Solving debt is a challenge. We are flooded with expenses and rarely rewarded appropriately for our work. It’s no secret the system is flawed. Children are taught an outdated curriculum in school and are forced into a pitfall of financial worries from the moment they agree to student loans and the terms in which he or she will pay the loans back.
Before knowing what it’s like to live on their own, kids are forced to choose a major of study which rarely turns into a career path. They are not taught personal finance like how to open a bank account, nor are students taught how to do their taxes, apply for a mortgage, compare interest rates, invest into the stock market or change a diaper.
Basic life lessons are left untaught in grade school, leading students towards taking massive amounts of student loans to one day receive the most expensive piece of paper of their life that may or may not result into a well-paid job or even a paid job at all.
Kicking student loan debt
Education is a good thing. However make sure you understand the enormous debt amounts and high-interest rates you are inheriting from committing to a university without a plan in place to pay it back. Not everyone can qualify for a scholarship so it is understandable when student loans are so necessary.
Loans sit on students’ shoulders the day they walk to collect their diploma. Student loans can haunt recent college graduate students as the interest piles up on the principle loan amount every day. Every day that passed, you can be hit with a $0.25 fee or more that is added to your overall principle loan amount. It feels like a never-ending situation without expediting the process. Solving debt will remove these financial strains.
Make a plan to solving debt
While you might crave a new car, an apartment of your own and independence from your parents, your student loans are going to hold you back for years if you do not take care of it quickly. Instead of paying off the minimum amounts, you want to take care of your loan payments with as much money as you can afford to speed up the payment process.
The more you pay towards your loans, the sooner you move towards reaching freedom of any student loan debt. You will be tempted to reduce your monthly payments so you can enjoy a bit more cash on hand to spend, but you are better off to bite the bullet and continue to use your money towards paying off any outstanding student loans.
The turning point when solving debt
Student loans have interest rates ranging from 3-8%. That means you are actually going to be paying more money because you do not have money in the first place. Weird how that works, right?
After climbing out of debt and paying off the principle, you are not only out of debt, but no longer on the negative side of interest rates. That is the turning point. When you begin solving debt, you’ll notice a key difference in your ability to save more money.
Once you are debt free of student debt, you can formulate a clear plan for yourself. You can take the same money you use to pay off your student loans, and deposit those funds into a brokerage account to start your investment portfolio.
You can use any app like Robinhood which introduced free trading. Since Robinhood, many other trading apps like Fidelity and Ameritrade have introduced free trades.
You are not going to become rich overnight by putting the extra money into these investments, but the important thing is that you will be collecting the benefits of interest rates. You can go from paying 6-8% interest rates, to collecting about a 2% yield from owning $SPY shares to start passively building your wealth.
Solving debt is one thing, but staying out of debt is a constant battle. It is important to stay as disciplined as possible and delay gratification. Let others spend their money on luxury cars or fancy clothing, those items are not assets and will not provide future value. The smarter route is to put that same money towards assets.
Buying shares of corporations is not as fun as riding a jet-ski on the ocean, but eventually the value of an item like a jet-ski will lose its’ value over the course of time while the value of shares of corporations will provide a return on investment for years to come.
As a general rule to go by, a jet ski with more than 100 hours is considered a high hour jet ski. On average a jet ski should have approximately 30 hours a year. Anything more than 30 hours per year is considered “high hours”.
– Source: JetSkiTips
If the jet-ski lifespan is stretched out over the course of 10 years, keep in mind you will need gas and insurance in order to enjoy your jet-ski. New jet-ski or wave runner vehicles cost between $5,000 and $20,000 depending on the make, model and year. Include $50 gas fill ups and about $150-$500 per year for insurance.
During that same time period, the value of stocks might fluctuate but you still own the shares and if it is a dividend paying stock, you actually will start making a profit off that initial investment.
Instead of paying insurance and gas, you can take that additional $1,000 per year and re-invest that money towards your portfolio. You can build a wealth creation machine instead of riding around on a wealth killing machine. After the 10 year period, you will see your initial investment rise in value, collect dividends for every share you own, and you will also contribute over $10,000 towards your investments instead of paying for gas and insurance!
It’s a no brainer to think twice about spending on toys, but it’s even more important to think about the double-positive by investing your money into good, well-run corporations. Again, it is not fun or sexy in any way. But it is proven to be effective over time with diligent investing and consistent discipline with patience. Over time you will see the value of your assets increase and your future-self will thank you for investing as you receive higher dividend payouts while your buddy spends more money on fixing his jet-ski, without even realizing the upside he missed out on.