Reduce Debt Increase Wealth

Reduce Debt Tips

August 13, 2023 MIsterchuck Season 4 Episode 178
Reduce Debt Increase Wealth
Reduce Debt Tips
Reduce Debt Increase Wealth +
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Show Notes Transcript

What it takes to pay off credit and tips and tricks to make the process easier. Do it yourself is the cheapest way to reduce debt but must be able to make tough decisions then carry thru with them.

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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. reduce debt tips, what it takes to pay off credit and tips and tricks to make the process easier, do it yourself is the cheapest way to reduce debt, but must be able to make tough decisions and then carry through with them. Other than do it yourself, you can get a credit counselor he can do. And they can help you some of them are nonprofit, some for profit, but then they gonna charge you a fee no matter what they are. So doing it yourself is a good way to get started. But the first thing you must understand is the debt trap cycle. What is the debt trap cycle, there's two ways you can fall into this trap. The first way is what I think a lot of people do. You spend more than what you earn, and use your credit to make up the difference. Thus, you're using your credit cards to buy those things that you're buying, that you would not been able to afford just solely based on your income. So in order to get out of the debt trap, you have to quit using your credit cards. The second way you can fall into it, you have maybe one or two credit cards, you pay them off every month, you think you have everything under control, then all of a sudden, you have balances on your credit cards and you're struggling to pay them down. And you're not making any progress. And what happened? Well, you didn't have a big enough savings account, emergency fund to cover an event that was unforeseen that happened. So you had to use your credit cards, or use your credit to pay for maybe your car broke down, maybe an appliance in your home broke down, maybe there was an accident and somebody got injured in your families, you had medical bills, but you didn't have sufficient savings to cover it. And you had to use your credit cards or your credit in order to pay for it. So what is my debt reduction plan, the first thing you got to do one is realize you have a problem. So we you're listening to this, you already got that part down, the first thing you got to do is quit using your credit cards, quit using credits. The second thing you got to do is make the minimum payment on all your debt, quit making extra payments. And there's a reason for that. And the reason is number three, create an emergency fund, if you don't have an a savings account, you need to have at least a minimum of $1,000. So by making the minimum payment on all your debt, that you free up some money to start your savings account. If you quit using your credit, you're making the minimum payment, you're taking money and you're putting aside and you're creating your emergency fund. And you need to build that up to at least $1,000 to start with. Then once you hit that $1,000 You continue putting money in your savings account until you have three to $4,000 above that $1,000. So what's that gonna do? Over the time it takes you to build that up, you're gonna have a larger and larger emergency fund, in case some unforeseen event pops up, keeping you out of the debt trap. Well, once you have that three or 4000 and access, you take that extra money and you apply it to your debt, paying off the highest interest debt first, generally credit cards, personal loans, stuff like that. Then you work your way down the car loans, and eventually your first mortgage. That is the problem most people have is Falling into the debt trap, and thinking they're able to get out of it by consolidating their loans. Again, a consolidation loan to pay off your credit cards, but you still have the same amount of debt, it may be more manageable. But if they company that gives you the consolidation loan does not require you to close down those credit cards, you may charge them up again, and you're right back to where you started. But you're worse because now you got an extra loan, plus all that credit card debt on top of it. So you're not making any progress, necessarily, by doing a consolidation loan, if you don't have the willpower to quit using your credit cards. If you quit using your credit card, and you make the minimum payment on that consolidation loan, over time, you'll get things under control. But if you're required to close those credit cards and cancel them, that's gonna hurt your credit score and the short run, but in the long term, it should improve and come back from that. So you avoided your debt trap is one have an emergency fund, don't spend more than what you make. So a good rule of thumb is have three to six months of expenses saved up this intention and advice is sound. For instance, if a household member loses your job, you have three to six months of income saved up to ease employment gaps. So maybe you got in a debt trap because you got laid off, or you quit your job for whatever reason, and you're unemployed for a short period of time. And then you got another job, that doesn't matter what happened, you got into the debt trap. Or maybe you just spend more than what you make. So maybe you have a spending problem, which has to be identified. And then you have to control yourself to keep your spending under control. I had both of those problems, I had my credit cards under control, then I thought well, I need to buy this, this and this, my credit card coming up, built up a little bit, I was paying them down. And then I had the car broke down, I needed tires for the car, or something happened. And I had to replace something, I got a bigger bounce on my credit card. And then it was a struggle to pay them down again, because I wasn't following my own advice because I didn't know what it was, at the time. Quit using credit, specially credit cards, make the minimum payments, build up your emergency fund, continue building it up and then apply the excess amount in your emergency fund to chosen debt. Generally speaking, one with the highest interest rate is you're better off. But if you have one that you can pay off, pay