Best Way To Start Paying Off Debts: An Entrepreneur’s Strategy

Debt is a double-edged sword. You can use it to help you or hurt you.

You need debt to invest in a business or to buy property. Those loans are good debt.

But if you can’t repay your debts and you owe more than you can pay…that’s bad debt.

Canadians are drowning in debt. The average Canadian owes about $1.70 for each dollar of income he or she earns each year after taxes. Canadians owe more than they save!

The situation is also alarming in the United States. The average household income is around $60,000, yet the average household debt is about $138,000!

So how can you tell if your debt is good or bad, and how can you make a plan to successfully pay it all off?

The first step is to think of debt as a kind of leverage. It’s nothing more than the money that you borrow from someone or an institution to perform an activity. And that activity could make you richer. It’s the sword that eliminates your troubles. Or it could make you poorer. And be the sword that injures you.

Good Debt

Good debt is the kind you want to have because when you’re finished paying it off, you’re wealthier than you were before.

It takes your business or career to the next level. Here are some examples:

  • A business loan from the bank to buy new equipment for your business
  • A business loan to hire more employees
  • A mortgage to invest in some property
  • A student loan from the government to improve your skill set

In each case, the person borrowing the money is using it for some type of advancement. The entrepreneur taking business loan plans to generate business revenue by getting new equipment or hiring more staff. The increased revenue and profit will help to pay off the loan.

The person investing in the property will make money if he or she is able to sell it for a profit. The student uses the loan to take some classes and gain skills that will add value to the marketplace and increase his or her income.

If the loan will help a person generate more revenue or income, then it’s good debt.

Bad Debt

Bad debt is the opposite situation of good debt – when you’ve borrowed money that you can’t pay off, or you’re financially worse off after borrowing money.

Let’s take a look at the same situations from the previous example:

  • A business loan from the bank to buy new equipment for your business
  • A business loan to hire more employees
  • A mortgage to invest in some property
  • A student loan from the government to improve your skill set

he entrepreneur buys new equipment, but it’s the wrong one, and doesn’t increase the productivity of the business. The new employees weren’t the right fit for the job so now the business is losing money. The property lost value, and the student paid for courses to learn skills that no one wants. The same situations are now examples of bad debt.

Bad debt is the worst kind of debt. Car loans, payday loans, and credit card debt. Basically any kind of debt for personal consumption or pleasure. These loans don’t generate you any kind of money.

They don’t make you richer. They make you poorer.

Almost every millionaire and billionaire in the world uses debt or leverage in some form.

When I started off in business, I had a lot of bad debt. I started paying it off and today I have very little bad debt. Instead, I have a lot of good debt that I leverage to make me money.

I haven’t forgotten what it was like to be in debt and struggling to make payments.

Let me share with you three steps I took that will help you get out of bad debt.

1. Focus on increasing your income, not lowering your debt.

Making the money that you are making right now, how long would it take you to pay off all your debt? Three months? Twenty years? When you think in those terms, it is overwhelming. How will you pay off all that money? It’s unrealistic to think you can be debt free with your current income.

For most people, it is impossible. So don’t do the impossible. What you want to focus on is increasing your income so you can pay off that debt faster.

It doesn’t matter what you do. You could have a job or you could have a business. But what you need is a high-income skill, a side hustle for your spare time, when you’re not at work or at your business. It will bring you more money to pay off that debt faster.

Here’s an example. A best friend’s husband, an employee who makes $100,000 a year, teaches golf in his spare time in the summer, and teaches people how to ski in the winter. Those activities are his passion and he makes good money doing it.

By having the high-income skill on the side, on top of his yearly salary, he makes an additional $30,000 a year.

Now imagine this, if you could bring in an additional $3000 to $10,000 a month, without changing what you are doing except adding another stream of income, how much faster could you pay off your debt?

This strategy made a tremendous difference for me.

When I was in my early 20s, I was $150,000 in debt and making only a few thousand dollars a month. But as I developed my high-income skill, I was making more money. First I was making an extra $5000 a month. Then $8000. Then eventually $30,000 a month.

If I tried to pay off my $150,000 debt using my $2000 monthly salary, I would be paying until I was 65 years old! Maybe even older.

But I was making more money with my high-income skills and keeping my expenses low so I could pay off $5000 here, $15,000 there. Before you know it, I was debt free. So focus on increasing your income, not lowering your debt.

2. Use good debt to invest in yourself

Remember, debt is nothing more than leverage. Even when I was $150,000 in debt, I was continuously investing in myself, taking courses and programs to upgrade my skills.

Money earned is a by-product of value creation. If you want to make more money, you need to deliver more value. To deliver more value to the marketplace, you need to improve your skills.

Most people want more money but they don’t want to work on their skills. But in life, you don’t get what you want. You get what you deserve.

When I was $150,000 in debt, a $1000 seminar wasn’t going to change anything. But if I could get one golden nugget or learn a new skill set through a program, there was a chance my life could change. The $1000 investment would be worth it.

If you can’t use your skills to increase your income and pay off your debts, then what you have isn’t a debt problem. What you have is a skill problem. If you work on your skills to make more money, then your debt is gone.

3. Pay off the debt with the most psychological impact first.

List all your current debts even if you don’t want to think about it right now.

For example:

  • credit card debt $5267.91
  • student loan $10,874
  • car loan $8684
  • credit card debt $1356

I want you to be very specific. Don’t round off any numbers. Be crystal clear.

When it’s a rounded off number, it always feels bigger and more overwhelming in your mind. Clarity is power. Vagueness is weakness. Once you make this list, it might actually not be as bad as you think.

Now you can see what you’re dealing with. You can tackle your list one item at a time.

What I’m going to teach you next to tackle that list goes against the advice of every financial expert.

Let’s say the large credit card debt has an interest rate of 20%. And the small credit card debt has an interest rate of 12%.

The financial expert will tell you to pay off the debt that has the highest interest rate because it’s costing you the most money. This strategy sounds logical.

Here’s the problem. We’re not logical. We’re emotional. I would recommend you pay off the 12% debt first. You’ll be successful sooner and you’ll feel better sooner.

Eliminate the debt that has the highest psychological payoff for you. Pay off the one that keeps you up at night. The one that you owe to your family and friends.

You feel so guilty when your family bugs you that paying it off would make you feel so good and so alive. It doesn’t matter if this debt has the lowest interest rate. The emotional relief will be worth it.

Forget logic. That’s what I did.

When I paid off that first little bit of debt, suddenly, I felt, “I can do this.” I could actually start crossing off those debts one at a time. And small success led to bigger success. But until you start paying something off, it feels so overwhelming that you’re too paralyzed to take any action.

So pay off the debt that has the biggest psychological payoff for you personally.