Readers may think about following facts: Total U.S. consumer debt (without mortgage debt) reached $2.56 trillion at the end of 2008, up from $2.52 trillion at the end of 2007. (Source: Federal Reserves G.19 report, February 2009). The average credit card indebted young adult household now spends nearly 24 percent of its income on debt payments, four percentage points more, on average, than young adults did in 1992. (Source: "Generation Broke: Growth of Debt Among Young Americans") The average credit card-indebted family in 2004 allocated 21 percent of its income to servicing monthly debt compared to the 13 percent dedicated to debt payments among all households. (Source: Demos.org. "Borrowing To Make Ends Meet," November 2007)
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What do the facts and figures tell us? Debts cause increasing social problems. The US inhabitants are world champions concerning debts, but other nationalities are also affected. Debtors need a substantial part of their income to pay back debts. Families and young adults are in particular concerned of high debts. No wonder, if high interest rates of 12 percent or even more have to be served in order to get a loan or to overdraw accounts or credit cards. The rising unemployment rate will cause serious difficulties for many debtors. If a debtor loses its job, it is almost impossible to pay the rate of redemption. The unemployment rate has reached 8.9 percent in the US and more layoffs are expected.
Accumulating debts reduce at last the freedom of choice and the peace of mind. How to become debt free and to regain freedom of mind?
Tips for a debt free life
o The first step is to calculate a budget of the monthly income and expenses. The budgeted expenses should be kept slightly lower than the income in order to gain a buffer. The buffer should be used to pay pack the outstanding debts. If one gets debt free, the buffer can be used to accumulate savings.
o It is always better to save money and accumulate some reserves for big expenses, e.g. home electronics, car, furniture, kitchen appliances, home repair, vacations, dentist bills, than to pay interest rates on loans. The person who saves money receives interests from the bank the debtor has to pay interest rates.
o It is tough in the beginning to achieve a debt free life. Readers may deliberate if all the expenses are really necessary. Can a smaller and cheaper car do the same? Is it always necessary to wear cloths of famous brands or do the regular department store cloths is also? Is it not also nice to cook and eat at home instead of setting out to a restaurant?
o If a debtor has different outstanding loans or debts on credit cards, the debts of high interest rates should be eliminated at first. The higher the interest rate is, the higher is the rate of redemption.
o If there is still some cash on a bank account, this money can be used to pay back debts. The interest rates of credit cards and loans are much higher than the interest rate that a bank pays. Thus it does not make sense to keep cash on the bank while there are outstanding debts.
o If a person still holds securities, e.g. stocks and shares, the securities can be used as collateral in order to get a loan from the bank. This could be an opportunity, if it is not possible to pay back all the debts on credit cards or other kind of loans at once. Interest rates from the bank are much lower if the bank gets collateral for a loan than on credit cards.
o The best is to use only one credit card at all. The credit card with the lowest interest rates should be preferred.
o It is better to pay the regular expenses for food, beverages, restaurant bills, cloths, shoes in cash than with a credit card. Paying in cash gives a better feeling for the done expenses. The budgeted amount for such weekly or monthly expenses should be kept in cash. Expenses have to be stopped, if the provided cash money runs out.
o There are lenders who lend money to people on a bad credit card score. They promise quick relief from cash problems. This lenders demand exaggerated interest rates. They are not only no solution for despaired debtors, but they make matters worse. Debts and rates of redemption gets more accumulated by such luring offers, the day of bankruptcy comes nearer.
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Liliane Waldner
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