Tuesday, August 6, 2019

Frugal Workshop Podcast #5 - Debt

Good morning and welcome to the fifth podcast of the Frugal Workshop blog. I'm your host, Belinda Richardson and I want to welcome you and all of my readers from Frugal Workshop. I'm so glad you decided to join us.

Today we are going to be talking about debt, so let’s get started. 

Have you ever seen the television show Hoarders? I saw an episode one time where the home was filled with packages from both Home Shopping Network and Amazon and the majority of those weren’t even opened. And those people were in serious debt or had spent a large portion of an inheritance and had no money left. 

Unfortunately, we live in a consumer driven society where some people think it is perfectly normal to live with credit card debt. Advertisers have found ways to get our attention  and make us want things we didn’t even realize we wanted in the first place. This type of society is constantly giving us new things to desire and encourages us to spend beyond our means. And we are encouraged to think that way by the credit card companies.

In fact, the majority of Americans overspend on a regular basis. Part of the problem is because credit card companies make it easy to get into debt. If you need something from the store you can go pick it up and put it on your credit card or order it online and have it delivered to your home. It’s  just too easy to do this and by the time the bill comes due some people may be shocked at how much they’ve charged. 

When payday rolls around they end up sending a large portion of their paycheck to these credit card companies, which leaves them without enough money to support themselves, so they continue to charge what they need on credit cards. It’s a risky cycle and the credit card companies actually love consumers who don’t pay their credit cards off in full each month.  

There are a few things driving the growth of consumer debt. Easy credit and advertising encourage people to live beyond their means.  In our consumer driven culture, buying new things like electronics, clothes, and other items has been made easier because of credit cards. 

In fact, people are buying so many clothes these days that it’s created the business model Fast Fashion, which is a term coined for inexpensive clothing rapidly produced by mass market retailers in response to the latest trends.  

Fast fashion is a major contributor to the world's clothing waste problem. Many of us give our old clothes to charity, but some of it ends up in a landfill. 

Fast fashion is not only harmful to the environment by creating textile waste, but it’s also harmful to our well being and ultimately our wallets. 

If you’re interested in learning more about this topic I will include a link in the notes for this podcast to a YouTube documentary that outlines how fast fashion adds to the world's clothing waste problem. It’s a video that everyone needs to watch.

Thankfully one way we can help to avoid the problem is to hone our skills to avoid Fast Fashion by second hand shopping, which works in our favor. Podcast #2 relates to second hand shopping. 

All of this reminds me of a story about one of my friends. Her and I were shopping one time at the mall in Chattanooga. She was looking at expensive perfumes to buy for both me and another friend of hers.  No special reason other than she wanted to do something nice for us. 

She ended up buying two expensive perfumes even though she was already in credit card debt. It didn’t make sense to me as I knew she was already in credit card debt. It would have better for her financially to put that money towards her credit card debt instead of buying perfume and adding to her debt load. 

There is nothing wrong with buying a present for a friend, but if you have to go into debt for the gift, it would be wise to reconsider that purchase. 

Not only are credit cards part of the debt problem in the United States today, but now the culture in high schools is based on the false idea that everyone should go to college. 

College costs used to be lower than they are today and student loans were not as common as they are today. But as high school students become more pressured to attend college, student loans have increased to the tune of thousands of dollars. 

I’ve read and listened to stories about student loans for tens of thousands of dollars. It’s a frightening concept to me to even think about being that much in debt. 

Logically, we need to try and do our very best to live below our means. If something happens one month that you are unable to do that and you have to borrow money, make paying that money back a priority. Pay it the very next time you receive a paycheck. If you restructure your life so that you're spending less than you earn, you will eventually get out of debt. 

What are the different types of debt?

First off there are two types of debt, which include secured and unsecured debt. Secured debt is backed up by the borrower with collateral such as a house or car. Unsecured debt, like credit card debt, is not backed up with collateral and includes debt such as credit card and medical debt.

What is the Difference between Good or Bad Debt?

The simple definition of debt is money owed to a person or organization you've borrowed money from, with the intent or requirement to pay the money back. 

Some debt is considered good while some debt is considered bad debt. 

While good debt has the potential to increase a person's net worth, it's generally considered to be bad debt if you are borrowing money to purchase depreciating assets. In other words, if it won't go up in value or generate income, you shouldn't go into debt to buy it.

One example of a bad debt is a payday loan, which are outlawed in some states and should be outlawed in all states in my opinion. 

A payday loan is a short term, high interest loan that is created to help a person financially until their next payday. Think about this...not only are some people living paycheck to paycheck, but a large number of people are getting loans just to MAKE it to payday. How sad is that? 

According to Credit.com twelve million Americans take out payday loans every year. The interest rates on some of these loans is extremely high with some charging anywhere from 400 to 1000%! It’s no wonder they are banned in some states. 

Why You Should Pay Off Your Debt?

