How to Convert Debt to Wealth
Everyone wants to get ahead financially, but the burdens of debt can be overwhelming. When you pay only the minimum amount due on your debt, you end up spending much more than you thought. Through financial responsibility, you can convert debt into wealth. The key is to be frugal throughout the whole process.
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Instructions
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Assessment
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1
Assess your debt situation. It's important to get a feel for where you really stand. Gather up all of your debts and add up the total amount. Pay attention to the interest rates that you are paying on your debt, as this has a major effect on the total cost that you are paying.
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2
Lower your interest rates if possible. If you can lower the interest rates that you pay on debt, you may be able to get a handle on debt and create wealth more quickly. Ask your creditors to lower the rates or consider switching the debt to a new credit card. Some new accounts offer 0 percent interest balance transfers for the first year.
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3
Use the snowball method to pay off your debts. Pay the minimum amount on all of your debts except for the one with the highest interest rate. Put all of your extra money toward this high interest debt. When you pay that debt off, apply all of the money that you were paying for the debt to the debt with the next highest interest rate.
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4
Participate in your company's 401(k) plan to decrease taxable income and increase wealth. If your company offers a 401(k) or other retirement plan, you should plan to participate. Your company will automatically take your contribution from your paycheck, so you don't have to think about it. In many cases, the company will also match the money that you put in up to a certain amount. This is free money.
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Open an investment account. Aside from your retirement accounts, you'll want to open an additional account for other investments. You can do this through an online brokerage account.
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Feed your investment account once you've paid off your debt. Continue the snowball effect by applying all the money that you once used for paying your debts and put it into your retirement accounts.
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Tips & Warnings
While it's usually a smarter move financially to pay off your debts before starting to build wealth, some people feel more motivated as they see their investment portfolio grow. If this is true for you, you can dedicate a small percentage of your monthly income to increasing your wealth instead of paying off debt.
