Reduce Debt Increase Wealth

How People get into Debt

May 07, 2023 MIsterchuck Season 4 Episode 164
How People get into Debt
Reduce Debt Increase Wealth
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Reduce Debt Increase Wealth
How People get into Debt
May 07, 2023 Season 4 Episode 164
MIsterchuck

Is the question everyone should ask themselves. This is important to know so the problem can be fixed. Then steps to get rid of debt can be taken. This episode is first in a series to become debt free.
Article Link:
https://www.debt.com/news/how-do-people-get-into-debt/ By John Boitnott
https://finred.usalearning.gov/Money/DebtTraps 

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Show Notes Transcript

Is the question everyone should ask themselves. This is important to know so the problem can be fixed. Then steps to get rid of debt can be taken. This episode is first in a series to become debt free.
Article Link:
https://www.debt.com/news/how-do-people-get-into-debt/ By John Boitnott
https://finred.usalearning.gov/Money/DebtTraps 

Support the Show.

Please support the show by subscribing, can cancel at any time. Thanks for the support.

All other inquires place topic into Subject.

Charles McDonald:

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. How do people get into debt? Is the question everyone should ask themselves. This is important to know. So the problem can be fixed 10 steps to get rid of debt can be taken. This episode is the first in the series to become debt free. I've done a series multiple times, but I'm doing this one in a little bit different order. This episode has the debt reduction plan. Before I start talking about how to reduce your debt, it's a good thing to know or understand on why you got into debt, how you got into debt. Maybe you were careful and you weren't spending more than you may, you're careful with your credit. He did everything right. And then boom, all of a sudden you got this debt piling up. Because debt can be a frustrating experience. Regardless of what happened. Breaking the debt cycle can be hard to do, specially when you're not even aware that you've been trapped in the debt trap. So what is a debt trap? A debt trap is when you spend more than you earn and borrow against your credit to facilitate that spending. While this on certainly can be caused by unnecessary expending, having an adequate savings to handle unforeseen costs can also result in a debt trap. Having an inadequate savings to handle unforeseen costs can also result in a debt trap. Not having an emergency fund, not putting aside some money into your savings account. Maybe you're careful, maybe you try to not spend more than you made. But you've been struggling you're living paycheck to paycheck to paycheck, every pay period, you always have 20 or $30 left over. So you never spend more than what you earn. So you're doing good. But then that one event happened. And you got trapped into the debt trap cycle. And what this event it could dispense something, your car broke down. Or maybe you need new tires for your car. Or maybe air conditioning in your home broke any little or maybe you had an accident and broke your arm or leg or one of your children broke their arm or leg and you want an emergency room and you didn't have the money to pay for it. So you put it on your credit card thinking I can pay that off in three months. But now we're a year later. And trust has been piling up, you hadn't been able to pay it off and you're trapped in the debt cycle. And that happens to everybody, the best of us can fall into this trap. And what makes matters worse, as you debt grows, your debt to income ratio increases, so your credit score goes down. Which means if you tried to borrow money, it's gonna cost you more higher rates of interest, higher closing costs, something so while refinancing your credit card debt with a lower interest personal loan isn't always a bad idea. But gotta be careful with consolidation loans. Borrowers can get into trouble when they acquire new debt on the now paid off credit cards often market as affordable due to low minimum payments, and the cycle continues on because they start using those credit cards that just been paid off. So how do you avoid a debt trap? One way to avoid the debt trap is by building your savings. So though easier said than done, the greater savings you have you'll be prepared to handle any potential trap makers that pop up. A good rule of thumb is have three to six months of expenses saved up through the The intention of this advice is sound. For instance, if a household member loses their job, having three to six months of income save up can ease employment gaps. And the amount of money can be intimidating if you're just beginning to build your savings. Instead, start smaller with your goals and aim for $1,000 emergency fund getting out of the debt trap. If you're already caught in a cycle of consumer debt, don't worry using smart, specific, measurable, attainable, relevant and time based goals, it can be broken. First, to determine the amount to pay towards your daddy's money on top of your monthly payments, then determine your plan of attack. Here are two approaches to consider. I'm not going to do that because I only give you my debt reduction plan. And it's much simpler to follow. If you stick to it, it will work and you will get out of debt relatively quick. But at first, it won't make any sense to you. But I'm gonna explain the reasoning. And why I recommend this debt reduction plan. It doesn't matter how you got into debt, if you're just spending too much money. Or if you're living off a credit card, you got to stop doing that EGS have to live within your means and quit trying to keep up with the Joneses. Your wants versus needs, you got to pay for your needs. First, save