Overcoming Debt
Some statistics to consider
Average credit card debt per household - $15,788 (May 2010)
College loans alone now total almost $830 billion (said another way,
$830,000,000,000!)
Credit card penalties estimated at $20.5 billion in 2009
National default rate on credit cards almost 28 percent
Home foreclosure rate worst since Great Depression
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Objectives
How did we get here?
Good debt or bad
Cost of credit
Trouble signs
Managing debt problems
Managing your spending and savings
Strategies to reduce or eliminate debt
How Did We Get Here?
Credit card offers were easy to come by
Great stock market run during 80’s and 90’s
Home values appreciated
Education expenses
Medical expenses
Putting off the inevitable
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06/29/2007 2:30pm eSlide - P4065 - LifeCare
Good Debt or Bad Debt?
Long-Term Benefits
Mortgage
Education
Automobile
Secured, lower rates
Short-Term Benefits (but long time to payoff)
Credit Cards
Store Cards
Unsecured, higher rates
The Cost of Credit
“
The most powerful force in the universe is compound interest” – Albert EinsteinPrincipal: $3000
Rate: 15%
Payments: $100
Total Payments: $3,784
It cost you $3,784 to spend $3,000!
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Trouble Signs?
You can only make the minimum payment each month
You have late payment penalties
You are using your credit card to pay regular expenses (groceries, gas, etc.)
Your total debt payments exceeds 35% of your take home pay (not including your home mortgage)
Managing Debt Problems
Contact your creditors first
Try to work out a repayment plan you can handle
Follow up in writing
Consider a qualified Credit Counseling Agency (www.nfcc.org) - Debt Management Plan (“DMP”)
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Managing Spending – Create a Spending Plan
Fixed Expenses
Housing
Utilities
Car payment
Insurance
Groceries
Discretionary Expenses
Travel
Dining Out
Entertainment
Shopping
Sports/hobbies
Club fees
Cable/phone services
Manage Your Savings
Pay yourself first
Create Emergency fund
- determine appropriate size of fund - set aside as savings, not investment
Set aside money to reduce debt
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06/29/2007 2:30pm eSlide - P4065 - LifeCare
Get Out of Debt!
Freeze credit card spending
Reduce discretionary spending
Re-direct that spending to increase monthly payments
Payoff one card
Parlay increased payments to next card
Can You Reduce Spending by $50?
Credit card #1 - $1000 balance, 10%
$50 payment
Credit card #2 - $3000 balance, 15%
$100 payment
Credit card #3 - $5000 balance, 18%
$100 payment
Cutting back on discretionary spending allows us to save an additional $50 a month that will be used to pay credit card #2
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Impact on Credit Card #1
Original $50 monthly payment on $1000 balance
22 months, $98 interest
Add additional $50 from reduced discretionary spending ($100)
11 months, $48 interest
Payoff time cut in half!
Parlay Your Payments!
Credit Card #2 - $3000 balance was lowered to $2269 over 11 months it took to repay Card #1
Add the amount of Card #1 payment to this monthly payment ($100 +
$100 = $200)
Payoff in 13 months, interest expense reduced to by $220!
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Finish it up!
Roll $200 from previous payments towards card #3, total of $300
Current balance - $4284
Card paid off 17 months later
In 3 ½ years, you have eliminated $9000 of credit card debt!
And the winner is . . . You!
Reduced interest payments by $2,327
Cut payoff period in more than half (from 94 months to 41 months)
And, most importantly, you are now debt free!
What if you could save more than $50?!
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Getting Out of Debt Review
The economy will change for better and for worse – adopt good habit for any season
Credit costs money – minimize your interest expenses
Don’t wait too long before getting help if you are experiencing problems dealing with your debt payments (www.NFCC.org)
Take time to understand your spending and savings habits and goals.
Are they in sync?
Find a strategy to get out of debt!
LifeCare Resources
Finance Web Service
Credit & Debt Library
Personal Finance Library
Interactive Calculators
Savings Amount, Amount Saved, Savings Rate, Spending Rate, How Much Can I Borrow?
HTML Articles
Related Web Sites
Audio Tips and Podcasts
Budgeting Basics, Money Management:
Goals and Action Plans
On Demand Webinars
Save $5000 This Year, Make Money Not Excuses, How to Improve Your Credit Score
LifeCare Guides
Personal Budgeting Worksheet, 66 Ways to Save Money, Knee Deep in Debt