Chapter 13 Bankruptcy: Escape The Debt Trap (And Keep Your Home)
00:00:00 Crush Debt Now!
00:05:51 Moving the Debt Mountain
00:07:07 What Is Debt?
00:22:56 Reasons Why You May Be Sinking In Debt.
00:25:04 The Cost Of Debt.
Hear it Here - https://bit.ly/crushdebtnow
Transcript
Crush Debt Now! A 3-Step Negotiation Strategy to Pay Off Debt and Win Financial Freedom Fast (Personal Finance Wizard Series)
Speaker:Written by
Speaker:Tom Cromwell
Speaker:Do you have excessive debts with no idea how you will pay them off?
Speaker:Are you being pursued by your creditors,
Speaker:receiving aggressive phone calls from debt collectors,
Speaker:and letters demanding payment?
Speaker:Are your lenders threatening you with court action and taking some of your
Speaker:wages?
Speaker:15% of Americans said that they had been pursued by a debt collector,
Speaker:according to a report by the Consumer Financial Protection bureau in 2017.
Speaker:Only one in four of these attended the court hearing.
Speaker:In all the other cases,
Speaker:it is almost certain the collectors will have benefited from default decisions
Speaker:in their favor.
Speaker:A judgment that would allow the debt collector to receive a percentage of wages
Speaker:or sequester other assets.
Speaker:If any of these situations apply to you,
Speaker:then this book has been created to provide your solutions.
Speaker:With this book,
Speaker:you will discover how you can deal effectively with these problems and crush
Speaker:your oppressive debts!
Speaker:By reading this book,
Speaker:you will - * Understand your debts;
Speaker:how and why they are perpetually draining your health and wealth.
Speaker:* Find out if your debt is sustainable.
Speaker:* Learn what to do if your creditors attempt to sequester your assets or wages.
Speaker:* Understand the legal processes and how to fight or stop the process.
Speaker:* Learn how to fight debt collections calls.
Speaker:* Know when not to use loan consolidation and why these are frequently scam
Speaker:attacks.
Speaker:* Master useful tips on how to negotiate with your creditors - and win!
Speaker:* Be able to save money on all different types of debt including utilities,
Speaker:taxes,
Speaker:mortgages,
Speaker:rent,
Speaker:vehicle loans,
Speaker:student debt,
Speaker:credit cards,
Speaker:and other loans.
Speaker:* Know when and how to use nuclear options of bankruptcy and insolvency.
Speaker:This book has been created to help people with serious and chronic debt
Speaker:problems.
Speaker:It is not aimed at people who are a few thousand dollars in debt who want to
Speaker:pay down their debts and need to manage their budget better and create savings.
Speaker:This is the topic of our first book in the Personal Finance Wizard series
Speaker:“Perpetually Broke - Living Beyond Your Income”
Speaker:“Crush Debt Now” is intended for debtors with unsustainable and severe
Speaker:financial issues,
Speaker:where some or all of the debt is already delinquent.
Speaker:I have a wealth of practical and commercial finance experience to draw on in
Speaker:writing this series of books on personal finance.
Speaker:I experienced an upbringing that showed me the value of every penny earned or
Speaker:spent,
Speaker:but I also learned that many other people,
Speaker:even those earning good salaries have an uncomfortable relationship with money.
Speaker:I can show you how it is possible to rise,
Speaker:phoenix-like,
Speaker:from almost any situation,
Speaker:however desperate it may seem.
Speaker:In this book,
Speaker:we will cover practical examples and advice to dramatically reduce the burden
Speaker:of your unsustainable debts,
Speaker:and bring back sanity to your finances.
Speaker:When you follow the step-by-step guide for all types of personal debts,
Speaker:then you can expect to save thousands or even tens of thousands (of dollars)
Speaker:in repayments.
Speaker:You can crush your outstanding debt and be completely free and be financially
Speaker:solvent within two years.
Speaker:Using the 3-step negotiating strategy in this book is a proven approach for
Speaker:drastic debt reductions for people of all different backgrounds and income
Speaker:levels.
