Step 12: The End of Financial Slavery

In this final essay of Money Fundamentals, we will discuss the need to eliminate the debt caused by consumer credit. Consumer credit is credit extended to individuals (rather than businesses) for personal or household use. This includes all forms of installment payments, other than for real estate. Credit cards, auto payments, student loans, debt consolidation, personal loans, etc. are all examples of consumer credit debt.

Eliminate All Consumer Credit Debt

Destroy this category of debt as fast as possible. Each of these debts has interest attached and it is the interest that must be eliminated in order for you to become wealthy.

Here is the method: arrange all of your bills in a stack. Put the bills in the order of the smallest sized bill first, followed by each bill that is bigger than the last. The biggest sized bill goes last. Eliminate the bills in that order.

It doesn’t matter if you have credit cards and student loans and car payments. Just attack the bill with the smallest balance first. Do whatever you can to eliminate this first smallest bill. The strategy is to make as big of payment as you can on that first bill, as often as you can.

Work overtime. Go around the house and collect all the change. Get a side hustle. Do whatever it takes to get the extra money to kill off the first bill, by making as big of a payment against it, as often as you can. You will be surprised at how quickly you can come up with the money to eliminate the first bill. The most wonderful feeling on earth is when you get your statement, showing a zero balance. Winning!

Pay it off and close the account! Don’t believe it when people tell you that it is bad for your credit to close accounts. Once you pay off a debt, be done with it. Then start with the next smallest bill.

Now you are at an advantage. You have a block of extra cash available because you eliminated the first bill. Now double your efforts. On the next bill, pay the amount you were paying to the first (now eliminated) bill, plus the amount that you were paying on the second bill. You will pay this bill off twice as fast as the first one. And again, make as big of a payment as you can, as often as you can.

At this point, don’t worry about the interest rates. Many people assert that the bill with the highest interest rate should be paid first to reduce the total amount of interest owing. But that never worked for me. I needed the satisfaction of killing off little dragons before I was able to kill the bigger dragons. And kill them all, I did.

The goal is to pay no interest at all and the only way to do that is to eliminate the underlying consumer credit debt altogether. Paying off an enormous bill is an undertaking that requires time and patience. You need to see results in order to be encouraged to move forward. Once you see zero balances on the smaller bills, you will be encouraged to tackle the bigger bills. One fine day, you will owe nothing to the student loan servicer, the credit card companies, the car dealer, or the bank.

Once you have paid off your consumer credit debt, you will enter the exclusive world of people who do not pay interest in order to live. You will have one foot out of the middle class and one foot in the world of the wealthy.

Wealthy people do not pay interest to a credit card company; they pay off the card every month or they pay cash outright. Wealthy people do not pay interest to the car finance company or the bank in order to drive a car. They own their car out right. If you are paying interest for anything other than real estate, then you are paying interest simply in order to live. Stop.

The goal is to pay no interest at all and the only way to do that is to eliminate consumer credit debt altogether.

Try to Pay Cash Whenever You Can

Finally, try to pay cash for as many items as possible. Try not to use your credit card at all. I know you must be thinking that, as long as you pay the credit card off every month, and pay no interest, then there is no down side to using a credit card.

A well written essay, by Donna Rosato, however, points out that using a credit card turns you into a different kind of shopper, “one who is less price sensitive and more extravagant.” ^[1]

First, with a credit card, you buy more. Rosato’s article showed that the average grocery store purchase, with a credit card, included items that were not essential, such as chips and beer. The average cash purchase was for essential living items only.

Second, you are willing to pay more for the same item than another person paid for with cash. The article showed that for an online auction for sporting event tickets, the average cash bid was $28.51 and the average credit card bid was $60.64.

Third, you have less of an idea of what things cost when you pay with credit cards. According to Richard Thaler, a professor at the University of Chicago Graduate School of Business, using a credit card “decouples the purchase from the payment.” Because the payment occurs a month after the purchase, you are less aware of the cost of the item you bought.

So, even if you pay off your credit card every month, you are, on average, still paying more because you use a credit card. Get into the ultimate habit of not using a credit card at all. Save and pay cash instead. I always feel good when I go to the mailbox and see no bills. It has gotten to the point where I get about five bills per month and each bill is for an absolutely essential item.

Okay, now for the final step. Have one credit card. This is a credit based society and you need established credit when you go to buy a house. Use the credit card once in a while and pay the whole balance every time you use it. Now you have demolished the credit card monster, yet have kept your credit score active. Play the game to win!

And, oh my God, we are at the end of Money Fundamentals. We made it together!

Now it is time to make the first major life altering wealth move — and buy some real estate! Read the next post to find out how to buy real estate.

And read the book below “Who Moved My Cheese?” under Recommended Reading. This book is about how to be ready to adjust to change when market conditions start to sour, and you need to look elsewhere for new money and opportunities. You are always going to need this information about looking for greener pastures. This book has a unique and fun way of addressing the issue of hunting for new opportunities when the market has changed.

^[1] Donna Rosato, “Life Without Plastic”, Money, (July 2008), 52, citing as sources “Effect of Payment Transparency on Consumption”, Dilip Soman, University of Toronto, 2003; “Always Leave Home Without It: A Further Investigation of Credit Card Effect on Willingness to Pay,”, Drazen Prelec and Duncan Simester, MIT Sloan School of Management, 2001; “Effect of Payment Mechanism on Spending Behavior, Soman, 2001.