DANCE out of Debt – 5 starter steps to eliminate debt

April 10, 2009 by Lakita
Filed under Practical Advice

Note: This was originally published in Paneh's 2/2009 newsletter (Kingdom Finance edition). I will be slowly migrating newsletter articles onto this site.

As ministers and children of God we experience great liberty ~ who the Son sets free is free indeed! However, in lieu of this liberty, many of us remain "financially incarcerated". I can't get away from the analogy of a minimum security prisoner. While they may experience some freedom, there is still a definite boundary and when that boundary is reached they are reminded that they are not as "liberated" as they thought they were.

Recently I've experienced what I am calling my own personal "financial awakening". I want to share with you all what I'm learning as a result of this transition.

FACTS

According to Bankrate.com, the average household carries $8,400 in credit card debt.
11% of the population pay the minimum amount on their credit cards
Over 50% do not pay their cards off in full each month (therefore incurring interest)

Ever wonder how long it would take to pay off that card? Consider this scenario:

$8,400 in debt (the National average)
Minimum payments of $212.50 (2.5% of the balance)
Your interest rate is 15% (the National average)

It will take you 21 years and 5 months to pay this off while paying $8,284.39 in interest.

Check this yourself using CNN Money's Debt Payoff Calculator. Whether you are $500 or $5,000 in debt it will project how long it will take you to pay off debt making minimum payments, fixed payments, and create a plan for you if you want to be debt free in a fixed amount of time.

I'm sure we can all think of better ways to spend $200 per month than on credit cards!

Here is another scenario showing the power of interest

Credit card balance is only $1000
Minimum payment is only $30
Interest rate is 28%

These are the types of cards a lot of college students are getting. Typically the interest rate is very high because they have no credit history. Paying the minimum only it will take 9 years and 9 months to pay this card off while paying $1,595.10 in interest.

Interest is very powerful, and we need to make sure it is working in our favor (savings & investments) instead of against us. The lesson is clear — get rid of damaging credit card debt as soon as possible!

It's worth noting that in the Bible, the concept of loans and interest was addressed in several occasions. However, the law did prohibit charging interest to the poor. Ironically, our financial system charges the highest interest rates to those with lower incomes. Since the borrower is servant to the lender do we really want to spend years in financial servitude? Will you resolve to abolish dangerous debt so you can move freely? If this isn't your testimony, will you share it with someone who may need the information?

Take these steps to DANCE your way out of debt!

Diagnose the problem:
You cannot come up with a solution until you know what the problem is. Here are example problems:

- I have too much dangerous debt
- I'm not prepared for retirement
- I don't know if I'll be able to send my son/daughter to college
- I am living paycheck to paycheck and worry what would happen if I lost my job

Assemble Your Data
Once the problem has been identified, you'll need to gather more information such as:

- Current net worth (Use this net worth calculator)
- Monthly income vs. expenses (Review bank statments)
- Current credit standing
— You are entitled to at least 1 free credit report each year. The official source is http://www.annualcreditreport.com. Don't be fooled by imitators that offer you a free report by signing up for some other service.
— If you want your credit score, you have to pay. Most lenders use FICO. You can get your score from their official site http://www.myfico.com *

* Note: Currently there is no regulation entitling you to a free score. Offers advertising a free score is usually dependent on signing up for some type of paid monthly service. Be sure to read the fine print!

Negate Bad Habits
Once steps are taken to remove dangerous debt; we have to turn around the habits that got us there in the first place. Some examples are:

- Spending more than you earn / Living on credit cards
- Little to no emergency savings funds, forcing you to use credit
- No budget or spending plan for accountability
- Frivolous spending without regards for needs vs wants

Create a Plan
Your plan will be based on your situation. If you have a lot a debt, your focus should be paying that off. If you are actively paying off debt but have little savings, perhaps that is your focus. Or maybe you just want to exercise better financial principals. Here are some ideas:

- Set SMART (Simple, Measurable, Accurate, Realistic, Timely) Financial Goals

- Pay off debt with the "Debt Snowball Method"* or use the Debt Payoff Calculator to create your own plan

- Review your spending habits and see if there are areas where you can curtail spending

* Note: You'll notice that the debt snowball method pays off the debts with the smallest balance first enabling the quickest victory and drive to continue. However, you can spend less in interest if you pay off the card with the highest interest rate first. You need to know what works for you.

Execute & Evaluate

Notate where you are today. Set a goal for yourself (3 months, 6 months, 1 year) and notate where you are in the future.

- Is the plan working?
- Does it need to be adjusted?
- Have priorities changed?

There are wealth and blessings laid up for us but we have to be in position to receive them and practice good stewardship. As we continue to do the work of the ministry lets shift the position of finances from a yoke of servitude to a tool we use to grow and bless others.

Editor's Note: This information contained in this article is for informational purposes only and does not constitute advice. The links to other websites are not under our control and are provided for your convenience only but does not necessarily imply endorsement. The content contained in this article are merely suggestions, however it is up to each reader to make their own decisions or to consult with a certified financial advisor.

photo credit: Andres Rueda