Speaker:The most successful case I have faced involved restructuring over 12 different
Speaker:store cards,
Speaker:credit cards,
Speaker:and loans which transformed the situation for the client,
Speaker:who was facing financial ruin,
Speaker:to clear all those debts in 3 Years.
Speaker:According to data from CNBC money,
Speaker:millennials aged 25-34 have the most debt,
Speaker:at an average of $42,000.
Speaker:Credit card balances make up the largest part,
Speaker:followed by student loans,
Speaker:and mortgages only a small part (3%).
Speaker:Naturally enough,
Speaker:this changes as we get older when mortgage debt becomes the most significant
Speaker:component followed by credit cards,
Speaker:car loans,
Speaker:then student debt.
Speaker:However,
Speaker:according to Kevin O'Leary,
Speaker:host of the ABC show Shark tank and personal finance author,
Speaker:age 45 is when "people should aim to have all their debt paid off"
Speaker:His logic is that for most people,
Speaker:they are halfway through their careers and working lives and so need to use the
Speaker:second half to accrue capital for their retirement.
Speaker:While I don't entirely agree with him (I still have a mortgage because it costs
Speaker:me less than inflation),
Speaker:he does make a sound point.
Speaker:Therefore,
Speaker:while it may be difficult for you to remember that you came to drain the swamp
Speaker:when you are fighting off hordes of alligators,
Speaker:it does pay to have a goal in mind.
Speaker:Right now,
Speaker:you are probably wondering just how you are going to stay afloat.
Speaker:To illustrate the key points and provide motivation,
Speaker:this book contains some case studies to show that you can apply the same
Speaker:lessons to your situation.
Speaker:It also offers practical worked examples,
Speaker:where relevant,
Speaker:as this often makes a point better than a thousand words.
Speaker:Last but not least,
Speaker:I have included all the actionable points in the summary for each chapter.
Speaker:Accept the need to act.
Speaker:Your debts are growing every day,
Speaker:start reading before your situation spirals beyond redemption,
Speaker:and decisions are taken out of your hands.
Speaker:This book contains all information that you will need to resolve your situation
Speaker:and sets out clearly and concisely how to tackle each problem.
Speaker:________________ Chapter One - Moving the Debt Mountain In this day and age,
Speaker:living debt-free is something that is nearly impossible to do.
Speaker:Most people have very limited resources and growing needs which are often very
Speaker:difficult to meet without taking on some kind of credit.
Speaker:It is common for people to take mortgages in order to purchase homes or acquire
Speaker:student loans to finance their higher education.
Speaker:Debt can therefore be a means to an end and a very practical way of financing
Speaker:some of our lives’ biggest goals.
Speaker:However,
Speaker:in recent years,
Speaker:the issue of debt has taken on very negative connotations and most people tend
Speaker:to perceive debt as a bad thing - which isn’t always a fair assessment.
Speaker:The truth of the matter is that debt is simply a tool whose benefits and or
Speaker:disadvantages depend entirely on how it is used.
Speaker:Understanding how debt works is therefore a very important aspect of financial
Speaker:literacy,
Speaker:which can help you to become more shrewd and disciplined with your money.
Speaker:In this chapter,
Speaker:we are going to look at how debt works,
Speaker:when it becomes sustainable,
Speaker:and how to stabilize your debt to prevent it from ballooning out of control.
Speaker:We will also discuss the debts that you should prioritize and why to do so.
Speaker:What Is Debt?
Speaker:Debt essentially refers to anything that is owed by an individual (or group)
Speaker:to another.
Speaker:In modern parlance,
Speaker:debt is commonly used to refer to money or financial assets that one party owes
Speaker:to another.
Speaker:As we mentioned at the outset of this chapter,
Speaker:debt can be a very powerful financial tool that allows you to achieve certain
Speaker:goals or needs in life.
Speaker:This,
Speaker:however,
Speaker:depends to a large extent on the amount that you are credited with and how you
Speaker:handle it.
Speaker:Taking on a lot of debt or poorly managing the money that you borrow can lead
Speaker:to poor financial outcomes,
Speaker:which can easily destabilize your life.
