040 Getting Out of Debt the Affluence Way

Hey there, real quick before we jump into the episode, listen, if your earnings treadmill hasn't set you free yet, running faster won't either. Listen, hustle without principles just going to burn you out. So here's what I want for you. I want you to join me for my money machine experience live. It is three free trainings. Deep dive into how to escape the treadmill and build a money machine that actually works for you. All right, grab your spot here by going to moneymachinelive.com and I'll see you in the free training. Hey there. Welcome to this episode of the affluent entrepreneur Show. Are you trying to figure out how to get out of debt? Maybe you feel like you're buried in debt and you're trying to figure it out. Well, in this episode, I'm going to walk you through how to do it the right way, the affluence way. Okay, so stay tuned for this show and this one's going to be a special one because I did this presentation live and I want to bring it to you because of the kind of response that I had for it. So stay, stay tuned. I'll see you in the episode. Cheers.

This is the Affluent Entrepreneur show for entrepreneurs that want to operate at a high level and achieve financial liberation. I'm your host, Mel Abraham, and I'll be sharing with you what it takes to create success beyond wealth so you can have a richer, more fulfilling lifestyle. In this show, you'll learn how business and money intersect so you can scale your business, scale your money and scale your life while creating a deeper impact and living with complete freedom. Because that's what it really means to be an affluent entrepreneur.

Are you looking to figure out this whole money game? Well, I got news for you. I want to invite you to my seven day money plan workshop, my money plan challenge. Okay, this is totally free and this is where we get a chance. I wanted to put something together to help everyone set a solid foundation. Here's the thing. If we're truly going to change our financial destiny, we need to have a rock solid, unshakable financial foundation. And so join me for seven days and we're going to walk through everything from figuring out the money mind stuff to understanding some numbers, understanding what your target is, structuring, you know, the plan, figuring out how to deal with your debt. What do you do first? How do you ratchet your income? We're going to take one element of each thing on each day, work it through in an action guide and workbook with tools and tactics to make it happen. And so all you gotta do is go to themoneyplanchallenge.com sign up for free, and go through the training. This is my gift to you for being on this journey with me. And hopefully what we do in that process is we set you on a solid foundation. So as we have more and more conversations, we can change your financial trajectory and destiny together. And I look forward to seeing you there. Cheers. Today. Today I wanted to actually do this session around debt because I just read a study I just read a study from the American Psychological association that was published in February of 2021. They did a survey of over 3,000, 3,100 people, and they were saying that they're stressed about money and debt and that type of thing. And so I wanted to do a specific session on debt. Go live and just have a conversation with you. I want to walk you through how I look at some of this stuff now. Now, the title said why I don't agree with Dave Ramsey. Let me be really clear as we start here, let's be clear. I love everything that Dave has done. Dave has made a huge impact on people's lives. He is an icon in some of the space. But some of the stuff I believe is not the right thing to do for entrepreneurs. And so that's where I want to bring this from, is how do we as entrepreneurs deal with debt? And debt can be something that chokes us out. Debt can be the ball and chain that keeps us from growing. Debt can be the fuel that allows us to fly and all of that. So thing is that I think that there's other ways to look at this. And so I wanted to have a conversation around it. Let's just kind of walk through this idea of debt and how I see it and why this is such an important element to consider when we first come into this game. And that's the thing that I think we really need to. To play from. So the first thing is this. Why does debt even matter? Why. Why do we even need to pay attention to debt? Well, here's the thing. The marketers have figured this thing out. The marketers have figured out that if they can get you or me to play the payment game, this is not a credit card, but this is a driver's license. But if they gave you a credit card, the reason they gave you a credit card is to give you credit. Maybe. But here's the more important thing. The reason they actually gave you the credit card is to remove the friction from your buying decision. And so they can get you to play the payment game. Okay, say that 10 times fast. And so one of the challenges is that when you play the payment game, you in your mind say, I can make that payment. And these payments will stack up on each other to a point where you can't actually make the payments. If you've gone the old fashioned route of trying to buy a car and you walk on the, on the car lot, one of the first questions they ask you is, well, what kind of payment are you looking for? See, they get if they can squeeze you into a payment, then the total number isn't as big of a deal. So that's one of the issues, is