Debts True Effect On Your Self and Family

We all know the problem with debt. It all starts simply when you buy something with that little piece of plastic. Its all so fun and innocent. Its a mindset that you need somethimg now. you don't have time to save for it. Get it now and worry about the bill later. Maybe you don't have the money, but you'll just make the payments

The short term effects of debt are you have to make your payments with your finite amount of income. This bill arrives in the mail with a small monthly payment, you pay the bill and go on with your life. It still feels good, your paying it back. You see the credit card is your friend, it helps you live a better life. You continue this cycle of credit and it works for a while. Till it doesn't. You eventually don't have enough money to pay your debt. You get behind and here comes stress, fear and worry. Credit has made your life better.

That's only the beginning. Think of all the things you do and can't because of all this wonderful debt. I can relate in my life the many things I miss out on because of debt. For starters my mortgage is 40 percent of my income. Dave Ramsey's rule of thumb is that it shouldn't be more than 25 percent of your income. I can see why my house is keeping me poor. My mortgage is keeping me from saving and paying other bills in my life. The lack of of cash has made me go into further debt when an emergency comes up. A lot of things around the house get neglected like repairs and maintenance. As the debt payment rises, taking more cash from our budget, we don't do a lot of other activities, namely vacations. If we do vacation its put on debt making the situation worse.

More effects are you have to work more. I had to start working on the weekends just to make ends meet. I can't go back to a 5 day week I need the money, guess why, my debt payments. Its incredible I have to give up my Saturday to pay my debt. I'm not working for me but I am working for the bank till I pay them off.

Your quality of life reduced. Your in a bondage to your debtor. You have to do things you don't want to do, your choices are limited when you are in debt. How would things be different if you were not in debt. Think about this carefully. For me I could work one day less per week. I would not worry about getting sick and missing work. For most of us we are one week from financial disaster. Think what your life would be like if you had no debt.  I would have a great reduction in stress. My family would have more stability and security.I could be using my income  to build an emergency fund or build a Roth Ira.

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Budgets: Hold Your Nose and Try One

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Budgets, that's a dirty word to some of you. It strikes terror in the heart of the unorganized. It's a necessary evil that you may come to think more highly of by the time we are through here. Let's take the pressue off by saying a budget is not a tool used to keep you chained up. It's a simple helper that tells your money where to go. Think of every dollar as a little ant on it's way to do it's work. Ants are very organized in their work. There are no lazy ants they all have a job and they do it without complaint. Your money should do the same. A budget will tell your money what to do. 
 
Now how does it work. Every month you make a new budget. With previous budgets you'll have a guide. But with your first budget it works like this. Top of the page list your income for the month. Next prioritize your spending. Food, electric, car, gas, rent or mortgage. These are the core items to indicate on your budget. Next group consists of all others listed by importance. You may have more items on your budget than money to spend. It doesn't matter if you can't pay all your items on the list. You spend your money on this list till it's gone. This is a simplified budget. But you can budget for things not just for this month, but for things many months away. 
 
Your budget is now done. Now don't you reel better. You have a plan. This really will reduce stress and simplify your life. It is important to do this together with your spouse. They do have a say in it. Also both must promise to follow it. If there is a change to be made mid month, both must agree to it. Total transparency must always be maintained. 
 
The benifits of a budget are many. They will bring your marriage to a whole new level. It will build trust and reduce stress. Your first budget may crash and burn, but start over and keep trying.

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Debt Snowball. What is it?

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Image via Wikipedia

This term "Debt Snowball" what does it mean, does it refer to when Frosty the Snowman went over his credit limit? I don't think so. Its a term made famous by financial guru Dave Ramsey. The way it works is first be current in all your debts. List all your debts from smallest to largest ignoring interest rate. Pay the minimums on all your debts except the smallest one. The smallest one pay the minimum and as much other money you can scrape up to pay it off as fast as possible. After the first debt is paid off take that amount and add it to the second debts minimum. Hence increasing the payment on the second debt. When that one is paid off, take all that money add it to the the third minimum debt payment. Keep doing this till you go thru all your debts. This plan allows you to focus an ever increasing amount of money on your smallest debt. Every time the debts are paid off the snowball payment keeps getting bigger ultimately getting you out of debt sooner.

The key to this plan is the focusing on the smallest debt for an emotional win. Even though other debts may be a higher interest rate. You may be thinking paying off the highest interest debt first would be mathematically correct. The emotional win is more valuable to the individual. To have a couple of wins under your belt is a ego boosting feeling. This gives you the encouragement to keep going. In my personal experience it the only thing that kept me going and still does. The tedium of going thru this process is exasperating. It takes a long time and is a lot of work. You could lose patience and chuck it all if you didn't have some early wins. It like when you go on a diet and exercise. If you don't see results you most likely give up.

