Rule 40: Pay Off Your Loans and Debts as a Priority

Do you pay off your credit card balance every month? If you do, and you don’t have any other outstanding loans/debts, then well done. You’re not wasting money paying interest and you’re already in a strong position to go forward. Skip the rest of this Rule and carry on.

If you do have a credit card balance (or five), an overdraft and/or other loans or debts, then you certainly aren’t alone. We live in a “have it now, pay later” society. We’re simply throwing money away paying off the interest. Debt is a a set of proverbial chains around your ankles.

There’s no doubt about it. You need to get loans/debts paid off as soon as possible. This is an important step; it’s not the first, but it’s close. I have a friend that once asked me where he should be investing his money. I told him he had no business talking about investing because he had $66,000 in credit card debt. There’s no point at all starting to put money into an investment, earning 8% interest, if you are at the same time paying 16% interest on money you owe to the bank or somebody else. It doesn’t make any sense. The simple truth is that those who borrow almost always pay a higher rate of interest than the rate received by those who invest.

I acknowledge that you may in fact have found a special situation where you can borrow money at a very low interest rate and believe you can invest that money for a bigger return, but don’t do it. This is the exact situation that caused the Great Depression.

I should stress here that there are a few possible special exemptions to this Rule; for example, if you’ve borrowed to invest in a business and you really know what you’re doing. We’re really talking mainly about personal debt in this Rule.

I’m not playing down how difficult it is to become debt free, but it has to be done. We’re going to make a plan to become debt-free in the next course. And when you finally make it to debt free, you’re never going there again, are you? (See Rule 37.) Of course you aren’t.