Managing vs. Eliminating Your Debt

Managing vs. Eliminating DebtI have a question for you. Should you be managing your debt or eliminating your debt?

This is a key question that you must answer and your response will determine your level of success with your finances.

If you are comfortable with keeping and managing your debt, you will spend your time making just the minimum payments, worried about how to increase your FICO score, and looking for options to move your debt around to the next card that offers you a “free interest balance transfer”.

You will be ok with always having a car payment and just using credit to get anything you think you need.

Debt will always be your companion.

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However, if your focus is on eliminating debt, you will put your energy on how to increase your income or cut your budget so you can apply more of money to your debt snowball.

You are not simply playing with credit cards, you are ready to break up with them for good.

You will learn to be patient and save for the things you want to buy.

Debt will no longer your companion, but your enemy. The enemy of your financial prosperity. Once you are done with it, you can move on to bigger and better things.

What will it be for you? Will you keep working on managing your debt or will you put your focus and passion on eliminating your debt?

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When Will I Get Out of Debt?

When Will I Get Out of Debt?That’s a great question isn’t?

Could you answer it with any kind of precision today?

I wanted to talk about how you can get out of debt.

About what it takes to end that slavery.

My assumption is that you want to be free of the chains and the burden of carrying debt.

However, that’s a big assumption because debt is normal and the numbers suggest that for the average American, that’s ok.

Just take a look.

The total household debt is $11.65T (as of Q1 2014):

  • Student Loan debt is at: $1.11T
  • Auto Loan debt is at: $875B
  • Credit Card debt is at $659B
  • Mortgage and Home Equity Debt stands at $8.7T

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As a financial coach I can teach you the process, the steps for getting out of debt.

I can also give you the reasons of why it is a good idea to live free of any debt.

What I cannot give you is the desire and the passion to get out of debt. That has to come from you.

In order to get out of debt, something has to change in your spirit, in your heart.

You will get out of debt only when you:

1 Admit that using debt will not bring you prosperity

You basically have to stop believing the lie that debt is a tool to help you win with money.

Just look at the high levels of credit card debt, car loan debt, and student loan debt.

Ask any of those people to see if they are prospering with their finances.

2. Get sick of paying interest

Do the math exercise on any of the debt items you are carrying today.

See how long is going to take to pay it off by just making the minimum payments each month.

Then, compute how much that item you bought on credit, will cost you in the long run.

Just do the math. It should scare you and/or make you mad.

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3. Get tired of carrying the debt burden

There has to be a moment when you say: “No more! I am not living this way! I have had it!!!!”

Until that happens you will be happy to go along and you will continue to rationalize your debt.

You will listen to the conventional wisdom that says debt is ok and that credit can help you.

When will you decide to become debt free? What are you waiting for? What will it take?

When you are ready to change your life and win with money, I can help.

 “The rich rules over the poor, and the borrower is the slave of the lender.”
Proverbs 22:7 (ESV)

$500 Monthly Car Payment or $500 Car Repair Bill?

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I have thought about this question a lot recently. You see, my car is a 2003 Ford Escape (great picture, right?) and I have owned it for 10 years.

My wife and I finished paying it off in October of 2007 in the midst of our debt snowball.

But you know with cars, something is always up; especially as they get older they tend to breakdown more.

My car has around 180,000 miles on it and the latest repair cost me about $500, which is about the same amount of a monthly car payment.

So here is the question for many people: as a car gets older and repairs are more frequent, do you breakdown and get a newer car with a monthly payment?

Or do you rely on your savings (emergency fund/car maintenance fund) to keep up with the occasional repairs?

I have to tell you, getting a newer car would be nice (here is the one I would like). But I am committed to a debt-free life style.

We have not had any consumer debt since February of 2008 and I intend to keep it that way. A monthly car payment is not an option for me.

We are working on paying off the house to eliminate our last debt. My goal is to finish paying it off by my 50th birthday (I just turned 46 in case you were wondering). And my goal is to pay off the house before I upgrade my car.

So I will continue dealing with maintenance and repairs. It’s not fun to pay them, but it is better than paying interest on an auto loan. A new car would be great, but a monthly car payment would get in the way of my greater goal of paying off the house.

So what about you? What are you willing to do to eliminate debt from your life once and for all?

