When you set out on your journey to Financial Freedom, you’re inspired and excited. That’s to be expected, and we love to seeing that enthusiasm in the community. But you’ll still be experiencing the pressure of paying off the debt you’ve built up. Don’t be discouraged!
Although you have the same debt, with the support of the Financial Foundations Community, you have the tools to tackle and exterminate that debt. Naturally, one of the questions you’ll have is which should you do first: build wealth or get out of debt?
How Did You Get Here?
Too often people fall into the rut of living paycheck to paycheck, paying only the minimum payments on credit cards, car payments and mortgage payments. If that’s your situation, you probably thought that as long as you paid the monthly minimum you were fine. Except you kept getting deeper into debt as credit card interest and fees accrued.
And because you didn’t have a Security Buffer, new “emergency” charges increased your balance. Have you been feeling like you’re bailing out a leaking row boat with a tea cup? No matter how fast you bail you continue to sink.
So Should I Get Out of Debt First?
As you’re evaluating your monthly spend for opportunities to add to your Pay Yourself First amount, you’ll probably notice that debt takes a big chunk of your income. Debt interferes with your ability to increase your wealth by directing that money out of your hands and right into your bank’s already full coffers. That vacation you got a great deal on? Taking the compound interest into account, by now you’ve probably paid for it twice over. So, yes, you want to get out of debt quickly and send that money out to work for you!
But if you’re just working on paying off your debt, you won’t have a Security Buffer protecting you and you won’t be working toward building your Freedom Generator. This pushes your goal of Financial Freedom further away.
Should I Build Wealth First?
Your debt increases the amount you need each month to cover your living expenses. While you work hard to bring in money, that money goes straight to someone else. Consider what your monthly expenses would be if you weren’t sinking money into car payments, credit card payments and student loans. You’d have a lot more money to build your wealth! So focusing solely on building wealth first isn’t the right tactic either.
Before Jumping In
One of the common barriers to Financial Fitness is a disorganized financial account structure. As you heard me say in the video above, if you’re putting all your income into one account and simply drafting off that for both monthly expenses and discretionary spending, you’re going to continue to face financial challenges. You may be saying, “So what? Isn’t that how everyone does it?”
The answer is a resounding, “No!” To avoid overspending—and to make sure your Pay Yourself First and your Security Buffer grow—you have to set up your Perfect Account Structure. Once you know the right approach to take with your debt, you’re Perfect Account Structure will fall into place.
Take a Balanced Approach
So what’s the right answer to the question we’re asking today? Should you start out focusing on Paying Yourself First or paying off debt? The right answer to the question is that you should get out of debt and build your wealth simultaneously. You’ll protect yourself by creating a Security Buffer and experience the joy of watching your debt go down every month.
And that means you’ll be inspired to stick with the plan! Your Pay Yourself First amount may not be huge at first, but a good rule of thumb is to designate two-thirds to extra debt payment and one-third to growing your savings.
The sooner you pay down your debt and build up your wealth, the sooner you’ll achieve Financial Freedom and have the chance to live the life you’ve always wanted.
What has been the best part of starting your journey to Financial Freedom? Seeing your debt go down? The confidence of having a Security Buffer? Share with us in the Financial Foundations Community!
image credit: Bigstock/weerapat
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.