repayment Archives - Live Debt Free

When we first get into debt most of us have the best of intentions. The debt we’re taking on is only temporary, right? Once this credit card, car or house is paid off I’ll never borrow money again! That sounds good – but do we really mean it?

Remember: debt is deceptive. It buys us what we want now and the payments are so easy that we get “settled in.” We no longer think about paying the loans off, just how we’ll manage the payments. At this point debt becomes permanent. It doesn’t matter that credit cards are revolving arrangements or that car loans will be paid off in a few short years. You’ll always have debt of one kind or another – so you stop fighting against it.

Permanent debt in the making

When you reach the point where you’re comfortable with debt – and most people do – your debt becomes permanent. The lenders and the loans may change from time to time, but you’ll always have the debt.

Here are three reasons you’re in perpetual debt:

New car every 5 years. One of the biggest causes of permanent debt is buying a new car every five years or less. By doing this you always have a car payment. Sure, it’s nice to have a new car – less repairs and maintenance, latest safety features and all – but it’s a pattern that keeps you forever in debt. Maybe you always pay off the debt on each car, but as soon as it’s paid off you take out another loan to buy the next car. (Learn how to stop financing vehicles.)

Perpetual mortgage refinancing. This one can be a tough call for a lot of people. If you’ve been refinancing every few years to take advantage of what seem to be ever lower interest rates, it really can seem like the right thing to do. But along the way, it’s typical to take some cash out (increasing the loan balance) or recasting the mortgage back to its original term. If each time you refinance, you recast a 25 or 27 year term back to 30, you’ll never pay off your mortgage. Many people do this and in the process create a perpetual mortgage for themselves. (Maybe you should rent instead and save for a house.)

Once a Visa, always a Visa. Credit cards take the top prize as the most stealthy of all debt – their marketing departments are full of geniuses. You start out borrowing a small amount – fully intending to pay it off next month – but the another “emergency” expense hits and the revolving feature takes over. Each month you’re borrowing a little bit more that makes the balance so large that paying it off becomes more of a wish than reality. You begin to resign yourself to the fact that you’ll always have credit card debt. (Learn how to pay off credit card debt.)

Debt is NOT your friend

Ask anyone who’s been through a foreclosure or bankruptcy – or who has been hounded by collection agents about one or more debts – and they will tell you this:

“Debt is only ‘friendly’ when you can afford to pay it. When you can’t, it becomes one of your worst enemies.”

The best way to avoid this outcome is by not being so friendly with your debt, especially when you can’t afford to pay it. We should never get comfortable with a debt, any debt, including a mortgage.

Debt increases your cost of living, cuts into your savings, and compromises retirement planning and funding. That doesn’t sound very friendly at all.

All debt should be temporary

In fact, the worst aspect of debt is the potential to get comfortable with it. Once you do, your debts have won control of your financial life. The way to change this is by viewing your debt as temporary – which is what debt is supposed to be.

If you have an installment loan, like an auto loan, and it runs for five years, plan on paying it off in no more than five years. And when the loan is paid, don’t take that as a cue to buy a new car! Instead, keep making those payments but stash them in a savings fund and use em to purchase your next vehicle with cash.

Credit cards? The basic advice stands here; plan to pay the balance in full each month. Credit cards should never be treated as an extension of your paycheck, or as a way to pay for what you really can’t afford.

And as far mortgages, 30 years is long enough! It’s okay to refinance and take advantage of lower interest rates, just be sure you never extend the term of the loan – ever. In other words, if you have 25 years remaining on your 30 year loan, the refinanced term should be no more than 25 years. So if you bought your house in 2005, you’ll still pay the mortgage off by 2035.

The best way to deal with a debt problem is by never getting into it in the first place. Borrow only if you have to, and when you do, make sure that you pay your loans off in the term provided – or less.

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Your Debt Costs You More Than You Know

If you want to take a truly sobering look at just how much your debt really costs you, follow this simple guide to figure out what your monthly interest amount paid is. Once you complete the exercise you will have finally developed a proper relationship between you & your debt!

This article will address the following:

What is interest & how destructive is it
How much interest I pay out each month
How I calculated that amount
The anger I gained toward my debt after completing this exercise
The incredible motivation this information gives you
Real steps we can take to lower, reduce, & eventually eliminate the interest we pay

What is Interest & How Destructive is it?

