Paying down personal debt

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Wendy S. Delmater's picture
Wendy S. Delmater
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Paying down personal debt

Yesterday I dropped by to see my personal banker at my small, highly rated, local bank. She's the district manager now so I thought she would have a finger on the pulse of the local economy. "How are people doing"" I asked.

"It depends," she answered. "Some have their house paid off and no debt and they are doing okay, But some . . ." she frowned and looked at a loss for words.

"But some have huge underwater mortgages?" I prompted.

"Yes, and other debt. It's not going well for them at all," she shook her head sadly.

Then today I ran across this news item:

The average consumer owes $15k on auto debt, $173k on mortgage, $26k on student loans, $48k home equity debt & $6k on credit cards. –Consumer Credit Score Climate Report

(I'm assuming from the context that they mean American copnsumer; hat tip to Dave Ramsey) Holy mackerel! Talk about unsustainable! I was gobsmacked and cannot wrap my brain around these numbers. My husband and I have NO debt of any kind. But we both had to pay off massive debts (from our exes.) I wondered if we had a CM thread about paying off debt, and searched. Nope.

So here it is. This thread to talk about the need for, and strategies for, paying personal debt. Have at it, folks.

 

.

 

 

 

Nate's picture
Nate
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safewrite wrote: Yesterday
safewrite wrote:

Yesterday I dropped by to see my personal banker at my small, highly rated, local bank.

Safewrite,

I don't mean to derail this post, but how did you find a small, highly rated,local bank?

Nate

ao's picture
ao
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Thomas Hedin's picture
Thomas Hedin
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nothing to pay the debt with.

It should be obvious that a big problem is that we lack anything to pay the debt with.

joesxm2011's picture
joesxm2011
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Checking on Banks

 bankrate.com has a bank safety rating feature that lets you check up on a bank or search by rating in your area.

This seems to me a little liberal in giving credit to banks, however it is a good place to start.

One of the McAlvany Weekly Commentary podcasts mentioned that they have a book called something like the Weisse Report and said that if you call them up and ask they will look your bank up for you.  I did this a couple times to further screen some banks I found using bankrate.com.

I felt bad bothering them, but I guess they feel that it is a good chance to get your address and send you a free sample of Don McAlvany's newsletter and the add for their gold coin company.

oppmsu's picture
oppmsu
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Here's my two cents.  Some

Here's my two cents. 

Some background.  We have been through Dave Ramsey's Financial Peace program and found it worthwhile, though we don't follow all his advice to the letter aka we are not Dave Ramsey disciples.  It did (and does) provide a solid foundation to start from. 

Full disclosure: We are debt free except for our mortgage, BUT we didn't start that way.  :(

In my opinion, debt reduction has to start with a process before ever getting to the actually paying down money part. 

1.  Have a budget. 

It is BY FAR the hardest part of debt reduction.  There are many online tools available that can help you create and/or manage a budget.  Some are free (mint.com) with limitations and some you pay for (youneedabudget.com).  We use YNAB (YouNeedABudget). 

Don't get frustrated when you are over budget or forget things that should be on the budget.  It takes 2-3 months to fine tune a first time budget....trust me I speak from experience.

2.  Stick to the budget. 

It's the second hardest part of debt reduction.  On the 28th of every month, we sit down and talk about what we have upcoming in the next month(s) to account for.  Once the original budget is set up, each successive month is easy and a simple 10-15 minute conversation is all it takes.

3.  Need vs. Want

Seriously.  It's the question we ask ourselves every time we feel the need to buy something.  If you ask it and you're honest with yourself, you'll quickly realize how much less you spend.  This goes for simple things like buying a Coke and bag of chips at the convenience store all the way up the chain to buying a new car versus buying used or just driving the current car a little while longer. It's amazing how fast you can get away from the "keeping up with the Joneses" mentality.

4.  Get rid of your credit cards.

It's a proven fact that consumers spend 10-20% more by using credit cards than with cash/debit.  Even for those that pay off their credit cards each month that fact remains, not to mention the debt cloud.  By debt cloud, I mean we used to put everything on credit cards and pay it off each month (no matter how much it hurt).  Then I lost my job with no severance.  BUT we still had a huge credit card bill to pay that next month even when we quit spending the day I lost my job.  With cash/debit you don't have that debt cloud.  FYI, I'm actually ok with those that have one credit card for emergencies until they have an emergency fund built up, but after that's done what's the point?

