Getting out of Debt -- update

[yesthattom]

Since a couple friend’s LJs have been mentioned debt lately, I’ve updated my slides and posted them. This is my advice for getting out of debt the only sane way. I’ve created a spreadsheet for tracking payments, but I haven’t tried it yet (since I’m debt free, I can’t!). So I’d appreciate any feedback people have when they try it.

PDF version

Sample spreadsheet for tracking your payments

Comments

[kimuchi.livejournal.com]

"Ha ha ha...no, the other snowballing"

I've never run up debt, but I'm terrible at the investment part. I've got my 401(k), but I'm really afraid to do anything else, I really have the "money in a mattress" mentality towards saving.

[jss]

> I haven’t tried it yet (since I’m debt free, I can’t!).
The solution is obvious: Go into debt. ;-)

When I reviewed them the last time, they made a lot of sense to me.

[shakal.livejournal.com]

I agree with almost everything in the PDF file, but I would advocate keeping two low-interest credit cards in case of emergencies. One is for the actual emergency, and if something hugely bad happens and you can't pay off that emergency in a month or two, transferring the debt to the other card at a lower percentage rate can make a big difference if the situation is that dire. Balance transfer percentage rates can be as low as 0% for six months compared to the purchases rate which on even the best of cards is what, 10%?

[awfief.livejournal.com]

What kind of emergency would that be?

The first thing I can think of is emergency plane fare somewhere. If it's that dire an emergency, folks should think of someone who can lend them $$ for that.

The only other thing is something like "the pipe burst and I need to go to the hardware store and get stuff to fix it, but I have no $$". And how are you a homeowner with no $$, anyway?

[shakal.livejournal.com]

You're assuming that "folks" know people who are willing and able to lend them plane fare. Not everyone can make that assumption!

A pipe bursting is way below the order of magnitude I'm thinking of.

For instance: A medical diagnosis of a family member which requires immediate money for tests and treatment of acute symptoms this month, but also can be expected to involve further treatments over the coming months which are above and beyond the current family budget for single-month emergencies.

Or another example: You're unemployed with an unexpected fairly costly car repair (either because of random hardware failure or because of an accident) which costs more than you have on hand for this month from temping, and possibly more than you can pay off next month and the month after that. Why pay even two months at high percentage when you can balance transfer to 0% for that time, and three months down the line or so, your income would be expected to increase.

[awfief.livejournal.com]

If you cannot afford a car repair, you cannot afford a car.

As for the medical diagnosis, that's tough. The books I've read say "save a little each month" so that you're set in a disaster. The obvious answer is "medical insurance" but that's not ubiquitous. Usually you do not have to pay up front for tests, though you do for medication/treatment.

Everyone I know could call on a relative or close friend to lend them money in an emergency like the plane fare or even the medical tests. They may have to swallow their pride to do it, or it may be difficult, but every single person I know could handle an emergency like that without going to a credit card. They don't always, but they could.

What's better, swallowing your pride, or ending up having to pay double for something?

Of course, the plane fare is a good example, because even if you have a friend lend you money, you'd have to get cash (a check takes time to deposit) and then use your bank card over the 'net, which isn't such a good idea. Cash for plane fare is a no-no these days. So pretty much you need a credit card for that.

Emergency credit cards are often used for groceries, though. Or "I deserve to go out to eat because I've worked hard." Not actual, real emergencies that happen rarely in life.

[shakal.livejournal.com]

If you cannot afford a car repair, you cannot afford a car.

Nice glib saying. Not entirely practical, though, especially for folks temping in between "real" jobs, who've saved responsibly and are using their nest egg prudently during unexpected hardship.

I can't speak for anyone else who's been in such situations, but pride or lack thereof was never an issue for me.

Actual, real emergencies have seemed to strike those near and dear to me far more often than should have happened statistically over the past few years. The fact that I've seen too many my friends go through this sort of thing means that I'm likely to take your theoretical/rhetorical statements rather personally. Cancer's a bitch, and so is heart disease, and so was getting laid off from your job during the past few years of our oh-so-charming economy.

So... I'm trying not to get into a debate with you here. For the most part, we probably agree on the pertinent generalities.

I was just saying that rather than the one credit card yesthattom advocated keeping for emergencies, I would recommend keeping two rather than the one, because balance transfers can save on interest for a few months until you can get your nose above the water. The utility of having two cards is greater than twice the utility of having one.

