Test Book

The

Get Out Of Debt Book

By Will Green

Š Copyright 2004 Willard A. Green

The Get Out of Debt Book

Page 1

Introduction

Welcome from the National Alliance for a Debt Free America!

Have you ever wished there was a source you could trust to help you really understand how money works, how to get out of debt, and how to live a life that is debt free, worry free, stress free? You can’t put a price on this kind of knowledge.

This is information everyone wishes was available, but it’s extremely difficult to find. Have you ever wished there was someone you could just talk to, ask questions and get the guidance you need? It isn’t taught in our schools; the only source has been professional financial counseling services or consultants who claim to have your best interests at heart, but seem to be interested only in the commissions from whatever “investments” they could sell to you.

After visiting a financial counselor, many feel they have paid far too much money for far too little information. And besides, when we’re in debt to the point that we can barely meet our monthly obligations, who can afford to risk money in the stock market?

The National Alliance for a Debt Free America (NADFA) has Financial Freedom Coaches who will take your hand and not just tell you what to do, but actually help you do it!

This book will reveal the secrets and tricks of the trade that could cost you thousands of dollars anywhere else.

The Get Out of Debt Book

Page 2

Our programs are designed to provide you with a REAL education about debt and how it affects your wealth and your lifestyle. We are going to give you compelling reasons why you must absolutely get completely out of debt, including mortgage debt, and we are going to back that up with doable strategies and techniques that will get you well on the way to attaining total freedom from debt for the rest of your life.

For most people, thinking about paying off debt is painful. It means having to budget and discipline their finances. Even those who are motivated to pay off their debts give up because they simply can't find a way to achieve it. Instead, people find ways to “manage debt.�

We are here to tell you that getting out of the death grip of debt requires more than simply reshuffling your bills.

Refinancing your mortgage, or using new credit cards to pay off the old, just doesn't work any more. In fact, it's a recipe for future financial disaster. More people filed for bankruptcy last year than graduated from college.

Over a lifetime, the average working American makes millions of dollars. For example, someone who makes $35,000 a year has a lifetime income of $1,400,000.

And the sad fact is, they probably won't have enough money for retirement at age 65. Where do all of those dollars go? Almost half of all income goes to pay taxes in one form or another: state and federal income taxes, sales taxes, use taxes and business taxes. They all take a big bite out of income. After taxes, the next biggest chunk of your income goes to pay interest on debt. That leaves a very small fraction to pay for everything else! What is wrong with this picture?

The Get Out of Debt Book

Page 3

The biggest problem is that most of us don't control where our income goes. Much of our money gets sent to the government and financial institutions, not by choice, but because of laws and regulations, and to service debt. The only solution is to get out of debt and have a choice about how you allocate your money. What most people don't understand is that getting out of debt gives you another choice - how much of your life you have to spend at work to make ends meet. When you decide to become debt free you dramatically reduce the amount of income you will need to support your lifestyle, and exponentially increase the amount of wealth you will have at retirement. In this book, we will show you how this is true and explain why it is so important to your financial future.

“Debt is a trap which man sets and baits himself, and then deliberately gets into.” Josh Billings

Nearly 85% of all homeowners have a mortgage. The vast majority of automobile purchases are made by lease or on credit. Credit cards are absolutely pervasive in our society and the regular use of consumer debt and credit cards are not only the “norm” - it is required. For example, rental car companies, airlines, and hotels have made it almost impossible to travel without a credit card. Mail order and internet sales require a credit card number for their transactions. Some retailers even require that you use a specific brand of credit card to get a “discount.” And once you get started, using credit is very seductive and way too easy.

Taking the next step deeper into debt for discretionary purchases like exotic vacations, expensive new clothes, or a new television or appliance is as easy as slipping a piece of plastic out of your wallet and signing your name or telling someone a sequence of sixteen numbers over the phone. We are constantly faced

The Get Out of Debt Book

Page 4

with a barrage of ad campaigns that tell us credit is not only normal, it's good for us.

It can be just as bad for us.

In January 2004, consumer debt crossed the two trillion dollar mark for the first time in history. The average interest rate has soared to over 15%! And that means that Americans are paying $30,000,000,000 to the banks and lending institutions every year. That’s thirty billions of dollars a year in interest expense, and it’s still growing year after year! How much better would America be today if families had not gone so deeply into debt, and that thirty billion or so a year was instead used to build real wealth for every family? We will show you exactly how you can make that happen, for yourself, and for others.

Americans have fallen into a money pit with no way out, seduced by the lure of instant gratification through advertising campaigns and deceptive promises of a better lifestyle, romantic adventures, incredible moments of deeply felt family values, and the fulfillment of personal dreams and fantasies that all happen when you use your credit card. You know, you've seen the ads yourself.

There are very effective marketing campaigns, and they are blatant, outrageous lies.

You don’t need a credit card to find joy, love, and happiness in your life, and even if that were possible it certainly wouldn’t last long after the bills come. You would have to face the reality of being even deeper in debt. There’s no joy in that!

It's no wonder we find both parents working in families today. It's not uncommon to find that one parent will even have to work more than one job just to make ends meet. In our opinion this is not good for our families. Parents who spend time at work away from the home are not available for their children. When both parents

The Get Out of Debt Book

Page 5

work, the children suffer. The educational system can't make up for family time, and it shouldn't have to.

“The borrower is the slave of the lender.�

Those same families, if they just didn't have debt, could have the same lifestyle, the same standard of living, but only one parent would have to work. By being able to have the same lifestyle with one income, children get more time with their parents; the parents are under less financial stress, and everyone benefits. But you have to get out of debt to do it. We are going to show you how.

Most people don't realize that debt makes everything more expensive, because they simply don't think about it that way. By paying a mortgage on a home, you will actually pay to the lender nearly twice what you agreed to pay for your new house because you have to pay interest for the entire term of the loan, which is often thirty years. When you use a credit card, you'll pay two, three, or four times the price of the purchase in interest, if you carry consumer debt year after year and don't pay it off right away.

It all boils down to the fact that you have to work harder and earn more income to pay for credit purchases, and more income means you are in progressively higher tax brackets, therefore paying even more taxes. That means you have to work even harder - and so it goes on and on. It's just not a good way to live your life. And we think most people would refuse to do it if they had a choice.

The incredible success of the persuasiveness of financial institutions is reflected in the fact that so many people feel their personal worth is somehow connected to their credit rating. No greater lie was ever told. The fact is your net worth is diminished

The Get Out of Debt Book

Page 6

by the amount of debt you owe, and has absolutely nothing to do with how much you can borrow on credit. And guess what? By using credit you've just made another choice - now you have to work more and earn more income to support the same lifestyle. What you have to realize is that whenever you take on debt you have this thing called ‘interest' as an expense on your income statement - and interest expense doesn't go away until you pay off your debts - all of them!

“Every man is the master of his own fortune.” - Sillust

Just imagine what your life could be like today if you were debt free. How many more hours could you be there for your family? How much more time would you have for vacations and time off, and how much less stress would you have in your life? If both spouses are working now, and only one had to work, what would that mean to your family life? Ironically, like it says in the credit card commercial, it's "priceless."

Our program is designed to educate you about debt, to give you an overview of how debt affects your ability to build wealth, and to offer you a way out. We will give you very specific strategies and techniques to pay off your debt and then we will show you that it is only a matter of making a decision to build a lifetime of wealth.

This educational program is the answer you have been looking for - HOW TO GET OUT OF DEBT! HOW TO OWN YOUR OWN LIFE! HOW TO DO IT!

When you join our alliance, you become part of our family. We don't expect you to do this all by yourself. We know that finances are probably the greatest source of stress in your life today. And it's difficult, if not impossible, not to feel the financial pressure.

The Get Out of Debt Book

Page 7

We all need friends to help us through the tough times, to see that we don't fall down, and to pick us up if we do. One of the founding principles of the Alliance for a Debt Free America is based on alliance members helping other members. We have several different programs to support you in the months and years to come. This book is just the beginning of our journey together.

Our goal is to get you excited about your financial freedom, and to offer you so much support and encouragement that you will want to pass this program on to many others. Then more and more people will have the benefit of a debt free future!

That's why we named the organization the National Alliance for a Debt Free America. Welcome to our family!

The Get Out of Debt Book

Page 8

Appreciation

“The man who moves a mountain begins by carrying away small stones.”

Chinese Proverb

How often do we journey through life forgetting who has most impacted us? I want to both acknowledge and thank the three men who assisted me with this modest work.

Glenn Wahlquist is the CEO of the Citizens Information Network. He has kept me on the high road, along with his wife Yuby who is my personal assistant. Glenn has both written and produced the DVDs in our “Confront Your Debt” course manual and helped write and word-smith the text. He is totally committed to helping you get out of debt!

Earl Strumpell is our writer who has taken my thoughts and put them on paper. I asked him to put his all into this manuscript, and he has. I insisted that his name be on the cover because of his contributions. Earl wrote Tony Robbins’ books and Jay Abraham’s encyclopedia.

Andreas Keller is my Mortgage Broker. He has forgotten more about banking than I have ever learned. He gave us the formula for perfect credit. He also has allowed us a banker’s perspective.

My dad taught at St. Albans School in Washington, D.C. from 1945 until 1979.

From him I learned how to teach.

The Get Out of Debt Book

Page 9

My mom was an Art Professor in Boston, Mass. before marrying dad. From her I got my love of beauty, and the concept that being debt free allows our creative juices to abound unrestrained.

My children have allowed me to understand the value of leading by doing and not by just telling them what to do.

My eighteen employees have taught me that when I serve them they reciprocate.

Now it is my turn to serve you. I know that you will reciprocate, too!

You can only become free when you understand what the bonds of financial slavery are. Those who own your life are not interested in your education. It is up to you to learn all that you can and then act on this new knowledge.

In order for KNOWLEDGE to be POWER, ACTION is required.

Act on the knowledge in this book and set yourself free!

The Get Out of Debt Book

Page 10

Table of Contents Page Introduction

1

Appreciation

7

Chapter 1

The Lies We Tell Ourselves About Money and Credit

12

Consumer Debt…Truth or Dare!

15

Chapter 2

The Death Pledge

28

Chapter 3

What is a Mortgage?

34

Three different types of mortgages

35

Chapter 4

Chapter 5

Fixed Rate

37

Adjustable Rate

37

Balloon Mortgage

39

Amortization

47

Amortization Schedule

47

Accelerated Mortgage Payments

49

Reasons Why People Don’t Use Them

52

Saving and Investing

55

The Time Value of Money

56

Risk and the Rate of Return

58

The Get Out of Debt Book As an Investor You Are Either A Lender or an Owner

Chapter 6 Compound Interest

59

63

Example of Compound Growth

63

The Golf Story

64

Rich Beyond Imagining

67

Achieve Your Financial Goals

69

The Rule of “72”

70

Become an Armchair Millionaire

70

Reasons for Saving and Investing

71

Chapter 7 Savings and Credit Cards

Chapter 8

Page 11

73

ME, Inc.

74

The Economic Life Cycle

76

The Anti-Savings, Financial Black Hole Known as Consumer Debt and Credit Cards

77

How Credit Cards are “Anti-Savings”

80

The Eighth Wonder of the World

82

Learning the Time Value of Money

85

Rule of “72”

86

Optimized Compound Interest

86

Your Wealth Potential (4 Scenarios)

88

3 Wealth Plans

91

The Get Out of Debt Book

Chapter 9 Building Perfect Credit

Page 12

95

What is a Credit Rating?

97

Checking Your Credit Score

99

What to Look For in Your Credit Report

100

Credit Scores Change Slowly

103

Other Considerations When Applying

103

Perfect Credit Solves All Your Problems

105

Chapter 10 Mortgage Acceleration Programs

106

Amortization Schedule

109

How Acceleration Works

110

The Accelerated Bi-Weekly

112

Mortgage Comparison (Bi-Weekly)

113

Accelerated Plus 10

115

Lump Sum Accelerated Plans

116

Arguments For and Against Accelerated Plans

117

The Bottom Line

118

Chapter 11 Positioning

120

Revolving Debt

121

Installment Debt

122

Mortgage Debt

123

Phase One – Get Stability in Your Monthly Plan

124

Phase Two – Optimize and Prioritize Your Payments

126

The Get Out of Debt Book

Page 13

Prioritization Within Types of Debt

131

Chapter 12 The National Alliance for a Debt Free America

134

Chapter 13 Confront Your Debt

141

Chapter 14 Add More Income to Your Life as a Financial Freedom Coach

146

The Get Out of Debt Book

Page 14

Chapter One The Lies We Tell Ourselves About Money and Credit

Americans have accepted mortgages as a normal and necessary step to home ownership. The great lie we tell ourselves is that we are “homeowners” when in fact there is no “home owner” as long as there is a mortgage. Home ownership isn’t in the hands of the family living in the house; instead, ownership is in the grip of the lender who holds the mortgage papers. The truth comes out when the “homeowner” gets into financial difficulty and isn’t able to make a few mortgage payments. What happens to the “homeowner” when his mortgage goes into default? Unfortunately for the family, they will soon learn who really “owns” their home.

When we call ourselves “homeowners” and we have to have a mortgage to “own” it, we are telling ourselves a lie. The fact is that we do not own our home, the bank or lender does. For the majority of the years you will be paying on your mortgage - and for almost everyone that means thirty long years - most of that time the lender owns more equity in your home than you do. Not until you have made payments for nearly twenty of those thirty years do you even begin to own more equity in your home than the lender. Even then, it would be a lie to say you are a “homeowner.” Should you default, the mortgage holder can foreclose. That is true up until the last penny of principle is paid. No exceptions!

Another way that we deceive ourselves is when we think that the more we have paid on our mortgage, the more financial security we have. The truth is that when there is trouble, banks and lenders are much faster to foreclose when you own most of the equity and they only own a little. That’s the thanks you get, that’s what happens after you’ve faithfully made payments for more than two decades. The lender has “financial leverage” over you, and can and will take advantage of it. It just takes a

The Get Out of Debt Book

Page 15

few months of financial hardship to find you are in default and facing foreclosure.

By foreclosing they take your equity away from you and legally they can do it!

Your house is then sold at auction. You lose, they gain. It used to be that you could go to your bank or mortgage company and talk to them. You’d try to work something out by explaining your situation and offering a plan. That is becoming increasingly difficult. Your mortgage is a financial instrument to a cold, impersonal financial institution. The way mortgages are “sold” from one institution to another, over and over again, means that some impersonal financial holding company “owns” your home. That means someone whose name you don’t even know, at a place you probably can’t find on a map of the United States, can make the decision to take your home away from you. It’s just not like the ‘old days’ when you knew the bank president or vice president on a first name basis. Those days are over.

Most people don’t realize that the bank or lender is at the greatest risk in the first years of a mortgage, and you are at the most risk towards the end of your mortgage.

That is why mortgage acceleration plans are so desirable; not only do they save you tons of interest expense, you will have more years of financial security, because accelerated payment plans take several years off the end of your mortgage when you would be most at risk. Instead of being vulnerable for that last decade, you can pay off your principle early and have real security, genuine home ownership for that period of time. Years and years of peace of mind. What is that worth? Freedom from mortgage debt is a wonderful thing. If you believe that mortgage debt on the home you live on is in any shape, manner, or form, desirable, or has any kind of advantage for you, now that is a really big lie. Read this book and we’ll prove it to you. You absolutely do not want to have mortgage debt on the home you live in. It could make financial sense to have a mortgage on income property, but never on your home.

We will explain why in this book.

The Get Out of Debt Book

Page 16

Consumer debt is the basis of the next lie that we tell ourselves. Somewhere along the line people began to believe that they have “earned” good credit. And if they have “good credit” the places they like to buy things “honor” it. There is nothing “good” about credit, and there is no “honor” in using credit. Just the opposite, if you really sit down and think about it objectively. There was a time when, not so many years ago, if you had to resort to borrowing money it meant you were in trouble. It meant you couldn’t make it on your own so you had to hit up relatives or go to your bank for a loan to get you through the rough spots. It surprises many people when we tell them there weren’t any credit cards until the 1940’s, and when they did come out, the first credit cards were so you could buy gasoline at 25 cents a gallon. Even then you had to pay your statement in full every month! It wasn’t so easy to borrow money back then, and it wasn’t something that you felt “honored” for.

Today we have gone beyond the “honor” lie by telling ourselves that using a credit card is something that is, well, it’s “priceless.” Guess what? Things may have new labels on them, but when you borrow money, it means you owe someone. It means you didn’t have enough to buy it yourself so you had to go bum money off of someone else. Ironically people would rather owe money than owe a favor. When you depend on someone else and you have to pay it back, it feels like a burden.

Borrow a rake or a lawn mower from a neighbor, and you are uncomfortable until you return it. What the financial institutions have done is to make borrowing money so impersonal and so easy we don’t even think about it. That’s the problem! If it’s so easy you don’t even have to think about it, no wonder so many people get deep in debt.

The Get Out of Debt Book

Page 17

Amount of debt of all families, distributed by type of lending institution 1989, 1992, 1995, 1998, and 2001 surveys Percent

Type of institution

1989

1992

1995

1998

2001

Commercial bank Savings and loan or savings bank Credit union Finance or loan company Brokerage Mortgage or real estate lender Individual lender Other non-financial Government Credit card and store card Pension account Other Total

28.1 26.0 3.8 3.7 2.5 20.8 7.8 1.6 2.0 2.8 0.1 0.9 100.0

33.1 16.9 4.0 3.2 3.2 27.2 4.3 1.6 1.9 3.3 0.1 1.1 100.0

35.0 10.8 4.5 3.2 1.9 32.7 5.1 0.8 1.2 3.9 0.2 0.7 100.0

32.8 9.7 4.2 4.1 3.8 35.5 3.4 1.4 0.6 3.9 0.4 0.3 100.0

34.1 6.2 5.5 4.3 3.1 37.9 2.0 1.4 1.1 3.7 0.3 0.4 100.0

Source: http://www.federalreserve.gov/pubs/oss/oss2/2001/scf2001home.html

Notice the shift away from Savings and Loan Banks (your friendly neighborhood banker), and towards institutional Mortgage Lenders between 1989 and 2001. This trend is accelerating!

Consumer Debt…Truth or Dare!

The lie we tell ourselves about consumer debt, meaning installment loans and credit cards, is that it’s “good.” We want to have good credit. It feels comfortable to have good credit. But we lie to ourselves when we say we need to have “good credit” to have a good life. The fact is there is nothing “good” about credit. It means we didn’t have enough money to buy something and we were forced to borrow to make ends meet. We couldn’t pay for it with the cash we had in our wallets or in our bank accounts. We couldn’t write a check for what we wanted so we just kept borrowing

The Get Out of Debt Book

Page 18

more and more by using a credit card. If we had really understood what that meant it would make us uncomfortable. Just like the feeling you get when you borrow something of value from your neighbor and forget to return it.

Credit means debt, debt is an obligation, and debt is a thief. Debt should make you really uncomfortable. The more debt you have the more uncomfortable you should be. Debt is a thief that legally steals your quality of life away from you. Debt is also deceptive and sneaky like a thief, stealing your wealth in such small increments in the beginning that you don’t realize it’s even happening until you are absolutely broke and destitute in the end. Don’t believe it? Then you need to read the rest of this book and do the math. Find out for yourself. And then tell others.

Here’s a fact for you to consider: In 2003, more people ended up bankrupt than suffered a heart attack. More adults filed for bankruptcy than were diagnosed with cancer. More people filed for bankruptcy than graduated from college. And, in an era when traditionalists decry the demise of the institution of marriage, Americans filed more petitions for bankruptcy than for divorce.

Source: http://www.law.harvard.edu/faculty/ewarren/media/trap.pdf

The lie you tell yourself is that you have “good” credit. The truth is, debt steals your lifestyle when you aren’t even looking, and before you know it you are a slave to debt. It’s like an addiction. Ask yourself, if you had to - right now today - give up all of your credit cards, could you do it? Nearly 25% of American households are in a very uncomfortable position where 70% or more of their after tax income is covered by debt. That’s a statistical fact you can look up at the Federal Reserve Board. One American family in four. And it doesn’t stop there! http://www.federalreserve.gov

The Get Out of Debt Book

Page 19

And if it’s reassurance you are looking for from your government, consider this paragraph from the Federal Reserve Board’s 2003 Annual Report:

Federal debt accelerated sharply, rising 11 percent, owing to the larger budget deficit. Household debt rose almost as rapidly, and the increase in state and local government debt also was substantial. In contrast, business borrowing remained subdued last year. –P27

The biggest lie ever told was that the years 2002 to 2004 were years of economic “expansion.” The problem is that there was a net loss of jobs and income during the same period, and as a result, households were borrowing more and more. When businesses are not borrowing in order to grow, that means there aren’t enough new jobs being created to support any expansion. Making matters worse, jobs are flowing overseas in fantastic numbers.

