10 Debt Traps

I came across this article today about 10 Unexpected Debt Traps, and figured I would add ten more common debt traps that people still seem to fall for:

1. Co signing for anyone for anything.  If you do this things might go along swimmingly for quite a while.  Until they don't.  And then that loan you cosigned for ages ago falls on you to pay off when the person you co-signed for decides that they either can't or won't finish paying off the debt.
2. Buying when you can rent.  Jet skis, RVs, boats...if it isn't something you use ALL. THE. TIME. then it is probably better to rent the thing when you need it instead of buying it and paying all the fees that go along with ownership.
3. Renting when you can buy.  Buying real estate can make some people squeamish but I have always been a fan of buying a place to live instead of renting.  There are many costs associated with home ownership but it seems like the ever-increasing costs of rent is more of an expense than owning.  Unless you won't be in a location for very long, it often pays to buy a place to live than rent (but obviously not at the top of the market!).
4. Being "unbanked".  People who can't or don't want to have a bank account usually end up paying way more in fees than people with bank accounts.  I have accounts at three different banks (one bank and two credit unions) and pay no fees at all for any of my accounts.
5. Payday lenders and car title lenders.  These places are huge rip offs when you look at the terms of the loans the provide.  400% APR anyone?  Sheesh.
6. Emotional spending.  I think we all do this at one time or another--cast common sense to the wind and just buy buy buy.  But people who do this all the time usually end up in a great deal of never-ending debt.
7. Playing roulette with your insurance situation.  I know some people who skipped car insurance for a few months to save money and almost invariably that is when they got in at-fault car wrecks.  Ditto skipping health insurance, life insurance, homeowners or renters insurance, etc.
8. Student loan debt.  There are a lot of people who don't much like school to start with but feel like they have to go to college at all costs.  Then they end up with a mountain of student loans for a degree they can't even really use.  If a kid is brilliant school-wise they should definitely go to college to get a useful degree but if they are kind of meh about school, technical certificates and trade apprenticeships can be much more interesting and much less costly.
9. Consolidating debt.  This is kind of a double-edged sword.  If you can consolidate all of your debt to a really low interest loan and pay the loan off ASAP, that's probably a good thing.  More often, however, people consolidate their debt then proceed to run up their high-interest credit cards again which just puts them in even more debt!
10. Not planning for the future.  Whether it is putting an emergency fund together, planning financially for your retirement, deciding on what you would do if you needed extended care, etc., if you start doing these things when you are 60 and/or in a major crisis, you will be screwed.  People need to start planning--and saving/investing--for their old age sooner rather than later.

No Wonder I Was Broke!

I was going through a box of stuff last night and came across the notebook I used to write my monthly bills in.  The notebook covered the years from 2002 to 2008.  Looking back through those list of bills was a startling trip down memory lane.  What was I thinking?  Each month I was burying myself in more and more debt and I didn't notice anything wrong with that??  My today self should have slapped my then self upside the head--at least then I may not have kept adding "small monthly payments" that eventually added up to nearly overwhelming debt. Here's what one of the biggest months looked like:

• Mortgage $1500
• Second mortgage $325
• Car payment $595
• Car insurance $195 (we had five cars at the time)
• Water/sewer $40
• Gas $90 (it was winter)
• Electricity $75 (ditto)
• Cable/internet $195 (apparently we needed every station known to man)
• Garbage $15
• Health insurance $35
• Cell phones $250 (we must have still had some kids on our plan)
• Son's family in the Philippines $150
• Tithe $100
• Newspaper $10
• Macys $50
• Sears $75
• J C Penny $60
• Chevron $250
• Visa $125
• Mastercard $100
• Other visa $90
• Discover $100

The list didn't include all of the cash we paid out each month for restaurants (daily), clothing (stuff we didn't put on the credit cards), money we would give to the kids, etc.

Just looking at that list made me cringe.  We were paying almost $800 a month just on credit cards!!!! (sadly most of that money went to interest, over limit fees and late fees).  I was such an idiot.

Fortunately we (eventually) got our act together and got out of debt and our monthly bill list now looks much more reasonable:

• Rent $600
• Electricity $112 (but going down next month!)
• Cell phones $80
• Health insurance $35
• Car insurance $33 (liability only for one--paid for--car)
• Son's family in the Philippines $95
• Tithe $50

Basically it was a three step process to go from over-the-top bills to spending a fraction of the cost to keep us fed, sheltered, and entertained each month.  The first step was paying off debt as quickly as possible and not using credit cards any more.  The second step was cutting down on the cost of things we can't do without (ie: we don't need a big house but we do need shelter so a small, one bedroom condo works very well for us and, fortunately the rental fee covers water, sewer, and garbage).  The third step was doing without things that don't impact us too greatly (ie: no cable, liability only car insurance, cheaper cell phone plans, no newspaper since I now read this online, etc).

