10 Steps to getting out of (Bad) Debt

Robert Kiyosaki, an investor and the author of the popular RichDad Poor Dad book, maintains that being debt free is financial insanity. Good debt is the key to wealth building.

He says that his Rich dad told him “The rich have more debt than the poor. The difference is that they have good debt, and the poor and middle class are loaded up with bad debt”.

Having said that, Kiyosaki and His wife Kim were at a point in time in so much debt that on several occasions they considered declaring bankruptcy, but they did not. They thought it best that they learn from their lessons and pay back the money.

He says today they are richer, not just because they have a lot of money - but richer from the experience and the lessons they learned digging their way out of debt. This is the gist of Robert Kiyosaki’s book 'Freedom from debt' in which he outlines the 10 steps to getting out of bad debt. Below are just the section headings, the 'meat' is in the book :-)

1) Tell Yourself the Truth i.e. How much do you owe and to who you owe it

2) Stop Accumulating Bad Debt

3) Make a List of All the Debt You Owe

4) Hire a Bookkeeper (or solicit the advise of one to help you consolidate and draw out a plan)

5) Make a visual Picture of Each Debt (a diagram indicating name of debt, amount outstanding, required minimum monthly payment and number of months it would take to pay it off)

6) Determine the Order for Paying off each Debt

7) Find an extra $100-$200 per month to allocate towards debt payment

8) Except for your #1 Debt, Pay only the Minimum Monthly Payment for each of your Other Debts

9) Move on to Debt #2

10) The Monthly Amount You paid on Your Final Debt – Invest It!

Reading Kiyosaki's book reminded me of George S. Clason’s book ‘The Richest Man in Babylon’ which also emphasised the need to have a plan to pay off your debt. In the book, there is a story of Shrewsbury who said that he made a list of all his debts and took it around and showed it to everyone they owed.

He then explained to them how it was simply impossible for him to ever pay them the way things were going along. Then he explained that the only way he saw to pay in full was to set aside 20% of his income each month to be divided pro rata, which would pay them in full in a little over two years. But in the meantime, he went on a cash basis to stop accumulating more debt.

Shrewsbury said he managed to pay his debt by allocating 20% of income to debt reduction while still setting aside 10% of his income towards saving. He said it was like having an adventure to make the change but he enjoyed figuring a way to live comfortably upon that remaining 70%.

Remember, getting out of (bad) debt is a process, but “A year from now you may wish you had started today.”