The 2 Most Evil Debts of All

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What are the 2 most evil debts of all? Nope, not credit cards…..can you guess what they are?

The answer: Payday loans and “Buy now, pay later” offers!

First, payday loans. Recently, most provinces have enacted laws limiting the interest these businesses can charge to around 21% to 25% (gee, only?), but in New Brunswick they have yet to do this, so it’s legal for them to charge up to 60% interest in that province! My advice is to avoid these places like the plague. And stop to think, if you’re spending your pay before you even get it, it’s time to make some drastic changes to your lifestyle, not the time to rack up some crazy 25% debt. Dude! That’s a quarter of what you’ve borrowed!

And topping my list of sneakiest  and most evil debts is the “buy now, pay later” offer. What most people don’t realize about these offers is how they calculate interest. Let’s create an example where you buy living room furniture for $3,000 on a “don’t pay for 18 months” offer.  The offer advertises “no payments and no interest for 18 months”. They’re not lying, you don’t owe them any money until after 18 months and technically, they don’t charge interest for those 18 months, but here’s the sneaky part; if you don’t pay the entire balance on that 18 month due date, they charge interest retroactively, right back from the date you originally purchased the item (18 months ago, remember?), usually at a rate of about 36% or so!

In other words, when they say “no interest for 18 months”, what they mean is you don’t have to pay that interest IF you pay up by the due date, if not, then you DO have to pay all the interest that was calculated over those 18 months and into the future until you pay the remaining balance.

So the only effective way to buy something on a “buy now, pay later” offer is to figure out what the monthly payments would be on the item (taking our example above, that would be monthly payments of $166.67), put that money aside each month for the 18 month period, and then pay the entire balance owing on the exact due date to avoid any interest being added to the price. However, if you’re disciplined enough to do that, why not just put the money aside every month and go get the furniture once you have the money in the bank?


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Spread Too Thin

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Can you save and pay down debt at the same time? Maybe, but should you? In my opinion: no.

If you carry consumer debt, then my advice is get it gone as soon as possible. And in the world of high interest consumer debt, every dollar counts. The faster you obliterate the debt, the faster you can get down to the serious business of saving and investing those savings.

What if you already have savings….should you use those to pay down the consumer debt? At the risk of sounding like I’m contradicting myself, again I’m going to say no. And then I’m going to sound like I’m waffling when I say, unless the only debt you carry is all at 20% or more. And even then, before cashing in your savings to reduce debt, do everything in your power to get the interest rate on the debt reduced first (remember last week’s video?)

Three reasons for this logic:

  • The interest you could be making investing those savings is probably more or equal to the interest on the debt if the debt is at 10% or less.
  • Seeing your savings wiped out in one swoop would be a hard blow to take.
  • Chances are, if you’re still adjusting to your new-found budgeting ways, you may not be 100% successful in keeping the debt gone once you pay it down, and then you would have effectively emptied the coffers for nothing.

Believe me, it took us 3 cycles of racking up and paying down our credit cards before we finally were able to get it right and make enough lifestyle adjustments to keep the debt away for good! Using my savings wouldn’t have made a difference to our spending patterns, and it would have been very depressing to start at zero again in accumulating those savings.


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Minimum Shminimum

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Let’s do the math, shall we?

You owe: $10,000

Minimum payment: $100

Interest charged: $162.64

freedigitalphotos.net-surprise

See what happened there? Your credit card company got you! You thought that by making your minimum payment you were making a dent, but uh-unh, they got you, your balance is still going to be more next month. And let me quickly calculate when you’ll have this card paid off……umm, never.

You most likely didn’t even notice because at the same time as they were pulling that fast one on you, you weren’t helping; you were charging more on the card.

So, there are two steps to making progress on paying off your credit cards. Firstly, stop exacerbating the problem. Immediately. If you don’t have the money, don’t buy the thing, simple as that.

Secondly, don’t just automatically assume you should pay the minimum payment they’re asking for. Quickly compare it to the new interest you’re being charged. Take whichever of those is the bigger number, add at least $1 to that and voila, you’re officially making a dent!


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photo: freedigitalphotos.net

The 7 Clinical Stages of Wealth

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Denial: This is the stage where you spend money like it’s growing on trees. You have no regard for the consequences and pay only the minimums on your credit card balances. Usually, this stage occurs before you’re actually earning a decent income, but your spending keeps pace with the CEO of your company regardless. This stage may involve hiding your spending from a spouse. (Note: if you find yourself saying, “It’s only $100.”, or something similar, you may be in the denial stage)

Depression: This stage usually occurs when you’ve been borrowing from Peter to pay Paul for a while and you hit the point where that well runs dry. Even if you’ve been managing to juggle your debts, the day comes when you have no more wiggle room. There may be a few tears as your friends head out to that concert and you’re left at home, hoping they won’t turn off the hydro. This stage may involve trying to mooch off of others.

Acceptance: This is the happy day when you decide enough is enough. You realize that you CAN live within your means. Heck, you can even live below your means and save some money up! You WILL have those adorable shoes and you WILL be sipping mojitos on the beach…in due course. Life is good!!

Budgeting: This stage is driven by your new-found determination to be awesome. You fearlessly list your income and your expenses and make sure that there’s more coming in than going out. You bravely turn away from the mall and put that money towards your debt instead. Your mantra: Just keep swimming!

Saving: This stage is the reward for all the sacrifices you made in the budgeting stage. You happily squirrel away all that “extra” money and enjoy the feeling of pride that comes from seeing those dollars accumulate.

Growth: You’ve almost made it! At this stage you’ve become an investing machine. You confidently grow where no deny-er has grown before. You laugh in the face of debt. Emergency repairs cower before you. You’re unstoppable!

Stress-free living: YESssssss!!! Finally! All that hard work paid off. Combining your new money habits with a little discipline, you can now breathe easy, knowing that debt is a distant memory. You can now look forward to your future without any financial stress. Congratulations! And enjoy those shoes…they look so cute on you!


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