5.  Cut, cut, and cut unnecesary expenses

Some examples: 

We reduced the cable package down to the base plus DVR. (saved $40/month)

We eliminated the home phone and just use our cell phones (cut $35/month out)

We cut the cable internet and use a wireless system (ours is Sprint Overdrive) and saved $25 per month.

We buy meat and chicken ONLY when it is on big sale.  Reduced our grocery expenditure by $1,400 annually.  Yes it costs more up front, but the savings over time is the help.  We also invested in one of those Food Savers which allowed us to buy family size packs but reduce them to one meal size portions to freeze.

6.  Sell stuff. 

Look around for things that you haven't used in 2 years, then 1 year, then 6 months. If you aren't using it and you don't need it again, try to sell it. Craigslist is a great way to sell stuff (and buy cheap). 

Once you sell stuff, use the money to pay down a debt.  DO NOT put it back into your bank account unless it is for the sole purpose of sending the money via check to pay down a debt.  

I'll stop there as I don't want to hijack safewrite's thread, not to mention let others chime in on how they do it.  I'll throw out other ideas if people want.  It actually turns into a liberating experience once you have gone through it. 

One last thought for those married or those with kids.  Getting out of debt AND involving the spouse/kids is one of the best life lessons you can teach.  Not to mention it strengthens relationships and makes you do something that a lot of families don't.......communicate!   ;)

Poet's picture
Poet
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Clarification On The Statistics

The original statistics are from www.creditkarma.com

In September 2011, Credit Karma released the following press regarding the "average consumer with an account" in August 2011:

  • $174,742 in home mortgage loans
  • $47,956 in home equity debt
  • $15,275 in auto loans
  • $29,985 in student loans

The same press release also stated that the average credit card debt as of August 2011 was $6,285.

(Source: http://www.creditkarma.com/about/credit_card_debt_falls_18_percent_since_august_2010)

So for those with a home mortgage, the average balance was $174,742. For those with student loans, their average balance was $29,985. For those with home equity loans, the average balance was $47,956.

Obviously there are many millions of Americans people like me and my wife don't have any such balances (except a few hundred on credit card at a time for gas or online purchases, that may last a few weeks before being paid off). We rent our apartment, have no home equity loan to speak of, have paid off our vehicles, and don't have student loan debt - or paid them off years ago.

Poet

 

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Jbarney
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Thought About This

Thanks for posting this.  I bet there are several of us who are in this boat, we want to pay off debt, but we also want to spend money on preps.  Sometimes I have to make a choice between paying off some debts or making preps.  I have to get it through my head that one of the most important things to do would be to pay down on the debt I have.  I just struggle to put resources into the basic preps, like food, skills, etc.  A post/thread like this is a good reminder how important it is to cut down on the debts.

I compare mysefl against some of the stats given and I don't think I'm in horrible shape.  Could be better though.

Thanks.

Jason

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osb272646
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Budget is the first priority

Oppmsu, you are absolutely correct that the budget is the most important tool for getting out of debt.  I would add that the budget has to be the outcome of an overall goal setting process.   I know many folks who use budgets to try and control their spending, but they almost always commit the terrible mistake of setting their spending budgets based on past spending habits.  This only institutionalizes the bad habits that have developed over the years.

I recommend that folks start the budgeting process by defining the goal.  Is it to save $xxx this year?  Is it to purchase a car without taking on a loan?  Is it to pay off student loans?  Etc.  Make the goal as aggressive as you can, within reason.  Next, carefully forecast your income, month by month for the next 12 months.  Subtract your savings goal from your income projection and the result is your annual spending budget.  Now, break down the annual spending budget into month by month, and line item category for each month.  Categories are things like rent, groceries, insurance, etc.   Once you have this all broken down by line item category, and month by month, load the budget into a budget program and start tracking monthly actual spending against the categories.  As Oppmsu said, there are plenty of household spending and budgeting programs out there to choose from.  Oppmus is correct that you'll find areas of spending which you forgot when you established the annual budget.  After a few months you'll get those fine tuned.  Just do not give up!  After a few months, you may realize that your spending will exceed your budget for the year.  At this point, you have to revisit your goal, and decide whether it needs to be revised to reflect a more realistic spending budget.

