During his economics class at Clark Atlanta University, the
scholar and educator, W. E. B. DuBois, was asked by an inquisitive
student for the quickest and surest way to prosperity.
"What I am about to share," Dr. DuBois replied, "you would do
well to write on your heart and place in your purse. Many a ruined
man dates his downfall from the day he began buying what he did not
need. If you are in debt, part of you belongs to your creditors. To
whom you give your money, you give your power."
Unfortunately, Dr. DuBois' advice is relevant to the vast
majority of Americans. 87% of U.S. households are currently
carrying debt outside of mortgages. Myfico.com reports that, on
average, today's consumer has a total of 13 credit obligations on
record at a credit bureau. These include credit cards and
In my book,
How to Be the Family CFO,
I break debt into bad debt and better debt. Better debt is debt you
use to buy an appreciating asset. Bad debt is everything else. So,
for example, better debt would include your mortgage, student loans
(for yourself, not for your kids), and debt to buy a business or
investment. Bad debt includes home equity loans, home improvement
loans, car loans and all department store and credit card debt.
So just how much bad debt are we talking about? According to the
latest statistics on consumer credit from the Federal Reserve,
American consumers owe about $18,654 per household, a figure not
including mortgage debt.
Warren Buffet, one of the most notable investors in the world
warns, "When the tide goes out, we find out who has been swimming
naked." Since the recession has hit, American families have felt
the strain of being overextended.
Before you retire, get rid of all bad debt. You cannot be
financially independent if you still owe money to creditors. I have
three simple guidelines to keep in mind when it comes to debt:
- Change your attitude about money-just because you have it
doesn't mean you spend it.
- Be entrepreneurial-look for other ways to make money outside
of your job.
- Save for what you want-do not buy things on credit.
If you're going to get rid of all bad debt, you've got to have a
plan. First, list out all the bad debts you have along with each
corresponding interest rate and monthly payment. Second, separate
the secured debt from unsecured debt. Secured debt is backed by an
underlying asset. If you fail to pay, the lending institution can
take the asset from you. Common examples include auto loans and
Unsecured debt has no tangible item on the line as collateral,
so it usually comes with a higher interest rate. Personal loans and
credit cards are the most common types of unsecured debt. Student
loans are a little tricky. It seems as though it should be
classified as unsecured debt, since the bank cannot take back your
education and there is no collateral; however, stringent laws apply
to student loan debt. For example, it is not dischargeable in
bankruptcy, so student loans should be considered secured debt.
Next, rank each secured debt from highest interest rate to
lowest. Your secured debts should be paid first, since you do not
want to face repossession or legal judgments.
For all your secured debts, you will continue paying the
regularly scheduled amounts. You will not make any additional
payments unless you have no unsecured debt to pay. If this is the
case, follow the waterfall approach outlined below to pay off your
secured debt more quickly.
Rank each unsecured debt in the same manner you ranked the
secured debt, from the highest interest rate to the lowest. You
should take a waterfall approach when deciding what order to pay
them. This means that you should start working on the highest
interest debt first, but continue to make minimum payments on the
rest to avoid damaging your credit.
Once you pay off the highest interest rate, move on to the
next-highest. Keep doing this until all your unsecured debt is paid
off, and then turn your focus to the secured debt.
You cannot be successful at getting rid of all your bad debt if
you are only making the minimum payments. Decide how much extra
each month you can allocate toward paying things off more
Once you pay off a debt, take the amount you were paying on that
debt and put it towards the next one. If you get a bonus or raise
at work, an inheritance, or other lump sum, use it to get rid of
Some may consider a "quick-fix" in the form of consolidation.
This entails taking a number of debts and combining them into one
large debt, often collateralized with a mortgage to allow for a
lower interest rate.
Generally, this is not a good idea for two main reasons. First,
for most, excessive spending is the problem and the excessive debt
is the symptom; therefore, consolidation may enable those with bad
financial habits to spend more. Second, your debt becomes spread
out over a longer period of time, meaning more interest is paid in
the long run.
Dealing with debt isn't particularly rosy, but you can do it. It
is going to take commitment, determination, and hard work to see
through to the end result. If you follow these guidelines and
steps, you will have a systematic plan to eliminate your bad debt
and put yourself that much closer to true financial
How does your debt compare? - MSN Money. Available at:
[Accessed May 11, 2010].
Credit card statistics, industry facts, debt statistics - Credit
Cards. Available at:
[Accessed May 10, 2010].
No statement in this article should be construed as a
recommendation to buy or sell a security or to provide investment
advice unless specifically stated as such. All investments involve
risk including possible loss of principal.