It’s called “out sourcing.” Jobs Americans used to have are being done by workers in China, India, Indonesia, Scandinavia, and all over the world because there are people there who are willing to work for less doing what we used to do for ourselves. And that means that Americans have to work for less here at home in

The Get Out of Debt Book

Page 20

order to stay competitive with all the outsourcing going on. That means Americans have fewer jobs. And no one is stopping this trend.

Total Payroll Jobs: The Big Picture

Source: http://www.factcheck.org/article.aspx?docID=234 As this chart shows, the growth of the job market in the United States has been flat since about 2001. The growth line should have continued its upward rise to be consistent with the growth in the economy. Compare this to the Household Debt Burden chart on the previous page and you will quickly realize that the household debt burden began to grow at exactly the same time as job growth went flat. It’s no coincidence!

The economic expansion of 2002 to 2004 is a lie. It’s not based on growth in jobs or income, it’s based on growth in debt. There is no real economic expansion. None. If Americans couldn’t borrow, then there would not be any expansion at all. Instead, we would experience a contraction. In fact, if you take away the increase in debt, the US economy is in a period of economic contraction. It’s scary. The last time that happened was during the Great Depression of the 1930’s. The lie we tell ourselves is that we are okay. That America is going to be fine. That things have turned the corner. It’s simply not true.

The Get Out of Debt Book

Page 21

In reality, Americans are going deeper into debt. Our government is going deeper into debt. The value of the dollar is being eroded so fast that it is staggering. The lie is nobody is saying anything about it. Most people don’t even realize that the value of the American dollar against the Euro dollar has dropped almost 50% in just four years. If the dollar was the stock market we would call that a crash. A disaster. And this has happened during the time when we are being told we are in economic expansion.

The thing is that even the US Government can’t pay its bills. In May, 2003, Congress and the Senate had to vote to raise the debt ceiling because the government couldn’t continue to function without taking out more debt. Imagine the US government defaulting on T-bills! It almost happened then and it can happen now!

When the debt ceiling is raised, it is the equivalent of printing money out of thin air.

The federal debt ceiling is like your credit limit. Imagine that you could raise your credit limit without consequence. You just tell the bank you’ve raised your limit and the banks loans you more money whenever you need it. That’s what the federal government is doing. The Euro dollar and the Japanese Yen are not fooled so easily.

These currencies are telling us our dollars are worth less. Not worthless. But worth much less, by half, than they were four years ago. It’s a fact, you can look it up on any long term foreign currency exchange chart.

The Get Out of Debt Book

Page 22

As you can see from this chart, a dollar exchanged was worth as much as 1.20 euros in 2001 or 135 yen in 2002. Today that same dollar exchanged gets you about .82 euros or 110 yen. That’s just terrible! To put it into perspective, a hotel in Europe that was $150.00 a night in 2000 was about $200.00 in 2004. A $30.00 meal would now cost you $40.00. Your dollar just doesn’t go as far.

The big lie is that we are okay. It’s not going to affect you and me and the people next door. If gas prices go up, we all talk about it, but it doesn’t stop us from driving.

Like our government, we just raise our personal debt ceiling and take on even more credit. If the price of goods and services goes up, we don’t even seem to notice, we simply go deeper into debt.

Most people are beginning to notice the price of a home is getting out of reach. That there are fewer and fewer first time homes available anywhere in the country should frighten everyone. This means there will be no one at the bottom of the housing pyramid. And it’s going to collapse. The prices of homes have been artificially inflated by cheap debt, and the value of those same homes absolutely deflated by the loss of intrinsic value in the dollar. These two forces are driving housing up to the point where a market “consolidation” is almost a certainty.

The Get Out of Debt Book

Page 23

Immigrants from Asia and Europe can come here and, because of the favorable exchange rates, buy American homes relatively cheaply. That’s bad news for Americans because it makes American homes for Americans more expensive. When Americans can’t afford American homes, but foreigners can, that’s shocking. But it’s the truth. In 2000 if someone sold a home in Europe for 500,000 euros they could maybe afford a $400,000 house in America. Today, if they sell that same house for 500,000 euros they could come to America and buy a $600,000 house.

This is in just four short years, 2000 to 2004. From $400k to $600k. Are you beginning to understand what is happening to the dollar? What is happening to our real estate prices? Why aren’t we screaming from the rooftops! We believe the lies and we live the lies. And the Federal Reserve keeps redefining debt to make the problem look like it isn’t there.

Many people are beginning to notice that too much of what they earn goes to pay bills. This probably includes you and everyone you know. More than ever before, many people are beginning to notice that they don’t have as much to spend. And there are a lot of people who are beginning to notice that there are a lot of debt consolidation and credit “management” services advertising in places where they never have seen them before. And even worse… many people are beginning to think they might need one themselves! Institutions are making money to get you into debt, and institutions are making money to get you out of debt. It’s a beautiful system, if you are an institution!

Sometimes lies are committed simply not saying anything. If you see someone is drowning, and you walk right past the lifeguard without saying a word, that’s almost a criminal act. Most people’s sensibilities would be deeply offended. How could you do that? But the truth is we do it all the time. In fact, many people make a living pushing the drowning person into deeper water! Approximately 25% of all

The Get Out of Debt Book

Page 24

American households have a debt ratio of 70% or greater. When lenders and institutions give credit to a family with a debt ratio of 70% or more, it’s financial murder, or at least assisted financial suicide. It happens every day. How easy is it to get into trouble with too much debt? We all know the answer! Really, really easy.

It’s a terrible system because no one is telling the life guard that they’re getting in over their heads. And no one is stopping the institutions from pushing them into deeper water. No one is even noticing the millions of families that are drowning in debt.

A 70% debt ratio means that in most cases it will be just four years, or less, until the family is going to have more debt than income. That’s slavery. All of their after tax dollars are going to go to two things; basic needs and debt payment. It’s over for them unless a new job or an increase in income comes along. And in the America of today that isn’t easy or likely. We are not seeing new jobs being created fast enough, and the new jobs that are being created are paid at lower income levels because Americans are competing with cheap overseas labor. Once again, outsourcing takes its toll.

Are you beginning to see how huge the lie is? Foreigners are getting our jobs, the value of the dollar is being seriously eroded, and that means foreigners can come to our country and bid on houses and land for a 50% discount compared to just four years ago! It’s got to stop! Do you know why no one is screaming? Because the government, in its infinite wisdom, redefined the debt ratio!

The Get Out of Debt Book

Page 25

Here is a quote from of the Federal Reserve Bulletin of October 2003 entitled: Recent Changes to a Measure of U.S. Household Debt Service (Excerpted from page 425) … However, recent research by Federal Reserve staff suggests that the increase in homeownership over the 1990s was concentrated among households with limited funds for a down payment. As a rough attempt to quantify the magnitude of this new-homeowner effect, we isolated the new homeowners in the 1995, 1998, and 2001 Surveys of Consumer Finances with the largest mortgage loans relative to their house values. For each of these waves of the SCF, we chose enough of these households so that, when they were removed from the homeowner group, the homeownership rate would be reduced to its 1992 value. Removing these new homeowners from the homeowner group subtracts about half the growth in the homeowner Financial Obligation Ratio (FOR) over the 1990s (chart 5).

This change may be an upper bound on the magnitude of the effect because we removed from the homeowner pool some of the households with the highest levels of debt. Indeed, excluding these households decreases the debt service payments of homeowners 11 percent, whereas their income decreases only 4 percent.

Source: http://www.federalreserve.gov/pubs/bulletin/2003/1003lead.pdf

Now that’s a neat trick isn’t it? You don’t want the debt ratio to set off any alarms so you redefine it by taking out of the computation the homeowners with the “largest mortgage loans relative to their house values” and presto! The rate is “reduced to its 1992 value.”

The fact is that the debt ratios of ten years ago were calculated on completely different fundamentals than they are today. We don’t know about you, but we think government statistics should reflect reality and be consistent over time. The great lie is that the household debt ratio is right where it has been historically! Or so it appears to the uneducated. Now you know.

The Get Out of Debt Book

Page 26

We don’t know about you, but we can’t walk past the lifeguard. We can’t leave someone drowning without trying to help. And there are millions of families drowning in debt. We’ve got to do something and we’ve got to do it fast. We need to educate ourselves to some very fundamental principles that we seem to have forgotten. The most important fundamental principle we need to learn and remember is this: All Debt is Bad! Debt steals future wealth. It’s a mathematical certainty. Debt means interest, and interest means income paid for no increase in the quality of life.

Interest expense does absolutely nothing for a family. It doesn’t put food on the table or buy clothes for the kids. Interest expense makes everything more expensive. It takes life away from us and gives nothing back.

The big lie is that we can afford to buy things on credit that we can’t pay for with cash. The truth is if you can’t buy it with cash, you really can’t afford to buy it on credit. We will say it again… That’s because credit makes everything you buy so much, much more expensive! It has to. You’ve got to add the interest expense charged by the credit card company month after month after month to the amount of money you paid for the thing in the first place. Depending on how long you take to pay your credit card balance down to zero, that can double, triple or quadruple the cost of everything you buy. If you couldn’t afford to pay cash for it, how did you possibly imagine you could afford to buy it on credit?

Because no one tells you this! They tell you “priceless” lies. There are no classes in public education that scare the heck out of you with the reality of how interest expense ruins your life. Just one $8,000 credit card balance carried throughout your working career steals $400,000 of wealth from your retirement. Who tells you that?

It’s here in this book. And how many people do you know who carry $8,000 of credit card debt month after month after month? Statistically, it’s the national average. It’s not something to be proud of. Actually the amount is creeping closer to

The Get Out of Debt Book

Page 27

$9,000 by many estimates. That is a tragic number. When you think about the pending demise of Social Security and Medicare, and the number of “baby boomers” who have no money put away for retirement, how much has this lie cost them? How much will this lie cost this great country of ours? It staggers the imagination. On a national level it is a disaster of historic proportions in the making.

We want to educate you out of this lie. We want you to discover the truth about debt for yourself. You’ve got to know the truth. And then you’ve got to act. We offer you solutions, the system and tools you need to get yourself, your family and everyone you know out of debt. Total freedom from debt. Because ONLY when you are free of debt do you rise above the lies and deceptions. Lies that you are being told and that you are telling yourself every day. We are here to make a difference. Join us!

Read this book and learn what debt is and how money works. Once you know the truth, it will set you free!

The Get Out of Debt Book

Page 28

Chapter 2 The Death Pledge

From the day the Mayflower first landed at Plymouth Rock, there has been one compelling desire common to all the peoples of the United States. This idea is the cornerstone of the foundation that has built our nation into the great country that it is today; the desire to own land, to own your own home.

In colonial times, those who dreamed of owning land migrated away from the crowded cities. They spread out over the coastal plains, following the riverbanks to the foothills, and then finally across the Appalachians and into the valleys beyond, into what is now the Midwest and Plains states. This westward expansion meant that by the 1850’s the United States had made some huge land acquisitions and laid claim to a large portion of the North American continent.

This sheer abundance of resources and the vastness of the territory gave the people a conviction that the "public domain" rightfully belonged to the people. The Homestead Act gave any citizen the right to claim 160 acres, under the condition that the land be "improved." That meant it had to be made into a working farm complete with a dwelling and crops. If the original homesteader was still on the land five years later, ownership was given. There were no mortgages, nor were there lending institutions to give you one. To “stake' a claim meant literally driving wooden stakes into the ground around the perimeter of the land that had been chosen.

It may surprise you to learn that mortgages haven't been around for hundreds of years. It wasn't until very recently that mortgages as we know them today came into

The Get Out of Debt Book

Page 29

existence. In fact, there were no financial institutions to give you a mortgage to buy land until the 1930's.

In the years after the Homestead Act became law, the economy became based on both industry and agriculture. For a large part of the population, everything was centered around the family farm. The work was as hard as the seasons, and the people lived and prospered from the earth.

Eventually the countryside became dotted with frame and brick houses. Fences were laid out and trees grew high to shield dwellings. Windmills pumped water from wells deep underground. The industrial age produced a host of technological advances that made farming more profitable. Out of necessity people came together to sell and trade their crops for goods and services. Rural farming communities and towns were born!

For many years the endless rows of corn and fields of wheat showed abundance and the prosperity of family farms; many occupied by the descendants of the original homesteaders. When the family grew up, parents would give each child a piece of the land to make a start. There were no debts to pay back, no mortgages and no foreclosures. Just a lot of hard work.

The people owned the land, and the early American rural communities prospered because the people came together to help each other. It wasn't really an option at the time. It was the way things were. When a new family started they didn't have much wealth, just the piece of land their parents had given them. To help them get started, the community gathered together in what has become known as a 窶話arn raising.'

Everyone in the community would come out for a day or a weekend to build a house or a barn for the new family. Some of the people would work in the actual building

The Get Out of Debt Book

Page 30

and construction. Others would bring food and refreshments for the people who were doing the work. It was a celebration of new beginnings, a life with a fresh start and HOPE for the future. It was a community gathering with the spirit of a joyous celebration of life and the abundance that came from the land.

There is a tremendous sense of support and responsibility that comes when people work together to help one another get a start in life. When a community comes together in this way there is a sense of trust. That trust creates something that no one person could have alone - a sense of community. Each person who participates with others in any venture gives a gift to the future, and the community prospers because of it!

Today we can see endless rows of corn and crops as we drive along country roads.

Dotted across the countryside are barns and farm houses that stand as a testament to the success of these communities and the spirit they embodied. But things have changed. The “family farms� are disappearing altogether, and with them, the sense of community and trust.

It was in the 1930's that mortgages got their start. Growing like a nasty weed during the Great Depression, mortgages spread across the land, sold by insurance companies who coined the term "mortgage."

The etymology of the word "mortgage" is from the Old French, and literally means "death pledge." The "mort" part of the word translates to "dead," and "gage" literally translates to "security." When the FHA (Federal Housing Administration) came up with the concept of a 30 year mortgage back in the 1930's, the average human lifespan was much shorter than it is today and the term "death pledge" had real

The Get Out of Debt Book

Page 31

meaning! Today we find that Webster's dictionary defines mortgage as "the pledging of property to a creditor as security for the payment of a debt."

Not simply content to collect interest and fees, there was also the expectation of taking ownership of the land when the borrower failed to make payments on it.

Whatever the basis for it, foreclosure became an ugly word heard by far too many people struggling to make ends meet. The insurance companies prospered because of peoples’ loss, taking possession of a significant number of homes and thousands upon thousands of acres of farmland that were once the family farm. Our sense of conviction that land ownership was a given right took a serious turn for the worse!

By the time of the Great Depression, fewer that 14% of American families owned the land they lived on.

In 1934, the government stepped in, and through the FHA a new type of mortgage was designed to help people who couldn't get mortgages under the existing system.

Mortgages were different then. The way the insurance companies had set them up, the terms were only three to five years, and the amount of available money was limited to 50% of the value of the land. Payments were interest only; at the end of the mortgage the principle became due in one huge balloon payment. It was almost as if it were set up deliberately so that foreclosure was inevitable. The problem was that very few could come up with the 50% down required to buy a home, and even at ‘foreclosure' prices insurance companies got stuck with properties that wouldn't sell.

The system was broken.

What the FHA did was to start a program to lower the down payment requirement and stretch the interest and principle payments over decades instead of a few years.

The goal was for average families to be able to purchase real estate and live in the same home for a lifetime. You can imagine that before this time, with 50% down

The Get Out of Debt Book

Page 32

required, few people had a large enough grubstake to buy the land on which to build a home. Fewer than four out of ten households owned their own home! Sixty percent of the people were renters. To fix the system, the FHA set up programs that allowed a mortgage to cover 80% of the value of real estate purchases. Later programs went to 90% and higher. This forced the lenders to do the same, creating many more opportunities for Americans to own their own homes.

The FHA introduced the concept of ‘qualifying’ for a loan. Most loans had been given on the basis of simply knowing someone. Communities were smaller then and the lenders and borrowers were better acquainted with each other. However, that opened the door to unfairness and led to widespread discrimination. The FHA's requirements for qualifying for a loan were far more objective and equitable.

The FHA was also responsible for creating 15- and 30-year loans. The FHA's goal was to make it easier to buy a home and keep it for a lifetime. They stretched out the time frame so that the monthly payment could be affordable to many, not just the few. For the most part, balloon payments became a thing of the past as amortization tables spread the principle and interest payments over the life of the mortgage, making it financially feasible for families to actually spend a lifetime living in their own homes.

The "family farm" has been broken up and sold over the last 100 or so years. New generations of Americans have left the farms and the spirit of community far behind.

They have made new beginnings in cities and suburbs. The farms you see now are mere shadows of the past because the vast majority of America's farmlands are now owned by large corporations. How could this happen? How is this possible? We believe that the innovation of the ‘mortgage’ and practices of the lending institutions have had a great deal to do with creating the conditions that have led to the demise

The Get Out of Debt Book

Page 33

of the family farm. We believe that we have all lost something that has been an important part of the American Spirit from the very earliest days of this great country.

As the United States became an industrial giant in the world, business became focused in the city centers and downtown areas. Families lived where the jobs were.

Home was no longer the family farm; home for most families was a small piece of land called a "tract" and houses were built side by side in housing projects and developments that became neighborhoods where the "American Dream" of owning your own home was fulfilled. All of this was made possible through the mortgage, but there was (and is) a price to pay.

With more and more families living in housing developments near centers of employment, prices began to rise to where, once again, not everyone could afford to own a home. As the cities continued to grow, the automobile made possible the development of the suburbs and more affordable housing.

Today, prices are rising beyond the reach of the many except the privileged few.

Very few new families can afford to buy a home, at least without some help. Now when children set off on their own to start careers and begin a family, parents who are financially able may give them a start with a down payment. Unfortunately, that leaves young people with financial encumbrances in the form of mortgages, credit cards and consumer debt. But at least they “own their own home.�

In the next chapter we will take a look at just what a mortgage is and what it means to your financial future.

The Get Out of Debt Book

Page 34

Chapter 3 What is a Mortgage?

“People are living longer than ever before, a phenomenon undoubtedly made necessary by the 30-year mortgage.� ~Doug Larson

A mortgage is a legal contract that gives a lender rights to your house until you have paid all the fees, interest and principal due, over a period of up to thirty years. It's a contract that says the lender can take your house if you fail to make the mortgage payment on your loan. Most people think at the "close" of escrow when they buy a house, and they have gone to a "signing," that they own their home from that point on. The fact is the lender holds the title to your house until the last cent of the debt is paid off. If you fail to pay at any point in the term of the mortgage, the lender will sell your house out from under you to get its money back. That's why it is so important to make your mortgage payment!

The "mortgage payment" can actually be a combination of four things:

1.

Principle - this is the amount of money you agreed to pay for your home, less

whatever down payment you made when you bought your home. If you bought your home for $100,000 with 20% down, the principle portion of your mortgage would be $80,000. You can think of it as an $80,000 loan. At the beginning of the mortgage period, the first several years in fact, the portion of your monthly mortgage payment that goes towards paying back the principle is very small.

2.

Interest - this is the money the lender charges you for the use of their money

to buy your house. The lender gave the person who sold you your house $80,000

The Get Out of Debt Book

Page 35

from its account so that you could buy your $100,000 home with a $20,000 down payment. The seller got your $20,000 and the bank’s $80,000 when escrow closed.

Now you need to pay the lender “rent” on that $80,000. That “rent” is otherwise known as interest. At the beginning of the mortgage, you are paying interest on the whole $80,000. As you chip away at the principle, bit by bit, month after month, and as the lender gets some of its $80,000 back, the interest or “rent” portion of your mortgage payment gradually decreases.

3.

Taxes - to protect the lender and guarantee the government its due, property

taxes are often included in the escrow account that was opened when you entered into an agreement with the seller to buy their real estate. These funds are held in the escrow account (in other words, they're in the hands of a third party for safekeeping) until the taxes are due, or certain conditions have been met.

4.

