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Written By Colin Graves

“Opportunity often comes disguised in the form of misfortune, or temporary defeat”

– Napoleon Hill

Your cloud of debt has a silver lining.

Do you have trouble believing that statement? It may depend on the current status of your relationship with debt.

Perhaps it’s way too involved, and your debt hovers over you like a dark cloud. If that’s the case, the information in this post will help you.

Alternatively, you may be farther along on your journey towards financial freedom. Your debt levels are under control, maybe you don’t owe anyone anything.  If so, that’s fantastic, but I encourage you to keep reading!  You can always use this information to help others; colleagues, friends or family members who may be struggling to manage their debt.

Where’s the FIRE?

If you’ve spent any length of time reading personal finance blogs, you’ve heard of the FIRE concept. The idea that by achieving Financial Independence, any person has the ability to Retire Early.

There are lot’s of FIRE guru’s out there, with the message that early retirement is attainable for anyone. The key, however, is to understand your ‘savings rate’.

Here’s how it works.

Simply put, the percentage of your net income you are able to invest in long term savings determines how many years it will take you to retire. The formula holds true regardless of your income level.

An example:

Family #1: Annual Net Income $100,000. By living on 1/2 of their income each year ($50,000), and saving the other 50K, this family can save enough money to retire, regardless of their age, in seventeen years. This assumes an annual return of investment (ROI) of 5%, which is reasonable within an equity portfolio. It is based on an annual 4% ‘safe withdrawal’ rate upon retirement, which would be enough to cover their $50,000 living expenses.

Family #2: Annual Net Income $60,000. By living on $30,000, and saving the remaining $30K, family #2 can also retire in 17 years, making the same assumptions of return, and safe withdrawal rate.

Of course, the family living on $30K has to make do with less.

That’s where the frugality guru’s come in.

Their message, of which I am a firm believer, is that by spending far less money on material possessions, families can afford to live on much lower income levels than society would have us believe. Furthermore, less money spent on things like luxury homes and fancy cars will lead to a happier, more stress free life. No more keeping up with the Joneses!

Financial Independence sounds pretty nice!

However, if you’re struggling just to make your payments, it’s hard to imagine living on 70% of your income, let alone 50%!

Herein lies the silver lining. There’s a good chance you already are.

To illustrate, let’s create a scenario of a family with a $5000 monthly income, and a very heavy debt load:

This family, let’s call them the Joneses, have a loan on a fancy new pick up truck and are also making payments on a couple of credit cards. They have a revolving line of credit balance that never seems to do just that, as well as a fairly significant consolidation loan. This is left over from the last time they tried to get their finances under control. Oh, and there’s the long-term loan for the 30-foot travel trailer. That is why they bought the truck, after all.

Because of all these payments, the Joneses can only manage to set aside $200 for long term savings, and even that feels like a stretch!

(For this illustration, we won’t include housing costs, just consumer debt).

Figure 1.

Monthly net income   $5000

Monthly savings             200

Consumer debt (excluding mortgage)
Truck Loan                      500 (amortized over 84 months)
Credit card                      200
Line of Credit                  300
Consol. Loan                   350
Loan, Camper                 150  (amortized over 20 years!)
Total debt payments  $1500/month

To summarize, after removing savings and debt payments from the equation, the Joneses really ARE living off of 66% of their income. It may not be their choice, but they’ve found a way to make it happen.

 $5000 income
–  1700 savings and debt payments
=$3300 ‘living’ income, 66% of overall net income.

Now for the opportunity.

If the Joneses are willing to make the lifestyle sacrifices necessary to pay off their consumer debt, and transfer the money spent on monthly debt payments directly into savings, they would create an immediate 34% savings rate!Every Cloud

We haven’t even taken into account the money they may be able to save
on other expenses such as their mortgage, groceries or dining out. There’s also fuel and other conveniences such as smartphones, cable, subscriptions etc.

It’s very possible that they could in due time they could move the 34% savings rate closer to 40%, or even 50%!

Think about your situation.

You may not have the debt load the Joneses have, but you may feel as though you’re unable to save nearly enough to someday achieve financial independence.

Try the same exercise.

Total up the payments you are making towards your consumer debt. Now imagine transferring all of this cashflow directly towards savings as soon as you’ve paid the debt.

To me, the thought is incredibly motivating, it’s the silver lining.  There is one caveat however:

You have to get serious about paying down your debt!


I’m going to leave you with that thought and some great news! In the next couple of weeks, I’ll be featuring another guest post from one of my favourite bloggers!

By the sounds of it, his post will pick up where this one leaves off, so stay tuned!

4 thoughts on “DEBT’S SILVER LINING”

  1. This is so true. When I was in debt, I lived on the minimum amount of money I could live on. I sent the rest to credit cards. Often I was short! Now that my debt is gone, I automatically save money every month. But it’s not as much as I used to pay in debt. Serious food for thought.

  2. This is awesome!

    I like how you break down how much we’re actually living on. Contrary to popular beliefs, 20 to 30% of our income doesn’t go to expenses — they go to debt.

    One of my favorite articles on personal finance in 2016 for sure. Keep it coming. I’m going to tweet this one.


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