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Five Signs You Have A Debt Problem

01.14.2013 by Kevin Mercadante //

When you’re managing your debt payments it’s easy to ignore the fact that you have too much debt. The purpose of debt – from a sales standpoint – is to spread the payment out over many years so that what isn’t affordable suddenly is. It’s all about the payment!

With all of the focus on monthly payment, the total amount owed – which is the number that really matters – can sort of disappear. After all, when it comes to debt and expenses, we don’t like big, ugly numbers. Small numbers are so much less disturbing.

Here are five signs that you may be carrying too much debt.

1. You don’t bother to total up how much you owe

Most of us know that we have debt, and usually about how much. When you’re getting in over your head there’s often a reluctance to spend much time dwelling on it. Specific numbers provide frightening confirmation of what we suspect – and prefer to avoid.

One of the best indications that you have too much debt is when you’re reluctant to find out just how much you have. You know that you owe on Credit Cards X, Y and Z, but you try not to pay too much attention to how much you owe on each. And you never bother to add up all the balances either.

Your attention centers instead on the monthly payments for each account, because they look much more reasonable than the combined balances on all accounts.

2. There’s little or no money for savings

Cars and appliances break down or need to be replaced, homes need to be repaired and medical episodes and auto accidents require co-payments. There has to be money sitting somewhere in reserve to pay for those.

If you typically don’t have savings to cover contingencies, there’s a very good chance that the cause is either excess spending or too much debt. The two are closely related, so it’s probably some of both.

Credit card bills and other loan payments are a quiet drain on monthly income. Not only do they leave little room for a regular savings plan, but they can also force you to reduce retirement plan contributions.

A sure sign that you have too much debt is when you come to view your credit lines as your emergency savings.

3. Debt payments – excluding mortgage – are one of your top two expenses

Add up all of your monthly debt payments – student loans, auto loans, credit cards, installment loans – every loan except your mortgage. How does that total monthly payment look compared to other expense categories in your budget? If it’s one of the top two expenses in your budget, you almost certainly have too much debt.

In most households, the monthly house payment will be the largest single expense. In second place might be groceries (if you have a family), health insurance or even combined utility payments (especially if you live in an area with severe weather).

If debt payments are second only to your house payment – or if they’re your number one budget outlay – you’re carrying way too much debt. In that situation, you won’t be able to make any financial progress until your debt is brought under control.

4. You can’t buy extras without using a credit card

Because of the combination of high monthly credit card bills and the lack of savings, there’s never quite enough money to pay for extras. A weekend away, a trip to the dentist, or even a night on the town are covered by a credit card.

Although it may be normal, it’s not acceptable if you want to win with money.

5. You’re shopping for a consolidation loan

For the most part, consolidation loans are about lowering the monthly payment. You’ll still owe the same amount as you did before the consolidation, it’ll just look neater in a single package. And it’s a strong indication that you have too much debt.

It’s not that a lower payment doesn’t have merit. The problem is that the lower payment makes debt easier to live with, rather than making it go away. And the lower payment could also clear the way for more borrowing. After all, if you’re comfortable with the new consolidated payment, it’s often easy to slip back into bad habits.

Note: Matt consolidated his credit cards and auto loans using Lending Club, and he recommends it, but only if you’re going to pay it off as fast as possible and are committed to taking on zero additional debt.

Getting out when you have too much debt

If you’re experiencing one or more of these situation there’s no alternative to taking action against your debt. It’s always better to deal with it while you still have control of the situation – before it reaches the crisis stage.

Here are some tips:

  1. pay close attention to your outstanding balances – that’s your real debt situation, not monthly payments
  2. do whatever it takes to stop using credit immediately
  3. cut back on non-essential spending
  4. sell as many possessions as you can
  5. increase your income with overtime, a part-time job or some type of side gig
  6. get some money in the bank (from steps 3, 4 and 5) so you won’t rely on credit
  7. start the Debt Snowball of paying off your debts from the smallest to the largest.

It’ll take time and a good bit of effort, but soon enough you’ll get to the point where you won’t mind looking at your loan balances any more.

And that’s good news!