Backing away now...

[wakinghour.livejournal.com]

If you cannot afford a car repair, you cannot afford a car.

So if you live in an area where there isn't public transportation, you should remain unemployed rather than drive to a job that doesn't pay you enough to afford expensive emergency car repair?

Everyone I know could call on a relative or close friend to lend them money in an emergency like the plane fare or even the medical tests.

I'm wondering if that's because you only know like, 4 people? *g*

Emergency credit cards are often used for groceries, though. Or "I deserve to go out to eat because I've worked hard." Not actual, real emergencies that happen rarely in life.

Very true. But isn't that a matter of self-discipline on the part of the creditee, and does not in itself make having an emergency credit card a bad idea in general.

[yesthattom.livejournal.com]

"If you cannot afford a car repair, you cannot afford a car."

That's rather elitist.

"Everyone I know could call on a relative or close friend to lend them money in an emergency"

Wow, that's rather rather elitist too.

Every year thousands of people become homeless because they thought "it could never happen to me". The truth is that millions of Americans are one hospital bill, or major home repair away from becoming homeless. It isn't a matter of pride, or not having enough friends.

In fact, the more I've talked with people about debt the more I've been surprised to find that there are so many people that don't even have the ability to have "an emergency credit card or two" as others have suggested.

[awfief.livejournal.com]

Elitist?

No. It's the strategy I use with myself and my friends, to combat the attitude of "I deserve this because I work hard/my friends have it/blah blah blah." It's not elitist, it's realistic.

If you cannot afford it, you cannot afford it. That's not saying you CAN'T have it -- I know folks who cannot afford a car and NEED one for work.

The fact is that many Americans feel they DESERVE material things, even if they cannot afford to pay for it. The fact is that if you cannot afford it, you don't deserve it.

It's actually a very capitalist viewpoint, which is weird coming from me.

I've dated a homeless man before; I know the Boston area system, and I know how shitty it is to be homeless. This was a man with a 6-figure salary before his mother (his only relative, as he was adopted and his mother had no close relatives) got a slow-moving cancer and died.

When we dated, I was in college. We could not afford a car, but we had one -- it was old, constantly needed repair, and his job depended on it (he was a medical courier). I don't think he had insurance, actually, come to think of it now, because I don't remember us ever paying it.

Cars need repair, and it's foolish to think "I can afford a car because I can afford the gas." The only reason I have a car is because my mother gave me her car when she bought a new one. At the time, I could not afford both insurance and lease payments, and I didn't have the savings to buy a used car.

So, yeah. If you don't have the money for an item, you cannot afford it. How is that elitist?

[ayse.livejournal.com]

Well, you could be a homeowner who just replaced their roof, or who just replaced their siding, or any number of things. You could be a homeowner who just remortgaged to negative amortization to pay for your father's surgery or your husband's cancer treatment. Heck, the first year living in our house, no emergencies, we blazed through our cash safety net faster than we thought possible, and we had no debt but the house loan. There were times when putting something on the credit card so we could pay for it in three weeks when we hadn't just paid the mortgage made a lot of sense.

There are any number of ways people can get deeply into debt, and need a line of emergency credit to tide them over. There's no need to be mean about it.

[ckd]

The slides are great. Maybe you should consider giving presentations about various topics; I think you'd be good at it.

[dev-random.livejournal.com]

This type of spreadsheet is invaluable. What I found useful was to build these rules (i.e. pay off highest interest first, make all minimum payments to other cards..) into the spreadsheet and all you had to do was put in a fixed amount of money you could pay per month, and it would figure out the day you get out of debt. It was really interesting, in my case, because if I payed only $200 per month it would have been 4 or 5 years before I got out of debt, but if I upped it to $300 it would take 2 years. Going to $400 only bought me a little more time, so with some jiggering I was able to settle on an amount that was realistic and payed off my debt relatively quickly.

I'd post the spreadsheet, but it's long gone.

Of course, not being in debt is the better solution :)

[yesthattom.livejournal.com]

If only I knew someone that could build a much better spreadsheet. One with macros and such that would literally work the system for people. Possibly a "I got a new bill" button that would ask the right questions and fill in the next column.

I've seen software that does that kind of thing but it doesn't handle basic things like balance transfers and such.

Such software isn't easy. I once tried to work out the database scheme for such a thing and got lost. It's really quite difficult to "do it right".