Speaker:Understanding the difference between good and bad debt as well as how to handle
Speaker:debt the right way can help you ease your debt burden and improve your overall
Speaker:financial position.
Speaker:What's the difference between good and bad debt?
Speaker:In general,
Speaker:any kind of credit or loan that helps you to grow your income or increase your
Speaker:net worth can be considered as good debt.
Speaker:Some of the most common examples of good debt include - * Student Loans Taking
Speaker:on a loan to finance college or university education can be considered as a
Speaker:good debt for a number of reasons.
Speaker:First,
Speaker:acquiring a higher education automatically increases your earning potential.
Speaker:College graduates generally tend to earn more on average compared to employees
Speaker:who only have a high school diploma or less.
Speaker:Obviously,
Speaker:there are exceptions to this as well as a number of other factors that
Speaker:determine one’s earnings in the job market.
Speaker:However,
Speaker:workers who have attained a college education are more likely to receive higher
Speaker:pay than those who haven’t received a higher education even in entry-level
Speaker:positions.
Speaker:In addition to this,
Speaker:employees who are better educated have higher chances of finding new
Speaker:opportunities in the job market compared to those who have not gone through a
Speaker:university or college program.
Speaker:A student loan can therefore be considered as a good investment with the
Speaker:potential for high returns.
Speaker:However,
Speaker:in order to maximize the value of taking on this kind of debt,
Speaker:one should choose a degree program carefully.
Speaker:If there are very few career options or potential for income growth then a
Speaker:student loan can easily turn into bad debt.
Speaker:If a college uses misleading advertising to make false claims about job
Speaker:prospects that don’t exist,
Speaker:then you may have a case against them and be able to overturn even your federal
Speaker:debts if these can be proven to be material.
Speaker:* Mortgage./Homeownership With property prices rising literally by the day,
Speaker:many people are increasingly turning to mortgage loans as a means to purchase
Speaker:homes and achieve a degree of financial independence.
Speaker:A mortgage is arguably the best debt one can take on.
Speaker:This is because it allows you to become a homeowner and cut down significantly
Speaker:on your spending (you can finally say goodbye to monthly rent payments).
Speaker:This provides you with greater financial freedom since you can channel the
Speaker:surplus income towards paying off other debts and making investments,
Speaker:which will ultimately help you to grow your wealth.
Speaker:Residential and commercial properties also generally tend to appreciate in
Speaker:value over time,
Speaker:which means you can sell your property for a much higher price after a few
Speaker:years.
Speaker:Furthermore,
Speaker:mortgage loans tend to have a very low interest - you can pay them comfortably
Speaker:over a given period of time as long as you are still earning some income.
Speaker:The downside of mortgages occurs when you are unable to pay back the loan since
Speaker:your property may end up getting repossessed by your lender.
Speaker:* Business Loans Unless you have ready seed capital or are able to source
Speaker:funding from friends and relatives,
Speaker:you ostensibly need to take a loan when setting up a new business.
Speaker:During the first few months of setting up a business,
Speaker:expenses and operating costs tend to be higher than profits.
Speaker:Therefore,
Speaker:in order to keep your business afloat,
Speaker:you need to have a capital reserve,
Speaker:which will allow you to pay your suppliers,
Speaker:cover your operating costs,
Speaker:and pay salaries to employees.
Speaker:Getting a bank loan can help you to keep your business running until you are
Speaker:profitable enough to meet your outstanding expenses and even scale up.
Speaker:A business loan is therefore a good debt since it allows you to become
Speaker:financially independent (your own boss)
Speaker:and has a high potential of growing your wealth.
Speaker:As you can see from all these examples,
Speaker:a good debt provides you with the opportunity to increase your earnings and
Speaker:grow your net worth.
Speaker:In contrast,
Speaker:bad debt is any kind of debt that you take on in order to purchase assets that
Speaker:don’t generate any income but instead depreciate in value over time.
Speaker:As a rule of thumb,
Speaker:any kind of debt that leaves you worse off,
Speaker:in the long run,
Speaker:should be avoided since they can be catastrophic to your financial life and
Speaker:stability.
