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Most of us have the dream of being debt free. To realize that dream, you must have a plan and sacrifice the things you want today. In other words, most people aren’t willing to sacrifice little luxuries such as eating out, fast food stops, trips to the ATM machines and losing track of where the money goes, entertainment, memberships to the gyms, expensive coffee breaks and so on in exchange for no debt.
By giving up some of the little luxuries you spend your money on, the money saved can be used to pay off your debts. If you counted every penny you spent for 30 days on every purchase you made and every bill that was paid, you would be surprised at where your money went. It will then be easy to cut back and use the money that you waste to pay your bills off. It may take several months or years to become debt free. Knowing you have a goal and a target date will help you meet your goal.
One man heard me on two separate occasions talking about getting out of debt. He purchased the book, The Insiders Guide to Managing Your Credit, and followed the guidelines to get out of debt. One year later he called in when I was on another radio show. He said that one year ago he was $15,000 in debt. But after purchasing my book and putting a plan together, he had reduced his debt to $2,500. It was rewarding for me to hear his testimony, but also a reinforcement showing how a plan could help almost anyone to become debt free.
Glen was self-employed and owed $45,000 in credit card debt. He owned his home and was paying an 11 percent interest rate on his mortgage.
Glen was self-employed and his income was inconsistent. When he called my office, he was distraught. He didn’t know how much longer he could hold on and make the payments on his credit cards and home. He thought by selling his home he could get enough money to pay off his debts and move into a cheaper home. Selling his home wasn’t what he really wanted to do because he had a young family and had lived in his home for more than ten years.
I had Glen list all of his monthly payments, including his credit card bills and house payment. They totaled $4,600 per month. Glen also indicated that he had fallen behind in some of his payments including his house payment during the past year. Everything was presently current; however, he didn’t know how long he could hold on.
I got an appraisal of what Glen’s house was worth and the amount of debt he had. I figured out that Glen could save $900 per month by refinancing his house at a lower rate and taking cash out to pay off all the credit card debts. (Because Glen had some problems on his credit report, his interest rate was slightly higher than a regular refinancing, but still lower than what he had been paying.)
Because Glen no longer had any credit card debt, I suggested that he add extra money to his house payment (marked “pay to principal”) so he could pay his house off in less than 30 years.
Glen was relieved that he didn’t have to sell his house and was able to save such a large amount per month. It took the pressure off him so he could build his business up.
SYMPTOMS OF TOO MUCH DEBT
Q. Is there a way to tell if you have too much debt? We are newlyweds and don’t want to fall into that trap. Any suggestions?
The best way to stay out of debt is to pay your credit cards bills off in full at the end of each month. People lose control by not keeping track of what they are charging.
Most people can afford to pay 10 percent of their net income to installment debt, not including their mortgage payments. If you pay out more than 15 percent to installment debt, you need to cut back. More than 20 percent being paid out to installment debt could result in financial problems. It is important to have a budget sheet that you fill out every month to make sure you are not paying out more than 10 percent of your income towards installment debt. If you are, make adjustments for the following month to reduce your debt.
It is important that both of you know exactly what is going on with your finances so there are no surprises. Review your budget sheet together once a month and try to live within your income.
MOVE YOUR HIGH-INTEREST CREDIT CARD BALANCES
Q. I have several credit cards that I am paying on. The interest rates range from 14 percent to 19 percent. I don‘t feel like I’ll ever get these cards paid off Are there any suggestions you could give me to get these debts paid off sooner?
The first thing you need to do is to make a list of all your credit cards. Include in your list the payment, balance, interest rate, and unused credit limit.
Once you have your list, analyze if you have room to move your balances from your high interest rate cards to your lower interest rate cards. If you do, take a cash advance and move the high interest rate balance to the lower interest rate card. For example if the credit card you have with 14 percent interest rate has a balance of $1,000 and a credit limit of $5,000, and you owe $3,000 on the credit card with a 19 percent interest rate, get a cash advance from your credit card with the 14 percent interest rate for $3,000. Pay off the $3,000 balance on the 19 percent interest rate credit card. You now would owe $4,000 on the 14 percent interest rate credit card. With the payment you were making on the 19 percent interest rate card, add that to the payment you are making on the 14 percent interest rate credit card. Continue adding the additional payment until the balance is paid off. You are saving 5 percent interest on 75 percent of your debt. Your balance will come down rapidly because the extra payments will apply towards the principal balance. You also will reduce the amount of years you’ll be paying on the credit card.
UP TO MY CREDIT LIMITS
Q. I am up to my credit limits on all my credit cards. It feels as if I will never be able to pay these cards off my total debt is $12,000.
Any suggestions on paying these off? I don’t own a home.
By maxing out your credit limits and only making minimum payments it could take you many years to pay the balances off.
For example, if you have a credit card balance of $2,000 and make only a minimum payment per month, it would take you more than 16 years to pay the credit card off. This is assuming you never make another purchase with the credit card. The interest you would pay at the end of the 16Y years would be $2,504.62 which would be in addition to the $2,000 which would total $4,504.62. That is a lot of money to pay for purchases that are now outdated.
Based on the original $2,000 balance, if you pay $5 per month over your minimum payment, you will save $738.59 and eliminate more than five years from the loan. If you pay $10 per month over your minimum payment, you will save $1,113.70 and eliminate more than eight years from the loan. By simply paying over and above your monthly payment, the principal balance will be reduced and you will pay the debt off quicker.