Insurance - again, to protect the lender, you have to get all different kinds of

insurance to safeguard against losses from things like fire, storms, vandalism, theft, and accidents. If you get a federally insured loan, you have to get even more insurance, such as insurance against floods if your home is in a “flood zone." If your down payment was less than 20%, the lender will want even more protection and you will have to pay what is called "private mortgage insurance." PMI is expensive.

You can save money when you make at least a 20% down payment.

Together these components of your monthly mortgage payment are known as the "P.I.T.I." - that is the Principle, Interest, Taxes, and Insurance.

The Get Out of Debt Book

Page 36

Three Different Types of Mortgages

While there are as many different types of mortgages as lenders and borrowers can continue to think up, there are only three basic types of mortgages:

· Fixed-rate mortgages. · Variable rate mortgages. · Balloon mortgages.

The type of loan you choose depends, for the most part, on how long you are going to own the real estate. For example, fixed rate mortgages are best if you plan to stay in your home ‘forever,’ and variable rate loans may work better if you know your career is going to make you move around every few years. Usually a balloon mortgage is only used if you know you are going to refinance, sell, or pay off the principle balance sometime before the "balloon" payment is due.

The Fixed Rate Mortgage - the key distinction of a fixed rate mortgage is implied in the name, i.e., the interest rate is "fixed" and never changes. The good part about that is the monthly mortgage payment is also "fixed" and never changes for the life of the mortgage.

The downside of a fixed rate mortgage is that you end up paying more "rent" in the form of a higher rate of interest over the term of the loan since the rates are slightly higher than for variable or adjustable rate mortgages. The advantages are that it is easier to qualify for a fixed rate mortgage, the fixed interest rate gives you a greater sense of certainty about your financial future, and you may, in some cases, get a bigger tax deduction.

The Get Out of Debt Book

Page 37

30 year fixed rate - because of the relatively lower monthly payment, a fixed rate mortgage is the only way some families can buy the home they want. For others, they appreciate that their payments are predictable and not going to change in the future. The 30 year fixed rate mortgage is so common most people think it's the norm.

If you think you are going to stay in your home for many, many years, and your income is not going to increase substantially over those same years, then this is probably the best kind of loan for you - the lower the monthly payment, the more "affordable" your home.

In the first seven to ten years of making payments, the amount of principle that is paid is small, a tiny fraction of what you owe the lender. Some people think that's an advantage because since you are paying mostly interest, there is a bigger tax deduction. The reality is that tax deduction or not, you are paying a tremendous amount of interest over the life of the mortgage, and there is no way a tax deduction can make up for that. Later in this chapter we will talk about the real tax "benefit."

You may be in for a rude awakening!

20, 15, or 10-year fixed rate - generally when the term of the mortgage is shorter, you can get a better interest rate, and the amount of "rent" (interest expense) you pay over the life of the mortgage is significantly less. The only problem is, the normal assortment of banks and lenders who offer mortgages don't want you to know about how to save interest expense because their business is making interest income! That means you may have to work harder to find a lender who will give you a shorter term mortgage at a better rate.

The Get Out of Debt Book

Page 38

While the biggest advantage to a shorter term mortgage is the tremendous amount of interest expense you save, there is another benefit; equity builds faster. With a shorter term, you pay a larger portion of principle early in the loan. That larger principle payment means that you own an increasingly greater amount of "equity" which represents your share of your home's value. The only disadvantage is that your monthly payments will be higher. However, if you can afford the payments, a shorter term mortgage is definitely the way to go.

The Adjustable Rate Mortgage - this type of mortgage is a better deal for the lender and sometimes better for you too, but it depends. "Adjustable" means that the lender can change the interest rate to reflect market conditions. There are rules they have to follow, and there are standard indexes that determine the rates, but the downside for you is that it gives the lender the flexibility to charge you more “rent’ in the form of higher interest rates over the lifetime of the loan.

To induce you to allow them this advantage, the lenders may offer you a lower initial rate, lower points, or other incentives. The initial interest rate could be two or three points lower than a fixed rate mortgage, with a proportionately smaller monthly mortgage payment, but that "advantage" could potentially work against you in the years to come.

The potential risk to you and your wealth is that interest rates could go up. After having been at historic lows for a number of years (as of April 2004), a significant increase in interest rates over the next year or two could catch a number of people by surprise. The phrase "lulled into a false sense of security" comes to mind.

The Get Out of Debt Book

Page 39

However, this type of mortgage can work for you if you understand the risks and don't plan to stay in your house for many years. These are some of the things you need to consider before you decide on an adjustable rate mortgage:

1.

Frequency of adjustment - how often the lender can "adjust" the rate will

affect the amount of interest you pay over the life of the mortgage. Usually, as an inducement, the lender will "fix' the rate for an initial period of the mortgage. You might hear the terms "Six month ARM," "One year ARM," or even "Two year ARM." That means the rate, and your monthly payment, are fixed for that period of time. After that, the lender can "adjust" the rate, and therefore your monthly payment can change.

How often the lender can adjust the rate after the initial fixed rate period depends upon your contract. As an example, you could have a 5/1 ARM, which means fixed for five years, adjusted at one year intervals, or a 3/3 ARM, which means fixed for three years and then adjusted at three year intervals after that.

2.

Caps - "caps" are limits to how high the rates can go. Caps also can limit the

amount that rates can increase at each adjustment interval. A "lifetime cap" limits how high the interest rate can go over the life of the loan. "Interim" or "periodic" caps limit the amount that rates can increase at each adjustment. You may find an ARM with a six point lifetime cap, and a one point periodic cap. When the lender gets an advantage with bigger caps, you will probably, but not always, get an advantage with a lower initial rate.

Since no one knows the future, the caps can help you or hurt you. Again, this type of loan is best if you don't plan to stay in your home for more than a few years.

The Get Out of Debt Book 3.

Page 40

"Tied" rates - the interest rates for ARMS can be, and usually are, tied to the

going rate for one year U.S. Treasury bills, certificates of deposit (CDs), or other established indexes. These indexes have lots of ‘inertia’ in that they don't change very quickly or very much over time. When your ARM interest rate is "tied" to one of these indexes, the lender will increase your rate to compensate should the index go up. The good news is they are required to lower your rate should the index go down. With interest rates at historic lows, it's difficult to imagine that rates will go down further; the historical perspective is that rates will increase and you need to consider that risk very, very carefully when considering this type of mortgage.

The Balloon Mortgage - you will remember this type of mortgage from our nightmare story of how the family farms were lost to the insurance companies during the Great Depression. Well, the balloon mortgage is still around today. For some situations, this type of loan may work out to your advantage. If you know with absolute certainty you are going to have a large sum of money at some point in the future, or that you are guaranteed the ability to refinance at a more advantageous rate with a conventional fixed rate or ARM in the future, then a balloon mortgage will give you the lowest possible monthly mortgage payment in the near term. Just make sure you get your money or do your refinancing well before the balloon payment is due!

The advantage to a balloon payment is that it is sometimes possible to pay only the interest on principle each month, thereby keeping the monthly payments very low relative to the amount of money being borrowed. The interest rate can be significantly less than with other types of mortgages. Once again, the big difference (downside) is the principle is paid all at once, at the end of the mortgage period. This is called the "balloon payment." The term of this type of mortgage is much shorter, usually five to seven years.

The Get Out of Debt Book

Page 41

If you already own one home with a large amount of equity, and want to buy a new home but don't want to wait until your old home is sold, this type of mortgage could work to your advantage because of the smaller monthly payment that you will pay while you are in transition from one house to the other. However, if your older home doesn't sell after weeks, months, or years of trying, then you could find yourself facing foreclosure and lose both of your houses when you fail to make the balloon payment.

Mortgages and the Income Tax Deduction - It's not what you think!

“Intaxication: Euphoria at getting a refund from the IRS, which lasts until you realize it was your money to start with!� ~From a Washington Post word contest

Mortgage lenders, their agents, and some real estate agents will all try to persuade you to look at more than just the rate of interest that lenders are charging, or even the APR, but to instead focus on all the tax deductions you will be getting. The reasoning is they want to persuade you that there is a "true" after-tax cost to your mortgage payment, and that makes buying a home that is otherwise out of your reach less expensive and therefore affordable. On the face of it, this is actually good advice. The problem is, it is seldom true in reality and there are serious penalties and other not so pleasant consequences to your long-term wealth that they aren't telling you about.

The Get Out of Debt Book

Page 42

Here's a typical scenario for someone who is a potential buyer in the home market:

BUYER: "We can't afford that! The monthly payment you're talking about is $1,800, we're only paying $1,200 a month in rent now and we can barely make ends meet as it is!"

AGENT: "Not to worry. What you have to realize is that in the beginning your payments are almost all interest, and mortgage interest is all tax deductible. The way I figure it, since you are probably in the 33% tax bracket, you'll save one third of your mortgage payment in taxes you won't have to pay, making your "true" mortgage payment $1,800 - $600 (tax savings) = $1,200, exactly the same as you are paying now in rent. Considering all of the advantages of owning your own home, equity appreciation, financial security, and all of those things, you'll actually be paying less than you are right now and you will own your own home."

Don't be fooled! Anyone who uses these standard clichés simply doesn't understand or fails to appreciate the real cost and "hidden" consequences of interest tax deductions. The actual tax benefit and the "true" cost of your mortgage payment are different for everyone, and it depends entirely not on just one aspect but on your whole tax picture. The answer just doesn't come from a table of figures in a tax handbook.

“In 1950, the average family of four paid 2% of its earnings to federal taxes.

Today it pays 24%.”

- William R. Matrox, Jr.

To begin with, most people are not in the 30% + tax bracket. After all, you have to be making over $110,000 a year to get into an income tax bracket that high. For most people, their actual tax rate is between 15% to 25%, and the write off is

The Get Out of Debt Book

Page 43

hundreds of dollars a month less than what the agent is telling them. A good agent would sit down, take the time and try to understand the client's position. The bottom line is that it is your responsibility to educate yourself and your broker or agent so that everyone can make the right assumptions. Keep your eyes open, there's more...

Even if your income puts you in the 30%+ tax bracket, you've got another problem.

Because you are making over $100,000 the IRS thinks you are too rich to deserve the full benefit of the mortgage interest deduction. The tax code starts cutting back on the amount of mortgage interest that is deductible as your income goes up. And if you make over $150,000 a year in adjusted gross income, guess what? Mortgage interest will give you nothing, zero, zip, nada, for your deductions, even if you already itemize!

When you are considering the "true" cost of a mortgage, or even if you already have one, it is absolutely in your best interest to seek the professional advice of a tax accountant or attorney to get the real story based on your complete financial picture.

Make that appointment right now; making a mortgage decision without a complete financial picture and anything less than full knowledge of all the tax consequences can really hurt you financially.

If you are like most people, your tax accountant may have a few other surprises for you as well. You will find that in order to deduct the interest portion of your monthly mortgage payment, you have to give up the standard deduction of $7,950 for married couples or $4,750 for individuals filing separately. Instead, you will have to start itemizing all of your deductions. That means a lot more work for you, and higher fees paid to your tax accountant because your tax situation just got a lot more complicated. In far too many cases, those who pay lower income taxes would

The Get Out of Debt Book

Page 44

actually lose money if they started itemizing in order to take the mortgage interest deduction.

As if that's not enough, there is yet another key point here. Cash flow is important to almost every household. If you find you are already stretching your dollars to barely meet your monthly expenses, you certainly will not be able to make that higher mortgage payment even with a "big tax deduction." The harsh reality is that the financial benefit of a "mortgage interest deduction" only shows up once a year at tax time, and even then it doesn't always mean money in your pocket. It only helps you when you actually pay your taxes and take deductions on April 15th. Sure, you might get a bigger tax refund if you are lucky, or it may go towards making your tax bill smaller.

“If you think nobody cares if you're alive, try missing a couple of mortgage payments.�

Either way, from an out of pocket point of view you still have to make your full mortgage payment every month, 12 months a year, no matter how big a tax deduction you can get on April 15th. As far as your cash flow is concerned, the bottom line is that every month you will still have to pay your full mortgage payment out of your after tax income.

If you don't have the cash flow to make the full mortgage payment right now, then you can't afford to take on the higher mortgage payment, regardless of the increased tax advantage. Don't be fooled or pressured by agents who will try to talk you into "stepping up" to a more expensive home because of the bigger tax deduction if you don't already have the cash flow to cover the bigger mortgage payment right now.

The Get Out of Debt Book

Page 45

Long term financial implication: okay, so let's say you do get a tax deduction and it works to your advantage. That means you ‘save’ the smaller fraction of your interest payment, but the reality is you are still ‘paying’ the significantly larger fraction of the interest payment to the lender. Key point - you are STILL paying money to the lender and that money is not ever going to come back to you.

“The only reason a great many American families don't own an elephant is that they have never been offered an elephant for a dollar down and easy monthly payments.” ~Mad Magazine

The interest portion of your mortgage payment does not build equity. It is income to the bank and an expense to you. Only the principle portion of the payment builds equity, and the sad fact is that in the first several years of the mortgage, you build very little equity. Unless, that is, you make additional payments against principle, an important concept that we are going to introduce later on.

For now, the most important thing to remember is that the interest portion or your mortgage payment is “rent” - plain and simple. It's an expense. You pay it to the lender and it never comes back to you. The second point is that the sooner you stop paying rent to the banks and lending institutions, the sooner you can start investing in your own future wealth.

Understanding this tax deduction is one of the most important points in this book.

Let me draw you a picture:

Over one calendar year you pay $10,000 in mortgage interest. You are at the 25% federal income tax level. On April 15th you get a refund of $2,500 or a quarter of the

The Get Out of Debt Book

Page 46

$10,000 interest you paid. Where did the other $7,500 go? It went to your lender.

You just gave away $7,500 to gain a $2,500 tax refund. How does losing $7,500 justify saving $2,500? And remember, it was your money in the first place!

We have all been duped! It took me months of study to figure this out. It is so simple that it is easy to overlook. Tax deductions for interest are not good for our wealth.

“All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulation.�

John Adams

The Get Out of Debt Book

Page 47

Chapter 4 Amortization

As introduced in Chapter 2, the FHA conceived the concept of amortization and as a result more people could afford mortgages. The advantage of using an amortization schedule is that you can make payments over a longer period of time. Home ownership became more affordable to more people because payments were smaller.

The downside is that the interest expense is most often more than the principle, meaning that when you have a mortgage to buy a home, you are often paying the bank interest in an amount more than twice the dollars that you agreed to pay for the property in the first place!

By amortizing a mortgage, the principle is paid against in very small increments in the beginning years of the mortgage, then the size of the principle payments gradually increase over the term of the loan until the last years of payments are almost all towards principle.

On the other side of the same equation, interest makes up almost all of the first seven to ten years of payments and gradually decreases over the life of the mortgage.

On the following page is a sample amortization schedule:

The Get Out of Debt Book

Page 48

Principle borrowed: $100,000.00 Annual Payments: 12

Total Payments: 360 (30 years)

Annual interest rate: 8.00%

Regular Payment amount: $733.76

Total Payments: $264,153.60

Total Interest Paid: $164,153.60

Interest as percentage of Principle: 164.154%

Cumulative Principle

Cumulative Interest

Principle Balance

Pmt

Principle

Interest

1

$ 67.09

$ 666.67

$ 67.09

$

666.67

$ 99,932.91

2

$ 67.54

$ 666.22

$ 134.63

$ 1,332.89

$ 99,865.37

3

$ 67.99

$ 665.77

$ 202.62

$ 1,998.66

$ 99,797.38

4

$ 68.44

$ 665.32

$ 271.06

$ 2,663.98

$ 99,728.94

5

$ 68.90

$ 664.86

$ 339.96

$ 3,328.84

$ 99,660.04

6

$ 69.36

$ 664.40

$ 409.32

$ 3,993.24

$ 99,590.68

7

$ 69.82

$ 663.94

$ 479.14

$ 4,657.18

$ 99,520.86

10

$ 71.23

$ 662.53

$ 691.42

$ 6,646.18

$ 99,308.58

15

$ 73.63

$ 660.13

$ 1,054.74

$ 9,951.66

$ 98,945.26

20

$ 76.12

$ 657.64

$ 1,430.34

$ 13,244.86

$ 98,569.66

30

$ 81.35

$ 652.41

$ 2,220.03

$ 19,792.77

$ 97,779.97

40

$ 86.94

$ 646.82

$ 3,063.96

$ 26,286.44

$ 96,936.04

The Get Out of Debt Book

Page 49

Pmt

Principle

Interest

Cumulative Principle

50

$ 92.91

$ 640.85

$

3,965.89

$ 32,722.11

$ 96,034.11

60

$ 99.30

$ 634.46

$

4,929.79

$ 39,095.81

$ 95,070.21

120

$ 147.94

$ 585.82

$

12,274.48

$ 75,776.72

$ 87,725.52

180

$ 220.40

$ 513.36

$

23,216.81

$ 108,859.99

$ 76,783.19

240

$ 328.37

$ 405.39

$

39,519.33

$ 136,583.07

$ 60,480.67

300

$ 489.22

$ 244.54

$

63,807.51

$ 156,320.49

$ 36,192.49

360

*735.72

$

$ 100,000.00

$ 164,160.46

$

4.90

Cumulative Interest

Principle Balance

-

As you can see from the Amortization Schedule, for a $100,000 mortgage at 8% interest the principle payment for the first five years (60 payments) ranges from $67.09 to $99.30. That means that on a one hundred thousand dollar mortgage ($100,000), each month for the first five years, you are paying less than one-one thousandth (1/1,000) of the principle. Mathematically, this is the only possible outcome when you compute a monthly payment for the term of a mortgage, at a fixed rate of interest.

After ten years (120 payments) you are still paying $147.94 a month towards principle, and $585.82 in “rent� (interest/profit) to the bank. This relatively small principle payment continues to work to your disadvantage and the greater portion of interest works to the bank or lender's distinct advantage. You are paying to the

The Get Out of Debt Book

Page 50

lender a huge proportion of your monthly payment in “rent” and building very little equity in your home for the first 15 years. As you will learn in the next chapters, this is the power of compound interest. But it's working in the lender's favor, not yours!

As you can see from the amortization schedule, after 15 years of paying on a 30 year loan, you have only paid down $23,216.81 of the principle, about 23%. You still owe $76, 783.19 or over 76%. After 15 years of payments!

At the end of the loan you can look back and see that you paid the bank $164,160.46 in interest over the term of the mortgage. The interest paid over the term of the loan is actually 164% of the amount you borrowed! It can be very frustrating.

But there is HOPE. Read on!

“Every worthwhile accomplishment, big or little, has its stages of drudgery and triumph; a beginning, a struggle, and a victory.”

Anon.

Accelerated Mortgage Payments - When you first buy your home it may take all of your financial resources just to come up with the monthly mortgage payment. Also there is furniture to buy for the new house, landscaping to put in, repairs to be made, and most people will want to make “improvements” in their new home when they first move in.

After a few years, things settle down and life returns to normal. Eventually, as wages rise and income increases, there is money left over each month after all the bills are

The Get Out of Debt Book

Page 51

paid and the savings account is given its 10% share of income. Life is good. At this point the home owner has some choices and one of them is a very good choice: it's called the "accelerated mortgage plan."

This type of plan gives the “home owner” the option to send to the lender an extra amount each month to be paid towards the principle of the mortgage. Since the regular mortgage payment takes care of the “rent” or interest the lender is owed, any additional monies can be applied directly towards the principle.

Another name for accelerated mortgage payments is an “equity acceleration plan.”

Whatever you want to call it, it is a very effective way to significantly reduce not only the term of the loan, but also the amount of interest you have to pay to the bank.

Here is what happens when you use an accelerated mortgage payment plan:

1.

The term of the loan is shortened by several years, giving you a greater sense

of financial freedom and security. Since you have paid off your mortgage years earlier than planned, you can use the same payments every month to increase the amount you have in savings and investments. As you will see in the next chapters on "Saving and Investing," this advantage can turn into substantial sums of wealth.

2.

You can rapidly increase the equity in your home. More equity means you

have more real wealth and less debt. If you should have an emergency and need to borrow a large sum of money, you will be able to take advantage of the equity you have built up in your home. Greater equity means more options when you need financing, and less stress in your life. A second mortgage and refinancing are ways to acquire money for an emergency. Many homeowners have established an “equity line of credit” for use during emergencies. Lower interest rates can often be obtained

The Get Out of Debt Book

Page 52

with these types of credit. You don’t have to wait, the money is always there if you need it and always use it wisely.

3.

