LESSON 2 by keara

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									Lesson 3: Understanding, Avoiding, and Eliminating Debt

Lesson 3. Understanding, Avoiding, and Eliminating Debt

Overall Objective: a. Every class member will make their own debt reduction plan by the end of class. b. By the end of class every class member will know the date they will be out of debt.

Preparation       Read through the Lesson 3 Readings on Understanding Debt 1: Counsel Have a copy of 3H Debt and Spending Plan Handout ready for class members to use to record their planned spending and debt. Bring pencils as well. Be prepared to discuss the items recorded on the forms if needed. Be ready to discuss how to fill out each column with class members. Print out Lesson 3: Understanding Debt Support Material if desired Print off 3S Debt Free FAQ Questions and Answers

Materials Needed:   Copies of the scriptures Calculators or a computer with Excel if available

Note: There is purposely more material in this lesson than you can teach in the forty minutes of class. Please prepare well and listen to the Spirit as it helps you to know what the members of your class need the most. Remember that the true test of teaching is not the quality or polish of the lesson, but whether what we teach helps people to live the gospel better and to apply things learned in their lives. For this class, if you can have tables available, that would be useful. Students will be working on their planned spending and debt for a little while.

Suggested Lesson Development Our Leader’s Counsel on Debt Our leaders have counseled us for a long time to get and stay out of debt.  When was this counsel first given in the scriptures? (Elisha counseled the Shunammite woman to “Pay thy debt and live.” (2 Kings 4: 7) Other prophets have given the same counsel.)

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Lesson 3: Understanding, Avoiding, and Eliminating Debt  What have our current leaders counseled?

Quotation President Hinckley gave this same counsel when he said: We are carrying a message of self-reliance throughout the Church. Self-reliance cannot be obtained when there is serious debt hanging over a household. One has neither independence nor freedom from bondage when he is obligated to others. . . . I urge you to look to the condition of your finances. I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. Pay off debt as quickly as you can, and free yourselves from bondage. (Gordon B. Hinckley, Ensign, Nov. 1998, 52–54) Instructors note: Much of this lesson will depend on the students you are teaching. Please listen to the spirit. You can really teach this lesson two ways. Format 1 is the process way, which will entail the seven steps. Format 2 is the spreadsheet way, which entails using the Handouts and computers if they are available. When I taught the course, I started with the prophet’s quotes, then went into the seven step process. I handed out the Debt and Spending Handout with about 10 minutes to go. I then brought up the Debt Free Spreadsheet Example and showed them two things. First, I showed that they had to make spending less than income in order to pay off their debts. By looking at the Tab #1 Planning, they could see if they lived within their means for that month. Second, I wanted to show how the increase in payments on debt resulted in a reduction in the time to pay off the loan. This is a critical message. The great thing is that they can see this visually as well. Finally, it is important to end with your testimony of how the Lord wants them to get out of debt, and how he is willing to help them if they will be humble and exercise the prayer of faith. Format 1: A Seven-step Process for Debt Reduction Someone wrote to a personal finance website: I like your website, but I didn't make it past the 'understand what church leaders have said regarding debt.' I know the counsel, but I'm still in debt, and don't know how to get out. I wish the Church would offer concrete advice to those who are foolish enough to already be in debt, instead of heaping more guilt upon our heads. I know I made a mistake. I know I was wrong. I am avoiding new debt, but paying off the old is a grinding load. How do you repent while you still owe tens of thousands? I wish the site were set up with a 'If you're in debt, here's help' button instead of lessons on how to avoid it.

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Lesson 3: Understanding, Avoiding, and Eliminating Debt It is a hundred times easier to get into debt than to get out of it. Many think that if they have a credit card, they have a right to use that money. That is not the case. Credit may be available, but it has a huge cost, both spiritually and temporally.   Is there a process for debt reduction once you are in debt? (yes) What is that process? (see below)

1. Recognize and accept that you have a debt problem.  Why is admitting a debt problem such a challenge? (It is often easier to blame our debt problems on others or on factors beyond our control than to take responsibility for our spending. Once we realize we have a problem and take responsibility for it, it is so much easier to ask the Lord’s help.) Why is debt a stumbling block to progress? (It impacts our life so much. Luckily, we have been promised that if we hearken to the Lamb of God: ―He shall manifest himself unto them in word, and also in power, in very deed, unto the taking away of their stumbling blocks.‖ (1 Nephi 14:1) This includes debt.)

