In debt? Here are some tips...

[Atash Hagmahani]

1. Don't panic. Apparently you've got lots of company.

2. Here's the tricky part: don't accumulate MORE debt. Work it down.

To work down debt, reduce spending enough so that you can accelerate payments on one of your bills, either the smallest or the one with highest interest. Pay it off completely.

Next, take the payment stream that was paying off the bill that got paid off, and apply it to the next bill, either the next smallest, or the one with next-highest interest. Pay that one off completely.

Repeat until they are all paid off.

To reduce spending, here are some random tips off the top of my head:

well first of all don't acquire any more debt especially not consumer interest. Consumer interest payments add up extremely fast. Maybe we'll get one of our mathematically-sophisticated members to explain just how fast. It's exponential folks. Don't pay consumer interest rates. If you can juggle your debt to reduce interest (I DONT' mean how much interest you're paying off, I mean how much you OWE. Don't do something foolish like one of those loans where the principal actually increases over the life of the loan!!), that might be one option. Read the fine print and make sure it really makes sense.

Interest adds up far more than most people realize. You get rich being on the RECEIVING end of interest, not the paying end!  Take it from a guy who uses a Zoroastrian handle ("Atash" (= "fire") is a Zoroastrian name, for those who never made the connection. Zarathustra told his followers not to borrow money at interest, because it would keep them poor. He didn't tell them not to LOAN money to outsiders at interest, as a result of which, Parsis (Zoroastrians) in India include some of the wealthiest people on earth, financiers to India like other ethnic groups are elsewhere). Some Zoroastrians actually have names that translate "Ready-Money".

"Ready money is the king's command" (old saying)

PLAN ALL MAJOR PURCHASES and budget minor ones. If you see something you want in the store, don't just buy it. Plan all significant purchases. Maybe you can find it cheaper. Maybe you can think of a substitute. Maybe you can acquire one used...maybe even free. Maybe you'll change your mind. I often do--I think "I don't want the hassle of owning that...it will turn into a maintenance hazard".

Maintain a mindset of "what are ALL my options for getting the benefit? Which will cost me the least in the long run?"

Always consider "cost of ownership". It's often not just the purchase price.

Think outside the box. Someone I know and I used to go around and around and around like this:

"I need a new car".
"You can't afford a new car".
"But I need a new car for work."
"OK, but you still can't afford one. Ask yourself how much sense it makes to have a job that gets you into debt".
"I've gotta have that job, and a car to get there."
"Move closer to your job and WALK".

Etc. It never resolved.

The person in question is trapped by paradigms:

1. I must have this job to make money. (Assumptions: "I can't make money without making wages." "I must pursue the job I have; there are no alternative possibilities of employment". "I must use money to buy things I need to live; arrangements like "work for room and board" don't exist and if they did, I would reject them without any thought,  etc)
2. I must drive to this place of employment. (Assumption: there are no other options)
3. I must have a NEW car. I will drive the new car until I can no longer afford out-of-pocket expenses for repairs, at which time I will buy another NEW car and I can afford it because a loan is available.
4. I can afford it, because the nice loan officer said I could. I can make the payments. I can afford the payments, because they are less than my total monthly income.

Approach life with a mindset of...

1. Will this benefit, net of cost of this benefit, improve my life (often the answer is "no, after taking into consideration cost")?
2. If so, what are ALL my OPTIONS for getting this benefit? You probably have more options than you realize.

Keep in mind that decisions you may already have made and committed to MIGHT BE OPEN FOR RENEGOTIATION AND DIFFERENT CHOICES.

It costs money to be poor! If you have no savings, then you are likely to have fewer choices available to you. For example, people often put "unexpected expenses" on credit cards, for lack of ready cash. Once you have some savings, more and better choices become available.

The way to go from negative net cash flow to positive net cash flow is to either reduce spending or increase income. I'll probably say some more about reducing spending, but will also cover increasing income.

[opsec]

"Move closer to your job and WALK".

Or ride the bus.

[Mike]

Atash, that was good advice.

Even those of us who don't have debt, we have expenses.  Like debt, expenses are flows of money in the wrong direction.

Starbucks/cafe lattes can be a major drain.  The Starbucks expense was a major cause of an acquaintance divorcing his wife.

A high school friend had the same problem.  His solution was to buy an expensive latte machine and then making lattes for his wife. 

It takes some discipline to follow through with money saving ideas.  For most of us buying a latte machine would've just compounded the problem..... with the latte machine going unused and Starbucks continuing to profit off of us.

[MnJRutherford]

Amazing.  We got a good espresso machine a few years ago for the same reason.  It paid for itself in about 4 months!  As a matter fact, Mike is a WAY better barrista than any of the Starbucks rookies!

[tigger]

Also, it doesn't hurt to shop around for the expenses that you do have.