By accelerating your mortgage payments and paying off your mortgage years

earlier, you save tens of thousands of dollars in interest that you would have paid the bank or lending institution since you are “renting” the principle for a much shorter period of time.

30 year Amortization vs. Accelerated Principle Payment

Principle in $1,000’s

30 year Amortization 100

75 Accelerated Principle 50

Payment Plan

25

0

5

10

15

20

25

30 years

The above graphic shows the effect on the principle balance of a $100,000 mortgage using a standard amortization vs. an accelerated mortgage plan. With a 30 year plan the principle is paid down slowly in the first 10 years. With an accelerated plan, the principle is paid down at a steady rate starting with year one.

The Get Out of Debt Book

Page 53

Why don't more people take advantage of accelerated principle payments?

There are several possible reasons why more people don't use accelerated principle payments:

1.

Lack of discipline - many people know about the benefits of accelerated

mortgage plans, and they have occasionally made extra payments, but then they don't keep track of where they are, so they forget about making the payments.

Without a system to keep track of the financial advantages, and financial plans and goals to keep you motivated, the fact is that it is difficult for most people to actually make that extra payment throughout the course of the mortgage.

2.

People in general don't know how to do it. Most lenders will accept

accelerated mortgage payments, but some want you to send in two checks, one for the regularly scheduled monthly payment and another for the additional principle payment. Each lender has a system for how they deal with accelerated payments.

Call your mortgage company to learn what requirements are specific to your lender.

3.

The lender offers an "accelerated" plan but it is too complicated and includes

too many fees and service charges. Some lenders now offer accelerated monthly payment plans as an option, but with so many fees and service charges, it just doesn't seem worth the trouble, it gets too complicated and people don't do it. And that's just what the lender wants.

4.

There is a penalty - some lenders include a penalty for early payment of

principle in the mortgage contract. When you are taking out a mortgage, it is absolutely essential that you read the fine print in the contract and make sure it doesn't include penalties for early payment of principle. If you don't know whether

The Get Out of Debt Book

Page 54

your current mortgage has a prepayment penalty, call your lender and find out. The good news is that the vast majority of mortgages do not have this penalty, and if yours does, there are ways to get around it.

“Money, says the proverb, makes money. When you have got a little, it is often easy to get more. The great difficulty is to get that little.� ~ Adam Smith

The mission of the National Alliance for a Debt Free America is to help you get around all of these obstacles and pay off your mortgage as quickly as possible. After the short course in saving and investing in the next few chapters, we will come back to accelerated plans and show you exactly how to make them work for you as part of an overall financial wealth building plan. Our goal is to offer you the education you need to become debt free and well on the road to financial independence in the process!

The Get Out of Debt Book

Page 55

Chapter 5 An Introduction to Saving and Investing

“Money saved is as good as money earned.” ~Danish Proverb

Definitions:

1. Savings - your savings account at the local bank is a repository for what we will call "short term" funds. Bank savings accounts are one of the most liquid places to put your money because you can turn it into cash immediately. There is a ‘cost’ that you pay for this liquidity, and that is low interest rates. Your savings account, for that reason, is not someplace you want to keep your money over the long term.

“The secret of financial success is to spend what you have left after saving, instead of saving what you have left after spending.”

Robert G. Allen

2. Saving: How To - pay yourself first. It is a very simple concept, but essential to your financial future. Whenever you receive a paycheck or any other form of income, plan to set aside a certain amount, for example, 10%. That means that every time you get paid, you pay yourself first by putting 10% into your savings account.

“Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate.”

- William A. Ward: Money Quotes

3. Investing - stocks, bonds and mutual funds are but a few of the investments we will call "long term" funds. These investments are used to meet long term goals

The Get Out of Debt Book

Page 56

because they are not as liquid as a savings account, but you get a benefit - the interest rate, or return on your investment, can be significantly higher on long term investments. The key difference between a savings account and investments is time.

If you can put your money away for a long period of time, five years for example, then investments may be the way to go. Many investments can be turned into cash quickly - stocks or mutual funds, for example. CD's (Certificates of Deposit) or long term bonds are not as liquid. The key idea is the longer you can invest, the higher your potential return and the more money you will have in the long run.

“Buy when everyone else is selling and hold until everyone else is buying. This is not merely a catchy slogan. It is the very essence of successful investment.”

J. Paul Getty

Are these investments really gambles? The answer is yes! Playing the stock market is for gamblers. One solid long term investment would be an income producing piece of real estate or some other form of real property. Not only does it have a high possibility of appreciation, somebody else is making the payments for it.

4. Time Value of Money - the relationship between time, money, and the rate of return on your investment (interest or appreciation) is described as the "time value of money." As we said before, the longer you can keep your money tied up in investments, the greater the potential return.

“As every thread of gold is valuable, so is every moment of time.”

John Mason

Let's say for example you have $1,000 to invest and you want to know how long it will take to double your money to $2,000. What you are really asking about is the

The Get Out of Debt Book

Page 57

time value of money - that means that the amount of time it will take for your money to double at a given rate of return (interest)…

5. Rate of Return - is how much your money grows in one year. If you start with $1,000 and invest it for one year at 6% interest, at the end of the year you will have $1,060. The extra sixty dollars is your "return on investment" or the product of the "rate of return." Rate of return is described using percentages and is always for one year.

Time Value of Money

“Money grows on the trees of patience.”

Japanese Proverb

The longer you can keep your money tied up in an investment, the greater the potential return. The idea is to double your money over and over again using a principle known as "compounding." We will talk about how compounding works in a moment. For now, an easy way to think about the time value of money is the "Rule of 72."

Going back to our previous example, if there is $1,000 to invest at a 6% return, how long will it take before you have $2,000? Here's how you do it:

"72" divided by 6 (%) = 12 years Using the “Rule of 72” tells you how long it takes to double your money at a given interest rate. The higher the interest rate, the shorter the amount of time in years it takes to double your money. Let's try another:

The Get Out of Debt Book

Page 58

"72" divided by 12 (%) = 6 years

As you can see, with a 12% return on investment (interest) instead of 6%, your money will double twice as fast.

Here are things you should burn into your brain cells about money. Everyone should commit these to memory, as they are the keys to building wealth:

1.

The more time you have to invest or save your money, the more wealth you

will ultimately have. Longer-term investments over many years produce much bigger returns because of compounding. People who start saving and investing in their younger years can easily build substantial amounts of wealth in their lifetime.

2.

The more money you have to invest in the beginning, the more money you

will have at the end. It's simple because the more you invest right from the beginning, the more interest you will be able to earn over time. This, of course, is because interest begins immediately to accrue on the amount you invest at the outset.

When a higher amount is invested on which to begin building interest, more dollars are accrued at a faster rate.

3.

The higher the rate of return, the more interest you earn on your investment,

and the faster your money will grow. When your money earns more interest, that means it is working harder for you, bringing you bigger earnings over time. The rate of return tells you how fast your money is growing, and a higher return means it's growing faster. Remember to use the “Rule of 72."

4.

Appreciation is better than interest because it is not taxed until the property is

liquidated or sold. Real property always has value in any economy.

The Get Out of Debt Book

5.

Page 59

Debt is bad. Debt robs you of potential wealth and must be avoided whenever

possible.

Risk and the Rate of Return

“Put not your trust in money, but put your money in trust.” ~Oliver Wendell Holmes

Safety, risk and the rate of return are all tied together. You don't affect one without affecting the others.

Low Risk - If you are a cautious sort of person and you want to always feel safe, you will put your money in low risk investments. Treasury bonds, CD's or savings accounts all are guaranteed by either the government or the institution, meaning you will always get your principle back. The trade-off is that you will get a lower return sometimes a significantly lower return. Right now savings accounts are paying around 2%, and using the "Rule of 72" that means it will take 36 years for your money to double. But it is liquid; you can walk right into the bank and get your money any time you want.

High Risk - If you are a risk taker and have money that you could afford to lose, you may want to invest some of that money in high risk investments such as stock options, commodities, high tech stocks, capital ventures, or start up business ventures. In these kinds of investments you can double your money in very short periods of time, or lose it just as easily. Many high risk investments are “volatile" and that means things happen fast. They are also illiquid - once you put your money

The Get Out of Debt Book

Page 60

in it is very difficult, if not impossible to take it out. The bottom line is that you can make a lot of money or just as easily lose a lot of money in a short amount of time.

Risk and Your Investment Portfolio - typically brokers advise a mixture of low risk, high risk, and average risk investments in a portfolio. How you balance out your higher risk with lower risk investments depends a lot on your personality, temperament and your personal goals. That is why it is so important to have a long term financial plan. Your age also makes a big difference in how you set up your portfolio. Age determines how many years you have to invest and that goes back to the time value of money.

Your investment broker gets paid for every transaction you make. Can you really trust somebody else with your hard earned money? You need to take responsibility for your money or it will no longer be yours! Only invest in areas that you understand. It’s your money!

“October: This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February.” ~Mark Twain, 1894

The Get Out of Debt Book

Page 61

As an Investor, You are Either a Lender or an Owner

When you put your money into a bank savings account, you are a lender. You are lending your money to the bank and the bank is giving you interest on the money that you lend to it. When you buy a government bond or T-bill, you are actually lending money to the government. Cities, counties and states all depend on bonds to keep government working.

When you buy stocks, or invest in a business or capital venture, you are an owner. A stock represents a "share" of the company. The bigger the company, the more shares that company has that are "outstanding." That means a big company can have millions of shareholders or people who own part of the company. If the company does well, the shareholders can receive a "dividend" which is like interest and represents a rate of return on the current share price. The stock price can go up or down, meaning that you can lose some of your principle or you can make money when you sell. This is in addition to possibly receiving a dividend while you own it.

When you sell your stock at a higher price than you paid for it, this is known as a “capital gain.” You will have to pay taxes on that kind of income, but only when you actually sell the stock for a “profit.” Conversely, losses are a “capital loss.”

Lenders usually take less risk that an owner, but owners can get higher returns on their investments. Let's look at some examples:

When you open a savings account at your local bank at 2% interest, the bank can lend your money to someone else to buy a house at 6% or 8% interest. You and the bank are lenders. If, instead, you invest your money and buy a share of stock in the bank, then you are an owner along with everyone else who owns shares in the bank.

The Get Out of Debt Book

Page 62

The Risk-to-Return relationship says that the more risk you are willing to take with your money, the higher the rate of return you can expect to receive. But that isn't always true. Some very risky investments can produce low rates of return if they are not ultimately successful. Risk Management is all about getting the biggest return for the smallest amount of risk involved. That depends on many factors, and if you are at all uncertain, you should seek the advice of a good financial advisor.

One of the first things a financial advisor will tell you is that the key to risk management is diversity, or spreading the risk around. You always want to spread the risk around to several different kinds of investments just in case something goes wrong. Many investors fully invested in high tech stocks lost out when the internet bubble burst. You don't want to put all of your eggs in one basket - ever - unless you own the basket!

The Get Out of Debt Book

Page 63

Chapter 6 The Foundation of Wealth - Compound Interest

“Knowing is not enough, we must apply. Willing is not enough, we must do.� ~Goethe

Compound Interest -

As you can see from our previous examples, the more money you have to invest, and the longer you can invest your money, the more wealth you will create. More money means you can take more risks over a longer period of time and you have the advantage of being able to diversify, virtually guaranteeing higher rates of return. It just gets better.

Of all of the financial principles, the most important concept, and probably the least understood, is what financial people call "compounding." Compounding means doubling your money over and over again.

That means you keep your money in investments for long periods of time, allowing the return earned in one year to earn additional returns on itself in the next year.

Your money keeps growing and growing like the proverbial rabbits.

Compounding also means that you can't, in principle, take your money out. If you do you will lose momentum, and that is certain to cost you money and years of financial wealth. The key to understanding compounding is the exponential growth curve that looks something like this:

The Get Out of Debt Book

Page 64

Example of Compound Growth

Wealthy

No Savings 10

15

20

25

30 years

Example of Compound Growth

The first thing you will notice is that in the beginning, not very much happens. Then when you are just getting tired of the whole thing, after about 15 years of scrimping and saving, it takes off. This is the magic of compounding.

People who are financially successful take advantage of compounding. They have the patience to see it through to the point where growth becomes "exponential."

That's the steep upward part of the curve. They get there by spending less than they earn, paying themselves first and investing their money over and over again to achieve a level of wealth unobtainable to anyone who does not understand this key principle.

The Get Out of Debt Book

Page 65

“Money is time. With money I buy for cheerful use the hours which otherwise would not in any sense be mine; nay, which would make me their miserable bondsman.”

-George Gissing

You may have heard the expression, "Time is Money!" This is what it's all about: the more time you have to save and invest, the more your money will grow and since it is compound growth, it grows exponentially. Let's look at some more examples of how compound growth works.

The Golf Story:

Let's say that you and your friends decide to go out and play a round of golf, 18 holes. Someone says, "Let's bet a dime on every hole, winner takes all." Now, that doesn't sound like much. It’s just a dime and since there are 18 holes, the most you can lose is $1.80. Someone else decides that's too boring and suggests that you double the stakes at each hole. What does that add up to in the end? If you are following our exponential growth explanation thus far, you can guess:

The first hole, the bet is one dime, $ .10

The second hole, the best is two dimes, $ .20

The third hole, the bet is four dimes, $ .40

See, it doubles at each hole. Now we've played three of the eighteen holes and we're only up to forty measly cents, right?

The Get Out of Debt Book

Page 66

The fourth hole, the bet is $ .80

The fifth hole, the bet is $1.60

The sixth hole, the bet is $3.20

The seventh hole, the bet is $6.40

The eighth hole, the bet is $12.80

And by the ninth hole, the bet is $25.60. So what are you thinking? Here you are half way through the game and the bet is over twenty five dollars! Perhaps you are getting an inkling that there is something bigger ahead, or maybe you think it's time to quit. Yep, that's what way too many investors do. They quit just when things are starting to really get going.

If you will look again at the compound growth diagram above, you will notice that for the first half of the timeline the curve doesn't move up a whole lot.

Many investors get frustrated at this point. They've been working and saving a long time, it hasn't been easy, and now they feel like they've really done something. So they cash in their investment and take a vacation with the money.

What would have happened if they just hung on a little longer?

The tenth hole the bet is $51.20.

The eleventh hole the bet is $102.40

The Get Out of Debt Book

Page 67

The twelfth hole the bet is $204.80

The thirteenth hole the bet is $409.60

The fourteenth hole the bet is $819.20

Only four holes to go. Oh, come on! I've been saving and investing for all of these years, look at what has happened - we've gone from a dime, just ten measly cents, and now we're all the way up to over eight hundred dollars! Let's buy a new car!

Let's use the money to remodel the kitchen! It can't get any better than this, right?

The fifteenth hole the bet is $1638.40

The sixteenth hole the bet is $3276.80

Over three thousand dollars! That's incredible! Sure there are two more holes to go but how much difference can that make? Right? I mean, we've done so well, let's buy a vacation home, a boat, a motor home, and live it up. We've earned it haven't we? That's the attitude of many investors at this point. They've done really well and it's hard to believe it can get much better. But it can. Oh, so much better! It can mean the difference between “having some money� and financial independence.

The seventeenth hole the bet is $6553.60

The eighteenth and final hole the bet is an astounding $13,107.20!

The Get Out of Debt Book

Page 68

We hope that you will notice the difference between the sixteenth hole and the eighteenth hole is nearly ten thousand dollars! And equally interesting, the difference between the first hole and the third hole is a measly thirty cents! Same distance, exponential difference!

This example of compound growth clearly illustrates the dynamics involved in the time value of money. When you have loads of time to invest you can create almost any level of wealth you desire. You need discipline and a solid long term financial plan to guide you, and anyone can learn to use this plan. But you have to stick with it!

Rich Beyond Imagining

“The most substantial people are the most frugal, and make the least show, and live at the least expense.� ~ Francis Moore

I am sure you've heard stories of the old guy, or the little old lady down the street who passed on and left millions to charity. No one ever suspected they were rich beyond imagining. Time. It's all about time. These old folks, who looked like they never had a dime, were putting their dimes into savings and investments.

They never took out a single dime and those dimes all turned into dollars, the dollars turned into hundreds, and hundreds turned into thousands and finally into millions. It just kept compounding over and over again. If they could do it, so can you! It's so simple!

The Get Out of Debt Book

Page 69

Always remember that whenever you take money out of your investments, especially at the early stages, even a small withdrawal slides you way back on the timeline of exponential growth. You've got to be patient and hold on. Later on you can take some out and it won’t hurt so much, but until you get exponential growth going for you, you have to hang on to everything you’ve got.

Let's look at another example to really bring this point home:

At the twelfth hole, the bet would have been $204.80. Let’s say at this point in your life you have an "emergency" and you need two hundred dollars. That would leave you with just a little over four dollars if you took it out of your investments. Now look back on the timeline to where the bet was four dollars - it's way back around the sixth hole!

You've just lost (spent) six holes of winnings for your little "emergency." If you could have waited to have your "emergency" until the fourteenth hole, just two holes later, your two hundred dollar "emergency" would not have set you back even one hole. The difference is incredible. Patience!

Your financial life, and your ultimate level of wealth, depends upon your understanding of this one principle as much as anything else. This is how the rich get rich. Sure, some people win the lottery, but this plan works for everyone! Compound growth is truly the key to riches, and the key to compound growth is time. You've got to set goals and make a long term financial plan!

The Get Out of Debt Book

Page 70

Achieve Your Financial Goals

“If you give people a light, they will find their own way.�

-Dante Compound Interest will help you to achieve your financial goals because your savings and investments earn interest. And the next year the interest you just earned brings you even more interest.

Put $1,000 into an account earning 5% interest per year and at the end of the first year you will have $1,050. The next year your original $1,000 again grows into $1,050. But in addition, the $50 interest you re-invested, has also earned 5% interest and has grown to $52.50. Now you have $1,102.50.

If this doesn't ring a bell for you, go back to the golf story and read it again. Small beginnings turn into big results over time.

The more money you have to invest and can continue to invest, the more "time value of money" you create. Higher rates of return will shorten the amount of time it takes for your money to double, meaning your money is working harder to make you more money.

"One's mind, once stretched by a new idea, never regains its original dimensions."

-Oliver Wendel Holmes

The Get Out of Debt Book

Page 71

“Rule of 72� Table

Interest Rate

Years to Double Your Investment

2%

36.0

3%

21.0

4%

18.0

5%

14.4

6%

12.0

7%

10.3

8%

9.0

9%

8.0

10%

7.2

11%

6.5

12%

6.0

13%

5.5

14%

5.1

15%

4.8

16%

4.5

17%

4.2

18%

4.0

Become an "Armchair Millionaire"

We challenge you to take out a pad of paper and a calculator, or use your computer.

Figure out how much you would have to save each month for 30 years in order to become a millionaire. Assume an interest rate of 6%. Then try 14%. The result will surprise you. If you don't have a clue how to figure it out then keep reading.

The Get Out of Debt Book

Page 72

“Money is better than poverty, if only for financial reasons.” ~Woody Allen

Reasons for Saving and Investing

1. To provide for a loss of income from:

a.

Disability

b.

Job Loss

c.

Retirement

2. To launch your children towards financial independence you have to feed them, clothe them, educate them, and set them up financially.

a.

Car

b.

College

c.

Career

d.

Down payment on a house of their own.

3. To taste the sweetness of life

a.

Creating a warm home filled with joy and laughter.

b.

Stepping into a new car with that wonderful smell!

c.

Just lying under the Mango tree and enjoying life.

“The faults of the burglar are the qualities of the financier.”

-George Bernard Shaw

The Get Out of Debt Book

Page 73

Chapter 7 Where Do Savings Come From and What the Banks Won't Tell You About Credit Cards - the Anti-Savings Plan

Think of yourself as a money making machine. You, through the course of your life, will produce a significant amount of money, a stream of income that can build wealth, or be spent on the pleasure of the moment.

Your business as a money making machine is to sell or trade your time, skills, and personal resources for income. These are known as your “working years” and you will likely find yourself in (on average) 3.5 different careers. As things change, so must you.

During this time, you have an incredible potential to accumulate vast sums of wealth. If the trading unit is one hour of your time, you can establish the theoretical value of your personal enterprise, "ME, Inc."

After all, “ME, Inc.” is:

Open for business 8 hours a day 40 hours a week 50 weeks a year over 100,000 hours in 30 years!

ME, Inc. sells hours of productive time and produces a lifetime of wealth.

