I am constantly asked about debt, budgeting, making proper decisions, and all else which encompasses proper money management. This piece will focus on many of the foundations that consumers should constantly think and reflect on regarding the above subjects.
Getting rid of credit card debt is one of life’s most pressing concerns.
The simplistic way of getting rid of it is not to have it in the first place, but that is not the object of this piece. We are not going to concentrate on the reasons why people accumulate credit card debt. Frankly, I believe that some of it is psychological, but that is more for the Dr. Phil’s of the world. Some of it, also, can be due to unforeseen or unfortunate circumstances, such as the loss of employment of medical emergencies, which may go uncovered by traditional insurance.
I have had numerous meetings with clients who have been in this predicament. The first item on the agenda is to cut up all credit cards except for ONE. I believe it is very unrealistic to go through life without a credit card. Online shopping and reservations have become so commonplace, that NOT having a credit card would be foolhardy and frankly, downright inconvenient. Consumers might ask if they should use an equity line to pay off balances. This certainly is an alternative, but the more important item is to learn proper money management, because, if not, I will guarantee that three years later the same consumer will be in the exact same situation.
There are three items that begin to teach people proper money management, and for this, I am going to concentrate more on the spending rather than the saving side.
The first is to make sure that you are spending no more than 28% of your gross income for housing cost. (Many Personal Finance experts recommend not spending more than 28% of your gross income on your monthly cost of housing). The second is to think of buying a certified car rather than a new car (the elimination of the term leasing was purely intentional), and third is to eliminate impulse and emotion in many purchases. If “retail therapy” is one of your weak points, recognize it, find out why it is, and attempt to do something about it. “Achievement breeds motivation” is one of my favorite expressions. If it is more important to have a ninth pair of “7 for all mankind” jeans in your closet rather than having money in the bank…until you figure this out on your own…your financial life will resemble the remnants of Hurricane Katrina.
Fill out an income statement. There is a trite saying, which says that, a “fortune can slip though your fingers…” We preach that it is important to know where your money is going. Does it have to be to the last penny? Of course not, unless you really wish to be anal or suffer from an over the top case of being ADD. It is an exercise, within reason, which can tell you how and where your money is being spent.
Recognize how devastating credit card debt can be. Here’s an example…
Lets say you are 28 years old, making $60,000 per year, $400 per month car payment, $1,000 per month in rent, and amortizing $350 per month in student loans. On a gross income of $5,000 per month, take one third away for taxes and 401 (k) contributions, you are left with net cash of $3,500 per month. The three fixed expenses listed above account for FIFTY PER CENT of your take home pay. If you are carrying $3,000 of credit card debt, using a 20% interest rate (and that’s LOW!!) that is another $50.00 per month toward debt…and remember your haven’t purchased any groceries, accounted for a gym membership, paid any utilities, insurance, gasoline and service for your car, vacation, Christmas, and other discretionary forms of expenses. The $50.00 of interest may not seem like much now…I will guarantee that this amount will grow exponentially if not paid attention to.
Having debt can cause one to become paralyzed while trying to figure out a way to amortize it. First, is that it will be accomplished the same way that you eat an elephant…one bite at a time. It is unrealistic to assume that you are going to win the lottery and take care of your debt and all of mankind with a winning Powerball ticket. I would do it the following way. Take the amount of your debt and divide it by a reasonable number of months it would take to pay it all back, in this instance use 24. This means that you will have to send the company an extra $125 per month in addition to your current charges. Using this example, we may not have accounted for ALL of the interest, but it would amortize the majority of the debt within two years.
Another favorite expression is “people change, yet seldom do.” In this instance, making changes both practically (using an income statement and budgeting process) and psychologically (why did you get into this predicament in the first place) would allow you a much smoother ride through life.