How to Pay Off Debt and Get Rich in 20 Years

Once you’ve paid off all of your high-interest debt, you may wish to consider investing in dividend stocks like Royal Bank of Canada.

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Do you want to pay off debt and get rich in 20 years?

If so, you’ve got a long road ahead of you, but your goal can be achieved.

With 20 years of saving and debt repayment, it’s possible to get “rich” in the sense of having more money than most people. What exactly “rich” means to you is personal, but according to StatCan, the average Canadian family has $400,000 in home equity and $158,000 in liquid assets when the last of its breadwinners retires. With 20 years of saving and debt repayment, you can certainly beat $558,000 in net worth, and become “rich” in a relative sense. With that in mind, here is a simple three-step process to repay your debts and get relatively rich within 20 years.

Step 1: Debt consolidation

The first step in paying off your debt is to consolidate it. This is where you go to a debt specialist who agrees to pay off all of your high interest debts with a lower interest loan. Over time, this makes your debt less expensive and burdensome. It also allows you to pay off the debts more quickly, as the interest doesn’t pile up as quickly.

Here’s an example of how debt consolidation works. Let’s say Sally, a lawyer, has $50,000 in law school credit lines at 4% interest, and $20,000 in credit cards at 20% interest. With these rates, she is paying $6,000 per year in interest – $4,000 from the cards, and $2,000 from the student loans! Now, let’s imagine that Sally speaks with a debt consolidation expert, who agrees to pay off all of her loans, in exchange for her assuming a 3.5% loan. Suddenly, Sally’s $6,000 per year in interest turns into $2,450 per year – much more manageable. And because the interest component is smaller, Sally will be able to repay her principal more quickly than otherwise would have been possible.

Step 2: Diligent repayment

Once you’ve got your debt consolidated, it’s time to start re-paying it. This should be much easier after consolidation. First, you only have one bill to keep track of now instead of several. Second, if all goes well, you’ll be paying less in interest. Make sure you don’t just pay the minimum payment, but go above and beyond, getting the debt paid down within a reasonable timeframe.

Step 3: Invest

Once you’ve got your debt under control, it’s time to start investing. If your debt is relatively low interest, you can even prioritize investing over paying off debt, though you need to do a bit of both.

One stock you could consider investing in is Royal Bank of Canada (TSX:RY). If you’re struggling with debt, you probably know how efficient the big banks are at collecting money from you. With a stock like Royal Bank, you get some of those interest payments sent to you in the form of dividends.

Royal Bank of Canada stock has a lot of things going for it. Being a Canadian bank, it is well-regulated, and less subject to the risk of bank failures than U.S. banks are. For example, Canadian banks like RY have to maintain a minimum 11% CET1 ratio (tier 1 capital divided by risk-weighted assets), whereas U.S. banks only need 4.5%. This makes Canadian banks safer.

Second, Royal Bank of Canada stock is relatively cheap. Trading at 11.4 times earnings, 1.7 times book value and 4.4 times operating cash flow, it’s not as expensive as the broader stock market. For this reason, you collect a relatively high dividend yield (4.3%) on the stock despite it having a low payout ratio. Not the worst stock a person could hold by any stretch of the imagination.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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