Speaker:Some of the most common examples of bad debts include - * Car Loans While
Speaker:owning a car provides you with greater freedom and mobility (which can make
Speaker:your life and work easier)
Speaker:taking a loan to purchase a vehicle is usually not a very wise decision.
Speaker:This is because you end up paying a lot of interest while the value of the car
Speaker:depreciates almost as soon as it leaves the showroom and continues to plummet
Speaker:with usage.
Speaker:If you must own a car,
Speaker:it is always best to purchase a used one and pay cash.
Speaker:You may not exactly end up with a luxury car that gets everyone talking,
Speaker:but you will ultimately save on a lot of money and avoid the stress that you
Speaker:would otherwise have to deal with when servicing the high-interest rates that
Speaker:are often charged on car loans.
Speaker:If you don’t have cash but still need a vehicle,
Speaker:you can take a small low-interest loan to buy an inexpensive but reliable car
Speaker:and try to pay back the loan as quickly as possible.
Speaker:You will still have spent a huge amount of money on a depreciating asset but at
Speaker:least you won’t have to pay high-interest rates,
Speaker:which can put a serious dent into your finances.
Speaker:* Credit Card.s Credit cards are without a doubt the second-worst debt that
Speaker:one can take on (after pay day loans).
Speaker:This is because they tend to have the highest interest rates of any kind of
Speaker:consumer loans.
Speaker:In addition to this,
Speaker:the payment schedules are usually set up to favor the creditor.
Speaker:Most people who default on credit card payments often end up accruing very high
Speaker:interests,
Speaker:which they are stuck paying for months or even years.
Speaker:* Clothes and Consumables While there is nothing explicitly wrong with buying
Speaker:expensive clothes,
Speaker:phones,
Speaker:and other consumables,
Speaker:acquiring these products on credit is usually a bad idea in most cases.
Speaker:This is because these items do not grow your income in any way and typically
Speaker:lose value very quickly.
Speaker:Every cent that you spend paying back debt on these items is money that you
Speaker:would otherwise put to better use elsewhere.
Speaker:Which is why it is always advisable to purchase them in cash.
Speaker:Fortunately,
Speaker:there are a lot of options and alternatives which you can use to acquire these
Speaker:products without having to take on debts.
Speaker:Instead of taking credit to purchase expensive designer clothes,
Speaker:you are better off buying inexpensive but good quality clothes from a thrift
Speaker:shop.
Speaker:Types of Debt- Secured vs Unsecured Debt There are two main types of debt,
Speaker:namely - secured and unsecured debt.
Speaker:Understanding the characteristics of these different types of debt is crucial
Speaker:because it enables you to know which debts to prioritize when it comes to
Speaker:payment.
Speaker:Secured debt essentially refers to any kind of debt that has an asset attached
Speaker:to it as collateral.
Speaker:The most common assets that are normally used as collateral are houses (for
Speaker:mortgage loans)
Speaker:and cars (for automobile loans).
Speaker:These assets provide lenders with leverage,
Speaker:which they can use to recoup their money and minimize the risk of loss.
Speaker:If an individual fails to clear their outstanding debt,
Speaker:then the lender has a right to claim their property.
Speaker:For instance,
Speaker:if you take a mortgage to buy a house and are unable to pay it back,
Speaker:the lender can legally repossess and sell the house to recoup their money.
Speaker:If the sale value is not enough to cover the entire debt,
Speaker:then they may continue to pursue you until they recover the deficit.
Speaker:An automobile loan is also another type of secured debt since the lender can
Speaker:repossess and resell the vehicle if the debtor fails to clear the debt as
Speaker:agreed.
Speaker:In general,
Speaker:a person who takes up a loan to purchase an asset never fully owns it until
Speaker:they have cleared the outstanding debt.
Speaker:Once the full payment has been made to the lender,
Speaker:the transfer of ownership on the asset is completed.
Speaker:Unlike secured debts,
Speaker:which are backed by collateral (recoupable assets),
Speaker:unsecured debts generally have no collateral rights attached to them and
Speaker:instead rely on the debtor’s promise to pay back what they owe.
