Tips And Guide For Debt And Loan Management

There are many ways to fall into debt. One person may overspend while another blindly ignores the mounting bill pile, believing that the problem will somehow magically improve. The reason for your indebtedness could be poor planning, a spending addiction, or a combination of bad habits. Whatever the reason, it is important to identify what you are doing wrong so that you can begin to make some changes. (Of course, there are many reasons for going into debt that have nothing to do with anything you may be doing “wrong,” such as a medical crisis or starting a business).

One reason why people end up in debt is that they were never taught basic financial skills, such as paying bills on time. Failing to pay your bills in a timely manner only compounds your debt problems because late payments can hurt you in so many ways. This problem should be easily fixed.
The first way comes from the costs incurred for the “privilege” of paying late. Say that you have a $139 credit card payment due on the 15th. If you end up paying that bill on the 20th, you will probably pay at least another $25 in late charges. In and of itself, a lone $25 late fee is no big deal. Usually, however, we are not talking about a single late fee; paying late can be a bad habit. If you multiply this late fee times, say, six bills—a couple of credit cards, your mortgage, a car payment—you could be easily losing at least $150 a month. That is a big waste of money. What’s worse is that the late payment habit can cause you to fall even deeper into a vicious cycle of debt. Money is tight, in part because of late fees, and then you pay late because money is tight. If paying late has become a habit, it could cost you upwards of $1,000 over the course of a year.
Paying your bills late hurts you in other, more insidious, ways as well. A history of late payments will ruin your credit rating, making getting other credit more expensive and thereby costing you even more money (Note, however, that it takes 30 days from the date the bill was due for the negative remark to hit your credit report.) A bad credit rating can really kill you financially.
Suppose you went to get a $20,000 car loan with good credit. At 6 percent over five years, you would pay roughly $6,000 in interest for that loan. If persistent late payments have hurt your credit rating, you might pay 15 percent for that same loan. Interest on that loan would cost you up to $15,000.
The good news is that it is not that difficult to get off the late payment train. A month or two of budgeting can get you back on a normal payment schedule and save you a lot of money in the long run (and in the short run).

Credit cards can be a boon or a bust, depending upon how they are used and treated. The responsible use of credit cards makes living a lot easier for many people. They fund business startups and treats for your spouse. We have no problem whatsoever with the reasonable and responsible use of credit cards.
The problem is that being unreasonable and irresponsible with credit cards is just so darn easy. Convenient and fun to use, credit cards can too easily become more of a curse than a blessing. With an average 17 percent interest, credit card debt is easy to create but difficult to erase. You must be especially wary of what we call in this book “the credit card trap.” This trap is very easy to fall into and very difficult to get out of. You fall into the trap when
? You run up a card with, say, an 18 percent interest that you know you can’t pay off.
? You use credit cards to buy easily consumable things like food, because you will be paying exorbitant interest for items that quickly disappear.
? You use credit cards for luxuries that you could not otherwise afford.
? You pay only the minimum payment due.
Once you have fallen for the trap, you have a card on which you owe a lot of money, on which you pay only the minimum payment, and on which the principal never seems to decrease.
Like so many of us, Nancy fell for the credit card trap. After graduating college, she moved to New York and got a job waitressing while she looked for acting jobs. She used her credit card overdraft protection to balance her checkbook every month. After a year, she was about $10,000 in debt.
She decided that she had to get rid of these debts before they got more out of hand. Although she used a method that we hadn’t thought of before hearing her story, it worked for her, and that’s the important thing.
Nancy took every extra cent that she made and started to pay off the card with the smallest balance, while paying the minimum on her other three credit cards (since the minimum amount due was a relatively small amount), until that card was paid off. She then did the same thing with the next smallest card, but instead of making only minimum payments on the other two cards, she made double the minimum payment, which she could afford to do because one card was paid off already. She then repeated this strategy with each of the last two cards.
It took her a little over a year, but at the end, Nancy was completely out of the credit card debt that had been overwhelming her. Also, an equally importantly, because none of the payments had been late or behind, her good credit remained good.
Of equal consequence, Nancy did not cut each card up as she paid it off or cancel the accounts as people are often advised to do. Instead, once each account was paid in full, she wrote a letter canceling it, saying that she was in the market for a card with a

