Friday, February 20, 2009

Getting Out of Debt

Okay, here's a topic that many musicians can relate to! People get into debt for all sorts of reasons, but it's only recently that getting out of debt has become fashionable. If you are currently drowning under an adjustable rate mortgage that's way beyond your means, then I'm afraid I don't have any silver bullet solutions to offer you....perhaps the government will figure out some way to throw you a lifeline.

But if you are simply struggling with garden-variety consumer debt or student loan debt, then there are some proven strategies for getting yourself out of the hole. First of all, as the old saying goes: if you find yourself in a hole, stop digging! Avoid additional debt like the plague. If you continue to allow yourself to think of borrowing as a solution rather than a problem, you will never escape debtor status, regardless of your income level. Most of my blog entries up to this point have been about living frugally and saving money. All of those habits will help you to eliminate debt as well. Since consumer loan interest rates are almost always higher than any reliable rate of available investment return, you should view paying off a loan early as tantamount to earning a high rate of return. Think of paying off your 11% credit card balance as a generous 11% gift to yourself, because that's what it is! That's more enticing than almost anything else you could spend your money on.

Lots of people owe money to multiple creditors, and often don't know how to prioritize their debt payments, so they just make the minimum payment on each bill that comes. Minimum payments are for suckers! The minimum payment option is designed to draw out your debt and earn the creditor maximum interest from you.

The first thing you should do is to make a list of all your credit accounts and find out the interest rate for each one. You can continue making minimum payments on the lower interest rate accounts for now, but target the highest interest rate first, and pay as much as you can on that account each month until it's paid off completely. After that one is paid off, target the second highest interest rate account in the same way, and you should be able to pay this one off even faster, because you now have one less account to service each month.

This strategy requires focused commitment to eliminating debt, because as you pay off your outstanding balances, your available credit limit will probably increase and those old temptations may arise again. Believe me, becoming debt-free is a very liberating feeling. It really is the best gift that you can give to yourself!


Dave said...

Thanks for the advice, Doug. This is such a unique and useful blog. I never have sat down and made a list of the different interest rates. I'll do that.

ln said...

This blog is great! Thank you!

I found you via google search - I was reading a couple of personal finance web sites and just didn't feel like the advice was "for me." I'm in my early twenties, a classical musician/teacher, and it's not easy to imagine your own financial success when you're reading about people who work for big companies with 401k's and salaries three times your own.

I love the ideas about lifestyle, freedom, and debt as the enemy of creativity. It's so true! Thanks so much, and keep writing to supply us with the tools to continue creating.