Speaker:Therefore,
Speaker:the lender cannot make any claim on the assets if the debtor defaults on
Speaker:payment.
Speaker:However,
Speaker:they can employ other avenues to coax the debtor to repay the debt.
Speaker:For instance,
Speaker:they can hire a debt collector to persuade the debtor to clear their debt.
Speaker:If this fails to work,
Speaker:they can file a lawsuit against the person who owes them and convince the court
Speaker:to garnish a percentage of the person’s salary,
Speaker:which is then redirected towards debt repayment.
Speaker:Some of the most common examples of unsecured debts include credit card debts,
Speaker:student loans,
Speaker:and medical bills.
Speaker:Is Your Debt Unsustainable?
Speaker:As we have seen from the previous section,
Speaker:debt is not automatically a bad thing,
Speaker:provided it is used for income-generating ventures and is paid back as soon as
Speaker:possible to avoid an accumulation of interest.
Speaker:Gauging your debt level is therefore very important when it comes to figuring
Speaker:out which debts to prioritize.
Speaker:However,
Speaker:identifying a debt problem isn’t always easy to do.
Speaker:There are several signs that can help you to determine whether you have a
Speaker:personal debt crisis.
Speaker:These include - * Making Minimum Payments While low payments provide you with
Speaker:flexibility and enable you to meet other financial obligations while still
Speaker:servicing your debt,
Speaker:making minimum payments is likely to keep you stuck in a cycle of revolving
Speaker:debt payments.
Speaker:Meanwhile,
Speaker:your interest continues to rack up,
Speaker:which means you end up paying more.
Speaker:* Very Large Minimum Monthly Payments If you are making very large minimum
Speaker:monthly payments to service your debt,
Speaker:you are going to have a very difficult time meeting your living costs,
Speaker:and may even end up racking up more debt just to compensate for the deficit.
Speaker:In an ideal situation,
Speaker:your monthly debt payments should not exceed 20% of your income.
Speaker:* Problems with Debt Collectors When creditors and debt collectors start
Speaker:hounding you constantly or threatening to garnish your wages and repossess your
Speaker:assets,
Speaker:this is a tell-tale sign that your debt has become unsustainable.
Speaker:If you are still earning some income,
Speaker:you should start making payments towards your debt to lower it,
Speaker:and stop your creditors from making such threats.
Speaker:* Over-Reliance on Advance Cash If you regularly take cash advances to cover
Speaker:your living expenses,
Speaker:then you are likely stuck in a debt problem.
Speaker:Cash advances should ideally be used only in emergency situations and repaid
Speaker:promptly to avoid racking up interest.
Speaker:* Being Denied Loans/Credit In case you are trying to secure a loan from a bank
Speaker:or other lender but are constantly getting turned down,
Speaker:you need to take a step back and examine your debt situation.
Speaker:Chances are your credit rating is very poor due to non-payment or minimum
Speaker:payment,
Speaker:which makes lenders very wary about extending any more credit to you.
Speaker:On the off chance that you do get a lender who is willing to give you a loan,
Speaker:their terms are likely going to be very unfavorable.
Speaker:* Not Growing Your Savings Your budget should always include a savings plan of
Speaker:some kind,
Speaker:whether it is an emergency fund,
Speaker:retirement savings,
Speaker:or college fund for your kids.
Speaker:If you always end up with nothing to save after sorting out your expenses and
Speaker:paying bills then you probably have a serious debt crisis.
Speaker:In order to manage your debt and maintain a good credit rating,
Speaker:it is important to know your debt-to-income ratio.
Speaker:A debt-to-income ratio (DTI)
Speaker:is essentially a metric that compares your overall debt to your income.
Speaker:Lending institutions typically use your DTI to determine whether you are able
Speaker:to make monthly payments and clear your debt within the agreed duration.
Speaker:Having a good DTI,
Speaker:therefore,
Speaker:implies that you have a good balance between your outstanding debts and total
Speaker:income.
Speaker:On the other hand,
Speaker:a high DTI means that you have too much debt compared to your income.
Speaker:Generally,
Speaker:you have higher chances of securing a loan if your DTI percentage is low.
