Debilitating Debt Destroys Dreams
JL Collins: "Debt has NO place in your financial life."
“If you intend to achieve financial freedom, you are going to have to think differently. It starts by recognizing that debt should not be considered normal. It should be recognized as the vicious, pernicious destroyer of wealth-building potential it truly is. It has no place in your financial life.”
-JL Collins, The Simple Path to Wealth
What if I told you that there’s somewhere you can legally put your money that will guarantee you a 16.22% (or more) rate of return?
Well, as Homer Simpson said to the security system salesman who asked him whether he could really put a price on his children’s lives, "I wouldn’t have thought so either, but here we are."
Jokes aside, all I'm really talking about here is a mental reframe you can make — and the accompanying actions you can take once you see things this way — that will put thousands of dollars right back into your pocket.
I’m talking about paying down your credit cards. ASAP. It’s not exactly what I would call “exciting,” but it’s 100% effective at saving you money.
If you’re reading The Competitive Advantage (which you are, right now!), it means that you have big dreams. It means that what passes for a “normal life” for most people is cancerous to your SOUL, and you’d do anything to avoid it.
You are willing to do whatever it takes to beat the odds and become great.
Well, that’s all good and everything - I’m right there with you. That’s why I WRITE this damn thing. But walking around shackled by debt will destroy any chance you have of breaking free and doing something important with your one and only life.
Debilitating Debt Destroys Dreams. Remember that!
According to Wealthsimple, the average annual return of the S&P 500 for the years 1957–2018 was about 7.96%. This is great, meaning that no matter what the market did in, say, 2008, you still would have made money.
But when you’re paying 16.22% interest on your credit cards (which is the average in the U.S.), it’s exactly like taking a 16.22% negative return on your money. Every year! Every. Single. Year.
Clearly, when you're stuck in a cycle of paying hundreds - if not thousands - of dollars every single month to pay down credit card debt, it makes wealth-building a whole lot more difficult. And that's not counting any other forms of debilitating debts such as student loans, which can literally follow you for life.
Debt is your worst enemy when it comes to building wealth for a lifetime, and according to JL Collins (and me too, actually), you have to do everything you can in your power to pay off your debts as fast as you can so that you can get on with the real business of living.
What Collins recommends is paying off all debt that comes with more than 5% interest before you even think about investing, but personally, I would advocate getting in the habit of investing, even if it's only with fairly small amounts at first.
For example, if you have $500 a month to use for debt repayments, I would suggest investing $100 or so in the stock market and using the rest to pay down your debt, just so you're building your investing muscles. This is going to be a personal choice, just like with all things money, but that's my $0.02.
If, however, it takes you 5 years to pay off all your debts before you're finally ready to start investing, and you don't learn much at all about the stock market during that time, you're suddenly going to be 5 years older and starting from the ground floor.
So even if it takes you, say, an additional 6 months to pay off all your debt using my method, you're going to have at least $6,600 invested at the end of those five years of debt repayments, at which point you'll also have a much better understanding of the stock market itself.
Technically, you'll have less money, but in my opinion, you'll be a lot better off, because you'll be both debt free and knowledgeable about the stock market, plus you'll have the $6,600 you've already invested!
Regardless of how you go about it though, debt is your enemy, and the banks are NOT your friends. The whole time you're paying interest on those credit cards and other debts, all you're doing is lining their pockets.
They don't just hold your money, either! They lend out the money you give them, so they're basically making money off you twice, while you're still living paycheck to paycheck. Yea, I don't like banks.
If you stick to the plan, however, your debt won't last forever. Eventually, you'll pay it all off. You will. I believe you will. And at the end of it, that $500 a month you used to be spending on debt payments will be earning money in the stock market, rather than just flying straight into the vault of some bank.
Then, the real financial fun begins for you.
Much of this post is part of my complete breakdown of Collins’ book which…isn’t ready yet. The breakdown, I mean. The book was published in 2016! But if you want to get all the Key Ideas, my best Book Notes, several effective Action Steps to get you started, a comprehensive Summary, and more, you’ll go here and sign up for the Stairway to Wisdom.
There’s a free trial of course, but there are also 50 breakdowns that will ALWAYS be free, just to give you a little idea of what the paid breakdowns are like and how great they are.
But hey, don’t just take my word for it. Test it out for yourself! My breakdowns are kind of like the summaries you’d find on Blinkist or Shortform, but they’re for people who actually LIKE to read, and they don’t waste your time or insult your intelligence.
Again, you can read 50 of them here for free.
Happy reading, and I’ll see you on Thursday!
All the best,
Matt Karamazov
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