While utilizing a variety of credit resources – creative and institutional financing, hard money loans, and even private money – will help you to reach the pinnacle of real estate investing success much more quickly than you could with cash alone, the way you handle your personal finances can mean the difference between success and failure, and how quickly you can reap the rewards available in today's real estate market. Getting a handle on your debt is much easier than you might think.
Reducing Your Debt Load
Let's face it: monthly payments are a drag on any budget, but when you're trying to squeeze every last dollar out of your meager paycheck so you can realize your dream of real estate investing riches, it becomes even more critical that you stretch your available cash as far as possible.
If – like most people – a large part of your monthly spending involves making monthly minimum payments to multiple credit card companies, you're well aware that this spending enriches the card companies in the form of interest payments, but your balances come down very slowly.
Here's how to dramatically ramp up the speed and watch those balances drop – and how to avoid increasing those balances with unwise spending.
For this exercise in financial empowerment, you're going to need a few things:
All of your credit card statements
A pen and paper
A beverage of your choosing
Look through each of your credit card statements and list the balance for each one in descending order from smallest to largest. For now, ignore the interest rate for each card. I know this flies in the face of the logic used by many of the so-called financial experts you see on TV, but I have a very good reason for advocating this approach – which I'll explain more fully very shortly.
Once you have the balances listed, I want you to list the monthly minimum payment for each credit card next to the balances. Take a look at this example so you have an idea of what I mean:
Visa Card #1 $377 balance $15 minimum monthly payment
Visa Card #2 $536 balance $21 minimum monthly payment
MasterCard #1 $1183 balance $36 minimum monthly payment
MasterCard #2 $4219 balance $56 minimum monthly payment
Discover Card $5925 balance $146 minimum monthly payment
Now I want you to think about how much cash you have available on a monthly basis for attacking this debt. If you haven't already done so, you should have a monthly budget that guides your financial decisions. If not, you need to create a workable budget today based upon your current income and financial situation.
For the purposes of this illustration, I want you to pretend that you can afford to apply an extra $250 per month towards paying down your excessive debt. It may be more or less than this amount, but this will give you a good idea of what I mean.
When you make your monthly credit card payments, I want you to pay the monthly minimum payments on each of your credit cards with the exception of the first one. Instead of giving the first one (Visa Card #1) their minimum monthly payment of $15, I want you to apply the entire $250 that you have for debt reduction, in addition to the minimum monthly payment of $15.
I realize that some of the financial experts advocate that you apply the extra payment money to the credit card with the highest interest rate because, they argue, the interest rate determines the payment and it will take longer and cost more to do it the way I advocate.
They're absolutely right; it will.
By doing it my way you gain an important psychological advantage that the other approach can't match. In two months time, Visa Card #1 will be paid in full, which will then reduce the number of credit cards on which you're making payments. That forward momentum will give you real, tangible results – which will motivate you to continue what you've started. You can't put a price tag on motivation and the sense of financial empowerment that comes from crossing a debt off your list and realizing that you're making real strides towards actually taking control of your financial life.
The potential savings you could realize by following the advice of these experts is minimal, but if you don't want to spend a penny more than necessary in order to get out of debt – and you don't need the psychological victory, feel free to pay off the higher-rate cards first. Don't waste too much time getting hung up on the process; the progress is what really counts!
Once you've taken care of the first card on your list, apply the minimum payment from the first card to the second one, and so on, until you have all of your credit cards paid off.
Controlling Your Spending
While it's important that you reduce your existing credit card debt, you'll never be successful if you don't also control the credit card spending that gave you that debt in the first place. There are several ways you can go about reducing your reliance on credit cards, but in a perfect world, you would just promise yourself that your days of financing today's wants and desires are over and that you'll simply pay cash for those items from now on.
The reality is that many people are weak and can't follow through with simple promises not to spend. If you can't control the urge to spend, you may have to cancel your credit cards and put your personal economy on a cash-only basis. However, you might want to consider one of a few alternatives to cancelling your credit cards. These are admittedly off-the-wall choices, but they work – and it can be fun explaining to others the lengths to which you were willing to go in getting your spending under control in order to achieve your very serious dream of real estate investing success!
The Ice Baby Technique – This simple technique can help prevent unwise spending decisions by forcing you to delay the urge to spend. Simply place your credit cards in a small container of water – and then stick it in your freezer. Before you can use your credit cards, you'll have to thaw them out first. While this technique won't damage your cards, it will put your spending on ice, while giving your better judgment a chance to kick in before making a financial decision that you could regret.
The Boxed Plastic Technique – Rent a safety deposit box at your local bank and place your cards in the box. While you can still access the cards in a true emergency, you probably won't be willing to drive to your local bank branch and go through the hassle of getting the cards out just to catch a sale.
The Hide and Seek Technique – Another option is to pull all of the shoeboxes out of your closet and to randomly place your credit cards in a box before replacing it in the rear of your closet. Don't pay attention to exactly where in the closet your credit cards are. If you get the urge to spend, you'll be able to get to the card – once you locate it.
Granted, these are unorthodox steps to helping you to control the urge to use your credit cards. There's no doubt that they'll work. It might seem a little foolish to wait for credit cards to thaw, take a trip to your local bank to “check” them out of a safety deposit box, or hunt for them in a pile of boxes. But they will have the desired effect; they will help you to control your spending.
By controlling your spending, you can get your debt under control, which will give you more money for the very serious business of creating wealth through real estate investing. The profits are real, the lifechanging nature of this opportunity is easily worth the cost, and the time for you to jump into real estate is NOW!