Debt repayment can improve your credit score, meaning you'll pay less on everything from rent to car insurance to future borrowing needs.
To make paying bills more streamlined and easier. I like it when I only have a few bills to pay. If I had my bills to pay and also had 10 credit cards to pay that would be unpleasant. 
I live my life to be debt free because I want the peace of mind and to be able to sleep at night without the worries that debt can wreak on a person’s mind. 
Pay off your Credit Cards each Month 
Credit cards are a great convenience if you use them to pay for things you can afford, would have bought anyway, and pay in full every month. And then there are the reward points you can earn from credit cards, which is also beneficial. But if you can't pay your credit card in full each month that means you are going into debt. Some people use them to spend money impulsively. 

Don't carry credit card debt to for entertainment or frivolous consumer spending or to eat out. 

If You’re Already in Debt, Don’t Make Any New Debt!

Many of these items are charged to credit cards and banks make a bundle collecting the interest on those accounts. Sears credit cards made more money for Sears than anything else they sold. According to the Motley Fool the credit card companies hauled in $163 billion dollars in interest in 2016. 

How to Manage the Debt You Have
Make a list of all of your debts, including the creditor name, total amount of the debt, monthly payment, interest rate and due date. Having all the debts in front of you will allow you to see exactly how much debt you’re dealing with.
The reason I’ve included the interest rate is because there are several websites and apps that allow you to plug this information into a calculator and give you a time-frame for when you will be debt free. 
Don't just create your list and forget about it. The times when I have paid off debt or even lost weight were the times when I was paying attention to what was going on with my finances or my weight. I kept myself aware and paid attention, so refer to your list at least once a month and update your list regularly. 
There are three steps to paying off your debt. Earn more, and use every extra dollar to pay down your debt. And spend less, and use the extra money to pay down your debt. Mr. Money Mustache calls debt a flaming emergency! 

Should You Save Money While Being in Debt?

I think this is a very personal decision to make and depends on your particular financial situation. You and your significant other, if you have one, need to discuss this and come up with your own plan. Of course researching all the options will help with the decision. 

Some people think it’s a huge waste of money to keep money in the bank earning no interest, while paying higher interest on debt. 

Others think you should save up $1.000 in an emergency savings account before you pay off debt. That way you’ll have money in case of an emergency and won’t need to charge more debt. 

In our home we have an emergency savings account to depend on so that we don’t need to go into debt in case of an emergency. 

Get Support While Paying Off Debt

If you need any motivation while you are going through the debt payoff process I would highly recommend joining Instagram. They have a debt free community that is very supportive of those going through the debt payoff process. They use the hashtag #debtfreecommunity and they are very motivating to help people trying to pay off debt. 

In Conclusion

There are a lot of aspects regarding debt and I have barely scratched the surface here. We will be visiting different topics on the subject of debt in the future. 

I hope that this podcast has been helpful to you and I want to thank you for taking the time out of your day to listen.

Resources Used in this Podcast:

The Motley Fool

How fast fashion adds to the world's clothing waste problem (Marketplace)

PayDay Loans on Credit.com

~ Living within our Means ~
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Making Cents Of It All said...

Great article. We follow Dave Ramsey. We are paying for youngest daughter's college as she goes. We live below our means and put 15% of our income into retirement. We only have our mortgage left. It will be paid off before hubby retires. We give up a lot of things that other people don't we are happy with what we have.

Belinda said...

Thank you, Marybeth. You and your dh are doing great job financially. My Dad paid off his mortgage before he retired. It was one of the best things he did. Giving some things up for that peace of mind is worth it.

thyme2Bthrifty said...

Good compilation for avoiding or getting out of debt.

Nil @ The Little House by the Lake said...

This is a very informative post, Belinda.
The only debt I have the mortgage. I want to pay it off as soon as possible, and definitely before I retire.

Belinda said...

Thank you, Anna.

Belinda said...

Thank you, Nil. That is a great and wise plan you have there. :)

thyme2Bthrifty said...

Did not finish my post 8/6. Tapped "Publish" before complete and could write no more.

Especially, I wanted to comment on the YouTube Channel about Fast Fashion. While watching the channel, I realized I knew most of its content and wished everyone would watch it and other channels about Fast Fashion. Kenya does not want our second-hand clothes stayed with me.

Americans are a wasteful society, and I am among the wasteful. DH and I are clearing papers one by one. He brought a photo to me. I had never seen it nor know its origin, but I appear to be age 5 with my maternal grandmother. It is not focused as I wish it were; however, I have read about a process to correct that. DH found GOLD for me.

In the meantime, DH and I push ourselves towards a minimalist lifestyle. Not near it yet. Fast Fashion urges not to waste. Clear message, Belinda.

Belinda said...

Bailey thinks everyone should watch the Fast Fashion video too, Anna. We are definitely a wasteful society. I work towards minimalism too, but I need to do better. I recently got rid of about 5 books that I was keeping because I loved them, but realized I never used them, so out they went. Thank you, Anna.

Belinda said...

And I should mention that we traded the books at McKay's, so someone else can love them too.

Belinda said...

And I should also mention...we can reuse our clothing for other things even if it is just for the rag bucket, it would be better than sending them overseas. They may still need things from us, but we could do so much better.

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