to realize that you don't want to play the payment game. The other thing that happens is we tend to think that, oh, it's just payments and I'll take care of it over time. It'll get paid off over time. Challenge is that we don't look at all the payments and the expense of all the payments and the interest and all the things that are going along with it. So we need to understand where we are in that process. And the third is that debt can truly strangle you. Now, I am not one of those people that says all debt is the devil. This is another place where I kind of depart from some of the conventional thinking. I think that there is productive debt and I think that there's destructive debt. But one thing's for certain, all debt stresses you and costs you. Okay? So not saying not to be in debt. I actually have a bit of debt on the house. I don't have consumer debt, that type of thing. But growing up and building things, I went into debt. Now, sometimes I did it stupid, sometimes I got in trouble, sometimes I did the things that brought these lessons to the surface. But today I don't do it that way, and my clients don't do it that way. So we need to be able to understand that debt can strangle us if we're not careful. And when we go into too much debt, your future, your family's future, your legacy, your children, your grandchildren, your future's being eaten up by interest. And so we want to be able to avoid that from happening. And so when we start to understand that payments never justify the buy, okay, in other words, if I can't afford it, I can't afford it. And so we don't use the payments, the mathematics of payments, to say, oh, I can buy it now. And I know that's hard for some people to consider, but if we can't afford to pay for it today, then potentially we're robbing our future to get something that we may not be able to afford to do. Now I get this. And I'm not saying not to buy things. I'm just saying to be intentional, be aware and be conscious, everyone that if you followed me for any time, that's kind of my focus is I want everyone to be aware, conscious and intentional with their decisions as we move forward. The other thing is that you can buy things at the speed of cash. Now, the reason I say this is that when you start to look at just do it for a week, Just do it for a week. I do this every once in a while and you start to buy things and you got to count out the greenbacks, you got to count out the dollars, you got to count out the pound, whatever it is in your currency, you tend to reconsider the purchase. Do I really need the purchase? Because the pain of buying, remember the friction and the buying decision is there. I remember. So I was seeing a nutritionist and everything with my cancer treatments, everything I was seeing nutritionist. And one of the things that they had me do was log my food. And no different with paying with cash when you log your food. So I'm looking at the menu or I'm looking at something I'm going to do, I want to eat it. Because if I eat it, I got to write it down. And if I write it down, they're going to know about it. So it changed. It changed the way I did things by understanding that. And so here's an invitation for you for a week. For a week. Pick a week. Probably don't want to do it during the holiday season that's coming up. But for a week, pay for everything in cash. See how much that changes your buying behavior. And then you'll realize the impact that credit cards can have and debt can have in your buying decisions in doing that. So when we get this right, you're debt free, you're not burdened by it, you're not held down by it. You actually are floating there and your cash flow is for your lifestyle. This is my beautiful bride. Those of you that can see the slide. This was us just recently. We just got back from a trip to London and you have a perpetual income machine that's going to pay for things in a way that, that this is something that we talk about in the affluence blueprint. Then what do you need to know? So let's just get into the brass tax of what do you need to know about debt and what's the steps? I'm going to talk a little bit about how Dave does things and then we'll talk about how I. If I have time, I'll talk about how I want you to do things. If not, we'll pick that up tomorrow. So here's the thing. The first thing is that, like I said, there's good debt, there's bad debt. We'll talk about that. But here's the consistent theme of all debt. No matter whether it's good or bad, it all costs. Okay? So I categorize things as productive debt and destructive debt. Destructive debt is typically the stuff that you put on debt or you borrow to buy that is consumables. Okay? It doesn't increase your net worth, it doesn't increase your wealth, it doesn't increase your cash flow. Productive debt is something that might go into debt and it's going to produce more income for me or more wealth for me. So for instance, I might borrow to buy a rental property or an Airbnb property. That Airbnb me property is going to produce cash flow on an ongoing basis. That Airbnb property is going to appreciate over the long term. And so what that does is that I'm using debt to create more wealth, to create more cash flow. It's a productive element for some of you that may be in the online or advertising space doing things from a marketing standpoint. You may potentially put your Facebook ads or your ad costs on a credit card. So you're borrowing to finance the ads temporarily because when they're