Archives For debt

Interest vs. Interest

September 24, 2015 — Leave a comment

handcuffsThat title may seem to seem a bit confusing, but it’s guaranteed that if you or your organization does not understand this simple statement and the reality behind it that you/they could end up as somebody’s slave.

When it comes to your money you can either pay interest or earn interest. Borrow money and you move into debt and begin to pay interest. Deposit your money into some sort of financial growth account and you’ll begin to receive interest.

The first makes you slave to the lender. The second is one of the ways to build wealth.

Which seems more to your liking?

Who Owes You?

July 15, 2015 — Leave a comment

babyYou know we often get the thought in our head, from some entitlement mentality that comes from who-knows-where, that just because we woke up today, or got out of bed this morning, or were BORN, that society or our country/city/family/employer/spouse or some other relationship that we’re in owes us something.

Not sure where we get that idea, but the longer I stay on this planet the more I come to understand that it just isn’t so. My father was a great one to remind us kids: “life doesn’t owe you anything just because you were born. You’ve got to go out and kill something if you want to eat.” Now, not in the literal sense – as in caveperson days, but in the biblical sense that if you do something about your situation, you might not eat.

The truth, I continue to discover, is that we are in debt when we come into this world and we spend a lifetime working off that debt. We owe our next great idea, our next invention, the next cure for some disease, for if we keep it to ourselves – what good does that do to anybody?

I have friends who get this concept and are continually working off their debt by the things they do. Some are artists who work with paint, others work with glass; some work with complex electrical designs, others write amazing code; some build buildings, others provide healthcare; some are musicians, others are cowboys; some work to free modern-day slaves, others represent those who cannot represent themselves. And on and on it goes.

So there are quite a few who get this idea – perhaps never even thinking about it in this way while quite a few still are convinced that they don’t owe anybody anything, but they are owed.

What can you do today to help pay off your debt – to help us become a better people, a better community, a better nation, a better world in which to live?

Debt 90I received this article in my inbox the other day, and thought I would share it with you. Enjoy!

As the holidays approach, you may be planning a gift list for those special people in your life. You may also be worrying about adding to your already sizeable credit card balances. In America today, carrying some debt is unavoidable, and even desirable, for most households. But between mortgages, car payments and credit cards, many Americans find themselves over their heads — unable to dig out from under a debt burden that consumes an ever-growing portion of their resources.

The median U.S. household owes $3,000 in credit card debt.1 Credit card companies have made running up that balance deceptively easy. But what’s lost when you are racking up big credit card balances is the realization that paying off your debt can be costly, in terms of its impact on your cash flow as well as your overall financial health.
Assessing Your Debt

How much debt is too much? The figure varies from person to person, but in general, experts agree that your debt-to-income ratio should be no more than 43%.1 A debt-to-income ratio is commonly used by lenders to assess an individual’s ability to repay the money he or she has borrowed.

To calculate your debt-to-income ratio, add up all your monthly debt payments (including mortgage, car and other non-housing debts) and divide that sum by your gross monthly income — i.e., income before taxes and other deductions are taken out. Mortgage lenders, in particular, use the 43% debt-to-income ratio as a benchmark to determine whether or not an individual is a good candidate for a mortgage.1

Other signs that you may be carrying too much debt include not knowing how much you owe, constantly paying the minimum balance due on credit cards (or worse, being unable to make the minimum payments), and borrowing from one lender to pay another.

If you find that you are overextended, don’t panic. There are a number of steps you can follow to eliminate that debt and get yourself back on track. Working your way out of debt will, of course, require you to adjust your spending habits and perhaps be more judicious in your spending.

Begin With a Budget

The first step in eliminating debt is to figure out where your money goes. This will allow you to see where your debt is coming from and, perhaps, help you to free up some cash to put toward lowering that debt.

Track your expenses for one month by writing down what you spend. At the end of the month, total up your expenses and break them down into two categories: “Essential,” including fixed expenses such as mortgage/rent, food and utilities, and “Nonessential,” including entertainment and dining out. Analyze your expenses to see where your spending can be reduced. Perhaps you can cut back on food expenses by bringing lunch to work instead of eating out each day. You might be able to reduce commuting costs by taking public transportation instead of parking your car at a pricey downtown garage. Even utility costs can be reduced by turning lights off, making fewer long-distance calls or turning the thermostat down a few degrees in winter.

