Wednesday, January 19, 2011
Getting out of Debt
In order for us to survive the current economic misery we have to make some adaptations to the new environment. We can survive not because we are "turning the corner" economically but because we have learned the lessons from our experiences. We should be learning that a life of easy credit isn't easy except under optimum circumstances; that things won't stay the same; and that we are to be able to carry our own weight financially. Remember, when we are encumbered by debt we make Mammon the master of our lives rather than Jesus.
So a few thoughts on getting out of debt- This is something that you MUST do to get freedom and to find peace.
1. If you have credit card debts pay more than the minimum
David Braze of Motley Fool writes, "First, break the habit of paying only the minimum required each month. Paying the minimum -- usually 2% to 3% of the outstanding balance -- only prolongs the agony. Besides, it's precisely what the banks want you to do. The longer you take to repay the charges, the more interest they make, and the less cash you have in your pocket. Don't play their selfish game.
Instead, bite the bullet and pay as much as you can each month. If your minimum payment is $100, double that to $200 or more. Examine your normal expenses -- you can find the money. (For a gazillion ideas, check out our Living Below Your Means discussion board.) Skip eating out at lunch, and bring it from home instead. Eliminate desserts. Give up happy hour. We all have "luxuries," and you know what yours are.
Make a few sacrifices, and you will find the extra dollars needed to increase your debt repayments dramatically. Those increased payments will save you hundreds, if not thousands, in interest payments. Plus, you will get out of the hole you've dug for yourself much more quickly. Is it fun? No. But it sure beats living a hand-to-mouth existence, fearing bills each month."
Dave Ramsey has an alternative plan. Make a list of all your debts and sort through them. Put the lowest one on top. Make minimum payments on all your debts except the top on the list. This one you pay down as fast as possible. Continue with the plan until all your debts are liquidated. Before you can do any of that, however, you will need an emergency cushion of $1000. Save that first. Use in only for emergencies. And above all put away ALL your credit cards. Pay cash for everything.
2. Cash out your savings account
You could cash out your savings and investments and use the proceeds toward debt repayment. Yeah, no one wants to do that. But sometimes it's just wisdom. Again Braze says, "Even when debt interest is at 12%, your investments would have to pay more than 18% before federal and state taxes to equal that outflow of dollars. We doubt the dollars in your savings account are earning anywhere near that rate of interest. Pay off the debt, and it's the same as getting that 18% return without any risk on your part. The higher the interest rate on your debt, the more attractive repayment versus investment becomes."
3. Borrow against your life insurance or your 401k
Do you have life insurance with a cash value? If so, borrow against the policy. Do you have a 401k or a 403b? Borrow the money from yourself and pay your self the interest. Again- stop using credit or you will just be further in the hole. Generally, you can borrow against these at below commercial rates and the debt repayment is a short term plan. Stay on the plan!!!!
Whatever you do you have to move to a cash economy. That is tough these days but it's a lesson learned. You didn't build these debts quickly don't foolishly think that you will pay them down quickly. Financial freedom isn't for the faint of heart. But God can and will help you. Buckle down and get free.
After you knock down your debts conintue in the 80-10-10 principle. Live off of 80 percent, honor God with 10 percent, and put 10 percent in a savings account for the rest of your life. Eventually you will be in the enviable position of financial freedom.
Posted by Pastor Dave at 9:45 AM