Many people have no savings at all. Although we all know that we are supposed to have some money saved, between bills and kids, it just seems too hard most of the time. It’s kind of like losing weight. We know it would be good for us, but it’s awfully hard to do.
Yet the great thing about having a little money in the bank is that you can use it for things that you would have otherwise have gone into debt for. Instead of charging that $400 trip to the beach, going further into debt, and paying more in interest, if you can save $400 you will be in much better financial shape. And it doesn’t have to be that hard.
If you would like to begin to save, try these easy-to implement ideas:

• Realize that small steps can yield big results. Put 10 percent of your spending money away at first, even if it’s just 10 percent of your pocket change. Over time, small amounts add up, and you probably won’t even miss 10 percent of your pocket money.

• Eat more cheaply. Eliminate a trip to a fast-food restaurant, make a cheap dinner one night a week, or bring your lunch to work. Save the savings.

• Use 10 percent less. Stretch your shampoo, laundry soap, and dishwashing detergent. Just stretching by 10 percent will enable you to meet your weekly savings goal.

• Change brands. Prices fluctuate, and without brand loyalty, you can get the best prices.

• Applied consistently, these ideas and others you come up with can yield enough savings to make a difference.

Another way to get in debt and ensure that you will stay in debt is to pretend that the problem will somehow magically disappear. You will win the lottery or make so much money next year that you need not worry about your mounting debts today. Wishful thinking can happen to anyone, for any reason; it happens to all of us for different reasons at one time or another.
The problem with this thinking is that it allows you to avoid responsibility for your financial problems. You need not take any corrective action because there will be a magical solution.
Dangerous wishful thinking happened to Mitzi Schlichter, former wife of pro-football quarterback Art Schlichter. When she married Art, she knew that Art liked to gamble, but she didn’t think he had a problem. She had her first inkling otherwise when, on the flight home from their honeymoon in 1989, Art told his bride that he had $10,000 in new gambling debts.
It took nine years of broken promises, debt, and heartache for her to realize that they had a serious problem with money and gambling. She divorced Art and now works at a treatment center for gambling addicts. Her ex-husband, once a number one draft pick and a starter for the Indianapolis Colts, is in prison for forgery. You may win the lottery, but most likely not. Getting out of debt takes work, being straight with your creditors, and being honest with yourself.

Your beliefs have as much to do with your current economic situation as almost anything else. When you are in debt, it is easy to see the world as one of lack. But the fact is, there is a lot of money in this world.
The story is told of a famous movie actor (who shall remain nameless) who enjoyed making millions and then blowing it all, every single penny. This actor is said to have done this time and again. He apparently liked the challenge of having to create a new fortune over and over again.
It takes a lot of courage—or stupidity—to do this, and there is no guarantee in life, certainly not in the movie business where some new actor is always coming along as the latest flavor of the month. After blowing his fortune for the third or fourth time, there was no guarantee whatsoever that this actor would ever make millions of dollars again acting in movies. But he did it again anyway. Besides chutzpah, what this actor had was a belief in abundance. He believed in it so much that he put his money where his mouth is. If he believed in scarcity and were afraid that he would never work again, he never would have done what he did. He credits his bedrock belief in abundance for his ability to keep working and making money.
No, you are not a Hollywood actor, but the moral of the story still applies. As the saying goes, “As a man thinketh, so is he.”