done right, and if they're done right, you spend a dollar on ads and you should get a multiple of dollars back, two, three dollars back because people are buying. If the ads aren't producing for you, then you got to shut the ads down or try a different ad. But the idea is that when you go in and you spend something or you borrow something, in order for it to be productive debt, it needs to increase your cash flows or increase your wealth, your net worth, your wealth, your investable assets. Okay? Destructive debt doesn't do that. Destructive debt is going and putting on a credit card to buy a big screen tv. Now, I'm not saying not to do it. Just understand that. I'm not saying not to do it. I'm just saying that it is something that by the time you pay it off. So if I go into a store and I buy a $2,000 big screen TV and I put it on a credit card, typically I'm going to pay I can pay as low as, like, I don't know, 25 or $30 a month. But $30 a month or even $50 a month is $600. $600 is going to take me years to pay off that big screen tv. By the time I pay it off, it's completely obsolete. One, two, by the time I pay it off with the interest charges, Instead of spending $2,000 on it, I spent $4,000 on it. That's destructive debt. That's destructive debt. And that's the debt that I do ask my clients and try to get them to avoid in doing that. So understand this two aspects, otherwise productive or destructive debt that come into play. One is that all debt costs, interest is a cost, and all debt stresses, okay, the burden of debt will stress you out, whether you think it does or not. Just having that on you, believe it or not, will stress you out. When there may be downturns or issues or anything. The fact that you have debt and debt payments that you can make is going to stress you out. So I just. As long as we're aware of all debt costs and all debt stresses, then we're good because we're consciously going into it. But I do want to avoid destructive debt, as I, as I said. So that's one thing to know. The second thing to know is that I think from a principal standpoint is we don't want to sell our future for our today. We live, let's face it, we live in a time right now where there's a lot of comparison, there's a lot of judgment, there's a lot of divisiveness, there's a lot of everything going on. We live in a social media world.

That we thought connected us. I truly believe that it's disconnected us. It has de. Socialized us in the sense that we are not connected human to human like we once were. And I know that there's this hunger to come back to that perspective. But here's the thing, is that too often we make a buying decision based on what we see on social media. Come on. I know I'm guilty of it. I'm one of those people that on Instagram an ad comes and go that looks cool, click. And I buy something and it comes in, I go, what did I just do? So I'm not exempt from it. How many of you have done that? I'm sure that all of you at least done that once. But the other side of it is if we're comparing ourselves to the people we see on social media, if we're comparing ourselves to the neighbors and the neighbors got a new car. If we're comparing ourselves to all of that and saying, oh, that's the way I want to live. And I'm going to invite you to start to examine, are you living someone else's life? Is this truly your life or is it being defined by everything, all the external factors that are out there and the tendency at that point is to over buy. The tendency is, it's like peer pressure is that we decide, oh, I'm gonna, I'm gonna go get a car because I wanna look wealthy instead of be wealthy. See, wealth, wealth is a, is a quiet pursuit for most. It's not parading Lambos and jets and things like that. I know there's plenty of people that do that and, and bless them, let them do that. Okay. I just don't buy into it. And I often wonder how much of that is the facade versus the reality. And so I look at it from that perspective. So we don't sell our future to have a today, so we look good today in people's eyes. I want you to feel good today in your heart. I want you to feel good today in your soul to know that you're taken care of and you're making smart financial decisions for your future, for your children's future, for your significant other's future, for your legacy. That's how we start to build legacy wealth and do these things in a different way. Then the other thing to understand is this a payment focus. A payment when you're focused on payments only leads to screw it spending. Okay, yeah, I said it screw it spending. So here's the thing is that, and again at confession, I have been guilty. Most of the things that I teach and talk about is because I did it. I screwed it up. I made the mistakes. Screwed spending is. You're going, ah, screwed it. It's only 100 bucks a month. Do you know that if we put, if we took $200 a month and put it away in an investment account over a period of time, over 30 years, it's over $300,000. So that, screw it, it's only 200 bucks a month turns it's really screw it. I just lost $350,000. Okay? That's what I mean by payment focus leads to screw it spending. And that what we've done is we've, we've stolen from our future to get to it. And that leads to a number four is if you're in debt. So let's face it many people are in debt. There's the credit card debt has gone up in recent recent years for a lot of reasons. And if you're in debt and you're saying, I want to get out, I want to get out, we can't dig out