jenniferkobernik: (Default)
[personal profile] jenniferkobernik
If you still have debt, take heart! Soon it may be hyper-inflated away!

In all seriousness, personal debt is a pretty big liability in the quest for resilience. It takes up a lot of your slack, making it harder to quit your job or spend time doing more valuable things than working for money. It can tie you to a particular job or relationship, affect your mental and physical health, and put you in the precarious position of losing possessions or resources on which you depend if you become unable to pay it back. It makes it harder to dedicate resources to stocking up, making useful improvements, or investing in the future. However, I doubt that anyone reading this is thinking, “No, I love debt! I think I’ll keep as much of it as possible.” So, how do you actually get out from under it?

The first step, if you haven’t already done so, is to figure out exactly how much debt you have, and under what terms (interest rates, penalties, etc.). Many people who are struggling with debt avoid taking stock of it, because they are stressed and intimidated by the scope of their debts. There is simply no way to make progress like this. At the least, you must make a list of all your debts (credit cards, payday loans, IOUs to friends or family, student loans, bank loans, home equity loans/HELOCs, medical debts, car loans, mortgages, etc.), their amounts, and their annual interest rates.

The second step is to stop going into more debt. Really, this should be the first step, but I’ve found that until they have a list, many people actually do not seem conscious of some of the debts they are incurring.

Look through your list and see if any of these debts are likely to increase in the future. Credit cards that you are still using are the most obvious culprit here; anything which is incurring penalties or fees due to late payments are another; repeated payday loans are a third, and almost certainly the worst.

If you are taking out repeated payday loans, I realize that you are very unlikely to have much financial slack in your life, but you must find a way to stop or you will never escape your financial misery.

Comb through your credit card and bank statements looking for discretionary subscriptions or automatic payments, fees or penalties which could be eliminated, etc. Set up automatic payments or make a bill calendar so you don’t incur accidental late fees. If you get charged a fee for dropping below a minimum balance, figure out what that balance is and monitor your account. These are relatively minor things, but if you can put a stop to this nickel-and-diming, you may be able to free up a bit of slack for yourself.

Next, you’ll need to set up a basic budget to stop overspending, running out of money before the end of the month, and increasing your debt. There are plenty of articles out there on budgeting, so I won’t go into too many details, but here’s a basic overview:

First, figure out exactly what your take-home pay is every month. If your pay is variable (for instance, you run a business or have a side gig), things will be a little more complicated and you should probably search for articles on budgeting with a variable income. You could also choose a “safe” number to work with (an amount below which you are confident your income will not fall except perhaps very rarely), but don’t fool yourself, and don’t use an average.

Next, you’ll need to list your expenses. I usually start by listing everything that’s fixed and non-discretionary (mortgage, car payment if you must own a car to survive, insurance premiums, loan payments, etc.). This is relatively straightforward.

Then I list everything that’s variable and non-discretionary (electric bill, groceries, gasoline, medical visits, credit card minimum payments, etc). I typically use the highest amount I’ve ever paid on a normal month (for instance, my highest water bill excluding outliers like the time the pipes broke and it was three times the usual). This gives me some wiggle room so that I don’t come up short at the end of the month, which often happens if you use the average amount for a given bill; almost everyone who has debt/spending problems will spend the extra on months when the bill comes in below average and come up short on months when it’s above average.

Then come fixed discretionary expenses. These would be things like the cable bill, Netflix or magazine subscriptions, the cell phone bill (unless you are required to have one for work, in which case it is non-discretionary but could perhaps be reduced), housecleaning, memberships, etc.

Next, list your variable discretionary expenses. Restaurants, drinks, trips, entertainment, hobbies, books, clothing, housewares, recreational substances, etc. Occasionally some of these might be a genuine necessity (your one pair of work boots are wearing out, say) but don’t get too caught up in this. Most shopping is discretionary.

Finally, try to list any infrequent/occasional expenses (insurance premiums paid once a year, taxes, new glasses, insurance deductibles, car or appliance replacement/repair, holiday shopping, vacations, etc.) and divide these out by month to get an idea of how much you spend on these sorts of expenses. I usually pay for these out of a separate savings/emergency account rather than as line items in my budget (the money that goes into that savings is a line item in my budget, however). These expenses can be a little hard to get a grasp on, but try your best and refine over time.

