status.

Rich is earned income driven. You have to work hard and earn income when you’re rich. Wealthy is asset driven. If you have sufficient assets generating enough income to cover your lifestyle and expenses, you don’t have to exert physical effort to get paid. Your assets are doing the heavy lifting. Unlike being rich, being wealthy has the ability to free you from working.

To accumulate assets, you have to save and invest over a period of time allowing your assets to grow. Income generated from assets is reinvested to generate more value and more earnings to your asset base. This is not an overnight process. It takes consistency and compounding efforts and compounding interest over an extended period of time. In this instant gratification society, very few have the patience necessary to get there. We want our stuff and we want it now!

Loans and its offspring debt feeds off of instant gratification and impedes our ability to amass wealth. The cost of everything imaginable is grossly inflated because of the availability of loans. Loans allow us to buy now and PAY LATER. By the time we pay off the item we purchased with the loan it’s outdated, and overused—creating a need for an upgrade in the item purchased. We take out another loan to purchase the upgraded model. Thus, the cycle continues. We’re left chasing our tail finding a hard time getting the traction we need to get ahead. We owe, we owe so off to work we go. Caught up in the trap of paying on expenses and debt when we should be using a large portion of that money to amass wealth. Solution. Invest in your debt!

What is investing in your debt? Investing in your debt is when you free up a minimum of 10 percent of your household income. Then strategically use the money you freed up to systematically and aggressively pay off all your debt. Doing this will give you a sound financial foundation with the necessary disposable income to invest long term to build an asset base you can be proud of.

When you’re saving and investing money, the goal should be to amass a sufficient amount of assets to either pay cash for something or amass a sufficient amount to generate income from that asset. With investing, there’s inherent risk. You have a chance to earn money but you can also lose money. With investing, there’s taxes on both earnings and appreciation once you sell the asset. With investing you’re expecting a return on your investment—but there’s no guarantee of how much of a return you’ll receive.
No investment is as secure and sound as a paid off debt. Investing in your debt provides a stress free, risk free, tax free, guaranteed return on your investment. The return is peace of mind, zero interest on the loan you no longer have to pay and the increased cash-flow you receive by not having to pay on the debt anymore.

Let’s give mathematical value to Investing in your debt. Let’s assume you have two credit cards and a car loan. Credit card one—$4,400 balance, 13 percent rate with minimum payments of $50 p/m. Credit card two—$7,000 balance, 17 percent rate with minimum payments of $120 p/m. Car payment—$35,000, 6 percent rate with minimum payments of $475 p/m. With making minimum payments, it will take you close to 8 years to pay in full—paying close to $21,000 in interest.

Let’s assume you follow the Invest in your debt method and you free up an extra $400 to systematically and aggressively pay off your debt. Using the same scenario above, you’ll pay off this debt in close to 4-years, paying close to $7,100 in interest.

Investing in your debt will save you 4 years and $14,000 in interest—plus increase your cash flow so that you can save and invest aggressively to build your asset base.

(Money Coach Damon Carr can be reached @ 412-216-1013.)

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