Thursday, October 16, 2014

How to Minimize Debt

How do you avoid being buried by debt?

Most well off individuals will tell you that the first step to saving and accumulating wealth is to live below your means.

1) Don't borrow money unless it is absolutely necessary.
2) Budget your spending, revise and reduce periodically.
3) Pay off any debts as soon as you possibly can.

Some people, such as myself, are fortunate enough to have had the right education and upbringing to understand personal economics very well at a young age. However, there are far too many people in this country who borrow, refinance, and borrow again; all as a part of what they consider to be the normal order of things. Pretty soon, this debt gets so large that you are only able to pay the minimum payments. This all ends, when you are staring up at the impossible debt mountain, while deciding whether it's worth to go to a debt forgiveness specialist and plead for mercy or to declare personal bankruptcy and have your debts (aside from school loans) written off.

It doesn't have to be this way. As long as you are employed and have income going into your bank account every month, you can work out a strategy to protect yourself from potentially toxic debt cycle.

Education
The first big decision you will make in your life as a young adult is to decide which college to attend. But it starts even before that, with the question - what do you want to do in your life in order to earn a living? Therefore, it is my suggestion to all High School kids out there to truly use your early years wisely to discover what you want your profession to be. Higher Education is incredibly expensive, and these loans cannot be defaulted upon in order to be written off. Once you have your direction in life, research the Colleges which have the best programs for your chosen profession in your locale - living at home while attending college will save you money. Out of those schools, pick one that has the lowest net cost = (tuition + meal plan + fees) - (qualified school scholarships + grants). In addition, make sure to apply for all relevant scholarships and grants available from your State and Federal Government - these will knock down your net cost of education even further. If the remaining net cost cannot be offset by contributions from your parents or relatives, that's when you will need to make use of the student loan institution. Finally, as long as it doesn't interfere your studies, find part-time employment to offset cost further.

Living Space
Once you graduate College, as long as you have a good relationship and understanding with your parents, I suggest you live at home for the first couple of years. It saves you money and allows you to pay off your School loans faster. But sooner or later, you will have to move out and live on your own. Do yourself a favor, disregard the mainstream media with respect to home ownership - it is a losing game for someone who cannot buy a house outright (or pay at least 80% of the cost up front). Even with a friendly 30 year Fixed Rate of 4.25%, you still wind up paying twice the cost of the home over the lifetime of your loan. This was strictly mortgage - there are other upkeep and maintenance costs that come with home ownership, which puts the financial squeeze on the owner further. This prevents you from putting away money which you can save, invest, or use to create another stream of revenue. Renting, on the other hand, allows you to forego financing, maintenance and upkeep costs; all while retaining that money for another purpose. On the other hand once you have saved enough to pay at least 80% of the desired home, you may want to purchase the house if you have, or are intending to start, a family. Assuming the home is paid off in full, or in a short amount of time, you are only paying for property taxes after that.

Food
Learn to cook and learn to shop for cheap ingridients. A lot of people get lazy in the age of the internet, choosing to spend their time with their cell phones, tablets and laptops; rather than choosing to protect their wealth. You don't have to become a master chef, just learn a few quick simple recipies that you enjoy and won't break the bank. The use of store-bought ingridients and home utilities can save you up to 50% over middle of the road restaurant in terms of food preparation and clean-up. On those occasions when you do choose go out, ty to find a discount such as a coupon, flyer, groupon, livingsocial, etc.

Clothing
Make sure shop at stores that offer quality goods at a deep discount (Marshalls, TJ Maxx, etc.) or go to outlet stores that get their goods directly from the manufacturer. As long as the clothes have a brand name and look in current style, chances are people won't be able to tell where you got them. Only buy the clothing you plan on wearing, as opposed to collecting dust. Value your money, to spend it frivolously.

Non-Essential
With non-essential spending, such as gadgets, toys, vacations, and everything else that does not fall into living essentials category, it is important to keep this category as lean as possible. I get it - you want to enjoy your life. You should definitely go on a vacation, get yourself a big screen television, a nice reclining couch. However, realize that these are not time sensitive purchases and you can wait until a great deal presents itself. You will want to do a little research on what you want to buy and the cost range for that item. Just remember - the latest, greatest and trendiest, is also often the most expensive.

Budgeting
Keep track of your incoming money and outgoing money. Sounds simple, but very few people actually do this. It is as simple as opening your Excel Spreadsheet document (or a Google Spreadsheet document) and recording your salary and expenses. This will give you an idea if you are cash flow positive or negative. Cash Flow Positive is when you have additional money left over at the end of the month when you subtract all your expenses from your salary. Cash Flow Negative is when you wind up with money owed after all your expenses are substracted from your salary. In general, even if you are Cash Flow Positive, you will want to increase your salary and other sources of income, all while decreasing your expenses as much as possible.

Tackling Debt
When it comes to paying off your debt, you have to realize the interest with which your loans grow (4.5%, 6%, 7.5%, etc.) are a lot higher than the percentage the bank or treasury bonds will earn you (0.10%, 1.45%, 2.25%, etc.). Therefore, it is in your best interest to put some of your Cash Flow Positive money toward paying off additional Principal  of your Highest Percentage Loan each month. This strategy will help you pay off your loans faster and greatly reduce the amount of your hard earned money that would otherwise be wasted on paying loan interest over the life of your debt.

New Streams of Income
Your primary profession does not have to be your only source of income. You should treat your time as a valuable resource. You may learn another skill, start investing, find small off-hours work that pay, write for money, teach, etc. Whatever you choose to do, try to figure out how to better spend the time you usually watch TV, play video games, or surf the interenet. This is all extra time that you can leverage to supplement your salary.

No matter at which stage of life you are in, if you work on these basics and apply them in your life consistently, it will allow you to evade your dependency on debt and save you money to enjoy living more comfortably.

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