AUGUST 17, 2017
SHOW DEBT OUT
People sometimes take on more debt than they want or than they may easily pay off in a short period of time. Mortgage balances, medical and dental bills, auto loans, student debt, credit card balances and unexpected and unavoidable expenses are often the cause of such unfortunate circumstances.
So what may be done to rid debtors of the burden?
First recognize that bankers and other creditors want to keep debtors on the hook. The longer debtors take to pay the more interest their creditors get to collect. Payments of interest never reduce the debt they owe. Payments applied to principal reduce the amount of their debt.
A Hypothetical Example:
Creating a Debt Inventory
So what are the principal balances that exist on the debtors’ balance sheet?
Here is a list of possibilities:
Mortgage . . . . . . . . . . . . . . . . . . . . . . $ 325,000
Student Loan 1 . . . . . . . . . . . . . . . . . . .. . 12,000
Student Loan 2 . . . . . . . . . . . . . . . . . . . . .12,000
Student Loan 3 . . . . . . . . . . . . . . . . . . . . .15,000
Credit Card 1 . . . . . . . . . . . . . . . . . . . . . .. 2,500
Credit Card 2 . . . . . . . . . . . . . . . . . . . . . .. 4,500
Credit Card 3 . . . . . . . . . . . . . . . . . . . . . .. 5,500
Auto Loan 1 . . . . . . . . . . . . . . . . . . .. . . . . 7,900
Auto Loan 2 . . . . . . . . . . . . . . . . . . .. . . . . 5,900
Due to Dentists . . . . . . . . . . . . . . . . . . . . . 2,300
Due to Doctors / Hospitals . . . . . . . . . .. . . 1.750
TOTAL PRINCIPAL DUE ON DEBT . . $ 394,350
Less Mortgage Principal . . . . . . . . . . . $ 325,000
Equals Other Principal Due . . . . . . . . . . $ 69,350
Using an Online Loan Calculator
One must enter the following information:
What is owed: $69,350;
The number years to pay: 10 years; and,
The interest rate on the loan is: 6.5%
Hit the calculate button and . . .
The monthly payment is $787.46 with
total payments of $94,495.20 over ten years.
To pay off debt in fewer years at the same interest rate of 6.5% monthly payments would be:
In 9 Years: $ 849.85 with total payments of $91,783.80 (Savings = $2,711.40)
In 5 Years: $ 1,356.91with total payments of $81,414.60 (Savings = $13,080.60)
In 3 Years: $ 2,125.51with total payments of $76,518.36 (Savings = $17,976.84)
This is why bankers want debtors to pay in ten years instead of three years.
If our debtors choose to pay $2,125.51 a month instead of $787.46, they will be free of debt in three years and will keep from giving the bankers an additional $17,976.84 in interest should they choose to pay their debt in ten years instead of in three years.
Here is a link for an online calculator that you may use:
http://www.bankrate.com/calculators/mortgages/loan-calculator.aspx
Finding Cash for a Higher Monthly Payment
From the example above:
The 3 year payment is.. $2,125.51 per month
The 10 year payment is $787.46 per month
The difference is $1,338.05 or $16,056.60 annually.
How much does a household receive in a year?
$16,056.60 is 32.11% of $50,000.
$16,056.60 is 16.06% of $100,000.
$16,056.60 is 10.07% of $150,000.
$16,056.60 is 8.03% of $200,000.
For those with household income of more than $150,000 the choice should not be too difficult.
For those with less household income the choices are much harder.
Living Simply and Reducing Expenses to Pay Debt
Essential expenses include these:
Housing & Utilities;
Medical and Dental;
Meals at home and lunches for work;
Auto and public transit;
Extra costs for long commutes to work;
Clothing allowance;
Required other employment expenses;
Minimum payments due on outstanding debt;
Disability Insurance to cover possible loss of income; and
Term Life Insurance if one has dependents or debt.
Whether we like it or not discretionary expenses include everything else.
Among those discretionary expenses are these:
Travel;
Events and Holidays;
Dining Out;
Gifts and Donations;
New Landscaping and Remodeling;
Other than essential telephone and computer costs;
Memberships, Subscriptions and Newspapers;
Does anyone want to give up those expenses? No one does but they are discretionary.
If our hypothetical debtors pay off their indebtedness of $69,350 in three years instead of ten, they will save $17,976.84 in interest costs never having to be paid,
That $17,976.84 will go a long way in paying for discretionary expenses during the seven years that follow those first three years of painful debt payments.
The Bigger Debt Issue
As most households take on greater amounts of debt paying off that debt becomes an economic problem for our entire society.
Why?
Payments to service debt are no longer available to pay for new consumption, for new savings, or for new investment. The vast number of US Households depend upon growing salaries and wages to cover their costs. After adjusting for inflation wages and salaries have not greatly increased over the last thirty years. When there is a new downturn in the economy income will shrink further but debt payments will remain the same.
The cost of housing as a percent of household income has risen to heights unimaginable thirty years ago. This also reduces the amount of income that is available for new consumption, for new savings, or for new investment. Rising debt payments and ever-increasing housing costs do not bode well for the better future that we would like to see for everyone. For now those blessed with financial and real estate assets seem to be in a very secure position. But unless a new source of growing asset investment and consumption can be found in the long run prices will have to fall to find buyers. The downward spiral will then be quite ugly to see.
Writing off debt that will never be paid and promoting policies that will allow financial asset and real estate prices to fall may be the only way to get back to an economy that works for everyone. Unfortunately our leaders are failing to move in that direction. Instead they keep moving in the ways of the past that no longer seem to work well.
