If my title intrigued you, I’ll assume your debt payoff strategy is in shambles.
I’m not surprised if it is. Many people struggle with debt:
- The average person carries $7,800 in consumer debt.
- 33% of this is revolving debt. The rest are loans.
- $51 billion of fast food was charged to credit cards
- Over 2 million households in the U.S. have more than $20k in credit card debt
It seems that many of us are in a never-ending spiral that we can’t escape.
Yet, successful businesses manage debt effectively every day.
Why is it that the same people who make these business decisions so effortlessly during the day come home and make emotionally fueled decisions at night?
That’s easy. They separate their working thoughts about money from their home life thoughts about money.
For some reason, when we reach home, we go from pragmatic individuals who can easily make objective, fact-based decisions for a company, to people who are emotional about their credit card debt and student loans.
I watched it happen for 16 years, but this behavior doesn’t make any sense!
You deserve success in your life. You deserve to have a debt payoff plan that actually works. All that you really need? Change the way you look at debt and your own financial picture.
Think of your own situation as if you were controlling a company.
Here are three crucial differences:
1) Companies manage interest rates and terms effectively, while most people don’t.
The average person says “I want a 15 year mortgage because my house will be paid off earlier than it will with a 30 year loan.” Really? Why is that? You can’t pay off the loan on a different schedule than the bank approves? Companies don’t begin negotiations by asking “when is the loan due” and then try to weasel the term to a shorter duration. Successful companies ask the bank for the longest, most flexible term available and then have their intelligent accountants create and maintain a repayment plan that works best for their goals.
Why do businesses do this? It makes financial sense to find a low interest rate and flexibility.
Why don’t we do it at home? We can’t trust ourselves to stick to the plan. We’ve messed it up so often in the past that we know we’re more likely to be successful if we have someone else do the thinking.
– How would you rearrange your debt if you focused on flexibility and interest rates?
2) Corporations focus on the big financial “game changer” moves while individuals worry about the latte factor and whether they should brown bag their lunch or eat at a restaurant.
Companies will focus time and attention toward negotiating salaries and health care costs to save millions of dollars. An employee stealing a few pencils and some toilet paper are a blip on the bottom line. Yet, the same people who focus on whether to raise the price of goods sold to increase profits $10 million will go home and waste all their time cutting a few coupons to save $4.73. What if they used this time to negotiate a raise or find better employment? That could mean $10k more to the bottom line instead of $4.73!
– What would happen if you focused your energy on major financial decisions instead of the line-by-line budget items?
3) A company makes decisions based on building financial muscle, not based on “feeling good.”
Companies weigh the financial impact of decision “A” against decision “B” and most often choose the more profitable path.
I’ve had clients who are vice presidents of major companies tell me, “I’m going to pay down a 3% loan before I tackle raising my 401k savings.” Why? “I hate having that hanging over me.”
While I appreciate the sentiment, I think this is where you modify the Nike slogan “Feel the fear and do it anyway” into “Feel the hanging over me feeling and do the right thing anyway.” It almost works.
- Why do businesses analyze financial data and growth projections before making decisions? They have shareholders to hold them accountable.
- Why don’t we make growth decisions more often at home? Would your financial picture be better if you thought of your family as shareholders? What would change about your focus?
Imagine a “shareholder” meeting to discuss what you’re doing well and where your “company” needs improvement
- What charts would you show at this meeting? Would you produce information about your projected future? Are these accurate?
- What changes could you make that you don’t make now if you had these?
If you were a shareholder for your company, what would you say about your stock? Going up? Struggling? Why?
David Bach would disagree with you for sure. I agree with the concept though. That’s why after 12 years, I still have student loans. Bigger things like retirement and buying my practice took priority.
Excellent comment. I’ll bet that buying the practice and retirement will make you more wealthy. While I’ve heard people say that Dave Ramsey helped them get out of debt and Suze Orman helped them get their head on straight, I’m glad you mention David Bach, because I think he’s far better at selling books than he is at helping people to become wealthy.
I would say my stock is going up hopefully! We will be paying down my girlfriend’s student loans after we get married to free up cash flow then continue to attack retirement even more aggressively!
Lance, you’ve written about this very topic also….but in different terms. I think as an accountant you look at things pretty pragmatically.
My stock is going up! I try to use debt on assets that grow such as in real estate. With the interest rates so low, I decided to use a car loan for my car purchase, but I am paying it off faster than the term.
I’d say that my stock is going up! Do you want to invest in it? I’ll submit an IPO and will be asking for $100/share. I’ll cap the shares at 1000.