of a hole by going down and digging at the bottom. We got to climb out of the hole. We got to climb out of the hole. We need to be able to find a way to get out. So one of the first things is that if we are living on credit cards, if we're living on debt, we need to stop it. I don't know if that's easy for me to say sitting here. That may be a hard decision. But one of the things that I'm going to ask you to do is to spend some time looking at your wants and needs and how much of the wants are being put on those credit cards and running you into debt versus the needs. I get the desires. But if it's something that's putting you further and further in the hole, let's stop it for a while. Let's settle some things out and let's move things forward before it gets too bad. All right? And then we'll talk about how do we get out of debt. All right? So that then leads me to this. How do you get out of debt? So I'm going to talk about Dave Ramsey's method, because I think it works for some people. Well, it's worked for a lot of people. So let's not. Let's not belittle it. But I just. I want you to then understand why affluent entrepreneurs ought to look at a different way to do it and how I look at taking debt into consideration. So let's look at how Dave Ramsey's done now. Dave Ramsey. Dave Ramsey has his baby steps. And taking care of consumer debt is his baby step number two. Okay? And baby step number two, he wants you to completely extinguish debt. And so here's how it works. He says after you get your starter emergency fund. So he just wants you to put $1,000 away. And I do something similar after starter emergency fund just in K purpose behind this is to make sure that if an emergency comes up now, statistics show that the majority of Americans at least do not have the capacity to take on an unplanned expense of $600. Well, the reason he wants this starter emergency fund of 1000 bucks is that you have the capacity to take on an unplanned expense, an emergency expense of $600, because you have $1,000 put away. So after you put that starter emergency fund, every dollar then goes to paying all your debt off, except for the house. Consumer debt, all consumer debt. He doesn't differentiate between good debt, bad debt. He says all debt is the devil. And I get it. He came from a place where he had to deal with bankruptcy and all that stuff. And it is a traumatic occurrence. It is a challenge. So then he turns around and says, now I want you to use the debt snowball method. Now, the debt snowball method is one of the methods you can use to, to pay off debt. It is actually a very popular method to use where what you do is you list your debts in, in balance order, so the lowest balance first and you with completely disregarding interest rate, completely disregarding any of that. You list them in order of the balances first and you pay the smallest one first. The purpose behind this is to make sure that you understand the, that you get the payoff as quickly as possible. So what he's playing with, and I totally agree with it, is that it's a, it's an emotional win to get a credit card paid off. So you may have a credit card or a bill that's $50 and you get that paid off, it's off your back and you go, it's a win. So he's looking for the quick wins because psychologically it creates momentum. And so that's the reason that the debt snowball method is one of the most popular methods because it gives people wins to grab onto this micro success to move them forward. Now the other thing that happens is until you have all your debts paid off, he actually doesn't have you build an emergency fund and he doesn't want you investing. In other words, everything is completely focused on debt paydowns and nothing else. Debt paydowns and nothing, nothing else is focused on other than that. So that's kind of the way Dave Ramsey's stuff works, which is great. And it's worked for a lot, a lot of folks. Here's the issues I see with it. One is that it's debt only focused. Your sole focus is debt. And what you're doing is just climbing out of the hole to get to baseline zero. The idea here is that the debt snowball is a psychological emotional win, which is great, but it may not be the logical win. We'll talk about that. In other words, it may not be the logical win, the best, the least expensive way to get out of debt in doing that. The third is that it delays to me this is where the big thing is, it delays the wealth mindset. So many of you have heard me say that wealth is more about your behaviors than it is about your money. That your ability to build wealth has to do with your habits, your decisions and your choices. And if our primary focus for the first two or three years is to get out of debt, and the only thing we're focused on is getting out of debt, then what you're doing is exercising your debt elimination muscles, which is great, but you're not exercising your wealth creation muscles. And when we're not exercising the wealth creation muscles, what happens? What happens is that as soon as you're out of debt, now you have to think about going into wealth creation mode. And now we have to develop that muscle, that habit, those behaviors anew. And so this is one of the biggest things where, where I start to depart with, with it for entrepreneurs. And the reason for it is this. Wage earners. Wage earners, traditionally the only way they could make more money if they were an employee was to go and ask for a raise. Now we do live in a gig economy, a sideline economy.