up your money to get your wants. And we're going to cover that much detail over the next couple of weeks. Also, one way we accumulate too much that is we tell ourselves we convince ourselves that we can afford it. When we decide to incur that we typically convince ourselves that we deserve it, and that can't afford to pay for it back over time. I've done that many times. And then I wish I haven't. Or maybe you are just looking at the cost of things in terms of a monthly payment. And maybe your car payment was $200 a month, maybe your furniture payments $50 a month, maybe your rent payment is $500 a month, but you forget to factor into there you got other expenses, such as utilities for where you live, gasoline for the car, car insurance, food, groceries, and you get caught up and wanting to buy things or maybe even things you really need. And you're looking at that monthly payment and thinking you can afford it but you're forgetting about the expenses that are not monthly payments, your utilities, your groceries, your gasoline, your car repairs, things and insurance on those things. So you got to be careful, don't overspend. social acceptance, maybe you're trying to keep up with the Joneses. marketing and media has a lot to do with it. We're there, you see advertising every day in and day out, maybe you see something you want. And then we get into an economic bubble. Maybe you bought a home and the value of the home went up. Even though you're just making the minimum payment or your monthly mortgage payment. you value your hungers up. Now you have this extra equity in there. So you borrow more money to buy something you don't really need such as a boat or a toy. And then sometime down the road, the market collapse and you owe more on the home than what you can sell it for and you're stuck and you might have to file bankruptcy that happened in 2008. And it can happen again. And you have a financial emergency, or any type of emergency that costs you money that you don't have to pay for. Whether it's repairing something that broke that you need to go back and forth to work such as the automobile or whether it was a medical emergency for you or somebody in your family. I have links in my show notes to two articles you can refer to the how people to get in the debt and debt trap. Also, if you wish to support this podcast, you can go to reduce debt increase wealth.com and click on the support button or You can go to my show notes and click on the subscription link. And it will take you to the same location. And I thank you, and it's not required. But if you find value in this and would like to contribute some money, I would greatly appreciate it. So now you have a general idea, we have the debt trap, whether it's you're spending more than you make, or you're living on credit cards, or you're trying to keep up with the Joneses, or you may be run unemployed for a short period of time. Or maybe you had a repair expense that you didn't have enough money to pay. And now you're in this debt trap. Now you owe more money, you're struggling to make the payments, he can't do what you used to do him. Maybe you used to go out and eat dinner every night. And now time you pay off all your minimum payments on your debt, you don't have any money left over to do anything. So you feel like you're stuck. And you're not wanting to do you're not happy is put it that way, you're struggling to pay that debt back. So how do you tackle this problem? The first thing you need is a debt reduction plan. You need to make a plan, you should be planning for every major event that happens in your life. Whether you're getting married, you have wedding plans, if you're gonna have a child, you have plans for having a child, or you're gonna buy your first home, you make a plan on how you're going to achieve buying your first home, you got a bunch of debt you want to get rid off, you have a plan on how to get rid of that debt. And this is what you need to do. And the first thing is quit using credit, quit using your credit cards, take them out of your wallet, forget even own them. Don't borrow any money and avoid doing a consolidation loan for now, the reason I say that is this, take a look of what you got, do really know how much debt you're in, we got to pull together all your credit card statements that you get. And you want to know the name of the credit card, how much you owe the interest rate. And when it's due, and you got to put them in order. You can put them in order by the due date, a month. So you can put them in order by the due date, then the interest rate. Or you can put them in order by the due date. And the balance, highest balance. First, the lowest balance last or the other way around, doesn't really matter. You just gotta know what you have in front of you. If you have car loans, he gotta put that out there. If you have a mortgage, if you have a line of credit on your home, all that you need the same information, who you owe, how much you owe, what's the interest rate, and when it's due. Because we're we're trying to get our debt under control, you can't get something in your control. If you don't know what it is. The second thing you do, now we know what our credit is, or debt is, quit using your credit cards don't do any personal loans. Don't do any payday loans don't borrow money, period, he got to start paying for cash for everything you're gonna do. Now how you gonna achieve that, if you don't have enough money to pay for these things? Well, how much of your monthly income were you paying extra on a credit card, trying to pay it down? Quit doing that. Make the minimum payment on all your credit cards, on all your debt on all your loans. Do not pay anything extra. Now, because we're trying to get everything under control. We're trying to get everything