If you want to achieve financial freedom and you are carrying short-term debts such as credit card debts, store card debts, personal loans, bank overdrafts, etc. then you are going to have to clear your debts at some point in order to reach your goal.
Furthermore, you are not yet making the best use of the money you already have and so you need to start using it more wisely and make it work for you instead of against you.
In this article, I’m going to outline a proven 2-stage process to financial freedom and provide you with some help if you want to clear your debts and stay debt-free forever.
Before I get to that though, let’s talk briefly about what your debts are costing you right now…
What Your Debts Are Costing You
Most adults in the “developed world” have at least one credit card and I expect you do too?
Let me ask you a question…
What is the annual rate of interest for outstanding balances on your credit card?
Bank interest rates vary widely depending on the bank, the type of card, your credit rating, etc.
According to Index Credit Cards, the average consumer credit card rate in the USA is 16.94%, almost 17%.
In the UK, the average credit card rate is slightly higher at 17.3% according to the Bank Of England in its report in March 2012.
In Australia, the average is 17.44%, slightly higher again, according to the Reserve Bank of Australia.
It’s not just credit cards either – if you don’t have a credit card but you have a store card or an overdraft on your bank account, you need to know that interest rates charged on store cards and overdrafts are even higher.
And don’t get me started on pay day loans – they usually have annual interest rates like 400% or more and can charge as much as 3,500%!
So as long as you have debts like these, with interest rates like these, the financial freedom that you dream of will have to stay as it is…just a dream!
But it doesn’t have to be like that!
Stage 1: Clear Your Debts
Clearing your debts and staying debt-free forever is step 1 of your route to financial freedom.
We all know that saving for our future is good don’t we?
If you are like most people, you probably have some savings in the bank for short-term emergencies and a retirement account or pension for your future.
Your bank savings are probably earning an interest rate of 1% – 2% at the moment and your long-term investments are probably earning 8% – 10% if you are lucky.
Now let me ask you another question…
Does it make sense to borrow money at an interest rate of 17% or more and then invest it in something else that earns 1% to 2% or even 8% to 10%?
This is not a trick question and so the answer is a simple “No.”
In other words, for every $100 that you earn, are you better off reducing your debt balance that is costing you 17% plus each year to maintain or increase your savings or your retirement account?
Paying off your debts is like having a bank account or an investment that PAYS YOU 17% interest every year!
Step 1 to financial freedom therefore involves clearing your debts and staying debt-free forever so that you don’t get into this position again.
Every $100 that you pay off your credit card balance will create another $17 of spare cash every year that you can invest properly.
And as your balance falls, month on month, it will cost you less to maintain.
Which means that the money you free up each month will accelerate.
Which means that you will be able to pay off more and more each month.
Which means that your debt reduction will accelerate.
Until all your short-term debt is gone and you are now ready for stage 2…
Stage 2: Invest Your Spare Cash
Now that you’re in the habit of living without debts, spending less than your income each month and creating spare cash you’ll be wondering what to do with your spare cash when all your debts are gone?
The obvious answer of course is to invest it.
You could save it in the bank and earn 1% to 2% on that spare cash if you want – always a good idea to start with to build up an emergency fund.
It’s also a good idea to put some spare cash into a retirement fund of some kind, whether you manage it yourself or not.
When you have more spare cash than that, you can go mad and spend it all (not recommended) or you can be more sensible and spend a little bit (for excitement) whilst investing the rest.
And when you start doing that, you’ll have become a Debt-Free Investor.
Stay a Debt-Free Investor for long enough, investing properly and sensibly as I explain in this blog and YOU WILL achieve the financial freedom that you dream of.
Yes, it might seem a long way off at the moment but it will always be a long way off if you don’t start to do something now to work towards it.
It was the Chinese philosopher, Lao Tzu, who famously once said…
The journey of a thousand miles begins with a single step.
How To Become A Debt-Free Investor
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How To Clear Your Debts And Stay Debt-Free Forever In 7 Easy Steps.
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