Sunday, June 28, 2015

Getting out of Debt. My Story.

   Why do we have debt? How does one accumulate so much debt? How can we avoid debt?
   We all have our own reasons for getting into debt, staying out of debt, or like most people wanting to get out of debt. But even bigger then getting out of debt is how did we get into debt in the first place? Homes, vehicles, and student loans are for the most part the starting lines to massive debt. Of course 2 of these 3 are also what is call secure debt, meaning if you stop paying they can take it away. But student loans are unsecured, which means if you stop paying bill collectors will try thier best to force you to pay any way they can, usually by endless annoying phone calls and letter. 
   Often times like my family you try really hard to keep debt to a minimum. The 3 above are consider perfectly acceptable to most people. Some people choose to rent a home rather then buy, we decided to buy. Eitherway chances are you have at least 1 if not all 3 of these types of credit. Then your car breaks down so you get a credit card (an unsecured line of credit) to pay for the repairs. Unless you shred this credit card after its 1 intended use it sits in your wallet. And like most of us "I'll pay it off and I can use it for emergencies." A few things can happen here. 1 You pay it off diligently and quickly and never use it beyond true emergencies. 2 You make only minimum payments at a time wishing the bills will just suddenly stop coming.  3 the most likely,  you make a few large payments realize there is enough room on the card to buy that new TV you've been wanting, you find someway to convince yourself that replacing your TV constitutes an emergency, and now your card is maxed out. Then the refrigerator dies and this replacement is a true emergency. You can't use your emergency card, it's maxed out, but you have a well enough income to cover a second payment so you get a store card to replace the refrigerator. I bet you bought the larger, fancier model with water and ice in the door. You included delivery too. I did. You might have even picked up a few home extras you've been wanting but didn't have the extra for, I did that too. Once again you make a few big payments between the 2 cards, your really trying here. Just when you think you'll get one paid off the washing machine breaks again and your tired of fixing the old thing.  Fortunately, there is just enough room on the credit card,  but only if you go back to the same store. Over time your either making up more emergencies, having more catastrophes, or debating whether to pay the extra on the cards or pay the minimum and go buy a new dress. Yeah the dress won didn't it?
   I have 9 lines of credit right now, yes 9. My house; my car, which is bigger and cost more then I probably needed; The air conditioning/heating unit which with a baby in December was a must;  The pet vet card, another emergency; The appliance card; The store card becuase it was an emergency and I wouldn't have cash for another week; the computer card; the loan for the really expensive pans you thought you needed to have; oh and the actual emergency card that by this piont is a revolving use card becuase there are so many payments going out that there is no more extra left. But hey at least your being diligent now and you only use this one right? Every month? Its starting to seem as though no matter how much you place on this 1 card at the end on the month is maxed out again. But all the others are specific stores or company's so even if they aren't maxed you can't just use them anywhere.
   So you take the first step. You take every single card out of your wallet (except the emergency card, becuase that's what is there for right) and you file them freeze them hide them.  Out of sight out of mind, right? And then the dog has an abcess and needs to go to the vet,  so you think "I'm only going to get out this one card becuase it's really an emergency." Yes that's where I am.  Understandably, some things are true emergencies and you have to find a way to pay for them. But wouldn't it be better to have some back up cash instead of always paying interest rates on a card? Instead of having to get another card becuase the first card is already maxed?  Instead of paying more on debt then you can put into a savings account to begin with?
   Did you know debt consolidation company's take the payments of all your debt and have you place no less then the payments of those debts into a savings account instead of making your payments. Then they attempt to bundle your card with hundreds of others people's cards for the same company. Offer a low fat rate for a bunch of cards that aren't being paid on anyways, and split that payment plus fees to all of the card owners. Who then use the money in savings to pay back.  Until all your cards are paid off, and by the way canceled. Given they might be able to save you money and pay off your cards faster but that's only becuase they are working with thousands if not millions of customers at a time with thousands of lines of credit with huge balance totals. But I'm only me, and I do know from my own mom what a hit on your credit score that looks like in the end too.
   I know I could try to find a debt consolidation company, but I really don't way to go that route. I could try to get a debt consolidation loan but with out collateral (that's the secure loan thing I mentioned earlier) it's difficult to get a high enough loan with a reasonable interest rate. I did try to refinance the house in an attempt to pay off the cards using equity, but thanks to the recession there's is still no equity in my house. So it looks like I'm going to do this the hard way. The one man (women) against the world way.  The doing my best to be diligent without screwing it all up way...
