Rough Times: Pay Off Your Debts

by James & Miel on March 7, 2009 · 0 comments

Hi All,

If you’re like us DINKs, you’re probably wondering how to improve your financial bottom line. The recent economic slowdown has torpedoed asset prices, so one’s options for seeing immediate gains to one’s net worth are limited.

One way to immediately improve your bottom line is to pay off debt. There are several advantages in doing so.

First, paying off debt improves your cash flow. Every dollar that’s borrowed usually costs you to carry the debt. Right, so if you owe 100 dollars at 6 percent annually, it costs you 6 bucks to carry the debt every year. Well, if you pay off the $100, then your budget has an additional 6 dollars more. Run some real numbers to see if what I’m saying makes sense.

Second, paying off debt improves your net worth. For example, lets say you have a mortgage worth $100,000, but you own $80,000 on your house. Your networth, all things being equal, would be $20,000 (i.e. $100,000 – $80,000 = $20,000). But, if you spend some time and aggressively pay down $10,000 on your mortgage, then your net worth is now $30,000. This is only natural, as you pay down debt your ability to build wealth drastically increases.

There are some tax issues with interest deductibility, but basically the first two points hold true.

Third, debt reduction is risk free. You incur absolutely no market risk, systemic risk, or other kinds of risk if you pay off debt. Every dollar you pay off is a dollar more towards your net worth, and a dollar that improves your cash flow – all at no risk to you. This is a contrast to stocks, bonds, & starting a business or any of the other typical means that people use to improve their net worth.

In terms of the mechanics of making this happen, here are some practical tips on getting extra money to pay off your debt, as well as an example of how its done.

Thanks,

James

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