Not Sure Have Debt Problem

Perhaps living paycheck to paycheck but not sure what the cause maybe. Is it just inflation at the grocery store and gas station. This may be only a part of this problem but how to tell if debt is getting out of control.

Article Link:
https://www.bankrate.com/personal-finance/debt/signs-you-have-too-much-debt/ By Heidi Rivera

Transcript

Charles McDonald: 0:01

Hello, I'm your host, Mr. Chuck, a retired accountant turn truck driver, I reduce my debt in a relatively short period of time, debt reduction to achieve financial freedom takes commitment, confidence determination. Not sure have a death problem, perhaps living paycheck to paycheck, but not sure what the cause may be? Is it just inflation at the grocery store and gas station, this may be only a part of this problem, but how to tell if that is getting out of control. I'm gonna talk about some of the obvious stuff at least obvious to most people. But I'm also gonna go on more detail on how you really determine if you have too much debt. And there's multiple ways of doing it. I'm going to try to keep it somewhat basic. Because if you don't know what your debt is to start with, you're not going to be able to do the calculations to figure out if you have a debt problem. If you're living paycheck to paycheck, is your is your debt growing every month? Are you making the minimum payment? Do you not have a savings account or setting up an emergency fund? Those are some of the clues that may be telling you that you could have a debt problem, because where is your money going? I have an article link in my show notes. They talk about this very same project, this problem that some people may have warning signs, your debt could be a problem, not remembering how much you owe, and who off the top of your head. I'm not sure if that's a warning sign. I don't remember how much exactly by now, who am I and there's only two credit cards I use? Do you borrow money to make payments on other debt, that's definitely you have a debt problem. Rely on credit cards to make everyday purchases, making only the minimum payment due on your cards, which is not necessary. mean you have a problem. It could be that you have a debt reduction plan in place. So you're doing that in order to create your emergency fund, so that you can accumulate money to make big lump sum payments. If you're familiar with my debt reduction plan, you know what I'm talking about, and not able to contribute to your retirement savings are able and wanting to are two different things. A lot of people don't want to because they think they got yours. They don't have to. But the sooner you start, the longer you do it, the smaller dollar amount it takes to build up all substantial amount of money. So one of the ways you tell is this, figuring out your debt to income ratio. But in order to do that calculation, you need to know your monthly gross income, as before taxes, and any other deductions. And you need to know how much debt you're paying. When you're using this is not do not include the extra payments you may made on your debt. Only add up all the minimum payments. So if you have your mortgage, house line of credit, or car loan and bunch of credit cards, he got it pull it all together, put it in a pile and figure out how much do you have? Or how much are you required to pay every month? What's the minimum payment you have to pay and use those numbers to figure out your income to debt ratio. So you figure up all your debt, you divide your income into it, come up with a percentage, hopefully it's less than 100%, hopefully is a lot less than 80%. Because if it's those high of a percentage, you definitely have a debt problem. Maybe of one way you've noticed you applied for a credit card, and they're being declined. Or maybe you're getting a credit card and amortize a rate of say 15% but they give you a credit card, but a has a 20% interest rate. That could be an indicator that you your credit is not as good as you think it is. Or maybe you've been declined Looking for a loan. And they would say, well, because you have too much credit card debt, those are all signs you have too much debt. There is good debt versus bad debt. While there are many different kinds of debt not all as necessarily bad for your overall financial health, that that can increase your net worth over time or that adds was a positive return can benefit your financial future. Have or bad debt does exist and it should be avoided whenever possible. For example, high interest debt accrual by credit cards, payday loans, and high interest personal loans won't benefit your wallet in the long run. So good dad is buying a home and you borrow the money. Because you know, over time based on historic history, that it's going to go up in value. Most of the time now there may be periods where it drops in value, but it's in it's kind of regain go back up. To me, Baghdad is getting a seven year loan to buy a $75,000 pickup truck. The value of that truck is gonna drop significantly as soon as you drive it off the lot. And as soon as you get more miles on it, you're gonna be oh and more on it than what the value of the truck is. Therefore, you're not going to get your money back if you sell it. So that would be bad debt, credit cards all bad debt. Why does high debt matter? Having too much debt particularly bad debt, suggesting you may be living beyond your means. This can make you seem like a riskier bar or in the eyes of lenders, as is makes you more likely to default and someone with a lower debt load too much debt and the wrong kind of debt will stand in a way of making financial progress. He won't be saving for his entire retirement or emergency to the extent you should your credit rating or suffering if you're increasingly and debt it limiting your ability to get better interest rate impacting your auto insurance premium ability to rent an apartment or even get certain jobs. The more debt you have particularly bad debt, the more likely you're going to fall victim to the vicious that cycle in which you need to take out more high interest debt to repay your existing debt over time this pattering a borrower and prevent a eventually spirals