   So... how many lines of credit do you have? Like I said I have 9, 2 are secure credit my house and my car.  The other 7 are revolving or open end credit, meaning unfortunately I can buy something else and charge it to that card if there is room and if it's to the proper company for some.
   Not including the house my debt weighs in at just under $30,000 a month with minimum payments of over $1000 a month.  My total monthly bills including this debt and my house, estimated gas and groceries is over $4200 a month with a monthly family income of roughly $5000 a month.  And unfortunately up untill now most of the extra approximately $800 dollars is spent every month on other uncalulated wants and needs or extra payments to this unwanted debt. This isn't my first time trying to correct my mistakes and trying to make ends meet. I have on many occasions gone over the bills and reduced spending in many areas, to include reducing the phone plan and cable bill. Removing bills and services that are otherwise unnecessary including a secondary life insurance plan. There are a few bills and expenses I could give up but haven't, like further reducing or ending phone and cable, ending our home security system, not getting my nails done every 2 weeks, or adjusting the air conditioner setting sacrificing a little more comfort for a lower monthly bill. But at least for now I'm going to work with what I have and reduce other excess spending to provide both a backup cash plan and pay off the debt.  Yes there will be times that I will need to use the extra cash. After all I have a husband 3 kids 2 cats 2 dogs a house and 2 cars. But the goal is to use the cash not the credit, and not reduce any more of our current luxuries unless absolutely necessary.
   So here's the plan. After figuring all of our monthly income and expenses I compiled a separate list of the credit I want to pay off. Though I'm sure I  made a few mistakes I used excel and wrote in formulas to figure payments and interest each month. Right now at minimum payments most of the lines of credit would take well over 2 years to pay off, with exception to my car which will be paid off in about 18 months at its current payments. I didn't include the house in this plan right now as my goal is to free up cash and the will take much longer even with extra payments.
   Prior to January when I first made this plan I was rounding must of my revolving credit payment up to the nearest 50 or 100 dollars. In total I was paying nearly $400 over my minimum payments across all the cards.  With little total balance improvement and a high cash shortfall at the end of the month often causing the reuse of credit to make ends meet.  At the time in my mind moving all of this $400 to 1 payment at a time would pay everything off faster and I should still have about another $400 for unexpected monthly spending. But I didn't take into account a child health emergency and lost time from work, though I did great budgeting for vacation. The past 6 months fortunately with exception to the 1 main emergency card, we have managed to avoid any additional spending on the credit. Unfortunately, I have also only been making minimum payments due to the unforseen expenses. Also, becuase I can't seem to get my husband past using the main card for an evening beer once in a while to avoid me having to record it in the check book, that one for now will remain a revolving line until I get a little further into this plan.
   On my payoff list I arranged my types of credit by balance due, though I think I want to look at it again and arrange by planned payoff. I choose to pay them off starting with the lowest balance mostly becuase I like to see progress and a lack of progress and hinder any plan. Small goals first big goals after.  I also when to my banks online bill pay system and set all of my bills both credit and none credit to auto pay, fitting with in our pay days to avoid unintended overdraft fees and reduce my ability to pay less on the payoff card then intented. To my surprise my first plan back in January with almost $400 a month extra on credit would have taken me just under 2 years to pay off. I figured the current  plan with only $100 extra a month and though we having been paying for the past 6 months my new plan will hopefully only run a little over 2 years. So I adjusted my bill pay to automatically pay my first planned pay off creditor at $100 over the minimum payment bringing that payment total to $125 while all others are still at only a minimum payment. I choose to only start at $100 over mostly becuase I need to have the extra cash for unexpected expenses while we try to cut unnecessary spending as well.  At any piont in time there is extra money at the end of the month it will go to saving and once my saving is stable at $1000 any amount left over each month will go to additional credit payments.
   So below is an image of the beginning of my payoff plan that actually takes effect July 1st 2015. My husband is current experiencing some temporary layoffs at work that will potentially cut our income by a few hundred dollars each month and he isn't getting the overtime we are use to but I have always figured overtime pay into extra spending and not regular income for bills. So things will reasonably be tight for the month of July but my goal at the end of this month will be all the bills are paid as planned and to put no less then $200 dollars into savings for true emergencies. Wish me luck.