Car insurance - with a cheaper car you can get by with liability only.  Or see how you can bump your deductibles.

Home insurance - know what you need.  A lot of people overinsure but that's only helpful if you have really bad luck.  Also, this is a good candidate for bumping your deductible.

If you keep a good credit score, that will probably lower both of the above.

If you have a cell phone anyway, might as well lose the land line.

Cable / internet / phone - you can probably save by bundling.  Or, just go with internet, use VOIP for phone, and look for any shows you do want online at PBS or Hulu or ...

Groceries - use a list to get just what you need and bulk where it makes sense.

And, as Mike said, watch the seemingly little things like Starbucks or eating out too much or ...  Because, this really does add up.  If you can, track your expenses in something like Quicken.  Then, you can see how consistent you are and see areas where you can cut things down.  It can also help you plan if you can look ahead to see what usual expenses you have every month, every 6 months, every year, etc.  Also, keeping watch can help you avoid stupid expenses like bouncing checks or sending in a late credit card payment.

[Lore]

David Chilton of WEALTHY BARBER fame got rich by reminding people of the distinction between NEEDS and WANTS. (It doesn't come naturally to folks who don't prepare simple budgets or distinguish between money and credit/debt.)

A good rule for responsible personal finance is PAY CASH.  Odds are that most of the things that you NEED can be paid for with CASH.

COUPONS and COMPARISON SHOPPING are good ways to make substantial savings. The discipline also helps a person to focus on NEEDS.

[Atash Hagmahani]

Ah, good, the conversation is going where I wanted it to. Good job, folks.

The discipline also helps a person to focus on NEEDS.

It also makes him/her more conscious of spending per se.

Subscriptions and automated payments are dangerous for that reason. Out of sight, out of mind.

[opsec]

Sometime I'll have to tell you about the time I was stranded in Alaska with nothing but $1.67 in my pocket and a full tank of gas in my Blazer.

[MountainMeg]

I tend to break things into labor cost.  I (or hubby as is now the case) makes $X per hour.  Calculate the time involved in earning the $ to pay for the item or service and ask "is it worth it?".  In a lot of cases the answer is no.

[Atash Hagmahani]

I tend to break things into labor cost.  I (or hubby as is now the case) makes $X per hour.  Calculate the time involved in earning the $ to pay for the item or service and ask "is it worth it?".  In a lot of cases the answer is no.

Good idea. Creating mental models for how much things cost, in terms that are emotionally meaningful, is a powerful way to get a handle on them.

[opsec]

I've made a similar calculation about the average work week vs. pay. Under the capitalist model, the more productive a worker is, the more they get compensated for their time because they are bringing greater value to the employer. Yet it has recently come to light that wages have been stagnating or even decreasing as productivity has increased dramatically. This means people aren't being paid for the value they are bringing to their employers. I don't have the numbers in front of me, but the conclusion I came to is that the employees are being compensated for their time and value from Monday until noon Thursday, then from about lunch time Thursday to the end of the work week, employees are effectively not being paid at all but in reality are slave laborers for the company.

[Dame]

..., then from about lunch time Thursday to the end of the work week, employees are effectively not being paid at all but in reality are slave laborers for the company.

The employers would say that time is their return on assumming the bulk of the risk, and the major variations in profit. 

Interestingly, over the years, I have noticed the so called capital investors tend more and more to be pension plans, and the more regulated by either government of trade union contract, the more they look like a back door to nationalization of industry by a smaller and smaller number of people.  In these systems the actual owners have little or no say.

[Beeherder]

A budgeting trick i found useful was to put the cash in my wallet on Monday for the full week's expected expenses. If there was still anything left on Friday i took myself out to a nicer lunch place as a reward. The trick of course is to leave the plastic at home too. This only worked about half the time for me but at least it kept me focused on controlling expenses.

The real trick is avoiding the devastating expenses of a major loss like unemployment, or medical emergency. It is my understanding that more than 50% of all bankruptcy filings had a major medical expense  in the preceding 36 months.

 

[Atash Hagmahani]

My best advice for medical, for those who can afford it, is to get a very high premium plan for major medical only, and pay for everything else out of a health savings account.

For those who are too old (especially right in that age gap between peak earnings and medicare retirement) and too poor for that option, I don't know what to do. Problem is too many people in that situation to have much hope of asking for help and getting it.

Another problem is that too much medicare made retail health care unaffordable for everyone. In some countries (particularly in Asia and South America) people pay for routine medical care out-of-pocket, and it's not a hardship.

Best advice is to stay as healthy as possible as long as possible by your own wits and wisdom. 

[opsec]

There is also the option of medical tourism. Thailand in particular appeals specifically to this segment of tourists. I have been there, and their medical capabilities are every bit as good as here in the US only much cheaper.