Family Debt - Debt Control
by: Jerry Price - Dec 1, 2005 - comment
“Here’s a sample no-debt commitment:
I am fully committed not to use credit cards or in any way incur debt to pay for any aspect of my/our Christmas holiday celebrations. I will not be guided by guilt or obligation and will do everything possible to keep all expenses well within the amount of money I/we will plan to spend.
“Here are a few suggestions to make sure your promise sticks:
- Remove your credit cards from your wallet or purse. Never carry them with you. Put them in a safe-deposit box, freeze them in a block of ice, or leave them in the safekeeping of a trusted friend or relative. Better yet, cancel all but one of the accounts (you’ll still be able to pay them off with monthly payments) and get rid of them.
- Prepare for an emergency. If you are fearful of being caught unprepared in the event of a dire emergency (a great new set of golf clubs for your husband is not an emergency), write down the account number of one all-purpose credit card such as a Visa or MasterCard and that company’s toll-free number and keep it in a secret place, such as your address book. Now you will have the solution in the event of a true emergency because you will be able to call the company for approval.
- Place your written no-debt commitment in a prominent place. The refrigerator door is a good place where the whole family can see it often. If you think of your goal in a positive and upbeat manner, your children will catch your enthusiasm and determination.”
Mary Hunt, Debt-Proof Your Holidays (Nashville: Broadman & Holman Publishers, 1997), 53-54.
- Save as much as you can on a regular basis._
- Invest conservatively—for example, in very broad stock-market indexes, variable annuities, and short-term broad-based mutual funds, Treasury or high-grade corporate bonds.
- Buy your own home, buy your own home, buy your own home, buy your own home, buy your own home.
- Avoid doing business with people unless they have a good reputation for probity and integrity, and if you can’t find out anything about them, don’t let them anywhere near your money!
- Remember that spending is not a substitute for saving.
- Remind yourself continually that life goes by with stunning, breathtaking speed, and you will want to prepare for the day when you no longer have the strength to work—or at least to work as hard as you did when you were young—and such preparation primarily takes the form of saving.
- Leave fancy gimmicks to stupid people.
- Know that there are no free lunches anywhere once your parents die, that you are the primary person responsible for you, and that caring for your family is a moral duty—and this includes being careful with your money.
Ben Stein, How to Ruin Your Financial Life (Carlsbad, CA: Hay House, Inc., 2004), 126-127.
“Using savings to pay down debts may seem like you’re losing money. You’re not losing; you’re gaining. Remember that the growth of your money is determined by your net worth—the difference between your assets and your liabilities … Hopefully, your savings and investments are earning decent returns, but if you have consumer debts, odds are that the interest on those debts is high.
“Having consumer loans on a credit card at, say, 12 percent and paying them off is like finding an investment with a guaranteed return of 12 percent—tax-free. You would actually need an investment that yielded even more—around 18 percent—to net 12 percent after paying taxes in order to justify not paying off your 12 percent loans. The higher your tax bracket … the higher the return you need on your investments to justify keeping high-interest consumer debt.
“If you have the savings to pay off high-interest credit card and auto loans, do so. You diminish your savings, true, but you also reduce your debts. You benefit financially because the interest on your savings is far less than the interest your debt accrues.”
Eric Tyson, Personal Finance for Dummies (Foster City, CA: IDG Books Worldwide, Inc., 2000), 78.
Steps to controlling debt:
- Seek help. If you’re not sure how to proceed, or you’re feeling too overwhelmed to act for yourself, call a non-profit credit-counseling program for advice and assistance in working with your creditors to set up a repayment plan.
- Contact your creditors. As soon as you’re aware you won’t be able to make a payment, contact your creditors.
- Cut up all credit cards and send them back to the issuing companies immediately. Officially close all credit accounts.
- Set a frugal budget and live within it. It’s usually easier to decrease spending than increase income. Don’t make any purchases above and beyond the absolute basics until you’ve made some headway in catching up on your back bills. Consider selling assets to find more money for your debt repayment. Even holding a large garage sale can sometimes generate enough money to help pay an immediate bill or two.
- Prioritize debts. Mortgages, child support and any debts that have gone to a collection agency are a priority.
- Pay each creditor something. No matter how small the amount you’re able to pay, it will show good faith on your part as you try to negotiate payment arrangements.
- Track personal spending. It’s important to identify any holes where your money is draining out. Keep a detailed record of every expenditure for one month, no matter how insignificant.
- Plug any holes discovered from the spending record. Small leaks sink great ships…even financial ones.
- Plan ahead for annual expenses (i.e.: insurance, car licenses, medical deductibles, etc.).
- Set long-term financial goals. After setting concrete, definite goals for future financial health, make all current financial decisions with your future well-being in mind. Keep the end result in mind—debt-free living!
Excerpted from Deborah Taylor-Hough”10 Steps toward a Debt-Free Family“:http://www.crosswalk.com/family/finances/715218.html (Crosswalk.com) [Accessed August 10, 2005]
“Your bills are overdue, your house needs repairs, your credit cards are maxed out. Oh, yeah, and your bank account is empty. You’re tempted to get a consolidation loan and have one, so-called, ‘easy payment,’ or refinance your house to pay off your debts. Well, first, figure out what got you into debt in the first place. If you don’t, you’ll be back in the same mess before you know it. Next, be financially disciplined for two months. If you can do that, then you’re ready to start climbing out of the quicksand.”
p(notes).Climbing Out of Financial Quicksand [Accessed August 10, 2005]
Common Errors and Expenses that Lead to Debt:
- Allowing a get-rich-quick mentality to govern decisions
Symptoms of a get-rich-quick mentality are evident in many of the investment schemes in the world today. Unfortunately, many Christians find themselves caught in the get-rich-quick trap before they realize what is actually happening.
