Understanding Debt Reduction

Hello, I'm your host, Mr. Chuck, I retired accountant turned truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence, determination. Understanding debt reduction, that reduction can be a daunting task overwhelmed and not sure how to start to get paper and pen out, get ready to list of steps needed to reduce debt, first a list and the order to proceed towards debt reduction, then we'll explain that list. But before I get started, I have a link an article from the nerd wallet. And I'm just going to cover one section of it. What not to do. If you're over it, sometimes overwhelming debt becomes the devastating swiftness, a health crisis, unemployment or natural disaster. Or maybe it becomes a little at a time and now creditors and collection agencies are pressing you to pay and you jest and if you're feeling overwhelmed by debt, here are some things not to do. Don't pay secured debt like a car payment. Late in order to pay in UNASUR current debt, like a credit card or hospital bill, you could lose that collateral that secures that debt your car. Don't borrow against the equity in your home, you're putting your home at risk of foreclosure. And you may be turned in unsecured debt that could be wiped out in bankruptcy and to secured debt that can't. Don't withdraw money from your retirement savings in order to repay unsecured debt. This is Financial suicide. Think twice about borrow money from workplace retirement accounts as well. If you lose your job, the loans can become inadvertent withdrawals and trigger a tax bill, which is the last thing you need. Don't make decisions based on creditors are pressuring you the most, that may lead to action that aren't in your best interest. Instead, take time to research your options and choose the best ones for your situation. So don't pay debt by borrow money against your home or your automobile to pay credit cards. And we're gonna cover later how you handle medical bills. Because I've done this in the past, and I've gotten away with it. So I'm sure everybody can do it. This article is from the nerd wallet.com Finance fine debt relief. And that's what not to do. So let's get started. Got your paper and pencil ready or pen. I'm gonna give you a list of things you do. And pretty much the order you have to do them which they all can be done at the same time, mostly. So number one, quit borrowing money, quit using your credit card. Number two, pay the minimum balance on all your debt or all your loan. Pay the minimum balance only. Number three, set up a savings account if you don't have one. If you have a savings account was a little bit of money in there. That's good. You need to increase your emergency fund. You need to get $1,000 set aside and your savings account. You call it an emergency fun. We're going to explain the reason later. Number four, get all your statements in order, collect all your credit card statements, everything that you owe money on that you're paying on time or whatever. Get them in order mostly your credit card bills if you have payday loans, Pawn Shop loans or any other type of loans that are not secured debt meaning they don't are not holding collateral. You didn't give them something to hold or they don't have the title to your car, stuff like that. We might gotta get all those statements together. Why the statements you might know what they are maybe you don't, maybe you've been avoiding looking at it, but we got to look at it, we got to know where you stand. In order to do that, you need your statements. The next one, which I forgot the number of believers five, is put them in order by the highest rate of interest first to the lowest rate of interest, you can do that in a spreadsheet. Number six, if you're not tracking your spending, you got to start doing it. And I'm not saying I'm tracking and because it's online on my bank account, I can go and look at it. Well, that's fine and dandy. But that's not tracking your spending, you need to have a check register that you keep track of, it can be online, a separate account from your checking account is not your online checking account, by us count about.com. It's simple, easy, and cheap, about $10 a year a little less than $10 a year. And it does everything you need to do and has the categories already set up, you can start entering directly in there, do not link your checking account to it, because you want to manually do it. So start tracking, number seven, create a budget. And we're going to talk about that a little bit later. That's all you need to do. Ie get that stuff together and start doing it, you're gonna get your spending under control, you're gonna get your debt under control at the needless the fair minimum, you're going to know how much you owe, who you owe, when it's due, and the amount of interest you're paying on it. And why is all that important? What we're going to talk about that now, one quit creating new debt, that's probably the hardest step of all, you got to start paying for all your needs, with your debit card, through your checking account or cash. Nowadays, it's most likely going to be a debit card. But you're not going to be paying for your needs using a credit card, where you're not paying off the balance, just quit doing that. So if you are living paycheck to paycheck is gonna take you some time, but you got to get yourself, quit creating more debt, quit using them credit cards, quit borrowing money. And you do that by paying for cash for everything. And if you're really in dire straits, and you have a lot of debt, then you got to pay for all your needs, with your debit card or cash. Same thing, and quit buying things that are once needs are housing, transportation, food, clothing, only buy the things you need and gonna use from paycheck to paycheck. A year, if you've got rent due, then you know, it's coming up in a week or two, you need to make sure you have enough money left and your pay in your checking account a week or so before. So don't spend it so that when your rent becomes due, you can pay it on time. You're gonna pay all your bills on the due date, and quit paying late fees and quit paying interest because that's gone. Yeah. If he hadn't already figured it out. That's gone. Yeah. So once you get converted, and you're paying from what you're getting from your paycheck, and you're paying for all your needs, you're in pretty good shape. Now you're also part of that needs is the minimum payment on all your debt, all your credit cards. Now you hear people say, Well, you got to make