Helping middle-income families to escape the chains of debt

By Lew Nason

Insurance Pro Shop


Isn't it our responsibility as financial advisors to help families to spend, save, invest, insure and plan wisely for the future to achieve financial independence? Then shouldn't we be setting a good example, along with helping them to:

Eliminate consumer debt

What’s the first thing you should do to put your family and yourself on the road to financial freedom? (Or, help put your clients on the road to financial freedom). I hope you said eliminate consumer debt. Because it is one of the biggest problems we all face today.

Don’t you wish credit cards contained a warning from the attorney general, the same as other products considered dangerous to your health? Warning: Credit card use could potentially destroy your good credit rating, devastate you financially, wreck your marriage and adversely affect your relationship with relatives, friends and associates.

Sometimes we can end up in debt through factors that are not within our control. Divorce, death of a spouse, medical problems or a reduction of income can each lead to financial hardship. Other times it’s due to a lack of self-control. We want what we want and we want it right now.

Whatever the cause, consumer debt, in most cases, is keeping us from achieving the secure financial future we want for our family and ourselves.

Consider the following sobering statistics:
  • Average credit card debt per household with credit card debt: $14,743

  • 609.8 million credit cards held by U.S. consumers. (Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

  • Average number of credit cards held by cardholders: 3.5, as of year-end 2008 (Source: "The Survey of Consumer Payment Choice," Federal Reserve Bank of Boston, January 2010)

  • Average APR on new credit card offer: 14.83 percent (Source: CreditCards.com Weekly Rate Report, May 11, 2011)

  • Average APR on credit card with a balance on it: 13.44 percent, as of March 2011 (Source: Federal Reserve's G.19 report on consumer credit, released May 2011)

  • Total U.S. revolving debt (98 percent of which is made up of credit card debt): $796.1 billion, as of March 2011 (Source: Federal Reserve's G.19 report on consumer credit, released May 2011)

  • Total U.S. consumer debt: $2.43 trillion, as of March 2011 (Source: Federal Reserve's G.19 report on consumer credit, released May 2011)

  • U.S. credit card 60-day delinquency rate: 3.23 percent. (Source: Fitch Ratings, January 2011)

  • Total bankruptcy filings in 2009 reached 1.4 million in 2009, up from 1.09 million in 2008. The vast majority were personal bankruptcies — Chapter 7 and Chapter 13. Business bankruptcies made up 6 percent of all filings. (Source: AACER, the American Bankruptcy Institute, January 2010)
And, here are the real kickers:

If your credit card balance is $8,000, and you make the minimum monthly payment at 18.9 percent interest ($127 per month), it will take you 25 years and 10 months to pay off the debt. You will also pay $31,368 in interest charges (almost four times the balance), bringing your total to $39,368.

If, for example, you didn't have your credit card payment of $127 a month, and instead you invested that money in a savings vehicle earning just an 8 percent return, in 25 years 10 months you could have an additional $130,376 in retirement savings that could generate $10,963 per year of additional income during retirement.

Your credit card payment is not only costing you thousands in interest, but is prohibiting you from saving for your family’s secure financial future and your retirement.

According to Harvard law professor Elizabeth Warren, the credit card companies are misleading consumers and making up their own rules.

"These guys have figured out the best way to compete is to put a smiley face in your commercials, a low introductory rate, and hire a team of MBAs to lay traps in the fine print," Warren told FRONTLINE.

Take charge of your financial future

You might be tempted to throw up your hands and say there is nothing you can do about your debt. But, we all know that won't get us anywhere toward solving the problem. The fact is that many of the people who walk past us every day on the street were once debt-ravaged souls themselves. And if they turned the corner, you can too.

To get out and stay out of debt, write down these two irrefutable facts and put them up where you can't ignore them: You are in debt because you spent more than you earned. The only way to pay off your debts is to stop spending more than you take in. And, pay back what you owe.

Whatever the cause of your debt problems — whether you lost your job in a downsizing, lost your senses at the electronics store, or any of a hundred possibilities in between — you must pay the piper. But first, take a deep breath and analyze exactly where you stand right now financially.

The best ways to get out and stay out of debt

Determine where your money is going (your personal spending habits). Then develop a realistic spending plan (a budget). This is half the battle and critical to your future financial success.

Pay off the principle — starting with the account with the highest interest rate, (or the lowest balance) start paying as much as you can to that account, until it is completely paid off. Then go to the next account and so on.
Cut up and cancel all your credit cards — except one. And then pay it off every month.

Use a debit card instead of a credit card — It gives you all the convenience of using a credit card but withdraws money only from your checking account and does so immediately, so you can't dig yourself into a hole.

Don't use credit to buy stuff that depreciates — Or, doesn't give you some income-producing potential.

Be a rate shopper — In the long run, even a small reduction in interest rate could save you a bundle of money.

Don't borrow money if you can’t pay it back immediately — An exception is your home mortgage. Other than that, credit payments should never exceed about 10 percent of your income.

Put money-saving tips into practice — Cut back on home energy consumption. Shop at outlet stores or wholesale clubs. Bring your lunch to work more often. Take advantage of free or low cost activities in your community.

Consider increasing deductibles and removing unneeded or low priority riders on your insurance policies to lower premiums. Use the freed up money to pay off credit cards and then for savings.

Pay yourself first — Start saving regularly. You can build up a nice reserve of cash, if you start today.

Just take out all your change and $1 bills at the end of each day and put it in a bucket. Then put it into a savings account and by the end of the year, you'll have a nice fund. And establish a forced saving plan with automatic withdrawals from your payroll check or checking account.

Be very careful about using an investment to pay off debt — If possible just keep nibbling away at your credit payments and keep your investments on track with your long-term goals by taking advantage of compounding interest. Or, pay back your investment the principle and interest you would have paid to a finance company.

Use home equity loans to consolidate your debts — Again be very careful. What you save in monthly payments by consolidating debt, you may lose by paying more interest in the long run. If you don't change your spending habits, you could end up in much worse trouble down the road.

Refinance your home to consolidate your debts, lower interest and create your own family bank.

Conclusion

For many people, credit abuse is the major cause of financial failure.

"With personal savings rates at one of its lowest rates ever, not only are secure retirements in jeopardy but also many Americans are one medical emergency or layoff away from financial disaster." Dar Haddix, “Many Ways to Boost U.S. Personal Savings.”
UPI Deputy Business Editor 4/1/2005

“If you would know the value of money, go try to borrow some; for he that goes a-borrowing goes a-sorrowing.”
Benjamin Franklin