- Ignoring the advisor that God has provided
It is very dangerous for a husband or wife to ignore the primary advisor that God has given them: their spouse. When there is a relationship as close as a husband and wife relationship, there will be problems. Since opposites tend to attract, they may not agree on a number of things and issues. But that’s okay as long as they communicate and try to reach a reasonable compromise.
- Home purchases
Nearly every family in America dreams of owning their own home. But many times they try to buy a home too soon after marriage or pay too much for a first home and end up in financial trouble. Unfortunately, quite often these families don’t realize that owning the home created their financial problems, because it took too large a portion of their spendable income.
- Car purchases
The second most common purchase that leads to debt is the purchase of a new car. Quite often couples who cannot qualify to buy a home buy a new car as a compromise.
- Scheduled disasters
In order to plan a financial disaster, all a family has to do is fail to plan for predictable expenses that haven’t come due yet, such as automobile maintenance, emergency home repairs, or personal injury. Failure to plan for these is a major reason many families end up in unmanageable debt, because when the expenses occur they must be paid, so the only alternative available is often a credit card.
Adapted from Common Errors and Expenses that Lead to Debt (Saddleback Church) [Accessed August 10, 2005]
Changing Spending Habits
- Establish self-discipline. Put all spending under God’s control. In so doing, individuals become managers of God’s finances and all spending should then be from the vantage point of whether He would be pleased with the purchase. With God’s guidance, any bad habit can be broken.
- How far money goes usually depends on how badly people want something. As such, they need to be in control of the money, under God’s direction, instead of having the money control them by limiting what they do.
- People need to be accountable to other persons for a specified period of time for everything they spend. Ecclesiastes 4:9-10 says, “Two are better than one because they have a good return for their labor. For if either of them falls, the one will lift up his companion. But woe to the one who falls when there is not another to lift him up.”
- Establish a want-to-buy list. Whenever people feel they need to buy something that is not budgeted, they should put it on the list. They should wait seven days and find two additional prices for the same item, to be sure they are getting a good buy.
Excerpted from How to Control Spending (Crown Financial Ministries), December 2, 2004
“Family debt has become an increasingly large burden for many low-income families in recent years. Although the percentage of low-income families with debt has remained fairly stable from 1984 to 2001, the amount of debt has increased substantially … Average debt in low-income families doubled between 1984 and 2001. The median debt in the poorest families rose from just over $1,700 in 1984 to nearly $4,200 in 1994, before falling back to $3,000 in 2001.
“For most low-income families, debt has grown much faster than has family income. Consequently, debt is a much greater problem for low-income families today than it was two decades ago. In 1984, total family debt in the poorest families was equal to just over 30 percent of total family income. By 2001, total debt in these families was equal to nearly half of total annual family income. In low-income families, total debts grew from 18 percent of total family income for those below the federal poverty level (FPL) and 7.5 percent in families between 100 percent and 200 percent of FPL in 1984 to 28 percent and 15.5 percent respectively in 2001.
“Today, low-income families confront an unprecedented level of family debt. Rising family debt levels mean that a much greater number of children are growing up in families that are experiencing significant debt hardship … Debt hardship is defined as total family debt greater than or equal to 40 percent of total family income. Debt hardship in the poorest families has risen from 42 percent of families with debt in 1984 to over 67 percent in 2001.
“In families whose incomes are between 50 and 100 percent of FPL, debt hardship has nearly doubled from just over 25 percent in 1984 to nearly 48 percent in 2001.”
Robert Wagmiller, Debt and Assets Among Low-Income Families (National Center for Children in Poverty), October 2003
“Older American households in 2001 became a significantly larger percentage of all families burdened with debt in excess of 40 percent of their incomes, according to a new report by the Employee Benefit Research Institute (EBRI).
“American families with a family head age 55 or older had approximately the same level of debt payments relative to income and of debt levels relative to assets in 2001 as they did in 1992. However, EBRI notes that housing is a rapidly growing share of family debt and finds a significant jump in the percentage of the oldest families with the greatest debt burden in excess of 40 percent of their income … The EBRI report is based on data derived from the Federal Reserve’s Survey of Consumer Finances … Among the study’s findings:
- The debt ratios of American families headed by someone 55 or older fell slightly in 2001 from their highest levels in the 1990s. Relative to assets, the ratio of family debt decreased somewhat over the period, down to 5.8 percent of assets after hovering around the 7 percent mark during the prior decade. Relative to income, family debt payments remained at approximately 9 percent of family income from 1992 to 2001.
- Debt ratios vary significantly across family characteristics, with younger, higher income, more educated, and higher net-worth family heads having higher ratios of debt. Generally, family debt as a percentage of assets decreases with the age of the family head.
- While overall ratios of debt to both income and assets remained fairly stable from 1992 to 2001, the composition of debt between housing and nonhousing debt shifted significantly. Housing debt represented about 57 percent of family debt payments in 1992 and grew to about 63 percent in 2001. The EBRI report notes several possible reasons for this, such as the sharp increase in housing prices in many parts of the nation in recent years; low interest rates have sparked a flood of home mortgage refinancing; and home equity loans make it easy to wrap otherwise nondeductible consumer and nonhousing debt into a deductible home mortgage loan.
- There has also been an increase in the percentage of heavily indebted families—defined as those with debt payments exceeding 40 percent of income especially for family heads in the two oldest groups (ranging from 5 to 10 percent of all near elderly and elderly families).”
Adapted from Debt Burden Growing for Older American Households (Senior Journal), April 27, 2004
Further Learning
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