Debt Question

Depending on the amount of debt you have...you can file Chapter 7 Bankruptcy. I know a guy that did it....he owns his house...has two cars and has had no ill effects from it at all (except he can sleep at night again).

 

That works from a psychological perspective certainly. It can be helpful if you have trouble with spending and controlling habits and things like that. But from an economic perspective, if you have $200 to pay off debt each money, you'll be best off financially putting it all in the highest interest debt.

 

Actually from what I understand, both methods work just about equally well. The time difference is usually minimal. The difference, is that your less likely to get frustrated by paying off the smallest debt first, because you see the results of your work faster. You "feel" like your accomplishing more faster when you pay off the smallest debts first, and your less likely to give up.

 

oh yeah...I recommend that everyone with debt should read "The Total Money Makeover" by Dave Ramsey. It's an easy read, but its well worth it.

 

I agree with this theory because it has worked for me. When I first started college I was just like most who did also, offered many different credit cards without any real financial knowledge. I ended up having four cards and each one was maxed out. When I read about the importance of credit scores and whatnot I figured it was time to get rid of this debt. The smallest was $500 while the largest was $2000. I was able to pay the smallest off in 2 months because of a real good summer job I had. I was also able to save up money from this job to apply to the other debts. Then when I went back to my regular job I could afford $150/month toward credit cards and sometimes even more than that. I was able to pay of the $700 and $1000 in less than half a year and the $2000 was paid off in just over a year.

 

I agree with the second part - that it makes you feel better and may provide motivation. So if that's needed to keep someone on the path to getting out of debt, then go for it. But from a purely financial perspective, it's not the most efficient way to go, and in the end, you are losing money by not simply paying the highest rate debt first. How much you're losing depends on the relative rates and the amount of debt you have at each rate. It may just be a little, or it could be a ton.

Part of getting debt-free, and more importantly staying debt-free, is learning to make the smart choice rather than the one that feels the best. Generally, the reason people get into huge debt is making decisions that don't seem too bad. Individually, they are not a big deal, but then when they all add up, you're in a big financial mess. This is the same thing here. The amount may be small if your debt is small or at fairly similar interest rates, but if you get into good habits, you'll save a ton of money over the long-haul. For example, if you have $150 in 20% debt and $100 in 10% debt, and you have $100 to pay off something. If you pay off the latter, you're left with $150 in 20% debt. If you pay off the former (the smarter method), you basically have $150 in 13% debt.

It works the other way too. For example, with subsidized school debt, you should almost always only pay the minimum amounts. I had a friend who was super financially conscious and wanted to get out of debt quickly so she was double-paying her student loan debt. What she didn't realize is she'd have more net money at the end of the day if she just invested those extra payments and kept the 2-3% debt. Same thing can apply to home loans or car loans, depending on the rates you get (especially because of the interest deduction for home loans) and what your investment opportunities are - it's a little riskier here than student debt, though. Finance can be a tricky concept and what seems smart isn't always so smart - but if you focus on the little things, it can be a huge money-saver down the road.

 

your forgetting that we're not robots and there is an emotional side to it. watching accounts go to zero balance is a huge emotional boost.

 

To repeat (for the third time):

it makes you feel better and may provide motivation. So if that's needed to keep someone on the path to getting out of debt, then go for it. But from a purely financial perspective, it's not the most efficient way to go, and in the end, you are losing money by not simply paying the highest rate debt first.

 

Debt consolidation was really a dumb move. I guess you want bad credit or something. You pay another company money that you could have paid your collectors with. Why in the world would you do that?

I suggest you watch Suze Orman show on Saturday night. She'll tell you cannot afford to go to Las Vegas. At the rate you're going you are well on your way to being Young (old), Fabulous, and broke.

 

Yeah, cause all the broke people are at home cause they're broke. lol

 

Sounds like RM95 has a good plan set and that a Vegas trip won't affect his financial obligations. Go for it man!

 

I went through Lighthouse Credit Foundation and paid a monthly fee of $30. Not that bad considerring they got my interest rate on my two cards down to ZERO. Seemed to work fine for me.

 

I agree
They make their Money off your plan
you paying early costs them money
so they have an incentive to advise you against paying off early

I'm not saying they lying but they do have an incentive to lie

Rocket RIver