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How to Money

Getting rid of debt

“At this rate we gon’ both die broke” Kanye West

Key terms

Interest rates

Snowball method

Avalanche method

If you haven’t yet calculated your personal net worth, please go back and do so first. It will help you see what you have (money and assets) and what you owe (debt and other liabilities) and will eventually form the blueprint for your early retirement planning.

Negative net worth

If you have a lot of liabilities, or if the sum of your debts is higher than the sum of your assets (and especially if your personal net worth isn’t increasing fast enough each month) you have to make some changes.

It is as mathematically simple as it is scary: if you have any liabilities, you’ll end up paying an amount much higher than the amount you currently owe as per your balance sheet, just to get to zero. If you have the right types of assets, by contrast, you will keep earning a much higher amount over time.

Bad liabilities vs good assets

If you have credit card debt — one of the most toxic kinds of liabilities— of $10,000, you could easily end up paying $18,000 just to reset the balance to zero...if you ever get to zero. You can theoretically spend an unlimited amount of money to pay back that $10,000. Yes, you could carry that debt for the rest of your life and never be in a position to stop earning and retire.

If you have $10,000 invested in the stock market, by contrast, you can expect that amount to double in roughly eight or nine years. Interest payments on debt you owe could go on forever, just as interest and dividends received on investments you own could be paid to you, forever.

Debt management

Debt by itself isn’t the evil that many make it out to be. That is if you take on the right types of debt and you manage it correctly. Businesses take on debt to hire people and buy things that they sell for a profit later on. You may take on debt to buy an affordable, reliable, 8-year-old car (or bicycle!) at the start of your career to get you to and from your workplace, to earn a salary and then promptly pay it off (proper money management). You could also choose to lease or finance a brand-new car and take on some high-interest credit card debt on your way home from the dealership (stupid management).

Write down your debt

For now, we need to take a look at the types of debt you have, the amounts due and their respective interest rates. In the same way that investments grow at an increasing rate over time, debt grows at an increasing rate, in the opposite direction. We’ll talk about the positive (asset growth) and negative effects (debt growth) of compound interest in a future email.

✅ TASK: For now, create your own personal debt spreadsheet, or

make a copy of this one⁠

. The end result should look something like the one below.

⁠

Sort your debt

You can sort your debt by the amount (how much you owe), the interest rate (how much it will cost per $100 per year), or by stupidity. Below, are common types of debt ranked from worst to “best”.

Credit card debt (highest interest rate first)

Payday loans (depending on the rate, this could be worse than credit card debt)

Personal loans (from banks, financial providers)

IOUs and debt to friends and family (this could very well be number one since they can affect and ruin relationships if not managed the right way)

Car loans (more on cars later)

Student loans (it depends on what you’ve studied and what you’re earning, but we’ll need to kill it nonetheless)

Real estate mortgage/home loans (depends on many factors, but we’ll look at houses later)

On snowballs and avalanches

You’ll need to focus your energy on immediately getting rid of the most destructive debt: things that charge the highest interest and keep you from growing your personal net worth each month (first all of the credit card debt, followed by the other types of debt, as above).

This is known as the

debt-avalanche method⁠

. Killing the priciest and worst offenders first.

Some people recommend the

debt snowball-method⁠

. Sorting debt from smallest to largest (in dollar terms), paying the minimum balance on all accounts and then throwing everything you have to get rid of the smallest balance you have left so that you can cross it off the list. Pick a strategy that is most likely to work for you and channel all your energy that way.

“Better” debt can help grow your net worth over time; if you took out a mortgage to purchase a (modest) apartment, you make your monthly payments without incurring penalties and property values rise faster than the interest you pay, you could end up growing your net worth over time. For now, we’ll deprioritise real estate and student loans.

Your debt situation might be a life-threatening emergency, in need of immediate and drastic action, maybe it’s just a small fire. Either way, you need to get serious about tackling it.

Earn more, spend less and/or sell something

You may need to consider getting additional income (

asking for a raise⁠

, starting part-time jobs) or by selling some of your depreciating and dusty assets to get rid of debt. This could be easy things like getting rid of your nonessential furniture and electronics, to something more drastic like

selling your vehicle⁠

to cycle to work until you’ve got things under control. You might want to read this again:

Enough stuff⁠

⁠

The other idea is to take a good look at your monthly spending and treat each incoming dollar as another small fire extinguisher to help you obliterate your debt, rather than using it to buy more things that needlessly subtract from your personal net worth. Put those little extinguishers to use.

We’ll look at some of the meaningful changes you should consider in a future lesson. For inspiration on paying off debt, here is

an encouraging video⁠

of one man paying off $91,000 in ten months.

If you’re already debt-free, well done! If not, don’t panic. We’ll focus on changing things in the coming weeks and months. Remember, don’t move on until you’ve created a spreadsheet of your debt.

Lastly, consider professional help

As mentioned before, money can be more about psychology and feelings (like feeling overwhelmed) than about cold numbers (the dollar amount of debt). There are specialists out there that can help you deal with the psychology of debt and might be better suited to help you get started. Ask for, look for, and find help.

Good luck.

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