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Personal Finance

Jim Graham

2003-11-01 08:09:00

: We've racked up a lot of personal debt, and I'm afraid it's going to get worse before it gets better.  I don't want to end up filing for bankruptcy.  Can you recommend some ways to help us eliminate this mess we're in?"

ANSWER:   The term "Personal Debt" is misunderstood as a problem within itself, however, it’s the result of uncontrolled spending, not setting financial priorities, and deciding between "Wants and Needs." Personal debt has a tremendous impact on lives, causing stress, divorce, and  bankruptcy.  But, personal debt can be managed and eliminated within 9 years or less by using prescribed money management principles and utilizing "Debt Leveraging."  It requires dedication in order to achieve the desired result.    We live in a society of instant gratification, and using credit to obtain it. It's always "I deserve it and I'm going to reward myself." Personal debt is usually the result of living beyond our means, uncontrolled spending, and not setting proper priorities.    The U.S. Bureau of Census, Standard Abstract of the U. S., 1999 and the Bureau of Economic Analysis, 2001, reports the total household debt stands at $5.4 trillion, or about $58,000 for every person in the U.S. That figure has more than doubled in ten years. Household debt has risen as a percentage of disposable income from 35% in 1952, to over 100% today.  *According to the Consumer Credit Assoc., Jan. 2002, total credit card debt in the U.S. was approximately $668 billion. * Mismanagement of personal finances including credit card debt is the #1 cause of stress. * 89% of all divorces were the result of mismanagement of personal finances. * Every year, approximately 1.4 million bankruptcies are filed, and the numbers increase nearly 15% annually. (Bankruptcy report Wichita Eagle, Mar. 2002. Kansas recorded 15,250 filings in 1998, 13,554 in 1999 and 13,331 in 2000, and as of Sept. 2001 there were 10,661 filings.) After reviewing hundreds of filings, over 95% could have been avoided. The most effective means of eliminating debt is being able to control spending and setting priorities of "Need over Want." In last month’s article "How Can I Control My Spending?" we discussed three spending decision elements: utility, availability, and affordability.    If you achieve your personal LONG term financial goals and spend this money in this instance, then you can "afford it," it's "JUST A MATTER OF CHOICE". "You can have anything you want----You just can't have everything you want" and still expect to have a comfortable financial future. By setting priorities, and dedicating yourself, ANY DEBT problem can be resolved without filing bankruptcy, of course, there has to be an income. In September, we discussed "How Money Works" and time’s direct impact on our decision making process. The more time you take to resolve the problem, the less time you have to acquire funds for retirement. During that increased time frame, you are paying more interest to someone else instead of putting it in YOUR bank account. Time is the enemy for debt management.    “Tracking,” has it's advantages, helping find an extra $200 to $300 a month in wasted spending which could be effectively used to manage debt. The debt elimination process principle illustrates how you can achieve your goals of financial independence by using some very basic principles, setting spending priorities, and putting forth the commitment to accomplish these goals.    To illustrate "Time Factor", the following example of individuals who used these principles with "Debt Leveraging" achieved the following: With an original debt of $110,000 which cost $252,270 (debt plus interest) they calculated being debt free in approximately 25+ years. Using this system they were debt free in 9.17 years, saving $88,334 in interest. When their total debt payment was converted into savings at a modest interest rate for 16 years, it saved an additional $479,022.26 for retirement.    Other processes to become debt free include:Home Refinancing - A good option allowing you to achieve a lower interest rate or monthly payment, but it does have drawbacks: (1) usually a finance charge of approximately $1,500 to $2,500 is added, depending on the amount being refinanced. It will be included in the overall payments, meaning you end up paying thousands in interest on the finance charge. And (2) when refinancing to lower your payments,  you select the 30-year mortgage. A 30 year mortgage means you‘ll be paying approximately 2/3 of the payment in interest. For example a $100,000 mortgage would end up costing $300,000.  The home is a liability until the equity is more then what you owe. Until you achieve this ratio, the home is not an asset.  Consolidating debt -This is another tool many have used, however, you’re borrowing money on a high interest loan to pay off other debt, and, if you don't use the proper principles, all you’ve acquired is more high interest debt.Bankruptcy -This isn’t what you want, but if you don’t apply proper management, then filing bankruptcy is just delaying the inevitable and will cost you hundreds or thousands in interest and stress. The average cost of a Chapter 7 is approximately $700-$900 plus a filing fee of $200; for a Chapter 13, $900-$1,100, plus a filing fee of $200, and a bad credit report for 7 years.      After considering all of the possibilities, proper money management education coupled with "Debt Leveraging" is the best solution. Remember, education is good, however, if you don't have the necessary management "tools" to manage your situation, then education is just that-information. Bankruptcy is not the solution, proper money management and understanding "How Money Works" is the ONLY Solution.