Becoming Debt Free

1
Becoming Debt Free

• Marilyn Bischoff
• ExtensionFamily Economics Specialist

2
Laws of Financial Freedom

• 1. Manage Spending
• 2. Prevent Financial Emergencies
• 3. Become Debt Free
• 4. Prepare For Retirement
• 5. Teach Kids About Money
• 6. Pay Off Your Home Early
• 7. Build a Legacy

3
How much debt is too much?
How much debt is too little?
4
Close your eyes . . .

• Imagine having no monthly debt payments.
• Thats right zero, zilch, zippo.
• Is it hard to imagine?
• What would your stress level be?
• What else could you do with your income?

5
Let me ask again . . .

• How much is too much?
• Could you ever be truly financially free with any
  debt?

6
Laws of Financial Freedom

• 1. Manage Spending
• 2. Prevent Financial Emergencies
• 3. Become Debt Free
• 4. Prepare For Retirement
• 5. Teach Kids About Money
• 6. Pay Off Your Home Early
• 7. Build a Legacy

7
Take Control of Debt
Maria
Tom
Jeff and Sue
Why do you think these people are in debt?
8
Steps to Take Control of Debt

• 1. Stop using credit.
• 2. Assess the problem.
• 3. Find the money.
• 4. Fix debt problems.
• 5. Talk to your lenders.

9
Step 1 Stop Using Credit

• Stop
• Charging new items.
• Taking on additional credit.
• Increasing what you owe!

10
Step 2 Assess the Problem

• Debt is only the symptom.
• What is the problem?

11
Take Control of Debt
Maria
Tom
Jeff and Sue
-Laid off -After 4 weeks savings is gone
Good Jobs 5 cards 2 new cars 40,000 debt
Single mother Job with a modest salary/no
benefits Sons hospital bills 8,000
12
Step 2 Assess the Problem

• Understand how you got into trouble
• Job loss?
• Didnt get pay raise?
• House/apartment you cant afford?
• Health crisis?
• No emergency savings?
• Divorce?
• Spending problem?

13
Step 2 Assess the Problem

• Make a Getting Out of Debt list
• Name of creditor.
• Annual Percentage Rate (APR).
• Minimum monthly payment.
• Number of payments remaining.

14
Step 2 Assess the Problem
Make a Getting Out of Debt list, (continued)

• Total balance owed.
• Payment due date.
• Date last paid.
• Total amount already paid.
• Type of debt.

15
Step 2 Assess the Problem

• Is Your Debt
• Secured debt?
• Mortgage, vehicle, furniture
• Unsecured debt?
• Credit cards
• Family Debt
• Youre taking the 2nd step to
  control your debt.

16
Step 3 Find the Money

• Activity
• Divide into groups of 3 4.
• Brainstorm ideas on how to find money to pay off
  debt.
• Write down ideas.
• Share with class.

17
Step 3 Find the Money (2)

• Loan Consolidation
• Borrow from your home.
• Home equity loan
• Home equity line of credit
• This doesnt fix the problem, it just transfers
  it!

18
Step 3 Find the Money

• Change your withholding.
• Reduce your interest rates.
• Paper route with kids
• Deliver pizzas
• Wait tables at night
• Garage Sale
• Ebay

19
Step 3 Find the Money (3)

• Sometimes loans can be forgiven
• Perform volunteer work
• Perform military service
• Teach or practice medicine in certain types of
  communities or,
• Meet other criteria specified by the forgiveness
  program.

20
Step 4 Fix Debt Problems
Debt Repayment Plan Methods

• Debt consolidation (transfer)
• Importance
• High interest rate 1st
• Lowest balance 1st (Debt Snow-Ball)

21
Debt Consolidation Method

• Obtain one loan to pay off debt.
• Monthly payment may be lower,
• but . . .
• Disadvantage
• Debt is spread over longer time period.
• Will cost more in the long run.
• Psychologically destructive.
• This Method is Not Recommended

22
Importance Method

• Pay bills to keep family safe
• Food, utilities.
• Pay extra on secured debts.
• Mortgage, Vehicles, appliances, furniture
• Pay bills that preserve your credit rating.
• Rent/mortgage, credit cards, student loans
• Make min. payments on succeeding debts until you
  can pay more.

