Friend and Foe: Why Debt Reduction is a Key to True Wealth

The decision to reduce debt is one of the most powerful financial choices a person can make. Reducing debt is a time-tested strategy that possesses enough advantages that everyone from college students to full-scale governments must eventually accept its value. In order to fully understand the debt-reduction mentality, a person must see the world through the eyes of a saver, a spender and an investor; these three mentalities, together, provide the perfect backdrop for understanding the critical significance of bringing debt to a triumphant end.

The Three Mentalities

To understand the average person, simply categorize every financial choice as saving, spending or investing. A person that saves is essentially communicating that they believe their money to be more valuable at a later date. A person spending money is communicating that what they receive with their money is worth more than the money itself, and an investor is communicating that they can create wealth with a hybrid approach. Investing is like saving money and spending money at the same time with the expectation that more money will be received from it at a later date.

The Saver's Debt Filter

Let's look at debt through the eyes of the saver. A person saving money wants to have money available to them at a later date, on command, and they want to make that amount as large as possible. But debt forces the saver to reduce the amount of money that they can save in any given period of time. If they do not pay their debt back quickly, they will always be reducing their total savings in the future as well.

This means that for a person saving money, debt is essentially an enemy to their primary financial strategy. It does not make sense for them to remain in debt, as the interest rate is effectively taking away from their savings in the future as well as the present. And remember, the saver wants money at a later date, and they want as much of it as possible. In other words, debt is a twofold loss to the person trying to save.

The reason that most savers engage in debt is because they wrongly believe that they can save more money if they convert the money they do decide to spend into a smaller monthly payment. This is a trap that eventually leads to a debt that grows out of control. Low payments lead to higher interest payments, and this means that their debt will grow rapidly against their savings. It is an understandable, yet dangerous mistake. A saver that spends money on their debt is opening their future up to stronger savings, which was the basis of their financial strategy in the first place.

The Spender's Debt Filter

The spender is punished the most by debt. A person spending money wants to get as much as possible out of each dollar, and they want what they buy to immediately contribute to their happiness, well-being and long-term stability. Spending can become addictive in this way, because any quick action that makes a person a little bit happier has the potential of creating unsustainable habits.

Considering that spending is a habit, imagine that a person has access to money that is not yet theirs: They have a large line of credit available to them at a moment's notice. Because the spender's primary strategy is to use money as effectively as possible on purchases, they will naturally exhaust this resource faster than a saver. However, the spending strategy means that a person wants to spend all of their money on goods and services. If they wanted to spend their money to generate more money, they would be an investor. This means that when a spender creates debt, they are basically buying money with money, and that is entirely counterproductive to their financial strategy of buying goods and services. A spender that reduces their debt is freeing up more money to spend at a later date, essentially increasing their spending power.

The Investor's Debt Filter

A smart investor is the least likely to engage in activities that involve the consequences of debt. An investor is always trying to make money with their existing money: Saving and spending would both reduce the amount of money they could have in the future. The investor views spending and saving as a net loss unless they somehow assist in financial gain.

This means that for a person with an investment mentality, debt is the exact opposite of what they are attempting to achieve. When an investor invests, they are receiving more money at a later date. When they engage in debt, their receiving less money at a later date. It's obvious that this simply does not make sense.

The Debt Minimizing Mentality

The truth of the matter is that borrowing money can be an excellent choice in the right circumstances. This means that with caution, prudence, intelligence and reason, a person could easily take command of debt and use it to their utter advantage. However, most people are not exceptionally skilled in this particular area; it is not something that is easy to practice, and the consequences can be devastating.

In order to circumvent the need for practice and dramatically reduce the chances of falling into financial quicksand, a person merely needs to adopt a debt minimizing mentality. What this means is that a person must consciously make decisions that create as little debt as possible, and they must make decisions that reduce existing debt as quickly as possible. This mentality is absolutely crucial for wealth generation, as without it, debt will always have an allure due to the natural power of money.

Creating Wealth and Balancing Debt

Creating wealth is the process of improving the most important areas of life: family, health, personal development and overall freedom. While the average person probably views wealth as money, wealth could be more aptly described as a lifestyle of abundance. Happiness comes from an appreciation of life, and money is simply a means to this end.

By remembering this about wealth, a person can approach the debt process as a simple cog in the complex machine that powers their life. However, if this cog is placed incorrectly, the entire machine can grind to a halt. Debt that is not strategic is more than just a financial risk; it is a risk to family, health development and freedom. A sincere, respectful approach to debt is necessary to minimizing or eliminating this risk.

Take this information and utilize it to the best of your ability. Always keep the saver, spender and investor in mind, and remember that people are a blend of the three personality types. Notice in yourself when you choose to spend, save and invest, and remember that the smartest choice is always the one that contributes to true wealth. Those that make choices that promote a lifestyle of abundance are the candidates most fit to enjoy it. Never risk true and lasting happiness on an impulsive financial decision, and remember that debt is a friend for a moment and an enemy for a lifetime.