Now, subtract all these expenses from your take-home pay and see where you end up. If you are spending less than you earn, great! Unless that seems not to match up with reality, in which case you probably missed something—chances are you straight up forgot something, underestimated how much you usually spend on variable expenses (I know plenty of people who think they spend $600 on food each month but actually spend $1,200), or didn’t account for the effect of a large occasional expense on your monthly budget. Go back through statements or keep a spending log to get a better idea of where your money is really going.

Once you have a budget that seems accurate, it’s time to make adjustments. You must bring your spending below your income, and you must free up some money with which to pay off your debts. I think discretionary fixed expenses (especially entertainment subscriptions) are the best place to start cutting. Once they are eliminated, they require no further discipline or monitoring, unlike variable discretionary expenses. Next, look to your variable discretionary expenses—you don’t need to eliminate them entirely, but you may need to reduce the amount spent in certain categories. Try to be realistic when setting limits. Then take a moment to see if there’s anything in your non-discretionary expenses that isn’t as vital as you thought, or perhaps can be reduced (shop around for cheaper insurance, move to a more limited plan, sell the car that requires a payment and share a vehicle, move to a smaller place, switch to a generic version of a medication, change your smartphone for a dumb phone, etc.). There’s no fixed amount you must free up, but obviously the more slack you have in your budget, the more quickly you can get out of debt. At the same time, if your budget is so austere that you don’t follow it, it’s useless.

You’ll need to create a plan for sticking to your budget—withdrawing the month’s allocation for variable expenses in cash at the beginning of the month and keeping it in envelopes by category (one for groceries, one for entertainment or eating out, one for gasoline, one for shopping, etc.) is a classic. If you run out of cash in that envelope, you’re done spending for the month on that category, unless you have extra in another envelope. It makes it easier not to unintentionally overspend, which is much easier to do on a credit or debit card. However you do it, you must monitor your spending and refine your budget based on how you do.

One issue that breaks many a budget is the unexpected, large expense—car repair, medical bill, appliance breakdown or damage to the home, etc. Typical advice is to create an emergency fund to deal with these expenses outside the normal budget. If you created a monthly estimate of occasional expenses as a line item in your budget, good—move that money into your emergency fund each month to build it up to a level you are comfortable with. You can also take advantage of any large, one-time sources of income (tax return, bonus, garage sale, etc.) to establish or increase an emergency fund. If you are consistently overdrawing your emergency fund and going further into debt, you must allocate more money to it and/or evaluate your spending to be sure it’s truly necessary.

All right, now that you’ve got your spending under control, it’s time to figure out how to prioritize your debts in order to pay them off. One popular method in personal finance, and one which I think makes a great deal of sense, is the “snowball method.” In this method, you make the minimum payments on all your debts except the first on your list. You put all the extra money in your budget toward this first debt until it is paid off, and then you add all the money you freed up by paying off the first debt to the minimum payment you’ve been making on the second debt until it is paid off, and so forth. As you work your way down the list, the amount of money you are able to put toward any given debt “snowballs” into an ever-larger amount.

There is much debate over how to prioritize your debts in order to pay them off. The most rational method is to pay them off in order of highest to lowest interest rate, but for many people, the most motivating approach is to pay them off from smallest amount owed to largest. I use a hybrid approach; I pay any that are emotionally or socially problematic first (for instance, a loan from your in-laws which is overdue and causing tension between family members), and then any that are especially small and easy to pay off (just for the satisfaction of seeing them gone), and then the rest in order of descending interest rate. However you decide to do it, make your list, throw everything you have at each debt in order, and don’t give up.

You may also want to investigate whether there is any way to reduce your higher interest rates. You might consider a balance transfer, consolidation into a lower interest bank loan, or simply calling your credit card companies to ask for lower rates (with the threat of a balance transfer as leverage). It is vital to run the numbers on consolidations and balance transfers, however—they are often time-limited with sharp rate increases at the end of the term and/or involve an initial fee, so you must make sure that you will actually save money by moving the debt, and that your spending is solidly under control, so that you don’t end up just shifting debt around without actually paying it off, and adding fees on top.

