Free Yourself from Debtor’s Prison

I was in my late twenties when I finally grasped a tiny bit of the Mystery of Mammon – the magic of money. It occurred to me while awaiting a payment for services rendered that the person who owed me money was waiting on someone who owed him money too. I realized that among the full-time residents of that small New Mexico town there was never more than about $5,000 in circulation on any day of any month. That money made its rounds every month starting at the top and ending right back there when the month was over. The only new money anybody ever saw came in by way of tourists from Texas, but that got immediately swallowed up by big bank accounts in somebody else’s town.

Many regular people have a certain psychological aversion to money, or to the idea of allowing money to rule their lives. The capital class depends upon this deep psychological aversion to empower the “money myth” they depend upon to amass ever more of it in their own coffers. Terms like “filthy lucre” and traditional religious prohibitions of usury speak to this deep uncomfortableness with artificial value, yet it is the general public’s uncomfortableness with artificial value that allows the capitalist system to operate.

People who are not comfortable with artificial value don’t tend to amass much money and are prone to use the artificially valued paper to purchase things that for them have actual value. A home. A reliable means of transportation. Nice clothes, big televisions, enough food to make themselves obese, computers, entertainment, toys… it’s what makes our consumerist lifestyles hum and it’s every bit as unsustainable – both personally and economically on the national level – as chemical-intensive force-farming. These days a college graduate begins his or her working career deeply in debt and remains deeply in debt for most or all of his or her life. And it never seems to matter how deeply in debt you are, there are at least 10 new credit offers in the mailbox every week to dig you deeper.

When the laws against usury were stricken in the early 1980s to allow for interest rates to regular consumers to hover between 30 and 50%, people didn’t stop borrowing. When home mortgage rates were near 20% people still bought homes, hoping to win the lottery before the “balloon” payment came due, or at least refinance when the rates came down. They didn’t come down for nearly a decade, and this crushed the middle class in a series of deep recessions that claimed a lot of homes, businesses and lives.

When the rates finally did come down, they only came down on the price of money to the lenders of money. For credit cards, home and car loans and other commercial credit, the price of money stayed high. During the “Greed Is Good” age, the combination of risky loans to foreign nations and fraudulent loan practices here at home have now brought us to the very brink of another great depression, where the US President is trying to broker a deal to bail out the lenders while saving half of the 3-4 million homes that are scheduled to be repossessed during the first part of 2008. An equal number of businesses are predicted to shut their doors for good during the next six to eight months. Bankruptcy rates are staggering and rising, and recent changes to the laws aren’t consumer-friendly.

So it’s a good idea even as we all prepare for the big end of the year holidays to take a little time to figure out where we are financially, where we’re losing and where we can win, and make some plans to get out from under as much debt as possible. In this and one or two follow-up posts we’ll take a look at some ways to dig yourself out of debt while still maintaining the survival basics and still living ‘the good life’.

Step I: Where Does the Money Go?

Take a little time to sit down with all your monthly bills and pay stubs, ATM receipts, credit card statements and checkbook. On a piece of paper list your income and your expenses. When they’re all right there in front of you it won’t be too hard to start categorizing where the money goes. Which of your expenses are necessary debt, which are unnecessary? Do you spend money frivolously? Do you eat out a lot? Did you really need 4 more pairs of shoes? How much cash do you fritter away on a daily basis? What do you do with your accumulated change?

If you have trouble remembering what you spend money on here and there during the month, try carrying a little notebook for a week and writing everything down. Multiply that by 4.5 and you’ll have a good estimation for the month. Carefully keep track of your method of payment for purchases too. Whether you used the credit card or the debit card, whether you withdrew cash at the ATM, wrote a check or used money transfers. Once you can see where your money’s going, you can also see whether you’re getting any real value out of it.

The idea is to cut back on what you don’t need to spend so you’ll have more to mitigate the high costs of what you do need to spend. I know some people who can’t imagine living without at least three credit cards, but simply having the money in the bank to pay cash for what you need will cost you much less. Paying off credit card debt will be the most important thing any family can do for themselves in 2008 to ensure they can weather hard economic times.

If you’re charging $100 a month on credit cards you’re paying about $120 for the privilege. If you can cut back that much on your buying you can use that same $100 to begin paying off the balance on your cards. If you decide you want to be credit card free in 12 months, add up your total credit card debt and divide by 12 (plus interest, which will diminish over that time as your debt gets repaid). That’s how much you need to be paying on those cards every month while NOT charging those new boots or that new snowblower.

At the end of the year you may find that you haven’t missed out on much by not using your credit cards to get yourself deeper in debt, and you’ve still got ~$120 a month you could be salting away in a savings account to cover big purchases or emergencies. Paying cash is always less expensive than financing, and getting into the wide world of thrift can earn you bargains galore without diminishing your life one bit.

There are some who may benefit from consolidating all their credit card debt under one ‘new’ card with a 6-month low introductory interest rate. That way all the interest goes to one party instead of 3 or 4, so costs you less in real terms. Don’t use the new card to go further into debt, use it as your means to get out of debt. Pay as much as you can on the principle during the first 6 months, and the increased interest in the last 6 months will be less because the principle is less. Big savings overall.

As the cost of home mortgages comes down (it’s now at half the 8% rate of our first mortgage), some with good credit ratings may want to refinance at the lower rate and “cash out” enough to pay off other debts. If the car is paid for, the credit cards paid off and cut up, the installment loan over with and the cost is tacked onto the mortgage at 4% you come out way ahead. Avoid high interest, adjustable rate and balloon schemes like the plague.

And only refinance for what you actually owe on the original mortgage plus your current consumer debt, even if your home is appraised much higher. Keep your equity for yourself even if the lender wants to assume all of it. Real estate may be a shaky market for a decade. 15 years is the most you’ll want to go for on the loan term, 10 is even better. Keep those payments as low as possible, pay extra when you can. An extra $100 a month (that you’re NOT paying on those credit cards) will shave years off the payoff date and save thousands in interest over the life of the mortgage.

More ideas will come in future posts, and if readers have any good ones I hope they’ll share!

Links:

Stay Out of Debt

Smart Money: Digging Out of Debt

How to Get Out of Debt

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