How much wealth? Well, that depends on how much ME, Inc. charges per hour:

The Get Out of Debt Book Hourly Rate

Page 74

Lifetime Income

$ 7.00

$

700,000

$ 12.00

$ 1,200,000

$ 15.00

$ 1,500,000

$ 25.00

$ 2,500,000

$ 50.00

$ 5,000,000

$ 65.00

$ 6, 500,000

$ 85.00

$ 8,500,000

$100.00

$10,000,000

ME, Inc. is truly an economic machine creating vast amounts of income. But it’s not how much you make, it’s how much you keep that builds wealth.

Savings come from spending less than you earn and investing and re-investing the difference. The key is to live on less than you earn! Pay yourself first, put a set amount of money away in savings and investments before you do anything else with that paycheck! And never touch your investments until your financial dreams are realized! No matter what the reason, as soon as you give it to someone else, it's gone - Forever!

“Income is a fixed sum of money that is hard to live within, but harder to live without.”

ME, Inc. is like a well-oiled machine making money and raking in revenue. And now the claims on your wealth come along. It seems like when you have it, everyone

The Get Out of Debt Book

Page 75

wants a piece of your wealth. The government wants its taxes - Federal, State, and Local. (Property taxes if you own real estate. Sales taxes whenever you buy something. Airport and Hotel taxes when you travel. Taxes here and taxes there!)

The Government will take between forty and sixty percent of your income over your lifetime! And ironically, a good portion of every tax dollar goes to pay the interest on Government debt!

The mortgage company wants its payment - including interest expense on the principle money you are ‘renting’ to buy your home. The grocer, doctor, school, car mechanic, plumber, and practically everyone you come into contact with wants some of your wealth one way or another. Before you know it, your children are off to college and now you get to spend even more money on tuition, housing, clothes, books and entertainment.

Of course, you want your life to be enjoyable too. You want memories of wonderful vacations, happy holidays, and a house full of joy and laughter. It doesn't happen without money, money, money. The big question is: how much is left to invest when everyone else is done feeding off the ME, Inc. money machine?

Let's look at the example of the life cycle of the ME, Inc. money making machine:

The Get Out of Debt Book

Page 76

Economic Life Cycle

In this example your income years begin with the first job and continue through to retirement age. The average person will have 3.5 careers in their lifetime as their income level steadily increases. By their second career they buy a house and carry a mortgage of $500,000 that is gradually paid off over the next 30 years. Then they retire and, if they have followed the principle of compound growth, their mortgage is paid off and they have enough savings (hopefully!) to see them through their retirement years.

“When I was young I thought that money was the most important thing in life; now that I am old I know that it is.� ~Oscar Wilde

As you look at the Economic Life Cycle chart above, you will notice that the amount of savings you have (Wealth) does not exceed your annual income until near the

The Get Out of Debt Book

Page 77

peak of your earning power. Somewhere about this time you are going to have a mid-life crisis. You feel like you have been working hard for a long time, and there is an illusion that you have very little to show for it. It takes discipline and patience to reach the steep part of the growth curve!

“With his own money a person can live as he likes - a dollar that's your own is dearer than a brother.” ~Maxim Gorky, The Zykovs

Through the years you have to spend money on food, shelter, clothing, entertainment, and transportation. Two cars can easily take $7,500 to $10,000 per year to pay for, insure, and maintain. A house requires maintenance. Most people will want to remodel their house or move to a bigger and better house at least once in their lifetime. You will want your children to get a good start in life and that means you will have to come up with tuition and living expenses for college. That can average $30,000 per child per year and more. And that doesn't take into account vacations and travel, or unexpected health-related expenses and other “emergencies” that happen year after year.

What's Wrong with Credit Cards and Consumer Debt or…The Anti-Savings, Financial Black Hole Known as Consumer Debt and Credit Cards With cars, housing, food, clothing, entertainment, vacations, college, and unexpected medical expenses all placing demands on our money, it's no wonder so many people are tempted by credit cards. Credit cards create the illusion that they really give us flexibility in our finances, without hurting us. The illusion is perfect - just a small monthly payment allows you to buy something you couldn't otherwise afford.

The Get Out of Debt Book

Page 78

The key phrase is "you couldn't otherwise afford." That means that if you took that same money out of your savings and investments to buy what you just used a credit card for, you would set your financial plan back years! It's a fact; use of credit cards will ruin your financial future! There should be a warning on every credit card:

"Caution - use of credit cards is hazardous to your wealth!"

Credit cards are far worse and can have a far greater impact than if you had used up part of your savings and investments for the same purchase or expense. The difference is that instead of losing interest income, you pay interest expense.

Unfortunately, the interest charges are “hidden” in the small monthly payment and most people don’t even know the amount of dollars they spend every month on interest expense, nor do they bother to find out. Because the monthly payments seem relatively small, when you buy things with credit cards it seems so harmless in the short term. Next thing you know your credit cards are used over and over again.

Credit cards make it possible for us to ignore our financial plans and relieve us from the pain of calculating our financial future; they create the illusion that we are doing well, when in fact we are not.

They are so easy to get, it's hard to resist. Hundreds of offers for credit cards are sent to each and every consumer, every year. And Americans, in ever increasing numbers, are jumping on the credit card bandwagon.

According to cardweb.com, the average American owes over $8,000 on credit card and consumer debt and pays over $1,000 a year in interest and finance charges. That means every year, year in and year out, each person has over $8,000 in credit card

The Get Out of Debt Book

Page 79

debt - money that they are "borrowing" at high rates of interest, often 12% to 14%, but as high as 27%.

“The bank hath benefit of interest on all monies which it creates out of nothing.”

-William Paterson, Founder of the Bank of England, c1694

Credit cards are a sweet deal for the banks who hand them out like candy. Think back to our compound growth example. Wouldn't you like to invest $8,000 and earn compound interest at a rate up to $27%? The results would be incredible, and they are! The winner is your bank or credit card company. The loser is your financial plan and your wealth. Using the “Rule of 72,” credit card companies can double their investment every three years!

How is that possible?? You make it possible when you use credit cards and carry a balance. Think about it. How did the credit card companies get so big and wealthy, if not on the backs of consumers like you and me?

“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” ~Henry Ford

Wealth is like water; it flows to where financial gravity takes it. Compound growth is financial gravity, and when the banks and credit card companies use it, your money flows to the bank. Credit cards are like a black hole - when you use credit cards paying those high rates of interest, your money disappears forever and never comes back.

The Get Out of Debt Book

Page 80

How Credit Cards are "Anti-Savings" Accounts.

In our golf game example we talked about having an "emergency" at the twelfth hole, remember… a $200 "emergency" that set us back six holes!

When you use credit cards for emergencies, the penalty is extremely painful to your financial future. And it just gets worse. If we use our golf game story, let's say we use a credit card to pay off the $200 "emergency" and the interest rate is 20% or $40 a year. That means that every year the $40 has to be paid and draws down our investments. Since interest starts the very first day you use a credit card, the forty dollars comes out at the twelfth hole and every hole after. The following chart shows you the difference:

12

13

14

15

16

17

18th hole

$ 204.80

$ 409.60

$ 819.20

$1,638.40 $3,276.80 $6,553.60

$13,107.20

$ 164.80

$ 289.60

$ 539.20

$1,038.40 $2,036.80 $4,033.60

$ 8,027.20

As you can see, what you end up with by the 18th hole is over $5,000 less than if you had not used a credit card. That represents almost 40% of your net worth at retirement! If you were planning on a million dollars for your retirement nest egg, use a credit card in your lifetime and you will have $600,000, not $1,000,000. You just lost $400,000! That is a HUGE difference! One little $200 emergency at the twelfth hole. Life is just like that. No different.

If you have been following our example, you may be saying, "Well, that's better than being set back six holes which is what would have happened if I had taken the whole $200 out of savings. That would have cost much more of my financial wealth at retirement." This is the illusion of credit cards and consumer debt. It’s like saying, “I

The Get Out of Debt Book

Page 81

just lost my hand, I could have lost my whole arm.” It still hurts and it still cripples your financial future.

The fact is, you still lost 40% of your potential lifetime wealth at retirement! Any way you look at it, it is tragic!

The challenge we offer you is to sit down with pad and paper or a computer, and figure out how much interest expense you will pay in your lifetime for credit card and consumer debt. Use the figures from the accounts you have right now. Credit cards, car loans, medical bills, furniture, appliances, whatever you have bought on credit or wherever you owe money and pay interest. Just take the calculations out 30 years and see what happens, assuming you keep doing what you are doing right now.

If you are like most people, you’ve never done this and it could be frightening. That should tell you something right there. It’s challenging to face reality. Our purpose is to get you to hate debt and get you out of debt quickly. It may be emotionally painful to get to that place, but it’s definitely worth it! And we are here to help!

Borrowers are slaves and lenders are masters. We each make choices daily that put us in one of these two positions. Become aware of your choices! Awaken and set yourself free to own your own life!

“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”

Thomas Jefferson

The Get Out of Debt Book

Page 82

Chapter 8 The Eighth Wonder of the World

Baron de Rothschild was once asked to name the Seven Wonders of the World. He replied, "I cannot, but I know that the eighth wonder of the world is compound interest."

There are three elements that work together to make becoming a millionaire a practical and reachable goal. They are time, savings, and rates of return on investments. You already have the knowledge of how the time value of money works for you through the principle of compound growth.

It was Albert Einstein himself who called the power of compound interest the “Eighth Wonder of the World.” And if it impressed Einstein it should really impress you. We've already presented to you the "Golf Story" and now we will give you a few more examples. That you realize and appreciate the power of compound interest is absolutely vital to your financial future.

“Compound interest is why the rich get rich, and the poor stay poor.”

What you don't have, if you are like most Americans, is a financial plan. If you have one, great! You are among the very few. A financial plan consists of a strategy for using the time value of money to your greatest advantage and action tactics.

A financial plan takes into account your income, your age, your current financial position. A long term financial plan works for you to build wealth with various financial strategies and tactics that help you take full advantage of the "Eighth Wonder of the World."

The Get Out of Debt Book

Page 83

By definition, compound interest is the ultimate buy and hold investment program.

Once you put money into savings and investments, you don't take the principle out (ever!) and you don't take out any of the earned interest for a very long time. The interest earned is re-invested and accumulates with the principle year after year.

Therefore what happens is over time you not only earn interest on the principle, you also earn interest on the interest. That's why it's called compound interest.

The result is called geometric or exponential growth. The results are profound and are easy to achieve. The only wonder is that everyone doesn't do it. You only need these three elements: time, savings to invest, and places (plural!) where you can safely and consistently get a good rate of return on your investments.

If you teach your children at the age of 15 about compound interest and they begin to save just $20 a month and continue to save $20 a month every month until they reach 65 years of age, they will have accumulated almost $280,000.00! On just $20 a month!

Let's take a look at how they got there. In the first year, their $20 saved each month adds up to $240 dollars. At an interest rate of 10%, that $240 dollars earns $24 dollars in the next year. The second year the original $240, plus the interest of $24, plus another $240 from saving during the next year adds up to a total of $504.00.

That entire $504 earns interest at 10% giving you $50.40 in earned interest.

The Get Out of Debt Book

Page 84

In the third year calculation, the $794.40 you see includes:

3 years of saving just $20 every month = $720.00 +

The first year’s interest of

$24.00

+

The second year’s interest

$50.40

and so it grows to almost $280.000.00!

Continuing with the calculations we see after the fourth year the total comes to $1,113.84. The total consists of:

1. Principle invested from savings of

$960.00

2. Interest earned on principle of

$96.00

3. Interest earned on interest of

$57.84

So after four years, we see that "interest earned on interest" is beginning to mean something. By leaving the interest in with the investment, we now have $57.84 more invested, and that too is earning interest.

By the 50th year, the total with compound interest comes to $279,338.05 and consists of:

Principle invested from saving:

$20 a month for 50 years

=

$12,000

Total interest earned on principle Interest earned on interest

= =

$30,600 $236,738

The Get Out of Debt Book

Page 85

This is truly the "Eighth Wonder of the World." Our 15 year old saved a mere $20 a month. At the end of 50 years they had taken out of pocket a grand total of only $12,000! Who can’t do that?

If there was no compounding, or if they took the interest earnings out every year and spent it, they would have earned a mere $30,600 in simple interest over the 50 years.

By leaving the interest in the account to earn compound interest over the same time period, that gives them an incredible $224,738.06 more than what they put in out of pocket.

Learn the Time Value of Money

The time value of money means the amount of wealth you build in your lifetime is directly dependent upon two things:

1. How many years you can save and invest.

2. The interest rate or return on investment that your money earns.

It takes time for compound interest to work its magic. The more time you have, the more wealth you create. The higher the rate of return, the more wealth you create.

The time value of money, because of compound interest, tells us that time is the most significant factor in building wealth. Given enough time, you can create almost any level of wealth you desire quite easily.

The Get Out of Debt Book

Page 86

"Rule of 72"

Investment Interest Rate $1,000

6%

Years to Double

Your Wealth in 36 years.

72/6= 1236/12 = doubles 3 times = $8,000

$1,000

8%

72/8= 9 = 36/9 = doubles 4 times = $16,000

$1,000

10%

72/10=7.2=36/7.2 = doubles 5 times= $32,000

$1,000

12%

72/12=6= 36/6 = doubles 6 times = $64,000

Optimized Compound Interest

Optimized compound growth is the principle that an incremental increase in all three areas (time, rate of return, and savings) is better than a big increase in just one area.

That's a relief, because it means that if you don't have so many years, you don't want to take a risk, or you have trouble saving, you can make adjustments in the rest of the formula and can still come out meeting your financial goals.

The concept of optimized compound interest recognizes that there are really three key elements that determine how much wealth you will build:

1. The amount of money you put into investments.

2. The number of years you can invest without touching the principle or interest.

3. The rate of return or interest rate your investments earn.

The Get Out of Debt Book

Page 87

The formula looks like this:

Years x Money Invested Annually x Rate of Return =Your Wealth Potential!

As you will recall, in the chapter "An Introduction to Saving and Finance," the rate of return depends upon how much risk you are willing to take, and the "Rule of 72" tells you how fast, or how often, your money will double. The higher the risk, the higher the rate of return, the shorter time needed for your money to double. Lower risk investments are safer, but offer lower rates of return. It takes longer for compound interest to have a big effect with the lower rates. Most investors want more and faster results. The key is to not push the risk factor out of your comfort zone just to get a higher return because you are in a hurry.

Optimized compound interest takes risk into account and works with all three elements to find an optimal solution. Many people think that to get wealthy quickly they need to get big returns, meaning they have to take lots of risks. Other people may think that compound interest is indeed a miracle, but they are already too old to make it work for them. Still others find that they cannot save enough and give up on their plans to build wealth. The problem with all of these ideas is that it's not just one element that makes a difference - it's all three!

Here's how it works. In these four scenarios, the wealth potential or goal is the same, $64,000. Using Optimized Compound Interest and the "Rule of 72" we see there are many different ways to get to the same goal:

The Get Out of Debt Book

Page 88

Realize that this is a one time investment altered by percentages and length of time.

Scenario 1 Yrs x

Money Invested x Rate of Return = Your Wealth Potential

36 yrs

$1,000

12%

$64,000

Scenario 2 Yrs x

Money Invested x Rate of Return = Your Wealth Potential

24 yrs $4,000

12%

$64,000

Scenario 3 Yrs x

Money Invested x Rate of Return = Your Wealth Potential

24 yrs $2,000

14.5%

$64,000

Scenario 4 Yrs x

Money Invested x Rate of Return = Your Wealth Potential

12 yrs $8,000

18%

$64,000

You will quickly notice that all four scenarios create exactly the same wealth potential; $64,000.

Scenario 1 - gives you 36 years to create $64,000 in wealth. You can do it with an initial investment of $1,000 and a 12% rate of return. Scenarios 2 and 3 give you just 24 years to achieve the same wealth of $64,000, so you have to make adjustments in the interest rates and/or the initial investment. Scenario 4 gives you only 12 years to build the same wealth. It’s not impossible! How can you do it? By using the principle of Optimized Compound Growth which states that incremental changes in two or more areas will produce an optimum result.

The Get Out of Debt Book

Page 89

Scenario 2 - to make our goal of $64,000, a big increase in initial money invested, from $1,000 to $4,000 is needed, but even though the time frame is shortened by 12 years, the result is the same because you are starting out with a bigger investment.

Four times bigger - $4,000 instead of $1,000.

Scenario 3 - two things have to happen to make up for the loss of twelve years of investing and compounding: The initial investment is increased to just $2,000 (easier than $4,000, right?) and the interest rate is increased to 14.5%. Still, the result is the same; potential wealth =$64,000. Adjusting two things incrementally is easier than trying to make it all up in one area.

By changing two elements, it's easier to achieve. If having to come up with four times the initial investment can be a problem in Scenario 2, you would choose scenario 3. Earning 14.5% is too risky for others, and if they can come up with the larger initial investment they would choose scenario 2. By adjusting all the elements it is easier to find a workable solution that suits your needs

In Scenario 4 there are only twelve years to accumulate $64,000! That means you have to start with a much bigger investment ($8,000) and earn a much higher rate of return (18%). Not a comfortable position for many, a challenge to be sure, but theoretically it can be done.

Again, we have illustrated the time value of money. It should be clear that without a doubt time is your most valuable asset when it comes to building wealth. Not everyone has enough time to build the wealth they desire. However, the principle of Optimized Compound Growth says that if you don't have as much time, it's better to work on both the rate of return and the initial investment (the amount you save) to achieve your goals.

The Get Out of Debt Book

Page 90

When you are young you have lots of time. You may find that you need to make very few sacrifices to build serious wealth but only if you get started right now will that be true. As you get older, you don’t want to find yourself in the position of having to take more risks to make up for the amount of time you have lost.

A good financial plan will allow you to optimize your investment capital, saving rate, and rate of return so that you can find a balanced solution that works for you in the years you have.

“In the old days a man who saved money was a miser; nowadays he's a wonder.” ~

Author Unknown

The Get Out of Debt Book

Page 91

The Get Out of Debt Book

Page 92

The Get Out of Debt Book

Page 93

The Get Out of Debt Book

Page 94

“Banks lend by creating credit. They create the means of payment out of nothing.”

~Ralph M. Hawtrey

“This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit.

If the Banks create ample synthetic money we are prosperous; if not, we starve.

We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.”

~Robert Hemphill

The Get Out of Debt Book

Page 95

Chapter 9 Building Perfect Credit

“Too many people spend money they haven't earned, to buy things they don't want, to impress people they don't like.� ~Will Smith

Those with perfect credit receive the lowest interest rates on their loans and that can save hundreds, thousands, even hundreds of thousands of dollars over a lifetime.

Those dollars saved in interest can go towards - you guessed it - paying off mortgage and consumer debt, and building wealth! It may seem a bit incongruous to have a chapter about perfect credit in a book that tells you debt is bad. But we are assuming that you must have debt or you wouldn't be reading this book. It follows then that since you have debt you must pay interest and that's where this chapter comes in.

It used to be that you were either approved for a mortgage or a loan or you weren't.

You were approved for a credit card with a set credit limit, or you were turned down.

Once you were approved, you paid the same rate as everyone else. This is no longer the case. Financial institutions now use a complex system of credit scoring to minimize human error when lending their money. After all, that is how they make a profit, and lending too much money to the wrong people wouldn't make for a bright future.

The credit institutions have created a system that uses statistics to compare your credit history to a database of all credit users. They predict the amount of risk a lender is taking when lending their money. The system works. It has taken most of the bias out of getting a loan, and once you understand the system, you can work it to your advantage.

The Get Out of Debt Book

Page 96

Over your financial lifetime, the difference between having a perfect credit score, or merely a good credit score, can really add up. A difference of just two points of interest on a $100,000 mortgage, for example, can affect the amount of interest you would pay by $30,000, $40,000, or more over the lifetime of the mortgage. That's real wealth you don't have to give away to the lending institutions!

When you have a perfect credit score, there are many benefits that accrue to you and all of them offer you financial advantages in your quest to pay off debt and build wealth.

For example, when interest rates change, you may find it to your advantage to refinance your mortgage if interest rates have moved significantly lower.

Refinancing potentially saves you interest expense in the long run.

When you have perfect credit, you may find that:

- You can qualify faster and with less hassle from the lenders.

- Lenders will compete for your loan, offering not only better rates, but better service.

- Cost of appraisal is lower because lenders trust you.

