which First ? Reduce Liabilities or Build Assets?

[Phil]

I just posted this question in the book review section, but thought it would be more relevant here (sorry for the double post mods)...

I want to settle my bad consumer debt in order to improve my Net monthly cashflow. I'm also keen to invest in cashflow producing assets and get out of the ratrace ASAP.

(I've been playing the cashflow101 e-game everyday for the last month, and have just got started on 202)

I'm interested to hear your responses to this question... If you had £12k of bad consumer debt which costs £255 per month in payments and had £12k cash on hand, What would you do? Settle the debt to free up the money every month or invest that £12k into a cashflow producing asset?

I'm also concerned as the secret said not to focus on debt, instead just set up a payment plan and forget about it, which is what I have been doing untill now.

let me know thanks

 

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[Runum]

It would be great to find income producing investments that would help you reduce that debt. The reality is, though, that you will probably have to pay off any bad debt before anyone will consider loaning you any more. Good luck.

 

[Hoop]

First, what do you mean by "bad debt"? Is it bad because you are in default or is it bad because you bought consumer goods you couldn't really afford?

Next, what is your goal? You talk about increasing your monthly net cash position. Well, both of your choices will do that. Eliminate the debt, you get to keep the monthly payment. Buy a cash producing asset, you get the extra cash.

So to me, based on the information, the question really comes down to your education, readiness, and ability to find a cash flow asset. If you can find, study, buy, and flow it in a few months, buy the asset. If you are new, have a lot of questions, and might get cold feet at the last moment, you are probably better off paying off the debt while accumulate your education, network, and gain your "investor legs".

-hoop

 

[Analyzer]

12 months * 255 = 3060/year or roughly a 25% interest rate on 12k.

I might be thinking slowlane here but unless you have a very detailed plan to invest 12k that will bring a much higher return use the 12k to pay down the debt and you just made a guaranteed 25%/year return.

 

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[mtnman]

Eh, this can be tuffsky depending on where you're at in your personal perceptions.

Debt comes and goes. How about a 50/50 PLAN. Pay down half, and use the other half to implement a business plan or investment that spews cash. Shoot for 12k/mo, you'll have that debt gone one month after reaching your goal. This screams ebiz.

 

[andviv]

You have seed money available. That is one of the most common issues for people to get started.
Part of the reasons to start the mentorships at fastmentors.com was that we realize that not having money and a mentor to guide you were the two primary deterrents for people not to get started on their financial path. That's why we are providing both to help others get started.

You have the capital and the determination. Why not move forward?

What things/services you can provide that people are willing to pay you for?
What can you do at a professional level? (meaning, getting paid for it).
What is stopping you to master something that let you move forward?

What if you come up with a plan that buys you 1 year of time to work on that project?

Here is the plan.
Put 12 months of payments in a bank account.
Use the rest as seed money to learn and master a technique, you have a year to make it work.

With numbers:
Put (12 x 255) $3,060 in a bank account and set it up as automatic payments for your debt.
Use the rest ($8,940) to buy the books/training needed to master your project and the expenses needed to get started.
Trust me, that is more than enough money to get started. The mentees from the fastmentors.com mentorships are starting with way less and will learn how to make it work. It may not be enough to get into big deals, but it is plenty to make it grow to get to the next level.

 

[Phil]

It would be great to find income producing investments that would help you reduce that debt. The reality is, though, that you will probably have to pay off any bad debt before anyone will consider loaning you any more. Good luck.

I agree with that. Thank you

First, what do you mean by "bad debt"? Is it bad because you are in default or is it bad because you bought consumer goods you couldn't really afford?

Next, what is your goal? You talk about increasing your monthly net cash position. Well, both of your choices will do that. Eliminate the debt, you get to keep the monthly payment. Buy a cash producing asset, you get the extra cash.

So to me, based on the information, the question really comes down to your education, readiness, and ability to find a cash flow asset. If you can find, study, buy, and flow it in a few months, buy the asset. If you are new, have a lot of questions, and might get cold feet at the last moment, you are probably better off paying off the debt while accumulate your education, network, and gain your "investor legs".

-hoop

What I meant by ‘bad debt’ was consumer debt that I ran up in my late teens – Doodads, Holidays, clothes, nights out, emotional spending (so young and foolish)

I have many goals, like the car in my avatar and my Mansion by the coast in Laguna Beach, CA. However my biggest priority is to be able to leave my current Job and go full time self employed to do the job I love- working as the Business Director for my clothing company. I felt that If I was to reduce my monthly expenses I could afford to pay myself less than I earn now (If I have to) until the company is more successful.

I also want to build a strong asset column (currently stands at £0)

That’s great advice thank you. I’m truly committed to becoming wealthy! I’m reading lots of books on the subject of financial freedom (just bought Think and grow rich yesterday), playing cashflow daily, looking at franchises, stocks and shares strategies and real estate books as well as spending time reading posts on here and singingpig.com

Is there anything else I can be doing?

12 months * 255 = 3060/year or roughly a 25% interest rate on 12k.

I might be thinking slowlane here but unless you have a very detailed plan to invest 12k that will bring a much higher return use the 12k to pay down the debt and you just made a guaranteed 25%/year return.

