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Taming Debt
“I can live with debt,” you may say. “I’d rather just be in debt than face the hassle of getting out of it.” But when you turn your back on your growing debt, you are turning your back on your own dreams. Here’s why: Debt keeps you from achieving your long-term financial goals. While everything may be working out month-to-month, when was the last time you took the time to worry about the long-term picture? Do you want to retire? Send the kids to college? Take that family vacation to the Bahamas? Debt will keep you from getting there. Elder Joseph B. Wirthlin spoke of the captivity of debt saying, “Remember this: debt is a form of bondage. It is a financial termite. When we make purchases on credit, they give us only an illusion of prosperity. We think we own things, but the reality is, our things own us. “Some debt—such as for a modest home, expenses for education, perhaps for a needed first car—may be necessary. But never should we enter into financial bondage through consumer debt without carefully weighing the costs” (Ensign, May 2004). You can get out of debt in nine easy steps—nine rungs on the ladder you will use to climb out of debt. You’ll be amazed at how quickly your debt will be gone with some simple organization, logical thinking, and a good dose of faith—in yourself. Step One: Always Pay Your Tithing This step is listed as the first for a reason: Nothing will help you become free of the chains of debt as much as being obedient to the laws of God. Yes, in worldly terms, tithing is a sacrifice—especially when a person is already having financial difficulty. Yet, when we practice faith in this principle, it quickly becomes easy to see it much more as a blessing than as a sacrifice. Who in want of a little assistance couldn’t use the opening of the windows of heaven? Followers of Christ have always been promised tremendous blessings to live according to His law—the blessings that come with paying a full tithe far outweigh the sacrifice. So does this mean that when we pay our tithing we are guaranteed a life of wealth and easy living? President Hinckley taught, “I do not say that if you pay an honest tithing you will realize your dream of a fine house, a Rolls Royce, and a condominium in Hawaii. The Lord will open the windows of heaven according to our need, and not according to our greed. “If we are paying tithing to get rich, we are doing it for the wrong reason. The basic purpose for tithing is to provide the Church with the means needed to carry on the Lord’s work. The blessing to the giver is an ancillary return, and that blessing may not be always in the form of financial or material benefit” (Ensign, December 1989). You cannot afford to not pay your tithing. Have faith that if you are obedient in this and other principles of the gospel, the Lord will help you make up the difference in the areas of your life where you may be lacking. Finding a testimony of this truth just takes living it. Step Two: Determine How Much You Owe This step may be a little scary, but it’s vital. In order to get out of debt, you first have to know how much debt you are really dealing with. Make a list of monthly debt payments—car, house, credit cards, etc. After listing it, don’t panic. There is a way out of it, and it’s worth it. Take a look at your bills and add up everything you send out in debt payments every month. How much is it? $200…$300…over $1,000? The average American household spends more than $1200 dollars in paying off loans and credit cards every month. That’s $1200 extra that you could have in your pocket each month, if you weren’t sending it out in the mail every thirty days. Step Three: Commit To a Fixed Monthly Payment Once you know how much you owe, the next step is to start paying it off. The number you calculated when you added up all of your debt payments—that becomes your new fixed monthly debt payment. In other words, you must pay that same amount every month without fail. The trick is that you must continue to make that fixed payment even as your minimum payments decrease. That’s the key to paying off your debt. For example, if your minimum monthly payment on a given credit card is $125 per month, you must keep paying $125 every month, even if the minimum goes down to $25. That way, there are no surprises in your budget, and the debt gets paid down faster. Pretty simple, right? Think a few dollars won’t make a big difference? Think making a fixed payment just can’t change your financial future all that much? Think again. If you have $5,000 in credit card debt at eighteen percent, and you pay only the minimum payment starting at $100 per month, it can take you over forty years to be rid of your debt. In that time, you could pay $13,000 or more in interest. But say, on that same card, you instead make a fixed payment of $100, even as your minimum payments start to go down. Your credit card debt will be paid off in less than eight years, and it will cost you less than $4,400 in interest, a difference of thirty-two years and over $8,000. Step Four: Roll