Budgeting, avoiding debt and getting
out of debt
Part 2
On January 27, 2015 I was asked to
speak to families by the BCMW Head Start program in Centralia about budgeting,
avoiding debt and getting out of debt.
I prepared a thirty-minute speech
with handouts and other documents. Most of my speech was cobbled together from
notes online, and I thought I would write it up as a blog to share with you.
Note that these are lecture notes
and not originally done to be read. It’s like reading a play - something I
always complained about in school when studying Shakespeare, etc. It’s like
trying to “listen” to Mozart or the Beatles by only looking at the sheet music.
So it is a little disjointed, but I hope you enjoy it.
Check the first part of my speech
here.
***
Now that you’ve
found a small pool of “extra” savings, how can you use that to get out of debt?
Make a conscious decision to stop
borrowing money. Right now. If you want to get out of debt fast, you have to
stop using debt to fund your everyday expenses and lifestyle. This means no
more financing furniture, no more signing up for credit cards, no more test
driving brand new cars that you don’t have the cash to pay for. This will help
you focus solely on the debt that you currently do have so that you can develop
a game plan to pay it off quickly.
DON'T take out a
big loan to pay off all the smaller ones; you can't borrow your way out of
debt. Especially if you are still used to using debt to finance your everyday
expenses. In a few years, or even months, you’ll be back to several loans and
credit cards AND the big loan that paid off your previous debt...
Ask
for a lower interest rate: Frankly I usually have doubts about this
working, but I’ve had people tell me they have had some success. Grab a bill from any
account charging you more than 15% interest. Dial the toll-free number on the
bill and ask to have your rate reduced -- say, to 10%. Tell them that you'd
really like to stay with them as a customer, but you are facing financial
difficulty and have received offers for much-lower-rate cards. Stand firm and
remember that, to them, you are both a customer and a means of profit. You have
nothing to lose - all they can say is “No.” Thank them and hang up. But if they
say yes, you could save some money. And always, always ask a letter from them
confirming the new rate.
Should you
switch to a low-interest or no-interest credit card? Well, why not? If you
stick to the payment plan it will save you money in the long run. One saying is
applying for lots of credit cards at one time hurts your credit. Odds are your
credit is already hurting right now ... so where’s the real harm? And all the
new credit cards can say is no and you can cancel them before charging anything
on them - but watch out for the transfer fees. Is it worth paying no interest
when they add a thousand dollars to your bill?
Is there any way to earn extra cash?
Books and financial gurus tell us to “go get a second job”. Yeah, right. I earn
more money, I lose my aid. Or “start
your own business”. Seriously? How can they say that and keep a straight face?
But maybe the older children can
help with part-time jobs. And they can help with expenses. They can start
learning about income and not using debt to fund living expenses. A habit
they’ll get into that will benefit them the rest of their lives!
Can you sell things? Don’t think of
ways to make some extra money as a waste of time. You might spend all day on
Saturday sitting at your yard sale for $40.00. But it’s $40.00! What else would
you be doing? Watching TV? The kids can help count money and make change - my
gosh they might learn something!
Take old toys to consignment shops,
sell old clothes on those online or Facebook yard sales.
Once you have found some extra cash,
it’s time to organize your debt and start paying it off.
***
Financial gurus use two approaches:
1. List your debts smallest to
largest regardless of the interest rate. This helps build momentum. When we
paid off our first debt it’s encouraging and exciting! Even though we had
higher interest debts, this gave us something that was very powerful: the
belief that we could get out of debt quickly if we stuck to the plan. Then when
that debt is paid off, roll that monthly payment into the next debt.
Example: you’ve found a pool of
$75.00 extra per month and pay that on a bill until that is paid down. Then you
go to the next bill and pay that bill the extra $75.00 plus its minimum
payment, let’s say $30.00, too. So you have $105.00 going to pay that bill.
Once that is paid off in a few months to a year roll that $105.00 to the next
bill and add its minimum payment - let’s say $40.00 per month. So you are
making $145.00 per month on that third bill!
2. List your debts starting with the
highest interest rate first and end with the debt with the lowest interest
rate. This will save the most money in interest over time.
Regardless of which process you
choose, the key is to stick with it.
