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?

How much money should you be saving?

Question How much money should you be saving?

Answer  Ten percent of your take-home pay.

Complete Answer  At the very minimum, you should be saving 10% of your take-home pay.

The 10% Affect  Saving 10% of your take-home pay may seem like an impossible task. It is if you try to do it all at once. If you do it one pay check/one purchase at a time, it’s not that difficult. I like to think of it as, “Small change equals big bucks.” For example, If you have $10 to spend on lunch, how different would your lunch be if you only spent $9? Instead of spending $100 for clothes, you only spent $90. Could you really notice the difference? That’s “small change”. If you do that for a year, you will have saved 10% of your take-home pay, that’s “big bucks”.

Financial Literacy Knowledge/Skill

Save 10% of your take-home pay.

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 should you be using your savings?

Can you afford that?

Question Can you afford that?

Answer By answering these two question you will know the answer; 1. What is your take-home pay for the month? and 2. Is the expense equal to or less than the recommended category amount in your spending plan?

Complete Answer Ironically, as a kid you knew the answer. When your parents gave you $10 to buy your school lunch, you knew you only had $10 to spend on lunch and you spent it accordingly. The same principle applies as an adult. Unfortunately as adults, at times we have to buy things that we cannot pay cash for at the time of the purchase. Most of us could not pay cash for a house or a new car. For those purchases that have to be financed, the same principle applies. What is your take-home pay for the month and what is the monthly cost of the item you are buying.

For Example: Can you afford an apartment? The total expenses (rent, utilities, insurance, et cetera) should not be more than 30% of your monthly take-home pay. Can you afford a new car? Again, the monthly expenses of that new car (payment, insurance, scheduled maintenance, gas, et cetera) should not be more than 15% of your monthly take-home pay. You get to set up the categories and the amounts (percentages) for your spending plan. The important thing to remember is that your total expenses should never be more that 100% of your take-home pay.

Financial Literacy Knowledge/Skill

Know what you can afford.

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: Is saving money important?

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?

How do you decrease your expenses?

Question  How do you decrease your expenses?

Answer  Cut down on your spending. A skit on Saturday Night Live makes the point very well. In this “commercial parody, a married couple are confused by their money woes, so a spokesperson presents them with Don’t Buy Stuff You Cannot Afford, a guide to prevent financial debt. [Season 31, 2006].”6  

Don’t Buy Stuff You Cannot Afford

Complete Answer   Other than income taxes, you get to decide what and how much you spend. In order to get control of your spending, the first thing you need to do is to know what and how much you are spending. You need to “Track Your Spending”. For example: How much does it really cost to “Take you out to the ol’ ball game?” It will include of course the cost of the tickets. Add to that parking, “peanuts and Cracker Jacks”, and a souvenir baseball cap so you can “root, root, root for the home team”.

There are a number of ways to track your spending. You may be naturally talented at remembering numbers. Great, that will save you a lot time if you don’t have to write things down. For the rest of us:

  • Some people carry around with them a small notebook to record their expenses.
  • Combining a debit card with a checking account is another way of keeping track of your spending.
  • There are a number of apps available for your smart phone that you can use to record your expenses.

Use whatever method or one that you make up, that works best for you. The important thing is that at the end of the month, you know exactly what and how much money you spent. Granted it’s a bit daunting and tedious, but with fortitude7 and a little practice you’ll become quite proficient. I starting by recording my spending in a small notebook. Gradually I progressed to using a spreadsheet on my desktop computer.

Helpful hints: You will have/receive a written record for most transactions; cash or credit card receipts, checks, and bill payment coupons. Most stores will offer a receipt if requested. For those few transactions with no written record; parking meter, vending machine purchases, or coin-operated laundry for example, make a mental note and record it when you have a chance. For those occasions that will involve a number and variety of transactions, attending a church festival or a day at the races with friends for example, count your money before you go and when you come back, the difference is what you spent. Will there be transactions you miss or amounts you couldn’t remember? Yes. Don’t fret, you will get another chance to be more accurate the next day and next month. I find it helpful to make it a daily routine to record my financial transactions from the previous day.

Financial Literacy Knowledge/Skill

Track your spending.

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:  Where are you spending too much money?