How to Get Out of Debt

To learn how you got into debt is the first step to learning how to get out of debt.  What kind of debt do you have?

Credit Card Debt

These little beauties offer convenience, too much convenience.  You ever wonder why you get so many offers in the mail for a new card?  Offers of "no interest for 90 days!" or "Transfer your balances to us and pay 'only' 12.9% (for the amount you transfer, all other charges are 20%)".

The answer is simply:  Credit card companies make a ton of money.  Where else can you get 20% on your money (or more) when the prime rate has been 4-8% for the last 5 years?  They want you to go into debt by making it easy.  It's simply human nature to rationalize that you can buy today and pay tomorrow.  No pain!

Then the credit card companies calculate a minimum payment such that it could take many, many years to pay down the principle debt on the card.  What a great business to be in!  For them.  Not you.

As far as I'm concerned this is the worst debt to be in and the first place to attack.

Car Loan Debt

Here's another loan scheme.  While the interest rates are not as bad, the marketing of new cars is questionable.  Basically, our society loves to show off how 'well' they are doing.  And nothing shows the masses that you're making a ton of dough like a nice new car. 

So the car companies advertise SUV's and high end cars with good looking, vibrant people driving them with smiles on their faces while the Jone's next door drool over the Smith's Lexus.

You don't want to be thought of as some kind of looser so you go to the show room.  Here's a $30,000 car there's no way you can lay cash down for, but for 'just' $600 a month for 6 years you can drive out of here right now! 

$600 a month for 6 years for something that will have less than $5000 in value at the end of the six years?  It's fine to own this type of vehicle if you can easily swing it.  But it's a very, very poor investment.

Mortgage Debt

There is nothing wrong with mortgage debt.  You have invested in an assest that will generally increase in value over time.  The interest rates have been pretty low for a long, so chances are you're not overpaying.

Be careful of buying too much house.  It's tempting to go for the 3500 ^Ft2  as apposed to the 2000 ^ft2 house.  Hey, chats another $1000 a month to live large?  It could be the differnce of funding the kids college fund and your retirement.  Think about it.

The other exception is the 2nd home and time shares.  Be very careful before going into debt on these.  While they can be an investment, the cash to invest in them better not be your meal money.

Student loan Debt   

An education is THE best investment you can make.  The return on this investment would make a loan shark blush.  By all means invest in yourself and your kids.  You'll never regret it.

The only question is does little Johnny really need to go to the $40,000 a year private school or would State U. for $18,000 provide as good an education, missing only the bragging rights to your friends.  Only you can decide.

Other Debt

Home equity loans and debt of this sort is double edged sword.  It's great to pay down high interest debt with low equity debt.  You can have some flexibility as to the term of the loan and they are pretty easy to get.

But, to pay for a vacation or luxery car with equity debt is a bad move.

Bottom Line   

You don't have to be foolish with your money to get in debt.  Divorce, layoffs, thing beyond your control can bite you.  By understanding how you got into debt and the type of debt you have you can more effectively come up with a plan to mange your debt.

Click here to learn how to make a get out of debt plan