Life is good!

The easiest way to explain “easy street” is to think of your financial journey as a game of monopoly. You are winning the game, so you think. You are spending money rapidly to acquire multiple properties,railroads and are even landing on free parking from time to time. You watch your property cards pile up faster than your competitors, and you mock the frugality of your brother when he saves his money for the big properties. At the end of the game, however, you are out of cash. Forcing you to sell all you have when you land on one his big ones.

This all depends on a roll of the dice, but if you’ve out-spent your income the odds are never in your favor.

With today’s economy, you’re probably thinking less and less about your personal debts and spending habits. As your income grows, you think you will pay off the debts you are currently accumulating down the road..  While debts may seem easier to pay off when times are good, don’t let yourself fall victim to this way of thinking.

Ignoring debt, especially without a plan of how to pay it off, and spending too much money can be hazardous to your financial health!

In real life, taking out a second mortgage is much more damaging than in a game of monopoly. Don’t take the risk that the dice might not roll your way.

Here is a simple four step process for keeping you out of financial trouble.

• Do the Math.

  Start by making a list of all your debts. Break them down into short-term (e.g., credit cards), intermediate-term (e.g., car loans), and long-term (e.g., mortgage) debts. Place long-term debt at the top of the list and short-term debt at the bottom. Just like that, you’ve quickly painted a picture of your current debt situation. No matter what that picture looks like, don’t stress out at this step. Panic is only going to make things worse. Writing down your debts is the first step in acknowledging that you have debt.

Here’s a sample of what that list might look like for you:

Mortgage           300,000

Student loan        80,000

Personal loan      50,000

Car loan              38,000

Credit card 1       10,000

Store credit card   2,000

Total: -430,000

It’s easy to ignore your debt, or feel like it’s not very much. Writing it down will force you to understand how spending money on that extra pair of jeans or airplane tickets actually effect you long term.

• Start at the bottom of the list.

  Pay off higher interest rate, short-term debt first (e.g., credit cards). Setting up a self-imposed payment schedule can help you manage your short-term debts and reinforce the importance of saving instead of spending money. Ultimately, your goal should be to eliminate all short-term debt and then budget for day-to-day expenses using personal savings rather than credit cards and high interest rate loans. This will also give you the sense of accomplishment that you paid off one of your debts. Keep the original list and track your payments or cross out debts when they are paid. You need the financial momentum that this will provide.

• Avoid the Minimum Payment Trap.

  You might sometimes wonder how department stores make so much money off of credit cards, minimum payments is the key. If you pay off a purchase after spending money that day, you still get the deals without the interest. Minimum payments of 25 dollars a month will drag a purchase out and let a lot of interest add up. For instance, if you have a credit card with a 17.9% finance charge and your balance is $1,000, making a minimum payment of $20 per month for the next year will only reduce your balance by $66.26. That means you’d be paying the credit card company $240 in exchange for a $66 reduction in your debt. Simply put, making a minimum payment is like throwing away money!

• Maintain Your “Impulse” Will Power.

  If you impulse shop frequently and regret spending so much money, don’t go to the mall unless you have a specific need or a list. Even then, delay your purchases for 24 hours. Almost every store nowadays holds items for you. Similarly with online shopping, try to place items in your shopping cart and wait for the next day to check out. Realistically waiting a day to purchase an item won’t have a big impact on your life. Often, an impulse will pass once you’ve had a chance to sleep on it.

Before You Pass “Go”

If you’re finding that today’s lifestyle leaves you with no choice but to go into debt, don’t panic. These four steps will help you control your debt, making it manageable. While you may be enjoying the ride down “easy street” today, making a right turn on to “smart street” will help solidify your personal finances for a better tomorrow. Just remember you never know when life might throw you an unexpected luxury tax or ride on a rail road. Do your best to enjoy the journey of becoming debt free.

As always, contact me to help you with that journey!