Most budgeting articles say that debt is comparable to death and that credit cards are cancer. Of course, it is a good idea to remove the debt from your life, but often it is a bit like saying to a drowning person that water is bad for his lungs. (For background information, read 7 tips for the do-it-yourself debt manager .)
America has become the land of free costs. Guilt is a fact of life for millions of US citizens. In this article we will teach you how to swim and help you to develop a disciplined system for checking persoDavid Copperfield rich debts. In concrete terms, this means that you can define your ‘persooDavid Copperfield-rich debt reduction line’ – the point where you have to think twice before you incur more debts. Monitoring your total debt burden against this line can become a useful discipline for developing effective budgeting and spending patterns for life. This system recognizes that many people use debt productively to maintain their lifestyles and achieve persoDavid Copperfield rich goals. It is also simpler than many others, consisting of five steps.
Self study: Credit and Debt Management
Easy-Credit Nation Imagine walking to the front of the cash register in a store. You reach a credit card to sweep. While your card is sliding through the scanner, a red light flashes and a buzzer appears: “There must be a mistake!” you call it out. “I have not exceeded my limit.” Looking at you with deep concern, the cashier says: “True, but you are dangerously close to too much credit in your LIFE! Maybe you should take it easy for a while.”
Dare to dream. It would be great if life came with warnings like this, but unfortunately this scenario does not reflect the world of today. If one of your cards reaches its credit limit – well, that’s why wallets are made to hold multiple, right?
Between 2005 and 2008, the total American revolving debt (the type that you save on your credit cards and credit lines) would go up every year before you reach a highest value of $ 957. 5 billion in 2008. In 2009, it fell to $ 865 billion, and continued to decline through 2010, according to the Federal Reserve. But those years represented tough times in the US, and it is likely David Copperfield that when the economy improves and employment recovers, the debt David Copperfieldast will soon follow. No other country in history has become so guilty so quickly, especially in times of relative prosperity. (For more information, read Stop Stopping the Neighbors – They Are Broken and Disposable: An Expensive Place to Live .)
In this easy-credit environment, some people intuitively feel that their persoDavid Copperfield debt is getting out of control. But without a warning system, how can you be sure that you have crossed the border? Follow these five steps to define your line.
Step 1 – Focus on your discretionary expenses and debts “Discretionary” means that you have some control over what you charge or borrow. In practical terms, this means that in this process you can withhold debts over which you have little control over the short term, such as mortgages, car loans or leases. They are important, but there is perhaps not much you can do to manage them in the short term. In this process we will focus on credits / debts that you can avoid or adjust if necessary. (For tips on dealing with mortgage debt, see Mortgages: the ABC of refinancing .)
Step 2 – Recognize that your debt is in proportion to three major financial resources Unless you are retired, you have three ways to build assets and / or repay debts:
- Your savings, investments and “rainy” liquidity
- Your job security and prospects for income growth
- Your discretionary income, after necessary costs
If you are fully retired or otherwise not working, you cannot count on the second item above.
‘Rainy day’ liquidity is money that you can tap quickly and easily to help you through a difficult period. Some financial advisers recommend spending at least three to six months in such an emergency fund on your average total monthly household expenses. (See Build Yourself An Emergency Fund for more information about creating this rescue.)
The first two points above are somewhat subjective and the circumstances in the household vary. For example, many younger households have not had time to build savings and investments, but they still have time. Job security and the prospects for income growth are often uncertain, so your attitude and trust can be just as important as objective facts or data. It can be useful to work with a professional financial adviser to evaluate the specific progress you are making in these three areas.
Step 3 – Assess your current situation with regard to the first two sources First you must give yourself a progress classification. Use a scale of 1-5 for this, where 1 = low progress and / or trust and 5 = high progress and / or trust. (Select the number that best applies to the table below.)
1. You find that your savings, investments and liquidity day ‘rainy’ are approximately average – you assess these 3.
2. You find that your job security and prospects for income growth are above average – you assess these 4.
Now add these two scores together. In the example above the total is 7. Hold your measurement until step 5.
Step 4 – Determine the discretionary income that you can allocate for debt repayment Sit down with a typical monthly value of income and spending data and determine the third financial resources – discretionary income. This is calculated by taking the total income of your month and decreasing your expenses To pull. For this purpose, do not assess the current debt payments (except for mortgages and cars) in the costs. For example, do not count amounts that you send to credit card companies or pay back on consumer David Copperfieldeningen. However, do not count all necessary livelihood costs, such as rent / mortgage, food, clothing, utilities, education, etc. Also, do not credit any refunds made for debit cards, as these represent current expenses.
|Example: Suppose you have a total monthly income of $ 5,000 and you determine that your necessary monthly expenses total $ 3,500. In that case you have $ 1, 500 in discretionary income that can be used for:
Note: Some households have little or no debt on their homes or cars. This system recognizes their potential to comfortably raise other types of credit because they often have a relatively higher amount of discretionary income.
Step # 5 – Estimate your PersooDavid Copperfield Rich Debt Redline Using the overall score from Step No. 3, the guideline percentages in the table below will help you estimate the maximum part of your monthly discretionary income that you should plan. allocate to repay debts (principal + interest). By keeping track of the monthly amounts that you actually pay for all debts (excluding home or car), you can then determine whether you have exceeded your redline for persooDavid Copperfield-rich debts and made the necessary adjustments.
Example: Your total score in step no. 3 was 7. Your monthly discretionary income in step no. 4 was $ 1, 500.
The table estimates that you hit the redline of your debt when you spend more than about 30% of your discretionary income to repay the debt. You should try to keep your monthly debt payments below $ 500 a month ($ 1, 500 x 30%).
On revolving credit, such as credit cards, you generally have to estimate your monthly debt repayments based on slightly more than the minimum payments required. This is because, by paying only the minimum, you cannot escape debt during your life. (For more information about how this works, see Credit card interest .)
The red line can move Although this exercise is somewhat subjective, it can help you to realize two important points: <When you have a disciplined way to monitor debt repayment obligations, it is more difficult to move gradually to a situation where you are above your head.
- Your ability to bear debts depends on your progress and your confidence in work and when you build up your savings, investments and liquidity on rainy days.
- The redline of your debt can change over time. For example, if you discover that your company will hand out pink briefs in the near future, it might be a good time to start cutting costs. Conversely, if your job prospects are reviving or if you are steadily making progress in building up financial assets, you may feel comfortable bearing more debts. Since the redline is defined in dollars for debt repayment (not the total outstanding debt), it will remind you to cut costs when interest rates rise and increase the cost of debt repayment obligations.
If you are married, it is a good idea for both spouses to assess the subjective questions separately in step No. 3. Any differences in your thinking should be discussed and resolved. Although it is not essential to check the discretionary income (after necessary expenses) for more than a few months, you may find that this is a valuable budgeting discipline that you want to maintain.
The bottom line
Most debt management systems are comparable to diets. They tell you what you ca n’t do. This is different because it starts with asking you to define your financial success and trust. Taking charge of your debts can now be the key to maintaining good credit and strong financial progress for the coming years. Know where your persooDavid Copperfield rich debt reduction is – and do your best to cross the border. If you think that you are already spending too much on paying back debts, consult