Level 1: Debt Reduction

In the previous post we discussed the 4 Levels to Financial Independence. So let's start with Level 1, which is a common place for most people: In debt with no investment assets (no, you're home is not an investment asset).

The majority of people are in this position, they may or may not have their own home, they have very little or no savings and they have personal debt. They may have a car loan or two and a balance on their credit cards which never seems to go down.


Let's keep the home loan out of this and just discuss personal debt: car and personal loans and credit cards.

Because this is so common, many people when asked what financial position they are in will say, "better than most!"

Let's make one thing clear, if you have personal debt, it means you've not only spent every single dollar that you've earned, but you've spent more than that! So not only ate you finding it hard to live on what you earn now, in the future you will have to live on less because you have to pay the debt back plus interest. So if you're spending is unsustainable now, then having less in the future is going to be harder!

So let's discuss some options on how we can start getting ahead of this debt and start moving towards Level 2.

First you need to know what your budget surplus is, which is what you earn (after tax) less what you spend. I recommend using a budget tracker for at least 3 months to get a good idea of what your budget surplus is.

Personal debt is high interest and as a rule of thumb, you want to put your money wherever it is getting the highest interest. Example, if you have a home loan at 5% and a credit card at 20%, any budget surplus you have should go to the credit card. Similarly, if you have a car loan at 10% and another personal loan at 15%, your money will be working 50% harder by putting money towards the personal loan.

In summary: use your budget surplus towards your highest interest debt first until it's all gone.

I will discuss tips on increasing your budget surplus in later posts.

Peace.