Debt! Getting In—Getting Out
LOIS and Rick had been married for almost a year. Like many young couples, they wanted everything at once—and it was easy! The payment on the TV was only $52 per month, and adding a VCR only increased the payment to $78. The new furniture was a little more difficult—the payment was $287 per month. Of course, that did not include the drapes and the carpet, which boosted the payment by $46.50. But the finance company had been cooperative.
The appliances came a little easier because the store accepted their credit card. That way monthly payments were automatic, and they did not have to apply for a loan. It would have been easier if Rick’s sports car had been paid off before the wedding as he had planned, but he had not quite been able to manage that.
Rick put it this way: “I thought marriage would be great, but I worry so much about our debts that it’s just not fun.” Lois agreed and added: “It was so easy to get into debt. Will we ever, ever get out of debt?”
This plaintive query echoes the dilemma faced by millions of families in most countries of the world. Rare indeed are the persons who manage to live their lives without shouldering a large, sometimes unmanageable, burden of debt.
Getting Into Debt
How does one get into debt? Simple! It is a way of life. Governments, multinational corporations, small businesses, families, and individuals have all come to accept debt as normal.
Pride often creates debt. Debt creates strain. Strain leads to other difficulties. So how does one live in a world that is debt oriented and, at the same time, stay out of debt?
Perhaps the first lesson to be learned is simple sales resistance. One cannot enter the door of most financial institutions without being assailed by posters offering loans. Credit cards are easily available. Over the spectrum from loan sharks to respectable banking institutions, there are millions of successful, aggressive persons who are in the business of selling money. To them, money is a commodity—like groceries—and their job is selling it to you. Learn to say NO.
Many formulas exist to define an acceptable ratio of debt to income. But these vary so much that many have little meaning. For instance, some economists feel that a family may comfortably allocate 30 percent of gross income to pay for shelter. This is for mortgage payments or rent. However, this formula may not be feasible for the very poor. So general formulas are often too vague. The whole problem of debt control is better considered on a personal level.
Some debt may be acceptable, but this demands discernment and careful management. For instance, most people cannot buy a home without incurring debt. It is unrealistic to think that a family must live in rented accommodations until they have saved enough money to go out and pay cash for a house. It will probably never happen. Rather, the family may feel that the money they are paying for rent can be channeled into paying off a mortgage on a house. Even though this plan will take many years, they conclude that it is more practical.
When we realize that the value of the house will likely increase with time, it follows that while mortgage payments may be higher than monthly rent, the family may be better off since they are creating equity, which is the value of the house minus the claims against it. A house mortgage at a reasonable rate, with manageable payments, may therefore be an acceptable debt. The same may be said of other large, necessary family purchases.
Other forms of debt may be absolutely unacceptable. Debt management includes the ability to reject them. Perhaps the best rule is: Do not buy what you do not need and cannot afford. Avoid impulse buying. Even if something is half price, it is not a bargain for you if you cannot afford it. Do not borrow for luxury items. Do not take vacation trips unless you can afford to pay before you go. Whatever you buy must be paid for sooner or later. Credit cards are useful to avoid carrying cash but are very expensive when used as a means to borrow money.
Getting Out of Debt
Some people may feel that advice on debt management is too late for them. ‘I’m already under a landslide of bills and commitments. How do I get out?’ The fact is that it is never too late to start.
The first move should be to establish a working relationship with a reputable bank. If you must borrow, this is where you will likely get the best interest rate. If your bank refuses you a loan, it is probably doing you a favor. Remember, it is in the business of lending money and will lend it to you if it seems reasonable.
Second, you must start paying off the debts in some organized way. On paper, project your anticipated personal cash flow over the next 24 months. Be realistic. Include every bit of income you expect to have. Then list everything that must be paid. Include some allowance for items that you cannot even think of right now. List the debts in order of priority. Then allocate your money on a fair basis so that each debt receives at least some payment. Set a target payoff date for each debt.
In conjunction with this plan, consider where you might reduce costs. Debt reduction always requires some sacrifice. Can the grocery bill be shaved by bargain shopping? What cheaper substitutions can be used in meal planning? Can vacations be cut? Can your living standard be reduced? Can some luxury items be enjoyed less often? Sometimes we just have to be ruthless with ourselves. Certain expenses can be moved from the “necessities” column to the “luxuries” column.
Once you have a plan worked out on paper, discuss it with your bank loan officer. He will be impressed when he sees that you mean business. He may be able to show you how to improve the plan. He may even suggest a debt consolidation loan. If so, be sure to consider the interest rate and the length of time over which the consolidated debt is to be repaid. It will usually mean smaller payments over a longer period of time. But do not be tempted to use the debt consolidation to borrow more money.
Any debt-reduction program requires communication if it is to be successful. Visit or telephone each person to whom you owe money. If you think it would be helpful, show them your plan. At least talk to them. Remember, they want to know what you are doing. Keep them informed. The one thing no lender can tolerate is silence. Silence is quickly interpreted as indifference or even refusal to pay. Many a creditor has started a lawsuit to recover money simply because no one bothered to explain what was happening.
Should you consider bankruptcy? In some lands, all people are entitled to the benefit of such provisions of the law, but it is not to be taken lightly. Debt is a commitment. Moral obligation is involved. Bankruptcy has a ripple effect that creates problems for others. It will remain a blot on your record.
There is nothing wrong with the old-fashioned concept of “pay as you go.” Indeed, if at all possible, the wisest course is not to get into debt in the first place. Debt can be a deadly quicksand that consumes you. Rick and Lois allowed themselves to be swallowed up. They have changes to make, but step-by-step they can climb out of their debts.
If you were buried under a literal landslide, you would use whatever mobility you had to start digging yourself out. It may be slow, but it works! Remember, no matter how long it may take or how difficult it may be to do it, getting out of debt is well worth it.
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Sinking into excessive debt is like being swallowed by quicksand