Typically, when we look at those that have broken free from the poverty cycle there are 4 basic steps that they have taken to get ahead.
- Better debt reduction strategy
- Acquire growth assets
- Increase cashflow
- Increased wealth
The first step is they have identified how to better manage their debt. By creating the best structures and payment systems they are able to reduce their debt much faster. They adopt the best way to manage their bills, debt payments and most importantly interest costs which accelerates the reduction of the debt. They still enjoyed the lifestyle they had become accustomed to but for every dollar of debt they decreased they in turn create an all-important increase in equity.
The second step is they acquired growth assets over and above their home. This comes from understanding that there are two distinctive types of debt, GOOD DEBT and BAD DEBT.
Understanding the difference between good debt and bad debt is an imperative lesson when it comes to building wealth. Good debt is when the debt is used to acquire growth assets that create the third important step which is to create additional income. This income and any associated tax deduction will then increase your cashflow which if structured correctly can result in their good debt being all but self-funding.
Unlike your home where you pay all of the cost of the debt, if your debt is self- funding then you receive 100% of the gain. So although your home is a good lifestyle asset due to the cost of the debt the gain you make from your home is hugely reduced by the cost of the mortgage.
The combination of the steps above lead to the fourth step of moving away from the poverty cycle which is that over time by applying these steps they were able to ultimately save more and develop wealth.