A side hustle economy. So now wage earners are creating additional income streams, so it makes a little bit of a difference. But by and large the, the focus of some of his work is, is been with wage earners. And the only way you increase your income is to ask for a raise, if you will. So their focus was on expense modification, debt elimination and to shrink the way we live and only deal with the expense side of the equation. Whereas entrepreneurs, on the other hand, entrepreneurs, they have the ability to affect both sides of the equation, to manage the expenses that they're dealing with and to increase the income, to put more promotions out, more campaigns out, to make more money by running the income stream so they can affect the income and the expenses at a much greater level. And so that's where, where my thinking starts to go is that how do we do that in a way that starts to drive things better. And so here's how I differ and I have some time, so I'm going to walk through mine. Instead of doing this in a two part session, I'm going to walk through the way I do it with my clients in the affluence blueprint, the people that I mentor and everything. And as entrepreneurs, I want us to look at this as the better way to get you out of debt because of how it works. So here's the deal. We have something like the baby steps, but it's called the wealth Priority ladder. And it's built, it's built in phases that are primarily focused on how entrepreneurs can build wealth, create wealth, and to create financial independence and financial freedom. That's really what we're driving towards. Here's the deal is that so often we get into business thinking that the business is there to give us freedom, just to find out that we're on a treadmill. And that treadmill is, got us trapped. And it's not. Because here's the idea is the business is a machine. And that machine isn't made to give you freedom. It's actually made to give you cash flow and have an impact on your clients and on society. So I create a business machine to create the impact and the cash flow, and then I use the cash flow to create the money machine. And that's where the wealth priority ladder comes in to play. Well, in phase two of the wealth priority ladder, we talk about a comfort fund. This is the same thing as the, as the baby, the thousand dollars that Dave Ramsey looks at. But I look at it differently because we're in business and our income can ebb and flow. I want a comfort fund. A comfort fund is what I call it. And I want it to be a minimum of $1,500 or one month's expenses, whichever is greater. So if my one month's expenses is $2,500, I want $2,500 in that comfort fund. I want to give you 30 days to operate without the stress of, of things if things start to, to have a problem. So now once we go to the comfort fund, we have that in place. Now we turn around and look at our peace of mind fund, the what, what Dave calls the emergency fund. I look at it as a piece of mind fund. When things go bad and I know that I have that cash set aside. I'm at peace. I have peace of mind. But where Dave says that you, you take care of your debt first, then you build the fund, I don't. I think that we exercise both the debt elimination muscle and the wealth creation muscle at the same time. We create the habits to make that happen. So I split the money. So say I have $500, I'm going to put 200 or 250 towards the debt. I'm going to put 200, 250 towards my investing to build my wealth at the same time. Sure, it's going to slow down your debt pay down, but it's going to accelerate your wealth creation at the same time. Now the other thing that I look at Is that Dave subscribes to the debt snowball method, which is totally fine. But there's also two other ways that you can pay down your debt. One is called the avalanche method. Where the avalanche method is, is you line up where the snowball method, you line them up by balance. Avalanche method, you line it up by interest rate and you pay the highest interest rate first. That's the logical way to make sure that you pay the least amount of interest. The problem with it for some is that it might be your largest balance, so it'll take longer to have a success. And so that's where Dave likes the snowball method. But depending on your, your mentality, depending on your temperament, the deal is to make a decision. I'm either going to use the snowball method based on balances, or I'm going to use the avalanche method based on interest rates. So I know that I minimize how much cost or interest I'm paying. And you stick to it. You