Roughly one in six Savers has selected paying off consumer debts as their wealth-building goal. That does not come as a surprise since, along with modest incomes, large consumer debts are the most important financial reason that people have trouble saving and building wealth.
The good news is that there is hope. With planning, discipline, patience, and maybe some outside help, almost anyone can reduce their debts and start to accumulate wealth.
Are you in trouble?
If you answer “yes” to any of the following questions, then you probably need to get your debts under better control:
1. Can you only afford to make minimum payments on your credit cards?
2. Do you worry about finding the money to make monthly car payments?
3. Do you borrow money to pay off old debts?
4. Have you used a home equity loan to refinance credit card debts, then run up new revolving balances on your cards?
Why too much debt is costly?
Borrowing more money than you can afford is costly in many ways. Americans spend well over $75 billion a year just on credit card interest and fees. That means that families who revolve credit card balances pay an average of $1,500 a year in interest and fees. If they saved that $1,500 in an account with a five percent yield, in 40 years they would have nearly $200,000! Taking on too much debt also lowers your credit score. That means you will end up paying higher interest rates on all your consumer and mortgage loans. A low credit score can also make it harder to rent an apartment, get utility services, and even get a job.
Too much debt isn’t just expensive. People with lots of debt often say they lack peace of mind. They worry constantly about paying off debts and making ends meet. The stress of these worries affects their family life, work performance, and other areas of their lives.
How to reduce your debts?
The first step in getting out of debt is to stop borrowing. To do that, you have to stop spending more than you earn. So, make a budget and cut out any expenses you can. It may help to cut up your credit cards or lock them away in a safe place.
While you are making a budget, figure out the most you can afford to pay each month to reduce your debts, then make those payments without fail. If you have debts on more than one credit card, either pay off the card with the highest interest rate first and work your way down to the card with the lowest rate, or pay off the smallest loan first and work your way up to the largest. Once you’ve paid off your debts, don’t give in to the temptation to start over-spending again. Instead, take the money you were paying each month on your debts and begin to save it. That will give you a financial cushion the next time an emergency strikes.
Where to get help?
If you are located at a military installation you can get assistance at the Family Readiness Center for free. Personal Financial Managers and Counselors are there to help and can be a great asset in getting a debt repayment plan in order. Another resource is MilitaryOneSource they also offer free financial counseling. Visit their website or call 1-800-342-9647 for more information.
In most communities, there are agencies that can help you manage your debts. The most helpful and most widely available are non-profit Consumer Credit Counseling Services (CCCS). CCCS counselors can work with you privately to help you develop a budget, figure out your options, and negotiate with creditors to repay your debts. Call 1-800-388-2227 to locate the office nearest you. There are also many Cooperative Extension offices in communities across the United States who offer workshops, home-study courses, and other services to help people manage their money, including their debts. Cooperative Extension offices are listed in the blue pages of the phone book under county government.
More Helpful Links:
Having an emergency savings fund may be the most important difference between those who manage to stay afloat and those who are sinking financially.
For additional information, click here.
The best investment most borrowers can make is to pay off consumer debt with double-digit interest rates. For example, if you have a $3,000 credit card balance at 19.8%, and you pay the required minimum balance of 2% of the balance or $15, whichever is greater, it will take 39 years to pay off the loan. With accumulating interest, you will pay more than $10,000 in interest charges.
For additional information, see the National Foundation for Credit Counseling website at www.debtadvice.org.
These savings will provide funds for emergencies, future consumer purchases, home purchase, school tuition, or even retirement (also see Tip #4). You can use one (or more) of your six discretionary allotments to automatically transfer funds monthly from your into a savings account. Saving automatically is the easiest and most successful way to save. What you don't see, you will probably not miss.
The people of the Defense Finance and Accounting Service (DFAS) take pride in serving the men and women who defend America. We take our contributions to national defense seriously. We work hard to fulfill the important fiscal responsibilities entrusted to us by the American taxpayers.
For additional information, click here.
The Thrift Savings Plan (TSP) is a retirement savings and investment plan for Federal employees and members of the uniformed services, including the Ready Reserve. It was established by Congress in the Federal Employees' Retirement System Act of 1986 and offers the same types of savings and tax benefits that many private corporations offer their employees under 401(k) plans.
A total of $10,000 may be deposited during each deployment and will earn 10% interest annually. You cannot close your account until you have left the combat zone, although your money will continue to draw interest for 90 days once you’ve returned home or to your permanent duty station.
For additional on the Savings Deposit Program, click here.
Military Saves collects information from members of the military who sign up voluntarily to participate in the savings program. The Military Saves site does not collect first or last names, but it does collect email address, installation location, installation name, branch of service, duty status, and rank/grade. Military Saves does not share personal information with anyone.
Karyn Hodgens, MA; Kidnexions Co-Founder
One of the many things I love about kids is their optimism. As parents, we don't want to crush that spirit! Then again, somehow we need to gently let our kids know that while a human tele-porter, for instance, isn't something we can help them build, maybe a pulley system from one side of the room to the other, is. It's about guiding their enthusiasm in a realistic direction.
Consider a recent Schwab 2011 Teens and Money Survey. A full 81 percent of teens aged 16 - 18 plan to choose a career either because they're passionate about the work or they feel it will help them do good for others. And that's great because we want our children to grow up and be happy in their professional lives. Besides, a happy workforce is a productive workforce!
But when it comes to the starting salary expectations of these teens, they're a little out of whack with reality. These teens expect to begin their careers earning $73,000. This is interesting because these same teens believe their current family income to be $70,000. If we do the math, we see that their optimism puts them $3,000 ahead of what their parents are currently bringing in.
It would be interesting to ask them what they think the median annual household income is. Would they be surprised to find out that it's $49,909? What makes them think that they can start off $23,000 higher than the median?
It's not about deflating their dreams. Rather, it's important that we encourage our kids to do and be what they want while setting reasonable expectations.
How do we do this? We talk to them about what they want to be when they grow up. And if they're not sure, begin with their interests. From there, we can help them figure out the financial outcome of following their bliss. Search engines are an easy way to find out starting salaries of different professions. If they end up with sticker shock, reassure them that their dreams are not out of reach—they're just going to require a bit more up-front planning. Tell them that by creating a budget and setting up an automatic savings plan, they'll become more savvy with their money, which will help them get more of the things they want in life. So it's not the career they choose; it's the money choices they make.
Enthusiasm can go a long way. But at the end of the day, without a solid financial plan and some realistic expectations, enthusiasm doesn't pay the bills.
Photo courtesy of Flickr Creative Commons