Wealth Diva Certification. Tele-Class 4

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1 S Wealth Diva Certification Tele-Class 4

2 Managing Your LifeStyle Cycle Build your assets and then build your lifestyle. Loral Langemeier 2003 Live Out Loud, Inc Income Expenses Assets Liabilities Debt and Bad Debt A lifestyle cycle is a cycle of bad debt. It s a trap where you re caught in the cycle of using your income to increase your liabilities, which then increases your monthly expenses, and continues a cycle of liability, expense, liability expense... versus, using a model of creating income to assets, income to assets called a wealth cycle, which will be further defined in the next lesson. Before we go further into how to manage your lifestyle cycle and eliminate your debt, let s focus on a concept many don t quite understand, namely: good debt vs. bad debt. Good debt is debt that is acquired through the purchase of assets, assets that are then invested to produce passive income. Examples of good debt would be the subsequent mortgage on a rental property; a line of credit strategically sought to enhance the growth of your business (as long as you re building your business as an asset). For those who may be investors and are incurring good debt, be aware that you will reach a point in your growth where you debt ratios are such that it could be difficult to get lending. We find this happens with many real estate investors who purchase a certain number of homes and then their debt to equity ratios are such that they can t get lending. This is not a bad thing, it s just something you need to be aware of and at this level of wealth creation, the primary option you have is to start using other people s money. Creating Financial Literacy for Women Only 2

3 Bad debit is typically defined as consumer debt, or debt that doesn t allow you to produce any revenue from it (ie. credit cards, retail therapy, beauty aids, shoes) basically anything you can purchase later when you have assets). Symptoms of a Lifestyle Cycle is reflected in the following phraseology: How did I get here. I made more money when I was making $20K/year. I can t seem to hold onto it. I ll invest when I have a bunch of cash. The money comes in, the money goes out. A winfall s going to get me out of this debt problem. What is your lifestyle cycle conversation about money? What conditioning is encouraging this cycle? 3 Creating Financial Literacy for Women Only

4 Statistics of LifeStyle Cycle Statistics show that several things happen to people who are addicted to the lifecycle cycle. They: tend to cycle their credit cards (credit card roulette) refinance their home on a regular basis consolidate their debt claim bankruptcy never contemplate projecting where they really want to be and getting clear about a financial forecast or their financial future What are the habits that keep you addicted to your lifestyle cycle. In order for this exercise to be effective, complete and total honesty is required. Credit Card Roulette There is a term we use when people, in desperation, begin to cycle their credit cards... we call this credit card roulette. This is where a person takes a credit card with a really high interest (let s say 20%), finds another card with a lower interest rate (10%), and, with good intention, they transfer the debt they ve incurred on the 20% card and roll it over to the card with the lower interest rate. This wouldn t be a bad thing in itself, but, in our experience, what typically happens is the individual soon runs up the 20% credit card again and the vicious cycle perpetuates itself. Although this may appear to offer some temporary relief, in truth, it merely gives the person a false sense that they re in control of their problem. Unfortunately, they ve only addressed the effect of the problem and not the cause, which is... they re in the habit of spending more than they earn, with no way of paying their debt and are not in the habit of paying themselves first. Creating Financial Literacy for Women Only 4

5 Refinancing Your Home There are appropriate times to refinance your house as a way of consolidating your debt, yet too many people use this as a process of delaying the inevitable. In fact, statistically, those people who use this method of paying off their debt, are into the vicious cycle of clearing their debt, only to spend more by incurring more credit card debt... then having to refinance again. There s an inherent problem with this cycle: there comes a time where they will virtually use all of the equity they have built up in their home and will have put themselves in a position where they ll be forced to take on another full mortgage. Consolidating Your Debt There are companies (debt consolidators) who will take all of your debt, collapse it into one nice comfortable payment for you and then go back to your creditors and pay off your debt for you. You then make monthly payments on the debt until it is clear. The down side to this is that because you re making a lower monthly payment than you would if you hadn t consolidated the debt, in the long run you re paying less on the actual principal of the debt and more in interest. Bankruptcy When we think debt, many people think of bankruptcy and certainly, there seems to be an epidemic of bankruptcy in the North America today. Bankruptcy is not a solution. In fact, it shouldn t even be an option until such time as you have checked it out very thoroughly. Bankruptcy can seriously disrupt your life and ruin your credit history. It s also very possible that it won t get rid of all your debt. Make sure you know the facts before you consider this option. The typical types of bankruptcy are Chapter 7 and Chapter 13. Chapter 7 is referred to as a personal financial dissolution also known as a liquidation bankruptcy. Chapter 13 bankruptcy is a personal finance reorganization also known as wage-earner bankruptcy. If you are contemplating bankruptcy, please consider other options of debt elimination first and be sure to consult an attorney who specializes in bankruptcies. Credit Repair Many people who have gotten into consumer or bad debt will need to deal with credit repair. This is an interesting industry. There are many credible agencies who can really help and enhance your credit ethically and efficiently and just as many who can make it worse. Having a resource for credit repair can be invaluable and is a tool we offer as a service to our Live Out Loud coaching clients. 5 Creating Financial Literacy for Women Only