Three Steps to Reduce Debt

Once you have a handle on your budget, you can begin to attack existing debt with the following steps.

Pay off high-rate debt first. The higher your interest rate, the more you wind up paying. Begin with your highest-rate credit cards and eliminate the balance as aggressively as possible. For example, assume you have two separate $2,000 balances, one charging 20% interest, the other 8%, on which you can pay a total of 6% per month. If you were to pay 4% per month on the higher-rate card and 2% on the lower-rate card (which is typically the minimum monthly payment), you would save $961 in interest and 18 months of payments over allocating 3% to each balance.2

Transfer high-rate debt to lower-rate cards. Consolidating credit card debts to a single, lower-rate card saves in interest costs over the life of the loan. Comparison shop for the best rates, and beware of “teaser” rates that start low, say, at 6%, then jump to much higher rates after the introductory period ends. You can find lists of low-rate cards online from sites such as CardTrak and Bankrate.

If you can only find a card with a low introductory rate, maximize the value of that low-interest period. By paying off your balance aggressively, you will reduce the balance more quickly than you will when the rate goes up.

You can also contact your current credit card companies to inquire about consolidation and lower rates. Competition in the industry is fierce, and many companies are willing to lower their rates to keep their customers. Even a percentage point or two can make a difference with a sizable balance.

Borrow only for the long term. The best use of debt is to finance things that will gain in value, such as a home, an education, or big-ticket necessities, like a washing machine or a computer that will still be around when the debt is paid off. Avoid using your credit card for concert tickets, vacation expenses or meals out. By the time the balance is gone, you will have paid far more than the cost of these items and have nothing but memories to show for it.

By analyzing your spending, controlling expenses and establishing a plan, you can reduce — and perhaps eliminate — your debt, leaving you with more money to save today and a better outlook for your financial future.

1Source: Consumer Financial Protection Bureau, “What is a debt-to-income ratio? Why is the 43% debt-to-income ratio important?” December 30, 2013.

2This example is hypothetical and for illustrative purposes only.

handcuffs. . .if you were debt free?

Check out this article from USA Today about some alarming statistics.

Maybe you need to think twice about that next purchase!

What would you do if you were debt free?

Simple Math

October 21, 2013 — Leave a comment

chalkboardWhen we were young we learned how to solve simple math problems. We learned that 1 + 1= 2. We also learned basic things like 5 – 5= 0. Some time later we learned about negative numbers and how to work with them. So we learned that 0 – 5 = -5. All of that seems fairly simplistic until we add something to the equation – the dollar sign “$”.

Now the numbers take on new meaning and do things regular old numbers cannot do. For instance, when we place the numbers into an account that earns compound interest, they multiply rather than simply add. In fact, some great thinkers of our day have called the concept of compound interest a modern miracle, that’s how crazy the numbers are when affected by it.

Here’s an example, let’s say I have $100 to place in an account that earns 10% interest annually. When I revisit that account next year I now have $110 in the account (if I left it alone to grow via compound interest). That’s truly amazing! Especially if I continue to add $100 each year. Now that’s a very simple example, but hopefully it proves my point that when you add the $ in front of numbers they take on a life of their own!

For instance, there are some people out there who would have you believe that in order to truly live you must be in debt. That’s just nonsense. You do not have to go into debt to live a great life. Here’s the kicker, you might have to delay gratification in order to do so. In other words you might have to save up before you run out and buy that car. Or you might have to save before you take that all-important, once-in-a-lifetime vacation. But seriously, there’s nothing wrong with that.

That simple math thing we were discussing earlier states this, if you spend more than you bring home you will be in debt to someone. It might be your Aunt Lucy or your grandmother or someone else but you will still be in debt. If you want to remain debt-free, you just cannot spend more than you bring home. Simple.

