This episode starts with the obvious, which unfortunately nowadays is not as obvious perhaps. The best way to deal with debt is to not incur it in the first place. It is still doable, even in developed countries like the U.S.! That said, Personal Finance Cat believes that good debt is still O.K., or even good, to incur, because of the power of leverage. The below is an example of using $100,000 to purchase real estate using all cash v.s. with debt, which shows the mathematics of why the latter gives you higher cash on cash returns.

All Cash With Debt

Price per unit 100,000. 100,000

# of units purchased 1 5

Rent per unit per month 1000 1000

Expenses per unit per month 300 300

Mortgage per unit per month 0 429.5

Net cash flow per unit 700 270.5

Total cash flow 700 1,352.7

Cash on cash return (annual) 8.4% 16.2%

Assumptions:

1. 20% down payment
2. 5% annual interest rate and 30 years term for mortgage
3. No closing cost (or seller pays for closing cost)

As you can see, using leverage almost doubles your rate of return!

Anyway, let's get into the 5 tips to pay down bad debts.

1. Live below your means.
2. Find alternatives for expensive items such as housing.
3. Earmark bonuses and other “windfall” money to pay debt.
4. Increase your income.
5. Delay gratification.