it Up But what happens when you finally pay off that first credit card? Do you get to throw a party? Well, OK, but just a small one, because you’ve still got a lot of work to do. As you start to pay off each of your debts, you need to roll up the fixed payment you were making on that debt to your next credit card or loan payment, so you can start paying off the rest of your debt all the faster. That is, your total fixed payment every month towards your debt will always stay the same, even as you start paying off individual debtors. It will stay a fixed payment until every one of your debtors is entirely paid off. Using these steps—adding up your monthly debt payments, using that number as a fixed debt payment, and rolling payments up as you pay off debtors—will get the average family out of debt in about ten to twelve years (including the mortgage). Seems like a long time? Not when you consider the alternative: a lifetime of debt and hundreds of thousands of dollars in interest—money that could be going to you and your family. Congratulations! You’re on your way to a debt free life, but you aren’t quite there yet. To keep out of debt, there are a few more steps on your journey. We need to make sure that once you start on the road out of debt, you’ll be able to stay that way—forever. Step Five: Never Charge More Than You Can Pay Off Now, this step is one of the toughest to follow, but it’s essential to paying off your debt. How can you pull yourself out of debt if you just keep digging yourself deeper? You don’t have to cut up all your credit cards, but you do have to be smart about using them. Even though it seems perfectly logical, a lot of us fall victim to the idea that a credit card equals free money—a way to delay paying for something you really can’t afford. That’s why you have a credit card after all, right? Wrong. If you can’t afford it, don’t charge it. Even if it’s only going to take you two months to pay off that new washer and dryer, don’t charge it. Never charge more than you can afford to pay off at the end of the month. Why? Remember when you were five and you told you Mom that if she would just get you that bicycle you would never, ever, ever ask for anything else ever in your whole, entire life? How long did that promise last? If you buy that new washer and dryer today, positive you will pay it off in two months, will you really pay it off? Or will you be tempted to cave in and buy that new MP3 player as you keep putting debt off, month after month? Determine today to follow the rule: Don’t charge it if you can’t pay for it. Then you can’t get into trouble with debt all over again. Step Six: Create an Emergency Fund So you’ve promised to never, ever charge more than you can pay off on your next statement. But what happens when an emergency comes along? What if the pipes break, or your pet gets ill? What if your alternator goes out, or your nine-year-old throws a baseball through your neighbor’s front window? Life happens and it’s often expensive. So you pull out the credit card and charge your roof repair. You don’t have the cash to pay for it when the statement comes in, but that’s OK, because it wasn’t you fault. It was an emergency. Right? Absolutely not. You will have the cash to pay for it—in your emergency fund. More than half of all households live month-to-month, meaning that they can’t make their mortgage or their electric bill or their car payment if they lose their job or get ill. They’re just breaking even. What kind of security is that? None at all. To achieve a basic security for you and your family, you need to establish an emergency fund. Start putting a fixed sum into your emergency fund until you reach three to six months of base living expenses. Only through establishing this level of security can you also be secure from falling back into debt when something goes wrong. What? You say you don’t have the extra money? You say you’re scraping to get by as is, and there’s nothing left over for an emergency fund? Oh, but there is. The average American household can save ten to fifteen percent of their income without even breaking a sweat. How? We’ll show you in step seven. Step Seven: Write Down Your Monthly Expenses No matter how hard you try to keep track of monthly expenses in you head, once you’ve written them down, there’s no denying them. In order to find the extra money for your emergency fund, you have to understand what you’re spending and why. Now pull out the list of your debt expenses that you made in step one and start adding all of your monthly expenditures: phone, insurance policies, groceries, gym memberships, season tickets to the symphony—everything you make a monthly payment for. Don’t forget to (gulp) total it all up. You have a number now, but don’t fret, there’s no serious math involved here. What you might notice about the number, however, is that it’s probably significantly lower than what’s actually coming out of your checking account every month—how can that be? That’s easy: a doughnut and newspaper on the way to work every morning, lunch out with coworkers or friends midweek, dog