Category: Finance, Credit.
So you are in debt- who isn t these days? Credit card commercials tell us that a trip to Jamaica is just what we need, regardless of whether we can afford it. (That s what your gold card is for, right? ) Loan brokers want us to borrow up to 125 percent against our home equity.
We live in a society that encourages people to go into debt. Even the federal government just had its first balanced budget in a generation and now faces the enormous task of paying off over trillions of dollars in debt. Many people know how to deal with money. Yet not everyone is in debt. Their debts are manageable, and they have money in the bank. That is what you deserve. That sounds nice, doesn t it money in the bank?
In order to get there, you are going, however to have to change some of your thinking about money and learn a few new methods of dealing with it. People who are not in debt think about and treat money differently than the rest of us. Why Are You in Debt? They know a few things about money and debt that escape the rest of us. What we hope to do in this book is to show you some of their secrets so you can adapt a few of these ideas and tools to help you get out of debt. Let s call them the" financially literate. " If you can begin to relate to money as they do, you will be well on your way to a life that is not only debt- free, but also prosperous.
Do not feel too badly if you are not good with a dollar, a lot of people aren t. Yet, unfortunately for many of us, we learn more about money from our parents than anywhere else. Money literacy is not taught in schools, and too often parents are too busy trying to dig themselves out of their own financial hole to help much either. The good news is that learning how to get out of debt and become more financially literate is not all that complicated. So the first question to ask yourself is: Why did you go into debt in the first place? The first step in the process is to figure out how you created so much debt, because if you don t figure out how and why you got yourself into this pickle, you might get out of debt, but you certainly won t stay out.
Sometimes going into debt is unavoidable, but often it is not. Going into debt is just the easiest. When money is tight, you have several options. Instead of choosing more debt, you might have decided to work overtime and make more money, or possibly you could have tightened your belt and spent less money. There are many reasons people go into debt: some are good reasons, and some are bad. Debt was not your only choice.
It doesn t matter. Did an illness or a divorce set you back financially? Did you buy luxuries you could otherwise not afford? Was debt your way of dealing with some other sudden, unexpected expense? If you can see a pattern, you need to address that pattern as much as the underlying debt. When you look at the reason why you went into debt, the important thing is to notice whether your spending habits follow a pattern.
Consider Mark and Diane. They have two kids to whom they are devoted. They both make a good living: he s a psychiatrist, and she s a psychologist. They send both to private school, which costs a total of$ 15, 000 a year, and both kids go to summer camp. Mark and Diane don t buy luxuries, they don t travel much, except for the, and kids expenses, they are very frugal. This expense adds up. Yet the only way they can pay for everything is by going into debt.
Although they would like to move to a less expensive neighborhood, they can t because they have no equity in their home, so they are stuck. They use their home equity line of credit and credit cards to stay afloat. What are they to do? The private school is going to have to go, camp may be out, or they are going to have to start making more money. If they are going to get out of debt, something in their lives is going to have to change. The same is true for you. Good and Bad Debt.
If you want to get out of debt, you are going to have to identify why you went into debt and change that behavior or pattern. Debt in and of itself is not a bad thing. Steve began his own law practice, and Azriela began her own entrepreneurial consulting business. Both of us( the authors) were able to start our own businesses because of debt. So we understand what debt is and why some debt is great debt. Debt constructs buildings and funds investments and entire corporations- even the government is funded by debt.
Debt allows you to do things you otherwise normally could not do, such as start a business, or pay for, go to college a home. The trick is to foster debts that help the cause and banish the ones that don t. Good Debt. Not all debts are bad debts. Debt that helps you, is manageable, enriches your life, and is not a burden can be called good debt. They are bad debt if you dropped out of medical school after one year to become a writer. For example, student loans are good debt if they enabled you to get through school and further your life goals.
A good debt helps. We want to help you get rid of that bad debt. A bad debt hinders. Other examples of debt that may be considered good include: Home loans. Not only does it permit you to own your own home, but it also allows you to build home equity. A mortgage can be a great debt. People who are financially savvy earn interest and equity.