But what about emergencies? Expect them, plan for them, set aside funds for them and you’ll have fewer emergencies. For us, our car used to supply emergencies. When we had a tire crisis, we also had a money crisis. ‘Cause who knew that tires went bald after so many miles? Now we plan for tires to go bald, water pumps to go out, brakes to need replacing, and more. What a concept!

Simple Math is just that – simple; un-complicated; easy to understand. What we need are a few more people who practice simple math.

How do you plan for emergencies? Share your story so other readers can learn from you.

CashHave you ever seen those TV commercials and at the end they make the statement “90 days, same as cash”? How about those commercials that tell you that if you’ll purchase with them and put it on credit you’ll pay no interest until who-knows-when? Millions of people fall for both of those scenarios every day.

Here’s the conversation you need to have – either with yourself (if you’re the one buying) or with your good friend (if they’re the one buying). 90 days is NOT the same as cash! These businesses are just that – in business to make money. Businesses come up with these creative ways for people to buy items so they can attach all sorts of fees and interest charges when people don’t pay on time. On average, 88% of the 90-days-same-as-cash deals convert to debt!

Did you catch that last part? Nearly 9 out of every 10 people who buy under the guise of “90-days-same-as-cash” default on their payments and that new Bedroom suite becomes more debt. If you don’t believe me, just try to buy something and tell the clerk, “I waited for 90 days before coming in to buy, cause you claim that 90 days is the same as cash. I want my ______ (you fill in the blank) FREE!”

Some stores make lots of money by preying off people’s willingness to buy these “deals.” Don’t allow that into your life! And don’t allow friends to get hooked either. We should start a campaign with the slogan “friends don’t let friends fall for 90-days-same-as-cash”!

Here’s a new way to purchase: save money, pay for something with cash, and be done with it. If it’s a big purchase, wait 24 hours and consult your spouse/friend/pastor/boss before buying. That will keep you from impulse buying and paying stupid tax.

What would happen if we paid for stuff when we bought it? Debt would almost disappear. Can you imagine?

It’s just one of the conversations you need to have.


debtI’ve counseled with several couples and individuals about their financial picture. For some, their picture is more like a microdot! Bad choices in the past are having the ill effects in their current situation, and they can’t even begin to think of their future.

I just went home for lunch and happened to turn on the TV to check out the local news while home. There, on the local news program, was a financial guy saying what I’ve said for years and what Dave Ramsey has said for decades about dealing with debt. Start with the smaller ones and attack them with a vengeance, then use that payment to attack the next debt and so on until you’re debt free!

Most of the people I‘ve talked with don’t have anything in savings, nor are they putting anything away for their retirement. That’s NOT a good plan. They’re not even thinking about their future needs, let alone their wants.

A while back now, my wife and I took a cruise to Alaska. Are we rich? Do we have wealthy parents? NO to both questions. Here’s what we did – we saved up for it and paid as we had the money. Then we saved a bit more and took cash on the trip. Imagine that.

Start today, begin putting some of your hard-earned money to work for you. Even if it’s what you would say is a small amount – it can build over time. And if it’s in an interest-bearing account, it will grow even faster.

So don’t think it’s too late or you’re too old. You can begin saving for that “rainy day” or that “bucket list item” today! So don’t give up, start. You’ll be glad you did.


Motivate Me!

Getting out of debt isn’t easy (surprise). Keeping up your morale is important. Every little bit of encouragement helps.

So here are some little bits of encouragement from fellow My Total Money Makeover (MyTMMO) members. How do they stay fired up while they are working Baby Step 2?

Nick and Heather in Iowa

We stayed motivated by setting goals. We made a thermometer-type chart (you can learn how to make one yourself on the MyTMMO forums) and colored in the squares until we filled our emergency fund.

To motivate our children, we promised once we were debt-free, we would save and take them to Disney World. They had their own thermometer to track the savings for the trip. It was a great way to explain to them why we couldn’t do certain things.

Sherry in Utah

We celebrate by buying some really good, but reasonable, steaks and grill out! It’s a small reward, but it’s something for us to look forward to as good steak is usually not in the budget.

