Major debt paid off!

We just paid off our largest debt! 2 years ago we started with around $25,000 in debt, including a personal loan, student loan, and car loan. As of last night, we have paid the personal debt - the largest chunk - and have shuffled the payments to the remaining ones. We now owe $6,000 on the car and $2,000 on the student loan, putting us on schedule to eliminate it all within the next 4 months.

With this milestone reached we are very excited!

Why did you take the ARM?

Countrywide is getting criticism for not permanently fixing the rates of several hundred thousand homeowners in risk of foreclosure. Part of this is being fueled by a protest group, NACA (or the Neighborhood Assistance Corporation of America).

If you take a look at their site, you will see all kinds of emotional statements designed to make you sympathetic to their cause, things that have nothing to do with subprime borrowers in foreclosure. Information such as "Chairman of Countrywide, one of the leading companies, is reported to have earned $22 million per year" seems to encourage the thought that because the CEO of a multi-billion dollar corporation is rich, he should forgive people who haven't been paying their mortgage.

These “geniuses” and their companies actually compensated their brokers and agents more if they marketed and closed loans containing abusive yield-spread premiums, low teaser and high re-set rates, and other costly loan terms and conditions

In other words, it worked like just about every commission based sale out there. Shocking that the company would give higher commission for a loan that makes the company more money.

Why on earth would the rates for these loans be so high? Why is lending to people with bad credit and lots of debt result in high rates? They answer it themselves: "almost one in every five subprime loan goes into default", yet they don't seem to make the connection. To be profitable, a bank has to get paid for the money it lends out. If a group of people tend to default at higher rates, their interest rate will be higher to ensure the bank doesn't lose money on those loans.

Modify every loan back to the rate at which these borrowers were or should have been qualified, and everyone wins. People can keep their homes and avoid financial ruin, and lenders can still receive payments on mortgages that borrowers can actually afford.

Here's the problem, NACA, they weren't qualified for payments they could afford. They were qualified for high interest adjustable rates, and that's exactly what they got. It is not the banks duty to set payments that someone can afford, it is the borrowers responsibility. What you are suggesting essentially shafts every single American paying a regular rate on a 30 year fixed.

These “genius” profit barons have pretended to create unparalleled homeownership opportunities for working people and families. Instead, they have preyed upon the most vulnerable, often based on a low credit score -- people with marginal credit and limited resources who could and should have obtained homes through fair lending practices. They charged people interest rates above 10% and often enticed them with teaser rates of 6% and less for the first two years.

The banks took a huge risk by putting these people into homes with teaser rates, when all the statistics showed that there was a high probability of default. To make such a venture profitable, they needed to charge higher interest rates later in the loan. These people could have used that time to rebuild their credit, save up to afford the new payments...anything. Instead, they rode along and when the teaser rate expired, cried foul. They can't refinance because, surprise, their credit still isn't any better.

Bottom line, it is not the banks responsibility to create a loan that is affordable to the borrower. Their only interest is in creating a loan that is profitable. It is the borrower's responsibility to determine whether that loan is affordable to them or not.

Banks don't want to foreclose. It costs money to foreclose. They end up with a house, which in all likelihood has been trashed by the deadbeat homeowner, that they have to sell for cheap at auction. They want you in your house, paying your mortgage, paying that interest. But because the group you fell into, that bad credit group, is a high risk and will default in higher numbers, your rate is higher in order to make up for the other deadbeats who do foreclose. Why is this so difficult to understand?

At the same time, some acknowledge that regardless of whether their loan is modified, some borrowers could lose their homes anyway because their financial situation is otherwise precarious.

"It all comes back to affordability," said Richard Pittman, housing services coordinator for ByDesign Financial Solutions, the Los Angeles branch of the Consumer Credit Counseling Service (CCCS). "As recently as 12 months ago, some were refinancing themselves out of their problems. A lot of them were just kidding themselves. They were fine through their second refi, but the third refi caused them problems."

Yes, I have read that a good number of these people in subprime loans in foreclosure, perhaps even the majority, are refinances. They refinanced equity to pay off their debts. This is the consequence of such a debtors lifestyle.

