The road to financial freedom…
In my life as an entrepreneur, I have learned to become a debt-shredding machine and a turn-around artist.
There have been several times when I’ve been $100,000 in the hole on credit cards, and several more times I have paid off all my debts and been in the good.
I want to be clear that the debt I incur has been through starting businesses or the unfortunate event of supporting several failing businesses are failing at the same time, such is the life of an entrepreneur.
I didn’t go to Vegas and throw down 100k on black and lose. As an entrepreneur, there will be times where you start businesses on credit cards, support yourself on credit cards or have your business survive on credit cards until you get proper business financing to run your business.
This usually takes at least 2-5 years to establish a track record to get better business financing.
Nonetheless, the technique I want to share with you today is a major pillar in financial freedom and fiscal responsibility.
Rather than hoping for a windfall to change your life, for myself, I would pay my debts by flipping a few houses. Instead – term out all your debts
The technique works like this.
Let’s say you have 10 credit cards, each with $10,000 of debt on them.
You want all 10 cards paid off, how do you do it?
First you must make minimum payments to the cards to keep your credit.
I would also recommend consolidating the cards and moving around the balances to eliminate a few of them right away if you can.
Lets say we have 10k per card though…
Card 1) $10,000 at 20% interest
Card 2) $10,000 at 10% interest
Card 3) $10,000 at 8% interest
Card 4) $10,000 at 22% interest
Card 5) $10,000 at 29% interest
Card 6) $10,000 at 15% interest
Card 7) $10,000 at 12% interest
Card 8) $10,000 at 10.9% interest
Card 9) $10,000 at 21% interest
Card 10) $10,000 at 18% interest
The amateur will try to pay these cards in a random fashion, the way to get out of debt is to first focus on the highest interest rate debt and focus all your resources to “term it out” as fast as possible.
You then want to create a “hit list” of debts, first pay off the most expensive one, then in sequence paying off the 2nd most expensive one until you reach the cheapest debt at the end.
Setting a pay-down schedule or “terming out” your debt is a major strategy I use on all debts in my companies. As soon as I take on a new line of credit or credit card, if I use it, my book keeper and I schedule a liquidation schedule, we print out a term payment schedule and stick to it.
For example, I just received a $60,000 business line of credit for one of my companies. It could be paid interest only at 12% interest in perpetuity, but instead, we have it on a 36-month term, so in 3 years – win or lose – it’s clear.
This helps build equity in your businesses and strengthens your finances over time.
Every single debt you take needs to be on a term schedule, and you need to put the most expensive debts on the fastest pay down schedules.
Also, it’s important to not take all your cash and try to pay everything at once.
Instead, if you have 100k of cash and 100k of debt, take a small portion, maybe 2k and make a principle payment towards the most expensive debt leaving you with 98k cash and 98k of debt.
If you blow all of your cash you will have no time to survive to make your next move, yes the interest costs you money, but in the words of my early mentor Bill Bartmann, self-made billionaire: cash flow buys you time and profits buy you praise.
You need to keep your cash on hand for your own safety and survival and follow the pre-set pay down terms you have set for yourself.
Follow these rules and you will have the following benefits:
1) Debt will become less stressful
2) You can sleep better at night
3) You will be building equity towards your business or your personal life
4) Eventually you will be debt free
5) You will have better cash management systems
6) You will learn to handle larger amounts of money
7) Debt will not scare you anymore
Don’t be afraid of debt, in today’s world, debt is money. Learn to use debt, good debt and bad debt to get rich and build your empire.
Every business at some point needs to take on debt, it’s better to learn to use it sooner rather than later.
Good luck!
Respect The Grind,
Stefan Aarnio
