Release from Servitude

A man is rich in proportion to the number of things he can do without. —H.D. Thoreau

Personal Debt

Freedom from debt is not an end in itself. It gives you a foundation from which to achieve your goals and life purpose. Think of how important a foundation is to a structure. With a weak foundation, the whole structure is at risk.

Given more money, most people just rack up more debt! It's like pouring your money into a sieve. Unless you close up the holes in your spending habits, the more you pour in, the more will pour out.

Debt is a symptom of some of our sins: greed, self-indulgence, impatience, fear, lack of self-discipline, lack of trust in God for provision. The more TV you watch, the bigger your desires will be. Our entire culture encourages the sins listed above.

Let no debt remain outstanding, except the continuing debt to love one another. (Romans 13:8)

Credit card companies will do anything to get you addicted to spending on credit. People who pay their credit card bills in full every month are known as "deadbeats" in the industry because they are using the credit system without contributing interest to it. $10 billion were racked up on credit cards in a recent year on groceries, which were consumed before the bills came due. 70% of credit cardholders carry a balance from month to month, with an average of 18.1% interest.

National Debt

If the national debt were divided up on a per capita basis, each man, woman and child would owe $53,000. If our country stopped borrowing today and all interest was forgiven, it would take 45,892 years to pay off the current debt at a million dollars a day. This will pass on to the next generations, but someone someday will feel the pain.

The Power of Compounding

Credit card companies will do almost anything to get you addicted to spending on credit, and it's not because they are trying to help you. People who pay their credit card balances in full each month are known as "deadbeats" in the industry because they are using the credit system without contributing to it. $10 billion were racked up on credit cards in a recent year on groceries which were consumed before the bill came due. 70% of credit card holders carry a balance from month to month, with an average 18.1% interest.

Credit can be used to pay for:

Assets which appreciate, such as a house or rental property. This can be a good idea.
Assets which depreciate, such as a car. It's best to avoid credit for this or pay it off as quickly as possible. Many people owe more on their vehicles than they are worth.
Expenses, such as groceries. Credit should not be used for this, unless the balance is paid in full every month.

Albert Einstein called compound interest "the most powerful force in the universe." It is a powerful ally when it's working for you, and a powerful enemy when it's working against you. It's working for you when you receive interest. It's working against you when you pay interest.

One of the best examples I've ever seen of this power was of a hypothetical brother and sister. The brother received $600/year for a paper route he worked between the ages of 8 and 18. He invested it at 10% interest and stopped saving at the age of 18, not using but not touching the money he'd saved. His total investment of $6,600 grew to $1,078,706 by age 65. His sister did not save when she was young, but after college when she got her first job, she began saving $2,000 a year at 10% interest. She continued to put in $2,000 a year for the rest of her life and never caught up with her brother. By age 65, the $80,000 she invested had grown to $973,704. When I read this, I couldn't believe it. I checked the figures and continued it into the future until age 100. She never caught up. This is the power of time and compound interest.

Types of Debt

Credit card debt.
Consumer debt.
Mortgage debt.
Investment debt.
Business debt.

How to Get Out of Debt

Stop borrowing. Cut up the credit cards. Resolve to not just get out of debt but to stay out of debt.
Sell assets.
Figure your cash flow margin.
Set up a planned repayment schedule and stick to it.

How to Figure Your Cash Flow Margin

Keep track of all your income and every single expense for one month. Total by category.

You must generate a cash flow margin in order to pay off debts and get ahead. In other words, your income must be at least somewhat more than your expenses.

If you are spending more than you are taking in, the difference must be made up in one of the following ways:

Generate more income. This is the least efficient way because about 1/3 goes to taxes.
Reduce expenses. This is the most efficient way because you get a dollar for dollar return.
Reduce savings. This depletes your margins and is only a temporary fix.
Borrow. This is the easiest way, and is how the debt cycle generally gets started.

Most people have a price. And they have a price because of human emotions named fear and greed. First, the fear of being without money motivates us to work hard, and then once we get that paycheck, greed or desire starts us thinking about all the wonderful things money can buy. A pattern is then set: get up, go to work, pay bills, get up, go to work, pay bills... Their lives are then run forever by two emotions, fear and greed. Offer them more money, and they continue the cycle by also increasing their spending. This is what I call the Rat Race.
—From Rich Dad, Poor Dad, by Robert T. Kiyosaki