How to Pay off Debt: Things to Avoid
Let’s say you’re in a position where you want to pay off debt. You have decided that the best and highest use of your money is to get rid of a particular loan or multiple loans so that you have more cash flow that’s not required to be paid to these fixed loan payments.
The reason that we’re talking about this is that a lot of times people pay off
Where Paying off Debt Fits into Your Cash Flow System
Paying off debt is not a destination. It’s just one step in the greater Survival to Significance Cash Flow System.
It’s important to have your eye on the endgame to make sure all of your decisions along the way line up to get you there.
To qualify to invest in cash-flowing assets, you need capital to invest. If you don’t already have the capital ready, the best way to build it is to maximize your cash flow today and put as much of your cash in your control as possible.
Paying off loans, and more importantly, understanding your financing decisions, is part of finding and freeing up money in the foundation. It’s where you keep more of the money you make and increase your cash flow.
When you keep more today, you increase your options, flexibility, and power to create lasting wealth.
Things to Avoid When You Pay off Debt
Using All Your Cash to Pay off Debt
Leaving yourself with no cash is risky because you might have no loans, but now you’re in a position where you have no money that you can access. In that case, you’re probably going to charge something up on a credit card again because you don’t have access to capital.
Focusing on Interest Rates
The problem with looking at just the interest rate is that it blinds you from seeing the big picture. It can take off your focus from what matters, and that’s freeing up cash flow.
Sometimes they’re the worst loans to pay off that free up the smallest amount of cash flow for you and don’t get you that far ahead.
Only Paying Smallest Loans First
Sometimes this might make sense but also this is the wrong focus. It can take your mind off of the big picture. What we want to do is focus on cash flow.
How to Pay off Debt
It all comes down to cash flow, and the reason is that you want as much cash flow as possible today in your financial life so that you can save more, and have money left over to direct to savings and direct to investing in cash flowing assets.
Don’t Drain Your Emergency Fund
The first is that you don’t want to pay off any loans until you have an emergency fund. I would recommend having a six-month emergency fund before you use any extra cash to pay off loans.
This may not always be possible for each situation, so this is just a rule of thumb.
Stop Extra Payments
Every time you make an extra payment, that’s money going to a bank or financial institution that could be directed to building up your assets.
Direct all of that extra money that you might have been making extra payments with over to savings. The reason for this is that you need to build up an emergency fund before tackling the debt.
Unfortunately, all too often, people spiral right back into debt after paying it all off because they didn’t have cash in their control.
Pay off Loans All at Once
We want to build up enough to pay off each loan all at once. That’s going to keep you in as much control as possible.
Determine Which Loan to Pay off First
Leverage the Cash Flow Index Snowball Method, for a more comprehensive strategy to pay off debt.
Create Your Time and Money Freedom
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Success leaves clues. Model the successful few, not the crowd, and build a life and business you love.
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Mike Michalowicz is a champion of profitability, on a mission to eradicate entrepreneurial poverty. Mike is the author of Profit First, Transform Your Business from a Cash-Eating Monster to a Money-Making Machine. He helps business owners realize their need for making a profit and design a practical, working system that doesn’t take ironman willpower to…Read More
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