Monday, January 7, 2013

Getting Out Of Debt Formula

Ever know exactly how to do something to get a wonderful result and get too caught up in other things and slack off in that one area creating a mess? Well, we got caught up in one crisis after another last year and neglected the tried and true methods to retain the financial securing level we had reached. 

December was a rude awakening and we had to step back and reevaluate our circumstances. We are tightening the belt and putting our financial house in order once more. It might take a few years to reach the ground we stood on at the beginning of last year, but we will. We know how. We've done it time and time again so why is it we don't stay there? Yes, circumstances beyond our control sometimes have pulled us off but last year it was service to others beyond what we should have offered. You can't lift if you are sliding down the hill too and we now understand that better. It isn't about caring. It is about allowing others to feel the consequences of their choices. We can help but need to find the fine line of enabling, not helping.

We need to exert a higher level of self-control. Not allow our emotions to help, to control our decisions. This self-control is the key to financial security. It is the key to everything. So we are going to turn more of our attention inward. Reevaluate just exactly where we are at and formulate a personal plan to move forward.  

The fact is the Rexroat's owe. Granted, not anywhere near the level of most Americans but we owe some and that is a very uncomfortable spot having been out of debt for quite a while with a little cash reserves. We know how we got to the debt free stage we are heading back starting now because this is nowhere to stay.

We haven't lost all self-control just some. We still wait at least six months before buying anything remotely expensive. You might be surprised what I consider expensive. It doesn't take much.  In that time we can decide whether ---
1. we really need it. or just want it 
2. we really need it now or buying it later would be a better idea,
3. we have the money to buy it
4. to buy it used or new
4. it is a good buy or the best product for what we want it for. (time for research)

There are only three good reasons for choosing debt, the experts say. 

Reasons to go into debt:
  • A mortgage on an affordable house.
  • Loans for college degrees or training that are accompanied by higher expected earning increases. 
  • Loans for some well thought out business plans.
Did you notice that vehicles are not on the list? Face it, most of the time debt is a choice. Sometimes we just pretend we don't have a choice so we can throw money at the problem so we can get what we want. We are one of those people to a degree because we always buy vehicles on a payment plan even though they are modest, used vehicles at a good price. The bright spot is that we are out of debt more years than in debt so we are progressing. 

Someday we will have learned and have our financial house in order. That is if the economy and Kirk's job holds out. But needless, if we are in good shape going into a crisis, we will weather it better. Mainly because we have financial money smarts.

There is one tried and true formula all the experts agree on for getting out of debt.

This is not a basic budget sheet. I'll cover some ideas in a later post on how to trim your budget as we work on ours. This is a debt sheet.

List loans: (This is a textbook example but we include medical debt on this sheet when we do it so tailor it to you.)
Debt                   Balance                    Payment    Rate /Interest
Family Loan       $ 0                            $ 0                     %
Credit Card (1)   $ 0                            $ 0                     %
Credit Card  (2)  $ 0                           $ 0                     %
Student Loan        $ 0                           $  0                     %
Auto Loan           $ 0                            $ 0                      %

Totals

I didn't show the six credit cards that are usually on the list but I can't imagine having more than one. Some of you will understand this better.

This is also where you discover why the auto salesman tries to sell you a vehicle by giving the payments per month, not the total cost including interest and why he tacks in the licensing costs etc. on to the loan. He makes more interest. The whole truth isn't pretty. But it isn't the real picture. This is reality so don't try and fudge it. Be honest with yourself. If it isn't a pay as you go bill, then it is credit.

This is the part that might surprise you but I promise you I have seen it over and over again by many experts. You do not pay the highest interest rate bill first. You pay the bill that you owe the least amount on off first by making increased payments. "Eliminating the smallest debts first increases motivation and has a 'snowball' effect that is highly successful." Whiling you are doing this, of course you are still making the regular payments on your other bills.  

If you think about it, it makes sense. If the highest interest rate was a large loan like a house or car, you would be a long time paying it off even with paying extra while carrying on with paying a number of smaller loans. I know because we always paid extra on our house loan dropping off five years off the loan but it was still twenty-five years. If we had waited on the smaller loans, they would have been paid years off by time alone. Extra money on payments saves you on interst you would have paid had the loan gone to full term. Time, means money, more of it or less of it.
  
You then take the increased payment amount you made on this now paid off bill and put it towards another bill. When it is paid off you take the increased payment amount of the first bill and the amount of the second bill and put it on a third bill. When loans are paid off, you then put the money into savings. That is where your future cars are paid from etc. That's the part we don't do so well on. "If you don't succeed then try, try again." Someday we'll have that part down too since we know that is our weak area to watch out for.

Where do you get the extra money from to make the increase in payment for the lowest amount debt? That is what the next financial blog will be about. First, I have to finish my paperwork and do some year end money paperwork to hopefully get some money back to help us climb financially back up the hill again. 

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