In this series of articles, you can go at your own pace as you work to kill the debt monster and get back full control of your money. Whether you were like a kid in a candy store or just spent a little more each month than you made for a long time, debt can be crippling and affect every part of your life. Use this set of articles to make things better.
Lesson One: Opening Your Eyes
Many people don't know how much debt they have or if they have a good mix of "good" and "bad" debts. Most people with a lot of debt try to ignore how much debt they have. They avoid reality because, after all, what you don't know can't hurt you, right? In this case, debt is bad because it always hurts you in the long run.
The first step toward getting out of debt or paying it off is to figure out how much debt you have and what kind it is.
Make a List
Let's start with the "bad debts," which are the ones we want to pay off as soon as possible. Bad debts include store credit cards, car loans, and charge cards, as well as any purchase that loses value instead of giving you a chance to make money.
Set up your list like this on a piece of paper or a computer spreadsheet:
Name of Card/Loan Amount Owed Interest Rate Name of Card/Loan Amount Owed Interest Rate Name of Card/Loan Interest rate per year
Ex: Citibank $2,123 18.36 percent 2123 x .1836 = $389.78
Then, follow the same steps for good debts. Good debts include school loans, mortgages, second mortgages, and other investments that could make money. We'll use your "good debt" list in a later lesson. For now, let's make two lists of everything you owe: "bad" and "good."
Look at the ratio of debt to income.
Once you've made both lists, you'll need to figure out how much bad debt you have. Compare the total amount in the "Amount Owed" column of your list of bad debts to your annual income after taxes. Your bad debts shouldn't take up too much of your income. With a simple formula, you can figure out your debt-to-income ratio, and for now, we're only talking about bad debt.
Total bad debt divided by income after taxes = ratio of bad debt to income
If you have bad debts totaling $5,770 and your income after taxes is $36,000, your bad debt-to-income ratio is 16%. The goal is 15 percent or less, so that your payments are still easy to handle.
What You Really Flush Down the Toilet
Now, to really open your eyes, add up the estimated amount of interest you pay on your bad debt accounts every year. WOW! Even though you should pay interest on student loans or mortgages, look at how much money you're throwing down the drain every year on your credit card and car loan payments. Imagine what you could do with that extra money over the course of a year.
Most of you have probably learned something new from lesson one as a whole. For alcoholics and drug addicts, the first step is to admit they have a problem. For people who want to get out of debt, the first step is to face the debt monster and figure out how much money they owe. In the next lesson, we'll learn how to get rid of credit card debt, which is the worst kind of debt we have.