Speaker:So,
Speaker:how does one determine their debt-to-income ratio?
Speaker:Well,
Speaker:in order to calculate your DTI,
Speaker:you simply need to sum up all your monthly debt payments and divide them by
Speaker:your gross monthly income.
Speaker:Your gross income is essentially what you earn every month before taxes and
Speaker:other deductions are made.
Speaker:To illustrate how DTI is calculated,
Speaker:let us assume that you pay $1500 every month for your mortgage,
Speaker:$500 on a car loan,
Speaker:and $500 for other monthly debt payments.
Speaker:Your total debt payment can be calculated by summing up all these payments.
Speaker:$1500 + $500 + $500 = $2500 If your gross monthly income is $5000,
Speaker:then your DTI can be calculated as follows - 2500/5000 = 0.5 x 100 = 50% This
Speaker:would be considered high because if taxes take around another 30% - 35% of your
Speaker:income this would leave you only $750 to $,1000 for the rest of your needs and
Speaker:wants.
Speaker:In general,
Speaker:lenders are more likely to loan you money if your DTI is less than 36% with no
Speaker:more than 28% of that going to mortgage payments.
Speaker:However,
Speaker:your DTI ratio does not really affect your credit score directly since credit
Speaker:agencies are not privy to your earnings and are therefore unable to make this
Speaker:calculation.
Speaker:Nevertheless,
Speaker:keeping your debt-to-credit ratio is still very important since it determines
Speaker:the ease with which you are able to secure loans from lenders.
Speaker:There are two ways in which you can cut down on your DTI ratio.
Speaker:One of the ways to do so is by increasing your income.
Speaker:You can achieve this in a number of ways such as requesting a pay rise from
Speaker:your employer,
Speaker:finding another job or side hustle to supplement what you are currently
Speaker:earning,
Speaker:completing another course,
Speaker:or program to improve your marketability and raise your salary.
Speaker:Alternatively,
Speaker:you can reduce your DTI by cutting down on your spending and minimize debts.
Speaker:Reasons Why You May Be Sinking In Debt.
Speaker:Controlling your debt is crucial if you want to take charge of your finances
Speaker:and achieve the goals that you have set for yourself.
Speaker:In order to do so,
Speaker:however,
Speaker:you need to get to the root of why you are in debt.
Speaker:Understanding why you have so much debt in the first place can help you to
Speaker:identify the mistakes that you have been making and how to solve them in order
Speaker:to be debt-free or have sustainable debt.
Speaker:If you are wondering why you are sinking into so much debt,
Speaker:here are some of the top reasons why you may find yourself in that situation.
Speaker:i)
Speaker:Living beyond Your Income One of the most common reasons why you may be
Speaker:struggling with debt is because you are trying to maintain a lifestyle that is
Speaker:beyond your income.
Speaker:You may be spending too much money purchasing expensive and flashy items in a
Speaker:bid to keep up with others,
Speaker:which inevitably forces you to take on a lot of debt to furnish that lifestyle.
Speaker:ii)
Speaker:Overspending Sometimes all it takes to get yourself trapped in a cycle of debt
Speaker:is failing to rein in your spending.
Speaker:You don’t necessarily have to be buying luxury items,
Speaker:but spending too much on living costs can easily result in a blowup of debt.
Speaker:iii)
Speaker:Reduced Income If your income suddenly reduces due to losing your job,
Speaker:for instance,
Speaker:this can put a dent in your budget and force you to take on debt in order to
Speaker:meet your living costs.
Speaker:This is why many financial experts usually advise people to diversify their
Speaker:sources of income.
Speaker:iv)
Speaker:Little or No Savings One of the reasons why including savings in your budget is
Speaker:always recommended is because it provides you with a financial cushion in case
Speaker:of unexpected events.
Speaker:Ask,
Speaker:yourself this.
Speaker:Suppose you lost your job today,
Speaker:would you still be able to maintain your current lifestyle?
Speaker:If you have not been saving part of your income in an emergency fund,
Speaker:chances are you would have a hard time staying afloat unless you take on some
Speaker:kind of debt.
