ABC’s of Getting Out of Debt

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By Paul Christos

The amount of credit card and auto loan debt carried by the average US Household is a staggering $18,500 to $23,500 per household. At 6% interest, $20,000 of debt accrues approximately $1,200 per year or $100 of per month of additional debt. The worst part about carrying this much consumer debt is that there is no intrinsic value in carrying it. This is “Bad Debt” because the interest paid on it can not be itemized as a tax deduction on your income taxes each year. Mortgage interest expense (“Good Debt”), as an example, can be itemized and taken as a deduction on your tax returns. As a result I have made it my personal obligation to minimize this type of debt as much as humanly possible. I am a realist and recognize that different situations require different financial measures. So, I am not agnostic to the fact that, for certain households, taking on consumer debt is a practical necessity and enables day-to-day survival. What I would like to do with this article though is to provide some advice based upon my experiences and some practices that I have adopted over the years to help eliminate “Bad Debt”.

* Figure out who you owe money to and categorize it into either “Good Debt” or “Bad Debt”. This is the single most important thing you can do. “Good Debt” is debt that is secured by an asset that appreciates in value. An example here would be real estate. “Bad Debt” is debt that you take on in which there is no tangible evidence of an asset that appreciates in value. The types of debt that I put into this bucket are credit card debt, auto loan debt, personal loans such as installment loans, debt used to finance education but not technically classified as student debt and any other loan obligation that is not specifically represented as ownership of an asset that does not appreciate in value. That 52” plasma TV you put on your credit card or that Kawasaki motorcycle you purchased is not an asset that appreciates in value, therefore it is “bad debt”.

* Once you figure out who you owe, and in which bucket, determine how much you owe. This is a simple exercise of determining the sum-total of all of your “Good Debt” and your “Bad Debt” obligations. On average your “Good Debt” should not amount to more then approximately 30 to 35% of your total household income. Add up the sum total of your “Good Debt” obligations, then add up all of your income (to include rental income on investment properties as well as cash-flow generated from business investments) and divide the two. The resulting percentage should not be greater than 30 to 35%. In shifting your attention to the “Bad Debt”, your primary goal should be to get this amount as close to $0 as you would be practically allowed based upon your household income and your lifestyle. This may not be achievable in the short-term but I am hoping that the advice I provide in this article will allow you to eventually get there. Believe me, it is a freeing experience once you get there. In order to get there, you need a plan and then the discipline to stay there.

* Once you figure out how much “Bad Debt” you have, you need to evaluate how easy it would be to consolidate all of that debt into one consolidated loan instrument. Consolidation would make managing your finances much simpler as well as allow you to more proactively manage your budget (which we will get to in a minute). Additionally, my bet is that once you consolidate all of this “Bad Debt” into one consolidated loan the resulting interest rate you would pay on this consolidated loan would be less than the sum total of all of the different interest rates you are currently paying. Lower interest rates result in lower monthly expenses which result in a faster path to getting rid of all of your “Bad Debt”. Many financial institutions offer loan consolidation products. In fact, if you are interested in consolidating your debt, please visit our Lending Group at to apply for a loan consolidation product.

* Once you determine which debt can be consolidated you now need to figure out what your total expenses look like. This should include all of your income as well as all of your “Good” and “Bad” debt and your day-to-day expenses. I recommend doing this on a monthly basis. It is simple, figure out the sum total of all of your income and make an itemized list of these items along with the amount of the income. Then, sit down to determine all of the places where you make a payment each month along with an estimate of how much it costs. This should be a very detailed, itemized list and should include everything you spend your money on each month or any services you pay for each month along with an estimate as to how much. Here are some examples of Income and Debt/Expenses. Income: Monthly salaryMortgage payment (good debt)Rental income from an investment property Debt and Expenses: Investment property mortgage (good debt)Revenue received from a business investmentBusiness investment loan (good debt) Auto Loan (bad debt) Credit Card Debt (bad debt) Electric bill Gas bill Trash service Auto insurance Dry cleaning Groceries Haircuts Internet service
Now that you have a list of all of your “Good Debt”, your “Bad debt” and the expenses you incur each month as well as an estimate of your monthly income, you need to set up a budget. This is the part of the process that requires the most financial discipline. The reason it requires discipline is because you need to take a hard look at your expenses and determine where you can reduce or eliminate certain expenses. By consolidating all of your “Bad Debt” under one loan with a lower interest rate, you will be decreasing your expenses. You need to determine where other opportunities such as these exist in your budget. You really need to think broadly about this one and consider all alternatives. Examples include reducing the amount of times you eat out at restaurants or reducing the amount of expensive entertainment you engage in each month. Make a list of these opportunities, along with the pros and cons of taking action on them and then prioritize the list based upon the biggest savings opportunity and the easiest to carry out. If anything is a large opportunity and easy to do (i.e. it doesn’t cause you to make a big sacrifice) you should do it immediately. Other choices will be more difficult to make. Bottom line here though is that you need to determine how badly you want to reduce your expenses so that you can free up income to pay off that “Bad Debt”.

* Once you set up your budget, you need to have the discipline to manage your finances to that budget. This is the single most difficult thing to do because it will require a radical change in behaviors as well as the discipline to resist impulsive purchases or reverting back to bad habits.

* After a few months of living your lifestyle under your new budget, revisit and revise your budget regularly. A budget is a tool that should be updated and revised as your lifestyle changes. If you move to an inner city and no longer need a car to get around, sell it and get rid of your automobile insurance. Then adjust your budget to reflect this lifestyle change. If you can get your employer to pay for your internet service at home because you work from home, update your budget accordingly. The closer you can stick to your up-to-date budget, the higher the probability of success in managing your lifestyle against it.

If you carry out these recommendations you just might be on your way to financial freedom and reducing your debt load.

For more financial advice and general financial information, please visit our web site at

About The Author: Paul has worked in the financial services industry for over 10 years. Much of this experience has come as an executive at a Fortune 500 financial services organization working with a wide variety of consumer lending products.

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