by Damon Carr, For New Pittsburgh Courier
“People tickle me. I was on a call with someone who was saying, ‘I want financial freedom…’
“I’m no finance advisor like you but is there such a thing? Sure, having enough money to pay for everything you need and want is good but is it really freedom? You still have obligations. Taxes and things like that. Maybe I’m wrong but it doesn’t seem like anyone can absolve themselves of financial obligations altogether.”
Christina, it’s possible to have financial freedom but it’s hard! It requires extreme discipline, major sacrifice for about 2 to 4 years to rid yourself of all consumer debt. Large student loans and mortgages will take upwards of 10 years depending on balances. As you work towards paying off debt and even when you become debt-free, you have to stay on guard not to fall back into the debt trap.
Financial freedom is being completely debt-free. You don’t owe any man or any company anything. No debt payments! Sure, there’s utility bills, taxes, food, and other lifestyle expenses. But imagine having no debt—no credit cards, no student loans, no car payments, no personal loans, no buy now, pay in 30 days, no IOU’s. Imagine how much more disposable income you’ll have? A lot!
Debt freedom is the first step to initiating the path to financial independence. What is financial independence? Shifting income sources from earned income to passive, portfolio, royalty, and rental income—to the point where income from these sources is sufficient to pay for your lifestyle and expenses.
Here’s why debt-free is the first step: Your disposable income is what you use to leverage your passive income sources, not OPM (Other People’s Money) because other people’s money is DEBT!
OK, here comes another question…
“‘I owe, I owe, so off to work I go’ comes to mind. How can I invest my money instead of playing cards?”
Wendy, I’ve been watching you play cards with my family since I was 10 years old. I’m now 48. That’s darn near 40 years you’ve been playing cards. Ask yourself: After 40 years of playing cards, did your winnings from playing cards allow you to build a substantial savings or respectable investment portfolio? The answer is NO!
As you know, I still play cards from time to time. It’s in my blood. About 3 years ago, I sat next to a guy who hit 4 of a kind at Rivers Casino. It paid him over $6,000. You’d think he’d get up and leave. He didn’t. He stayed and played until he lost it all. I watched this guy squander it all at the same table. Dumb, right!? I’ve done similar stupid stuff on a smaller scale. I consider gambling to be the adult version of Chuck E. Cheese. It’s fun! It’s a rush! It frees your mind of the daily grind! Plus you can win money! Lots of money!
Gambling is the act of risking money for a reasonable gain in a short period of time —and it’s fun! It’s a component of the get-rich-quick scheme. Few get rich and stay rich from gambling because: 1. The house always wins. 2. Easy come, easy go!
Investing, on the other hand, is the act of risking money for a reasonable gain over an extended period of time. It’s boring! It requires patience, sacrifice, and consistent saving and investing over an extended period of time.
Saving and investing is how you build financial security and eventually wealth.
Let’s say you gamble and lose approximately $100 per month! Let’s say over that 40-year period, you invested money instead of gambling it. That $100 investment would be worth $637,000 assuming a 10 percent average rate of return.
When you realize, diligent, consistent saving over an extended period of time is a sure-fire, proven method for ordinary people to accumulate extraordinary wealth, you’ll curb the get-rich-quick schemes and partake in saving and investing in things that have proven to make others wealthy.
All that to say this…Curb your gambling! I’m not going to say stop. Because you’re not. Put a limit on how much you will lose in a given month. Make saving and investing a priority and a goal.
OK, here comes another question…
“I’ve thought about resuming payments to my student loan because it’s stagnating my credit score. My score would be higher if more of my student loan was paid off.”
Michika, this might surprise you! Your credit score shouldn’t be your primary focus. Your wealth score should be! In fact, your wealth score is the best measure of financial success. Your wealth score is your net worth.
Net worth is defined as assets minus debts equals net worth. In other words, what you own minus what you owe equals your net worth. When your net worth equals $1,000,000.00, you’re a millionaire. Notice I said when your net worth = $1,000,000.00, not your income. You might be surprised to know that there are people earning over $1,000,000.00 per year that are not millionaires.
Due to COVID, federal student loans are not only in forbearance. There’s no interest being accrued. The interest rate is effectively 0 percent. This means that every payment you make right now is a 100 percent principal reduction.
Therefore, resuming your student loan payments now is smart for three reasons: Increases your wealth score. Increases your credit score. Every payment made will go to the principal, thus shortening the time you’ll have this student loan payment hanging over your head.
I recently had another person ask me how they could quickly pay down their student loan payments. I’ll detail that process in my next article.
(Damon Carr, Money Coach can be reached at 412-216-1013 or visit his website at www.damonmoneycoach.com)