impacting your credit and long term financial health. Plus more debt means your debt to income ratio is high, making it harder to get approved for loans or similar products in the future. So as your debt keeps growing, it's going to be harder and harder for you to borrow money. Also, your insurance rates will start to go up because the insurance company looks at how much debt you have. And they consider you risky, therefore they will charge you more. And same way with lenders if you try to get our car loan for say, your spouse or a second vehicle, whatever, they're gonna see you as a risk. And they're going to charge you if if you can get the loan, it'd be a higher rate of interest, what to do if you have too much debt. The first thing we have to do is determine if we have too much debt. So you have to get all your paperwork, keep all your monthly bills from all your credit cards, personal loans, everything that you pay, so we can add up what your minimum payment is for a month. And then you can look at your gross income for the previous month or that current month. And do the math to figure out what your total debt to income ratio that includes your home, your transportation, your personal loans, your credit card debt, and student loans, just to get an overview of what you're dealing with. Let's say that number is 65 to 70% of your gross income. That is why you're living paycheck to paycheck because most your money is coined to pay that debt. Now let's break it down. What is the mortgage on your home? That to income ratio on your mortgage? If you want to be super conservative, that should be no more than 25% but that should include your mortgage your taxes and your and your insurance on the home. Because that's what most people are paying in their escrow. So if it's 25 to 35% you're probably pretty good. If it's 55% you probably purchased a home you can afford and that is putting us drain on your financial budget, and now you have to cut back someplace else. Whether it's not having a new car, paying cash for a car, driving an old beat up car, whatever the case, you have to cut back somewhere else. Or you're gonna have to borrow more money to pay your living expenses. And if you're doing that, you definitely have a debt problem. Of course, then the article I'm referring to talks about get debt counseling, do it yourself, Alma, do it yourself, or I'm gonna, I'm gonna recommend that you take care, you got yourself in this problem all by yourself, you can take care of it all by yourself, Is this getting to know figuring out what you need to do? And now you decided that you have a debt problem. That's step one. And maybe you got all your debt statements together, or your credit card statements or personal loan statement, your car loans together, you're, even if you have to go online to the website, and then write it down on a piece of paper, who you owe, how much is your current balance? What's your minimum payment, what's the interest rate, and when the payment is due? What's the due date, and do that, for all your debt, if you do it in a spreadsheet, you'll be able to rearrange it and sort it any way you wish for future reference. But if you just write down on a piece of paper, if you don't have a lot, that will work, if you have 20 credit cards, yo, and it's going to kind of get out of control. So you probably should use a spreadsheet on a computer, some form or another. So once you do that, what's your next step? We have the have to have a plan. So the plan is, I want to pay off my debt? How am I gonna go to do that? How am I gonna go about that? Well, that's called a debt reduction plan, you identified all your debt, you've sorted out by your housing, your transportation, and personal debt. The goal here is we want to pay down the personal debt or the debt with the highest rate of interest first, so that we can say more money, and the faster we can get rid of that, the better off we're gonna be overall. So how you gonna do it? Well, the debt reduction plan is you gotta quit using credit. Number one, quit using your credit cards, II gotta start paying for everything from your monthly income, from your paycheck from the amount of money that goes into your checking account. If you're somebody that takes $500, and don't deposit in your checking account, because you don't want your wife or other spouse to know how much you really make. But you use that cash, to put gas in your car or buy groceries, those things you don't have to really account for. And a budget because you're the income is not included in your budget, therefore, where you spend it on, is not going to be included in your budget. Just a tip for those person doing that. I recommend 100% of your money go in your checking account, You wrecked the you account for it, and you budget for it. So, regarding quit using credit, we're gonna make the minimum payment on our debt. That's number two. Number three, we're gonna start a savings account or emergency fund. Emergency Fund is nothing more than a savings account. At the same bank, you have your checking account. That way it's easy to transfer the money from your checking to your savings. Or the other way if needed. The emergency fund is money you set aside in case some unforeseen, unforeseen event happens. Whether that's an accident and somebody gets injured, whether you have an accident in your car and a car gets injured or destroyed or you get laid off for anything that you had not planned for is what your emergency fund is for and nothing else. The minimum balance you need in there is$1,000. So got to build up your emergency fund to $1,000 all the time that you're paying cash for everything. When I say paying cash, you're using your debit card, or paying cash, you're not putting it a charge on a credit card, or you're not borrowing money to buy something, and you're making the minimum monthly payments on all the day. And then we take the money that we have, after we pay all our bills and everything, we then take that five bucks, we have$10, put it in a savings account and start building that up. Once you have your minimum of $1,000, you continue to build up your emergency fund, you continue not using your credit