Contrary Advice: Don’t Pay Off Your Debt!
I’ve got to tell you, I’m a little bit sick and tired of the traditional personal finance advice out there that is telling you to pay off your debt and pay down your mortgage.
Insisting that you’ll experience financial freedom when you’ve got 6 months savings in the bank, no one you owe money to and you’re on your way to a relaxing retirement.
That’s all well and good, but it’s also not entirely true.
It’s not true in two regards:
1) You don’t have to wait until you’ve got 6 months savings and no debt to experience financial freedom. You can experience financial freedom right now.
2) Paying off your mortgage and all your debt could actually be harmful to your financial well-being, especially right now.
Now, that second statement is a big one, especially because it flies in the face of the traditionalists who say financial freedom is only possible with no debt.
But, consider this:
Imagine that you had $5,000 of credit card debt, owed $25,000 on a line of credit and had $50,000 in available remaining credit on your line and $20,000 available credit on your credit cards. Now imagine that you were diligently doing what the traditionalists said and paying down your debt, a little bit at a time. You were staying current on your payments and even paying a bit more than the minimums each month.
Then wham, your hours were cut at work and out of nowhere your credit card companies decreased your credit card limits and your lender yanked the remaining balance on your line of credit.
Now what do you do?
You’ve got no access to credit and the chances of you qualifying for credit now, given the tightened credit restrictions and the decrease in your income, are ? none.
What should you have done instead?
I’m about to give you a radical plan. A plan that is not for the faint-hearted. And, a plan that is all about understanding your best investment. It’s a plan that requires a lot of belief in yourself and what I’ll call spiritual balls.
Here’s the plan:
Don’t pay off your debt. Not now anyway. If you’ve got a line of credit on your house, write a check to yourself for the balance NOW. Your bank just may take it back tomorrow.
Now, I’m not saying to go out and blow that money on more stuff you don’t need, vacations, or other consumables.
I am saying to put it in your bank account and figure out how you can invest it so it’ll make more money than it’s costing you.
It’s the same with available credit on your credit cards. I’ve got several low interest credit cards ? about 4.9%. I know that I can use that credit and earn way more than that. Not if I buy a big screen TV or go to Cabo, but if I make a great investment. (If you have poor credit and your interest rates are high, this is likely not a good strategy for you because the return on your investment needs to beat the interest rate on your debt for this to make sense).
So, what’s your best investment? What’s the best way you can make a 10, 15 or even 25% return on your investment dollars this year?
Invest in yourself!
Take that money and start a business. Not any business though. Start a business that will leverage your time and your resources in the best way possible. It takes money to make money.
(By the way, you do not need to quit your current job to do this! I started business #2 while I was still working full time in business #1. Yes, it was stressful and took a lot of work, but it was SO worth it!)
So, use that money to find the best possible mentor you can and put aside some of the money to implement what you are learning.
The key is to find someone who has already done what you want to do and is going to show you the way step by step!
Make the commitment to yourself. You deserve it.
Two years ago, I paid Dave Dee $30,000 plus 5% of my business to coach me on how to build an information marketing business so I could work from home and leverage the knowledge I already had. Within three months of working with him, I had made $115,000.
Today that business is a million dollar business. I call that a good investment.
I’ll invest over 6 figures in coaching in 2009 even though I’ve already had a huge amount of success. But, you know what? I keep learning. The most successful people do. Some of that investment has been made with my own line of credit. I know I’ll generate at least a million dollars from the investments I make.
If you believe in yourself, there is no better investment than you. Don’t wait for the bank to take its’ money back. Invest in yourself and watch that investment pay off for the rest of your life.
[...] and personal advice to a variety of individuals. I just received my email update regarding this article Ms. Neely posted on her [...]
December 18th, 2008 | #
Are you prepared to actually say that you think this makes sense for the majority of Americans? For the majority of American families?
I’m very much behind the idea that you shouldn’t use the money you have to buy consumables, especially when you are in debt. But the reason that experts say that paying off your debt and having a rainy day fund is the way to go is because basically everything we know about sociology, psychology, and economics reinforces that it is, in fact, quite true for the majority of people.
So I challenge: are you actually willing to say this is a good idea and back it up with any kind of reasonable academic data to counter the overwhelming evidence that this is not only not good advice, but actively harmful advice for the average American?
December 19th, 2008 | #
Alexis, I admire your courage to share views that are, as you state, not traditional. As you said your advice is radical and not for the faint of heart, but entrepreneurs are a unique bunch (me included). I’m not sure I would advise my clients to follow this plan, but I don’t think you intend it for everyone. If someone felt confident enough in their plans, and wanted to take these risks, I would strongly urge them to reduce other risks in their life. For example, by changing the asset allocation of their retirement plans to more fixed income and less equities, they could reduce their overall risk exposure. Since entrepreneurs are generally risk takers, it is best to reduce risk in the other areas of their lives to help offset their business risk.
December 19th, 2008 | #
[...] Martin-Neely posted a radical article about debt management, and some drastic shifts in financial planning (see my post [...]
December 20th, 2008 | #
Alexis, this makes a lot of sense, actually. I was prepared to read this and scoff, but I’m not. I do have a question, though. What if there is someone out there, one person, who is basically already doing what your “dream business/venture” is? In my specific case, there is someone out there who is the expert in the field. I very much want to learn from her and tailor what she’s doing to my specific niche (so we wouldn’t be direct competitors or anything). but this person is not willing to tutor me or mentor me. I have offered to pay her day rate for a few days of her time. I’m discouraged, but I guess not that surprised…if you have a good idea, why would you want to share it with potential competition?
Except I see others doing it–like you. You share what you’ve learned with other lawyers all over the country. Sure, you’re not doing it out of altruism–you’re making great money off it! But you’re still willing to share, because you know that there’s more than enough business to go around. An attorney in, say, Dallas, TX is not going to be “competition” for you.
I really like the idea of taking what money you have and investing in something that will make you MORE money, and a lot more happy, too! And I guess if I can’t get the “expert” to mentor me, I’ll just have to work harder to learn for myself! (and maybe I’ll end up doing it even better than she does!)
January 5th, 2009 | #
@Matt @ Thrive: I accept your challenge. My advice is not directed towards the average American. As I indicated, it’s not for the faint-hearted. Most are. It’s a plan for people who believe in themselves and have spiritual balls. Most don’t. So, I’d say this is for the average American who is tired of being average and wants to be superior.
@ Emily W.: I’ve encountered people like this along my journey and been saddened every time. I’ve spent way too much time trying to convince them that we could create so much more together than if we competed against each other. But, each time, I was discouraged. I’ve realized that it’s silly to waste my time trying to change people who don’t want to change and think they already know everything. Instead, I will be the change I want to see in the world. You’ve heard that saying right? So, find people who are like you and want to create bigger pies rather than grabbing as much as they can of a smaller pie and hoarding. Find people who will mentor you (and by the way, you can often get the best mentoring outside of your field!) and then mentor others back when you achieve success. Keep seeking and you will find!
January 7th, 2009 | #
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January 13th, 2009 | #
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October 15th, 2009 | #