3 Tips For Making Sure Debt Works
In Your Favor
Most people, including many financial professionals, think of debt as the devil. They’ll advise you to do everything you can to get out from under it as soon as possible, whether it’s a credit card with a 20 percent interest rate, a student loan at 5 percent, or a home loan at 3.5 percent.
But all debt isn’t created equal, says Al Zdenek (www.AlZdenek.com), author of the bestselling book Master Your Cash Flow: The Key To Grow And Retain Wealth. The idea that you should pay down “good” debt like a home mortgage quicker than you have to, especially at the expense of saving and investing, is antiquated and could be dangerous, he says.
“This Grapes of Wrath mentality was handed down from generations who experienced the hardships of the Great Depression,” says Zdenek, the president, CEO and founder of Traust Sollus Wealth Management. “But the irony is the farmers who owned their land outright back then often had nothing left to pay their property taxes and lost everything. Those who had more debt but also more savings did fine. They had the reserves to weather the downturn.”
Conventional wisdom gets it wrong when it comes to debt, Zdenek says. Here are some tips for getting it right:
- Use good debt to create a cushion. Everybody should have a cushion of cash for when something bad happens, Zdenek says. “For example, what would happen if you lost your job?” If you already used all your money to pay off your house in order to be debt-free, he warns, you may lack the cash flow you need to pay the everyday bills that keep coming in. And putting your house on the market for a quick sale might mean taking a lower price. But if you hadn’t paid off the mortgage, he says, you could preserve the money you have in your investment accounts.
- Take the time to run the numbers. People usually decide to dump debt because it makes them feel secure and successful. But financial decisions should be based on reality, not feelings, Zdenek says. “I’ve seen some really smart people – doctors, lawyers, executives, business owners – make some bad choices because they just don’t understand how to manage their wealth,” he says. Perspective comes from doing the calculations to compare how it will affect you if you do or don’t pay off your debt like student loans or pay cash for your luxury car.
- Make debt work for you, not against you. People often say they’d like to save, but first they want to pay off some debt. There’s no reason they can’t do both, Zdenek points out. “If you have a house, why not take out a home equity loan, pay off higher interest debts and start saving the difference right now into your 401(k)?” he asks. “Saving now rather than later means that you’ll take advantage of the principal of compounding which can grow your wealth faster and may allow you to work less in life”
“It’s important to make your relationship with debt a healthy one, with you in the driver’s seat,” Zdenek says. “Don’t let your attitudes about debt be dictated by emotions, what you’ve been told in the past, or a Depression-era mindset.”
About Al Zdenek
Al Zdenek (www.AlZdenek.com) Author, Speaker, Wealth Advisor, is the president, CEO and founder (1982) of Traust Sollus Wealth Management, a boutique wealth management firm dedicated to empowering people to transform their lives and live the life they wish now and in the future. This is done by consistently making the best financial decisions. His bestselling book, Master Your Cash Flow, shows readers how to achieve the wealth they need and then find additional cash flow and, if saved, build wealth sooner, work less years or have more wealth to live the lifestyle they desire now and forever.
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