Most of us have negative connotations when we hear the word budget, likening it to a financial diet. But budget does not have to be a bad word. Honest! (We ask you to suspend your negative beliefs about budgets for a little while and see whether creating one might help you far more than hurt you. If, at the end of the next few chapters about budgeting, you are not convinced that a budget can help save the day, by all means revert back to your former budgetary beliefs. Just give us the benefit of the doubt for a little while. Thank you.)
A budget is a money plan. You can use it to organize and control your financial resources, set and realize goals, and decide in advance how your money will work for you. A budget allows you to know how much money you have to spend every month and where you are spending it. As such, a budget is the one of the most important steps you can take toward maximizing the power of your money.
An architect would never start work on a new house without a blueprint. An auto manufacturer would never begin construction of a new car without a detailed set of design specifications. Yet many of us spend money without a plan to guide us. At the very least, a budget should allow you to find extra spending money in your paycheck every month.
Compare a budget to driving a car. In an automobile, you get plenty of feedback on how you’re doing. When you drive, you use mirrors, speed limits, and the instrument panel to get information about your driving, and you know that a small mistake can cost lives. If you go too fast, you get a ticket. There is plenty of feedback from both within and without the car to tell you whether you are doing a good job.
Think about what would happen if you took some of that feedback away. Suppose you didn’t have a gas gauge, or an oil pressure monitor, or a rearview mirror, or a speedometer? What if you had no windshield? Driving would be beyond dangerous. You need feedback to know where you are going. Managing your finances without a budget is like driving a car with a blindfold on.

Compulsive overspending is a sure way to get deep in debt. Maybe you are the overspender, or maybe your spouse is (maybe you both overspend). An overspender is someone who loves to spend money to bring pleasure. Budgeting, saving, and investing are not part of the plan. The spending is such a problem that it gets in the way of paying normal bills.
Overspenders may use the spending of money for many different, and not altogether healthy, reasons:

As a substitute for love
As a way to avoid problems at work
To avoid intimacy
To relieve guilt
To feel important
To gain power
To gain confidence

A compulsive overspender spends money whether he needs to or not. He celebrates an important event by blowing a wad of cash or running up a credit card. He does not stop to think whether he can afford something, if he wants it, for whatever reason, he gets it.
Compulsive overspending can ruin a relationship. The other partner may become so angry at the precarious financial situation the overspender has put the couple in that she pulls away. Or she might become an enabler, helping the overspender by making up the difference and then resenting it.
There are several things a spouse can do to help the overspender or that an overspender can do to help himself:

1. Realize that overspending is usually a symptom of a deeper problem that is not being addressed. Counseling might be in order to help the overspender figure out what the real problem is and begin to deal with it.
2. Be honest. An overspender may deny that there is a problem, thinking that he is just a misunderstood, fun-loving guy. The spouse must tell the truth. The overspender must admit the truth.
3. Come up with a financial plan of action. You, or you and your spouse, need to set some financial goals and decide how you will begin to achieve them. (Read the rest of the book!)
4. The spouse cannot rescue the overspender. She can help, she can love him, but rescuing him just makes the problem worse. She may even have to separate herself financially by opening up a separate checking account and getting credit cards in her own name. For example, Carol finally had to divorce her husband to avoid getting sued by his creditors, although she continued to love and live with him.
5. Try a role reversal. Go to a department store and switch roles. The frugal wife should become the overspending husband, and the husband should be the one that constantly says no. Watch how your mate behaves and notice how it feels to act differently. You might be embarrassed to see yourself through your mate’s eyes.

For Mark and Jean, this last simple exercise helped them see things just a bit differently. Mark was the overspender, and Jean was the practical one. He just loved to binge shop, and she loved to hoard things. She was in charge of their finances and paid all the bills. Needless to say, they constantly fought about money. After their relationship took a turn for the worse because of money, they sought counseling. After a few sessions, they realized that Mark’s overspending was rooted in his poor childhood; spending money helped him feel powerful. Jean also learned something; she learned that making money and not spending any was a way to make her husband feel guilty and gain some power in their relationship. That was when they went on their excursion to the department store. That trip helped her see why Mark liked doing what he had been doing; it was fun to spend money. For his part, Mark didn’t like what he saw when Jean acted like him. She looked out of control and irresponsible. Though it took time, both began to change and become a bit more like the other.