How to Transform Debt Into Wealth

Living with debt is not normal. Tell yourself that on a regular basis. Unfortunately, we live in a culture that promotes excessive consumption and dependence on others to help us pay for it. That type of behavior is what led to the 2008 housing crisis. People are spending beyond their means to impress people and they end up hurting themselves in the long run. If you are consumed by debt, it's time to go on a debt diet and start building wealth. It won't be easy, and it won't always be fun, but living debt free and without dependence on credit cards works. All it takes is discipline and foresight.

Things You'll Need

• A job
• Maybe a second job
• Loads of self discipline
• The ability to say "no"
• Pencil and paper
• Calculator
• Passion

Instructions

Set Aside Money

1. Set aside $1000 for an emergency fund. Do whatever it takes to have $1000 accessible 24 hours a day. Have yard sales, sell used books on Amazon, take your old CDs in to a used record shop. Do whatever it takes to get that money.Once you have it, don't spend it. It's not to dip into if you want to go out to dinner or take a vacation. It's for those unexpected car repairs, the broken water heater, things like that. If you deplete your emergency fund for any reason, it should become your first priority to get it back up to $1,000.

2. Momentum is key to Step 2. Forget about APRs and interest rates. Stop contributing to your 401k, or reduce it to 1 percent. Write down your debts from lowest total balance to highest. You're going to pay the minimum monthly payments on all your bills while getting crazy on the the one with the smallest balance. By paying off the smallest debt first, you'll have a sense of accomplishment. That feeling is going to keep your momentum going and keep you on a debt free path. Don't have enough money? Time to start working more. Take a second job, sell the extra car in the driveway. This is not a game, THIS IS YOUR LIFE. No material possession is as satisfying as being debt free feels. So as hard as it is to have to deliver pizzas or part with your stuff, think of the relief you will feel when the debt is gone.

3. Time to finish the emergency fund. Once your debt is all gone (except for your mortgage), save three to six months' worth of expenses in the emergency fund. How will you know how much that is? During this whole process you need to have a budget. Your spouse must be on board with this. Your budget must cover the entire month, or paycheck to paycheck. Every detail from haircuts to cat food to car insurance must be accounted for in the budget. Every dollar of income must be told where to go. Once you learn your spending patterns you can save three to six months' worth of expenses. Emergencies will happen. Don't be caught off guard.

4. Move on. Now that you have actual cash flow you can start building wealth. You should now designate 15 percent of your income to retirement. Use your company's 401k, 403b, pension plan or SEPP and contribute as much as you can. If you can't donate that much with your company's plan, invest in a Roth IRA. An easy and safe way to diversify your retirement portfolio is to put 25 percent in Large Cap mutual funds, 25 percent in Mid Cap mutual funds, 25 percent in international mutual funds and 25 percent in Small Cap mutual funds.Using this method, 15 percent of your income will now be TAX FREE! You will not pay taxes on those funds. How cool is that?

5. Look out for the kids. Now that you have yourself settled, it's time to make sure your kids are taken care of. It's time to start regularly contributing to their college funds. Look into ESAs and 529s. Do some reading and research and determine which way is best for your family to save. Don't waste your time on savings bonds or whole life insurance for kids. They rarely even pay out a two percent return on your investment and that is well below the average seven percent inflation.

6. You're set, your kids are set, now it's time to squash that mortgage. "But I like the tax deduction," you say. Nonsense. Isn't not paying a mortgage each month better than getting a little bit back on your taxes? Seriously, think about it. If you like making monthly payments, invest what you would have spent in a mortgage payment in mutual funds and your return will be far greater than any tax deduction you would have had.

7. Finished. That's it. You're done. All you have to do now is watch those investments compound and accrue interest like crazy. Time to have fun. You have the cash do do anything you want now. Imagine the possibilities.

Tips & Warnings

• For a reality check, read books such as "The Millionaire Next Door" by Stanley and Danko and "The Total Money Makeover" by Dave Ramsey.

• Do not, under any circumstances, rely on credit cards for anything. Close the accounts. Credit cards are not for emergencies. That's what your emergency fund is for.