What is missing here? Case studies. No one appears to be asking these homeowners one very important question: "Why did you take the ARM?"...I would be very interested in hearing their answers.

Economists fear consumers may start spending within their means

Here's a depressing AP article about consumer borrowing habits. The Christmas shopping season is already upon us, with retailers begging you to come in and spend money you don't have. Home equity loans are dried up, leaving credit cards as the most accessible way to borrow your way into oblivion. As a result, revolving credit debt is up-up-up! That's not really what depresses me. What upsets me is that the "experts" out there, the economists, whoever they are, are completely happy with the outcome.

Now that Americans have sucked all the equity out of their home, they're diving right into higher-interest debt, with the credit card industry. It's kind of like jumping out of a pool with a couple sharks and into a pool with a dozen piranhas.

During the housing boom, when home sales were hitting records for five consecutive years and prices were soaring, many homeowners tapped the rising value of their homes to finance increased spending by taking out home equity lines of credit.

However, now that home sales are plunging and double-digit increases in housing costs are a thing of the past, home equity lines of credit have become less available. That has pushed consumers back to credit cards to finance their spending.

Hey, heaven forbid people start spending within their means. Let's increase spending even though we aren't increasing income. Let's fuel big companies by borrowing more money. Here's a question, brilliant economists: What are we supposed to do after the home equity has dried up and the credit cards are maxed out? How exactly will we still be fueling economy when we're all freaking broke and three-quarters of our paychecks are getting sucked up by interest charges?

Analysts are watching closely to see if the steepest slump in housing in 16 years could have a more serious impact on the economy through the wealth effect

I had no idea what the wealth effect was so I looked it up.

One problem, home values don't make you more or less wealthy unless you plan on selling the house and living on the street. Instead we get this "perception" of wealth by letting people take out loans.

the fear is that falling home values could cause consumers to cut back on their purchases. Since consumer spending accounts for two-thirds of total economic activity, any serious cutback in spending could lead to much slower economic growth.

GOOD! Fear? Are these experts idiots? How does it help our economy if we're all broke! People need to start paying off their debts and living within their means. Then when they have real capital they can go spend it.

FRB G.19 Release

Debt horror story

MSN published a letter to the editor, a real debt horror story. Just in time for the holiday season. It hit close to home because my own parents did not manage their finances very well.

Her parents have gotten themselves into a situation where I just don't see an easy resolution. With $71,000 left on their mortgage, they refinanced and took out $100,000. … They did it again and invested $100,000 in a business venture. ... They then decided to take out a home equity line for $52,000. They have over $20,000 in credit card debt at 16 percent. They put their car up for collateral for a loan for $15,000. They borrowed $22,000 from a family friend, $9,000 from me, and who knows what else. ... They have no life insurance, $18,000 in one 401(k), and are nearing retirement 58 and 62 years of age. Their bills are twice as much as their income.

Adding it all up, we see that they have a mortgage/equity loan of $323k, $20k on credit cards, a $15k car loan, and $31k in personal family "loans". All told almost $400,000 in debt. These parents, in the 50-60 age bracket, seem to be in a generation of debtors who embraced credit and leveraged everything to support an inflated lifestyle. Unless their house is worth half a million dollars, they have little hope of recovering, and zero hope of retiring - especially when you look at their paltry retirement fund.

It breaks the heart to hear about such a couple, especially when you can relate. "This could be my folks!"...but it is a hard lesson that we need to pay attention to, so that we don't end up in the same abysmal place.

I might need to get divorced

I had a disturbing conversation with my wife the other night. We were talking about the results of this situation with the medical bills and about our progress on paying down our debt. We threw the idea back and forth of paying off my student loan before her car loan. Now interest-wise this makes no sense, but balance-wise it does. I can pay off the student loan in one big lump payment if I focus all our debt repayment on it for one month. That would kind of simplify things since I would have one less debt to worry about, and would be a nice feel-good victory. The extra interest we would end up paying on the car loan to do this would be negligible. She agreed. Then she gave a reason why she agreed:

"Well, the car loan isn't really debt anyway."

