Getting out of Debt

GETTING OUT OF DEBT

According to the Executive Office for the United States Trustees, on an average day in U.S. Bankruptcy Court, 6,310 new cases are filed. To illustrate the number of bankruptcies, consider that in a given year more Americans file for bankruptcy than graduate from college, and more children live through their parents’ bankruptcy than their parents’ divorce. Compare this to the average daily bankruptcies in 1973 of 1,500. In addition, for many of the past five years, Utah has led the nation in bankruptcy filings per household. It’s time to take control of our spending, hopefully this presentation will help you do just that (and if it doesn’t, it makes a great fire starter).

Goals

In order to attain any kind of success it’s important to first determine how you plan on getting there. Could you imagine someone wanting to climb Mount Everest but not devising a plan on how to get there? Yet many of us want to be financially successful without creating a plan. We make excuses about how boring it is to budgets or how time consuming it is to reconcile, but I would bet that the person that reaches the peak of Mount Everest can tell you some times that weren’t extremely exciting or fun. But the climber had a goal to reach so the expedition continued until success was attained. The same is true with our finances.

Let’s do a quick task. The first thing you need to do is devise a plan:

Take a minute and go on a virtual shopping spree. Write down all the goals you would like to achieve in your lifetime. Don’tworry about details just start making your list.
Take that list and narrow it down to five items that best line-up with your priorities. These should be the five most important things for you to accomplish in your life.
Figure out how much each of these items will cost and how long it will take to accomplish each goal.
Break long term goals (those that will take more than one year to accomplish) into short-term goals by determining how much your commitment is yearly, monthly, even weekly if you want.

All right, you’re already headed down that financial Mount Everest expedition. See this isn’t so hard or boring is it? And hopefully it’s even a bit challenging too. Finalize your goals on the Excel spreadsheet included in the Personal Financial Plan under the tab titled “Chapter 1-Goals.” Type over “Goal 1, Goal 2 . . . .” At the bottom of the Excel spreadsheet is a table that can help you determine how much your long-term goals will cost annually.

By the time you have completed the goals sheet on the included spreadsheet your goals should satisfy three requirements:

They should be specific. Your goals should be both time and dollar sensitive. For instance a goal stating “I will not spend as much money on videos” is not specific enough. Instead, your goal could be “I will only rent one video each month.”
They should be realistic. You know yourself better than anyone else does. Create goals that can be attained but require you to stretch yourself do meet them.
They should be known by others. Share your goals with friends and family members that will keep you on task. Research has proven that goals are more likely to be accomplished if they are shared with others.

Spending and Saving

Do you know how much you spend on electricity each month? How about groceries? If not, it’s time to find out. The way we’re going to do that is to build a budget. I know, you’ve tried this before and it didn’t work. Maybe that’s because you didn’t know how to put a budget together or nobody had sat you down and said “if you want to succeed in life you need to work at it!!—That’s no different with money!!” You need to spend time with your money if you want it to work for you. Plan, budget, analyze, and revise. Remember, this is one thing in your life where you are in charge!! You get to create the budget the way you want to and you get to spend the money the way you want to. Hopefully, once you realize where all the money is going, you will even make changes to the way you spend money the way you want to.

Making a budget is easy. Making a realistic budget is MUCH harder!!

Planning

So where’s your money going? Some monthly expenses are easy to determine. For instance, rent or mortgage payments, credit card payments, and car loan payments. You should be able to budget those easily. For some of the others make an intelligent guess. Use last month’s checkbook register to estimate utilities, groceries, gas, savings, etc. Write these amounts down. Do any of the amounts surprise you? Are there some expenses that you still have no idea what they are because you withdrew money from the ATM and you’ve forgotten what you spent it on? The reality is that most people don’t know where their money goes. They pay their bills, buy the things they want, and if there’s money left, great. If not, there’s always plastic. But that’s no way to make you feel better about your finances so let’s try a different approach.

As I said earlier keeping up with your finances will take some time. But think about all the time you spend making that money. Wouldn’t it be worth it to make sure that money is used the best way possible?

Budgeting

There are thousands of different ways to keep track of your spending. It doesn’t matter which way you use as long is you start keeping track NOW!! I’ll give you a few templates to use. You can use one of them, buy a finance program yourself (MS Money, Quicken, etc.), or create your own template. But start budgeting and tracking your spending as soon as you can.

