Taking Back Your Future
Posted on August 18, 2006
Last week we discussed how payments on consumer debt could put you in a position where part of your tomorrows must be used to earn money to pay interest that buys you nothing. In this context, the people you owe own part of your future. The more you owe, the more of you they own. Not a pleasant thought is it? Unfortunately, it’s true for most Americans.
As consumer debt in this country approaches $2 trillion dollars, the average person carries approximately $9,000 in credit card debt and continues to be bombarded daily with pre-approved offers for more new accounts. One enticement to put more credit cards in your wallet is the incentive to transfer balances from existing cards to new cards with periods of 0% interest. Another is department stores that offer discounts along with periods of no payments and no interest if you will open a new account and charge the purchase you are about to make on it. Even stores where you have existing accounts make offers of no payments and no interest for up to a year if you will charge larger purchases to your accounts.
Companies selling cars, boats, motorcycles, appliances, furniture and other large ticket items fill the airwaves and newspaper pages with advertisements that promote easy credit and low payments more than the merits of their products. Why?
Why do we have such an obsession with consumer credit in this country? I’ll bet that if you asked 100 people you’d probably get 100 different answers to this question, but since this is my column, I’m going to tell you what I think. Big business has figured out that the deeper they can get us in debt, the more they own us.
I was talking with a friend a couple of years ago who was praising the dealership where he had just purchased a new truck. (Of course, there was nothing wrong with the one he traded in that was only two years old and on which he was still making payments.) He was so excited that they were able to get him in the new truck with only a $32 increase his monthly payments. He was making $19.20 per hour at the time, which meant that after taxes were deducted, he would only need to work about an extra 2 � hours to make the increased payment. That doesn’t sound like much, but he wasn’t quite so excited when I pointed out that the new payment of $720 per month would require him to work well over 50 hours per month just to drive the new truck.
Taken by themselves, payments or slight increases in the payments on consumer debt don’t seem like much. The extra $32 per month my friend added when he bought the new truck seemed small and that was what he focused on at the time. He was comfortable with the $688 payment he had been making. What he failed to recognize was the fact that he hadn’t just increased his payment amount; he had also obligated himself for an additional three years. That’s how people get into financial trouble and gradually surrender more and more of their future to those they owe.
I asked my friend if he had any other consumer debt and was surprised at his answer. He had two Mastercards on which he was making minimum monthly payments of $30 and $26, two VISA cards with minimum payments of $15 and $22, a charge account at a furniture store on which he had a payment of $41, an account at an appliance store with a payment of $28 and a payment on an equity line of $120. He was paying out over $1000 per month; nearly half of his after tax income. He said he had been trying to pay a little extra money each month but his debt didn’t seem to be going down. He asked if I could give him a tip on how to get out of debt. I asked him how much extra he was paying per month, over and above the minimum payments. He said he was trying to pay at least $10 extra on each account except for the truck payment.
Here’s the tip I gave him! With seven accounts, applying $10 to each one is hardly enough to make a difference. I suggested that the take the $70 and apply it all to the account with the smallest balance until it was paid off. Then when it was paid, add the amount of the minimum payment he had been making on that account to the $70 and apply it to the next smallest account. Fortunately, his smallest balance was on the furniture store account, which had a larger monthly payment. It took only four months to pay the account in full. He then added the $41 furniture payment to the extra $70 and started applying an extra $111 to his next smallest balance which was a credit card. In six months, this account was paid off and he added the $15 minimum payment to the $111 and began paying an extra $126 on the next smallest account. Gradually he retired that account and then another one and the last time we spoke, he predicted he would be debt free except for the truck payment, within a year.
So the tip is, if you have several accounts, don’t spread your additional money over all of them. Apply all you can to the smallest one first, pay it off and then add what you were paying on that one to the next smallest account. Keep knocking them off one at a time until you get out of debt and then start saving what you were making in payments so you can pay cash for future purchases. You’ll not only have more in the long run, but you’ll sleep better in the mean time and more importantly, YOU will own your future.
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