an extra payment on that credit card or you'll never get paid off. If you keep paying the minimum payment, you'll never get it paid off. Well we have a plan. That's what this plan is. We want to first build up a an emergency fund of a minimum of$1,000 which is step three. Once you get that money set aside, the reason you're doing that, so as something would come up, say you're in an accident or your child breaks an arm or leg or if you blow a tire on your car, you have some money available to pay for it for that emergency only. Okay, once you have $1,000 then you can And you in putting the same thing, put your Maxtor money into that savings account, and you build it up until you have roughly $3,000, which is$2,000 greater than your emergency fund, you do that, because while you're building it up, you're just getting a bigger and bigger emergency fund. So something would happen, you don't have to use credit to pay for it, trying to get you off of using credit. Once you have the$3,000 in there, all your bills are paid, and you know, have any big bills coming up in the next, you know, couple of weeks, then you can take that $2,000 and apply it to a credit card, or one of your debt. Now, which one do you need to pay first, to get started, I recommend you pay off to whichever one has the lowest balance. So if $2,000 will pay off a credit card, you want to do that, if it's gonna get it closed the pan off, you want to do that, so that you can make some progress in this journey. And once you get that first one paid down to zero, you'll feel good, don't overreact, don't go out and spend a bunch of money because you want to keep that credit card at zero. And do not close that count, keep that credit card open. Because if you close that account, cancel that card, because it's paid off, your available credit will go down, and that will hurt your credit score. So you want to keep the available credit. But don't use that credit card, maybe every 60 days or so put a small charge on there, like $10 and pay it off right away the next pay day, pay it off. So it's always at zero, you don't want to be paying any late fees or interest on any of your credit cards. So that's what we're trying to get you out of, then then you just build up your emergency fund again, it's over and over and over, and you build it back up to $3,000, or maybe a little bit more than second time, but you only take out$2,000. And because you're gonna increase your emergency fund from that $1,000. Over time, maybe even the first six months or so, get it up to $500. And then in the next six months or so, get it up to $2,000. But we want to keep applying the money above your emergency fund limit where there's 1000 1500 or$2,000, then you build it up to 4000 or 5000, you have a bigger emergency fund while it's in your savings. So as something would happen, you're covered and less likely having to use credit, you take the excess out, you apply it to your next credit card, which should be the highest interest rate first. And you want to apply that to that loan that has the highest interest rate. Why because we want to pay that now as fast as possible, so that we can get out of paying all that interest. Because the more interest you pay, the longer it will take you to get your principal paid off. So if we can get that paid down faster, and get it paid off, and then the next one, and then the next one, your process will be speeding up because you're gonna have less debt to be paying on. And you remember, keep paying the minimum balance the whole time. And it's gonna be a slow at the beginning and then it's gonna speed up over time. And the closer to the end you get the faster and faster is gonna be he might be applying extra money to a loan, every month, every pay period, it can get that quickly. Now your if your goal at first should be to focus on all your credit cards because that has the highest rate of interest, focus on all your loans that have high rates of interest and pay those off first. Once you get that under control, don't stop, look at your car loans, pay off a car loan. If you have two car loans pay one off you have one car loan. If you have a first mortgage and a line of credit, that line of credit is going to go up because as adjustable rate on it. So you want to work on that also Most likely is going to be a lower rate than a car loan, unless you got a really good deal on a loan on a new car. So always keep that in mind, you're always looking at what's the highest rate, and you just keep applying it and you keep paying it off and keep paying it down. Now, some will argue that on your mortgage, if you get all your debt paid down, you got one mortgage, and you have 3% interest, and you still have 25 years to go or whatever. Do you pay that off early? Well, if you pay extra on your mortgage is not going to reduce your payment, the only way you can reduce your payment would be to refinance. And once you refinance, most likely, you're gonna have a higher rate of interest. So those extra payments will cut time off at the end of that loan. So it all will depend on your situation, it all depends on can you afford to make that monthly payment, if so, how much extra, say$100 $200 May be the knock off three or four years at the end of the loan, and you'll be out of that mortgage fairly faster. But you're paying it back with cheap money because of inflation. And a 3% mortgage rate is a good deal, believe me, my first mortgage I had was 12 and a quarter percent interest. And then when I got it refinance down to 8%, I thought I was doing good, then I got it down to 6%, and 4%. So it's just a matter of the economics going on at the time you're doing it. So so that's going to be up to you make the decision on your own. If you're older getting close to retirement, maybe you want to pay it off. If you have some other reason why you don't want to have a mortgage on your home, if it's a valid reason, reason, talk with your spouse and discuss it and make the decision. I can't tell you whether it's good or bad, because I don't know all the facts. But you don't want to use any secured debt, or pay it late to pay and unsecured. Now let's talk about hospital or doctor bills. Genuine genuinely speaking, they're not going to turn it over to a credit agency, it takes a month before you even get the bill. So you get a bill and maybe three or four months later, maybe you're back to work, healed up whatever it was that caused that medical bill is Aquino is done and you're back to normal life, well make a minimum payment, pay