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Robert Kiyosaki's 10 Steps to Getting Out of Bad Debt

Updated on November 30, 2015

1. Tell Yourself the Truth

Tell yourself the truth about your debts. Face the hard facts about your debts. How much you owe and to whom you owe it to. Hold yourself accountable for your debts and do not pretend that you are financially okay.

Most people make the mistake of pretending that everything is okay. This only makes matters worse for them as they pretend, they keep accumulating more bad debts. So it is always good to be honest with yourself in regards to debts.

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2. Stop Accummulating Bad Debt

After you have held yourself accountable for all the debts you have, put a stop to all your bad debts. Don't take any more new loans.

3. Make a list of all Debts you owe

After putting all your bad debts on hold, make a list of all the debts you owe. Your bad debts are the ones that you are going to pay and that includes; credit cards, vacation loans, residential expenses. Do not include your good debts such as; investment loans, rental property loans as they are paid for by someone else such as your tenant.

Let me explain a bit more on the "Rich Dad" concept of bad debt and good debt. Good debts are debts that put money into your pocket. A loan for rental property is a good example of a good debt as the tenant will pay off the loan whilst still putting money into your pocket. Bad debts take money out of your pocket. Loans for vacations, credit cards, school loans are some examples of bad debts as they take money out of your pocket.

Financial freedom is determined by what type of debts you have. Good Debt or Bad Debt.

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4. Hire a Bookkeeper

Bookkeepers are very important in facing the hard truths about bad debts. There are 3 important reasons why bookkeepers are important;

  1. They keep accurate, neat and orderly records which is vitally important if you are going to buid wealth.
  2. Bookkeepers provide a lot emotional support during your harsh financial situation
  3. Rich people have bookkeepers on their team.

A lot of people make the mistake of not hiring a bookkeeper thinking that it is an expensive exercise. How could you not afford something that is vital to your success?

5. Make a visual picture of each Debt

Make a visual drawing of all debts you have listed in step #3 above. That will make it lot more easier for you to determine an order of how your debts will be paid. The illustrations on the left should help you do that;

For each debt, you draw a quadrant as shown on the example on the left. Write the name of the debt in the upper left hand corner and the total amount owed in the upper right hand corner. The lower left-hand corner you write the minimum monthly payment and then divide the total amount owed by the minimum monthly payment and it should give you the number of months required to pay off the debt. Write this number in lower right hand corner and circle it in red.

For example, if you owe $2000 on your visa credit card and your minimum monthly payment is $100, then, $2000/$100 = 20. Your visa credit card loan will be paid off in 20 months.

Do the same thing for every debt you have on your list.

6. Determine the order for paying off each Debt

After you have completed a quadrant for each of your debts, determine what order you are going to pay off the debt. Look through all your quadrants and find the lowest number circled in red and write a # 1 next to it. Find the second lowest and write a # 2 next to it. Do that for all your debt quadrants until if you have a number next to every quadrant. The quadrant with the number 1 is the first debt you are going to pay off and the quadrant with the largest number circled will be the one you pay off last.

7. Find an extra $100-$200 per month

Once you have determined the order in which you are going to pay off your debts, find ways to earn an extra $100 - $200 per month. This may be a bit difficult for you but you have to face the truth. The extra $100 may be your stepping stone to being financially set to achieve your goals. Be creative, get out of your comfort zone and start looking for ways to earn that extra 100 bucks.

8. Except for your #1 Debt, Pay only the minimum Monthly payment for each of your other debts

For all your debts, make sure you only pay only the minimum required every month except for debt number 1. Pay only the minimum monthly required for all other debts and put the extra $100 - $200 dollars towards debt # 1. Thus for debt #1, you are paying the minimum monthly payment plus the extra $100 - $200. Do that every month until debt #1 is completely paid off. Go to your chart and put a big red X through debt #1. You have succeeded!

9. Move On to Debt #2

You have successfully paid off debt #1, now turn to debt #2. For debt #2, pay the minimum monthly payment required for all other debts, pay the minimum required for debt #2 plus the full amount you were paying on debt #1.

For example: for debt #2 your payments should be.

  1. The monthly payment required for debt #2
  2. The minimum you were paying on debt #1
  3. The additional $100-$200

Now you are paying more than the minimum monthly payment and the extra $100 to $200. With each debt you pay off, you accelerate your payments on the next debt. Continue every month until you have debt #2 paid off. Go back to your debt chart and put a big red X on debt #2. You have succeeded again. Celebrate!

Move on to debt # 3. For debt #3, you pay as follows:

  1. The minimum monthly amount payment required for debt #3
  2. The total amount you were previously paying on debt #2, which included:

-The minimum monthly payment you were previously paying debt #2. -The minimum monthly payment you were paying on debt #1. -The additional $100 to $200.

Continue each month until paid. Continue this process for each debt, always paying the minimum required plus everything you were paying towards the previously paid off debts.

10. The Final Amount You paid on Your Debt - Invest it

Once you have paid off your last debt, take the total amount you were paying on the last debt you were paying and invest it. Continue investing each month. This will be the starting point of your debt-free life and financial success.

Remember this is a process and in order for this formula to work, you have to stick to it month after month. Do not go off the process because your chances of becoming debt-free will be very slim. Keep your spirits up and focus on a brighter future. If you feel like quitting, talk things over with a friend and your bookkeeper. Rather than arguing with yourself or your partner, seek advice from professional financial people. Remember, two minds are better than one.

"What do you do when you find yourself in a hole? Stop digging."

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