A final issue to consider is whether or not it makes sense to pay off large, low interest (usually secured) loans such as mortgages ahead of schedule. Many people believe that it is better to invest the money you would put toward these loans at higher returns rather than using it to pay off low-interest debt. This is highly dependent on your investment abilities and confidence, your risk tolerance, and what lets you sleep easiest at night. I personally prefer the freedom and flexibility of being debt free, but many people find similar security and freedom in having investment income instead of being dependent solely on their jobs. My personal preference is to pay off debt, and then to accumulate some savings, and finally to make oneself independent from one’s job, but your mileage may vary.

Well, there you have it! List your debts, get your spending under control, prioritize your debts, and put all your extra financial resources toward paying them off one at a time until they’re gone. Simple, but not easy!



In other news, I have just entered my second trimester of pregnancy, the baby and I are doing well (still nauseous, sadly, but well!), my husband is overworked from taking up my slack but also doing well, and all prayers, blessings, and well-wishes for the continued health and safety of our family are deeply appreciated!

Welcome Back!

Date: 2022-04-05 03:42 am (UTC)
From: (Anonymous)
Hey Jen,

Thanks for another witty and helpful essay! At the moment, debt is not a problem for me and my husband, but that's just the thing: "At the moment." Things can, and do, change in a heartbeat. It's so important to know where your money is going. Like others, the school of hard knocks counts us among its students. Our most recent bugbear was those little internet subscriptions. They can add up fast, and sometimes interest in them fades and it is SO easy to forget you are paying for them. Five bucks here and ten bucks there can add up. Plug those leaks!

Good energy is sent to you, your baby, and your husband daily. May you all be blessed.

Valerie
drhooves: (Default)
From: [personal profile] drhooves
Hi Jen,

For those in debt, it's the biggest thing preventing a higher level of resilience. It's a lesson I learned 25 years ago, and haven't been in debt (other than two mortgages) since. It was a huge stress reliever to live within my means.

A few points to add:

- bankruptcy - can be used for most debt except student loans. If you can get past the moral dilemma, and want a fast track to being debt free, this may be an option.

- cell phones - many companies lock you in to a higher monthly fee by (you) subsidizing new phones on a regular basis. It takes some research, but using an older or refurbished phone can save huge bucks, and discount plans are out there. $20 or so for unlimited text and talk is possible, even cheaper plans for those who dig around or don't use the phone much.

- mortgages - paying them off early is generally better, though interest rates are rising, making some "investment" products more attractive. Stocks are very risky, and bonds too. Do NOT refinance to simply get a lower interest rate. You "reset" the amortization clock. Review mortgage and principal amounts early in a mortgage versus later in the cycle to better understand this. Bankers are not your friends, and the interest is NOT evenly distributed across the life of the loan - it's frontloaded with the bank getting their flesh early on. Refinancing and debt consolidation may still make sense in some cases, but run the numbers to make sure.

Date: 2022-04-05 03:01 pm (UTC)
neptunesdolphins: dolphins leaping (Default)
From: [personal profile] neptunesdolphins
One thing I caught myself saying: "Why spend money when you don't have to?" When you think about it, why spend money unless you have a compelling reason to.

Thesis time...

Date: 2022-04-06 04:58 pm (UTC)
drhooves: (Default)
From: [personal profile] drhooves
There's no short answer to those questions. Look no further than .gov to see an example of how NOT to manage your finances. But I think there are several factors that result in people spending money they don't have, and living the high life, which have become more common over the last 50 years or so:

- culture of debt (keeping up with the Jones')
- easing change of credit standards, easier to get $$$
- The Long Descent - wages not keeping up with the cost of living
- more time elapsed now since the Great Depression - the generation of savers is shrinking, the generation of those experiencing poverty dying off
- lower education and life standards around finances - exponents anyone?
- impact of financial, educational and medical monopolies skimming GDP
- the rise of socialism/communism, .gov to provide security vs. independence of family and local lodges and other social institutions
- the export of inflation to other countries by moving jobs there
- housing as an ATM and investment vs. cost of essential need
- and many more...

It's been my observation that views on money and debt are unique to everyone. Two of my brothers are tighter with money than bark on a tree. I live for the now, in case I get hit by a bus. A happy medium is probably better. But once in debt, it can be a slippery slope with little to no slack. Living paycheck to paycheck can be just around the corner, with a health problem, car repair, major appliance failure or worse yet - job loss.

There is a racketeering aspect personal finances today. What should be closer to indentured servitude is morphing into modern day slavery. To repeat, the banksters are not your friends.

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Jen

October 2024

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