When you analyzed where your money went last year you may have found a load of ATM withdrawals and now you have no idea what you did with all that money. Although cash is good to have because it’s accepted as payment by everyone in the good ole U.S of A, the down side is that it’s hard to remember where you spent it. So let’s look at some ideas on how to make it easier for each of us to track spending:

Give up cash for a while. Use checks or debit cards and let your bank keep your transaction history for you. Make sure you keep track of debit card transactions in your register or you’ll have a worse problem than you had with your cash.
Keep a memo pad or a small piece of paper in your purse or wallet to write down what you spent money on.
Every time you make a purchase keep the receipt. When you get home put the receipt in an envelope attached to your refrigerator or a jar sitting on the counter. At the end of the week or the month update your expenditures.
Use your PDA to record purchases in.

All right, let’s get started.

Go to one of the budget spreadsheets provided, either the monthly budget and associated actual sheets or the single month tracker. Fill out as much as you can on these sheets. Start off by deciding what you want to keep track of. If the accounts on the spreadsheet don’t work for you change them. Are you surprised at how many “things” you spend your money on? Are you spending more than you make? Well, that’s what we (you and me) are going to try to solve. By the end of this process you should have some real ways to help you live within your means. Although some of the things discussed in the next few pages may seem corny, remember, managing your money is more than just having money left at the end of the month. It’s more than buying generic ketchup instead of Hunt’s. To really live within your means requires a change in your attitude toward spending.

Below are a few of my corny ways to help you think about money differently:

Before buying something think about how long you have to work to pay for it. If you get paid an annual salary divide your salary by 2,080 (that’s about how many hours are in a year) to determine your hourly rate. Now when you’re thinking about buying that new whatchamajigger ask yourself “Is it worth _____ hours of my labor?”
Think about how much the money you’re considering would be worth if you invested it.
Every time you get ready to spend money, think about your goals. Does this expenditure help you reach the goals you set or not? Are you prolonging the time it will take to attain your goals?
Take care of your money. When you receive change back from a teller don’t just jam it into your purse or wallet. Organize it. Face it all the same direction. Put the larger bills in the back and the smaller bills in the front.

I know, pretty corny hugh? But if you’ll start doing some of these things you’ll think about money differently. And when you think about money differently you start using money differently.

Before putting any dollars on the sheet let’s talk about a few things that might make this process a little easier AND better.

The budget doesn’t control you—you control the budget. Now that you’ve started thinking about all the things you spend money on you’ve probably discovered an item or two you can do without or at least cut back on. If you’re having a tough time letting go of these special expenses review your goals again. Which one are you putting off until tomorrow so you can spend today?
A budget is all about knowledge. The purpose of budgeting is so you can better understand where your money goes, how you can enjoy it more, and where the best “bang for the buck” is.
The best budget is the budget that works for you. That’s why I want you to decide whether to use one of my formats, a budgeting software packet, or create one on a piece of paper. The best system isn’t THE perfect system, it the system that’s perfect for you.

It will take a while to complete your budget, but once you’ve done it the process will become easier and easier. Let’s start adding numbers to your spreadsheets.

Fill in the income line(s). Put in your pre-tax dollars from your paycheck, child support, alimony, interest, dividends, or any other source that you spend from. If you transfer money from savings for the month put that in this section too.
Fill in as many of the expense items as you can. Rent/Mortgage, gas, child care, etc. should be pretty easy to complete. Use your check register from last month to estimate other expenses.

Before you write down your loan and credit card expenses let’s talk a little about ways to get out of debt. First take a minute and imagine yourself completely debt free. No more credit card bills, no more car payments . . . . .mm-mm-mm does that feel good or what? According to a recent survey performed by Myvesta.org, the typical person living in the West carries $2,524 in credit card debt. If the typical person pays the minimum (3%) payment, it will take approximately 11 years and 9 months to pay the card off. The card holder will also have paid $1,170 of interest payments to pay the credit cards off, given a 12% interest rate. Are credit card purchases really worth that much? That says for every dollar you spent you paid almost $1.50 for it.