I was floored! What? Not debt? I need to tell the bank to stop charging us interest. She stood her ground; a car loan is not really debt. So I ask her why she thinks a car loan isn't debt.

"Because everyone has a car loan."

I stopped to think about this. Does everyone have a car loan? Of course not. Does anyone need a car loan? Of course not. Very few people absolutely need to buy a car that second...they could easily just start saving a payment and buy a car in a few years. Most people buy a new car when theirs starts having problems, or they just get tired of it. That's certainly not a necessity to borrow money. Rarely do people literally run their car into the ground until the engine implodes and it refuses to move another inch (and those that do have probably been saving for a new car anyway).

Yet there is the mentality that everyone has a car loan, that everyone needs a car loan, and that it isn't really "debt". Why is this? Is it because everyone around us is so addicted to debt that one little car loan doesn't seem like a big deal? Has the automotive industry itself so well marketed buying a car on time that it seems like just another standard process in buying any car? Or are we just so entrenched in this culture of instant gratification that saving money for 5 years for a single purchase just seems outrageous and out of this world?

Followup to unexpected medical bills

On September 7 I revealed a few medical bills that were put on our credit card. We had some hard decisions to make, and my wife and I had different strategies for tackling this new debt.

Obviously we were not going to carry a credit card balance, it had to be paid off. This left us with 3 options: tighten our belts and attack it as best we could, use a portion of our emergency fund and then repay ourselves back slowly, or use a portion of our debt repayment to pay it out. Her idea was to use the debt repayment (as that is what it is technically for) and I wanted to use the emergency fund, seeing this as an emergency.

Our compromise was to pay as much as we could during the month and see what was left over at the end, then use the debt repayment amount to pay it. Here we are at ground zero and it stands as thus: out of the $1,700 card balance we have paid off all but $400 just by saving a little extra and putting whatever we can into it (and some generous help). It's been tight. But now out of our debt repayment (what we pay extra towards the principles of our debt) we need only use $400, still allowing us to put $900 towards other debt. In the end, I think we both feel pretty good about this result.

The Black Death of the 21st Century

Here's an interesting article from MSN about a recent trend showing up in the wake of recent foreclosures. Mrs Rossman sums it up perfectly (emphasis on the two conflicting concepts added by me):

They opted to let their mortgage payments go while keeping current on all their cards. "I would rather be late on one thing than on several things," said Rossman, who works at a local church, pointing to the "very high interest rates" on their cards and the need to keep accessing credit. "But we can't just incur debt forever," Rossman, 24, also acknowledges. "We're cutting coupons, eating very cheaply and doing everything we can to stay within the budget."

Mrs Rossman gets an F for logic; better to not pay your mortgage than not pay your 6 credit cards. Late on 6 debts is worse than being late on 1 debt right? You are reading this right. This family (with a new baby no less) has decided to stop paying for their house so they can keep current on their credit cards. Why? Because they need them, and they can't stop spending.

The proliferation of no-money-down home loans over the past few years, coupled with the current housing downturn, is giving rise to a new mentality: People will risk losing their homes while doing everything to keep their credit cards.

Credit card companies are ecstatic, of course, because not only does this ensure more profit at the expense of the consumer's security but it opens a whole new market for them. Yes, right when we have ample evidence (via massive foreclosures) that lending money to people with sloppy credit or little income is a bad idea, credit card companies are targeting just that demographic.

As people such as Delana Dowdy in Darby, Mont., found out, falling home prices and tightening credit have made it harder to withdraw home equity to pay off debts such as credit card bills.

"The appraised value (of the house) didn't come high enough to consolidate our bills," said Dowdy, 36, who runs an antique store. Right now, she's behind on both her mortgage payment and card bills.

See, it never occurred to these people to just stop spending beyond their means, they are disappointed that they couldn't sign up for a new loan with some nice home equity to pay off their existing debt. As if that would be some kind of solution?

Teesa Rossman and her husband bought their house for about $135,000 two years ago with no money down. But a subsequent -- though temporary -- job loss and the birth of their first child have strained the Rockford, Ill., family's finances in recent months. Just last month, the couple found it impossible to pay all their bills and had to choose between making payments on their mortgage or their credit cards.

