Debt

Debt, Debt, Debt


First off, I just want to say that if you don't have any debt let me give you a round of applause.

I myself was fortunate enough to graduate college without any loans or debt thanks to scholarships and another program in Louisiana called TOPS. Well, except my car which I'm trying to pay off now.

Some people differentiate between debt by saying “good debt” and “bad debt,” depending on whether the debt appreciates (education) or depreciates (car) over time. Others despise debt altogether. Whatever the case, most people have it and in the words of my boy Rack em Willie (RIP), "It Ain't no fun!"


I was listening to 102.5 on my commute to work and the broadcaster was speaking on how the interest rate for the Stafford loan for college education plans to more than double up to 6.8% by July. 

Did you know that the average student graduates with about $20,000 in student loan debt? 

So let's do some quick numbers:

Average Student loan: $20,000

1) @ 3%

Balance: $20,000
Min Payment/ Month: $200
Time it will take you to pay it off: 9 years, 8 months
Total Interest they make off you: $3,043
Total you pay at the end: $23,043

2) @ 6.8%

Balance: $20,000
Min Payment/ Month: $200
Time it will take you to pay it off: 12 years, 4 months
Total Interest they make off you: $9,597
Total you pay at the end: $29,597

So basically with this new increase in interest rate for the Stafford loan, the average student will have to pay about $6,500 more and will have 3 extra years with that debit monkey on their back with having to pay it off. (Even if you file bankruptcy, you have to pay back student loans)

I want you to pay attention to how much money you’re putting toward monthly payments because the loan amounts are so large that even an extra $100/month can save you years of payments.

First, to inspire you to take action on paying off your student debt, play with the financial calculators at www.dinkytown.net. or at www.calculatorweb.com . You’ll be able to see how paying different amounts can change the total amount you’ll owe.

Second, I want to encourage you to put AT least $50 more each month toward any debt you have. (Draw up a monthly budget to see where your money is going!!) Not only is this a psychological victory to know that you’re consciously working towards paying off your debt, but you’ll also be able to focus on investing sooner, either in yourself or a 401(k) /IRA, which I will touch on in the future. 

Make sure this is automatic, drawing right out of your checking account, so you don’t even see the money.

PAY YOUR DEBT OFF AGGRESSIVELY

If you've found yourself in debt—whether it’s a lot or a little—you are basically in a fight against 3 different entities:

First, you’re paying tons of high interest on the balance you’re carrying.

Second, your credit score suffers—30 percent of your credit score is based on how much debt you have—putting you into a downward spiral of trying to get credit to get a house, car, or apartment, and having to pay even more because of your poor credit.

Third, and potentially most damaging, debt can affect you emotionally. It can overwhelm you, leading you to avoid opening your bills, causing more late payments and more debt, in a downward spiral of doom.

Let's look at an example scenario:

DUMB DAN VS. SMART SALLY: PAYING OFF $5,000 DEBT AT 14% APR:

Five Steps to Ridding Yourself of Credit Card Debt:

1. Figure out how much debt you have
   .    

        2. Decide what to pay off first. (There are two strategies that are recommended to paying off debt.)  

•   Pay min on all debt, but pay more money towards bill with highest APR (interest rate). Most credit cards have an average APR of 14% so it might be wise to tackle those first. 

                  OR

•   Pay min on all debt, but pay more to the bill with the lowest total balance. 

       

       3. Decide where the money to pay off your debit will come from:

•       Check your regular cash flow and draw out your monthly budget
•       Prioritize your bills using the chart in step one. 
•       Pay min on all debt but attack at least one bill using methods in step two
•       Stop accumulating more debt!!!!

        4. Get started NOW! 

•        Eliminating your debt should have a positive effect on your credit score. Get your current score for free from Credit Karma and simulate scenarios to see how your future score might change with improved money habits. www.creditkarma.com.

Tiger Tracks Week One:

Step 1:  If you have debt, start paying it off. Give yourself one week to figure out how much you owe, call the lender to negotiate down the APR or restructure your payments (in the case of student loans), and set up your automatic payment with more money than you’re paying now.

Getting out of debt quickly will be the best financial decision you ever make.

Tools:

www.calculatorweb.com

www.dinkytown.net
www.mint.com 
www.creditkarma.com