For example, charging groceries means that you will pay about 17 percent interest on items that will be consumed within a week. People who are not financially savvy pay interest and create money for others. A financially literate person would never do that. A car loan can be a fine debt because you get something long- lasting out of the debt. Car loans. If you need a nice car for your job( if you are a real estate agent, for example) , a car loan may be considered good debt because it helps you in your career.
Business loans. However, a car loan that you cannot afford is a bad debt because it detracts from your life. If you can service the loan, and it helps you make more money, the loan is good debt, but if the loan is nothing but a source of problems for you, the debt is bad. Credit cards are fantastic. Credit cards. They are convenient and easy. The problem with them, as you probably know only too well, is that it is too easy to fall under their siren spell and get in over your head before you know it.
They can help finance a business or even medical emergencies. That s when they begin to hurt your life more than help it. How do you know if your debt is good debt or bad debt? Bad Debt Blues. Easy. You sleep poorly because of them. Bad debts cause stress.
They cause fights and foster guilt. Hard- pressed to come up with a definition, Powell uttered the famous line, "I know it when I see it. " The same could be said for bad debt: You know it when you see it, and it certainly can be obscene. Supreme Court Justice Lewis Powell was once asked to define obscenity. Bad debt seems impossible to pay back. The things quickly disappear, but the debt has a nasty habit of sticking around, seemingly forever. You create bad debt when you charge things you don t need or when you borrow for things that you consume quickly, meals, such as clothes, or vacations. Bad debts can become very bad debts because of interest and penalties.
If you do this with five items, you owe$ 1100, and that s a lot of money. For example, if you buy a CD player for$ 200 and don t pay it off by the end of the year, and your credit card company charges a usurious 20 percent APR( 20 percent per year) , you owe$ 220 by the end of the year. Money Talks. Here are some simple ways to save a little extra: Don t use ATMs at other banks and avoid$ 2 user fees. Tight for money? Cancel your movie channels on cable and save about$ 20 per month. Hold a garage sale and make about$ 200.
Put all of your change at the end of the day in a jar and save about$ 50 a month. Cancel your cell phone and save$ 50 a month. Credit cards are the prime culprit, but they are by no means the only one. You can create bad debt when you agree to pay these crazy interest rates that some creditors charge, because the debt seems to grow exponentially. High interest can also come with personal loans, or unpaid taxes, business loans. You re surprised to find that the phone bill is still unpaid. You know what the bad debt dance looks like, anyone reading this book does: New bills are coming in before you ve cleared out those from last month.
Somehow the dentist was never sent his check. Your Visa and MasterCard bills include late payment penalties. You know what past- due notices look like. The hardware store sends a letter telling you you re past due and requests that you send a check at once. Worst of all, these things don t surprise you anymore. There is more month left at the end of your money, and payday seems far away.
Avoidance is a common coping mechanism to deal with a budget that doesn t balance. The finance company can come take your car. The problem is, it can create even more problems than you already have: Your property could be repossessed. The electronics store can come take its TV back. If that happens, your wages could be garnished, or your bank account could be levied upon. You could get sued. Imagine your surprise when you go to get that$ 1, 000 out of your checking account to pay your mortgage and you find that it has been seized by one of your creditors.
Failure to pay a bill now means that a creditor can get a judgment against you and force you to pay it later when you sell your house, only then you will pay it with 10 percent interest per year. A lien can be placed on your real estate. Loss of services. Yet, as much as you have been avoiding the problem, the truth is that your debts are neither crushing nor hopeless. You could lose your insurance or your utility services if you avoid paying those bills. They are simply a problem- one for which there is a solution.
You began to do that the moment you read this articles. But no one ever eliminated a problem until he or she recognized and admitted that there was a problem. As you read it, you will need to begin to formulate a debt- reduction plan that will work for you. Debts You Want to Keep. As you do, you need to determine which debts are necessary and which are not. Steve, one of the authors of this book, is a bankruptcy attorney. They talked, came up with a plan of action, and Bill went on his way.
