Like most successes in life executing a great plan goes far to assuring success. Investing is no different. To succeed as an investor the first step is establishing the right foundation. What is the right foundation? There are many opinions, but take it from someone who has operated from the wrong foundation that a lot of debt on your personal balance sheet is destructive to your investing plans.
The wise would be investor will take drastic steps to assure they don’t have any debt and that they are operating on a cash basis. This basis is provides a strong foundation from which even relatively modest earnings can create success.
How does one accomplish this? Well, perhaps a better place to begin is where not to start. We should not assume that we are somehow simply better disciplined and smarter than other folks. The statistical facts don’t support this. Do you know that on 2.7% of mortgages are paid early. Do you really believe that as a starting point you are better than 97.3% of people? To succeed, most will benefit from assuming that you are not different.
Where to begin? You must begin with a behavioral make over. You have to move from spender to saver. You have to move from consumer to producer. You have to become a money producing machine and allow the “snowball” begin to develop momentum. (Warren Buffet’s biography by this name is a good place to learn about the Snowball theory).
Having decided to keep debt out of your life provides you the firm foundation on which financial success can be laid. With laser like intensity and unwavering attention you will spend your time from this point reducing costs, eliminating luxuries, increasing income and increasing debt payments. In a relative short time, you will be debt free.
However, to get there you new behavior requires some foundational steps. First, put away $1,000 as an emergency fund. Emergencies are not Christmas. Emergencies are not normal car maintenance. Emergencies are those contingencies that can throw off your new resolve to eliminate debt. Next, you will pay off your debt by focusing on the smallest items with as much as you can pay and minimizing the larger debt payments behind that. Your ever increasing debt payments will eliminate the whole batch in a surprisingly short period of time. Next, you will fund your emergency fund with 3 to 6 months cash reserve maintained in highly liquid accounts. Last of all you will eliminate your house debt and move toward 15% of income wealth savings. In 5 years, you will be almost financially independent. In 10 years, you will be completely free. And, at retirement, you will have the options to spend your time as you feel appropriate. This path laid out by Dave Ramsey is a proven and when put on paper obvious path to financial freedom and power.