Section 8: Investing Strategy - Decreasing Debt

<aside> 🗒️ In this section: we'll learn first how to decrease debt. We'll then cover the other key part of investing strategy (increasing your assets) in Section 9.

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<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/a84f7224-b53b-4f22-9793-290d50f3313f/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/a84f7224-b53b-4f22-9793-290d50f3313f/Favicon-simplify.png" width="40px" /> The key to creating and maintaining wealth is increasing your investments (assets) while decreasing your debts over time.

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<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/e25a31af-913c-46e9-9f98-1368bb0b822f/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/e25a31af-913c-46e9-9f98-1368bb0b822f/Favicon-simplify.png" width="40px" /> Debts are 🔑 to pay off because the monthly payments are expenses 👎. Once paid off, you can use that $$ to save and invest 👍.

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The 🔑 to wealth

Step 0: Understanding How Debt Slows Down the Money Flywheel 🎡 🙅🏻‍♂️

We added debt to the "Money Flywheel" from Section 6B below to show how it can slow your roll to building wealth. If you have debt, instead of extra money from saving going to enjoying what $$ can buy you, it goes to expenses (debt payments) and slows down the flywheel 😧.

Step 1: Label Your Debts as 'Good' or 'Bad'

First, put each debt you owe in either a "Good" bucket or a "Bad" bucket.

"Good" debt is money that you borrowed to buy something that can increase in value (otherwise known as a appreciating asset). For example, a home loan is a good example.
"Bad" debt is money that you borrowed to buy something that won't increase in value (otherwise known as a depreciating asset). Examples include student loan debt, credit card debt, or car loans.

Step 2: Order Your Bad Debts by Interest Rate

Bad debts are the ones we want to focus our energy to squash, so order your bad debts from highest to lowest by interest rate (how much the lender requires you to pay in penalty). For example, a $100 loan with a 10% annual interest rate requires you to pay $10 (100 * 10%) in penalty a year.

Step 3: Pay off your bad debts ASAP

As you can see from the demo below, debts with higher interest rates are more expensive to pay off because of the larger amounts of interest they generate.

<aside> <img src="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/8cd6332e-7bb6-4b8d-9031-a8676b22c70a/Favicon-simplify.png" alt="https://s3-us-west-2.amazonaws.com/secure.notion-static.com/8cd6332e-7bb6-4b8d-9031-a8676b22c70a/Favicon-simplify.png" width="40px" /> Pay off your debts with the highest interest rates first

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[How interest rates work and why paying off your highest interest rate loan first pays off! For those who want to play with this themselves, feel free to copy this spreadsheet.](https://www.loom.com/share/7fe74e8d150a4b998122ac9eb3e1b04f)

How interest rates work and why paying off your highest interest rate loan first pays off! For those who want to play with this themselves, feel free to copy this spreadsheet.

Here are some hacks for how to pay off other types of debt:

Paying off credit card debt 💳

Since credit card debt has the highest interest rates (15-20% 🤯), it's important you pay off your credit card bill in full every month. If you have existing credit card debt, any money you are saving should go to paying this off ASAP.