under control by not using credit. And by using. By doing that, we need to free up some cash. So we can pay for things like groceries and our gasoline for the car and pay our monthly bills. If you're not paying all your bills on time, every month, you got to do that. So let's start now. Your needs what our needs eats, housing, transportation, food, some clothing. I say clothing because you have to wear something, because you got to go to work, you got to wear something. But you don't have to have it pay for it every week or even every month. But you gotta have a little bit set aside or available to when you need some, maybe your pair of shoes where that you need to buy a pair of shoes or your pants get a split, and you need another pair of pants for work. Get a hole in your shirt. So you need to buy a new shirt for word, you know things happen. So just a little bit for clothes, housing. And when I say housing, I mean the mortgage payment if you're buying a home or your rent payment, plus all the utilities, utilities include the internet and your cell phone. Transportation is your car payment, gasoline and any repairs you do to your car, and also includes if public transportation, if you live in a city that has that and if you use that food would be groceries and dining out by going to the grocery store and cooking your own own food is always the cheapest way to do it. But if you don't do that, you just need to cut back on Dining Out dining out is an expense, you can really reduce on and start learning how to cook. And I see on TV all the time you can buy these meals that come to you they're probably cheaper to go into a restaurant, or anything do is heat up the food or cook the food. It's easy and simple. And they gave you instructions, and it's probably tasty. And if you need to be on a diet, they're probably proportion by size. So you're going to probably lose weight, because you're going to probably most likely be eating a little bit less. That's just a benefit of being poor and broke and any money, you're gonna eat a little bit less save some money. So you can get your debt under control. And then once you do without entirely as much as possible. Now, I don't really say you should cut back, but I'm just saying, once, if you really want to get your debt under control, the easiest and fastest way to do it, there's only two ways you can do it is increase your income, or reduce your spending. The easiest way is to reduce your spending, maybe for somebody, it might be easier to increase your income, I don't know what that situation would be. But for most people, it's easier to reduce their spending. That's number two. So so we're quit using credit. And we're making the minimum payment. And number three is that you don't have a savings account, set up a savings account the same bank that you have your checking account, and put five bucks or whatever they take to start one up. And you want to build yourself an emergency fund. For now, up to $1,000. It may be a slow process, because maybe you can only put five bucks a pay in there. But do whatever you can do, because number three is building an emergency fund. And we need to have a minimum of$1,000 in there at all times. That would be your emergency fund. So that if something would happen, he don't have to use credit to pay for it. If you break your arm or go to a hospital or need tires for the car or whatever, you'll have some money available to pay for it. So even if you have to use credit, and won't be as much. But our goal here is to quit using credit, make the minimum payment on all your debt and build up your emergency fund has three things is not that difficult to remember. You just got to do it. And you got to start today. Start right away with these items, and you're gonna start working towards becoming debt free. What happens once you get the $1,000 in your savings account? Well, you keep building it up, and you keep making the minimum payment on all your debt. And if you would Google how to pay off debt. Every article you see out there is gonna say make extra payment on your debt. Well, we're gonna do that, but we're gonna do it a little bit different. We're not going to make Make $100 extra payment every month. Because that's not going to really result in much of a game. And if we pay that$100, or that extra $150, and we get down where we don't have any savings, and we're still paycheck to paycheck when we're doing without, and then something would happen, we don't have any savings or emergency funds to cover it, we just get deeper in debt. We're trapped in a debt trap. And it's a cycle. And it's hard to get out of quit using credit, make the minimum payment for now, start your emergency fund, build it up their $1,000. Once you reach 1000, that's the minimum balance that's in that account, continue building up your savings until you have three to $4,000 in there. Why? Because it may take you a long time to get up to$4,000. That's $3,000 over your minimum, why such a big number. Because if something would happen, have an emergency, you have a bigger emergency fund to cover it, the more you can pay for it without borrowing, the less credit you're gonna have to use, the better off you could be, you're making the minimum payments, you're inching net, your balances down a little by little over time over the month. Once we have 3500 to $4,000, you have all your bills pay, you're paying everything timely, you're all paid up, you want to the grocery store, you got plenty of food in the house, your cars for gas, you have no big bills coming up, your car insurance is not due for three months, you're looking pretty good. Take that extra money above $1,000, whatever it is 3030 504,000 and apply it to one of your debt, you start with the highest interest debt first. Generally speaking, that