Why would you choose to keep a credit card company happy (and fat) rather than pay for your home? What will they do when they come home and find the locks changed and all their stuff on the sidewalk being picked through by their neighbors?

I have a reason. The same reason why a homeless man will buy a bottle of booze instead of a sandwich. Addiction. The people mentioned in this article and those like them are addicted to credit. They are addicted to creating their own lifestyle regardless of the cost, they are addicted to the materialism and the consumption of "stuff". Spending money makes them feel good, makes them feel successful, and gives them a false sense of security. What happens, then, is the music stops and they are scrambling for a chair, clipping coupons and eating Ramen noodles, but the one thing that put them in this situation - their insatiable need for credit - is the one thing they can't live without.

Credit addiction is the Black Death of the 21st century.

Newflash: When you borrow money you have to pay it back

What do economists think of the recent credit squeeze? Everyone is waiting for the rising foreclosures and sinking bad debts to trickle down to everyday consumers. Will we experience another depression? Will bread cost $10 a loaf?

"For the past 25 years, America has experienced a period of rising consumer debt," said Steven Fazzari, an economics professor at Washington University in St. Louis. "Up to now the high debt levels have had a positive influence on the economy. In fact, it was a stimulus to economic growth. But now it's likely to become a source of economic contraction."

How is increasing debt a positive influence on the economy? Sure, if you double your income by borrowing money you don't have, you can spend more. Is that good for the economy? Ask a marathon runner if it's a good idea to drink a gallon of coffee and start out in a blistering fast run.

"Our research suggests that we're facing a much more serious problem due to our consumption habits, that could have a much bigger impact,"

When you think about everyone who refinanced in order to cash out equity in their homes, they have been spending money that they didn't really have. Now their equity is gone, they can't pay back their loan, and the supply for their spending surplus is dried out. Now they have to live on their income alone, plus pay hefty monthly payments on all that debt they accumulated. It's no wonder they won't be spending much elsewhere.

"What will people do when offers for new credit cards don't show up in the mail three times a week? People won't be able to simply pay off old loans with new lines of credit. They'll be forced to service their debt, if they can."

Perish the thought.

Can you become too obsessed with your debt?

Probably.

So my wife and I were sitting down last night discussing a few of our current money problems. Namely, a couple a medical bill forced us to dip into our emergency fund and we have a follow-up that is going to cost us again. We still haven't replenished our emergency fund, mainly because I haven't taken our debt repayments to reimburse it. Instead, I've been nickel and diming the fund to slowly bring it back up - using any spare income we have.

Needless to say, our fund is not back up to $2,500 yet. Actually, it is $1,900 now because of that bill. This new bill will set us back another $600. Ouch. Not a good month for the emergency fund.

Of course this discussion lead to how we are going to repay our emergency fund and pay our upcoming medical bill. We have very different approaches.

1) Her plan. She wants to take our debt repayment amount (about $1,200) for this month and pay these medical bills with it. That will of course cover the whole thing and bring our emergency fund back to where it should be, but it leaves us with little extra to put into the debt (not including the regular payments - our debt is a closed term loan and a student loan) for the month of September.

2) My plan. I want to pay the bill out of the emergency fund and slowly build it back up out of our discretionary income without reducing our debt repayment amount.

This lead her to the following conclusions about me:

1) I am too obsessed about repaying our debt.
2) I am wrong.

I don't like the idea of using our debt repayment to pay these medical bills because I feel that's what our emergency fund is for. I don't see the debt repayment as optional. In reality, this would only set our goal of being debt free back a month. Not the end of the world.

This also lead me to once again showing her a simulation of our debt payoff plan, how much we are sinking into this debt, and how wonderful it will be without debt. None of this affected her conclusion that I am wrong.

So, we compromised. We will wait it out until the end of the month and put as much as we can into the emergency fund to bring it back to snuff and save extra for the upcoming bill. If we're short, we'll use a portion of the debt repayment.

Living like a king - when you're not one

Tricia over at bloggingawaydebt.com recently posted a link to an article in a Kansas newspaper about a couple deep in debt. This couple has 1 kid and a second on the way. They are only 24 and 26 and already in almost $100k of debt. Their total debt, including their mortgage, is $187k.

