 Good day fellow investors and welcome to Investing Motivation Monday. Today we're going to discuss five steps how to get out of bad debt and get onto the wealth creation path. I'm going to do that by taking the example of Adam. He's in his 20s from Ember Philadelphia and he has asked me to help him with his personal financial situation. His quick details, his income, his debt, a lot of student debt here. We're going to go through that and then on how to pay that back and how to start investing. His question is should he start investing more or should he pay down his debt? Well, the first question I asked is what's the interest on the debt? What's the expected return on his investments? How does he feel about the debt and does he plan to own a house? So I thought that a lot of my viewers will be in a similar situation. Young viewers, student debt is starting just starting to invest and would like to know okay what to do and most importantly how to approach such a situation. Further, started college when I was 16 years old, naively took huge debt to pay for that college, hoped for a higher income which was just 35 gross for the first five years of work. Now there is a promotion with a 60k income but okay looking on the debt, student loans on average 5.76, personal loan 9.5 on 16,000, car loan 6, credit cards 14.4% on 4000 and one card zero but then 23% huge interest rates. The investments are 2k in a 401k and 1k in the stock market just playing to learn how it really works. The personal feeling that debt is crushing, plans to own a house but seems crazy, lives in Embler Philadelphia as I said, rent about 700 with his girlfriend 1100 for one bedroom apartment, builds utilities, groceries, gas, debt payments and now the question is what to do? Let's start with the five steps. First, setting a goal. What do you want in life? When you have a goal everything is easier and I went to look on Zillow to see what's there in Embler Philadelphia. I found just randomly this house, free bedroom, bathrooms, expected mortgage 961 per month on a 48,000 down payment. Now you might say Sven, we are 80,000 in debt. How can we get, how can we dream of getting to 50,000 to get a down payment? Well I think that in finance and especially in personal finance, you get what you focus on. If you focus on getting the 50,000 down payment and getting rid of the debt you will find ways which leads me to the next steps. But before that let me elaborate on the house. 1100 on rent, what happens with that? Have you ever had your landlord call you and say, dear Sven, I'm going to lower your rent because I like you or because there is a recession? No. What happens is that each year the rent goes up, up, up, up, up and up. And if you find yourself renting over 30 years, there is a high probability that the rent will be going up to 3% alongside inflation for those 40 years. If you take a fixed rate interest rate mortgage now for 40 years there is one guarantee. The payment will be 961 for all the 40 years plus you might get some tax deductments. I don't know where you live. So on one side you have a house that will probably increase in value, ups and downs there will be but will be in the long term higher probably and fixed payments and you have rent that will constantly increase alongside your income. But I prefer to be in the owner's zone in this case when the rent owning is similar. Second step, how to get to having your debt paid and having the down payment? Well, should you invest in stocks or should you pay the debt? It's very easy. You look at the price earnings ratio of the stocks you are investing and you see that now it is around 25 for most good companies divide one by 25 and you get the earnings yield for the stocks. One by 25 is 4% and now we have seen the loans there 14% 23% 9% 6% which are extremely high interest rates. If you pay down your loan that's a 6% 20% 23% 14% return with no risk because you know you won't be paying that next year. If you invest in stocks that's a 4% long term return highly volatile, highly risky with a big possibility that the cumulative returns over the next 10 years will be negative. I will let you find your own answers. However, I would note that I would take 90% of the extra money to pay down the debt and 10% I would still invest it in stocks. Now you say Sven you're contradicting yourself. Well, yes, because the 10% is there to make it a habit because when you make it a habit over the long term you create wealth. So you start paying down your debt as soon as you have more money available you increase this 10% in stocks to 2040 and you will pay less or you will be left with lower interest rate debt which then you balance out with stocks. So that's two. Let's go to three. Number three and I think this is the favorite find an additional income. We live in an environment of huge opportunities. This YouTube channel is a crazy opportunity. I don't know you can start teaching if you have a college degree and some evening school. You can start something on Etsy. You can start something on Amazon. You can start editing, copying, writing something for other people, doing research, whatever. Today's world gives immense opportunities and if you dedicate I don't know two evenings or one Saturday a week to getting extra income I bet you that you can get to I don't know 500-1000 perhaps later or at the beginning 100 later 1000 dollars per month in extra income that will speed up the process of debt repayment. So think about focus about okay I want to repay my debt because the debt is such a huge burden that doesn't allow you to grow and create wealth because other people that have landed you the money are creating wealth. It's key to have good debt in the form of a mortgage at least or investment debt but that's more sophisticated. Let's first pay off the bad debt. Number three Richard Taylor and Shlomo Bernazzi two university professors have devised a very very interesting scheme and that's called Save More Later. Our friend from Philadelphia said that his income will grow two to three percent each year so without any pain you can simply say okay each two percent growth that I get increase in salary promotion that I get I will pay off my debt probably in two three years he will get a better job he will go from 60 to 90k and then without changing anything in your lifestyle you take the 30k and you pay off the debt and then your life shifts but let's see how that works with the two percent increases. So the first year you increase your repayments three percent on 50 000 what's net left you increase your payments by 1.5k second year it's already 3000 third year 4.6k fourth year 6.2k fifth year 7.8k goes to repayment of debt and if you do that each year with bigger even promotions your debt becomes repaid very very quickly and if you do it with your partner even better and then you get to that down payment for the house for starting creating wealth very very quickly. The last one is pay yourself first this is one that hurts and it's painful but it's the most efficient let's say that you say okay let me put 1300 dollars per month or 16 000 per year to repay the debt and then it quickly quickly accumulates and in three four years you are out of that and ready to save however that is 25 percent of the income that's a huge hit to the lifestyle and that's you have to wait where whether you're going to do that I prefer to increase your income rather than be frugal because this will give you more experience more power more long-term growth in life which is what drives you and really pushes you to the wealth creation frugality might lead to a good life but mostly it's a miserable life I read once an article about an investor that didn't want to buy electrical windows on his car because he was too frugal at 72 he regretted living such a life for the previous 70 years so you see where do you fit and how do you go about that the conclusion is that investing in stocks is just part and perhaps not even the primary part of our financial life cycle yes it's an important part but these personal finances are much more important because they allow you how much are you going to invest in stocks real estate paying off that that will drive you put you on the right trajectory for wealth creation and if you smartly approach those things you might repay your debts quickly get only good debt that will increase your wealth or the long term and really change completely how your life will look in 5 10 15 years the key is to do small things work one Saturday extra do something small things every week consistently over the next five years and you will see where you will end up and the second thing with personal finances it's always a fight between immediate gratification or delayed gratification by looking for additional income you are not so much delaying gratification you you still live your life as it is but your income grows but that income by saving more later when the income grows is directed to smart investments and high interest debt repayment thank you for watching i hope i have helped at least one of you with this if in five years you send me an email or a message when you have helped me a lot with this then my job has been done looking forward to your comments any questions do you like this discussion how do you think about personal debt or investments always love to hear your comments love to answer them click like if you like the content subscribe if you haven't and i'll see you tomorrow in the next video