Throw that excess cash at your debt
I mentioned this before ... if extra
money comes to you, take this cash and use it to tackle your debt. Some good
examples would be a tax refund, selling a car, selling toys at consignment
shops or online. The more cash you can put towards your debt, the faster it
will disappear.
Be aggressive
in paying down debt, but don't get so ambitious that you risk missing minimum
payments on your mortgage, automobile, or any other secured credit account.
(Secured means that if you miss enough payments, the bank can show up and take
away your stuff.)
***
Then
there is bankruptcy, this is what I do. I am a bankruptcy attorney. In this
debt pay-off plan I consider this the nuclear option. Boom! I’ll explain why in a bit.
There
are two kinds of bankruptcy you can file - the Chapter 7 and the Chapter 13.
Why they are called that is because the bankruptcy code is like any book - it’s
divided into chapters and the chapters that apply to people at 7 and 13.
Chapter 13 is a consolidation of all your debt - kind of like what we are
talking about right now. The Chapter 7 eliminates or liquidates all debt.
There’s
a lot more to it than that, such as car loans and house loans, but that would
take up another half hour.
The
trouble with filing bankruptcy is the same as getting a big loan to pay off
your debt. You need to get in the habit of not financing your everyday expenses
with credit. Bankruptcy will eliminate your credit cards and loans, but if you
don’t learn to live and spend without them - you’ll be back to owing more
credit cards and loans in a few years, or months!
Remember
that originally credit cards were a safe substitute for cash - usually in
bigger cities or stores. I charge on my account and pay it off at the end of
the week. In rural areas people charged until they had the cash available. It’s
too wet to cultivate the beans, but after ten days of sunshine I can harvest the
crop and pay store or bank debt.
Debit
cards are now the substitute for cash. I use a debit card instead of cash. It’s
safer and most places take them now. Don’t use credit cards for food or
clothes. When Wal-Mart announced in the mid-1990s they would start accepting
credit cards, I knew the impact it would have on people dependent on credit
cards.
***
OK, so I’ve paid off all my debt,
now what? Establish a starter Emergency Fund of $1000.
You might be wondering, ‘Why is
having an emergency fund important’? Well, if you don’t have any money in the
bank and an emergency does happen, how are you going to pay for it? For most
people, credit cards become the funding source for those emergencies. If you
are trying to get out of debt then you need to put a buffer between you and
debt; that is exactly what an emergency fund does.
A fun way to save money is to add
money into a jar or piggy bank at the rate of the same amount of dollars as the
week of the year beginning January 1st (we’re nearly in February so you will
have to catch up quick). $1.00 the first week, $2.00 the second week, etc. This
might get tight by the time you get to week 30 or so... (this will be
mid-July), but by then you’ve collected $465.00 - in ten weeks that will be
$820.00 (mid September): there’s your Christmas spending money. If you can make
it to Week 48 (just after Thanksgiving), that’s $1,176.00. That’s a nice way to
save up for your emergency fund. By the way, if you want to catch up, the end
of January totals $15.00.
When you have a huge debt load you
feel isolated and bummed out. But if there is one thing to remember is that you
are not alone. And there are people you can turn to for help. There are lots of
books and financial gurus out there. You can check out books and DVDs from the
library or buy them cheaply on ebay.
And by the way, check your local
libraries or museums or conservatories for free activities for kids and
families - game days, reading nights, movie nights, etc. Substitute that
instead of paying for the family to see a movie.
When it comes to getting out of debt
one of my favorites is John Cummuta. His earlier tapes and DVDs talk about this
system of paying off your debt slowly and I like what he says and his
down-to-earth style. Nowadays he also talks about what to do with all that
extra money: invest in this, invest in that, start your own business, etc.; but
his method to climb out of debt is still good advise.
But there are also so many scam
artists and charlatans out there, so be careful. You know, “I can help you make
a millions dollars. Just send one dollar to “How to Make a Millions
Dollars”...” and their secret is to get one million people to send them a
dollar...
And don’t put up with smarmy
condescending jerks. The type that says it’s not your fault and then spend
twenty minutes telling you why it’s your fault.
Debt doesn’t have to be forever.
Develop your financial game plan and start your journey toward being debt-free.
***
(The suggestions
and ideas of this blog are cobbled together from various internet sites and
blogs. Some ideas and suggestions are original; some taken from various
“un-cited” sources. Copyrights, if any, are held by the proper holders.)
Michael Curry