The question this couple has is

“How can we get caught up with our bills and get our expenses together to start saving?”

and the answer, apparently, is

“Reducing your big tax refunds will almost correct your negative cash flow. But cutting expenses and paying off credit cards will be critical for longer term success.”

What? What kind of useless advice is that? This couple is completely broke and in debt. Adjusting their withholding isn't going to help much. Worse, they sugar coat their situation by claiming a net worth of $24k. But when you look at their "assets", they include $55k of "stuff" and $150k in home value. Though we don't know how they calculated their home value, the market is tanked. And the stuff? I guarantee they could not liquidate everything in their house and raise $55k at a garage sale, unless they have some seriously valuable antiques or collectibles.

How much do you want to bet they have a big plasma screen TV? They have only $1k in actual cash and $1k held up in a retirement account. They have $23,000 in car loans with cars supposedly worth $25k.

I think this family has a problem with living beyond - way beyond their means (all this debt was accumulated before they were making $60k/yr, and she has yet to finish school). Sell the cars and buy small older ones, sell any expensive appliances or electronics, cut up the credit cards (and try to find lower interest balance transfers if their credit isn't already trashed), and forget about saving. You've got a small emergency fund, you have negative net worth, you're still young. Get those credit cards and the personal loan paid off, then start saving a tiny bit for retirement while you attack the student loan. Then save up for a car and buy one with cash. But most importantly, stop living like a king.

Suddenly it's all clear

So my pond has been a monumental struggle, and it seems like everything we did could not help. It was just dirty, cloudy, and mucky. Our solution was to just empty it and start over. We did water changes, vacuumed it, threw money at it left and right with chemicals and cleaning tools - it was exhausting! Then this morning I woke up and it was completely clear!

I thought this was so much like getting out of debt. You struggle, throw money at it, get frustrated, make mistakes, sometimes just want to throw in the towel and start over...but eventually after all that work, you'll wake up and it'll all be clear!

Hard work does pay off. Becoming debt free is hard work. You are going to struggle. It is not going to be fun. But the end result? It is all worth it.

Embracing the debt culture - auto financing

I think financing an automobile is absurd. This is my opinion after having dealt with financing vehicles myself and currently being indebted to a financial institution for my wife's car. Financing a car, let alone financing a new car, doesn't add up. You pay more for the price of a purchase that is constantly depreciating. By the time its done depreciating, it's nearly worthless and you've spent thousands of dollars while paying interest on top of it to a bank.

There are 2 winners here: the bank and the dealership. The dealership wins again when you trade in your $30k car for $10k and they resell it for $13k!

But, consumers are more than willing to accept these terms in order to get into a new car. In fact, they are accepting even worse terms than our parents did. Compared to this, spending $500 on "rust-proofing" sounds like a good deal.

Buyers are paying more, extending loan terms and making smaller down payments, according to a recent study by the Consumer Bankers Association. Many buyers are also wrapping old loans -- for vehicles they haven't yet paid off

Way to go consumers!

According to this survey, 60% of buyers are opting for loan terms greater than 5 years. That's a staggering number. The average loan is 65 months. That could mean about a thousand extra in interest over the whole loan. Ouch!

Worse, while car prices are going up, down payments are going down. 1% was the average this year, or $3,000 on a $30,000 car leaving you with $27,000 financed. That must leave the bank salivating. Since your car probably depreciated more than that just by driving it off the lot, you're upside-down in the loan before you even park it in your garage. This also means when you turn it in, you'll probably be financing your old car along with your new one. The average amount a car buyer is upside-down when trading in their 2005 clunker? $2,600. I think we can safely say that 1% down payment is going nowhere towards the principle of the new vehicle.

It gets better. Apparently blind to the subprime mortgage crisis, banks are lending big loans to people with worse credit. Maybe the departments don't talk to each other? Or it could be that Americans are obsessed with their shiny vroom-vrooms, often skipping house and revolving credit payments to pay for shiny.

I was also surprised that a whopping 21% of people lease - ie, rent their cars.