Now that the trip down memory lane is done, I never want to go back there!  I'm debating whether to burn the notebook or keep it as a reminder in case I ever edge toward debt again...

5 Critical Financial Moves That Put Us on the Road to Solvency

Just a few short years ago we were mired in debt and it looked like I would be working until I was 90. Obviously we were doing everything wrong financially that you could think of but we were so comfortable in our rut that we didn't know, or didn't want to know, what to do to get out of it.
Then I found Dave Ramsey, listened to his show religiously, made some (many) changes, and now today we have our debts paid off and I was recently able to quit working and travel for a while until we decide what to do next.
These are the five critical changes we made that, without which, we would still be up to our eyeballs in debt:

1. Pay cash for a car and drive it until it dies. For many years we leased cars, had insanely high car payments, and just thought that was the way that everyone did it. Today we have one car, it is paid off, and we will drive it until it dies and not a moment sooner. I think car debt is the number one change that people could make in their financial lives that would immediately put them on the road to solvency.
2. Don't use credit cards. Aside from car debt, we also had the habit of running up our credit cards (there were many) as high as the banks would allow (and when that didn't work we would call the banks and grovel for a credit limit increase which they would often grant). The amount of unsecured debt we had on credit cards was ridiculously stupid but we had no one to blame but ourselves. Today we pay cash for everything and have paid off our credit cards. Hubby has one credit card that we don't use (he feels more secure with it for some reason) and I have no credit cards (and no desire to ever have one again). There is absolutely no reason you, or anyone else, should be guaranteeing your future income to buy something you want today, at 20%+ interest no less.
3. Don't eat out. Again, we had the high-flying lifestyle with the cool cars, the crazy credit card debt, and the major shopping sprees. With all of this debt, we were also working like maniacs just to tread water with these debts which meant we weren't often home which meant we both--along with the kids--ate out literally every day. Often we would eat all three meals out. Needless to say this was an expensive habit that only served to rack up credit card debt even faster (and it certainly wasn't healthy either). Now I see that eating at home can save SO MUCH money. For example, feeding a family of four dinner out at a restaurant can easily run $50 to $80, for one meal. For that much money, you can feed the same family of four at home for an entire week!
4. Have an emergency fund. When you have a huge amount of debt, everything is a financial crisis. Until I heard about Dave Ramsey, I had never heard of the concept of having an emergency fund. When Dave said that you need an emergency fund so that if an emergency arises you don't have to use your credit card to cover it, it was like a light bulb went on in my head. Duh. Since I put together my emergency fund, as Dave had predicted, we have never had to put a financial crisis on our credit cards because we had the cash to cover it. This allowed us to pay off our credit cards once and for all. If you don't have a "starter emergency fund" of $1,000, you need to do this today.
5. No. More. Shopping. I used to shop recreationally. My friends and I would run to the mall during lunch, I would see someone with a new purse, think I needed one, and cruise by the mall after work to pick one up. The hubby and I would spend our weekends walking around Costco, the mall, and other big box stores being subtly convinced that we needed more and more stuff to be happy. Needless to say, that kind of hobby can bury you in debt faster than just about anything else. Today we shop only when we absolutely need something and there is no more aimlessly wondering around a store just because we are bored. I also don't feel compelled to shop just because I see someone else with a new purse or new shoes and I don't equate my self esteem and "status" with what I own.

With those simple steps, we were able to dig ourselves out of the mound of debt we had buried ourselves under for years. It really is that simple. Yes, your ego may take a hit when you drive up in a car that is older than your kids, when your purse is so many seasons old it can't be identified, or when you have to opt out of the expensive restaurant meal with friends because "that's the place you have always gone to" but it no longer fits in your budget, however the feeling of freedom that comes with being debt free more than makes up for any temporary ego problems you may have.

Not Going into Debt Can be Tough...Especially When the Joneses Buy a New Mercedes

My heart is set on living debt free and cash only. I am slowly working my way out of debt inch by inch and I look forward to next week when I cancel my last credit card. Today I talked to my sister-in-law who informed me that my other sister in law just bought a new Mercedes. I don't know if I feel happy about it (happy for her because she does work really hard and kind of "deserves" it and even more happy that it isn't me signing up for years of car debt) or sad because I would really like a new Mercedes (or a new anything...the only thing I have now is a shiny bus pass and a hubby who lets me drive his old car any time I need it). Also, I know that this particular brother and sister in law are up to their eyeballs in debt and have been for decades so I actually feel sad for them even though they will look nice driving around in their new car.
So I think I will push my sadness aside and focus my attention on getting out of debt. I will be thankful that I have a wonderful, supportive husband, thankful that we are both employed and our incomes easily pay our bills each month, thankful that with each paycheck we are slowly becoming debt free, and thankful that indeed, one day, I will be able to "live like no one else" as Dave Ramsey says and actually pay cash for any car that I want. I bet the car will even drive better than new because it won't be dragging a payment book along behind it!