  • Are you willing to stop borrowing money? You can’t borrow your way out of debt. Raising your debt ceiling won’t cut it.
  • Are you willing to live on a budget and spend only to the level of your income? You can’t keep relying on the banks to catch your slack. At some point, you will be too much of a risk.
  • Are you willing to make the tough decisions and cut down on those items that are not basic needs? It will be painful and unpleasant, but necessary. Someone in your family will complain. Will you deal with it?
  • Are you willing to sacrifice to generate additional income to accelerate your debt elimination?

Remember, you are the solution to your money problems. It’s your life, it’s your money, and it’s your decision on what happens with your finances.

What’s your decision?

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The Best Kind of Vacation

Baseball Tour 2013

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I just returned from a great vacation with my wife. We are both great baseball fans and for the second year in a row, we went on a Baseball Tour.

The road trip included 6 games in 7 days including stops in Cincinnati, Cleveland, Toronto, Pittsburgh, Detroit and St. Louis.

We truly had a great time the trip ranks right at the top of our list for a vacation. My wife is already thinking about what cities will be part of Baseball Tour 2014!

We came home with lots of souvenirs and pictures and many memories. But you know something we did not bring home? Credit card bills. That’s right, this vacation did not follow us home.

We have made a commitment to a debt-free lifestyle, which includes how we have our fun. Taking a vacation is a great thing and you should do it. But don’t go and plan a vacation thinking about relying on credit cards to make it happen.

Instead, spend some time planning your vacation. Based on where you want to go and what you want to do, come up with a vacation budget. Typical items may include air fare, lodging, car rental, gas, event tickets, tolls & parking, souvenirs, and food.

Then, start saving for your vacation. Add a line item to your budget for a vacation sinking fund to make sure you are saving with a purpose.

I hope you enjoy your next vacation and I truly hope you have the best kind of vacation: a debt-free vacation.

When are you planning to take your next vacation?

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Life after Debt: Building Up Your Financial Household

House under Construction

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 By wisdom a house is built, And by understanding it is established;
And by knowledge the rooms are filled with all precious and pleasant riches.
Proverbs 24:3-4 (NASB)

Last week I began a short mini-series on what happens after you get out of consumer debt. I wanted to discuss where you need to apply all that energy and focused intensity you used to get out of debt.

If you recall, I equated a financial wellness, as a journey in three stages that are analogous to the building of  a home: laying down a firm foundation, building up your financial household, and letting the trees grow.

Today I want to cover stage 2: building up your financial household. After you get out of debt your next step, to strengthen your financial position. You want to focus on increasing your savings and managing the risks to your finances.

Savings

Savings fall in three major categories: emergencies, large purchases, and wealth building. Just like when you are building a home, some rooms will have higher priority than others. In the list below, I would personally pay initial attention to items 1 & 2.

  1. Increase your initial emergency fund ($1,000) so you can cover 3-6 months of your monthly expenses.
  2. Start saving for retirement (15% of your annual household income) and college expenses if you have children.
  3. If you don’t own a home, this might be a good time to start saving for a down payment that will cover 20% of the purchase price. If you own a home maybe it’s time to save for that renovation project you have been putting off for a while. Or you could start paying extra on the mortgage principal so you can retire that mortgage earlier.
  4. Is it time to replace one of your vehicles? Well, start saving now so you can buy a nice, reliable, used car with cash a few months from now. Stay away from car loans and car leases. Remember, the name of the game is to stay out of debt.
  5. How about saving money for some fun? You know, the financial wealth journey has to include some stops for fun and rewarding your hard work. You don’t have to wait until you are in your 80s for that cruise around the world. How about saving for a short weekend getaway or a 2 week vacation? And don’t forget about saving for Christmas!

 

Risk Management

The skill of managing risks is essential because life happens. We don’t’ control many things that happen to us, but we can control how we prepare for them.

  1. Review your insurance needs. It’s time to make sure you are prepared for what might happen. You need to properly transfer that risk to someone else via the wise use of insurance.
  2. Prepare a will. We all come into this world with a limited time. You need to be sure that you leave accurate instructions for your loved ones when your time comes.
  3. Get into the habit of checking your credit report with regularity. Each of the 3 Credit Bureaus is required by law to provide you with a free copy of your report every year. You could end up with 3 free reports each year (one from each bureau). Pay attention to your financial reputation.

 

 Question: Where do you need to put more focus today on your finances, savings or risk management?

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