I don’t really have an investment plan for the £12k I was just thinking possibly invest in a rental property or a small franchise something like that. I’m not entirely sure what £12k would buy me or produce in cashflow? Thats how I thought aswell: Paying £12k produces/ frees up £255 every month for life!

Eh, this can be tuffsky depending on where you're at in your personal perceptions.

Debt comes and goes. How about a 50/50 PLAN. Pay down half, and use the other half to implement a business plan or investment that spews cash. Shoot for 12k/mo, you'll have that debt gone one month after reaching your goal. This screams ebiz.

My current personal perception on debt is Bad debt makes you poor, Good debt makes you rich.
I can’t tell you how many paradaigm shifts I’ve had over the past few months in relation to finance and wealth but I feel like a completely different, immensely positive person!
I would love to hear your perspective on debt. Its sounds like you’re on another level – I’m yet to reach.

That’s a cool plan but I have no idea where to start with an ebiz let alone one that produces a potential £12k a month. I thought about doing one of those £1 per pixel sites, but they’ve been rinsed now. Any ideas?

Thanks

You have seed money available. That is one of the most common issues for people to get started.

Part of the reasons to start the mentorships at fastmentors.com was that we realize that not having money and a mentor to guide you were the two primary deterrents for people not to get started on their financial path. That's why we are providing both to help others get started.

You have the capital and the determination. Why not move forward?

What things/services you can provide that people are willing to pay you for?
What can you do at a professional level? (meaning, getting paid for it).
What is stopping you to master something that let you move forward?

What if you come up with a plan that buys you 1 year of time to work on that project?

Here is the plan.
Put 12 months of payments in a bank account.
Use the rest as seed money to learn and master a technique, you have a year to make it work.

With numbers:
Put (12 x 255) $3,060 in a bank account and set it up as automatic payments for your debt.
Use the rest ($8,940) to buy the books/training needed to master your project and the expenses needed to get started.
Trust me, that is more than enough money to get started. The mentees from the fastmentors.com mentorships are starting with way less and will learn how to make it work. It may not be enough to get into big deals, but it is plenty to make it grow to get to the next level.

I’m definitely going to look into fast mentors. I realise I do need a mentor. Does it matter that I am based in the U.K?

I am ready to move forward. I’ve set up my own clothing company with a partner which I’m dying to work full time on as this is my passion. I currently work as a surveyor for a construction company which I loathe but the money is excellent, I’m just bored out of my mind doing it.

I’ve read a ton of books recently to learn everything I can about running a business. At the same time I’ve been reading lots on developing a plan to financial freedom (as I’ve mentioned above).
I would say that the plan would be an amazing idea if £255 per month was my only single expense. In order for that plan to be feasible I would need to have enough money to also cover rent, food, phone, broadband, fuel, electricity, gym, insurance, etc


Thanks for your reply

 

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[andviv]

I’m definitely going to look into fast mentors. I realise I do need a mentor. Does it matter that I am based in the U.K?

I don't think so. Today you can make money in the market from anywhere, or play poker online, or use tools like eBay. If these are available for you (and I know they are) then you should be ok.

I’ve set up my own clothing company with a partner which I’m dying to work full time on as this is my passion. I currently work as a surveyor for a construction company which I loathe but the money is excellent, I’m just bored out of my mind doing it.

What prevents you from working on your company at night and keep you current job during day time?
That way you continue growing your company while your job covers your expenses.
Is your company worth the sacrifice of working on your real passion 4 to 6 hours at night?

Of course, you will also have to reduce any unnecessary expense.
Do you know what expenses to eliminate first?
What expenses can you get rid of today?

 

[^eagle^]

I was in the same situation six months ago.

I chose to pay down the debt. actually it was chosen for me but that is another story. I was leaning towards it anyway.

The reason I paid off the bad debt was:

1. Freed up about $800 USD a month.
2. psycologically made my life a whole lot simpler with less bills to pay.
3. More options available to create good debt with debt ratio near zero.
4. Showed more responsiblity to creditors
5. Increased my FICO score 30 points.
6. If I choose to I could take an easier lower paying job (but I'm using my surplus towards additional closing costs.)

It's like puling off a bandaid. It's gonna hurt but not as much as you think it will.

I'm now closing on my first property realizing an instant equity ~$70,000.

Great question BTW rep++

 

[Ryan_Taylor]

I think this is a pretty debatable question that you're going to get responses all over the board. The bottom line is there probably is no perfect way to do this, so do what you think will work best for you. The important thing is to take action.

Don't spend too much time thinking about what the best strategy is . . . just do it. Maybe along the way you'll realize there is a better way to accomplish your goals, but at least you're making progress.

Me, personally would think paying down your "bad debt" would be the priority. But in the meantime, start building income streams that can help you pay that off faster.

Andviv suggested eBay as an example - maybe you can sell a few thing for a few extra bucks and realize that it's a really good way to make some extra money. After your debt is paid off you never know what type of part-time business you may have on your hands.

I'm not saying eBay is the answer, but you never know until you try yourself. What works for some people won't work for others.

