Wednesday, January 30, 2008

Importance of Debt Freedom

Two reasons for working towards being debt free:

  1. The less debt one has, the less passive income is needed to pay for it. As shown in my last post, I need $1900.00/month of passive income just to make up for my debt obligation.
  2. Money spend on debt can be used in investments which generate passive income. We all know that it takes money to make money. In my case, if I always make minimum payments it will take almost 54 years to pay my debts and during that time I will pay almost $222000 in interest alone!!!!

Imagine $222000 that could be better spent towards generating passive income will be gone! The worst part is that my total debt today is about $220000!

Can I have a show of hands? Who thinks that I am totally and utterly done for?

The good news is that there are things that can be done to help us back on the path to financial independence. The most important tool is an application I found, Debt accelerator. To give you an example of how useful this piece of software is, it shows me how with the same money that I spend today towards my debts can pay off the debts fully in 14 years rather than in 54 years and save just over $124000 in interest! That is money saved that can be applied towards investing in passive income stream.

This software even shows you the impact of applying a monthly acclerator to your debts. An accelerator is an extra amount that you budget to attack debt.

The strategies that Debt accelerator makes use of are known as cascading debt elimination and snow balling. I will explain these strategies in the next post.

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