The argument of paying higher interest debt first is mathematically correct. It seems the right way to go. But responsibility with money is more psychological than math related. If you did the math on using credit, you wouldn't us it. It goes along with impulsed purchasing. Did you ever want to purchase an item. Maybe something you were exposed to when you were walking down the isle of a store. You just grabbed an item and put it in your shopping cart. Your whole thought process consisted of: See item, like item, I have credit card, Buy it. Totally a Pavlov's dog reaction. Not more than 2 second thought process and programed response. Now if you had left that credit card at home and only had cash the entire event would of happened differently. Thought process would go something like this. See item, like item, I only have cash, Do I want to use my little bit of cash on this piece of junk. Answer, "No". Its not automatic, it actually takes longer to decide to purchase because using cash actually hurts. Using credit is fun and painless and can be rationalized easily. You actually buy more stuff when you use credit. 

Here is an example of the debt snowball in action:

My Debts listed smallest to largest:

1. Home Depot - Balance 1214.00 - minimum 22.00 - Interest 15%
2. Chase 1 - Balance 2858.00 - minimum 36.00 - Interest 2.9%
3. Chase 2 - Balance 7076.00 - minimum 170.00 - Interest 16%

Here is the plan for paying off $11,148.00 of debt in 19 months. Its the plan I am going to follow. Of course if  I have any other extra money I will add it to the snowball. Again it will take discipline and focus to complete this. You must establish goals and make a written plan on how to complete them . The Debt Snowball is the best plan for getting out of debt. Some people have gone the way of "Debt Consolidation". Thats when you refinance all your bills into one amount and have one small affordable payment. This is not a plan for success. Its a lazy way of just moving your debt around and believing your actually doing something. Its a false economy to think that. Another way people pay back debt incorrectly is go to a credit consolidation company that takes charge of all your debt and renegotiates your balances and interest rates down. You end up paying them a large fee and wrecking your credit. Take charge of your debt, do this your self.

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Can You Start At 50+? Part 2

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Such great plans and goals have been made. Do you think I can really pull it off? A lot of debt has to be paid off. Lets see whats before me.

• Credit Card 1- Finished by October 1,2010
• Credit Card 2- Finished by October 1,2011
• Credit Card 3- Finished by October 1,2014 (realistically)

It doesn't look good for the old retirement account. This is a real problem. Starting in 4 years worries me. When seeing it in black and white it speaks volumes. But what choice do I have? I have a plan and I'm sticking to it. But maybe I should just pay the minimums on the cards and put the extra debt payments in my Roth IRA. I'm doing the debt snowball process for paying off debt. I'm putting all money towards the smallest debt and only the minimums to the others. When that's payed off then throwing all moneys toward the next one and so on. To reduce this time frame an increase in income is needed or a decrease in expenses. I'll be trying on both those fronts. So to answer my own question. Yes. But I wish I would of done this 30 years ago. It going to be a real pain in the ass.

Can You Start At 50+? Part 1

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The question is: Do I have a choice? Waiting so long to finally wake up and do something has really put me into a corner. It has forced me to get going. I'm worried I won't have enough money to retire on. Which is so true because I don't. I have a wife and family, they're not going anywhere. It's hard to believe I'll be 70 in 18 years. Wow. Still 18 years is far away. A lot can happen in that amount of time.

Now that I know I'm screwed I have to remember my goals. I must stay on track. My second goal is to pay off all debts but the mortgage. That means no saving till that's done. It's going to take a while to accomplish that. But later I'll be able to save at a greater rate. I am going to focus on the debt payments because it will free up more money to invest.
        The lack of focus can keep knocking you off track. The constant starting an stopping makes you just want to give up. You only have so much money to pay bills and save. The trouble starts when life happens. A car repair, medical bill, home repair or not budgeting for an upcoming event. You must be prepared for all these things or you will put back to the beginning. Paying better attention to your money is key.

GOALS, GOALS, GOALS

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Through all my life i have been told that to accomplish something in life you must have a plan. Mom and Dad would constantly say "Go to school, study hard, go to college and get a good job." Was I the only one to here this? I know this was my first plan given to me by my parents. If I followed it I would become successful. It didn't work to well, life got in the way.

I had some of my own goals in my life that I set up. For instance "Try to finish college, get some kind of job and try to pay your bills." That plan was the one I did accomplish. Who said, "When you aim at nothing you'll hit it every time."?

Well that's not going to happen anymore. I am setting goals here and now for the world to see. In time we will see what I accomplish. Now what are these goals?

1. Have $1000 saved in the bank for emergency's.
2. Get on a budget.
3. Spend less than I make
4. Pay off all debts but the mortgage.
5. Have 3 to 6 months expenses in savings.
6. Save for college for my 10 year old daughter.
7. Save 15% of my income to a Roth Ira for retirement.
8. Pay off Mortgage.

There are my goals. I have the first 2 completed. I am struggling to do the third goal. Maybe I'll get better with time. The fourth goal is what I'm concentrating on now. Are these lofty goals? I don't think so. I do think that if I don't do them I will be reading the book "50 Ways to Cook Alpo" in my retirement.

I must admit I am stealing this list from Dave Ramsey's "7 Baby Steps". He is real good with these things, check him out. I did edit it for my life but "Baby Steps" are great.