Debt Elimination

My daughter once “borrowed” $100 from me to purchase a used SmartPhone. She had been watching her mother and I use ours and really liked the idea of being organized and having a “Computer” of her own. She had the chance to get a broken one free of charge and needed the $100 to have it repaired. I thought this would be a fairly harmless way for her to get a taste of what debt felt like (and I knew she was good for it, because we pay her to “babysit” for us). Needless to say, I came across like a “loan-shark”. We had many lively discussions about the outstanding balance. I wanted her to learn what the “bondage” of debt felt like, I wanted her to learn that it should be avoided whenever possible. I think if you were to ask her what she thought of debt you would hear a resounding, “I hate it!” She discovered for herself that which Samuel Johnson stated so clearly, “Do not accustom yourself to consider debt as an inconvenience, you will find it a calamity.”

Why should debt be avoided? Basically, beyond a house and an education, debt is bondage. We are basically placing ourselves in bondage to our wants and indirectly to the lenders. We are putting ourselves in the position of working at a job that we may not like because we can’t afford to quit. We rob ourselves of the ability to set new financial priorities for our family and ourselves because our income is already committed. We rob ourselves of freedom in exchange for a “mess of pottage”.

How do you know if you are in too deep? You should ask yourself these questions:

• Are you only making the minimum payments?

• Are you near your limits on individual accounts?

• Are you behind in any payments?

• Are you worried about how much you owe?

• What would happen if you couldn’t work?

You should really consider a debt reduction plan because it will save you money. Debt incurs charges for interest. Some credit card accounts charge as much as 21% annual interest and that doesn’t include the fees that are related to having the account and fees for such things as; being over your credit limit, late payments, etc. I remember when my wife and I had a Sears account and paid the $10 minimum payment faithfully, until the first time we created a debt reduction calendar. When we did this and listed Sears first on the list because we were paying 21% interest on a washer and dryer. We discovered that only $2 of our $10 minimum payment was going to the principle (the amount we owed) of the loan. The other $8 was going to interest charges.

So now that we have given you sufficient reason to get out of debt, how do you proceed? Well, you can simply start paying more than the minimum payment. Or take all your money out of savings and pay off an account or two. A more structured and planned out approach will allow you to make the most of your resources. You will need to know a few things first, so gather these things up:

Monthly statements for your debt accounts, from these you will find out:

• What you are currently paying per month

• What the interest rate is

• What the outstanding balance is

• What your monthly finance charge is

Your plan should allow you to prioritize where you put your “reduction” efforts. You will want to pay off the highest interest rate debts first. You will also want to consider is that as you begin to reduce your debt and begin to pay off debt you will have “extra” money that normally would have gone to payments on that debt. You should decide that you will dedicate that “extra” money to the acceleration of your debt reduction. For example; you owe Store “X” $500 and have a payment of $10, you owe Store “Y” $300 with a payment of $10. You want to pay off Store “X” because the interest rate is 21% so you pay an extra $5 per month until it is paid off. Then you think, “Cool, I have an extra $15 to spend.” Wrong, apply that to Store “Y” so that you are making a $25 payment and you will greatly accelerate the process of paying them off. You continue this way, paying the same amount out on debt as you did when you started, until you get to the last account. Now you’re paying everything you were originally paying on debt, to the last account, and it will probably only take a couple of months to pay off.

There are a few options available for debt reduction planning tools.  A quick google search will reveal those currently available.

Another tool for accomplishing this is a simple Debt Elimination Calendar. You can use a spreadsheet or piece of paper and create a column for each loan or credit card that you have. List the debt with the highest interest rate in the first column on the left and then next highest to the right of that and so on. Then create a row for each month starting with the month that you plan to start your plan. In the row for each month list the payments that you intend to make in each column for the debts. Add some extra to the payment of the debt in the first column to accelerate the time to pay off the debt, even if this is only $5 per month. Continue on filling in the payments for the upcoming months. As you pay off the debt in the first column add the amount that you were paying on that debt to the payment you make on the debt in the column to the right and so on. Here is an example of what this spreadsheet might look like:

I hope that this information will help you down the road of emancipating yourselves from the bondage of debt. Whatever you do, do something. Nothing will change if you don’t do something. Even if all you can do is add $1 to one of your payments. I remember when my Wife and I started down this road and how important it was to me to have her give me that very advice. If you approach this as a family it will have more meaning to each of you and what a valuable and essential lesson for our children to learn.