grooming, two nights at the movies, a few trips to the ice cream parlor with the kids, parking tickets, bottled water, ATM, hairdresser . . . everyone’s list varies. Step Eight: Track Expenses for Seven Days When you wrote down your expenses you discovered that you probably don’t know exactly where all of your money is going. In fact, statistics show that you won’t be able to account for ten to fifteen percent of your monthly income when you try to write down all of your expenses. How do you find the wayward dollars? Track your spending for seven days. Regardless of the format, whether it be cash, check, or charge, we need to track every expense for seven days. Tracking expenses is easy and it lets you know precisely where your money drain is. All you need to do is keep a pencil and paper with you everywhere you go for one week, or use an empty checkbook ledger to write down every cent you spend. That’s right—every single penny. If you tip the valet $2, write it down. If you give your kids $.25 for a gumball machine, write it down. Leave no expenditure unnoted. Step Nine: Start Shaving Off “Wants” Have you guessed where the money for the emergency fund is coming from yet? By shaving off just a few of the small luxuries you discovered when you tracked expenses, you can easily save hundreds of dollars every month. In fact, the average American family can put away over $300 monthly toward that fund without giving up anything that they will really miss. Think of it this way: if your doughnut fix is costing you $4 every morning (throwing in the daily paper, too), you’re losing $1,000 per year on pastry (and probably gaining weight, but that’s another article)! By taking some homemade muffins to work and reading the news online, you could save that money with very little sacrifice—it’s like getting $1,000 for nothing. How much are you spending on impulse purchases and extra stuff every month? If you cut just half of these expenses, would you have enough money to put away for emergencies? Sure you would. Find a few small things you can cut. Add them up and promise to put that amount every month into the emergency fund. Even if you can only spare $50 each month, do it. Pay the same amount every month into your fund until you could live off of it for three to six months with no other income. When you learn to distinguish wants from needs—I “want” the doughnut, but I “need” to pay the electric bill—you’ll be able to cut small wants easily. Then you can begin to save for your emergency fund. And only then can you get the security you need to stop living paycheck-to-paycheck, and the freedom you need to stop letting little emergencies run your life by spinning you deeper and deeper into debt. Step Ten: Put Your Newly Found Money To Work Finally, all of your hard work is paying off. After you’ve filled up your emergency fund with at least three months worth of living expenses, and after you have paid off all of your debt, chances are you’ll have $1,500 or more extra every month. Now the question becomes: what to do with the extra dough? Anything you want. Although getting a few books on investments and putting at least ten percent of your income away for retirement would greatly help. A quick parting thought: Out of all that extra money, if you can put aside just $300 a month in an investment with a ten percent return, you would have almost $400,000 in 25 years. If you did that for an additional ten years for a total of thirty-five years you would have over $1.1 million. Imagine, at one point you were thousands of dollars in debt, and now you could be thousands (even hundreds of thousands) of dollars richer! To that point, in October 1998, President Gordon B. Hinckley said, “One of the happiest days in the life of President Joseph F. Smith was the day the Church paid off its long-standing indebtedness. “What a wonderful feeling it is to be free of debt,” President Hinckley continued, “to have a little money against a day of emergency put away where it can be retrieved when necessary.” Congratulations! You Are Debt Free (And Staying that Way) Need a quick recap of how you got there? In only nine easy steps: always paying your tithing, determining how much you owe, paying it off at a fixed rate, rolling it up, paying off everything that you charge, creating an emergency fund, writing down all monthly expenses, tracking spending, shaving wants from your expenses and putting your newfound wealth to work, you have eliminated your debt and taken a huge leap towards achieving your goals. Imagine being completely debt free: all the money you earn can go to personal savings and investments for the future, and there will be nothing to hold you back from achieving your financial dreams. Whether you plan to retire in Hawaii, leave a legacy for the grandkids, or go on a mission (or all of the above), paying off your debt allows you to be free and smart with your money—and that freedom is priceless. LDS Living Magazine
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Today's date: March 20, 2010
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