While there are several definitions of “interest”, for the purpose of this article we focus on the interest amount paid toward our debts and will define interest as a fee paid on borrowed assets; and/or the price paid for the use of borrowed money.

Simply put, interest destroys your ability to build wealth by taking your hard earned money and misappropriating it toward paying rich people (the people who loaned you the money.) I will demonstrate this fact by listing my interest amount paid from last month (March of 2009).

How Much Interest I Pay Each Month

Please note that I will have to pay these amounts each & every month until I eliminate the associated debts. However, on the bright side, the amounts will lower each month as I lower the principle debt amounts.

Mortgage 1 (80%) – $592
Mortgage 2 (20%) – $296
Student loan 1 – $165
Student loan 2 – $120
Auto payment – $52
Credit card 1 – $30
Credit card 2 – $19
Credit card 3 – $11
Credit card 4 – $8
- Total interest amount paid for March 2009 – $1,293

Let it be stated that this is approximately 20% of our gross family income (amount after taxes). A convincing explanation of how this interest amount paid greatly hinders our ability to save and become financially free is simply not necessary; the numbers speak for themselves.

How I Arrived at the Above Amounts

Follow these simple steps to find out your monthly interest amount paid:

Write down a list of all your loan amounts including your mortgages, student loans, auto loans, credit cards, etc.
Either look at the statement each account mailed you last month, or log into their associated web sites to find the amount of interest (a.k.a. finance charge) you paid over the past month.
Write down the numbers you find above next to the associated accounts
Calculate your very own monthly interest amount paid.

After completing the above steps, you will most likely be filled with anger! I was.

The Anger I Gained Toward My Debt

Before I completed this exercise I was certainly angry about the amount of debt I had, but now that it has been so plainly laid out in front of me I have entered into an entirely new realm of DEBT HATRED!

Similar to how the bible teaches us to HATE SIN, I am learning more & more to have a righteous hatred toward my debt. It gives new meaning to Proverbs 22:7, “The rich ruleth over the poor, and the borrower is servant to the lender.”

It is important that we use this information as motivation to push us into a much more passionate, much more driven, much more functional stratum of debt repayment & elimination.

How to Channel Your Anger Into Motivation

This step is simple but crucial. You must not allow yourself to slip into the trap of becoming overwhelmed. You must realize that you are the only one who can turn this around. You must stand up and fight. You must take control of your own financial destiny and your own financial freedom!

Consider, meditate, and memorize this quote and use it as a daily battle cry against your debt: “A journey of a thousand miles begins with a single step.” ~ Lao Tzu

Solidify in your mind the realization that you got yourself into this mess & just the same you are the only one who can get yourself out. Now stand up and take responsibility for your own actions and commit to establish a new financial mission of debt free living. A mission that will change your existing relationship with your creditors. A mission that will enable you to take control of your own financial situation. A mission that will allow you to finally begin building your own wealth with the money you have long been squandering on interest and debt. A mission strongly fortified with direction and goals.

Real Steps to Reduce, Lower, and Eliminate Interest & Debt

I would like to start this section by happily reporting that Credit Card 4 from above was eliminated with this past months payment! That means that I will now be paying $8 less interest every month, and when I add in the reduction of principle of the other debts, that number actually grows to $12.

By using a focused, goal oriented approach, in one month I was able to lower my monthly interest amount paid by $12. I will use this amount as motivation and will keep track of how much I reduce my interest amount paid each month. You should do the same.

Hold on to the list you formulated above.
Call each creditor & attempt to get your interest rate lowered. This can give you a HUGE jump start in lowering that initial amount. DO NOT skip this step!
Each & every month record the interest amount paid for each debt.
Calculate your total interest amount paid every month.
Track your progress by listing your lowered amounts.
Place these monthly amounts somewhere you can see them every day, like your refrigerator.
Balance your focus by paying off both small debts & high interest debts. I use both of the following methods in tandom:
- The Dave Ramsey snowball method of paying off small debts first to motivate yourself & see entire debts eliminated
- Focusing on the highest interest debts – doing so will be the fastest way to lower your interest amount paid
Some would say reward yourself once a month by treating yourself to something you want, but for me the lowered amount of interest I’m paying is reward enough. Use what works for you.

The more we eliminate our interest amount paid each month, the more we can use toward paying ourselves. This disciplined approach, if properly employed, enables us to begin building wealth and will help guide us down the road toward our ultimate goal of FINANCIAL FREEDOM.

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Avoid the Pitfalls of Permanent Debt