Speaker:The Cost Of Debt.
Speaker:Whenever you take credit,
Speaker:whether it is a mortgage,
Speaker:a payday loan,
Speaker:or a student loan,
Speaker:you are essentially using someone else’s money today with the promise of
Speaker:paying it back in the future.
Speaker:Since the individual or institution that lends you the money does not have
Speaker:access to it until you pay it back,
Speaker:they have to charge interest on top of the loaned amount.
Speaker:Interest is the cost that one is charged for using borrowed money.
Speaker:An alternative way of thinking about interest is that it is the profit that an
Speaker:individual or institution earns from lending money to another party.
Speaker:Interest is normally calculated as a percentage of a loan that is payable to a
Speaker:lender for the privilege of using their funds.
Speaker:Whenever you borrow money,
Speaker:you always have to pay back the total amount in addition to an interest,
Speaker:which is charged to compensate the lender for the risk of lending their money.
Speaker:So,
Speaker:how much interest does one pay when they take out a loan?
Speaker:Well,
Speaker:this depends on a number of factors such as the amount of loan,
Speaker:interest rate,
Speaker:and duration of repayment.
Speaker:In general longer-term loans and loans with high-interest rates tend to result
Speaker:in higher costs for the borrower.
Speaker:Credit card loans,
Speaker:payday loans,
Speaker:and to a lesser extent,
Speaker:car loans are typically charged much higher interest rates compared to mortgage
Speaker:loans.
Speaker:Taking any of these loans is therefore likely to be very costly in the long run.
Speaker:To illustrate how costly debt can be,
Speaker:consider the following table - Mortgage.
Speaker:Vehicle Loan.
Speaker:Credit Card.
Speaker:Payday.
Speaker:Amount Borrowed.
Speaker:$300,000 $30,000 $3,000 $300 Simple Interest Rate.
Speaker:4.7% annual 8.64% annual 25.6% annual 20% for 14 days APR (excluding fees)
Speaker:5.0% 9.0% 29% 521% Term Of Loan.
Speaker:30 Years.
Speaker:3 Years.
Speaker:1 Year.
Speaker:1 Year.
Speaker:Interest To Be Paid.
Speaker:$996,582 $8,467 $870 $1,563 Total Amount Owed.
Speaker:$1,296,582 $38,467 $3,870 $1,863 Interest on all loans is assumed to have a
Speaker:monthly compounding when a debtor fails to pay interest on a given month.
Speaker:The only exception to this rule is payday loans,
Speaker:which are typically compounded fortnightly (every two weeks).
Speaker:The interest to be paid is the total amount of interest that one owes assuming
Speaker:you make no payments over the duration of the loan.
Speaker:This means that for the payday loan you borrow only $300 but you have to pay
Speaker:back an eye-watering $1,863 if you borrowed the money for 1 Year.
Speaker:(normally you are expected to pay it back within 14 days,
Speaker:which makes it seem reasonable,
Speaker:when in fact it is usurious).
Speaker:The fees for non-payment of interest can be very high,
Speaker:especially for payday loans and credit card loans.
Speaker:In some cases,
Speaker:they can ever be more than twice the amount of annualized percentage rate (APR).
Speaker:The annualized percentage rate is essentially simple interest expressed in a
Speaker:way that allows for comparing different compounding periods.
Speaker:Understand Your Budget.
Speaker:The number one reason why most people usually find themselves sinking in debt
Speaker:is simply that they spend more than they earn.
Speaker:In other words,
Speaker:they don’t live within the confines of their budget.
Speaker:If you are struggling with debt,
Speaker:therefore,
Speaker:understanding your budget and optimizing it to suit your income and expenses is
Speaker:absolutely important.
Speaker:Let us now look at some of the steps you need to take in order to budget
Speaker:appropriately and cut down on your debt a lot faster.
Speaker:* Track Your Spending In order to determine whether your expenditure exceeds
Speaker:your income,
Speaker:you need to start keeping track of your monthly spending.
Speaker:Make a list of every penny that you spend on everything from food,
Speaker:clothing,
Speaker:entertainment,
Speaker:and utilities.