will be a credit card. So you want to work on paying off credit cards first, personal loans, car payments, or car loans, line of credit, and then your first mortgage, your mortgage on your home is going to be the least amount of interest, the interest on your credit card or personal loan, payday loans, those should be first because they got the highest rate of interest. So you want to start tackling that. You'll hear about the snowball method that's paying off the lowest balance first. So you feel like you're making progress. And the Avalanche Method is paying off the highest interest item first. So that you pay less interest, you pay down more principal over time, and you would pay off your debt relatively faster, but less because you're paying less interest. You'll pay off their principal faster over time, but it may take a longer period of time. Before you see any progress. I'll be back in one moment with my final thoughts. If you're interested and learning about an online software that helped myself get out of debt, it does tracking, budgeting, and keeps track of all your assets and all your debt. It even tells you how much and when to transfer money into your savings account, and how much and when to transfer money to your debt and which debts to pay off and order. First. It's not cheap. It's a one time payment. But it will definitely be an investment something and yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase wealth@gmail.com and I'll send you the information about this online software that worked great for me. So you're probably thinking this debt reduction plan that don't sound too bad. I was calm. I didn't think of it before or why if I tried to do it, I'm not very successful. Quit using credit. make the minimum payment. Start a savings account, build up an emergency fund. Then save and access an emergency fund to a point where you can make a large Payment against one of your debts. And repeat, keep doing it over and over and over until you have no debt. But why doesn't that happen? I said earlier, you need to know what your debt is, what your credit card debt, how much you owe, who you owe, how much you owe, that's the total balance, the interest rate and the due date. But how much is your monthly payment on credit cards if you keep using them, and you don't make a lot of payments on or you make the minimum payment, and you keep using it, your balance is increasing it month in and month out, that minimum payment keeps going up. So for all your debt, how much is the monthly minimum payment, add all that up, that is taken right off the top of your monthly income, or the amount of money this deposit into your checking account comes right off. That's money you don't have for anything else is gone. So if you make $5,000 a month, and all your credit card monthly payments, your car payment, your mortgage, your line of credit, may be your second car. And that adds up to$3,500 a month. That means you only have $1,500 a month to pay for everything else. What is everything else, utilities, gas, food, anything that you buy, because remember, we're not using credit. So if you buy something, that means is coming out your checking account, or your cash that's in your pocket. But where's that cash coming from? From your checking account, or he took it out your savings. And you got to reframe to do that, from doing that. The only time you take money out of your savings account is to pay down some of your debt. And you're doing it one debt at a time. So that that gets completely paid off, maybe, and two or three of these large payments, plus all a monthly minimum payments, no matter how long it takes than one's gone. Once one's gone, that's gonna free up that minimum payment, you're gonna have one less minimum payment, so you're gonna be saving a little bit more little bit quicker. And over time, as you pay the second and a third and the fourth loans off, your minimum amount is getting smaller and smaller. So you're putting more and more in your savings, which then your savings is growing quicker. So thou your debt is getting paid off sooner or faster. And before you know it, you're gonna be debt free. I paid off about$135,000 In three years, eight months. And this is how I did it. But it's more than just quit using credit, make the minimum payment to your emergency fund, build up your emergency fund, apply it to debt. It's more than that. I done a lot more than that. Because how can you do that? How do you know how much you can put in your savings every month, if you don't know how much everything else is costing you. If you're not keeping track of your spending, you'd have no idea. If you just look once a month in your checking account and say, Oh, I have $600 in there, I can transfer $500 to savings. And then two weeks later, you're transferring it back to checking because you had a bill due because you have no idea what's going on in your life. It's called tracking. you track all your income and all your spending money in money out God to know how much and do into when everything is going so that you can pay all your bills on time every month. That's gonna be the next episode. We're gonna talk about tracking your spending, tracking all your money from your checking your savings and all your credit cards. We talked about tracking in the next episode than the episode after that we're going to talk about budget thing and how to do it the easy way. Then the episode after that, we're going to talk about what you do when you get your debt paid down when you start getting things under control, and things that you consider having, so that your emergency fund is covered, so that you don't lose everything if a big natural disaster would hit. So that's in a nutshell, debt reduction plan, tracking budget, what to do when things get better