- Lenders requirements for insurance, and the corresponding insurance premiums, are lower.

- Lenders are more relaxed about documentation of your income.

- You have more choices in the type of loan products available.

- Escrow requirements are easier to meet.

- You can borrow up to 100% and often 125% of the value of your property.

The Get Out of Debt Book

Page 97

What is a Credit Rating?

The best credit ratings should go to people of good income with steady jobs, with few debts, and a history of using debt wisely. Unfortunately, it gets complicated because all of those things have to be quantified.

Different lenders can look at the same financial situation in different ways. That's why there is a system to determine your credit worthiness, based on statistical averages. Basically, it is a fair system that works well.

There is a downside. You have to be very careful with your credit rating or it can hurt you financially. And that takes work. Always remember, the amount of interest you pay is up to you! There are huge differences from lender to lender in their loan qualifications, and there can be big differences in rates offered to applicants with good or even low credit scores.

If you "work the ratios," you can save yourself thousands and thousands of dollars in interest expense over the life of the loan. But it means that you will have to find a lender who will work with you. It means you will have to work to obtain and maintain “perfect credit.”

“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.” ~Mark Twain

Don't ever assume that your lender has your best interests in mind; it's up to you to shop around and get the best deal. However, the key to the “best deal” is always your credit score.

The Get Out of Debt Book

Page 98

When borrowing money, applying for credit or a mortgage, the most important thing you have working for you is your credit score. So let's take a brief look at how that works:

- Your credit score is a number like a test score, like the SAT used for college admission. If you have a high score, you can get into the best places.

- Your payment history affects your credit score more than anything else (so always pay your bills on time!).

- How much you owe and how many people you owe is the second biggest factor.

(When you promptly pay off most all of your debts, your credit score goes up - way up. When you owe too much to many different lenders, your score goes down - way down.)

- Other considerations are how long you take to pay your debt, the kinds of credit you have, and if you have had a rash of credit inquiries recently.

We highly recommend that you educate yourself about credit by reading and studying books on credit. These books are easily found in libraries or bookstores, and you can learn even more by visiting the numerous web sites devoted to the subject on the internet.

Many credit related courses are offered on line by banks and lending institutions.

These are excellent tools to get you up to speed on how credit works for you.

The Get Out of Debt Book

Page 99

Checking Your Credit Score Credit scores supposedly run from 300-900 but for almost everyone the following scale will apply:

- 800 and above - the banks will fall at your feet and beg to give you a loan.

- 500 and below - banks beg you to go somewhere else.

Nearly 75% of us fall between 500 and 800. There isn't a big difference between 500 and say, 550, or even 600, but there is a real advantage in having “perfect credit” with a score close to or over 800. That is the only place you want to go!

Your payment history, all of your credit accounts and balances, car loans, mortgages, any history of collections, liens or judgments, and everything else you've ever done with your credit is collected into databases called repositories at ‘credit bureaus.’ There are currently three such private companies that maintain a database of credit information: Equifax, Experian and Trans Union. These are the companies that sell your credit report to banks and other institutions.

Often lenders will get reports from all three and take an average of the scores.

Unfortunately, that means you have to regularly check all three reports to maintain a good credit score. That’s where the work comes in.

To check your credit score you can use any number of commercial services. For example, you can get your FICO score at www.myfico.com for a mere $12.95, or you can get "All 3 scores and 3 credit reports from TransUnion, Experian, and Equifax" for $29.95 at the same site. There are many, many other commercial sources from which you can obtain your credit scores for a fee. Some banks may even offer free reports or credit checks.

The Get Out of Debt Book

Page 100

What to Look For in Your Credit Report

Once you get your credit score, you need to check for the following:

- Open accounts. Examples of open accounts are credit card accounts, department store credit accounts, gas company credit cards, any creditor that sends a monthly statement (even if it is a zero balance), a car loan you are making payments on, a medical bill you are paying off, etc. They will all be listed on your credit report. Too many or too few open accounts can hurt your score. Currently the ideal number is between four and six open accounts. You will want to close accounts if you have more than six. You should open accounts if you have less than four.

What you need to do is to make sure that the accounts listed on your credit report are in fact current and open accounts. If a medical center, for example, shows an open account even though you’ve paid your bill, you need to take action directly with the creditor to close the account and have that fact reported to the credit bureaus. On the other hand, if you have good credit with a merchant or lender and it doesn't show up on the credit reports, contact the lender and find out if they will report it for you.

Landlords often do not report rent payments to credit bureaus unless it is requested by you. It can be a real advantage for you to have your landlord report your punctual rent payments.

- Account Balances. When you owe too much to too many people, it really hurts your score. Ideally you want low balances at just the right number of accounts. Make sure the balances in your credit report agree with your statements. Resolve any differences with the lender.

The Get Out of Debt Book

Page 101

- Account Limits. If you have run up your account balances close to your credit limits, your credit score will suffer. Pay down any accounts that are near the limit as quickly as possible. It is better to have a few accounts with average balances than one account with a balance close to the limit.

- Late Payments. One or two late payments over 30 days doesn't seem like a big deal, but it can really hurt your perfect credit. Check your credit record for any history of late payments. Call lenders and resolve any errors. Mortgage lenders tend to have a longer memory for late payments, and they have their own system for keeping track, so be sure to always pay your mortgage first and on time! Do not let any accounts become 30 days overdue.

- Recent is more important than history. What you have done in the last year or two has more relevance to your credit score than something that happened five or ten years ago. Even bankruptcy is forgiven (but seldom forgotten) after ten years! Make sure all of your recent information is accurate and then concern yourself about the past.

- Liens, judgments, collections. These are to be avoided at all costs. If you have a tax problem, take care of it! If you think you may lose in court and there is more than even a minimal chance you will be ordered to pay a settlement, pay it now before you end up in court and be done with it. Put it behind you. Protecting your credit rating is more important than winning a fight over a petty dispute.

Never let any account go to collections! Stay on top of your finances and resolve any issues. It is always best to pay first and ask questions later! If it ultimately turns out you were right, you will still have all the trouble of clearing up your credit report and that can take months or even years. Like we said, you have to work at it.

The Get Out of Debt Book

Page 102

Caution: If you are a member in a cooperative, or you belong to a homeowner's association where you live, be very careful about liens from these organizations.

They are just as destructive to your credit as any other kind of lien.

Make sure when you move that all of your creditors have found you at your new address. Make a list of all of your creditors and check it twice! If they can’t find you after you’ve moved, a collection agency will! And it won’t look good on your credit report!

- Resolve disputes with creditors directly. Most creditors don't want to lose customers. If they have made a mistake and you can show them the error, most will work with you to correct it. You can have recourse through the credit repositories, but that takes longer and the creditor can still be a problem in the end. It is better to work it out directly with the creditor and get them to report the correction if it’s gone that far. Be persistent!

- What you see is what they get. Whenever you take out a loan make sure your application is consistent with your credit report. Leave nothing out, or it will raise eyebrows. If there are gaps, fill them in. Explain everything that doesn't make sense at first glance.

"No man's credit is as good as his money" -Edgar Watson Howe

The Get Out of Debt Book

Page 103

Credit scores change slowly. Even after your creditor sends in a correction, it can take weeks, even months for the change to show up on your credit report. The same is true of accounts that are paid off or closed.

If you owe too much money to too many people, it can take months or years to make the necessary changes in your lifestyle, and then even longer for the number of accounts, reduced balances, and improved payment history to get to the point where it makes a big difference in your credit score.

That is why you must start RIGHT NOW working on a perfect credit score.

Other Considerations When Applying For A Loan

Your credit score is the most important part of the process of getting a loan or a mortgage. Here are some other factors that influence your ability to get a loan or obtain credit: Character - it is your job to let the bank or lending institution’s representative know who you are. It is your job to let these people know you are worth lending to. Business history or employment backgrounds are important, but even better are good letters of recommendation from your employer(s). If you are applying for a loan at the same bank as the one used by the company you work for, get your employer to go to bat for you and put pressure on the bank to give you the best rate. Get as many references as you can from influential people who know you and can testify to your good character.

Commitment - when you make a big down payment you are showing your commitment to the bank. If you are borrowing on the home you live in, that's even better because statistically banks know people will work harder to keep the property

The Get Out of Debt Book

Page 104

where they live. A big down payment for the home you live in can give you more leverage when negotiating rates with the lender.

Make sense of your history - lenders are looking for a good employment history that presents a stable income picture. If you have moved around a lot and have jumped from job to job, you are going to look unstable to the lender. If at all possible, put your personal history into perspective so that it makes sense to the lender.

If you have had a personal crisis such as a health problem that upset your finances and it created a blemish on your credit report, but you have worked diligently to improve your score since, a detailed explanation with an outline for a solid plan to manage credit and pay off debt in the future can make all the difference.

Collateral - more collateral usually means better rates. It is in your interest to make the biggest down payment possible. However, a big down payment or property offered as collateral for a loan will not get you a loan if you have bad credit. You may get a slightly better rate that way, but the truth is banks don't like to foreclose and they will seldom consider collateral as a mitigating factor when approving a loan if you already have bad credit.

Banks never look upon foreclosure as anything other than a last resort, and when they do foreclose they don't expect to come out with a profit. The bottom line is, your good credit is what the banks are looking for; collateral is important because it shows your commitment; a big down payment lowers your monthly mortgage payment, but you won't get a mortgage or conventional loan without good credit regardless how much collateral you put up.

The Get Out of Debt Book

Page 105

Perfect Credit Solves All Your Problems

Perfect credit solves almost all your problems when you’re looking for a mortgage or a loan. Perfect credit opens doors and allows you to negotiate the best rates. You will get little or no hassle from the lender about employment history, collateral, and appraisals. Escrow goes quickly and smoothly and closing expenses are held to a minimum.

Most importantly, perfect credit significantly reduces the amount of interest expense you will have paid in your financial lifetime. That difference can be invested and turned into real wealth at retirement, and adds immeasurably to your quality of life.

And let's face it, perfect credit is less stressful. Once you have achieved perfect credit by paying your bills on time and reducing your debt to a minimum, you will breathe easier and have a much greater sense of financial security. It's definitely worth it.

“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of their property until their children will wake up homeless on the continent their fathers conquered.” ~Thomas Jefferson

The Get Out of Debt Book

Page 106

Chapter 10 Mortgage Acceleration Programs

“Whatever you can do or dream, you can begin it. Boldness has genius, magic and power in it. Begin it now.�

-Goethe

We hope you have learned in the previous chapters that debt is bad for your financial wealth. Will Green, the founder of the National Alliance for a Debt Free America, likes to tell a story about cigarettes, a specific brand of cigarette of which he used to smoke two to three packs a day. One morning, Will got mad at his cigarettes. Real mad. Will got so mad that he flipped his cigarette in the toilet and quit smoking right then - right there! Mad was a good thing!

This is what our goal has been in offering to educate you about the impact of debt on your financial future. We want you to get really mad at debt. We want you to hate debt. Now we want to show you how to quit this bad habit and get rid of debt.

Although mortgage debt isn't as destructive to your long term financial plans as consumer debt, mortgage debt represents the biggest debt most people will ever have in their lifetime. Mortgage interest is without a doubt the largest financial expense any of us will incur in our lifetimes.

What is even more significant, the bank or lending institution owns your home until you have paid back the very last penny of the principle owed to them. For certain there are alternatives and legal means to prevent it, but foreclosure is still an ugly word. We all know better than to miss a mortgage payment on our homes.

The Get Out of Debt Book

Page 107

“Banking was conceived in iniquity and was born in sin. The Bankers own the earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again.

However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of Bankers and pay the cost of your own slavery, let them continue to create deposits.� ~Sir Josiah Stamp

There can be no freedom where there is debt. Our goals are freedom from mortgage debt for all Americans, and educating people on how to build real wealth. We believe that owning your own home free and clear of mortgage debt is the cornerstone, a prerequisite for financial freedom.

As you build wealth there may be times when holding a mortgage on a piece of real estate is to your advantage, but no family can really be financially independent or wealthy when the roof over their heads is owned by someone else.

When you and your family are free and clear of mortgage debt it goes beyond a sense of security and financial freedom; it ensures a better future. Equity continues to build in your home as the years go by and as property values appreciate. When you plan your retirement, or make college plans for your children, you can look to your home as source of wealth for the future and a sense of security for the present.

Another advantage of freedom from debt is security against unexpected emergencies due to health or family problems. When your home is free of mortgage debt, you have options and choices denied to those who are debt burdened.

The Get Out of Debt Book

Page 108

The question most people ask is "How?" How do I get to enjoy debt free living when there is so much debt? Everyone has it and no one pays it off completely. We all have credit cards, and refinancing seems to be the latest rage. We've gotten so used to having debt that we have almost forgotten that there is such a thing as debt free living.

Let's look at some of the ways you can cut back on the amount of debt you will ultimately have in the years to come.

Back in Chapter 3 we introduced the concept of amortization. Amortization is a good thing. It is the fundamental reason why American families are able to purchase the home of their dreams and live in that home for their entire lives if they wish.

Amortization allows people of ordinary means to purchase real estate, to buy a home for their families and to feel secure in their sense of home ownership when it wouldn't otherwise be possible. Amortization means that you can borrow a large sum of money and make relatively small payments over a long period of time.

Just to refresh your memory, an amortization schedule looks like this:

The Get Out of Debt Book

Page 109

Principle borrowed: $100,000.00 Annual Payments: 12 Total Payments: 360 (30 years) Annual interest rate: 8.00% Regular Payment amount: $733.76 Total Payments: $264,153.60 Total Interest Paid: $164,153.60 Interest as percentage of Principle: 164.154% Pmt

Cumulative Cumulative Principle Interest

Principle Balance

666.67 666.22 665.77 665.32 664.86 664.40 663.94

$ $ $ $ $ $ $

67.09 134.63 202.62 271.06 339.96 409.32 479.14

$ $ $ $ $ $ $

666.67 1,332.89 1,998.66 2,663.98 3,328.84 3,993.24 4,657.18

$ $ $ $ $ $ $

99,932.91 99,865.37 99,797.38 99,728.94 99,660.04 99,590.68 99,520.86

Principle Interest

1 2 3 4 5 6 7

$ $ $ $ $ $ $

67.09 67.54 67.99 68.44 68.90 69.36 69.82

$ $ $ $ $ $ $

10

$ 71.23

$ 662.53

$

691.42

$

6,646.18 $

99,308.58

15

$ 73.63

$ 660.13

$

1,054.74

$

9,951.66 $

98,945.26

20

$ 76.12

$ 657.64

$

1,430.34

$

13,244.86 $

98,569.66

30

$ 81.35

$ 652.41

$

2,220.03

$

19,792.77 $

97,779.97

40

$ 86.94

$ 646.82

$

3,063.96

$

26,286.44 $

96,936.04

50

$ 92.91

$ 640.85

$

3,965.89

$

32,722.11 $

96,034.11

60

$ 99.30

$ 634.46

$

4,929.79

$

39,095.81 $

95,070.21

120

$ 147.94

$ 585.82

$ 12,274.48

$

75,776.72 $

87,725.52

180

$ 220.40

$ 513.36

$ 23,216.81

$

108,859.99

$

76,783.19

240

$ 328.37

$ 405.39

$ 39,519.33

$

136,583.07

$

60,480.67

300

$ 489.22

$ 244.54

$ 63,807.51

$

156,320.49

$

36,192.49

360

*735.72

$

$ 100,000.00 $

164,160.46

$

4.90

-

The Get Out of Debt Book

Page 110

As you can see, this is a 30 year loan and there are 360 payments. At the end, $164,160.46 has been paid as interest for a loan principle of $100,000. This is a total of $264,160.46 in payments.

How Acceleration Works

Look at the numbers for the first 20 payments. There is very little change in the amounts of principle being paid. Nor is there a significant change in the amount of interest being paid to the bank. It is also true that the amount of principle being paid is relatively small, only $76.12 a month even after 20 months of payments. That's almost two years. It goes on like that for a quite a while. After 5 years, or 60 months, the principal portion of the payment is only up to $99.30 a month.

It makes good sense that for every extra $100 or so you pay to the bank against the principle of your mortgage, you can potentially save nearly one whole month's payment at the end of your mortgage. Paying an extra $100 every month will take years off the term of the loan.

What most people fail to recognize is that your only obligation is to pay back the principle. That’s the amount of money you actually borrowed in the first place. Just because it’s called a 30 year mortgage doesn’t mean that you are obligated to pay interest for 30 years!

The fact is you have a choice; a very important choice that will have a profound effect on your wealth.

In our example, for every extra $100 paid against principle one month’s payment is saved at the end of the term. Twelve such payments save a year of payments. If your

The Get Out of Debt Book

Page 111

payments are $733.36 as in the example above, for every $100 paid beyond the normal mortgage payment, there will be a savings of one payment of $733.36 at the end of the mortgage. That’s over a seven to one return on your investment! Over a 700% return, better than the stock market!

This example is only strictly true if you are at or near the beginning of a 30 year mortgage, but do not despair! The truth is no matter how many years you are into your mortgage, there are distinct advantages to an accelerated payment plan. These benefits are of tremendous benefit to you.

In order to fully understand the implications to your wealth, an amortization schedule for your particular mortgage is needed. Why? Because a careful examination of the amortization schedule specific to your mortgage will reveal the dollars and cents advantages to your long term financial future. Then you can decide how much you want to accelerate your mortgage principle payments and you’ll know why you are doing it.

Some banks call these kinds of programs "Accelerated Equity," "Accelerated Mortgage," or "Accelerated Payment Options" and other similar names.

Often banks and institutions will charge for the privilege of using an accelerated payment plan, so you need to check with your mortgage lender to find out specifically how this will work for you. At the end of this book we will offer you a course that will totally educate you in mortgage debt and save you thousands of dollars in interest payments.

The Get Out of Debt Book

Page 112

Accelerated bi-weekly

Here is an example of how the accelerated payment option works:

Assuming a monthly payment of $1,000 you would make payments totaling $12,000 in a year.

If you select a regular bi-weekly payment schedule, the following calculations would apply:

$1,000 (monthly payment) x 12 months per year = $461.54 bi-weekly 26 payments per year

Since there are 52 weeks in a year, you would make 26 payments. Each payment is one half of a regular monthly payment or $461.54.

$461.54 payment x 26 payments = $13,000 per year paid towards your mortgage instead of $12,000.

What it boils down to is this: when you make a half payment every two weeks you end up paying a little more each calendar month. That increment adds up to one full payment at the end of the year. By making an extra payment each year, you take several years off the term of your mortgage. It is simple, and it is easy.

On the next page is a chart that shows you how much more quickly you can pay off the principle on a $100,000 mortgage at 8% with a bi-weekly plan.

The Get Out of Debt Book

Page 113

Mortgage Comparison Principle Remaining

Year# 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Standard $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

99164.64 98259.94 97280.15 96219.04 95069.86 93825.29 92477.43 91017.7 89436.81 87724.7 85870.5 83862.39 81687.61 79332.33 76781.56 74019.08 71027.31 67787.23 64278.22 60477.96 56362.29 51905.02 47077.79 41849.91 36188.12 30056.4 23415.75 16223.93 8435.20 0.00

Biweekly $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $

98372.15 96609.41 94700.62 92633.67 90395.45 87971.78 85347.28 82505.33 79427.89 76095.47 72486.92 68579.38 64348.06 59766.15 54804.58 49431.9 43614.06 37314.15 30492.25 23105.09 15105.85 6443.80 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

The Get Out of Debt Book

Page 114

Many mortgage lenders have no penalties or restrictions for making extra principle payments other than simply writing out a separate check and marking it "payment against principle." But, you must absolutely know for certain what the exact procedures are that are specific to your mortgage and lender. Contact your lender and ask about their rules.

How many weeks you take off the term of your mortgage ultimately depends on the initial term of your mortgage, the principle balance, the interest rate and the amount of principle you pay as an accelerated payment.

Generally speaking you can expect to take seven to nine years off of a thirty year loan simply by using a bi-weekly plan, but just as significant is the amount of interest expense you don't have to pay.

Monthly

Loan Term

360 months

Total Interest Paid $164,149.22

Interest Saved

Bi-Weekly

594 pmts = 274.2mos

$117,848.46

$46,300.76

Loan Term Will be Shortened By: 85.8 months

As you can see, the savings are considerable; over $46,000 in interest. Not to mention that you will own your home more than 7 years earlier, or in about 23 years instead of 30. That's seven years of financial security and independence from a very small monthly increase in your mortgage payment!