Be sure to not charge again on the credit cards that you are paying down. You will only be starting the cycle over again.
When your balances are low enough, begin transferring the higher interest rate credit card balances to the lower interest rate credit cards and continue to add your extra payments.
LOW INTEREST RATE TEASERS
Q. My goal this year is to try and get out of debt as soon as possible.
I have four credit cards that are charged to their limits. I have been receiving these low interest rate credit card applications offering rates of 4.9 percent. Would I be wise to apply for these cards so I can pay my credit cards off quicker?
Credit card companies are saturating the mailboxes with these teaser rate credit card offers. Usually the interest rates offered with these credit cards are only good for six months to one year. These cards are usually available to you as long as you move a balance over from another card.
By moving your credit cards to the lower interest rate card I would suggest you continue to make the same payments you were on the higher interest rate card. Cancel the credit card that you moved over to the low interest rate card.
Keep in mind that you will need to know all the terms of the teaser rate card and be on alert to the expiration of the low interest. As you come upon the expiration date, contact the bank and ask them to extend the low interest rate for another six months. If they don’t agree to this, look for an other lower rate card to transfer the balance. Follow the same procedure as you did with the first card by canceling the credit card that you moved. By continuing to make the extra payments, your balance will be zero in no time and you will have saved money.
MORTGAGE REDUCTION PLAN
Q. I want to pay my house off early. We have a 30-year-fixed-interest- rate loan. How much extra should I pay to reduce the years of my loan?
One extra house payment per year can cut a 30 year loan into a 15 to 17 year loan. You can divide one house payment by 12 months and add that to your regular payment.
Most of the mortgage payment is paid towards interest, however when you pay over and above the monthly payment, specify that it be applied to the principal.
By making extra payments each month you will save possibly hundreds of thousands of dollars during the life of your loan and have your house paid off early.
TOO MUCH DEBT -- NOT ENOUGH CASH
Q. Our debt is higher than our income. We own a home and are having problems making ends meet. We do have some equity in our home, but I don’t think refinancing will solve our problems. Any suggestions?
If refinancing your home is not an option, perhaps you need to consider selling your home and paying off all your debts. Use the money you have left over to purchase a smaller home with less of a house payment.
Sometimes it’s hard to make a drastic decision like selling your home; however, the longer you allow yourself to get deeper into debt, the harder it will be to solve your problem. It is better to act quickly rather than wait until you fall behind in making your payments and your credit rating is affected. This way you can get into another property being debt free with only one house payment to make.
If you need to raise cash in a hurry to offset some bills, take an inventory of some of your household assets such as furniture, jewelry, computer equipment, automobile, and so on. There are things in your home that you probably never use that you can sell and raise some cash to pay off part of your debt. Advertise these items in the newspaper, or have a giant garage sale.
WOULD A PART TIME JOB HELP?
Q. We have had unexpected medical expenses. Our income is not enough to cover all the bills we have. I am considering getting a part-time job. My wife is working full time and we have three children. Would this be the smart thing to do?
Most people don’t plan for unexpected emergencies and live from pay check to paycheck.
Will getting a part-time job help? You need to determine if the amount of extra income will be enough after calculating your travel time, clothing, food, and child care costs. If it ends up netting you very little income after calculating your costs, don’t do it.
It would be better if you could work overtime at your current job. If that isn’t a possibility you might want to brush up on your skills by going back to school. You may be able to get a raise at your current employment or land a job with another company that offers you more money.
I had a client who went back to computer engineering school and ended up getting a new job that tripled his salary.
USE YOUR TALENT AND HOBBY TO MAKE SOME MONEY
Q. I want to earn extra money to pay off our bills. I am a home maker with three children at home. Is there a way to make extra money from home?
Absolutely! Most of us have special gifts and talents that we can make money with.
Make a list of the different things you like to do such as baking, crafts, sewing, art, music, and so on. With the list of things you enjoy doing, develop a plan to make money doing it. There are numerous books out on how to make money working from your home. Go to the library or book store and check them out.
My husband and I had a friend who enjoyed working on cars. He took an early retirement and during the interim of getting another job he worked on several individuals’ cars and made money doing it. He was able to have a steady cash flow coming in to offset his bills, doing something he enjoyed.
Q. I just received my credit card statement for all my holiday purchases. I blew it! I’m not sure if I can pay this off before the next holiday. Do you have any suggestions?
Plan, plan, plan! Holiday credit card spending usually is never paid off by the next holiday. We all have a tendency to overspend; however, with a plan we don’t have to go broke doing it.
As the holidays draw near, make a list of every purchase you think you will make. In your list include gifts, food, entertainment, clothes, baking ingredients, wrapping paper, tape, labels, ribbons, travel costs, and so on.
Review what you spent last year and set your budget. For example, let’s say you spent $1,200 during the holiday season. If you divide that by 12 months the total would be $100. Now beginning in January you would need to set aside $100 per month to cover your holiday expenditures. Put the money in a savings account, or set up an automatic withdrawal from your paycheck to set the money aside. When the holidays come, you won’t have to charge anything. You can pay cash and rid yourself of any new debt.
As for the remaining debt that you have from all the past holidays you never paid off, throw in extra money with your minimum payment and you’ll get it paid off is less time.
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