One day, an old acquaintance named Bill came into his office and said that he needed some help getting out of debt, but he also wanted to avoid bankruptcy if at all possible. About four years later, Steve ran into Bill again and asked how things were. Bill had$ 30, 000 in credit card debt and was behind two months on his mortgage when he left Steve s office. Bill relayed the following story. That day, Bill finally decided that something had to change. His mortgage was his largest, debt because he, and favorite loved his house.
He wanted to pay everyone back, put some money in savings, and keep his house. Bill s first order of business was to prioritize his debts. He was therefore able to keep his most important debt and focus his energies on getting rid of the debts he didn t want anymore. Wanting to save his house, Bill called his lender and found out that it had a program that would enable him to roll his mortgage arrears onto the end of his loan. Bill put together a credit card repayment plan. He was diligent, but not always perfect.
He started living a bit more frugally, making some extra money by moonlighting, and paying more on his credit cards than the minimum. Although it took him several years, he finally did get out of debt. Bill did it, and you can too. He also kept his house and even created a little nest egg. Debts to Get Rid Of. The most obvious are those where you are paying high interest and penalties, things such as credit cards, taxes, lines of credit, or any other debt that is much higher than inflation. If you want to prosper financially, there are plenty of debts that you will want to wipe out.
In this articles, you will see how to formulate a plan that will enable you to get out from under these burdensome debts. Make paying your rent or mortgage a top priority. But as you contemplate this plan, you also need to prioritize certain debts and pay them on time: Rent or mortgage. Payments on a home equity line of credit or second mortgage are also essential because you can lose your house if you don t pay. Make the payments. Car payments.
If you don t, the car will be repossessed. These services are important, and the bills usually have heavy late payment penalties. Utility bills. Child support or alimony. Taxes. Not paying these debts can land you in jail. Taxes may be put off for awhile if necessary, and we show you how to do so later on in the book, but if the IRS is about to take your paycheck, house, bank account, or other property, you should set up a repayment plan immediately.
The goal of this articles is to help you get out of debt within the context of making your life work. The First Rule of Holes: Stop Digging! You will not be asked to make radical, unreasonable changes in your life because doing so rarely works. If you are going to start getting out of debt, you have to stop going into debt. Instead, sometimes gradual, important, small but significant changes can make a big difference. One way to start is to begin to wean yourself from the credit card teat if you think that is part of your problem.
That would be impractical and unreasonable. You don t have to cut up all your credit cards. Start slowly, but build up to it and get strong. The only way to stop going into debt is to stop going into debt. You can do it. You might as well start now because the sooner you start, the sooner you will get out of debt. We will show you how to easily trim your budget( well, almost easily) so that you need not incur more debt to stay afloat.
The longer you wait, the longer it will take. But begin now. Down the road you will see that this is one of the most important steps you can take in getting out of debt. You are going to have to stop sooner or later. You will thank yourself for this gift. Long- Term Goals. Remember the first rule of holes: Stop digging!
Now is the time to begin to think about your long range financial vision. Changing some habits? What is it you hope to accomplish by getting out of debt? Paying off your MasterCard? But you can have even more. Probably what you really want is a less stressful life, one that s free from money worries.
Getting out of debt is one thing, but prosperity is another thing altogether. If you do make some simple changes to your thinking and your behavior, not only will you get out of debt, but you also will get ahead. You have read this once already, and you will read it again in this book: If you don t begin to do some things differently, to change the way you think and treat money, you might get out of debt, but you won t stay out of debt. You will get what you deserve: a life of abundance. Doing so for nonessentials does not. The Least You Need to Know Going into debt for essentials makes financial sense.
Not all debt is bad debt. Stop adding to your debt right now. You may want to keep debts that enhance your life and get rid of the rest. Cultivate a long- term plan of action.
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