IN SEARCH OF A DEBT- FREE LIFE

" DEBT, DEBT....EVERYWHERE, BUT NOT A DEBT TO RELIEVE"

Anonymous.

Michael Harris, a certified consumer financial consultant, reports that according to a study by the U.S. Department of Labor, 96% of Americans will fail financially by the time they reach retirement age. The statistics cited by Ellen Rohr, another noted certified consultant, are even more troubling :

• The average American household has over 13 payment cards which include credit cards, loan payments and various store cards.

• Americans carry, on average, $ 8,000 in credit card debt from month to month.

• 46% of all Americans have less than $10,000 saved for their retirement.

• 96% of all Americans will retire financially dependent on the government, family or charity.

• Only 2% of all homes in America are paid for.

A couple of examples will perhaps give us a clearer picture of what the above-mentioned statistics are attempting to convey.

Example 1 : Suppose you decide to buy a $2,000 furniture set on your credit card. If you make just the minimum payment with 19% interest, believe it or not, it will take you 31 years and 2 months to pay off the balance! You’ll pay over $ 8,200 in interest alone!

Example 2: If you have $ 8,000 in credit card debt, if you were to make only the minimum monthly payment on that debt, at 18% interest, it would take 25 years to pay off and cost you more than $ 34,000 in total!

Example 3 : What if you have a mortgage? It’s even worse. You’ll end up paying around 4 to 5 times the purchase of your house with most 30 year loans!

Michael Hodges, in his updated March 2007 Grandfather Economic Report (http://mwhodges.home.att.net), asserts that :

“ By the year 2006, America has become more debt-dependent than ever before with a total debt of $ 48 trillion, or $ 161,287 per man, woman, and child - or $ 645,148 per family of 4. These figures are 63 X higher compared to those in 1957. Each added dollar of a new debt produces less increased national income. In contrast, the growth of national income for the same period has only increased 3 folds from $ 3 trillion to $ 10 trillion.”

Looking at these mind-boggling statistics he concludes :

“ America, that used to derive strong family incomes and values from producing real goods and savings, even with one bread earner per family, has moved to a fully consumptive society financed by ever increasing ratios of debt at private and government levels, with nil savings – with debt ratios reaching new records – with each dollar of debt producing diminishing amount of national income. – We are at a cross-road. Our young generation faces extremely significant challenges in this regard –And may be less prepared to meet the apparent future than any prior generation in recent history. AMERICA MAY EXPERIENCE A CRISIS OF ECONOMIC UN-SUSTAINABILITY!”

Debt management counselor David Huffman claims, “ 97% of American don’t know what they owe. No one ever taught them ‘Money 101’ or ‘Debt 101.’ That’s why they are broke and getting deeper and deeper into debt.” The unfortunate thing about the whole US economic system is that it is built in such a way that makes it possible for the credit industry to exploit people’s desire of wanting something now by offering “easy monthly payments” or “no interest until next year.”

Thus, Americans have been brought up with the mentality of “instant gratification.” If they want something, they want it now! And they’re using credit to get it. And it is not hard to guess that this kind of economic system is draining every dime of each American’s future wealth!

When Michael’s report just came out many economists dismissed him as a scaremonger – a lonely doom prophet who shouts his voice out in the wilderness for people to repent of their sins of committing and piling personal debts. The Chicago Fed senior economist Francois Velde says that fears of consumer debt are completely overblown.

He admits that while for the past 50 years debt has been growing - reaching records high almost every other quarter - there’s no sign of impending catastrophe because household assets are also growing. He argues that interest rates won’t rise until economic growth and incomes are also gaining strongly, making the higher payment possible. In addition, much of the increase in debt in recent years has been for mortgages, and millions of Americans have low rates locked in for 30 years.

As we now know, the sharp rise in foreclosures of subprime mortgage market in the United State in 2006 finally became a full-blown global financial crisis in July 2007. Rising interest rates and increasing monthly payments on adjustable rate mortgage left many home owners unable to meet financial commitments, and lenders without the means to recoup their losses.

This has resulted in severe credit crunch, threatening the solvency of a number of marginal private banks and other financial institutions. This has, in turn, caused declines in stock markets worldwide. Several hedge funds have become worthless. There are widespread contraction of retail profits and bankruptcy of several mortgage lenders across the board.