Speaker:You can either go the traditional way of writing down your spending with a
Speaker:notebook and pen or take advantage of the numerous budgeting apps that are
Speaker:available today.
Speaker:I provide a budgeting sheet as part of my free financial toolkit.
Speaker:* Add up Your Total Expenditure and Income Once you have determined your total
Speaker:monthly spending,
Speaker:the next thing you need to do is add that with your income.
Speaker:This will help you to easily tell if you are spending more than you are earning.
Speaker:Consequently,
Speaker:you will be able to identify the changes that you need to make in order to make
Speaker:your budget more practical.
Speaker:* Create a Budget If you have realized that your spending exceeds your income,
Speaker:you need to make cuts to your spending until it is less than your income.
Speaker:Ideally,
Speaker:you should make a budget first and then look at the areas where you may need to
Speaker:cut down in order to reduce your spending.
Speaker:By creating a budget and sticking to it,
Speaker:you will eliminate the tendency to overspend and cut down on your borrowing
Speaker:habits - which are keeping you stuck in debt.
Speaker:The table below compares the difference in what will happen to your wealth if
Speaker:you either spend $100 more than you earn (the debtor),
Speaker:or spend $100 less than you earn (the investor).
Speaker:Debtor.
Speaker:Investor.
Speaker:Cost Or Return.
Speaker:23% 9% Cashflow.
Speaker:$ -100 $ 100 Year 1.
Speaker:$ -1,338 $ 1,254 Year 2.
Speaker:$ -2,984 $ 2,621 Year 3.
Speaker:$ -5,008 $ 4,111 Year 4.
Speaker:$ -7,498 $ 5,735 Year 5.
Speaker:$ -10,560 $ 7,505 In the debtor column,
Speaker:you have a negative cash flow (earning – expenditure)
Speaker:per month of $100,
Speaker:after 1 Year. you will owe $1,388 of debt,
Speaker:finishing owing $10,560 after 5 years based on the 23% APR. On the other side,
Speaker:$100 positive cash flow based on a 9% return on investment in the stock market
Speaker:(which is conservative the returns have been in excess of 11% over a
Speaker:thirty-year period)
Speaker:then you finish with an investment of $7,505 after 5 years.
Speaker:* Establish an Emergency Fund If you are earning a monthly income,
Speaker:it is absolutely important that you put a percentage of that into an emergency
Speaker:fund.
Speaker:As a matter of fact,
Speaker:many financial experts usually recommend creating an emergency fund before
Speaker:saving money for other goals such as retirement or vacations.
Speaker:Ideally,
Speaker:you should put at least 10% of your income in an emergency fund until you have
Speaker:enough funds to meet your living expenses for at least 3 months.
Speaker:Having an emergency fund provides you with a measure of financial security in
Speaker:the event of unforeseen occurrences such as job loss,
Speaker:car breakdown,
Speaker:or medical emergencies.
Speaker:Without an emergency fund to cater for these unexpected expenses,
Speaker:you may end up having to take on credit,
Speaker:which can make your debt situation even worse.
Speaker:Here are some of the key points to take away from this chapter - * Debt can be
Speaker:a good thing or a bad thing depending on how it is utilized and repaid * Any
Speaker:debt that helps you increase your income or improve your financial situation
Speaker:can be considered as good debt.
Speaker:Examples include mortgage loans,
Speaker:student loans,
Speaker:and investment loans * Any kind of debt that is used to purchase consumer items
Speaker:or depreciating assets is a bad debt,
Speaker:which should be avoided.
Speaker:Examples of this include,
Speaker:car loans,
Speaker:and credit card loans * Creating and maintaining a workable budget will help
Speaker:you keep your spending in check and avoid borrowing too much.
Speaker:* Maintaining a low debt-to-income ratio is very important since it proves your
Speaker:debt is sustainable and makes lenders more confident about your ability to pay
Speaker:back loans.
Speaker:This has been
Speaker:Crush Debt Now! A 3-Step Negotiation Strategy to Pay Off Debt and Win Financial Freedom Fast (Personal Finance Wizard Series) Written by
Speaker:Tom Cromwell