I’d say my stock had some pretty rocky times for a while due to mismanagement but now future projections are looking pretty good. I don’t really agree with your section about just focusing your energy on the major financial decisions. Saving money on the line by line budget items is much easier than trying to get a raise or a better paying job. All of those line by line items can add up to a significant amount each year. People can’t just pull a $10k raise out of their ass just by putting a bit more effort into it.
While I understand your sentiment, we’ll agree to disagree, Jeremy. You only have so much energy. I can waste it on $10 decisions or spend it on $10k decisions. I’ll choose the latter every time. The “latte factor” or “extreme couponing” never made anyone rich.
I think it really depends on a person’s situation. Cutting expenses enough can make a person wealthy in some sense. Some people are truly stuck in jobs where they only get a minimal raise despite how hard they work and sometimes people work in an industry with little potential outside of their current job. It’s not always practical to assume you can earn more money. I do agree that extreme couponing is a big waste of time considering the return on investment.
We opted to get out of debt as quickly as possible to relieve some pressure on our monthly budget. It may not make sense from a pure math point of view, but the peace of mind was completely worth it.
Our stock is rising.
We were the same way- hated debt. I couldn’t wait to get out of it. Now that we are, I have no regrets and we can save and invest all of our excess funds! Almost done paying off that mortgage- 35 months to go!
I tend to agree and congrats on how far you’ve come on the mortgage!
I would say my stock is going up. I would not always have said that, but thankfully mistakes in the past can be great lessons for the future. I think the key is exactly as you say managing debt effectively. That requires logic and looking to see if taking on the debt in the short term will help you in the long term.
I love this approach! While I’m grateful that we are nowhere near the average household in debt, we do have a small amount that keeps revolving. I’ll have to reevaluate our approach from a less emotional point of view. It’s not something that’s hindering us, but it is something I don’t like having even if just based on principle.
Mortgage debt only!!! I expect to pay cash for our next car!!!! If I can’t pay cash, then I can’t afford it!!!! I’m kind of boring, I guess 🙂
While I understand your math, I know the power of behavioral finances trumps 1+1=2. If the VP will sleep better at night, pay off the debt and then work on increasing 401K later…he’s a VP and making 100K, he’ll be ok in the end.
For the average Joe a combination of budgeting, increasing income, and paying down debt will go a long way to being fiscally fit until they have extra cash flow to invest.
I definitely employed a similarly matter of fact approach when getting out of debt, for the most part. Sure it took a great amount of motivation and encouragement to get to actually do what was necessary, but in terms of the decisions that were made, they might as well have been made by a corporation at times.
I’ve always said you should treat your finances like it is a business. This is why I like your perspective…you are very balanced in your approach.
Most people don’t understand that when you take out a mortgage your goal is leveraging, not just buying the home. I especially like #2…negotiating on game changers. With my women conference that’s my main focus and the topic of how to negotiate will be part of my conference.
For me, my stock is going up as I’m growing my “business.”
Most people focus on saving and not on increasing income because they bought into notion that it’s much harder to increase income than to live a frugal lifestyle.
I think doing both is a surefire way to financial freedom. I understand your view point about the importance of time factor. Is it worth spending an hour to save $4? Probably not. But it all depends on individual situation.
I really enjoyed your creative way to find nexus between a corporation and individual behavior when it comes to money.
“The average person carries $7,800 in consumer debt.” I always knew I was a more-than-average kind of girl! Ha! Guess I can’t brag there, buuuut I can brag that we’re probably attacking it more aggressively than most would. We’ll get there, and then we’ll hopefully be an inspiration to those that have struggled.
This is a really smart way to look at handling your finances. I confess that I’ve been guilty of leaving my pragmatic business mind at work instead of applying it to my finances at home. Hmm…what an interesting thought process. I definitely need to become a shareholder in my personal finances and start thinking of big game changers that can help my situation!
I am so happy to hear that not using coupons can make me rich! Call me Non-Coupon Queen: I can find any and all excuses not to enter the couponing madness game. Now I just need to spend more of that non-couponng time making money…
Thanks for asking — my stock is rising! I’m rushing to pay off a student loan that’s at nearly 5%, and I know that’s the one place where I can get a guaranteed return. My car loan, at 3%, is not something I’m going to prioritize because maxing out my IRA is more important.
I took the half and half approach. While I expedited my debt payments, I still made sure I took advantage of the markets.
“Companies manage interest rates and terms effectively, while most people don’t.”
Interest rates are so important to take into consideration. They make a huge difference. Great post.
Joe, I love this! If more people started running their family finances like a business rather than something they just mush together, we’d have a lot fewer problems on our hands! We could all learn something about having a 1) annual budget, 2) cash flow plan, 3) ROI!
Obviously I feel like the MMD stock is going up!