Strive to Be Debt Free

Being Debt Free Is Not an Impossible Dream

According to some statistics, the average American household has approximately $8,000 in credit card debt.

According to other statistics, only about half of American households either have a credit card or carry a balance on one. Does this mean that of the households that do have credit card debt, they are carrying balances that approach $16,000?

I don’t know for sure, but I do know that most people filing for bankruptcy owe about 50% more on unsecured debt (which likely includes medical bills) than they earn. For example a family earning $30,000 typically has about $45,000 in debt.

What is this money spent on? The latest fashions, TV's, stereos, microwave ovens or whatever. How many purchases do you make that can truly be classified as necessary?

How many things would you have not bought if you had to pay cash?

For people in debt, this is not a tenable situation. If you owe $8000 on credit cards, paying a moderate interest rate of 13.5%, you have to pay $1080 a year just to service the debt; that is pay the interest. You are not reducing you principle by one cent.

Now this may not seem like a lot, but if your family earns $30,000 a year, you’re making $14.43 a hour before taxes, and, if you have a good accountant, probably about $11.00 a hour after all taxes are taken into consideration.

Now if you also have a $100,000 mortgage at 4.5%, you have to pay, at least in the first years, another $4500 in interest.

If you have a $15,000 car loan at 7.5%, that’s another $1125 a year in interest.

This adds up to $6705 in interest costs only. At $11.00 a hour (you can’t pay bills with pre-tax income), this means you have to work 609 hours or 15 weeks - nearly 30% of the year - just to pay interest.

But, you say to yourself, I’m in $123,000 debt and only make $30,000. There’s nothing that can be done about it. I certainly can’t cut up my credit cards; I need them to buy groceries at the end of the month when money is tight. I can’t pay down any of this debt, I don’t have an extra cent. The bills are eating me alive, but there’s nothing I can do about it – and besides it’s the banks’ fault for lending me the money in the first place.

There are things that can be done to become debt free. Nothing you’re going to like to hear. And until you face reality and scream “I’m mad as hell and I’m not going to take it anymore!”, you probably will just skate by, leaving things just as they are.

I have read the analogy that many people are addicted to credit, just as people are addicted to drugs and alcohol. Until you reach your personal bottom, you won’t do anything to become debt free.

But once you reach that point here are some things to consider.

If you have enough equity in your house to pay your other debts, refinance your house at the lowest rate you can. Pay off all the bills and write each creditor telling them to close your accounts. Do not even think of applying for new credit. Use the money only to pay off your old debt. Use whatever you save on interest to start a savings plan.

Drive the car until it’s ten or fifteen years old. Modern cars can last that long. And the cost of maintenance and repairs will be a lot lower than new car payments and you will also save on auto insurance.

If you have no equity, harsher steps are necessary to become debt free. Cut up all your credit cards. Close the accounts. Cut out all spending except for food – no restaurant meals are allowed. If you smoke or drink, give it up.

If you have any assets that are worth anything, like a second car, an ATV, RV or boat, sell them.

Get a second job or start a work at home business. Use every extra cent you make or save to overpay your debts, starting with the one with the highest rate. When one debt is paid, add the money you were paying on that debt to the payments you're making on the next debt – in other words don’t reduce the amount of money you are allocating to debt just because a bill is paid off.

Keep doing this until little by little your debt starts to disappear. If you have one of the financial software packages I wrote about in Financial Software, you will find that they have a neat program that allows you to set up a plan to become debt free. It shows you how many years earlier your debt will be retired and how much interest you will save. (You can get a similar printout from many debt counseling organizations for about $20)

Refer to the schedule monthly and cross out each month as you go. You can track your progress and see the light at the end of the tunnel. This will create a little added incentive to continue to strive to be debt free.

Once you pay off the unsecured debts, keep going with the mortgage. You will not believe the way you feel the day you wake up debt free at last.

I ran the above scenario through Quicken's Debt Reduction module. As it stands now, the debt would not be paid off until April 2035. Total interest would be $89,936. (That's 4 years of your life.)

Without adding anything to the monthly payments, the debt could be paid by July 2019, reducing interest to $48,045 and saving $41,890. If you can increase your payments by $50 a month, only $12.50 a week, you will be debt free in June, 2018 and save $46,130 in interest.

Finally if you could put an extra $50 a week toward debt repayment, you would be debt free in April 2016, only 11 years from now, and save $54,860 in interest. The more you add every month the faster the debt disappears and the more interest you

save. Another method to consider is the patent pending debt strategy contained in the e-book, How I Became Completely Debt Free, which will allow you to payback all of your debts, including your mortgage, in about 3 to 5 years and without claiming bankruptcy, without increasing your income, without getting a loan, without using any illegal or immoral techniques, without hiring an attorney and without so much as even calling your creditors.

These are not impossible goals. They require self discipline. They require that you only buy things you can pay with in cash. They require you to act like an adult and take control of your life.

But imagine what you could do if you had no debt.

  | Top | Credit Counseling | Home |