 

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[wildambitions]

What if you come up with a plan that buys you 1 year of time to work on that project?

Here is the plan.
Put 12 months of payments in a bank account.
Use the rest as seed money to learn and master a technique, you have a year to make it work.

With numbers:
Put (12 x 255) $3,060 in a bank account and set it up as automatic payments for your debt.
Use the rest ($8,940) to buy the books/training needed to master your project and the expenses needed to get started.

:iagree: GREAT Plan! +Rep+

 

[andviv]

Don't spend too much time thinking about what the best strategy is . . . just do it. Maybe along the way you'll realize there is a better way to accomplish your goals, but at least you're making progress.

I don't agree.

"Just do it" is a great way to accomplish things once you know your strategy.
Strategy is defining in what direction you are going. Read the definition of the word and you will see that doing this is an excellent starting point.

I do agree, however, that you don't have to spend all your time in finding the best strategy and then no time executing anything (analysis paralysis).

Define at least your general direction based on what you know today, and then start executing this plan.

 

[Ryan_Taylor]

Actually, I think by disagreeing with my point you actually further emphasized what I was saying

 

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[DeletedUser394]

I'd work on increasing the "good" debt, (ie sound investments), and decreasing your "bad" debt.
Also, I've learned from other people's experiences that it's a good idea to pay more than just the limit required on your debt payments in order to reduce the amount of payments necessary and subsequently the total amount of debt owed.
I suggest you use the cash that you have to invest in "good debt", and take an extra shift or two at the office to cover your payments.

Good luck, and keep us posted. :seeya:

 

[andviv]

Play cashflow with both strategies and see which one takes you out of the rat race the fastest consistently. That is how I determined that I prefer to move forward instead of paying liabilities first.
Ryan_taylor, it seems people read what they want to read. So be it.

 

[AroundTheWorld]

Ya, nice thing about cashflow though..... no loan officers.

All you have to do to get a $5,000,000 loan is agree to pay the interest!

 

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[andviv]

Ya, nice thing about cashflow though..... no loan officers.

All you have to do to get a $5,000,000 loan is agree to pay the interest!

Are you checking SBA-backed loans? what you are buying qualifies for a business anyway, right?

 

[AroundTheWorld]

I've never gotten - - or really even looked into SBA loans.

It is my understanding that they take a lot more paperwork and a lot more time to close... (Russ, you have gone the SBA route, right?) Have you Andviv?

 

[Bilgefisher]

Play cashflow with both strategies and see which one takes you out of the rat race the fastest consistently. That is how I determined that I prefer to move forward instead of paying liabilities first.
Ryan_taylor, it seems people read what they want to read. So be it.

This was an eye opener for me when I first played the game. I think it really depends on the liability. Some have hefty monthly payments for little balance, while others have much smaller payments relative to the debt. I think its always important to way all the options.

 

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[andviv]

Yes, Russ said he went through it already. I'll look for his post.
I started one application but in the end the business did not work out. The biggest issue for us at the time was that we were asking for money for a brand new business so there was no track record. That would not be the case for you, so give it a try, make a couple of call to see what they have to offer.

Edit:
See these:
http://www.thefastlanetomillions.com/showthread.php?t=4561&highlight=small+business
http://www.thefastlanetomillions.com/showthread.php?t=211&highlight=small+business
http://www.thefastlanetomillions.com/showpost.php?p=35066&postcount=29

 

[andviv]

This was an eye opener for me when I first played the game. I think it really depends on the liability. Some have hefty monthly payments for little balance, while others have much smaller payments relative to the debt. I think its always important to way all the options.

Actually very few liabilities made sense if I was getting deals that could accelerate my returns on investment. Then, once I had accumulated enough cash I just "bought" my way but of the rat race by paying ALL liabilities (obviously, except taxes).
Check the Cashflow 101 strategies thread, we discussed strategies like that one in there. Russ H had a bunch of great suggestions in there, and that is why the game is so important as a tool to validate strategies.

 

[kimberland]

The thing about the Cashflow game
is that it is mostly about rational decision making.
People aren't rational.

For example:
Mathematically, it likely makes sense to pay off the debt.
However, I know that it was easier for me to continue investing
than it was to start investing.
Once I had some money in the markets,
it drove me to add to that initial investment.

Knowing that about myself,
I'd take at least a portion of my cash
and invest it.

A buddy is that kind of gal
that obsesses over her debt.
She can't think of anything else
while she's owing others money.
It makes sense for her to pay off the debt first.

Successful investing is all about knowing yourself.

 

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[^eagle^]

Ya, nice thing about cashflow though..... no loan officers.

All you have to do to get a $5,000,000 loan is agree to pay the interest!

I know I would not get my current loan on my current deal without paying off liabiliites.

However, Our thread starter is using a business as his income so Investing might be a better choice for him.

It was a better choice for me to pay it off.

 

[venom]

So you pay off the debt and wake up tomorrow broke or close to it.
How do you get your business started. Every business has start up costs and expenses.
So what do you do ?

Clothing biz.
I figure many costs
Cloth
thread
marketing

Eagle what makes you say you wouldnt of gotten your loan . Your networth is basically the same . Did you put money down into your deal ?