Chris Dodd, chairman of the Senate Banking, Housing and Urban Affairs Committee, has highlighted the predatory lending practices of subprime lenders and the lack of government oversight. Mortgage brokers have also been alleged to steer borrowers to unaffordable loans even though lenders offered these borrowers that found them acceptable risks, appraisers with inflating housing values, and Wall Street investors with backing subprime mortgage securities without verifying the strength of the portfolios. Borrowers have also been blamed for over-stating their income on loan applications and entering into loan agreements they could not meet.

The effects of the meltdown spread beyond housing and disrupted global financial markets as investors, largely deregulated foreign and domestic hedge funds were forced to evaluate the risks they were taking and consumers lost their ability to finance further consumer spending causing increased volatility in the fixed income, equity, and derivative markets

The impact on the economy of this American problem was also felt in Europe, where the European Central Bank tried to control the crisis by injecting over USD 205 billions in the European financial markets.

This is just the tip of the ice berg. Underneath the surface of this debt crunch looms a larger disaster which could strike and sink the US and even the whole world economy without any warning. Since nations are made up of individuals, it is the responsibility of each and every one of us to do something to resolve our financial and debt problems which collectively will in turn contribute to the economic growth of each nation and a happier individual life.

SO WHAT’S THE SOLUTION? How do individual Americans cope with their personal debts which are strangling them? Michael Harris suggests a total debt elimination. You need to get the credit industry to get their siphon hose out of your life and never let them into your life again. If you are mired in debt, you must make a commitment and take a disciplined approach and assume a logical and proactive stance on getting yourself out of debt. As a start you can do the following :

• List your bills. Next, list your balances. Finally, get started paying off your first bill with the lowest balance. You focus on paying off one debt at a time. Pick one bill and get started. Systematically pay down your debt. Don’t make extra payments on the others. Just focus one at a time. Keep doing this for all of your bills and eventually you’ll have a sizeable amount of money to eliminate your mortgage. If you stay with it, you’ll have a debt-free life.

• Make sure that your day to day living expenses stay as low as possible. Only spend money on the basic items that you need.

• Stop using your credit cards. Use only your debit card. This will stop you from over spending as you can only spend what you have available in your account.

• Make effort to buy your food in bulk. This will last you for a couple of weeks, may be months.

• Choose a basic TV service at home. If possible, stop watching TV altogether. Nielson Co. states that the average American will spend 9 years of their life watching TV which works out to be about 4 hours a day. Instead, you could look for a second job or selling stuff on eBay to make more money.

• Choose a dial-up Internet Service.

• Make a conscious effort not to buy lunch, take lunch to work

• Make a strict budget even for special occasions, such as birthdays, holidays etc, and make sure you stick to it..

• Set your thermostat in the winter time to 63 degrees.

• Set your air conditioner to 78 degrees in the summer time.

• Do not buy lottery tickets. You are only wasting your money.

• Club memberships that are rarely used should be dumped too. You don’t need to waste money on things that don’t get used.

• Look for a 2^nd or 3^rd job whenever possible. Use your paycheck to pay off your debt.

• Start saving. A little bit every month adds up. Start with whatever you will commit to - something is better than nothing.

• Talk to your creditors. You may be able to work out a better interest rate or payment schedule. Talk to the owner or general manager of your supply house. Work with the credit agents for your store cards. Negotiate your debt down if you are facing collections as credit card companies do not want you to declare bankruptcy . They do not want to risk losing all what you owe them.

• Read books about making money and personal finance. Ellen Rohr suggests you read ‘The Richest Man in Babylon’ by George Clason. This slim book uses a story to teach the basics about reducing debt and increasing your wealth. This timeless classic was written during the Depression and offers spot-on advice for today.

• Kristi P. Carter points out that government grants for debt relief are available to all citizens of the United States from the federal, state, and local governments, or privately-funded foundations. There are grants available to assist citizens with cost of living expenses such as mortgage payments, utility bills, or even for home improvement needs. Grants obtained through the United States government do not have to be paid back and are also interest free and non-taxable.

• Another good move is coupon clipping. This will help you save and earn you some friends to support you in your debt-free life campaign. Look for other coupon-clippers to trade.

Conclusion :

There are no overnight debt cures. To stay debt-free and to manage well your debts, you must take the first step. Start tracking your spending habits today and tailor your moves to your debt-free life goals. There are tips you can follow to help you reduce your debt and keep your interest rates low. Do not give the credit card companies and opportunity to get you in their snares. Pay your bill on time, earn more money to pay off your debt faster, spend less than you earn, check your credit score and you can get out of debt and lead a debt-free life. Self-discipline will help you breeze through it all.

Copyright 2007 by Sujanto Rusli
http://become-debt-free.blogspot.com

http://economicslessons.blogspot.com
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