Eugene in Oregon

Each month I get excited on the day that I can pay down or pay off a credit card. In the past year I have paid off five cards. When a card is paid off, I cut it up and put it in a jar that I can see from my computer. The pieces are really piling up!

Shane in Colorado

Every time my wife and I permanently knock out another monthly payment, we celebrate the following month by taking the money we would have paid on another payment for that debt, and use it for a night on the town. Dinners, desserts, movies, games, gifts, you name it. It temporarily pauses our snowball, but it gives us both the relief and excitement we need to do it again!

You know yourself and your family better than anyone, so take some time and figure out how you can keep yourself motivated on the cheap while paying off debt. It’s okay to give yourself those small rewards every so often.

You just need to earn them first.

shacklesMy apologies to the Capital One folk for using their tag line, but it just seemed to fit with today’s post.

A few days ago, our Rotary club had the honor to play host to a visiting GSE team from India. GSE= Group Study Exchange. Basically a team of 5 people from differing businesses in India came to the US to tour in our Rotary District to exchange ideas on how to conduct business.

One of the men presented some interesting information on the spending and saving habits of the people of India. Did you know that their average savings rate is 35%? 35%!! And we in the US can barely scrape by with saving 10%.

A few posts ago I discussed the 10-10-80 plan. That pales next to that plan from India. I guess there it would need to be a 10-35-55 plan.

Can you imagine living on 55% of your income? Many of us can’t imagine living on 80% of our income!

He also showed us a graph of the debt to GDP ratio. Who tops the list? The US followed closely by the UK. India is way down on the list. They just don’t use debt to conduct business there.

Now I don’t plan to go and live in India, but I think we could learn a bit from them. I think our local, state, and national policy makers could learn a little as well. If we do not begin to develop a new way of thinking about debt, I’m afraid of what awaits my grandkids when they hit the job market.

We all need to learn how to live below our means – from the lowest paid employee to the corporate CEO and on to the policy makers from the local level all the way up the ladder. If we do not, and those we’ve become indebted to suddenly call the note – we may be surprised at who owns us.

Someone once wrote, “the borrower is slave to the lender.” Oh wait, who was that? Just King Solomon, the wisest man who ever lived! Maybe we should begin to listen. Just saying.

So how are you creatively living below your means?

Share something you’re doing now to change your future.

OK, if you’ve stayed with us for the past couple of days we’ve discussed several steps to Breaking the Chains of Debt. Today is the final edition of this post, though we reserve the right to re-visit the issue or add to the dialogue as needed.

So far we’ve talked about:
1. Decide now to refuse to go further into debt.
2. Find an accountability partner.
3. Establish an Emergency Fund.
4. Pay off debt using what Dave Ramsey calls the “Debt Snowball.”
5. Pray for divine guidance as you are working your way out of debt.
6. Sell something and apply the proceeds to the debt.
If you do those six steps, you will find yourself eventually out of debt and saving money. Your grandparents used to tell you why you save – “for a rainy day.” Though it’s an out-dated phrase, the principle rings true.

Here’s my 7th and 8th final steps to this whole process:
7. Become a giver.
If, up to now, you have not been giving to charities, or your non-profit of choice, or to your church – begin doing that now! If you’ve been working the previous six steps you are well on your way to financial freedom. Now is the time to establish the habit of generosity!

No matter how much you earn each year, no matter where you live, no matter what you do to earn your income – you have been given much, you can give as well. There is no financial formula that guarantees your return on giving. But it’s much like gardening or farming – if you want more flowers or to harvest more corn, you have to plant more seed. Establish giving as a habit in your life and you will reap the rewards.

8. Continue working each and every step.
My last step to Breaking the Chains of Debt is to simply continue working through each of the steps consistently, frequently, all the time, without giving up and you WILL break the chains of debt that have you bound up and restricted from doing what you would like to do financially.

Does that guarantee that you will become rich? That depends. What’s your definition of “rich”?

We can talk about that later.

Remember what we discussed yesterday – “the borrower is slave to the lender”? You now have the tools to no longer be a “slave”, but you, too, can be on the path to true financial freedom. The question remains – will you work the steps or will you remain a slave to debt?

It’s for you to decide.