cards or using credit, he continue making your monthly your minimum payments until you have three or $4,000 in your emergency fund. Now, why am I doing that? The long because at the beginning, when you're struggling, is gonna take you a long time to get that first $1,000. The reason we have the emergency fund, it's okay, if some unforeseen event happens, we don't have to use credit number one rule to pay for it. Or at least we can greatly reduce what we have to pay for our credit, we're gonna continue to build it up to a minimum or out to maximum the say, of three to 4000. I prefer and I did 4000 When I personally did this plan. That way, when I go, that gives me longer time with more money in my emergency fund. In case something bad would happen. It gave me a little more peace of mind for a longer period of time. Now, once you got your bills paid down for a month, you have the $4,000 and your emergency fund, you made all your monthly payments, all your utility bills are paid your groceries are all up today, yeah, gas in the car. And now it's time to take that $3,000 The amount over the minimum of 1000. Take the 3000 and apply it to one of your debt. Unless you can pay one off, then pie the rest of it to the next debt you may have. And then you start that cycle over again, you make the minimum payment, you keep building up your emergency fund, again, until you have your maximum amount of 4000. And you then take the 3000 the amount over the minimum and apply it to your debt. Whichever one you want to pay off. There's various different ways to apply your money I've talked about in past episodes, he can pay off the smallest balance first, he can pay off the debt with the highest rate of interest, just come up with something that makes you comfortable. And then be consistent and do it. time in and time out. I'll be back in one moment was my final thoughts. If you're interested, and the software that I use personally, to reduce my debt, I have a link on my show notes, shop financial.com, copy and paste it. And it will take you to the website. If you are looking for any spreadsheets or other information that I talk about from time to time. I have links in my show notes. And I always have links to the articles I refer to and my show notes, plus other things like the happy draft.org which is a another organization that helps you with your debt. So feel free to go on my show notes and link and check out whatever I'm putting out there. I appreciate it very much. If you would like to make a contribution to help keep this alive, then I would gladly accept that. That's in my show notes. Thank you very much. Well, that sounds let's not that bad. So far. What you've done is identified that you may have a debt problem. You got it in front of you. You looked at all the paperwork, you separated, the credit card statements and your personal loans. They manage your auto loans and your mortgages on your home, if that's the case, so you have all this debt in front of you, you have a plan, you have a debt reduction plan, you're gonna quit using credit, you're gone to make the minimum payment, you're gonna start an emergency fund and start building that up, and then you're going to increase it above the minimum to a maximum amount, then you're going to take the difference between the minimum and maximum and apply it to one of your debt. And that happens over and over and over. Sounds easy enough, doesn't it? It is. But the problem is, how do you build up your emergency fund? How do you save the money into your emergency fund so that you can apply it to the debt? If you're just winging it, you're probably not gonna have a very successful rate. Because if you have money in your pocket, or checking account, you might be the type of person that like, Okay, I, how much money do I have I checked my checking account, okay, I just got paid yesterday, I have $2,000, I can spend $500, or grocery store, I can put $100 in each of my vehicles, I can go out and party or have do this, what I like to do on the side, when I'm not working. And then all of a sudden, all those credit card payments come due, and you're broke? And what have you done in the past? Have you didn't start using a credit card to pay for things? Until next pay day? If so, you can't do that no more, because you got to pay cash for everything. So how do you keep track of these things? That's the next episode. And detail. I'm gonna talk about tracking your income and all your expenses. And looking for things that you can do away with that you're paying for, that you no longer use, no longer interested in, or no longer need, that you should cancel, find ways to save money. And you can do that by tracking all the money that comes in your household. And all the money that goes out of your household. Then the next step, after that, is creating a budget T can see this month, how are you doing? Have you cut back your spending in any way shape, or whatever? Are you least keeping it maintaining at the same levels, so you're not spending more than what you should. And that's called a budget. Tracking is your lifeblood, your budget is your control center. And that's one on lifeblood control center. And with those two things in place, your debt reduction plan will run like clockwork, and you'll be able to look, how do I speed off paying off my debt? Well, I got to two things. Either you got to increase your income, or you got to reduce your spending on that saying you cut back to a lifestyle where you never do anything. And like I'm just gonna leave it at that. Because it's up to you. You control your life. If you want to be a minimalist, buy in only what you need for the next year or two years to get your debt paid off. So then you can enjoy life and do more things. But instead of paying for it with a credit card, you're paying for it with cash, that you're not borrowing the money to do what you want to do. And your life will have a whole lot less stress, because you're not going to be worried about that's gonna come to some day. How am I going to pay for it? You're not going to have that in your life, and you'll be much happier and glad you went through this pain to get your debt under control.