The Get Out of Debt Book

Page 115

If you will recall our discussion of compound interest and the golf story, you will recognize that this is again about the time value of money and compound interest, but it's working in reverse. It's the lender who is compounding and you are making the payments. When you shorten the curve, you save compound interest expense that would otherwise work against you.

Accelerated "Plus 10" Program -

A "Plus 10" accelerated mortgage program is similar to a bi-weekly in that you are paying extra principle. Some people just go ahead and send in whatever extra they can manage without giving it too much thought. The problem with this is that it is inconsistent, there's no plan, and you will probably not keep it up for the duration of your mortgage.

With a "Plus 10" plan you decide how much more you can pay on your mortgage each month. You make a commitment. In this example, the "10" means 10%. So if your mortgage payment is $1,000 a month, "Plus 10," would calculate out to $1,100 a month, or an additional $100.

When you commit to a “Plus 10� plan you can save even more interest, and become mortgage free months or even years earlier that you would with a bi-weekly plan.

Enhanced Plus 10 Programs -

Whenever you get a pay raise, or have an increase in your income, it is a good idea to put as much of that increase as you can towards the payment of debt, including mortgage debt.

The Get Out of Debt Book

Page 116

The benefit is obvious: a thirty year mortgage is paid off over your income earning years. Most people will find that they can easily increase their mortgage payment every few years because of increases in income. After some time "plus 10" can turn into "plus 20," "plus 50," and so on through the years. The key is to have a plan and stick to it -every time your income goes up, increase your payments accordingly.

The goal is to get out of debt and start building wealth as quickly as possible.

Lump Sum Accelerated Plans -

The “Lump Sum Plan� is yet another way to accelerate the payment of your mortgage principle to quickly build equity in your home. With this type of plan, you make an extra lump sum payment towards principle once a year.

Probably the easiest form of lump sum payment is to apply your federal tax refund to your mortgage. If you are going to deduct mortgage interest from your income tax, you will find that you are required to itemize all of your deductions in order to take the mortgage interest deduction. Although this can be a disadvantage for some taxpayers, there are excellent programs to help you keep track of tax deductions and itemized expenses. These techniques and strategies can give you a significant refund at the end of the tax year.

By applying your tax refund to your mortgage principle you can potentially pay your mortgage off many years earlier.

The ideal scenario is to use a bi-weekly or plus program in conjunction with a lump sum payment for optimum acceleration of your debt freedom plan. The National Alliance for a Debt Free America (NADFA) will show you several options in this

The Get Out of Debt Book

Page 117

area that you can use to your advantage. We will discuss these and other concepts in the next chapters.

Arguments for and against accelerated plans -

- You don't need someone's help to make extra payments on your mortgage.

True! It is also true, however, that you need to check with your lender to find out if there are any restrictions or requirements that you must meet. You must be wary of fees and charges for these kinds of payments. Some lenders charge a one time setup fee and monthly service fees.

Without a system of support and accountability, most people don't have the discipline to consistently make extra payments throughout the life of their mortgage and therefore miss out on the "time value of money" benefits.

- For tax reasons, you should carefully consider whether you want to pay off your mortgage.

False - the tax benefit of a mortgage interest deduction is largely unavailable to most taxpayers and is relatively insignificant when you consider the total picture. Keep your own money, the bank has enough! This has been discussed in Chapter 2.

- You shouldn’t pay off your mortgage with dollars that could be better invested in stocks, bonds, mutual funds, etc.

The Get Out of Debt Book

Page 118

Again, this is not true. Where else can you get a 1,000% return on your money? It is important to remember that the return on your investment is guaranteed when you invest in paying off your mortgage debt.

When you invest in paying off your mortgage debt, it is a certainty that you will get a return on those dollars in the form of saving tens of thousands of interest expense dollars that you have already committed to pay.

The Bottom Line:

Accelerated mortgage payment plans save you tens of thousands of dollars of interest expense, and you will enjoy the freedom and security that comes from owning your home free and clear. The mortgage interest dollars paid to a lender are a very significant portion of your lifetime financial expense. Without an accelerated plan, those interest dollars go to the lender and they never come back. They are lost to you forever.

Clearly the time value of money must be taken into consideration when you include an accelerated mortgage payment plan in your long term financial wealth building future. Very few people can get a guaranteed rate of return on investments lasting over many years and offering anywhere near the financial advantages of an accelerated mortgage payment plan.

The NADFA “Confront Your Debt� course will take you through several levels of exercises to explore the options for your specific situation. No matter what the numbers tell you, or how complex the analysis, it all comes down to the many thousands of interest dollars you will save, the peace of mind and sense of financial independence that comes from owning your home free and clear.

The Get Out of Debt Book

Page 119

Remember, the borrower is the slave of the lender. With the money you save, you will be able to add real assets to your wealth building plan. Every $1 you save equals $1.50 in before tax dollars. Want to reduce your taxes? Reduce your debt!

“The whole profit of the issuance of money has provided the capital of the great banking business as it exists today. Starting with nothing whatever of their own, they have got the whole world into their debt irredeemably, by a trick. This money comes into existence every time the banks ‘lend’ and disappears every time the debt is repaid to them. So that if industry tries to repay, the money of the nation disappears. This is what makes prosperity so ‘dangerous’ as it destroys money just when it is most needed and precipitates a slump. There is nothing left now for us but to get ever deeper and deeper into debt to the banking system in order to provide the increasing amounts of money the nation requires for its expansion and growth. An honest money system is the only alternative.” ~Frederick Soddy

The Get Out of Debt Book

Page 120

Chapter 11 Positioning In order to get out of debt, you need a system. Without a system to help you plan how to pay your debts, it could take several years, or even decades, longer than you had planned to become debt free. That translates into considerable money in interest needlessly paid to banks and lenders. In your lifetime, this can mean hundreds, or even thousands, of dollars of income that, instead of going to financial institutions, could have gone towards building wealth for your family’s future.

We want you to have the best chance to become totally debt free as quickly as possible. When you have a system in place, you aren’t at the mercy of your emotions, pressure from your spouse and distractions from your family or well meaning friends and co-workers.

The system we recommend is something called “positioning.” Positioning will give you a way to break your total debt load down into manageable chunks.

There are two main parts to positioning. The first part is to achieve financial stability. You can only stay on track with a debt payment plan that helps you to create and maintain stability. To do this, you must decide to stop spending money on anything that isn’t absolutely necessary. Baby food and medicine are necessary expenses; but going out to lunch every day is not. Instead, take your lunch to work with you. The average lunch costs $5.00, or $25.00 per 5 day work week. This comes to $1,300.00 per year that could be applied to your debts!

The second part of positioning is to optimize and prioritize your debts. Make a list of your debts, from most important to least important. This will help you pay off your entire debt load in the shortest amount of time.

The Get Out of Debt Book

Page 121

Different kinds of debt represent the pieces of the system, and recognizing how they work for and against you is the key to getting out of debt as quickly as possible. As you will discover, each type of debt can have different effects on stability, optimization and prioritization. To really understand how positioning works, lets take a look at the three types of debt.

Revolving Debt

Revolving debt is defined as that which comes from credit cards, department store credit accounts and lines of credit.

This type of debt is difficult to budget because it increases disproportionately when you make a purchase on the account. Your monthly bill reflects a minimum payment, but you can pay more than the minimum, or even pay off the full amount.

As you make more payments and reduce your balance below your credit limit, you can charge more purchases against the account. This is why it is called “revolving” debt.

Whatever you buy, you cannot be certain how much you will be paying each month, because revolving accounts do not have a set payback schedule. Each subsequent purchase gets rolled into the existing balance. It doesn’t take many purchases for the balance to get surprisingly large.

The good news is that although additional purchases cause you to have a bigger balance to pay back, your monthly payment isn’t much higher. But this kind of “good news” can get you deeper into debt faster than you can imagine!

The Get Out of Debt Book

Page 122

Ninety percent of all credit card holders complain that it is difficult to get out of credit card debt, and one out of every five credit cards is maxed out, charged to its limit.

Remember, your monthly bill shows the minimum payment due. If you elect to make the minimum payment, you maximize the amount of interest expense, and this can theoretically take up to ten years to pay off a single purchase. There are no guidelines given by the credit card companies to suggest monthly payment amounts that would get you out of debt faster. Their profit comes from the interest you pay them. They don’t want you to pay your balance in full!

As an added liability, interest rates on this type of debt, especially credit cards, are generally much higher than any other form of debt. These factors make revolving debt the most expensive and the most difficult to control, and cause havoc and instability in any debt repayment plan.

Installment Debt

This is debt that comes from borrowing money to purchase big ticket items such as cars, furniture and appliances. You take out a loan for the purchase price, and make monthly payments of a fixed amount over a period of years until the principle balance is zero.

Installment debt is easy to budget because the monthly payments are always the same, for the life of the loan. These loans are usually amortized, just like a home loan. As a result, in the beginning, the payments cover mostly interest, with just a little bit going against principle. As you reach the halfway point, more is applied

The Get Out of Debt Book

Page 123

toward principle. If installment loans were not amortized, the first monthly payments would be huge, and most people would not be able to afford to make the purchase.

The finance charges are set at a specific interest rate, and typically do not change for the life of the loan. However, some installment debt has a variable interest rate, called an APR, which can cause the monthly payment amount to go up or down, corresponding to bank interest rates.

The good news about this type of debt is that once the loan is repaid, the account is closed, and you get clear title. You’re out of debt!

Mortgage Debt

This, of course, is the loan used to buy a home or other real estate. This type of loan is amortized to keep the monthly payments low over long periods of time, commonly 15, 20 or 30 years. The same as with installment debt, without amortization and low regular monthly payments, most people would not be able to buy their home.

Although his type of loan offers the lowest interest rates, and the payments are easy to budget, the total amount of interest paid over the life of the loan is greater with mortgage debt, because the price of a house is usually higher than other items you might purchase.

Mortgage debt usually offers the option of accelerated payments, which can save large amounts of interest expense over the life of the loan.

The Get Out of Debt Book

Page 124

Phase One – Get stability in your monthly debt repayment plan and avoid payment risk.

Nothing is more devastating to a debt repayment plan than to have your debt ratio or debt service load increase unexpectedly because you missed a payment or overlooked something. If you are blindsided by a substantial monthly increase on just one of your debts, it can put your entire plan in disarray and you could become discouraged and stop following your plan.

Once you commit to a plan, it is important that you stick to it over the long haul. But even the most dedicated of us can find commitments hard to keep when we are standing on financial quicksand. For that reason, take heed of the following points to avoid payment risk.

Step One – Pay down any credit cards or revolving accounts that are near your credit limit, to avoid risking over-limit fees and delinquencies. Going over your credit limit can devastate your plan. Not only are there service charges and penalty fees to pay, there is a good chance your interest rate will increase substantially. And it will stay high for a long time. Not only that, over-limit accounts will have a negative effect on your credit rating, which can make all of your interest rate charges higher over the long term. Make it priority number one to build a cushion of at least 10% of the credit limit on your cards by paying down maxed out cards.

Step Two – Always pay all accounts on time, even if it’s just the minimum payment. This prevents interest rate increases and late fees, and protects your credit score, too.

The Get Out of Debt Book

Page 125

Step Three – Keep all of your regular utility bills and recurring household monthly payments paid on time. If you miss a utility bill one month, that amount will be added to the amount due for the next month. The money to pay the bill will have to come from somewhere.

The double payment is not in your plan, and will create instability in your budget. If you miss two payments in a row, you will get “shut-off” notices. And if you miss three payments in a row, you will be without that utility until the balance on your account is paid in full. At that point, everyone makes the same choice: keep the lights on and the phone working, because they are more important than paying other debts. Needless to say, this devastates your plan. It’s much better to pay utility bills as they come in, the day the bill comes in the mail. That’s right, before the due date.

This will help you stay out of trouble. That way, if you come up short and need a cushion, you can delay payment of the next month’s bill until its due date.

Remember, our goal is budget stability.

Hint: It’s just as easy to keep the top half of your gas tank full as it is to keep the bottom half full. That way you never have to worry about running out of gas, and you have more time to find the cheapest prices!

Step Four – No new debt! Adding new charges to revolving accounts can have significant and disrupting effects on your monthly budget and debt repayment plan.

Monthly payment amounts can jump dramatically and cause even the minimum payment to increase to the point that you’re force to readjust your entire plan.

Hint: The average credit user will pay $450,000 in interest expense in their lifetime, and over 50% of that amount - $225,000 - is interest that could have

The Get Out of Debt Book

Page 126

easily been avoided! That same $225,000, if invested at a 10% compounded return, after 30 years becomes more than one million dollars!

Step Five – When you have a choice, pay off APR loans first. APR loans allow the interest rates, and your monthly payments, to increase if interest rates go up. This is payment risk that can mean havoc to budget stability and your debt repayment plan if you don’t have enough income to meet the challenge. In the future, you will want to avoid APR loans unless you know with absolute certainty you can pay back the entire principle quickly.

Phase Two – Optimize and Prioritize Your Debt Payments

Return to Chapter 6 to review and bring forward the amount of discretionary income you have available to pay debts. By now you should have created your Spending Plan to Effectively Eliminate Debt (SPEED) and you know with certainty how much money you can commit each month to pay down debts. “Discretionary” money is money you have left over after every monthly bill has been paid and allowances made for necessities.

Fill in the blank:

The amount of discretionary income I have committed to paying down debts each and every month is $_____________________.

The question now is how do you allocate your SPEED to optimize debt reduction?

The challenge is that with so many different kinds of debt all sorts of contradictions and conflicts come up for almost everyone.

The Get Out of Debt Book

Page 127

Which of these statements is (are) correct?

1. Higher interest rate debts, like credit cards, should be paid first because they are the most expensive form of debt you can have.

2. Installment debts that are anywhere in the early to middle portion of the term of the loan should be paid first because making extra principle payments up front can significantly reduce the total interest expense you pay.

3. Big ticket lifetime interest expense debts, like auto loans and mortgages, should be paid first because that most effectively reduces your total lifetime interest expense.

4. The most difficult to pay debts, like credit cards and revolving credit, should be paid first because that keeps you from incurring late fees, service charges and over limit-penalties.

5. Peace of mind and financial security are more important than a few dollars saved in interest expense.

The answer is they are all correct!

Step One – Optimize!

The only way to resolve the conflicting demands of each type of debt is to think of debt payment as a process. The most important objective in any process is to reduce any potential for bottlenecks and setbacks. We pretty much took care of those in Phase One – Get Stability in Your Monthly Debt Repayment Plan. Once you have

The Get Out of Debt Book

Page 128

stability in your debt repayment process, you can begin to look for ways to accelerate your overall debt repayment plan. That is our second objective – overall acceleration of debt repayment while minimizing lifetime interest expense paid (optimization).

The solution lies in the problem. You will remember that there are three basic categories of debt: revolving debt, installment debt and mortgage debt. Each of these has distinct characteristics, and there are specific advantages to paying off each type of debt. The question, then, is how to find the optimal debt repayment system.

Fortunately, the answer is quite simple:

The optimal solution in any process or system is to make incremental improvements in several areas while keeping long term goals in mind.

The following example illustrates how this works.

Since the concept of optimization originated with W. Edward Deming’s work in manufacturing, we will use for our example the process of making widgets. Let’s assume there are five steps in the widget-making process.

Step One – manufacture the individual parts Step Two – inventory the parts and store them for later assembly Step Three – build sub assemblies Step Four – final assembly of sub-assemblies into widgets Step Five – test and inspect the widgets

Let’s assume that each step takes the same amount of time, with 20% of the total time consumed assigned to each step:

The Get Out of Debt Book Step One

Step Two

20%

40%

Page 129

Step Three Step Four 60%

80%

Step Five 100%

If we were to increase productivity 100% in any one of the five steps, that would only give us a 20% increase in total productivity:

Step One

Step Two

40%

60%

Step Three Step Four 80%

100%

Step Five 120%

That means we made the parts twice as fast, a huge effort, and we got a mere 20% increase in production. Not bad, but thanks to the genius of W. Edward Deming, we know there is a better and more efficient way to get a bigger return with the same investment.

Now let’s refocus our effort. Let’s make four incremental improvements, increasing each of the first four steps by 5%. Watch what happens:

Step One

Step Two

25%

55%

Step Three Step Four 88%

113%

Step Five 135%

By increasing the productivity of four steps by 5% instead of one step by 20% we get a 35% overall improvement in production! This is the power of optimization.

You don’t have to understand the mathematics. All you have to remember is this one fundamental principle:

Making incremental improvements in several areas is more effective than a big improvement in any single area.

The Get Out of Debt Book

Page 130

Step Two – Prioritize!

Earlier, we recommended that you allocate portions of your discretionary income for the payment of debt principle to each of the three areas. Here is one example of how it might work:

Total discretionary income for payment of debt:

$100.00

Mortgage acceleration payments

$ 50.00

Revolving debt extra payments

$ 25.00

Installment debt extra payments

$ 25.00

This example shows that for every $100.00 you have in discretionary income to be applied to debt, $50.00 goes toward your mortgage, $25.00 goes to revolving debt and $25.00 goes to installment debt.

The above is only one example. You have to decide what works for you. Only you know the details of your individual and family finances, but the point is you may change the proportions you allocate to each category based on your needs. The important thing is that you begin working on all three areas for the most effective reduction in overall debt.

The amount of discretionary income I have committed to paying down debts each and every month is $_____________________.

Monthly Mortgage Acceleration Payment

$___________________

Monthly Revolving Debt Extra Payment

$___________________

Monthly Installment Debt Extra Payment

$___________________

The Get Out of Debt Book

Page 131

Prioritization Within Types of Debt

Revolving debt and credit card debt.

These represent some special situations because of the impact on your credit score and the complexity resulting from having many different accounts. When you pay down on revolving debt, remember the following:

1. Pay off accounts with small balances first, especially if you have too many open accounts.

2. Pay off newest debt first. This will help maintain your credit history with the older, more established accounts.

3. Pay off high interest accounts first. They cost you the most in interest expense.

One method many people find works well for them is the avalanche, or snowball, method. With this technique, you pay off the accounts with the smallest balances first. Then you add the money you were paying on those accounts to the amount you were already paying on the next largest balance. As time goes by, you create a “snowball” effect, because every closed account gives you more money to pay on the account with the next highest balance. There is no mathematical advantage to this technique, but it feels so good when you win by paying one off!

If you prefer, you can take a more balanced approach and use the principle of optimization. Distribute the money you have allocated to each account within each type of credit. It won’t hurt to pay more against an account with a higher interest

The Get Out of Debt Book

Page 132

rate, or to get rid of an account that you have bad feelings about, but using an optimized plan with prioritization as outlined above will prove to be most effective.

Installment Debt

Just as you did with revolving debt, use optimization with prioritization. It works the same way. The snowball effect doesn’t work as well here, because these are bigger balances paid over longer periods of time, and you don’t get the psychological boost from a win nearly as often. You may have to work several months or years to get even the smallest installment debt paid off, especially loans such as those used for buying or leasing a vehicle.

Instead, we would like to offer you another option for installment debt. We will use a vehicle loan for the example. Let’s say you have a car that is three years old and you are 30 months into a 60 month installment loan on it. You are finally getting to the time when the payments are becoming mostly principle. If you have the money available, you might want to pay the loan off in full simply to be rid of it. It wouldn’t be financially helpful to pay the loan off in full at this point, however, because you wouldn’t realize any interest expense savings.

Our recommendation is to continue to pay the loan off by making regular monthly payments, so that any extra money you have can be applied to other debts, rather than being used to pay off this loan. Then, when the vehicle is paid for, keep it for five, or ten, more years instead of buying a new one!

The advantage here is that for the next five years or more, you have the money you would be paying on a new vehicle available for other applications. You can allocate it to be paid against your other debts, or even make monthly deposits, in the same

The Get Out of Debt Book

Page 133

amount as the vehicle payments, into an investment account. At the end of five years, you would have enough for a down payment on a rental property, or an investment in a business opportunity.

At the end of the five years, if you so choose, you can buy a new car or truck, and again start making installment payments. Yes, this is new debt, but if you are investing for five years every time you buy a new vehicle and producing a stream of income, it works out to your benefit. After thirty years of doing this, you would have bought three new vehicles and would also have had money to invest in three real estate rental properties. At some point, the income from your rental properties will be more than enough to make the payments on your next vehicle!