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2. Involve the family    Why involve the family? (Getting into debt is often a family activity, and to get out requires a family activity as well. Some family’s make it a game to save money and get out of debt) What does getting out of debt require? (It will require a change of habits and life style, and so will require the help of the entire family.) How do you involve the family? (One method is to hold a family council. Discuss your desire to get out of debt, to follow the counsel of the prophets. Humbly ask each family member if they are willing to help your family as you work through a debt reduction program. Involve family members in the process. )

3. Decide why you are in debt It is easier to get out of debt if we understand why we started using debt in the first place. Think through the reasons for debt, using the framework discussed in Understanding Debt I: Counsel. Is it ignorance, carelessness, compulsiveness, pride, or necessity? If there are external reasons for debt, understand them. But most important, determine what you need to do to make sure it does not happen again. For example:  Did a large medical debt cause you to borrow to fund that expense? Do you now have adequate insurance and an emergency fund to cover those costs?  Did you give into the temptation to buy clothing, gifts, vacation, or toys on credit? Do you now know your goals and will not succumb to that temptation again?  Did you rent or buy too big a house, so you do not have sufficient funds for your other expenses? Have you considered what you really need in a house,

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Lesson 3: Understanding, Avoiding, and Eliminating Debt and have you considered insurance, property taxes, utilities, repairs and furnishing expenses in your monthly estimates? Determine why you went into debt, and then set a plan so it will not happen again. 4. Stop incurring debt. We have been counseled that debt for a home or education is acceptable. But other than these two exceptions, most debt is unnecessary. Someone said, ―If you find yourself in a hole, stop digging.‖ (Anonymous) Likewise, if you find yourself in debt, stop spending.  Do not buy anything else on credit.  Be especially careful of offers about using home equity loans or lines of credit to pay off your credit cards or other debt until you have your spending under control.  If you have a home equity loan or line of credit, pay it off quickly and do not open it again. 5. Make a list of all your bills and look for one-off ways of reducing debt. There are things to do as you work to reduce and eliminate debt. The first step is to list all your bills. Be honest in all your accounting--do not leave out any debts. List your debts by creditor, amount, interest rates, minimum monthly payment, and fees. Next, look for one time ways of reducing debt. Examples include:  Use savings or sales of assets to reduce debt. Sell things you do not need. Do you really need that second or third car, or that motorcycle or ATV? Once those assets are sold, it also eliminates other expenses, such as insurance, repair, and gasoline. Determine what you really need, and resolve to not go into debt for cash for it.  Consolidate balances to a cheaper credit card with a lower interest rate. (Beware the balance transfer fees, though) Lower interest rates can aid in paying down your debt faster. A dollar less in interest payments is a dollar more you can use to pay down your debt principal.  Have a yard sale to earn money to pay down debt. Often the things you buy on credit are impulsive purchases, and are not really necessary. Use wisdom in your purchases.  If you normally get a refund for taxes, do your taxes earlier in the year to get that money sooner. Then you can use that money to pay down debt. These are a few ideas that may be helpful as you find one-off ways of reducing debt. 6. Develop one year and one month spending plan (a long-term and short-term budget) Critical to paying down debt is understanding your spending. It is critical you have a handle on your spending; otherwise, you may be going deeper and deeper

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Lesson 3: Understanding, Avoiding, and Eliminating Debt into debt. Please note that this section will be handled in more detail in Reading 4: Understanding Debt II: Getting Out. First, make a list of all your income sources and estimate the amount you will receive over the next twelve months. Review your check register, your bank statements, your income tax return and any other source to ensure you have not forgotten any sources of income. Then estimate your expenditures. Involve the family. Make sure you include items such as saving for retirement, and missions and education for your children. Include birthdays, presents, and Christmas in your expenditures. 7. Organize a repayment or debt-reduction strategy and follow it. Finally, once you have an annual and monthly budget, set up a debt-reduction strategy to pay down your debt. Format 2: Making a Debt Reduction Plan Instructor’s Note: Our objective for this section is to make preliminary spending plan for everyone and a debt reduction plan for the students who have debt. We are using the framework developed by Keith Russell of Alberta Canada, which we have modified specifically for this class. Please print out the 3H Debt and Spending Plan Handout and give a copy to each of the students. Planning is an important part of personal finance. As part of planning, our assignment is to develop a preliminary spending plan for next month, which includes the debt that we have now. Debt and Spending Handout Hand out the 3H Debt and Planned Spending Handout. Make sure class members have pencils. We will work together with the class members to fill these forms out. I encourage the use of tables if available so students can have the room they need to work. Following are explanations of the columns and what they mean. a) Account Name (C1 Column): The first column is the account name. While these account names are general categories for most individuals, they can be changed. Please change the items to the way the class member spends their money. Class members will have different spending patterns. For most people the listed items are generally acceptable. b) Planned Income and Spending (C2 Column): The second column is your planned spending for the next month. Record the money that will be spent on the item for NEXT MONTH. It is hard to start in the middle of a month and record things when