This approach to budgeting will force you, over time, to examine every little thing you spend your money on.  Then, you can weigh that spending against your goals, and decide if it's better to keep spending on that item, or to use that money to make headway toward your goal.

If you over spend your budget one month, then try to adust that month's budget by taking budget spending out of a future month and moving it back into the current month, to offset that overage.

This may sound like a lot of work, but it produced results for me.  In 1984, after a few years of falling further and further behind in the debt trap, my wife and I decided to establish a budget and hew to it.  By 1992, we were totally debt free, including mortgage and car loans.  This freed up our finances so that we were able to help our three kids through college without their incurring student debt. 

I think the worst thing about debt is that it demoralizes a person to the point that he cannot fight back.  Then he just slips further and further into the hole.  

Oh yes, one other thing:  for you married couples out there, the entire process must be a joint effort.  It does no good at all for one spouse to embark on a financial management program without the buy in, support and input of the other.

 

 

 

 

Saffron's picture
Saffron
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A *somewhat* risky way to pay down credit card debt

This is how we did it, oh something like 10 or 15 years ago. With all the changes credit card companies are making these days, I'm not sure this is doable now (we have one credit card which we pay off monthly so I don't pay attention to the promos we get in the mail.) 

The way to do it is to take advantage of the credit card promotions for no-interest for XX months on transfers. Transfer the debt on your credit card(s) to the new promotional card. For XX months you can pay the minimum balance without accruing interest. Then right before the promo ends, transfer the remaining balance to a new no-interest for X months card. When I was doing it, we were getting promotionals like this every other week, so it was no problem to find a new card to transfer to ... that is the part I'm not sure about today.

The only reason this is somewhat risky is you really have to pay attention and a) pay *at least* the minimum promptly every month and b) do the switch to a new card at the right time or they hit you with *all* the interest, not just one month's worth. But the benefit is that while you are working hard to pay down debt, at least you are not accruing additional interest on what you aren't able to pay yet.

Another thing is to always call in and see if you can get late fees dismissed. I have never been turned down and in fact it is so easy that I am starting to wonder whether late fees aren't in fact an illegal fee which they tack on hoping we'll just pay without questioning. Of course, it is a rare thing ... I am usually prompt and up-to-date on our bills, so I'm not exactly sure they would ok that if I was chronically late and requesting dismissals.

~ s

MrEnergyCzar's picture
MrEnergyCzar
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watch less tv

Watching less TV lowers your spending as well.  Probably because you aren't bombardied with consumerism ads.

I get cable TV for free on my laptop via a slingbox from Best Buy.  Initial $200 investment.  Saves you hundreds per year.

MrEnergyCzar

 

ao's picture
ao
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get rid of the mind mush
MrEnergyCzar wrote:

Watching less TV lowers your spending as well.  Probably because you aren't bombardied with consumerism ads.

I get cable TV for free on my laptop via a slingbox from Best Buy.  Initial $200 investment.  Saves you hundreds per year.

MrEnergyCzar

 

Better yet, watch no TV.  You save yourself from mind mush, save on your electric bill, and save on your cable bill.  We turned ours off and stopped our cable and haven't regretted it for one second. 

Plus, anything I can do to take power away from the Controllers makes my day.

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earthwise
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TV zombies
ao wrote:
MrEnergyCzar wrote:

Watching less TV lowers your spending as well.  Probably because you aren't bombardied with consumerism ads.

I get cable TV for free on my laptop via a slingbox from Best Buy.  Initial $200 investment.  Saves you hundreds per year.

MrEnergyCzar

 

Better yet, watch no TV.  You save yourself from mind mush, save on your electric bill, and save on your cable bill.  We turned ours off and stopped our cable and haven't regretted it for one second. 

Plus, anything I can do to take power away from the Controllers makes my day.

Amen, ao

When the financial crisis hit in '08 we unplugged in order to save the $82/month (satellite, extra fee for HD, extra fee for a DVR) and havn't regretted it either ( well maybe a little during football season!). Also, the extra time gained not spent in a semi-coma in front of the tube results in a much better lifestyle. And our kids have a much better life experience also. TV is for losers; no wonder western culture is going down the tubes. 

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