"Overall there's a lot of debt," says Elmendorf. "And if you add that to credit card debt, and home equity debt, consumers are pretty tightly leveraged these days."

No kidding. I wonder what percentage of consumers just pay cash? I bet it's not very high. I often hear a car loan is, along with a mortgage, "normal debt". I guess normal is "leveraged", ie, "broke". When you think about the numbers, paying cash for a used car just makes sense.

Auto Loan Problem Revealed!

Mystery solved! The finance company no longer had my insurance information. My insurance company no longer had my finance company information. The declaration page didn't get sent for the insurance renewal, and the finance company charged me their own insurance.

The interesting part is that this isn't at all reflected on the payment. The numbers simply don't add up. If I had not checked it, found the problem, called to determine why the money was missing, and called both companies to get the paperwork back in order, I would have continued to be charged this extra insurance while already being covered. I do not know how long the finance company would have done this before bothering to notify me that there was a problem, but I am guessing that they never would have.

In fact, this happened before at the beginning of the loan, but was apparently corrected after 2 months. However instead of taking it from the monthly payment, as they did this time, they just tacked the insurance (I did not ask why their insurance was $2,200 a year) onto the balance of the loan. Supposedly I had not been charged interest during those two months, but I have asked for a full history report so I can check the math myself.

Hopefully this will be taken care of by the end of the week. I have updated the information with my insurance carrier, and with the financier, and had them fax the declaration. It should take 24-48 hours for the fax to go through, plus another 2 days for the financier to update their system and make the correction. I also requested a hard copy be mailed to me so I can fax it to the finance office myself.

Then, I will be having fun all next week checking the account to make sure the remainder of the payment has been properly applied.

So the lesson here is always check your payments, review your statements, and don't finance stuff!

Mismanaged Auto Loan

As if I needed another reason not to want to do business with loan companies, my wife's auto loan has been misapplied this month. I have vowed never to take another loan or finance a car again. When you pay in cash, you aren't dependent on some guy in an office somewhere entering your information into their computer. The more businesses you work with, the more problems you will inevitably have. You will always have human error.

Since I hate my debt and I distrust companies, I always double check my payments and make sure the companies are doing their jobs. Since I started to handle my wife's auto loan, I began checking the deposits made each month. The payment I just made has a problem, a big problem. Out of a $300 payment, only $175 was applied to principle with a $30 interest payment. $95 vanished.

So I went back and looked at all the payments all the way back to the origination of the loan. No other problems. However, I noticed another huge issue.

2 months after she signed her loan, the finance company increased her balance by over $2,200, then credited the $2,200 back 2 months later. For 2 solid months (59 calendar days to be precise) she was being charged interest for an artificially inflated balance. I ran the numbers and determined that during that time, they overcharged her around $25 in interest!

We are calling them this afternoon to try to get this straightened out. Certainly people make mistakes, but knowingly collecting interest that isn't owed without informing the customer of the mistake? That sounds negligent to me. And disappearing money? The numbers don't look like they could be a simple typo, and its quite possible an employee somewhere pocketed it.

Always scrutinize your payments to be sure they've been properly applied. You can't trust other people with your money.

What will a brand new car really cost?

If you're anything like me, you balk at the very idea of paying more than $15k for an automobile. The value of these things sink like a rock. The depreciation is even worse on a luxury car. I wonder what this guy felt like when he traded in his car. If the link doesn't work, it's a 2002 Volvo S80, very nice, full leather interior, with only 87k miles on it selling for $12,000. Guy probably traded it in for around $9-10k. The MSRP on this vehicle brand new was around $45k. Over 5 years that's a depreciation of $6,600 a year!

Assuming a no-down zero-interest loan (we'll assume the guy has awesome credit since he's buying a luxury sedan) he was paying $750 a month on the car while it was going down in value $550 a month. So over 5 years, this vehicle cost him $583 per month to own, not including all his maintenance costs.

Compare this to the person buying the car now. When people take care of their vehicles, they can last forever (I've had plenty over 150k that looked and ran brand new). There will be some increased maintenance costs for an older car, but the preventative maintenance is about the same as with a new car. Oil changes, adjustments, etc.