that one off, and you have a you made some progress. Now you got one card, that was a zero balance, quit use a net, do not cancel it because that would hurt your credit rating down the road, you may want to use that if they send you an offer. And here's a tip, he may get an offer on that on paid off credit card to transfer balance from another credit card for three or 5% transfer fee, but have 12 or 18 months of no interest. So what I did was I paid that 5% I transferred two or 3000 over and I made sure it was interest free. I made the minimum payment for a while because I had time and I cut I worked on the higher interest rate card or credit card. And then when it came within six months, I made sure that I got that interest free one paid off in the six months. And then a few months later, they send me the offer again. And I was able to do that over and over. So I'm paying less interest, which makes you able to apply more to the principal, which then you pay off your debt faster. So that's a tip. Never cancel a credit card when you got it paid off, keep it open and helps your credit rating and you might get some good offers in the mail where you can use that to your advantage. So how do you go about quit using your credit card, especially if you had credit cards, that were paying some monthly bills, maybe a gym membership, maybe you had a credit card, paying your phone bill, your cell phone bill, or whatever may be in a streaming bill, where he got first of all, you got any of those monthly subscription, you're paying through that credit card, you got to get rid of them, either cancel them and do away with them if you can, or use your debit card on your checking account to pay it. We want to start paying for the money that we have in our bank account to pay our monthly expenses. So everything that we pay on the regular basis, whether it's rent, mortgage, utilities, car payments, all your credit card payments, you got to pay for those items from your monthly income. So how do we quit using credit cards? For me wasn't too tough. I just took them out my wallet didn't have it. never bought anything online. tried not to use them, put them in a drawer. So I really had to think, do I really want to do this, I'm trying to get out of debt, I'm making progress. But if I use it, I'm gonna go backwards. So I was determined not to use them. So I made it difficult. So what are some other ways you can help you quit using credit cards, I have a link in my show notes that what it's called Easy to remember guideline help people reduce credit card debt as the Consumer Financial Protection Bureau. And they have a worksheet in and this article that you can download a link that will help you find areas where you might use your credit cards less often. So now we know that we cannot just stop using credit cards. So let's do it over a period of through three to six months. First thing want to do is find things that you can use your credit card less often. Maybe remove all those subscriptions that are coming out monthly, either cancel them, or put them over on your regular debit card. If you don't have the income to pay for them, why are you paying for if you're struggling to pay for your rent, and utilities month a month, why the hell are these things that's being charged on your credit cards. So I would highly recommend if you struggling to get out of debt to cancel anything that you don't absolutely need. Now your cell phone you probably need any streaming services, cable TV, get rid of those type of items. Maybe you use your credit cards every morning when you go to get your sell for a cup of coffee, words iced coffee or latte or whatever and something to eat on your way to work. That's something you can identify that you can put in your budget. If you have the money available your grocery budget, use cash and stat or use your debit card on your checking account instead. And quit using it on that credit card. Decide on a goal for managing your credit card use. Create a rule to live by on how you want to use your credit cards. Make a commitment to yourself to act on your goal. So the rule you would make would be I'm only gonna use my credit card to pay for something that has the unforeseen expanse that my emergency fund can't 100% pay for. So let's say that your car breaks down is $2,000. You know you have $1,000 in your emergency fund, there's half, maybe you've been building it up, maybe you have 1500. So you would use that 1500 How your savings and then an extra 500 on a credit card. So instead of putting a 2000 on your credit card, you put 500 So now it's a smaller amount to be less interest and you'll be able to pay it off faster. And now we have to rebuild. your emergency fund that's gone has slowed down you're paying off your debt but a debt only one up 500 instead of 2000. Do that at that unforeseen event and make a commitment and you stick to it. Put your credit cards in your dresser drawer or someplace where it's hard to get to? Do you really need to buy something, he got to really think about it anything over$100 Anything over $25 that your whatever rule you make, you really need to see for you buy it is think about it. Do you need it? Why do you need it? Can you get by without it, if you never had it before, apparently, you can get by without it. So write down on a worksheet and they have a worksheet in this spreadsheet. So try to cut out things that you use in your credit card for reduce things. And over a period of three, maybe four, six months, you might see that you're no longer using a credit card. So you have one whole month without any new charges. So that's a good thing. Now, if you got three or four of them, you got to do across the board for all of them. And you just need to cut out those things you don't absolutely need. If your goal is to get out of debt, these are the things you have to do. Avoid the debt trap, stay get yourself out of the debt trap, by quit using your credit, make the minimum payment, build your emergency fund, build it up, pass your minimum amount, which in this case is $1,000. Maybe over time, your emergency fund will grow to 2000. So now in the minimum amounts 2000. So you go up to 4000, you take 2000. And you apply it to one of your debt. Curly, simple, but that's hard to get started. And it's hard to stay focus, you have to stay focus. That is how