Mortgage Debt

We believe that mortgage debt should receive the highest accelerated payment priority, because of all the reasons we have discussed in this book. Your home is so important that your mortgage payments should come first, before any other debt service.

If you don’t have enough discretionary income to cover monthly minimums on all your debts, your house payment should come first; then your car payment, food, utilities, and the other payments that are necessary to provide your family with food and shelter.

You must have a home to live in, transportation to go to your job, and food to eat.

These are the barest essentials. After these expenses are taken care of, if there is money available to be allocated toward revolving debt, it can be serviced.

The Get Out of Debt Book

Page 134

Chapter 12 A Word From Will Green, Founder and CEO of The National Alliance for a Debt Free America

”If a person gets his attitude toward money straight, it will help straighten out almost every other area in his life.”

- Bill Graham

At the end of each month, the big conflict for many couples is over money spent on something outside of the budget. We get thrown off balance financially and that's when we have a problem. Many of us live from month to month, and we don't believe we have a lot of choice about that. It's just the way it is. We have a home and we have a family to feed, clothe, and educate. The fact is, we are all finding it's getting harder and harder to make ends meet with what we have. And it’s certainly not showing any signs of getting easier.

We’re in this situation because we have debts. This debt isn't the kind of debt that really benefits us a whole lot. This kind of debt is called consumption debt.

It is debt we take on when we buy our cars, furniture, clothing, food, medical needs, and all the things we want to buy but don’t have the cash to pay for. But we buy them anyway, with borrowed money. Credit card debt is borrowed money debt.

Instead of writing a check, we use a credit card. When we get our statement from the bank or credit card company, and if by some chance we actually open and read it, we notice that there is a balance. That balance shows us the total of how much we have spent. We really should pay it off, but we don't because something else comes up. That’s when the bank gets to charge us interest.

The Get Out of Debt Book

Page 135

Think of it as “rent” on the money we borrowed to buy the food we've already eaten. Now that's a problem. And it’s not a good feeling.

Almost 90% of the marriages that end in up in divorce court are marriages that have been destroyed by debt. When you consider that more than one out of every two marriages will end in divorce, that represents a lot of pain and suffering caused by getting into debt with no way out.

Debt itself causes a whole myriad of problems. Financial pressure creates stress and stress alone is the single largest cause of disease. Debt forces us to work longer and spend less time with our family and our partner. The truth is, Debt Sucks!

”Debt is like a crazy aunt we keep down in the basement. All of the neighbors know she is there, but nobody wants to talk about her.” ~Ross Perot

If finances are out of control, that causes tremendous pressure on a marriage.

There seems to be a general agreement that there is one thing that spouses want more of, and that is time with and attention from their mates. Even if both spouses are working full time just to pay off their debts, they still find those bills for the mortgage, the car payments, the utilities and the credit cards keep showing up in the mailbox. How are they ever going to have time to spend together, time that is necessary to have a happy marriage?

How can we get control of our finances when we have so much debt? As a nation, we have far and away the largest amount of personal debt of any country on the planet. The cost of living is growing and people spend

The Get Out of Debt Book

Page 136

beyond their means just to be able to keep up. There is no end in sight. We are plunging deeper and deeper into debt as individuals, and as a nation. It's a very serious problem. Just recently it was announced that consumer debt in America surpassed two trillion dollars. That's a two with twelve zeros after it!

$2,000,000,000,000.

And that is only consumer debt! And the interest expense on that debt is a staggering $80+ billion dollars annually. It_s a serious problem indeed! Over half of our tax dollars are used to pay the interest on our national debt! You and I are being punished by the irresponsibility of our elected officials regarding spending.

Debt is the number one cause of stress in America today. The whole purpose of the National Alliance for a Debt Free America is to teach you how to get control of your finances. When you get control of your finances, you get control of the rest of your life. We believe that just by eliminating mortgage debt, we can make a huge difference for families in America. When parents have more time for their children and more time for each other, that's a good thing.

�Make no mistake, my friend, it takes more than money to make men rich.� ~A. P. Gouthey: Quotes about Money

The reason that the founders created the National Alliance for a Debt Free America was because we all had the same problem. We all understood that the biggest problem we had, and that all the people we knew had as well, was debt. And the biggest debt that most of us have is mortgage debt.

The Get Out of Debt Book

Page 137

For example, as the Founder of NADFA, I have a mortgage on my home, a mortgage on my farm and a mortgage on the building where the National Alliance has its offices. The surprising thing is I grew up in a family that never owned a home. My dad taught at St. Alban's School in Washington, D.C., and the school always provided housing for our family as part of my dad’s compensation.

For me, renting was normal. As far as owning a home, my attitude was – “who cares?” The reality is that most of the wealth in this country comes from real estate. If you never own a house, then you never have an opportunity to develop equity through appreciation of your real estate investment. The wealth you create that way is very different from ordinary income. Every family should OWN a home!

"The highest use of capital is not to make more money, but to make money do more for the betterment of life."

-Henry Ford

I initially created this financial freedom program to get my own homes and buildings out of debt. I realized that if we could do just one thing to improve our lives, we should get ourselves out of mortgage debt. If we could pay off the mortgage on our home, that would cause a big improvement in our family’s welfare.

We wouldn't have to work so many hours, and our spouses wouldn't have to wait so long to the buy the things the family needs. I wanted to set an example for others to follow. This model will get our friends and loved ones out of mortgage debt too. It has to be so good that our closest friends will benefit as much as we do.

The Get Out of Debt Book

Page 138

I have personally done something that we recommend to some of you and do not recommend to others, and that is to roll a first and second mortgage into one mortgage. Then you can take some extra money out of the equity that has built up to pay off your credit card and consumer debt. That means that by refinancing we use some of the equity money to pay off credit cards that were at a much higher interest rate than the interest rate on our mortgage.

Now when we make a monthly mortgage payment we are paying much less than the total of what all of our payments were previously. The extra money goes directly to the reduction of the principle due, reducing the mortgage dramatically.

I now have just one monthly mortgage payment of $2,400 instead of payments on two mortgages, a first and a second, and payments on several credit cards. However, I know that out of that monthly $2,400 mortgage payment, the bank gets to keep about $2,000. This is the real cost of living in a nice home. This is money I will never see again.

That $2,000 represents the interest portion of the amortization schedule on my mortgage. The problem is that only about $350 a month is going to pay off principle, the actual money I borrowed.

I know that by making extra payments on principle I can really shorten the term of my mortgage. My goal is to be debt free as soon as possible. Was this a smart move? When I took out the new mortgage, I carefully checked the terms and conditions to make certain I could immediately begin an accelerated mortgage payment plan. I already knew exactly what I needed to do, and how to do it.

The Get Out of Debt Book

Page 139

Here is a sample of my amortization schedule for just the first 12 payments, in other words, for the first year:

Pmt

Principle

Interest

Cum Prin

Cum Interest Principle Bal

1

$ 398.20

$2,000.00

$ 398.20

$ 2,000.00

$ 399,601

2

$ 400.19

$1,998.01

$ 798.39

$ 3,998.01

$ 399,201

3

$ 402.19

$1,996.01

$ 1,200.58

$ 5,994.02

$ 398,799

4

$ 404.20

$1,994.00

$ 1,604.78

$ 7,988.02

$ 398,395

5

$ 406.22

$1,991.98

$ 2,011.00

$ 9,980.00

$ 397,989

6

$ 408.25

$1,989.95

$ 2,419.25

$11,969.95

$ 397,580

7

$ 410.30

$1,987.90

$ 2,829.55

$13,957.85

$ 397,170

8

$412.35

$1,985.85

$ 3,241.90

$15,943.70

$ 396,758

9

$ 414.41

$1,983.79

$ 3,656.31

$17,927.49

$ 396,343

10

$ 416.48

$1,981.72

$ 4,072.79

$19,909.21

$ 395,927

11

$ 418.56

$1,979.64

$ 4,491.35

$21,888.85

$ 395,508

12

$ 420.66

$1,977.54

$ 4,912.01

$23,866.39

$395,087

I sat down and figured out that I was still paying a whole lot of interest $2,000 to the bank in interest for the mortgage in the first month - and it didn_t seem to go down much for the rest of the year. Even worse, less than 1% of the principle balance would be paid off in the first year. Looking at the chart above, you will see that the reason is that the payments are mostly interest expense.

On the remaining credit cards I still was paying about $500 a month in interest, and my monthly car payment included about $660 in interest. I am in an upper income tax bracket, and that means I have to earn about $4,300 just to pay about $3,200 in interest expense every month.

The Get Out of Debt Book

Page 140

That put a lot of pressure on my family. If there was a way for me to get rid of most of my debt, and get my finances under control, how much do you think the quality of my family life would improve?

Let’s take a moment to look at your own situation. Let’s say that you are paying $1,200 a month on your mortgage, which is the national average. The truth is you have to earn more than $1,200 just make that payment. It probably takes about $1,700 to pay that $1,200 because you only have access to the money that is left after you pay your federal income taxes, social security tax and other state and local taxes. That means if you didn’t have to make that $1,200 mortgage payment, your income could be $1,700 less every month and you could still enjoy the same standard of living you have now.

If all of a sudden you didn’t have to earn that extra $1,700 every month, what would that mean to your family? Could you change careers and finally do something that you love instead of what you are doing now? Could one spouse leave a job they don’t like and stay home to raise the children? Or could one of you work part time while the children are in school and be there for them when they get home in the afternoon? Wouldn’t that be better than having to send them off to daycare?

“People who can least afford to pay rent, pay rent.

People who can most afford to pay rent, build up equity.”

- Arthur Bloch, Murphy's Law.

The Get Out of Debt Book

Page 141

Chapter 13 Confront Your Debt

”Putting off an easy thing makes it hard. Putting off a hard thing makes it impossible.” ~George Claude Lorimer

We all know that financial stress undermines our lives on many levels.

Relationships, health, well being… all suffer when there are severe financial pressures. If only we could be free from the financial pressures of life! What do you think it would be like to become free of the crushing burden of debt? The better we feel about ourselves, the healthier we are. When we are free of debt we have less stress. Can you imagine how much better life would be if all of your after tax income was yours to keep? You would have no credit card bills, no payments on auto loans, and no mortgage payments to make. Your lifestyle would be markedly improved.

It is possible to be free of debt, safe, and financially secure. Let_s take a journey toward financial freedom together.

With the “Confront Your Debt” course, we are going to give you dozens of ways to achieve financial freedom with the same income you are now earning. We are also going to show you ways to increase your income that are easy, fun and exciting.

You may attend the “Confront Your Debt” course in person as a participant in an intensive two day seminar, or you can go through our distance learning curriculum. The goal of this comprehensive learning experience is to re-program the way you think about money and debt. Our course will

The Get Out of Debt Book

Page 142

absolutely create a paradigm shift in your consciousness, and you will absolutely recognize debt as the seductive monster that it really is.

”A wise man does at once what the fool does finally.” ~Baltasar Gracian

Throughout this course, you will discover the consciousness you need to take control of your financial destiny. To own your life you must break free of the habits that confine you. To be truly free one must be debt free.

The “Confront Your Debt” course is fun because it teaches you simple secrets that increase your knowledge. You could very well find yourself growing on several levels: economically, emotionally, and spiritually.

“Time and money spent in helping men to do more for themselves is far better than mere giving.” ~Henry Ford

The “Confront Your Debt” course is divided into four sections.

The first section of the “Confront Your Debt” course invites you to gain a deeper understanding of our debt based culture. Our belief is that we can only deal with things that we truly understand. Understanding our debt based culture, and how we got to this place, is the first step towards financial freedom.

A written chapter is followed by an instructional DVD. You will discover how debt suppresses our creative abilities and inhibits the flow of abundance in

The Get Out of Debt Book

Page 143

our lives. It is fear that motivates us to resist better opportunities. Fear keeps us in jobs that do not fulfill or challenge us. Fear can be translated to…

False Expectations Appearing Real.

Fear is the opposite of faith.

The second section creates excitement. Here you will learn how a $100 investment today will save you $1,000 in the future. You will learn that there is an absolutely guaranteed way to get a 1000%+ return on an investment in your own debt.

Once you become aware of these principles, we’re certain you will agree that they are simple, common sense ideas. Your own copy of our proprietary software, filled with facts and figures you provide, will convince you that the results we promise are no exaggeration and are easily obtained. A second DVD follows to imprint these ideas into your right brain, the creative part of your mind. You will learn how to literally save tens of thousands of dollars from this one section alone.

The third section includes a CD with a spreadsheet you fill in with the data from the second section’s worksheets. Real time tracking will enable you to constantly monitor how you are doing on your financial freedom plan. You can track your success daily if you like and be certain that you are winning.

Section four of the course is for your sons and daughters, nieces and nephews. We’ve designed this DVD to speak to young people from ages 12 to 25.

You know your children should never be burdened by debt. By helping them to understand the hurt that debt brings, and the joy that wealth can create, you can

The Get Out of Debt Book

Page 144

ensure that they will be in a better position to lead our nation and our world into a better future.

My mentors include two billionaires, both of whom have third grade educations. The gifts from these mentors include these truths: that life is full of ideas, and the brains to accomplish those ideas can be rented for a modest salary; and knowledge is power, but only when acted upon.

"To accomplish great things, we must not only act, but also dream; not only plan, but also believe."

-Anatole France

When your dreams become your reality, commitment propels you forward to the completion of the task. With proper encouragement and a deep understanding of the fundamental principles of creating freedom from debt, you will find you can allow yourself to dream. Larger than life dreams can become your reality as your life grows to meet the challenges ahead. You actually create your own reality. Learn how to direct your life with ease to accomplish daily goals.

You will find that as you step into your life purpose, barriers disappear and opportunity presents itself in abundance. It’s up to you to take action.

Whatever you believe, you can achieve - with the proper support. We want to support the transformation of your dreams into actual and tangible reality.

We are here for you!

There is a story about twin brothers who, as most twins are, have been best friends for all of their lives, and who went through similar educational and life experiences during their growing-up years. Today, though, their lives couldn_t be more different.

One is wealthy and one is broke. One has riches beyond imagining while the other

The Get Out of Debt Book

Page 145

has been through bankruptcy more than once and is in trouble again. The differences in their lives exist because of decisions they have made along the way.

As you study the “Confront Your Debt” course, you will be shocked and amazed at how small decisions can make huge differences in our lives. You will undoubtedly find yourself faced with facts and options that will help you see the impact that even the smallest decisions can have on your life. Our goal is to help you make better decisions about your own future.

I wrote this book to encourage you to join me in becoming debt free. I also developed a plan to teach you how to become a Financial Freedom Coach, to help others end their debt by sharing the “Confront Your Debt” course with them, and in the meantime, take part in a very lucrative compensation program.

The Get Out of Debt Book

Page 146

Chapter 14

Add More Income to Your Life as a Financial Freedom Coach

”I sleep more soundly at night when there's money in the house than when there isn't.”

-P.K. Shaw

Why is it that some people earn $10 an hour and others with the same education and knowledge earn $50 an hour? It is probably not what you think.

In 1970, Max Sturman, a man from Richmond, Virginia, taught me how to sell real estate. The typical real estate sales person closes an average of one or two sales per month. Thanks to Max, during my first year I closed 119 home sales, or just one less than 10 per month. From then on every job I had was a breeze. How would you like to learn what Max taught me? The secret is revealed in the “Confront Your Debt" course.

Would you like to be able to work three weeks a month and earn more than you do now? Earning money and accumulating money are two very different things. We want to share a new perspective on both. Creating wealth is easier than you can imagine.

In order to win any game, one must know the rules. Mastering the rules increases ones chances of winning. Money is a big part of life’s game and your relationship with money will determine how much of it you accumulate.

We live in a ’Show and Tell’ culture. The more toys we have the better we feel.

The Get Out of Debt Book

Page 147

Feeling good is quite important. Being out of debt and having more money will make you feel good! We want to add a large spare time income to your portfolio.

We are in need of independent Financial Freedom Coaches (Mortgage Fixers) to share our story with their friends, neighbors and relatives. Mortgage Fixers have the exclusive wholesale marketing rights to market all distance learning courses of the National Alliance for a Debt Free America, Inc. (NADFA) and the IMA Group, Inc.

The opportunity is available to everyone age 18 and older. Mortgage Fixers register as independent distributors with the National Association of Mortgage Fixers, Inc. Once registered, they may purchase educational courses available from NADFA and the IMA Group at wholesale prices, and resell them at retail.

When we created the National Alliance for a Debt Free America, we were faced with a very important question: What is the fastest way for us educate the most people about NADFA? We chose genealogy marketing because it has the potential to get an idea across the country more quickly than any other method. Today over 40,000,000 Americans are or have been involved in genealogy marketing. Harvard Business School even teaches these marketing concepts in its MBA program.

We believe that those who do the work should be duly compensated. Genealogy marketing is the best way for all concerned to be able to quickly begin earning a large income, without having to invest a lot of money. In fact, if you choose to, you may begin with a start-up cost of $ZERO. You can give it a try and see if the business is a comfortable fit for you, with no risk.

One of the most often perceived problems with the genealogy marketing concept is that you have to sell, sell, sell. As a Mortgage Fixer, all you have to do is ask these

The Get Out of Debt Book

Page 148

simple questions: “If you could learn how to benefit by over 100 times the cost, would you pay $1,000 for this knowledge” “If you could save over $100,000 on what you are already spending, would you pay $1,000 to learn how” “If you are buying your home and can learn how to do both, would you pay the tuition fee of $1,499 for this education?”

When they express interest, all you have to do is send them to the website we provide for you. When they learn about the National Association of Mortgage Fixers, Inc., and decide to take advantage of the many benefits available to them, all the rest – their registration, tracking the sale and making sure you get paid – is done automatically.

Financial Freedom Coaches (Mortgage Fixers) complete a comprehensive marketing course that teaches them, step by step, how to help others get out of debt. The course includes several separate curricula, taught by nationally recognized leaders in the fields of sales, marketing and management. Our optional Financial Freedom Tool Box is offered to Financial Freedom Coaches to help them absolutely master their knowledge of debt and all of its implications.

Looking at the economic conditions around us, one can see that there are problems and uncertainty. Debt is on its way to destroying our country. Debt may be destroying your family. We think there is some urgency to people getting out of debt now. The best way to protect our families is to own our real assets and live debt free.

We all need help getting out of debt. It is much easier to become debt free when we work toward that goal together, instead of having to try to do it alone. Together we are a formidable force. It has been said that two people of like mind have the power of ten. How much more power do hundreds, or even thousands, have? Join us as a

The Get Out of Debt Book

Page 149

member of our family. We need your intelligence and abilities as much as you need ours!

With our encouragement and support, your success is assured. Wealth and prosperity are indiscriminate and do not care who owns them. Success is yours at the point you decide to own it. With your drive and determination, you already have what it takes to succeed!

Come learn with us! At the National Alliance for a Debt Free America, our intent is to help one million families become debt free over the next decade.

We really do need your help to set your friends and loved ones free from the crushing burden of debt!

We will give you the knowledge you need to GET OUT OF DEBT! Become a Mortgage Fixer! Change your life and the lives of those you love!

Remember this quote from an earlier chapter? This should be you and me! ”The most substantial people are the most frugal, and make the least show, and live at the least expense.”

Francis Moore

The lessons you have learned in these pages are really just the beginning. We urge you to order the “Confront Your Debt” course now, while you are determined to get out of debt. It is available from the Mortgage Fixer (Financial Freedom Coach) who offered this book to you or from NADFA at www.nadfa.org, for your own private use, at the full retail price.

The Get Out of Debt Book

Page 150

To purchase the course at wholesale, and help us coach your friends and loved ones, contact the Financial Freedom Coach who gave you this book, or find a Mortgage Fixer in your local area at www.themortgagefixers.com.

To learn more about becoming a Mortgage Fixer, (Financial Freedom Coach) contact the Mortgage Fixer who gave you the free Get Out Of Debt Book, or visit www.themortgagefixers.com to find a Mortgage Fixer in your local area.

To better understand why genealogy marketing is a great way to get out of debt, you may order ‘The Taxman Shakedown’ video at the end of this book. We are giving it away free. You just pay $10 shipping and handling.

”A man’s true value is the good he does in this world.”

Bendixline

Our next book will teach you some of life’s simplest lessons from a child’s point of view. The title is “The Spend Your Way To Wealth Book”. As you read the true stories presented here, you will see yourself in some of them. Publication is projected for December 1, 2004.

Be looking for it at www.thespendyourwaytowealthbook.com.