How do you get out of debt?

Question How do you get out of debt?

Answer Stop spending more money than you take home.

Complete Answer  When you have mastered the three most critical elements of managing your money; know your income and expenses, live below your means, and save (Financial Literacy Knowledge and Skills), you will be in a position to get out of and stay out of debt.

Step 1 in getting out of debt is to stop spend more money than you take home each month – live below your means.

Step 2 is to list all your debts from the smallest to largest balances.

Debt Balance
Credit Card A 300.00
Credit Card B 1,500.00
Credit Card C 3,500.00
Car 18,000.00
House 103,000.00

Step 3 is to determine the amount of minimum monthly payment for each.

Debt Minimum
Monthly
Payment
Credit Card A* 25.00
Credit Card B* 37.50
Credit Card C* 87.50
Car 500.00
House 1,100.00

*Minimum payment of $25.00 or 2.5% of unpaid balance, 18% interest on unpaid balance.11

Step 4 Pay extra on the debt with the lowest balance while paying the remaining debts at the minimum or required amounts each month.

If only the minimum amount ($25.00) was paid each month for Credit Card A, the total interest would be $33.27 and take 14 month to pay off. On the other hand, by adding an additional $75.00 each month (total $100.00), the debt would be paid off in 4 months, with total interest of $9.32.

Step 5 When the first debt is paid off, add that money to to pay off the next debt, then the next,  and so on until you are out of debt.

Please Note: The process of getting out of and staying out of debt only works if you are living below your means – spending less money than you take home. If you continue to spend more money than you take home, you will never get out of debt.

Financial Literacy Knowledge/Skill

How to get out of and stay out of debt.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Should you lend money to a family member or friend?

Is saving money important?

Question  Is saving money important?

Answer  YES!

Complete Answer  Without savings;

  • You are living paycheck to paycheck. Any interruption in your regular paycheck, such as a sudden illness, a cut in your work schedule, a temporary layoff,  will cause your finances to quickly spiral downward.
  • You don’t have money for a financial emergency expense.
  • You cannot afford big ticket items (down payment on a house or a car, purchase of a washer/dryer, furniture, et ectera).
  • There is no possibility of a comfortable retirement in your future.
  • Most disheartening of all, at the end of another year,  you have nothing to show for a year’s worth of work.

Financial Literacy Knowledge/Skill

Understand that savings is an important element of your financial literacy.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you save money?

What’s the difference between needs and wants?

Question  What’s the difference between needs and wants?

Answer  Needs are those things that are required for you to live, thrive and survive. Wants, on the other hand, are those things that enrich our lives, things that we enjoy, things that are nice to have, things that are important to us.

Complete Answer  Needs would include things such as shelter, food, clothing, health care, transportation, education and a marketable skill. In the example of Adam the imaginary person (post of August 29, 2016), he was spending 33% of his take-home pay for housing (shelter) and 16% for car expenses (transportation). Both expenses are considered needs and were within the guidelines of an effective spending plan.

Dining out, a new car, a vacation, going to a ball game with friends are examples of wants. In a recommended spending plan, wants fall into the category of Lifestyle. An evaluation of Adam’s spending plan showed that he was spending more than he as taking-home, and specifically, the excess spending was for wants; Adam’s spending was 42%, the recommended amount is 25%.

In summary, Adam needs to spend less than he is taking home, specifically, he needs to cut down on his Lifestyle spending. This may take a little temperance8, but with a little forethought and practice, he will be able to bring his spending down and spend less money than he brings home each month.

Helpful Hint  Cutting down on Lifestyle Expenses is the easiest way to spend less. Not going out for dinner, not buying those new shoes, making coffee at home, and checking out a movies from the library (free) are just a few examples of decreasing Lifestyle Expenses.

Financial Literacy Knowledge/Skill

Understand the difference between needs and wants.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: Can you afford that?

Where are you spending too much money?

Question Where are you spending too much money?

Answer  Only you can answer that question.

ExampleFor one month, Adam’s (imaginary person) income was $3,600. Tracking his expenses revealed the following; housing $1,170, car $590, credit cards $525 and lifestyle $1,500.

Income Expenses
Amt. % Amt. %
Take-Home Pay  $3,600  100
 Housing Expense  $1,170  33
 Car Expense  $590 16
 Credit Card Expense  $525  15
 Lifestyle Expense  $1,500  42
 TOTALS  $3,600  100  $3,785  106

Can you identify where Adam is spending too much money?

Complete Answer  You have all the information needed to answer that question.

  1. You know how to calculate income for the month. (Post of July 18, 2016)
  2. You can track spending. (Post of August 15, 2016)
  3. You know what a typical spending plan (budget) should look like. (Post of Jul,y 25, 2016)

In the above example, Adam’s total expenses ($3,785) are greater than his total income ($3,600). Adam will eventually go bankrupt if he continues spending more than his income.

To identify where Adam is spending too much money let’s examine his spending.

  • Housing Expenses which include mortgage/rent, utilities, cable/satellite/Internet  service, cell phone, insurance, et cetera. Adam is spending 33% of his income. The recommended amount is 30% and may vary between 25% and 35%. Adam’s amount spent for housing is a little on the high side, but within the recommended amount.
  •  Car Expenses which includes car payments, gas and oil, maintenance and repairs, license plates, insurance, et cetera. Adam is spending 16% of his income. A little over the recommended amount, but close enough.
  • Credit Card Expenses are in reality debt. Credit card debt will be address in a future post. For this example, we will assume it is debt pay down. Fifteen percent is within the recommended amount.
  • Lifestyle Expenses could be classified as discretionary spending, which would include such things as dining out, clothing, entertainment, hobbies, vacations; all those things that that you enjoy and like. Adam is spending 42% of his income on lifestyle things. The recommended amount for lifestyle is 25%. Adam is spending too much money on lifestyle things.

Financial Literacy Knowledge/Skill

Identify where you are spending too much money.

Comments or Questions

Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and/or questions you may have about managing your money (Financial Literacy).

Next week’s topic: What’s the difference between needs and wants?

Why are you having money problems?

Question: Why are you having money problems?

Answer: There is an imbalance between the money you are receiving (income) and the money you are spending (expenses).

Complete Answer: It is literally that simple. And I assume that if you are having money problems, it’s because your spending (expenses) is greater than the money you are receiving (income)—you are living beyond your means. You could be living below your means, with income greater than your expenses. But most people would not consider that a problem. Ideally, you should be living within your means. As was discussed in the recent July 25 post, you should be 1) paying all your monthly bills on time, 2) saving money for a rainy day and 3) be putting money away for retirement.

To solve your money problems, you will need to correct the imbalance between income and expenses. You will have to increase your income or decrease your expenses. We will address both in upcoming posts.

Financial Literacy Knowledge/Skill: You should be able to state clearly why you are having money problems. For example; “My income is too low” or “My expenses are greater than my income.”

Comments or Questions: Thank you for visiting the Financial Literacy Life Skill site. Please feel free to submit comments and questions you may have about managing your money (Financial Literacy).

Next week’s topic: How do you increase your income?