New Thoughts on Reducing Debt

As I mentioned in the intro, it is not typically about how much you make but more about how much you keep. Individuals and families across all income levels are letting expenditures control their financial futures. You would expect that today’s two income families would be experiencing a higher standard of living and greater financial security than the one income households of old. However, the fact is, most families are buried in debt. Credit card and unsecured debt has tripled from 4% of household income in 1981 to 12% today. Try these ideas for gaining control of expenses and freeing up funds for longer term goals.

Less focus on small tick items and more focus on big recurring expenses. The real issues today are exorbitant fixed costs such as mortgage payments, car payments, college tuition, insurance premiums. Reassess those big expenses – checks that you write once per month with little thought – and consider whether you are getting the most for your money. Do you really need two big car payments, an expensive private college over an acceptable public school, the oversized home, etc? You can turn your finances around very quickly by reassessing your needs and your priorities.

Avoid long term contracts to allow you more flexibility. In the long run longer contracts for satellite TV, phone service, gym memberships, etc. may cost you more than the more expensive short term contracts in terms of termination fees, regrets and services going unused.

Don’t trust your mortgage lender to tell you how much that you can afford. Mortgage lenders have come to realize that you can manage to make timely payments at much higher levels than is financially responsible for you and your family. Many people are house poor because lenders have awarded them mortgages that are beyond their means. Stick with a guideline of not spending more than 30% of your gross income on your housing costs (payment + taxes and insurance). This will allow you the funds necessary to pursue your other goals and not leave you living for your house.

Pay off your highest interest debt first then move onto the next debt. An exception to this may be if you have a debt that just irks you every time you write a check, it is about peace of mind also- pay off these nagging debts then move on to the high rate cards. Some individuals suggest that you get rid of the smallest debts first and move on to the larger ones to build some momentum and confidence. Though this may cost you somewhat in interest costs, if this keeps you motivated and focused by all means go this route. The benefit is that it does simplify the bill paying process by having fewer items to pay as you whittle them down to just a couple.

Each spouse or significant other should be 100% responsible for the finances. Ground rules should be established for spending and paying debts even though only one may be responsible for the paperwork. Without this responsibility, the more financially responsible person ends up nagging and controlling ending in unwanted conflict and tension. Don’t question spending as long as it falls within the household budget.

Related Links:
Money Matters
Interest Free Financing