Archive for the ‘Kick Debt’ Category

Are You in a DEBT CYCLE?
July 27, 2009

“I don’t need any help with my finances, I am getting by just fine.” That may be true. For many, however, the simple act of getting by can very easily fall into a cycle of debt that can lead to bankruptcy, foreclosure and more.

Sherry attended one of our workshop classes with a desire to improve her finances, but also an attitude of defensiveness about her situation. She waited until after the class, to convince our presenter that my presentation didn’t apply to her. Five months later, we saw her again. This time she waited to talk to us for a different reason … she had gotten sick, and had gone through several rounds of antibiotics. The doctor visits and prescriptions that she had to pay meant that other bills had to be neglected. After several months she was still trying to catch up, only now, she was dodging creditors, and in danger of losing her vehicle. She was using credit cards to get by, but now was maxed out and had no options.

What is a debt cycle? It is a pattern in spending and debt that occurs when expenses exceed monthly income. Credit is used to cover the difference. The new payment of additional debt even further exceeds income. The individual continues to borrow money until the entire thing implodes.

Here are the warning signs that you are susceptible to the debt cycle:

  1. You have no Emergency Fund or Savings
  2. You are unclear about your financial situation
  3. You struggle each month to make ends meet

The two largest contributors to the cycle of debt are the lack of an emergency fund, and spending in excess of income. Things do come up. You will have unanticipated expenses (emergencies) that occur like medical co-pays, car repairs, school projects, etc. It is vital to have the money set aside to pay for those things when they happen. Without an emergency fund, you are forced to sacrifice payment on another bill, starting the cycle of debt.

So, what can you do to protect yourself?  First of all, make a budget. If you don’t have one, please use our free budget calculator or worksheet.  Second, make sure that you are spending less than you make. Next, make sure that you have an Emergency Fund in place. To begin with, work hard to get your emergency fund to $500. To find out how much your total emergency fund should be for your household, click here for an online calculator.

Sherry’s situation can be avoided. Take care of yourself first, by saving. When you do have an emergency fund, it feels like less of an issue when you can pay for it and move on with your life.

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How to Pay off Debt: Comparing Popular Debt Reduction Methods
July 16, 2009

We all want to pay off credit card debt, and ideally be debt free. However, what is the best way to get there? I will compare two methods, and give you some feedback so that you can decide which debt plan works for you. Both of these scenarios assume that you are already paying the minimum for all cards, and can afford to pay additional money each month. I probably don’t need to mention this, but if you are struggling to pay the minimums, then that should be your primary focus.

1. The Snowball method works this way:

  • List your debts from the smallest balance to the largest balance.
  • Apply extra money to the smallest balance until it is paid off. For instance, if you have a debt of $150, with a minimum of $10, pay the minimum plus extra payments ($50 for example) until it is paid in full.
  • Use that missing payment amount (the minimum of $10 plus the additional $50 you were paying) to apply to the debt with the next largest balance.
  • When the second debt is paid, use the missing payments from those two debts toward the third.
  • Continue that process to continue to pay more and more towards the largest debts until the last one is paid.

2. The alternate method is to attack the debts with the highest interest this way:

  • List your debts from the highest interest rate to the lowest interest rate.
  • Pay extra money to the first debt until it is gone.
  • Use that missing payment toward the next debt on the list.

Take a look at the calculator I used for an actual comparison between the two approaches:

So, which method is right for you? Obviously, you can save more money by paying off the highest interest rate first. However, if you know that you struggle to stay motivated in your plan to pay off debt, the Snowball method will give you the personal satisfaction of accomplishing smaller goals. Either way, the fact that you are tackling your debt will be your ultimate reward. Click here to use my free calculator to compare these two debt strategies for your situation.

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