Figure paying $12k for the 5 year old luxury car with 85k miles on it. After another 5 years the vehicle is 10 years old with, say, 170k miles. Its probably nearing a good retirement age by that time. So sell it for a few grand. My 2002 Volvo has now depreciated $150 a month during my ownership, as opposed to $550 a month. Oh, and by the way, instead of a $750 car payment while waiting for the beautiful 02 Volvo to go on sale after 5 years, I was stashing away $400 a month in a nice 5% savings account.

So the first owner has sold his brand new car, spent $33,000, and is back in another new car with a loan.

I waited 5 years, kept the clunker I had, stashed $400 (leaving me with, btw $350 extra a month to maintain my old clunker) and bought the same car for $12k with $15,800 left over in my pocket, not including the extra $350 a month that I doubt went entirely to maintenance.

The difference between the same car purchase brand new vs 5 years old is $48,800!

What would being debt free mean to me?

What if I had no mortgage payment, no car payment, no debt at all? Here's a fun activity. Take all your essential bills, not including the debt and the 'luxuries', with the average you pay each month and multiply it to a year. My list includes:

water, electricity, gas, telephone, taxes, insurance, fuel, food

Altogether this is a yearly expense of $15,680. This is what we live on if we own our home (paying taxes/insurance on it of course) and cut back to the bare essentials.

Could you make $16,000 net a year? What is the cost of your "bare essentials"?

How do we feel about debt?

Here's a nice MSN article on how we feel about debt. Some of the quotes they have from message board posters is a real eye opener.

"The people who have a game plan are much less likely to wind up in trouble again,

So says the author of Credit Card Nation, which by the way was a dreadfully dry book. Why? Are we so entrenched in debt that we can't even imagine that we can live without it?

Marie thinks so. She writes

A reader posting as "Marie38" believes that "being totally debt free is impossible." She makes $42,000 a year, and savings and 401(k) contributions are automatically deducted. Marie38 does not defer vacations and other extras, although she does pay cash. "My plan is to live while I am still young enough to do it," she wrote. "No one can predict the future. . . . None of us are guaranteed even one more day."

Marie has her head in the sand. She has the "have it now" attitude that plagues people. How old is Marie? We don't know, but we do know that she will never be debt free. More and more people are realizing that paying the bank is stupid; banks should be paying you! Yet Marie will never experience this, not because she only makes $42k a year, but because she has already given up. The banks have broken her. She may have a nice retirement portfolio, and plenty of savings, but she will always owe something to someone. She will never own a home, or a car, or any big ticket item. She will always be in debt because she cannot fathom using patience and sacrifice in order to break the debt cycle and make her money for for her.

Or take Beangal, who is living in perpetual debt even though she's trying.

Sometimes, life teaches us financial lessons. A reader posting under the name "Beangal" ran up credit card bills in her 20s, paid them all off -- and then "got right back in." Recently, she wiped out her consumer debt by refinancing her home. She now evaluates every purchase and steadily funds both savings and retirement. "I'm just smarter about my money now," Beangal concluded.

Beangal wants to change, but she hasn't. She paid off her debt, then racked it up again. Then (and even MSN doesn't catch this one) she continued to feed her debt by transferring it, rather than paying it off. She didn't learn from her mistake and she made another one! Refinancing and consolidating your debts does not wipe out your debt.

What, please tell me, is the difference between consumer debt and real estate debt? The interest rate? Heck, you can get a 0% balance transfer credit card. Beat that with a 6% mortgage rate. The interest tax deduction? Why am I going to pay a dollar in interest to get back 20 cents? This is a sign of a perpetual debtor. Beangal isn't "smarter with her money". If she were smarter, she would have attacked the debt, paid it off, and started to pay down her house. Beangal will only have wiped out her "consumer debt" if she sells her house. This is the lie that banks feed us and so many people fall for. Beangal fell for it just like millions of others. My own mother fell for it!

Houses are not banks. The only way to eliminate debt is to pay it off with your income. If you want to be debt free, and anyone can be debt free, you need to stop thinking like a debtor. So are you going to be a slave to the banks, or are you going to get rid of debt and make your money work for you?

What is the average credit card debt?

