As the economy moves toward an uncertain future with inflation and supply shortages, there’s one thing we must do to stay afloat during these challenging times: get rid of consumer debt.
Not all debt is the same. We have business debt and consumer debt. Do you know the difference between the two? Did you also know business debt is often considered good debt?
Consumer Debt Defined
When people think of being in debt, they often think of consumer debt. Consumer debt is defined simply as “debts incurred for use by an individual for family, household, or personal reasons.” In most cases, consumer debt is debt incurred using credit cards or loans received for cars or furniture.
Examples of consumer debt include purchasing the following items:
- Household items
- Motor vehicles (automobiles/trucks)
At the time of the sale these items may seem like great purchases, but over time, they can be devastating to your budget and savings.
Working For Money
If a person isn’t careful they will find themselves working just to keep up with their bills. They must pay those credit cards every month. They have to pay on that car note or furniture bill. They put a little gas in their car or pay for groceries or lunch with a credit card. Each of these purchases add up and over time, the majority of their paycheck is spent on bills.
Thanks to inflation, many people may resort to using credit cards even more just to get by.
In addition, we are conditioned to get a job and “reward” ourselves with things. For example, if we get a nice job, what do we do?
- Get a nicer/newer car
- Move to a more affluent neighborhood
- Buy nice things (clothes, television, furniture, etc.)
- Go out more and enjoy life
In many instances, these items are paid for on credit, or force us to live check to check in order to pay for these items. As a result, we are tied to that job and reliant on that paycheck to get by. It is for this reason many of us only have $400 in savings, and can’t afford to be out of work for an extended period of time. It’s a dangerous cycle that few of us can get out of.
How are we told to get out of debt? Usually we have 2 options:
- Cut back on expenses
- Get a better paying job or a second job
This can work, but a change in mindset is essential to not only get out of consumer debt, but stay out of it as well. We must become accustomed to avoiding consumer debt if possible. We must find a way to live within our means.
Don’t Get Another Job, Get Another Income Stream
There is nothing wrong with wanting nice things, but how we get them is what gets us in trouble. Instead of working to buy items that lose value when we purchase them, what if we bought things that retained their value or even generated revenue?
This is the concept of making money work for you.
For example, wealthy individuals have multiple streams of income. This is not to be confused with multiple jobs. Instead, they have various assets that generate revenue. Examples of assets include the following:
- Dividend paying stocks and mutual funds
- REITS (real estate investment trusts)
- Businesses (entrepreneur)
- Monetized social media (YouTube, websites, blogs, etc.)
- Royalties (books, music, publishing rights, etc.)
- Rental property
- Vending machines
- Precious metals (gold and silver)
Each of these (minus the precious metals) can generate revenue on a consistent basis. The strategy is simple:
- Purchase an asset.
- Grow and cultivate that asset.
- Start receiving cash flow from the asset.
- Purchase desired item from the revenues received from asset.
If done this way, you now have your desired object and still own the revenue generating asset. Using myself as an example, if I want a new pair of shoes, I won’t go out and buy them immediately. Instead I will purchase them with royalties I receive from online book sales. That means I will have my new shoes in a couple weeks or a couple months, depending on how many books I can sell.
I will use my passive income stream to purchase what I want, instead of monies I receive from ghost writing. Ghost writing is my “job,” but I resist the urge of using those monies to buy things I want. I use those monies to pay my basic living expenses (mortgage, car insurance, etc.) This way, I don’t go into debt. I find a way to purchase in cash using my revenue generating, passive income streams.
When done this way, people think you’re spending your “hard earned money” on material items but you’re not. You’re simply spending money you made while you were sleeping. Your main monies are used to pay your primary living expenses.
This type of spending philosophy is used by wealthy people as well. If they want a fancy car, expensive jewelry or any other nice item, they don’t go out and buy it. Instead, the financially savvy ones will use money from dividend paying stocks, rental property or royalties to purchase the item. The average person sees the flashy items, not realizing it was paid for in cash, and not from their primary income source.
Change Your Mindset, Change Your Life (Business Debt)
This type of thinking isn’t taught in school. We are taught to get a job, and that one paycheck will pay all our bills, living expenses, and for whatever else we want to buy for pleasure. If it’s not enough we are told to either get a better paying job or a 2nd job. We are then told to save enough for retirement and live off those savings. This type of thinking will get you trapped into working for money and working your life away. The key is multiple streams of income and passive income.
Instead of consumer debt, a better option is to have business debt. Business debt can be defined as monies used to fund a business. For example, money borrowed to purchase real estate, a company car or a franchise is referred to as business debt. Unlike consumer debt, which is used to purchase items that lose value, business debt is used to to acquire assets that retain their value and can generate revenue. That revenue is then used to pay back the loan.
For example, if a person gets a loan to purchase real estate, the monies received from monthly rents is used to pay back the loan. If a person gets a loan to purchase or lease vending machines, the monies received in sales of candy and soda is used to pay for the machines.
In each instance, the loans are eventually paid off with the proceeds, and now, you own the asset outright and receive the monthly proceeds free and clear. These proceeds can be used to buy more assets. Using myself as an example again, I also buy physical gold, silver coins, and small amounts of bitcoin with revenue received from book sales.
Patience Is Key
Easing out of consumer debt can take time. It can also take time to accumulate assets and generate passive income. The key is to create a game plan and implement that plan. Once you have a plan, work on decreasing your debt and begin to slowly accumulate assets. Remember: the best time to plant a tree, 20 years ago. the second best time? Today.
As I said before, this type of thinking is not taught in school. It’s critical you learn everything you can about how money works and the various ways to generate revenue that do not involve a traditional 9-5. Register for my online course on generating passive income: Tired of the 9-5? How to Retire Early With Passive Income. Available on Udemy.
In addition, our children must understand these concepts as well. My book Planting Seeds: The Children’s Guide to Entrepreneurship introduces young people to the world of business and and entrepreneurship. Pick up your copies today on Amazon.