don't bounce back and forth. So in our world, I give the option to work from there because I can have a client that says I'm going to pay it down. On the avalanche method, we plan a launch. They go do a launch, a promotion, a campaign. They have a windfall of money that comes in and they can drop it right against that high interest debt and get it paid off. We call it leapfrog funding in this stuff. So the next thing is this is that I want you to be able to adjust for what I call emotional debt. In Dave's method, there is no adjustment. It is or it isn't. This is the way you do it. Debt snowball. But here's the thing. Let's say that you borrowed money from a family member. You're going to pay them interest and you're going to pay them back. But there's an emotional element to that debt. And have you ever had it where you want to go do something but you owe this family member something, that person might judge you and go, wait a second, you owe me money and you're going off to Disneyland. So sometimes we allow the emotional debt to bounce to the front of the line before we do the debt snowball or before we do the avalanche method to relieve the emotional stress on you and in that relationship as soon as possible. So hopefully that makes sense. So that's the way I look at it. Then what this allows us to do is this. When we use this method of taking care of debt, a couple things happen. One, you are now in a debt elimination focus and wealth creation focus at the same time. So your debt's going down and your wealth's going up. Okay? You're getting either a psychological win or a logical win, depending on whether you go with the avalanche method or the snowball method. You build a wealth mindset and you start your path to the behavior change necessary to build financial independence and wealth as you go. Okay? So this is why I like doing this differently for entrepreneurs is, is I want you to be in a wealth creation mindset, not a debt elimination mindset only. I want them both. I want you to control the debt, control the expenses, but I want the wealth creation in there. So you, as you come through it, you've already exercised the muscle. And here's the big thing. Even though it slows down your debt pay down, it accelerates you into the investing game. The fact of the matter is this, it gets the compounding clock starting to tick. Okay, Think about this. A dollar invested over five years will turn into six, seven dollars in five years. Okay? That same dollar for 10 years will turn into almost $18. So the sooner we can get into the game, the sooner we get the power of time on our side. And time is the greatest wealth lever that you have. Okay? So this is why I look at things from a very different perspective and say in this situation, especially for entrepreneurs, I want you to look at debt from the perspective of how do I get debt elimination and wealth creation at the same time to make that happen. So this is the way that I look at it in taking care of debt. And this is why I don't necessarily subscribe to Dave Ramsey's approach or the conventional wisdom that exists for entrepreneurs. Entrepreneurs are a different breed. We're a different animal. We approach things differently and we can come at things differently. We can manage the expense side, we can manage the income side. We can come at it from that perspective. And if we're looking to create financial liberation, financial independence, we need to have a wealth creation mindset as well as a debt elimination mindset. Not one. The singular focus and the delay of the wealth creation mindset will slow you down, in my opinion and at least in my experience. Thank you for listening to the affluent entrepreneur show with me, your host, Mel Abraham. If you want to achieve financial liberation to create an affluent lifestyle, join me in the affluent entrepreneur Facebook group now by going to melabraham.com group and I'll see you there.

And that's it for this episode of building your money machine where we help you learn how to master your money, eliminate financial stress and live a life of choice. If you found this valuable or helpful to you, here's what I'd love for you to do. If you do me a favor, go to Apple, Apple Podcasts, or wherever you're listening to this podcast and rate and review the show. It helps us tremendously to keep us at the top of the list so we can can continue to get this information and this message out to people. Because I truly believe that financial freedom is your birthright and I want to help each and every one of you claim it. Thanks so much.