When you see an article headlined "The big lie about credit card debt", you have to read it. So I did, and it was interesting. It points out some flaws in the polling system used to calculate credit card debt. The average credit card debt, they say, is $9,300. That does sound pretty high.

What is the real figure? Well, I don't know personally. The article didn't convince me that their method was any better. $2,000 is believable, but then again so is $9,000. I'm not sure what to believe, and I'm not sure it really matters. All that is important is that we are not carrying balances and have no debt. Is comparing ourselves to other's debt any different than comparing the kind of cars we drive, or what features our houses have? If we feel like having $3k in revolving debt because the average is $9k, isn't that "keeping up with the Jones'", and isn't that just as bad?

A fascinating topic would be the average debt, not just card debt. Including mortgage, and especially including car and home equity loans. I have a feeling if we looked at the average auto loan debt and evil home equity loan debt, we'd have a staggering number. Especially when you think of how many people fell for the scam of rolling your debt into a low interest equity loan. When it comes to reducing debt (and your monthly payments) there is only one sure fire way, and that's paying it off!

Swapping money around and consolidating and doing any other "quick fix" scheme is only putting a candy coating on your big fat debt. I say lay it all out, add it up and stare at that number until, like I did, you loath it. When you can finally say "I hate you, and I'm going to pay as much as I can to be rid of you forever," that's when debt repayment really starts to work.

Paying taxes for forgiven debt

Another article on paying taxes on a forgiven debt. Any debt that is forgiven by your lender is considered income. Fortunately most of us won't have to face these kinds of problems. Very few of us are $200,000 in debt. The average credit card debt is only $9k.

What gets me is that you aren't just paying taxes on the money you borrowed and never paid back. I suppose I can understand that, as the lender gets breaks as well when it writes off unrecovered debts. But how much of that "debt" isn't what you borrowed...but just interest and fees? I borrow $5k from the lending company, miss a payment and lose my job, and they write off a balance of $10k after a year because of all the fees. So I pay taxes on 10k instead of 5k? That's a little hard to stomach, especially since default rates and fees are just absurd.

Which makes me wonder, if I borrow $5k and they add a ton of fees and charges to hike up the balance, do they WANT me to pay? What happens when a lender writes of a debt? Tax breaks? At what point does it become more profitable to artificially inflate a bad debt into oblivion and write it off/forgive it rather than spend all the money and time trying to collect the original balance?

Of course it also costs them to issue you a 1099, so they may not even do it if they only "forgive" a few hundred bucks.

My debt free goal

We have been chipping away at our debt for a while now, trying to find as much money in our budget to become completely debt free (with exception of the mortgage for now). Finally we have come up against a brick wall. We are still managing to eat and keep the electricity on while affording a few luxuries to keep us sane, but doubt that we could afford to hit the debt any harder. Our debt consists of a car loan and a student loan. At our present rate of minimum payments it will be paid off by October of 2009. With our debt repayment plan, we're projecting April of 2008! Looking at this graph is all the more satisfying.



I hate my debt. I loath it. It's like a termite infestation eating away at your house that you just can't seem to get rid of. Since we bought our house we have gone from paying the minimums on these debts to paying over 20% of our income in extra payments. Finally it looks like we're getting somewhere.

When I ran the numbers I was even more pleased. The regularly matured loans would have cost me $1,543 in interest. But by prepaying it we pay only $862, a savings of $681 over a year or so! Then I got to thinking about or opportunity costs. Our minimum payments on our debt eat away at $595 of our monthly income, with a whopping $1,670 including our debt repayment. Where's that huge chunk of money coming from? Mostly it comes from our Roth IRA contributions (5% of our income) and our general savings (10% of our income). With a nice contribution already going to a 401k and a decent emergency savings fund in place, we put the Roths and saving on the back burner until we get out of debt.

Once we are free and we can put all that money back into earning for us, we get an opportunity to have over $33,400 in our combined Roths and savings accounts (though some will be earmarked for purchasing our next car in a few years with cash) by October 2009. If I took my debt repayments and just kept saving instead of paying it off, I'd have around $31,000, a $2,400 difference. Just brainstormed fanciful numbers.