Debt “How did I get so far in debt? How do I get out of debt? Debt has become a way of life in America. Whatever the reason, it is all denial. People know they don’t have money to pay for many things they buy. Think about it – one of the first things you learn in school is the basics of math and we all know that when you get to zero and keep subtracting what do you get? At one point, the American Dream was owning your own home, two cars and having a family with two children. Low mortgage and interest rates have put many material assets within reach for Americans. Now, some say, getting out of debt has become the new American dream. The nation’s ethic has changed. Our parents viewed debt as a shame and accumulating a nest egg as the right thing to do. The young see that as “old school” and have been convinced that going into debt is fine. The result is that while 40% of credit card users pay their bills in full each month, the remaining 60% roll them over – and over and over. The average balance of theses “revolvers” is calculated to be more than $11,500. The debt industry – and it is an industry – has persuaded people that their “wants” are “needs” and that if you really care for someone, you’ll spend more money on them. They tell you it’s so easy, just use plastic. But they don’t tell you how it will hurt, in mounting debt and higher interest rates and higher fees. From television to radio, magazines to computers, advertisements say that the good life is just a purchase away. The message: you don’t need to SAVE to HAVE. One thing about financial risk is until it happens, until the bad financial consequences happen; people tend to ignore the possibilities of it. Many people say that when it comes to lessons on managing money, they looked not to their parents’ example, but to an even bigger one: the United States. How can consumers see the virtues of living within their means when the nation continues to live way beyond the bounds of its own budget? People in trouble generally don’t have a good idea of how much they spend. So, how do you know when you’re in over your head? For starters, anyone who spends more than his or her after-tax-income is clearly in trouble. Credit counseling services swear by “the 20 percent rule” as a good rule of thu mb to assess and manage your expenses. The 20 Percent Rule: Never spend more than 20 percents of your take-home pay for the total of these monthly debt payments: auto loan, credit card monthly payments, student loans, home equity loan, second mortgage, installment loans and personal loans. If you include your rent or mortgage, do not exceed 40 percent of your take-home pay. Using this formula you’ll have the remaining 60 percent of your after-tax earning to handle basic living expenses like food, clothing, child care and automobile costs as well as this essential: a savings plan. If you already have debt, it is possible to become completely debt free. You need to rethink your plan if you are relying on the minimum monthly payment method to rid yourself of debt. For example, say you own $2,000 on your credit card at a rate of 19.8 percent. Your minimum monthly payment is 4 percent of the outstanding balance – about $80. To pay off this debt by paying only the monthly amount, it will take you about 116 months (almost 10 years) assuming you are never late and do not add any new purchases to the balance. By the time you pay off the debt you will have paid about $1,215.44 in interest. Now consider this: What if you made a solemn oath to pay $80 every month until the darned thing was paid in full, ignoring the fact that the actual monthly minimum payment was going down every month? You would reach a zero balance in just 32 months, instead of 116. And if you promised to pay $90 a month? The
debt would be history in just 28 months. How about a pledge to pay $100 a month? You would pay it off in just 24 months, more than eight years sooner than if you stuck to the credit card company’s requirement for the minimum monthly balance. The Rapid Debt Repayment Plan is based on the principle that getting out of debt brings a great deal of personal gratification. Basically, you concentrate on one bill at a time in order to experience the exhilaration of a zero balance as quickly as possible. Paying off one debt fuels your determination to pay the next and the next and the next. While not instant gratification, this method certainly offers short-term achievable goals. Keep in mind that for this plan to work, you must not incur further charges on your credit cards. The first thing you must do is determine exactly how much you owe and the exact nature of your debts (credit card balances, personal loans, payments to the dentist, doctor or a family member). Make a written list of each debt. Include the current balance, minimum payment, interest rate and number of payments required to pay it in full. Next arrange your debts in order of the number of months required to pay in full, with the shortest payoff first on the list. Add up all the current minimum monthly payments. Remember this important total. Now you need to make a personal commitment that until you are debt free you will pay the same amount toward your Rapid Debt Repayment. Take a look at the example shown at the bottom of the page. The total of the minimum monthly payments in the first month is $300. This is the amount our indebted family has committed to pay every month until they are debt free, regardless of declining minimum payments. In Month 1 they make all of the minimum monthly payments for a total of $300. In month 2 they do the very same thing. In Month 3 they pay the department store only $23, the outstanding balance, retiring their first debt. Now the $2 they didn’t have to send to the department store must be included with the regular payment to MasterCard (the next debt in line), increasing that payment from $55 to $57 (every little bit counts, you know!). In Month 4 the $25 payment that used to go to the department store is added to MasterCard’s payment so it becomes $80. This additional payment is what will get that bill paid in just 10 months, including interest. You’ll notice that the total amount paid in Month 4 is still $300 even though the number of debts has decreased. And on it goes. The family will continue to pay $300 every month, always taking the old payments and adding them to the payment of the next debt in line until they are 100 percent debt free in Month 17! If you want to see your personal Rapid Debt Repayment Plan work even more quickly, simply increase your total monthly payment.
Interest Balance Rate ($) (%) 20.9 16.9 18.9 0.0 12.0 1 25 55 40 100 80 300 2 25 55 40 100 80 300 3 23 57 40 100 80 300 4 0 80 40 100 80 300 5 80 40 100 80 300 6 80 40 100 80 300 7 80 40 100 80 300
Payment Month 8 9 10 11 12 13 14 15 16 17 18 80 40 100 80 300 80 40 100 80 300 2 118 100 80 300 0 54 166 80 300
Dept. Store 71 MasterCard 597 Visa 478 Dad 1,500 Orthodontist 1,950 Totals $4,596
0 220 112 0 80 188 300 300 300 253 0 300 300 300 300 300 253 0
There are many effective ways to deal with debt. The bottom line – Don’t spend more than you make!