Training Your Mind to Become Debt Free
It’s been over a year since I made my last car payment. The feeling of not having to owe anybody was worth the temporary struggle. When I started my journey into becoming debt free I thought it would never end. Every month logging into my Ally auto loan account and looking at the amount I owed was very discouraging. I got fed up with paying them every month. I thought of all the other things I could’ve been doing with that money instead. I wondered why I was so quick to pay for a car before I even paid myself. I was young of course and my priorities were different at the time. I could’ve easily waited and bought a different car in cash, but I wasn’t patient at all. I wanted a brand new car and I wanted it now!! Purchasing My First Car
For the average working class American, when it comes to building wealth, your cash flow is so important because more than likely it’s your number one wealth building tool. When your monthly cash flow is tied to car payments, or any high-interest debt, it depletes your opportunities to grow your net worth. Debt puts you in a hole that is hard to climb out of if you don’t manage it right. The best way to live is to avoid this at all cost. Paying cash for vacations, cars, and hobbies may seem like a foreign concept to most. I used to tell myself I would never pay for a car in cash, but now I understand why financially successful people preach this. Cars are depreciating assets. When you finance a vehicle it goes down in value faster than you can even pay it off. On top of that, you’re paying extra with interest. If you financed a brand new $20,000 car over 5 years at 8% interest rate, the total amount it will cost you would be $24,332.
After those 5 years of making monthly payments of $406, your car might lose half of its value and will only be worth $10,000. When you pay for it in cash you’re done. Don’t have to deal with a monthly payment and interest for a depreciating asset. Now let’s say you took that same $406 per month and invested that amount into an ETF (Exchange Traded Fund) that followed the S&P 500 index (Standard and Poor American stock market index based on the market capitalizations of 500 large companies) every month for 5 years. The S&P 500 index averaged a 13.84% return over the past 5 years.
$406 multiplied by 12 months in a year is $4872. If you were to put $4872 annually into the stock market that follows the S&P 500 index you would have $35,245.52 today. These investments are appreciating assets that grow your net-worth.
This doesn’t even include dividend reinvestments. Dividends are pretty much profit sharing some companies pay out to their shareholders for investing with them. Some people choose to cash these payouts and some choose to reinvest them back into their stock shares. It’s like someone paying YOU interest for giving their company capital. I know this is going over some of your heads lol But the moral of this is to show you how to build wealth by investing in assets that appreciate.
Borrowing money to purchase depreciating assets is like a double whammy when it comes to building wealth. It’s hustling backwards. Like starting off a 100-yard race 50 yards behind everybody else. Use your cash flow wisely. Once you eliminate high-interest debts, it frees up your potential to invest and save your cash flow. If your cash flow gets eaten up by debt payments it ties you to your job because now you’re living check to check just to stay afloat. Now you can’t save for a down payment on a home, your child’s college fund, your own retirement, vacations, hobbies… etc. Shift your thought process, educate yourself and make a change now for your future. One of the best things I’ve learned while paying extra to pay off debt is learning how to live below my means. I was so used to paying $700+ per month to Ally Auto Bank for years and living off the rest of my salary. Now that I paid that loan off, I have an extra $700 I can use for whatever I want now. Why I Paid Off My Car Early That’s $8,400 a year after tax going back into my pocket, it feels like I gave myself a pay raise. The goal isn’t to pay off debt and just go right back in, so now I’m investing in my future. Putting myself in a position to win and allocating funds towards my goals. Although the process of paying down debt is boring and frustrating, I guarantee you the end result is definitely worth it. Trust me you can do it!!! Make a change today and transform your life for the future.