We have been exploring aspects of personal finance that have to do with savings, growth, and the future. However, this week's subject, debt reduction, is by far the most important regarding any financial plan that you will create for yourself.
This is an extremely difficult, highly emotional, deeply psychological subject for some people. It makes many people want to hide, shut down, go eat something, turn on the television, go to a movie, or purchase something on their credit card. They will do anything other than look at their debts. How can you be honest with yourself without feeling so overwhelmed with the belief that the walls will crumble at any minute? How can you avoid becoming emotional—depressed, angry, frustrated, or panicked?
Let's examine where your original purchasing behavior and attitudes toward debt came from. Step One: Calculate the debt you are living with and the sources of that debt. I used to live in blissful ignorance about how much debt I was carrying. It was a lie I lived every day. The anxiety, fear, worry, panic, denial, and on and on, that I was experiencing were creating a huge block in my life—one I couldn't even acknowledge. I had to have someone force me to go through every drawer in my file cabinet, every paper, and every statement. She sat there while I wrote a list of what I owed and tallied it up. It was terrifying. This was a crucial moment in my personal and financial future because I was no longer ignorant. This was the moment when, if I so chose, things could change for the better.
Now, for some of you, this may seem like an awfully dramatic response. Good! Then simply do it. Open your files and write down your debt.
For those who need a little help, find a friend to be accountable to or to partner with. If you are resistant to doing it, ask yourself why. Sit down quietly somewhere and write honestly in a journal or on a piece of paper why you think you don't want to know. You'll find the answers if you take the time. Just remember, as you explore this question, that wonderful phrase, "Knowledge is power." All the feelings that come up, all the thoughts that arise to stop you, are there to keep you from gaining power. Just take the action, and own up to what you owe. It's just a number on a piece of paper. If you read on, you'll see that it is a number that, with a plan of action, will eventually be reduced.
Patterns to Peril
Step Two: Ask yourself, Where do I think my debt came from? Did it come from "necessity" or did it come from "want?" Sometimes, it's difficult to separate the two. We can often make a "want" a "necessity," especially if we are actors trying to steer our career with all the marketing tools we need—mailings, classes, etc. Michael O'Shaughnessy, author of Millennium Woman, said, "Actors want to finance their career on credit cards. You have to find a way to devote a 24-hour period to make the additional $500 to pay for new pictures. It's called creativity. It's just too easy to put the expense on a credit card because it's to 'finance my career.' What it gets down to is your own intensity level and your own discipline. It's a cop-out to say, 'I'm putting it on my credit card waiting for the big hit.' Use your ingenuity instead."
This is a hard one for a lot of actors because, without the credit card, they believe there would be no "new pictures." However, those $500 pictures on a credit card will easily cost you twice that or more if you don't pay it off immediately, instead adding it to the principal of existing debt owed. As O'Shaughnessy said: "There is this thing called Rule of 78—it's actually an algebraic formula on how credit card companies credit payment back on what is owed. A $3,000 card balance bearing 19 percent interest takes 39 years to pay off if you are making the minimum payment. That comes to $175,000 in the end."
You can see why it is so important to understand what you are doing when you make a purchase. It has become too easy in our society to whip out our credit card and "pay" for goods or services. This is not an act of payment if we are doing it unconsciously. Examine your thought processes when you intend to purchase something. They are behavior patterns established from an attitude about money that had its origin at a specific time in our lives. It is an attitude that has either been inherited from our parents and their money beliefs or stems from a particular event.
In my case, my point of origin regarding credit cards occurred when my boyfriend, at the time, thought I should purchase a computer. I didn't have the money. He said I should charge it, and it would be "free." Now, I don't blame him for that because I am responsible for my own actions. However, the results of that attitude, which I made my own, remained with me and became a part of my unconscious behavior regarding debt and purchases for many years. I continued to spend using this "free" approach, never aware of what I was actually doing. I was creating a beautiful future of ever-increasing debt.
The question is, what is your point of origin? Do you freely buy a pair of shoes for $100 that you couldn't possibly pay cash for while carrying a balance due on your credit card that you can't pay off? Why? Be honest. Maybe you know what you are doing and think you "should" be able to have nice things in your life and are angry that you don't have the cash to purchase them. You'll charge it now and worry later. However, the worries that will plague you later could become substantial.
O'Shaughnessy said, "Getting in consumer debt is crippling in a lot more ways than we think. It robs you of your financial credit strength—for mortgages and auto loans. You need the power of a good credit rating score number. You have to have a good score. Having low balances on consumer debt and making prompt payments will enable you to get loans. You will never grow financially unless you cut out all consumer debt from your life."
Step Three: Reduce that debt. Mark Pash, of Pash & Benson International, Ltd. clearly stated: "Credit card debt is death. The best plan, of course, is don't get into debt. Debt is caused by money that you don't have. It's a vicious cycle. Any time you pay off debt, you look good. You must reduce your most expensive and non-tax-deductible credit cards first. You should have your maximum debt on your home and no debt anywhere else. If you can borrow on your home, you can pull from the equity to pay off the car or credit cards. This is preferable because the rate is better and deductible. With a home loan, you borrow on the mortgage. You pay 8 percent, and after taxes it is around 6 percent or less."
What about those of us who don't own a home? How do we create a plan we can live with? The first step, mentioned in Week Two when we discussed budgeting, is simply and clearly emphasized by Sheila Moore of SJM Enterprises: "Minimize your expenses as much as you can to pay off your debt." Take a look at the budget you created. Did you make room to pay more than the minimum due on your credit cards? If not, where can you create the room to do so? How can you get even an extra $15 or $20 more a month to add to that minimum? You would be amazed at the difference this will make in the long run.
Credit card debt is not the only source of liability in our financial life. Take a look at the list you have from Step One. Prioritize the creditors by interest rate and balance due. As Pash said, you want to reduce the non-tax-deductible credit cards first. List any medical bills, personal loans, auto loans, student loans, as well as your mortgage, and any additional debt.
Create a table with the following columns: Loan Description, Principal, Regular Payment, Power Payment, and Estimated Payoff Date. List your creditors under the "Loan Description" category, and put the current total owed under the "Principal" category. Under the "Regular Payment" category, list what payment you make monthly to this creditor. The "Power Payment" category is where it gets interesting. Starting with the creditor you have decided to reduce first, take the extra money you have found or created in your budget, and put it in that category. For example, if your regular payment is $100 and you have found an extra $25 a month, put $100 under the "Regular Payment" category and $25 under the "Power Payment" category. You will be making a payment of $125 to that creditor. For the second creditor in this table you will be writing $125 under the "Power Payment" category; when you have paid off the first creditor you will then add the $125 you have been making to that creditor to the regular payment of the second creditor on the list. Continue this calculation with all the creditors in your table. Finally, as best as you can, fill in the "Estimated Payoff Date" category, taking into account the Power Payment that you will be making.
You are on the way to creating a plan for debt reduction that you can implement and succeed with. What you now have in front of you is your future. Responsibility, control, reduction of debt, and the sense of satisfaction that comes along with it will be yours. You can see where you are heading. It is no longer a mystery. Congratulations, you are on your way! BSW