One change to look at

[chukspace.livejournal.com]

I have read that cancelling your credit cards can temporarily adversely affect things like your FICO score, because it affects the percentage of how much debt you have. For example, let's say you have 3 credit cards, each with a line of credit of $10,000, and you have $5,000 of debt. If you cancel two of your credit cards your percentage of debt goes from 17% (5000/30000) to 50% (5000/10000).

I think the answer to this is to wait until you have completely paid off all your debt before you cancel the cards. Also, if you aren't planning to buy a house or car or make any other big purchase where the banks care about your FICO score, go ahead and cancel the cards.

Re: One change to look at

[awfief.livejournal.com]

I don't know if that's accurate, but you don't need to cancel your cards to stop using them. One book that I really like said to put your credit card in the freezer in a tub of water.

This of course doesn't work for geeks like me who've memorized their card #. But there's an easy way around that -- request a new card with a different #. Report it stolen if you have to (but don't make any new purchases, that would be fraud!)

[sweh.livejournal.com]

I've never been in debt like that, so I've no practical experience. But I do have a question.... would you advocate (if possible) transferring the balance of one card (eg your highest interest card) to a NEW card (if possible, as I said) that offers "zero interest for 6 months" (or whatever) and never use that card for anything else. Wouldn't this effectively make the worst card into your best card, and so allow you to snowball on another.

Of course you have to be careful if you do this on an existing card; if you already have a debt on card A and you do a zero interest transfer of card C onto card A, then all your payments on A will go to paying off that zero-interest part, and the existing debt on A will be racking up the full accumulated interest.

[dawn-guy.livejournal.com]

Credit card companies offer the "no interest for six months" balance transfer deals because there are enough consumers who don't have the discipline (or the resources) to pay off that transferred balance before it starts accumulating painfully large amounts of interest.

If you're in a position to take advantage of a "no interest" balance transfer, it can save you hundreds of dollars. If you're not, it can cost you at least as much.

[dariodevil.livejournal.com]

Thank you very much. Seriously. I was just dealing with some debt-related stuff this morning. The spreadsheet in particular is great.

[okelle.livejournal.com]

Since your debt was caused in large part by your SO's compulsive spending patterns, your method for getting out of debt may or may not be helpful for people with compulsive debting and spending patterns. I skimmed your presentation and it looks very practical and no doubt worked incredibly well for you -- and will for others.

It's also important to address the underlying reasons why people go into debt and keep themselves in debt in the first place.

The issue of debt is very similar to the issue of being overweight: we all KNOW (or many of us do, anyway) how to eat and live so that we don't gain weight, or how to eat to lose weight. But the actual practice of doing so proves difficult, and oftentimes it's because there is a subconscious desire to be overweight/in debt, or a belief that we deserve to be fat/impoverished.

I recommend two excellent books by an author named Jerrold Mundis that deal with the issues of debting, spending, and earning. They offer both practical advice and the kind of psychological support that are necessary for a compulsive spender/debtor to become solvent.

The titles are:
How to Get out of Debt, Stay out of Debt, and Live Prosperously

and

Earn What you Deserve: (I forget the subtitle, but it mentions underearning).

[yesthattom.livejournal.com]

Thanks for the tips! I'll add those books to the presentation.

[okelle.livejournal.com]

My pleasure. Great work on the presentation. I can see that you put a lot of time into it, and it's a real service to your friends and folks at large. I hope it helps lots of people!

[dawn-guy.livejournal.com]

catbear used a similar strategy to crawl out from under about $40K in debt from his previous marriage: pay minimum on everything and as much as the budget allows on the highest-interest debts, leaving enough accessible money to cover a month's expenses. Now he's out from under all that debt and socking a fixed amount away each month for retirement, as I've been doing since I was 25 (Canada is much more a culture of savers than of consumers).

We don't make impulse purchases of more than a few dollars, which results in a lot of research being done to get the best widget some of the time and frank discussion about whether we need a widget/this widget the rest of the time. We also don't buy services we won't use enough to warrant, like cable TV and cell phones.

We may not have tons of consumer electronics or the latest toys and movies, but we're content and we have the money to buy what's important to us. We have about $300 a month to "fritter away" on singing lessons and chamber/orchestral concerts.

Our next big step is to have enough saved by to not feel the need for two full-time day jobs between us. It's going to be hard with alimony and child support obligations, but I have a feeling it's more a mental limitation than a financial one.