you do it. I'll be back in one moment with my final thoughts. If you're interested in 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. And 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 in yourself and an investment in your personal financial life. If you're interested, send me an email at reduce debt increase And I'll send you the information about this online software. That worked great for me. Okay, the next final thing I'd like to talk about is what is debt relief and how does it work? If you find you're not making progress on your debt, no matter how hard you try, if that's the case, you might be facing overwhelming debt. So how does debt relief work? To break free of this financial burden, look into your debt relief options. These tools can change the terms or the amounts of your debt so you can get back on your feet more quickly. Debt Relief and falls and wiping the debt out altogether and bankruptcy, pending changes and your interest rate or payment schedule the low your payment or persuading creditors to agree to accept less than the full amount Oh, but debt relief programs are not the right solution for everyone. And it's important to understand what the consequences might be. And then they start talking about bankruptcy. Bankruptcy is kind of a weird thing. I from what I read, I've never been through it. I've never done it. You gotta go get yourself a bankruptcy attorney. And he's not going to tell you anything until he gets his first some initial fee. And that first initial fee might be 500 or$1,000. And what's he gonna tell you? Well, before you pay, I'm just gonna say well, I can file bankruptcy for you. Yeah, we can do bankruptcy. But once she gets your fee, he might say, Well, before we file bankruptcy, you have to prove that you can't pay off your debt. So you have to go to a debt counselor and here's a debt counselor that works with me, who happens to be a for profit A debt counselor, and they're in cahoots. And now you got to pay that fee. And then the first thing they tell you is quit making payments on your credit cards. Now you're all your credit cards, even though you've been making let you know the minimum payment, and you have a large amount, but now they all go into fault. So your credit rating tanks, and yet you still owe all that debt. So you got all these people calling you now, okay, now we got the debt counselor trying to negotiate better terms for you. Of course, they don't start doing anything until they get their feet. So you've been paying fees that could have been applied to your debt, that's my personal pin. And then that through over time, they find out well, they were low your interest rate 1% or 3%. And it doesn't really make a whole lot of difference. So that will really help you a lot. And if they give you debt relief, if they forgive you on the debt you owe, that becomes income to you. And you'll get a 1099 for your what it is, and the male, then, you know, after the end of the year that they do that, and now that's gonna be income to you. And you could owe more income taxes to either the Feds and state depending on where you live. So it doesn't necessarily solve a problem, and it probably most likely is going to make the problem worse. And that so you got to be in bad shape. And then you got to be aware of scams, a debt relief downside, there's people out there that will scan you and take your money and they won't do anything for you, or very little. So you need to understand the points before entering in agreement. What do you need to qualify? What fees were you pay what credit which creditors are being paid, and how much is your debts and collection, make sure you understand who owns the debt. So the payments go to the right edge agency. So make sure you pay the agency that's collecting that debt, and not directly to the first creditor that sold your debt. Because that screws everything up, I went through that nightmare. So I got a show notes from the nerd wallet that talks about all this. But if you follow my debt relief plan, quit using credit, make the minimum payment, get your emergency fund build up to a minimum of $1,000. And then keep building it up until you have three to $4,000 Take the excess and apply it to a debt, I would recommend the highest interest rate first, or if the very first one and the one that you could possibly pay off. First time, do not cancel any credit cards that you pay off, keep them open. Because if you cancel them, that's gonna hurt your credit to income ratio, because your credit was gonna go down and it's gonna hurt your rating down the road, you might get an offer to transfer the use of balance transfer or you have 12 or 18 months of interest free, they're not going to charge you interest, you just paid the three to 5% transfer fee. And then you can have that length of time that they're offering to pay that off with no interest, which gives you the opportunity to apply more money to the higher interest, credit card or loan to get it down. So you that overall you're paying less interest, more principal in getting out of debt faster. That is the name of the game is gonna be slow at the beginning he gonna be creeping along, you're gonna think you can't do it. It's gonna look like you're not making process. Any progress for six to nine months is gonna be a struggle. You need to reduce your spending to the bare minimum. only pay for what you absolutely need. That's the biggest tip I can give you. If you're truly want to get out of debt, whether it's paying off your credit cards, or paying off all your debt. Once you get started. You want to pay off all your debt. Maybe your goal to start with is to get your credit cards paid off, then maybe a personal loan, maybe your student loans, and then maybe a car payment and then the second car payment and maybe your line of credit on your home then your force more. Once you get going, this becomes faster and faster. It's slow start. Very slow start. As you get going, it's gonna pick up some speed. The less debt you have, the more you can say, the faster your savings and emergency fund is gonna grow. Therefore, the more you're gonna have to apply the debt, the debts gonna get smaller. your emergency fund is going to keep getting bigger. I think you see where I'm going. He has to make the decision. What can I do without now so I can have more later.