Debt Reduction & Debt Elimination Strategies
If you have ANY debt, and that includes a mortgage, having a debt reduction strategy to get rid of your debt as quickly as possible is the most important thing you can do in creating financial stability and freedom. Living on one income not only becomes possible, but when you get rid of debt, a family can live quite comfortably on one income, even a fairly modest income. Can you imagine how far your money would go through to the end of the month if you didn't have a mortgage payment, car payment, student loan payment or credit card balances? Homeschooling becomes feasible for those who thought they needed two incomes and couldn't see how they could work away from home and still homeschool. Not only that, but when you develop a debt reduction strategy, you are teaching your children important life skills they certainly won't get in public school! When developing your debt reduction strategy, it is important to evaluate your options and decide if the resources or tools available will really help you. Some debt reduction strategies may sound good in theory, but they do not adjust to the real-life financial challenges or are simply not something you and your family can keep up for any length of time. Others are simply a waste of money and may put you even further behind. Dave Ramsey's Debt Reduction PlanMany people are reading Dave Ramsey and following his plan for debt reduction. He has books, tapes, cds, training courses, subscriptions – a ton of products for sale on his website. Some of the general ideas he presents are sound: get out of debt as quickly as you can for greater financial stability and peace of mind. However, there are some problems with some of his debt reduction strategies and ideas.Dave Ramsey's Debt Snowball MethodFirst, let's look at Ramsey's Debt Snowball Method. His approach is the start with the smallest debt without concern for the interest rate or other factors, and focus on paying that debt off first, while just paying minimum balance on all other debts. After the smallest debt is paid off, then the theory goes, you take the extra you were paying on the first debt that is now paid off and put that, in addition to the minimum that was already being paid, to focus on elimination the 2nd debt....and so on. But is that the best use of your money and will it get you out of debt the fastest? The problem with ignoring the interest rate and other factors is that the momentum that is building can end up being rather negative, as the rest of your debt gains momentum by you only paying minimum payments on high interest, large debts, dragging you into even more debt.Is all debt bad and are credit cards bad? Now at first you may be thinking sure debt is bad and credit cards have gotten the average American in a whole lot of debt, so what Dave Ramsey says makes sense – but does it? What if you could borrow say $2,000 at an interest rate of 4%, invest that money into a home business that starts generating $500 a month after 6 months, and continues to grow while creating residual income? Would it be worth paying the interest on that $2000 for 10 months to create income that keeps growing? If you have read any of Robert Kiyosaki's books you'll understand this and why debt isn't always bad. What about credit cards? Dave Ramsey suggests you cut them up, never use them again, get out of debt as fast as you can, then only pay cash or use a debit card. But are credit cards really bad if used properly? The problem is that public schools do not teach sound financial principles, so we graduate without an understanding on how to use our money effectively. Credit cards used wisely can be a great benefit. You can actually use the bank's money interest-free for 30 days – provided you pay it off in full when the bill comes in. If you have learned sound financial principles and are not burdened by debt, a credit card can be a safety net for life's emergencies. Obviously the best strategy is to have a reserve of money to cover emergencies, but what if you have money available that you could use, but it is earning a higher interest rate than the bank is charging you? It may make sense to put the bill on a credit card. As homeschooling parents we need to teach our children sound financial principles so they learn how to manage their money effectively and can use credit cards wisely. The problem I have with Dave Ramsey's approach is it is really not teaching financial literacy nor a good understanding of the “why's” and “how's” in money management. Crown Financial Ministries ProgramCrown Ministries has helped many people get out of debt and is based upon some sound biblical financial principles, although some people feel that some of the material in Crown Financial manipulates scripture. Also, the challenge for busy homeschooling families in participating in the Biblical Financial Study, is that a program may not be available in your area, or you may have difficulty meeting for 2 hours every week for 10 weeks.From the testimonials I have read and people I have spoken with, Crown Financial Ministries appears to do a good job of helping people to change their way of thinking about money and finances. However, I know people who still have had difficulty with their finances after going through their program. Although people may have a better understanding of money and budgeting, they become frustrated and give up because unexpected expenses can destroy their carefully planned budget and they can't see the “light at the end of the tunnel”. Credit Card Consolidation for Debt Reductionf you have credit card debt and are able to transfer higher interest rate debt to a card at a lower rate, it can be a real benefit in helping with your debt reduction plan. However, make sure you check all the details. Some credit cards will give you a lifetime low rate until the transferred debt is paid off, but others will only give you an initial low rate or have other stipulations, such as making a minimum of three new charges per month.Beware of Credit Card Consolidation companies. A credit card consolidation company can ruin your credit, and make your situation ten times worse.
Home Equity Loan or Refinancing for Debt ReductionEspecially in the current economic climate, a home equity loan probably is not the best option for debt reduction. In fact, home equity loans have caused a lot of problems for people who borrowed using the equity on their house while the housing prices were high, only to find they owed more than the house was worth when prices plummeted. In addition, many people who would have qualified in the past, are not able to get home equity loans because of the current banking situation, or are having existing home equity loan lines of credit lowered.Because the mortgage rates have come down, many people are looking at refinancing as a way to lock in a lower rate and help get rid of debt. But not everyone can qualify for refinancing and it may not be the best move financially, even if you are getting a lower rate. The rule (though not an exact number) is you need to have at least 15% equity in your home to do a rate and term refinance. While closing cost will vary from lender to lender the average closing costs/prepaids for a $200,000 loan without PMI is approximately $8,000. If there is enough equity in your home above and beyond the 15%-20% that you must have to refinance you may be eligible to "roll" your closing cost back into your loan so you will not have to write a check at the closing. This can make refinancing seem painless but BEWARE... If you “roll” in your closing costs, you need to figure out how long it will take you to recoup these costs. The average time to recoup the $8,000 closing cost with a new rate of 5% is 52 months. You need to look at you and your family's long term plan. If you are not planning on staying in the home the amount of time necessary to recoup the cost, then the rate saving may not make sense. A number of years ago I looked into refinancing to lower my rate. It looked like a good deal, but before I paid for the home appraisal, I asked the broker if he was sure of the numbers he was quoting me. Well after getting the results of the appraisal, the broker came up with new numbers claiming that he thought the house was worth more, even though I had given him an extimate lower than the appraisal came in at. When I evaluated all the costs I realized that it would have taken almost 10 years for me to recoup the closing cost based on my savings, so I told him to forget it. He tried to use the fact I had already paid for the appraisal to convince me to move forward, but it made no sense to throw good money after bad. You need to look at the return on investment (ROI) and in my case, the ROI was way too long. As it turned out, I ended up selling that house before the 10 years, so it was just as well I never went through with the refinancing. Why the Debt Elimination System I Use is More Effective Than Other Debt Reduction StrategiesA friend who was formerly in the mortgage business introduced me to a program that is helping people to pay off their debt, including their mortgages, significantly quicker and helping them to use their money more effectively so they are benefiting – instead of the bank. In all the years I have been helping people to start home businesses and be more effective in their chosen businesses, I have been aware that most people really need more than just increasing their income – they need to learn how to utilize the money they do have more effectively. So when I say what this program was doing, I became very excited. Here are some of the unique features that make this program a far more effective debt reduction strategy than all the other possible options mentioned here:
Strategies to Save Money as Part of your Debt Reduction Strategy
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