Not long ago I was doing financial counseling with someone who was seeking to get out of debt. They began to talk about all the bills they had accumulated over a number of years which has grown into a large amount of debt. They had gotten into the cycle of using credit cards to satisfy their wants and now needs due to the lack of cash flow they desperately needed a plan to help them get back on track and headed towards financial freedom.
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We discussed their plan to pay off their debt which began with a simple exercise of having them add up all of their debt which included writing out the annual percentage rate (APR) for each credit card or loan. After everything was added up we discovered a disturbing fact – they could not afford their debt. High interest rates combined with minimum monthly payments was diminishing their cash flow and making it an impossible task to reduce their debt. I came to a startling revelation that it cost more to be broke than wealthy.
Many of us do not take the time to familiarized ourselves with our own debt. We are so blindsided by the instant gratification that swiping the credit card provides that we don’t realize that the item that we just paid for will take us years to pay off. It is important that we begin to take steps to educate ourselves about the debt that we are acquiring. I believe the more we understand our debt and know what we are paying off we will more incline to pay by cash, delay gratification or decide that we do not need that item after all.
Let’s do a simple exercise.
Know Your Debts:
Add up all of your credit cards including how much you spend on overdraft payments, over the limit fees and late fees. Also, make sure you add all loans and mortgages, this includes check cashing loans (I know these hurt but add them up anyway.) and students loans. Calculate how much is owed and how much interest is being paid on each debt.
Proverbs 27:23 Be sure you know the condition of your flocks, give careful attention to your herds…
What Did You Discover About Your Debt?
When you complete this exercise, think about what you discovered about your debt? Below are a few suggestions that should come to mind.
Pay off the current debt now!
Stop the cycle of debt by not acquiring more credit card debt.
Renegotiate terms of the credit cards or loans.
Do you need to take steps to renegotiate your credit terms?
Write or call your creditors to renegotiate the terms by asking to lower your interest payments. Ask for a new and lower repayment schedule, request a lower interest rate or just ask to settle the debt for a lower amount.
Close your eyes for a second and imagine what you would be able to do it if you took all the money that you were spending on credit cards, loans, overdraft payments, late fees, check cashing and used that same money to invest in stocks, for a business or your retirement where would you be now. Investments have a risk but you always loose with debt.