Personal Finances Part 3 - Debt

It is officially the start of a new month, and a great time to start using the Cash Flow Plan, as Dave says “spending every dollar on paper on purpose for every single month, because every month brings different expenses”.

Completing baby step 1 will allow you to now proceed with baby step 2, which is dumping your debt (all except for the house payment) as fast as you can.

DUMPING DEBT

Cut up the credit cards. You don’t need them. Credit Cards have been marketed to us so intensely that the credit card companies have instilled in us that we cannot live with out them. Grandpa and Grandma didn’t grow up using a credit card; they just saved their money for a rainy day.

Dave recommends “never using a credit card. NEVER! You can obtain internet access, make online purchases, and buy things in a store with a debit card”.

Baby step 2 also means cutting back in luxuries and squeezing every extra cent into the debts.

To quickly dump debt you may have to implement most, if not all of these changes to your cash out-go:


1. Sell the new car(s) to get out from under the large payments and then buy a used run-around-car for 2 to 5 thousand. WATCH Dave's  Reasoning to not buy a new car.

2. If your housing payment is more than 35% of you net income, then get out of it! Sell the house or else apply for a lower interest rate in your mortgage. Rent a cheaper apartment. (To figure out this percentage, divide the payment by the net income - easy!).

3. Sell lots of stuff. Have a garage sale and put that money towards the debt.

4. Cut down on eating out. Eating out will eat your food budget and you alive. Cook from scratch – it’s healthier and cheaper. You may have to resort to “beans and rice and rice and beans”.

5. Cut out the daily purchases for the coke/pepsi, coffee, cigarettes, etc. DRINK TAP WATER it’s free. Bottled water, juice, and pop drinks adds up quickly; get a tap water filter if you need to.

6. Cut back on movie theaters. Need a date with your spouse? Go for a walk and talk, it’s free.

7. Consider eliminating cable or satellite, cancel the cell phones to free up some money.

8. Put expensive hobbies on hold.

9. Shop at consignment stores like Good Will.

10. Stop spending money on any other extra’s that do not fall with in the four walls.

11. Get an extra job (temporarily), work over-time

Just get out of debt as fast as you can. It’s easy to wander into debt, but to get out you’ll have to sacrifice.

Pay off the smallest debt first, while continuing to pay the minimum balance on the remaining debts (if possible), then use all that extra cash that was going towards the smallest payment and put it towards the next smallest debt, and so on and so forth until every debt is paid.

DEBT CONSOLIDATION
Debt Consolidation is a CON and does not work. Debt CON-solidation does NOT save interest – it throws your low interest loans into one high interest rate, it gives you a smaller payment making you stay in debt longer. You can NOT borrow your way out of debt. The company may also charge a fee that could also be going towards your debt. Smaller payments equal more time in debt. "Debt CONsolidation is an emotional and psychologiacl lie. The debt is only moved, not paid off. It's like taking a diet pill and continue the bad habbits - it makes me exempt from change. If you don't change your habbits, you're going to go right back to where you were." Using a debt consolidation company will most likely not change the spending behavior that dug the pit for you in the first place. You can’t continue to dig your way out of the pit, you must climb your way out! Debt consolidation doe not get you out of debt - YOU get YOU out of debt.

Remember the four basic walls:
1)Shelter
2)food
3)clothing
4)transportation (not a brand-new car!) Your income must provide for these necessities first, and then you take care of the debts.


CHANGE YOUR WAY OF THINKING:

Car payments do not have to be a way of life.

You do not need to build your credit score by applying for a credit card.

The best way to beat debt is to quit borrowing money and live on less than you make. “Act your wage”.

Dave instructs “buying things on 12 months same-as-cash is a stupid idea. If you buy the item with cash, you will get an even better deal. If you can’t save up and pay for the item with cash, you can’t afford to buy it! To get a deal when considering a purchase, use cash and be sure to show the retailer your cash in hand.”

Debt is heavily marketed to young people, and they will receive a lot of offers from credit card companies.

(When I was getting credit card applications in the mail I would return the application with the statement “REMOVE FROM MAILING LIST” written on it – this will make the companies pay double postage for sending the application, and give the post office additional revenue. Eventually I was removed from all the mailing lists, and have not gotten any new offers for several years now.)

SIGNIFICANT PURCHASES
A significant purchase is normally anything over $300. You need to set a significant purchase price amount with your spouse, so when a purchase comes up that is more than this amount, you both must agree to the purchase before spending the money on it.

Develop discipline in your power over purchasing:

1. Wait overnite before making a purchase to get over the excitement/high of wanting to make a purchase.

2. Consider your buying motive – is it to get rid of guilt, depression, or stress; or do you really need it?

3. NEVER buy anything you do not completely understand!

4. Consider the opportunity cost – think long term. Example: spend $40,000 on a new vehicle that in 10-15 years it will be worth $5,000 OR put that $40,000 into a mutual fund and let it grow, 15 years later it could be worth $300,000.

5. Always seek counsel from a spouse, a parent, or someone knowledgeable.

Unfortunately, I have made 2 huge buying mistakes (buying a brand-new car, and taking out a student loan) because I did not follow any of these steps, and now I deeply regret them when I think of the money I could have invested and saved. The opportunity cost for me is that I could have had money for a down payment on a house.

LESSON LEARNED: Make purchases you will be proud of 10 years later.

CREDIT BUREAUS & COLLECTION PRACTICES
Dave Ramsey gives very detailed information on how to respond to credit collectors, and what to do if they are calling you, so much so that I am not going to cover it. If you are experiencing these assaults, then read his book: “Total Money Make-Over” or, preferably, take the course: “Financial Peace University” either on-line or where a class is being hosted in your community. He will teach you how to deal with collectors, how they manipulate you, and what your rights are against them.

Interested in taking FINANCIAL PEACE UNIVERSITY? http://www.daveramsey.com/fpu/home/ is where you can search if a class is being offered in your area, or choose to take it on-line.

Financial Peace University is changing Seth's and my life and view of money. It has given us financial hope in our future. The time you will put into it is worth it, believe me! Just take his class, you will not regret it. I promise.

If you can’t take Financial Peace University, then read Dave Ramsey’s how-to book titled “Total Money Make-Over” – There is an excellent package for sale on his website: http://www.daveramsey.com/store/specials/Starter-Special/prod459.html?ictid=lm2

Dave Ramsey’s show is daily on the Fox Business network, or on the internet site hulu: http://www.hulu.com/the-dave-ramsey-show you can also pick up bits and pieces of his how-to’s from listening to the show.

Here is a show where Dave discusses HOW to use and stick to a budget. Once it loads, the segment begins about 13 minutes in.

Here is an excellent show where Dave discusess the difference between the book and Financial Peace University, gives more information about getting out of debt, as well as some motivating call-ins of people who are now debt-free.

YOU WANT TO BE DEBT FREE, NO LONGER SLAVE TO THE MASTER(card)!

Interestingly, In the Sunday morning session of October 2010 General Conference, President Henry B. Eyring mentioned that the phrophet Ezra Taft Benson instructed that house mortgage payments be paid off as soon as possible. Well, Dave Ramsey teaches this also, it is baby step 6. So follow the councel of our prophets, pay off your home early.... How? Get on board with Dave Ramsey's 7 step program.

Here are some great talks on the topic of debt from previous General Conferences:
"The Responsibility of Welfare Rests with Me and My Family"
"Earthly Debts, Heavenly Debts"
"Prepare Ye"