*******

Image : Vectorportal via Flickr

Categories // Debt, Money Management Tags // loans, money, planning

Reasons To Pay Off Your Car

07.12.2012 by Kevin Mercadante //

It’s better to be debt free than owe money.

I’m talking everything: your credit cards, student loans – even on your home.

It can be done – if – we make the right choices.

Regarding auto loans: if you have a choice, pay it off ASAP!

Here’s why.

Owning a car is expensive enough without a loan

Owning a car comes with many expenses: gas, insurance, registration, taxes, maintenance, care, and repair. Together these can total several thousand dollars per year. But throw a monthly car loan on top, and you have thousands more.

The secret to success? Pay cash for cars and save money for their regular care. If you take care of them they’ll take care of you.

If you lose your job, it’s one less payment

Living light never feels better than when you lose your job. Suddenly income evaporates (or is lowered to the level of an unemployment check) and one of your primary new tasks is to cut spending. If you own your car, one major expense is already out of the way.

In today’s unstable job market, this is a goal worth making reality!

The RISK of not making your payments

Most of us take the risk of auto loans a bit too lightly. After all, stop paying your credit cards and you may get nasty phone calls and a series of threatening letters, but nothing will be taken from you, at least not for a while. Stop paying on your mortgage and you’ll get to stay in the house for as long as the slow wheels of the foreclosure process will allow.

But – stop making payments on your car, and you’ll lose it, and quick!

If you lose your car you’re probably not able to earn a living. Do you see the vicious cycle here?

Never take this risk of borrowing money lightly.

Own important things free and clear, whenever possible

Call it peace of mind or whatever you want but owning things without debt is as a sanity issue.

If everything you own has a loan attached to it, life can be maddening. Debt is everywhere you look—even when you’re out driving your car.

A debt free car is like a mental and emotional oasis, it’s one very important asset you can own free and clear, and we all need as many of these victories as we can get.

Keep your options open

Few things in life are constant.

As we go through life, our circumstances change,  our directions change, and even we change. Even if you have no intention of it, your future can hold an unexpected life change.

If change does come – trust me – you’ll be better served by having all of your financial ducks in a row. And owning your car free and clear is one great way to prepare.

Benefits of owning your vehicle

Owning your vehicle free and clear benefits you in several ways, including but not limited to:

Sell your car. A car loan is a limiting factor if you should decide to sell. Auto loans reduce the amount of money you’ll clear on the sale ,and (if the loan is large enough) could even render the sale impossible.

Buy your next car. A loan means less money from a sale or trade-in, and that means a lower down payment on your next car.

A lower down payment means an even larger loan on the new car, and the cycle of ever higher car debt to continue. By being debt free on your car, the cycle is broken.

Start a new business. If you want to start a new business, being debt free on your car makes it easier. It’s not just one less bill to pay, it’s also one less obligation to worry about. If you start your own business you’ll want the fewest obligations possible.

Accept a lower paying job. There are at least two reasons this could happen, 1) you’re laid off and forced to take a pay cut, or 2) you move into a job that you really like but it pays less. The car loan, so easy to handle at your current pay level, may be impossible to manage in a lower paying job. By owing your car you’re in a position to move when you need or want.

Raise children at home. How much easier would this be to do if you owned your car debt free?

Just to take some time off. Each of us need to do this from time to time, especially between jobs or before starting a new career or business venture. It’s a way of clearing our heads before the next big move. Whatever the reason, it’s easier to do with no car loan to worry about.

We should work to be debt free in as many areas of our lives that we can – but – your car is one asset to be especially motivated to pay off.

Once you do, many risks and burdens go away, trust me!

Can you see why being debt free on your car is so important? Do you see why it should be one of the first debts to pay off?

Categories // Debt, Money Management Tags // auto loan, borrow, own

11 Ways We Dove into Debt and How We’re Digging Out

03.21.2012 by Matt Jabs //

It was not all that long ago that our ‘Debt Free’ Adventure was more like a ‘who cares how much debt we have’ adventure.  I suppose we were semi-responsible in that we never made ourselves house poor, nor did we ever go hog wild on gadgets or toys.  In fact, the reason we accumulated debt at all is simple… up until January of 2009 we never understood how powerful a prison of debt can be.

