Outsmarting Debt

by | Jan. 09, 2005


The problem is that, for most of us, there is simply not enough money to go around. If you often find yourself living from paycheck to paycheck with little left over for any unexpected expenses, then you’re among the norm. That’s why even the smallest setback can send so many of us into a near panic.

The key to financial maintenance is to be able to outsmart all those who want to take the money you worked so hard to earn. To stay on sound financial footing requires that you follow four basic principles:

1. keep your expenses at a lower level than your income
2. avoid impulse spending
3. pay as you go
4. keep money evaporation at a minimum

Let’s show you what we mean.

1. Expenses Must Be Less than Income

Spending less than you earn will be your key to financial freedom. This will bring financial independence and provide you with control of your life. Living on less than you earn proves you are smarter than a banker. You learn to beat the banks at their own game. It is not only key to independence and freedom from debt but essential to future planning.

2. Avoid Impulse Spending

Work as hard at spending your money as you do earning it. Some people look at shopping as a form of recreation, but recreational shopping can be almost as dangerous as gambling.

Learn to know what you are going to buy before you leave the house. Estimate the cost of the items you are going to buy. You may try using the Internet to check prices before going to the stores. Many sites offer comparative pricing, which allows you to get a better idea of quality and price and helps you avoid the impulse to buy just to regret the purchase later. Then when it comes time to make your purchase, stay within the limits you have set.

3. Pay as You Go

Being debt-free is a mentality that must be instilled within your mind. You must pay for every expense as it comes and you must pay it in full. What if you don’t have the money and you haven’t planned for something that your family really wants? Remember that there is a certain amount of joy that comes when your family plans for and anticipates a purchase. Set a goal and game plan that will help you save enough money to purchase the item in the future after having worked and saved.

4. Keep Money “Evaporation” to a Minimum

One problem with money management is the inability to account for money spent. This is especially true of cash. When you carry a large amount of cash it becomes extremely difficult if not impossible to recollect where it was spent and for what it was spent. The money just evaporates.

In addition, carrying cash offers an almost constant temptation to spend for unplanned items. Try to make all your purchases with checks issued for the exact amount and resist the temptation to make them out for a few dollars more. This offers you a record of your expenditures. Also, avoid using a credit card for groceries and gas unless you plan and execute paying off the credit card each month! Keep your receipts and deduct them from your checking account immediately so that you know where you stand.

It doesn’t matter how you record your spending, just keep a record. This keeps “evaporation” to a minimum.

A Power Payment Plan

Every household, no matter the circumstances, wastes a certain amount of money each and every month, and that is the money you will use to get out of debt. There are many extra sources of money you may not even realize are available to you (see “Debt Free Savings”). In fact, between ten and fifteen percent of your income is a potential resource that can be used to break the back of your debt. We’ll call this money your power payment.

At the beginning of next month, sit down with our family and make out a check for whatever amount of money you reasonably feel you can save after examining your monthly budget and expenditures to decide what you can reduce.

At the bottom of the power payment check, write in big letters: FOR PRINCIPAL ONLY. Make out your check at the beginning of the month so that you won’t be tempted to spend it. Ideally, the amount of this check should be equal to the ten to fifteen percent that most experts agree the average household wastes each month.

If this amount seems beyond your grasp, then make out a check for whatever amount you feel you can spare from your monthly spending plan, whether it be three percent or seven percent or ten percent. Any amount will get the ball rolling.

Now look at the current monthly statements sent by your creditors. You are going to make minimum monthly payments each month on all your debts except for one debt on which you will concentrate more money. This debt payment will include the regular check for the minimum monthly payment plus the power payment check.

Add your power payment check to the monthly payment check and enclose it in the envelope for payment of the debt on which you’re currently concentrating. With the elimination of each debt, the power payment will naturally grow larger.

The whole process might be easier to visualize if you think of each debt as a stack of building blocks. Each of those blocks represents $100. Let us also assume that you have five debts—each, therefore, being represented by a building block and each debt carrying a minimum payment of $100. Your power payment is also equal to $100. Now, stack the power payment of $100 on top of the $100 minimum monthly payment of your lowest debt. You are now spending $200 toward the elimination of the first debt.

When the first debt is eliminated, you will take the first two blocks, now representing $200, and stack them onto the next block. Now you are spending $300 toward the payment of the second debt. With the elimination of each debt, your power payment increases, and the momentum gathers.

Does this seem unbelievable? Test it for yourself. We warn you: This system is the same system many debt-relief companies use to pay down your debt—and they charge you good money to do it. But you can do it for yourself. Test it. See how easy it is for you to kick debt out of your life.

Debt Free Savings

The following are just a few of the many ways you can start to save money—money that can be used against your debt as a power payment.

•Use public transportation whenever it is feasible.
•Buy and maintain as few vehicles as your family can get by with.
•Hang on to that old car. Today’s cars last longer than cars built in the past.
•Keep up the maintenance on your vehicle to avoid costly repairs later.
•Always fill up in the early morning, particularly during the summer months, because gas expands in the heat of the day.
•Slow down! Did you know that just by reducing your speed from 70 mph to 65 mph will save you $5 for each hour of driving and about $10 if you are driving a truck or an SUV?

Debit and Credit Cards
•Avoid those cards that carry a balance with interest. Use only those cards that are paid in full at the end of every month or debit cards that are deducted directly from your bank account.
•There are some cards that offer “cash back” advantages if they are paid before a certain date. Such cards can be advantageous to you if you are good at discipline and self-control. Pay these bills as soon after you receive them as you can to maximize your savings.
•If you can’t keep your monthly credit balance at zero and control your spending on credit cards, then cut them up, nuke them in your microwave, or freeze them in a block of ice so that they have to be unthawed before using so that you can control your spending.

•Carefully plan your meals.
•Keep your eye out for the weekly grocery special and savings.
•Keep your pantry fully stocked. A fully stocked pantry of food purchased at its lowest price allows you the flexibility to still serve your family delicious meals while continuing to purchase only weekly sales items. This strategy could cut your grocery bill nearly in half and increase your food storage.
•Remember that shopping on an empty stomach can be a big distraction. You’ll put many more items in your cart when you are hungry than when you have a full stomach.
•Limit your trips to the store to once a week. Even better, try to limit your trips to every other week or even once a month where that is possible.

•Be happy with what you have. We waste an incredible amount of time and money trying to impress people who don’t really care.
•Look for good used appliances, perhaps from a neighbor or friend who is moving. In addition, check the classified ads or look for good garage or estate sales.
•When you’ve made a purchase, be sure to save the receipts and the warranties. Many times these warranties and receipts will save you from having to purchase a new appliance.

•Unplug idle appliances when not in use and when feasible. TVs, VCRs, CD players, microwave ovens, and so on will continue to use small amounts of electricity when not in use and cost consumers about $3 billion annually.
•Keep your laundry room door shut when the dryer is in use. A dryer uses air to dry the clothes inside. You will force your dryer to work harder when the door to the laundry is left open.
•Turn your water heater down to 110°F to save on heating water.
•Clean furnace filter about every two months. Consider cleaning your heating ducts.
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