So how do we get out of debt? Let’s talk about a few proven steps:

Commit to yourself (and someone else since goals shared with others are more likely to be reached) to spend less than you make. Quit using credit cards for daily purchases. If you can’t afford it today how can you possibly pay one-and-a-half times more for it tomorrow?
Distinguish between bad debt and good debt. If you are going into debt for something that appreciates, if the interest rate is less than 10%, or there are tax advantages associated with the debt it might be good debt. Everything else is bad debt. Those are the items you want to get rid of first.
Pick one credit card to keep. From the list of credit cards you have pick the one with the lowest interest. Cut up all your other cards. Promise yourself NEVER to use the card you didn’t cut up unless it is an emergency (breaking a nail and needing to get a quick manicure is NOT an emergency).
Gather all your credit card bills, write down their balances and minimum payments, add them all up and (once you recover from your near heart attack) promise to pay not only the minimum payment but an additional amount in order to pay the card(s) off quicker.
Find the telephone number for your credit card companies on their bill. Call each card and request a lower interest rate. Start with the company that has the highest rate. Try to get the rate as low as the card you didn’t cut up.
Choose a quick winner. There are a couple of thoughts on this subject. You can either:
Go to your list of “bad debt” and choose the highest interest rate and start working on paying that debt off first, or
Go to your list of “bad debt” and choose the lowest balance and work on paying that debt off first. Though most people will encourage you to choose the card with the highest interest rate I prefer getting something paid off fast so you feel encouraged and know you can do this. If you choose the card with the highest rate and that card also has the most charged on it you might not have it paid off for years. I prefer paying off the card with the smallest balance. Once it’s paid off you feel a sense of accomplishment. Now use the monthly payment you were paying on the paid off credit card and apply it to the card with the highest rate. As you pay off a card apply the payment to the next card. You’ll be surprised how fast you will pay your cards off.
Be aggressive toward paying off your credit card but don’t put other payments in jeopardy (car loans, mortgage, etc.) by trying to over pay on credit cards.
Celebrate!! As you get a card paid off take time to congratulate yourself for a job well done. Take yourself out to dinner, go to a movie, or just hug someone that means a lot to you!! But do something. This is a major accomplishment (just don’t use your credit card to pay for it!)

Getting Out of Debt and Staying Out of Debt

Getting out of debt and staying out of debt is actually a very easy concept. Living it may be more difficult, but the concept is simple. All you have to do is spend less money than you make – easy right?!?!? So why is this concept so hard to live by so many of us? Mainly it’s because we have to do it every day for our entire life. It’s not something we can do this week, not do next week, and still be ahead of the game. Instead we have to do it day in and day out, night in and night out, week days, weekends, holidays, and even while we’re on vacation.

The real problem with debt is that it costs a lot more than savings earns, generally. For instance, let’s assume for a minute that you set aside $25 a month in an interest bearing account that makes 5% interest. Over a period of 5 years that $1,500 would have grown to $1,700. If, on the other hand, you went $25 a month in debt and the interest on that debt was 12%, after five years you would be $2,100 in debt. That’s $400 more than what you could have saved!! That is the difference between saving and spending. See we really DO have to work harder to save than we do spend!

Creating Your Own Financial Global Positioning System (GPS)

In order to get where you want to go, you first have to know where you are. Let’s start this journey by finding out how much interest you pay each year. Do this by filling in the Debt worksheet included in this packet.

Let’s walk through the numbers on that spreadsheet so you can do your own. Looking from left to right, place the name of your card or loan in the first column (column B-Name of Card/Loan). In the second column (column C-Amount Owed) place the new balance from your bill. If this is a vehicle loan either look your loan up on the internet or call your financial institution to find out how much is still outstanding on your loan. In the next column (Column D-interest rate) place the interest rate for your card or loan. In the fourth column (Column E-Estimated Annual Interest Payment) calculate your annual interest payment by multiplying the amount owed (Column C) by the interest rate (Column D). Remember when multiplying by an interest rate you need to move the decimal two places to the right, so if the interest rate is 13.5 percent you need to multiply by .135 to get the correct answer. If you are filling this spreadsheet in on a computer, Excel will do this calculation for you. Place your annual after-tax income (net income) in the next column (Column G-After Tax Annual Income) and calculate your Bad Debt-to-Income Ratio in the last Column (Column H-Bad Debt-to-Income) by dividing the amount owed (Column C) by your after-tax income (Column G). If you are using Excel this calculation will be done automatically. Now do this for all your loans except your mortgage. When you finish you will have a complete list of your loans, their amounts, and your total Bad Debt-to-Income ratio. Are you a little surprised at how much debt you have, how much interest you pay? Remember, the annual interest you pay is how much you pay for the honor of staying in debt. If your total Bad Debt-to-Income ratio is 15% or greater we need to spend some time reducing it. Our goal is to get this number to zero and keep it there.