23
High Interest Rate Method(Power Pay 1)

• Pay highest interest rates first.
• Pay as much as possible on high-rate debt until
  its paid off.
• Make at least minimum payments on other debt.
• When highest interest rate debt is paid off, pay
  on the next highest-rate debt, etc.

24
(No Transcript)
25
Low Balance Method (Debt Snow Ball/Power Pay 2)

• Pay off the bill with the lowest balance as
  quickly as possible.
• Then roll that extra payment to the next largest
  debt the following month.
• Repeat, and watch the snowball grow!
• This is the Recommended Method

26
(No Transcript)
27
http//utahreach.org/ppay/
28

• powerpay.org

29
If you cant Take Control of Debt on your
own . . .
Seek Professional Counseling

• If you cant develop your own repayment plan.
• Help is available from
• Some credit unions, churches, Armed Services
  Family Support Centers, Credit Counseling
  agencies.

Professional Debt Counseling
30
If you cant Take Control of
Debt on your own . . .
Credit/Debt Counseling Agencies

• Choose a non-profit agency that offers
• Services in person (best for many people), by
  telephone, or internet.
• Educational programs, money management advice,
  and help with budget development.

31
How a Credit/DebtCounseling Agency Can Help

• Negotiates with your creditors.
• You repay debts with a debt repayment plan.
• You deposit money with the cc agency each month.
• Agency pays your bills.
• Youll probably have to stop using credit.
• Will take 24-48 months to complete.
• Read Where to Go for Credit or Debt Help
• Credit Cents Bulletin 841-8

32
Step 5 Talk to Your Lenders

• Decide how much you can pay on each bill. If less
  than Minimum
• Contact your creditor.
• Explain your situation try to obtain modified
  payment.
• Make contact as soon as possible.
• If bill is turned over to collection agency,
  creditors are unlikely to workwith you.

33
Avoid Future Debt Problems

• Know your income and expenses.
• Recommended Emergency savings for 3-6 months.
• Plan for major purchases.
• Needs and Wants lists.
• Remember, getting out of debt is not easy, it
  takes commitment.

34
Avoid Future Debt Problems Housing Debt

• Avoid becoming house poor.
• Recommended total monthly housing costs should
  not exceed 33 gross income.

35
When Buying a House

• Rule of thumb (Gross Income)
• 25 gt to monthly mortgage payments (principle
  interest)
• 33 gt to total monthly housing costs (including
  taxes, insurance, maintenance, improvements,
  landscaping, etc.)
• 36 gt of your income for total debts including
  the a house.

36
Avoid Future Debt Problems Housing Payment

• Example If Gross income is
• 3,000 per month
• Recommended housing cost
• For mortgage payment (25)
• 3,000 x 0.25 750 Max monthly mortgage
  payment.
• For total housing costs (33)
• 3,000 x 0.33 990 including taxes,
  insurance, maintenance, improvements,
  landscaping, etc.
• Max total debts (36)
• 3,000 x 0.36 1,080

37
Avoid Future Debt Problems Recommended Vehicle
Costs

• 10 gt for vehicle debt.
• Dont forget other expenses 5gt
• Insurance
• Gasoline
• Maintenance
• 3,000 x 15?
• 450

38
(No Transcript)
39

• Total balance owed

www.bankrate.com
40
More Web-based calculators

• CNN Money
• http//cgi.money.cnn.com/tools/
• USA Today
• http//www.usatoday.com/money/perfi/calculators/c
  alculator.htm

41
Rule of Thumb

• Only use debt for purchases that will appreciate
  in value.
• Home
• School
• Even in these cases you must use credit wisely.

42
Assignments for This Week

• Use powerpay.org or utahreach.org/ppay to
  calculate your debt repayment plan using the
  lowest balance 1st method.
• Calculate the percentage of your income that you
  are spending on cars and your home.

43
You can take control of debt!
Do you have questions Please complete the
class evaluation. Thank you!
44

• Authors
• Marilyn C. Bischoff, Family Economics Specialist
• Marsha A. Lockard, Extension Educator
• Barbara D. Petty, Extension Educator

45
Activity Ideas

• Dart board with credit cards.