Now that we do understand the power of debt slavery, we avoid it like the plague.

Mindset of the chronically indebted

Before I get into specifics, it is important to touch on a few “thinking problems” we had that are commonly shared by those in deb, you have to change your mindset:

  1. We just didn’t care – By far the biggest personal finance problem for us was simply our lack of responsible money management.  If we would have taken control of our financial reigns from day one we would be in a much better position.  Oh well, since we can’t change the past we focus on doing the right thing going forward.
  2. Influenced by culture – One of the biggest reasons we slowly let ourselves get into debt was because we did not purpose to think for ourselves.  Rather than responsibly determining our purchases based on actual savings and income, we bought according to cultural norms.
  3. We make decent money – We figured because we were both college educated, working professionals that we should be able to have certain things.  Rather than responsibly determining our purchases based on actual savings and income, we presumed our income would always be there and leveraged against future income.
  4. We deserve nice things – Because we sacrificed and worked hard all the way through school, we felt as if we deserved to buy nice things the day we began earning rather than the day we had actually accumulated the savings.  Rather than responsibly determining our purchases based on actual savings and income, we felt as though we deserved nice things before we actually earned those nice things.

Ways our debt accumulated

Here are a few specific ways our debt built up over the years:

  1. We ate out constantly – Before analyzing food costs we rarely planned or prepared meals in advance, instead we would just eat out whenever we felt like it.  Now we set a strict budget for groceries and dining out and are careful to stick to it every month.  Not only do we save thousands of dollars each year, but we have also lost around 60 combined pounds.
  2. We never used a budget – Rather than telling our money where to go, our money would just seem to vanish into thin air.  This always happened, regardless of how much money we made.  Now we give every dollar a job rather than wondering where it all goes… and boy does it feel great!
  3. Credit cards as an emergency fund – Rather than save money for emergencies, we chose to go into high interest debt each time we had an emergency.  Saving for emergencies was a personal finance fundamental we lacked in times past but have since adopted… and we feel much more secure because of it.
  4. I fell for the HDTV craze – I take full responsibility for all our financial irresponsibility… but this particular purchase deserves a special mention.  Against her better judgment, my wife gracefully went along with my decision to purchase a $2,000 television – bless her heart.  This was obviously a terribly unnecessary purchase decision on my part.  We had a 27″ television that worked perfectly fine, but for whatever reason I just had to have a fancy new boob tube.  I would sell it in a heartbeat if I weren’t sure to lose my tail on it… so we just keep it and plan on having it for a loooooooong time.  🙂
  5. Bank fees – Oh my word… I hate talking about this because it makes me feel like such a D-bag.  Before we started our debt free adventure it was not super uncommon for me to be hit with bank fees.  Both over-the-limit fees and late fees were things that ate up a good amount of our money over the years.  Never again I say… never again!  Next to responsible management of our money the best move we made to avoid bank fees was switching to Capital One 360 Bank – they treat us so much better than any bank in the past.
  6. Just swipe it – We used to just swipe our debit cards for everything with the only requirement being a positive balance in our checking account – and even that was ignored sometimes.  Now-a-days we use cash envelopes for our five most easily abused budget categories:  groceries, miscellaneous, dining out, entertainment, and clothing are all kept under tight reigns by limited amounts of cash each month.
  7. Alcoholic beverages – Rather than waiting until we were home to enjoy a beer or glass of wine for much cheaper, we would order drinks with dinner.  A lot of people talk about the latte factor, but I wonder if the less popular alcohol factor eats up just as much or more of the average American family budget.  Now-a-days if we want an occasional beer or glass of wine we just wait until we get home.

Of course there are other factors that contributed to the debt we battle so fervently today… but this list gives you a good idea of what not to do if you want to win with money.

Ways you got into debt

What are some specific things you have changed or need to change in order to avoid future debt and help dig your way out of existing debt?

photo by Joe Shlabotnik

Categories // Debt, Money Management Tags // Debt, emergency fund, mindset, save

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