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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

How to Pay Off Student Loans Now

05.30.2012 by Kevin Mercadante //

How To Pay Off Student Loans NowLast week we discussed the darker side of student loan debt as well as various strategies for staying out of it in the first place.

But what if you’re a recent graduate already carrying an over-sized student loan balance, is there hope for you?

Absolutely, but it won’t be easy.

Exactly how difficult that will be will have a lot to do with how much debt you have; the larger the loan balance the tougher the choices you’ll face.

Why you need to pay off student loans as quickly as possible

When you finish college it’s natural to want to get on with your adult life as soon as you can. You want a new car, a place of your own and to begin experiencing some of the adventures you couldn’t afford when you were in school. A few years later you might be looking at marriage, buying your first home, and for some, having children or starting a business. All will cost money, and some will require new loans.

In addition, careers and jobs aren’t as stable as they once were. Even though you have a job upon graduation, it’s hardly inconceivable that you might be unemployed just a year or two later. If that happens, you’ll need all of your financial resources to deal with the crisis at hand.

Student loans will interfere with all of that, and that’s why you should pay them off as soon as possible. Not only will they be a drain on your future cash flow and your ability to deal with a job loss, but they could also limit your ability to borrow money to buy a home or finance a new business.

How quickly you’ll be able to pay off student loans will depend on both the size of your debts and on your personal situation upon graduation.

Loan size

Though the average student loan debt is just over $25,000, the amount owed can vary by individual, anywhere from a few thousand dollars to well over $100,000. If your debt is at the lower end of the range, you can manage the pay off without making too many sacrifices. But if your debt is into the tens of thousands, you’ll need to make sacrifices, some of them life changing.

The bigger your student loan is, the greater it’s ability to interfere with your future plans, and the greater the need to get rid of it as soon as possible. You may be able to blend the pay off of a $10-20,000 student loan into the rest of your financial life, but if you owe more in student loans than you earn in salary, you’ll have to step out of your comfort zone to make it go away.

Your employment status

We hear and read a lot these days about graduates having student loan troubles, and though much of that has to do with loan size, employment is a more common problem. Let’s face it, it’s hard to pay back a large debt when you’re either unemployed or under employed. And more grads are falling into either category than ever, which is yet another strong reason to pay off student debt as soon as possible.

If there’s no work in your field of study, or you can do no better than minimum wage, there are certain student loan relief programs that may help you. It’s a long shot that you’ll qualify for any of them, and if you don’t you’ll have to be prepared to roll up your sleeves and get busy.

Strategies to pay off student loans

The best time to accomplish this is when you first get out of school. Life becomes more complicated as the years pass and as they do your ability to pay off the loans will decline. Here are ways to make that happen. You should easily be able to find an extra $10-15,000 per year to pay toward your student loans.

Housing on the cheap. There are several choices here: 1) move back in with your parents, 2) rent a room close to work, or 3) share a house or apartment with one or more roommates. If the choice is renting an apartment by yourself for $1,000 per month, or sharing a small three bedroom house for $1,200 with two roommates at $400 each, you’ll have an additional $600 per month, or $7,200 per year, to pay toward your student loans.

Employment plus. Take a second job and dedicate it entirely toward the pay off of your student loans. Even if you only make $8 an hour, if you work 20 hours per week, you’ll earn $160, or about $8,000 per year. Even allowing for taxes you’ll still have a good chunk of money to put toward your debt. And two bonuses: 1) with a part-time job you’ll spend less time at home with your parents or roommates, and 2) since you’ll be working, you won’t be out spending money!

A “beater” to the rescue. Buy the cheapest car you can afford to buy without taking a loan. If that’s a $2,000 beater, then that’s’ what you buy. While a new car may be very desirable after graduation, buying it with a loan will just add more debt to an already substantial pile, and cut down on the amount of income you’ll have to devote to paying off your student debt.

Staying out of other debt. The last thing you want to do while paying off your student loans is to run up your credit cards or take other loans. That’s just a matter of exchanging one form of debt for another.

You can use all or a combination of several. How far you’ll have to go will depend on how large your student loan debt is and how much you want to make it go away. But the sooner you do, the better the rest of your life will be.

*******

Do you think it’s a good idea to make paying off of student loans a high priority after graduation? Share your thoughts.

photo by Victor1558

Categories // Debt Tags // college, student loan

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