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Lesson 3: Understanding, Avoiding, and Eliminating Debt some of the things have already been paid for. So have the class PLAN ONLY THE NEXT MONTH. c) Savings or Debt (C3 Column): This column is for savings and debt. Record the amount of DEBT OWING for the item. Remember that a DEBT is only something that has money owing at the end of the month, i.e., Car, House, Credit Cards etc. Unless you have money owing on those items, leave it out, i.e., utility bills, groceries etc. d) Interest Rate (C4 Column): This is the interest rate column. ―Interest‖ here refers to your APR or annual percentage rate. While your APR may not be known for each DEBT, especially for credit cards, a close figure should be recorded. Current rates for credit cards are about 14-24%. e) Months to Pay Off Debt (C5 Column): Divide the C3 column by the C2 column and put the answer in the C5 Column. This is the number of months it will take you, given your current planned spending, to pay off this debt. f) Debt Priority (C6 Column): This column is for the priority of your debt. The objective is to find the debt you can pay off first, and then that money can go toward paying off other debts. Find the smallest answer in the C5 column and place a #1 in the C6 column across from it. Place a #2 in the C6 column beside the next smallest number from the C5 column. Continue until all DEBT OWING items have numbers beside them in C6 column. This becomes the Priority in which DEBTS OWING will be paid. The number one ―#1‖ will be paid off first etc. If any free money is found after subtracting Expenses from Income, that money should be paid on the #1 DEBT, and when that DEBT is cleared the money should be paid on the #2 DEBT with the money freed, and so on till all DEBTS are paid. Class Member should try to spend ten percent less than they make to speed Debt Reduction. If Possible. g) Years till Debts is Gone (C7 Column): This column is critical. Divide the answer in C5 by 12 and place it in this column. Total all the numbers in column C7 and that will be the number of years till all your DEBTS OWING will be paid off. Even if interest is not calculated the number in the column will be very close to the finishing date.

Filling in the Information in a Spreadsheet with Class Members: If you have time, it is good to show the spreadsheet. I brought up an example with some data on it named 3S Debt Free Example. Explain that the spreadsheet is divided into many tabs, of which we will use four today. They are: Part #1 – Planning Part #2 – Planning

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Lesson 3: Understanding, Avoiding, and Eliminating Debt Prioritizing Debt Planning #1 and #2 Combined Explain that you will review each tab only briefly TAB 1: Part #1 – Planning Discuss with the class members filling in the handout or the spreadsheet. 1. Identify the ITEMS that you spend money for each month. 2. Record the amount spent on each item. If it is not known use a close amount. 3. Record the amount of DEBT OWING in C3 4. Divide ―DEBT OWING‖ in C3 by the monthly payment in C2 and record it in C5. 5. Find the smallest answer in the C5 column and place a #1 in the C6 column across from it. Place a #2 in the C6 column beside the next smallest number from the C5 column. Continue until all DEBT OWING have numbers beside them in C6 column. 6. In the C7 Column, divide the answer in C5 by 12 and place it in this column. Total all the numbers in C7 and that will be the number of years till all DEBTS OWING will be paid off. Even if interest is not calculated, the number in the column will be very close to the finishing date. It should be about five years. If it is over five years keep good records. Your DEBT will reduce. TAB 2: Part #2 – Planning 7. Add your interest rates to your debt. This Tab is only to include interest rates for your debt. You will put the information directly into the spreadsheet in the Pink Areas. TAB 3: Prioritizing Debt 8. This Tab is only to include the priority of debt. Put the number 1 by the debt with the shortest time to repayment. That way you will have success and will have other money that you can use to pay down other debt. TAB 4: Planning #1 and #2 Combined 9. This is a summary sheet for all you have done. Notice that you can now tell how many months or years it will take to get you free of debt.

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Lesson 3: Understanding, Avoiding, and Eliminating Debt

Conclusion Getting out of debt is a great goal, and is something that Jesus Christ want’s us to do. He said in D&C 104:78: ―And again, verily I say unto you, concerning your debts—behold it is my will that you shall pay all your debts.‖ You now have a way to get out of debt and a goal as to when you will be debt free.

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