6 Having a Clear Financial Vision for Your Future Most people in debt rarely undertake the process of determining exactly where they are and where they d like to go financially. They re so caught up in their lifestyle cycle, they can t see their way through to a positive solution that will enable them to build wealth. The good news is that by employing some very basic yet diligent debt elimination processes, you can get out of this debt cycle within 3 to 7 years while starting to build your wealth cycle at the same time. The challenge for people is to be unemotional about the process. You need to commit to set the debt plan in place and allow it to work its magic. You need to atrophy your debt muscles and enhance your wealth cycle muscles. To atrophy your debt muscles, we want you to enact a debt elimination plan that will ensure you will be out of debt. While are doing that, you will also build some new habits of putting money into a wealth account every month starting NOW and start the process of building your first wealth cycle. Open Your First Wealth Account A wealth account is an account whose sole purpose is to build wealth; it is not a savings account. Whereas a savings account is designed to save your money at a very low interest, a wealth account typically is a brokerage account, trading account, money market account an account that you could convert your cash asset to purchasing an investment. The purpose behind this account is to force you to get into the habit of paying yourself first. Very few banks offer these accounts, you will need to seek out a brokerage firm or go online and research one. When the process we ve outlined above becomes a habit, wealth becomes possible. And the good thing is you don t have to wait. Even if you re in debt, a portion of all you earn can go into your wealth account... NOW. It may only be $20/month. It doesn t matter. The important thing is that you just need to get into the habit of doing this one thing. We encourage parents set up a wealth account for their children when they are born and begin conditioning their children to pay themselves first by having the child put a percentage of everything he or she earns into this account (ie. allowances, paper routes, etc.) Creating Financial Literacy for Women Only 6

7 Pay Myself First Commitment By I will open up my first wealth account with and will invest $ (company) per month. To be even more proactive, I will set up this wealth account as an auto debit account to ensure that it happens. Signature Date Ready, go... let s get rid of this debt. 7 Creating Financial Literacy for Women Only

8 Getting Out Of Debt If you are in debt, we strongly encourage you to follow our debt elimination process. Though there are many processes available, this is one way to eliminate consumer debt and allow you to live in abundance. This is a process that is similar to one used by John Burley in Automatic Wealth. A Five-Step Process In the previous chapter, we asked you to create your financial baseline and create a filing cabinet where you would keep all of your financial records. In so doing, it makes this process slightly easier to begin... immediately... because you ve done the groundwork and organized all of your consumer debt in advance. Step 1 In the boxes below, we want you to list all of your consumer debt (credit cards, loans... as previously described.) We ve given you an example and suggest you finish the exercise with your own consumer debt... inserting one debt in each box. VISA $7,000. $200. 9% 35 Creating Financial Literacy for Women Only 8

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10 Step 2 Divide the Total Amount of the debt by the Minimum Payment of each bad debt. This gives you a factoring number. Do this with every debt. $7, = 35 (Factoring Number) Step 3 Review all of your consumer debt listed on the previous two pages. Take the debt with the lowest factoring number and that will be your first priority in payoff. In the space provided, list the debt in order of the factoring number... with the lowest appearing in the number 1 spot and the debt with the highest factoring number in the number 8 spot. Priority Order of Payoff Name of Debt Factoring Number Min. Payment TOTAL DEBT PAYMENT: Step 4 We encourage you allocate $200 of your current spending to accelerate (jumpstart) your debt elimination plan. This will go a long way in eliminating your debt... really! Creating Financial Literacy for Women Only 10

11 Step 5 With your Priority Order of Payoff in tact, take the debt listed in the first spot and apply the $200 we asked you to allocate in Step 4 to the minimum payment listed with this debt. For instance, if your minimum payment is $350 and you add $200, you ll be paying a $550 payment on that debt until it s paid in full... all the while making minimum payments on each of the other bad debts you have listed. When you re finished paying off the debt in the number one spot, take the amount you were paying on the number 1 debt and add it to the minimum payment of the debt in the number two spot and so on until you totally eliminate all of your bad debt. You need to be very clear about the amount of money you will allocate to your debtelimination plan. Please fill in the blanks below. Total of Minimum Payments: $ Plus $ 200 Monthly Debt-Elimination Contribution: $ In the space provided, write a commitment statement to yourself about your debt elimination plan. Signature Date 11 Creating Financial Literacy for Women Only

12 What do you need to shift in your thinking so that you ensure you never end up in debt from this point forward? Now that I am debt-free and it is one year later, because I have paid myself first, I now have $ to invest. Creating Financial Literacy for Women Only 12

13 What are the 3 things I learned from this lesson? ACTION What 3 actions will I take as a result of this lesson? I will be accountable to whom? 13 Creating Financial Literacy for Women Only