We talk about fear a lot on our podcast. Fear is natural and, TBH, necessary. But when it comes to finances, three types of fear tends to hold us back: from investing, from charging clients what we’re worth, or from taking chances when building a business.
Fear can also make you focus on the wrong thing when it comes to your net worth. Paying down debt rather than building up your assets, to be specific. And that’s what we discuss in this week’s episode: where our fear of the “debt boogeyman” comes from, our three-step strategy on how to overcome it, and what part of your finances you should be focusing on instead.
[00:46] The first of our Nine Commandments
[01:25] What is your net worth?
[01:54] Debt vs. assets: which should you focus on more?
[04:01] How we got inspiration for this episode
[09:38] Why the Dave Ramsey way of looking at debt is problematic
[10:54] The types of assets you need
[13:41] Where did Millennial “fear of debt” come from?
[16:15] How to change your debt-fearing mindset
[17:44] Steps to building a positive net worth
[20:46] A couple of analogies for paying down debt and building assets
“Net Worth is King.” That’s our second of Nine Commandments, after “Leave the Punch Clock Mindset Behind.” (A little insider info for you: we’ll be talking about our other commandments in future episodes!)
So what is your “net worth,” exactly? Simply put, your net worth = your assets – your liabilities.
You want a positive net worth, which is where you have more assets than liabilities. “Own more things than you owe,” as Dustin put it in this episode. As simple as that sounds, we see more people focus on paying down their debt rather than building their assets. That’s partly because our culture focuses on debt so much, even though assets are just as important, if not more so.
Let’s be real: our society’s obsessed with debt.
And honestly, we blame Dave Ramsey and his Debt Snowball Plan. Yeah, we said it.
We won’t go into too much detail about his methodology (which we have linked in the show notes if you’re really interested), but generally, he advises people to attack their debt first. Once it’s all gone, then you should invest, he says. But there’s a fatal flaw in that plan: all those years you spend paying down debt only are years you could be saving thanks to compounding interest!
But we keep shooting ourselves in the foot by paying down debt… because we’re scared! Where does this fear of the debt boogeyman come from? Our parents dealt with the highest interest rates ever to date in history, from the mid-1960s to the mid-1990s. Which, by the way, is the generation that Dave Ramsey comes from. We Millennials were raised to believe that we have to be debt-free before we save or invest. (Thanks, Mom and Dad.) Now, over the last 10 years, interest for debt is at one of the lowest it’s ever been. This means that the Baby Boomer mentality of fearing debt doesn’t really make sense anymore.
We need a new way of thinking about debt and assets.
We’ll lead the charge on getting rid of that debt-fearing mindset. Instead of looking at debt as some horrific monster, think of it as a necessary presence instead. You can and will deal with it, but other parts of your financial strategy are more important and will make a bigger impact on your wealth.
Think of it this way: even if you pay down your debt to zero, if you haven’t been saving until that point, you have no wealth. Zero is then your starting point, which is a waste. Choosing the right assets and focusing on saving — at any income level — is more important than paying down debt. Here’s how to do both at the same time.
Step one: Pay off your high-interest debt first. We typically think of anything over 6% as high interest, like credit card debt. Get rid of it; pay off your credit card debt on a monthly basis. This is the only thing we’ll agree with Dave Ramsey on.
Step two: Pay the rest of your debt normally. This includes your mortgages or student loans, which are usually less than 6%. Make those regular payments…and stop worrying about them. You can do it.
Step three: Put the rest of your discretionary income into savings using a bucket strategy. At the same time you’re lowering your debt, you’re working toward positive net worth.
We talk a lot about our bucket strategy, but here’s a quick recap of how it works. You have three “buckets” to put your savings towards and we recommend using all of them to build your net worth. Using this strategy, you’re putting money towards all of these goals at the same time, letting these savings grow now so you can enjoy them later.
Getting over your fear of debt takes time and change can be scary. However, we hope that our explanation of where this fear comes from can help you start changing your mindset. Don’t waste time chipping away at your debt only, when you can be paying it down and building your assets at the same time to achieve positive net worth.
Tune in to the full episode to get the full download on debt… and why it shouldn’t be ruling your life.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual.
What if you had a clear formula to help you figure out how much to save… while paying down debt and enjoying life? It is possible… when you know your numbers.
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