Debt

I don’t know about you, but I was taught to avoid four letter words. And debt is probably one of the worst! Breaking the habit of partaking can be tough, but worth it.

Debt begets debt. Seriously. Think about it: You’ve racked up $10,000 in credit card debt. Initially, you think, “No big deal; my interest rate is 0%. I’ll get it paid off in a year or two.” Meanwhile, the department store calls; you’re late on your May payment. Now you have to double up on that payment, plus pay a late fee of $29.00. That may not seem like the end of the world, until you get your next bill in the mail. Your credit card company bumped your interest rate from 0% to 29%. The debt you thought you would pay off in 18 months is now going to be hanging around (like a noose) for upwards of seven years!

That, my friends, is why debt begets debt. And even if you don’t get hit with late fees or a rising interest rate, whatever interest you are paying is keeping you beholden to credit card companies.

Types of Debt

Debt falls into two categories:

• Appreciating assets (like the debt you may acquire purchasing a house or rental property)
• Depreciating assets (debt you acquire when you purchase durable goods (cars, appliances, electronics, furniture, sports equipment, toys…) or nondurable goods consumed immediately or with a lifespan of less than 3 years (clothes, food, fuel, cosmetics, office supplies…)

As a country, we have built debt mechanisms to support purchase of depreciating assets with credit cards, car loans, and lines of credit. It is actually easier to get into debt on depreciating assets!

Debt (noun)

From Merriam-Webster Online:

1 : SIN, TRESPASS

2 : something owed : OBLIGATION <unable to pay off his debts>

3 : a state of owing <deeply in debt>

4 : the common‐law action for the recovery of money held to be due

Money Tool: Spending Report

Knowing how you’re spending your money is the first step toward getting out of debt, so you can pinpoint areas that you can reduce spending and divert funds to pay off your creditors.

Some banks and credit card companies generate reports that track the categories of your spending and allow you to analyze these expenditures by the month or even by the year. (See an example of a Spending Report in Appendix A.) This tool allows you:

1. The ability to review the history of your spending, so you can manage your future choices;
2. To use this information when applying for credit to demonstrate your beneficial financial behaviors;
3. To eliminate tension between partners while trying to communicate and reconcile spending;
4. To set up level-pay plans that anticipate your established spending habits.

Want or Need?

Does it make sense to go into debt to take advantage of a discounted sales price on a family vacation?

Here’s a way to reality-check your decision:

If you charge $1,000 at 18% interest/year and carry the balance for 5 years (including interest on the interest) you’ll spend an additional $1,287.76.

Is it still worth the discount?

Balance	Rate	Interest
$1,000	x 18%	$180.00 end Year 1
$1,180	x 18%	$212.40 end Year 2
$1,392.40	x 18%	$250.63 end Year 3
$1,642.40	x 18%	$295.75 end Year 4
$1,920.15	x 18%	$348.98 end Year 5

Total debt Year 5 = $2,287.76

Why We’re in Debt

According to MSN Money, the key drivers of debt expansion (before 2008, when getting credit became harder) include:

• Unusually low interest rates
• Rising popularity of Internet shopping, in which credit cards are the currency of choice
• A hot housing market, which has encouraged buyers to stretch for new homes
• Aggressive extension of credit to consumers with weak credit scores