him $50 Pay him $25 That the more debt you have the lower amount you're gonna go, they want their money. So if you call him if he just sent a bill payment, and or call him up and say I can't afford to pay this all once I like to do payments, can I pay you $25 a month, I'll pay you on this day, every month, you can count on it, blah, blah, blah, and they're most likely gonna take it. But if you don't do anything, and you don't call them and set up some type of plan, they may turn it over to collection, hospitals, so be yet to deal with them more directly. Maybe they want copies of your previous year's tax returns to see how much you make. But then you got to explain to him Well, you know, I have a good income, but I have a lot of debt, I'm working on getting my debt under control. This was an emergency it wasn't planned for is not in my budget. But if I could pay you $50 a month, I can put it in my budget and I can make your monthly payments. Yet, Bill might be $300,000 Don't get me wrong, it would be a lot. And then the insurance is gonna pay a large chunk of it if you have insurance. So then you're gonna be maybe, maybe 20 or 30,000 is going to be do you plead poor? What I did, and you make payments on it for three months, six months, maybe a year, and then all of a sudden they'll quit sending your bill. They'll just go away. And you call them and ask them well how much they still owe. And they'll look it up. No, we don't say you owe and anything if they wrote the balance off, they'll collect the money for a while, and then they'll write it off when he hits a certain point. Now, I don't guarantee that and I don't recommend you not paying it and hope they write it off. You got to call them set up a payment plan and make payments. You got to show some good faith here in order for them to do the other part. So I'll be back in one moment with my final thoughts. If you want to contact me to request my spreadsheet for the budget it or leave a comment or ask a question, you can send it using my email, reduce debt, increase well@gmail.com. reduce debt increase wealth is all together no spaces. If you'd like to ask a question, quick question in the subject, if you'd like to request my monthly budget, put Brett spreadsheet in the subject matter if you want to leave a response of any kind to put a comment in the subject matter, I will get back to you as soon as possible. Understanding your debt is an important thing in order to get it under control. So you got to quit creating new debt, you got to pay cash for use your debit card for all your need to make the minimum payment on all your debt, three, set up a savings account, build up an emergency fund the first time $1,000 In over a period of six months or so increase it by $500. And then after a year, you should have about $2,000, the more the better. Eventually, when you get your debt paid down. your emergency fund should be three to six months of your expenses, how much you spend every month times six, that should be what you have set aside for an emergency. So if you get injured at work, or you get sick and you can't go to work, you have money to pay some bills, track your spending. And now do it by just looking at your checking account online. Have a separate account, count about that calm, they don't pay me I don't make any money. It is a tracking software or a check register, where you can put in multiple checking accounts, multiple savings account, multiple credit cards. Everything that you use to pay or buy, things should be in there. And you should update it every pay every week. If you go shopping, and you go to four or five different stores and buy some things, maybe clothes for going back to school for your children, go ahead and enter them that same day. That way is quick and easy and is fresh in your mind. And you're gonna be more accurate budget. After you start tracking for 30 days, you might want to go back in your checking account and enter the past 30 days, you're gonna have categories, you're gonna be able to generate a report by category with totals by category, you use that report to break your first budget. And that's your budget amount. So your first month that you track becomes the first budget dollar amounts you're going to try to match the second month. So you have a budget amount is from that report, you have your actual. So actually, when you go in every pay period, and you update that account, you create another report from the from the first of the month, to the current date, by category and the totals that your actual spending. And if you have your budget set up, you have a budget, you have actual and you have the difference, you can see where you may be spending more money, the current month than you did in the past. You can see thanks is gonna help you plan better, you're gonna know that your expenses coming up. So you got to save some money set some money aside, so you have it available to pay when it before becomes due member in order to get out of debt. You got to pay everything on time and you're gonna pay it on the due date. So you don't pay late fees and additional interest. We're trying to reduce what you're paying the credit card, you got on start thinking you got to make the money work for you. The credit card companies have them work and the money is working for the credit card company if you owe a lot. So you got to put your money to use to work for you. Now once you get your budget done, you can look at the detailing you can figure out oh, why am I paying for this? I don't use that anymore. Go ahead and cancel it. You see Some TV already got these apps that they cancel stuff makes it easy. That's the reason because that's how you get under control is the years spending money might have a reoccurring payment set up for something you're not even using anymore. Get rid of it. And that will help you save money faster. That will help you get out of debt, faster. Simple, but it works. If you stay, too on it, I'm not telling you not to spend your money on entertainment, or things you may enjoy. The just gotta be realistic at looking at where you're spending your money, and try to reduce your money to where it's not really needed on once and focus on paying your needs on time every month and get in that habit and pay yourself first. You got to start thinking, I need to say money instead of thinking I need to spend money. You don't need to spend anything other than for housing, food, clothe transportation, and keep that at a minimum as much as possible. You'll be glad you did. So