Friday,Guest Posting February 17, 2006 marked the first of a multi-part series for The Oprah Winfrey Show, where Oprah challenged Americans to get out of debt. Oprah teamed up with three of the nations top financial experts to create a step-by-step action plan to show her viewers how to get out of debt. Oprah featured Jean Chatzky, Glinda Bridgforth, David Bach as her top financial experts.
Oprah compared Americas over-spending habits to our similar over-eating habits. She showed how compulsive spending is much like compulsive eating and how America doesn’t just have a high rate of obesity in our body, but obesity in our debt.
Oprah featured three families that were suffering from their high debt. First, there was the Widlund’s, who had the lowest annual income at over $75,000 and $81,000 in debt! Then there was the Eggleston’s, making about $92,000 a year and with $115,000 in debt. And the Bradley’s topped it off with over $100,000 a year income and $170,000 in debt.
The Four Steps of the Debt Diet, WITH some Special “Secret Sauce” added… Enjoy!
Debt Diet Step 1: How much debt do you really have?
Calculate how much debt you really have so you can begin paying it down.
Often times many people do not even know how much debt they really have. This is an important step to getting your debt under control.
It’s a good idea to run a three-in-one credit report. A three-in-one credit report is a combined credit report from each of the three credit bureaus (Experian, Equifax, and TranUnion). Whether you regularly get monthly statements or not, running this kind of credit report will show you any old debts that you still may owe, along with anything that may be being reported to the bureaus for which you may not be responsible.
Special “Secret Sauce” for Step 1 of the Debt Diet: What “kind” is just as important as how much…
Knowing your “Point A”, your “current reality” or where you’re starting from IS the best place to start. If you were driving to New York, how would you know where to go if you didn’t know where you were starting from?
…But knowing how much debt you have is only one side of the coin.The other side of the coin is knowing what kind of debt you have.
Knowing how much of each type of debt you have will make a HUGE difference in understanding which options are available to you, AND how each option will impact you.
Organize your debt into these categories:
• Secured Debt – This includes any debt secured by a title or asset, like a house, car, motorcycle, boat, RV, etc. This may also include dirt bikes, quads, jewelry, or furniture.
• “Qualified” Unsecured Debt – This includes all unsecured debt (debt NOT secured by a title or asset) that may qualify for debt management programs such as credit counseling, debt negotiation/settlement or other debt management programs.
Qualified unsecured debt includes credit cards, personal loans, credit unions, hospital & medical bills, collection accounts, and deficiency balances.
Some examples of unsecured debt that is not qualified for debt management programs are payday loans, cash advances, MAC tools, Military accounts (Star, Omni, etc.), public utilities, personal loans from family or friends, and student loans.
• Other Unsecured Debt – All unsecured debt “not included” above
• Student Loan Debt – Self explanatory.
• Tax Debt – Any debts owed to the IRS or State TAX authority.
Once you know how much of each kind of debt you have, document it and keep it handy. If your situation changes, update your info and keep it current.
Debt Diet Step 2: Track your spending and find extra money to pay down the debt.
Cut back on daily extras and find savings where you least expect them.
Track Your Spending:
This is a multi-part step. The first part is to track your spending. Track each and every penny that you spend, whether it’s food, coffee, gum, bills, etc., track it and write it down for review.
This alone can be very powerful. It can show you just how much of your money is eaten up on the little things. This is what one of Oprah Experts refer to as the “Latté Factor®.” Say you buy a latté every day… after all, it’s just $5, right? But added to the soda each day, a snack from the vending machine at work, some gum and maybe some candy, too it really starts to add up! Just $10 a day can double the minimum payment on a $10,000 credit card! That’s up to $3,600 a year!
Trim the Fat:
The next part to this step is “trimming the fat.” Look at where you are spending your money. It’s time to make sacrifices. Try using a budget calculator to find some extra cash to pay down your debts. From cutting back to basic cable or not eating out as much to downsizing your big-screen T.V. and giving up the extra car, cutting back on these extra expenses can really cut back on your total debt!
Special “Secret Sauce” for Step 2 of the Debt Diet: DID YOU KNOW That Most People Spend 10% More Than They Make?
You probably know how much money you made last month, but do you know how much money you spent? Or do you know how much money you have left to spend this month? If you don’t, you’re not alone, most people have no idea.
The fact is most of us spend 10% more per month than we make. That comes out to $431 per month based on the average American income. No wonder the average credit card debt is now at $8,500!
So why is it so difficult to track your spending? Today we live in a near “cashless” society. Using debit cards, credit cards, automatic deposits, and wire transfers, we rarely even see our money. It’s easier than ever to spend, spend, spend!
We Need A New Way To Manage Our Money
Traditionally, many people managed their money by dividing their cash into several paper envelopes. An envelope for food, entertainment, utilities etc. They then spent their money from these envelopes. They always knew how much money they had left to spend, and how long it had to last. So how can we use such a simple, effective system today, when we don’t even see most of our money?
• Track every penny that you spend for the next 30 days
• Create a spending plan and stick to it!
Debt Diet Step 3: Learn to play the credit card game.
Get expert advice about how to lower creditor’s interest rates.
This, again, is a two-part step. The first step is attacking your interest rates. Many people who are deep in debt are suffering from high interest rates. Creditors may raise your interest rates if you are ever late on any payments or simply because you have too much debt.
You will want to contact each of your creditors and lower your interest rates. This is not always easy but if you follow some simple secrets, you may find that your results are better than you would expect!
Once you have gotten your interest rates lowered, you will want to re-assess how you use the money you have allotted to pay them off. You can also use the extra money from your budget that you uncovered to pay your cards off quicker.
Special “Secret Sauce” for Step 3 of the Debt Diet: Know your options.
Making minimum payments is simply not smart. It’s purely in the best financial interests of the bank, not you. If you can afford to pay OVER the minimum payment each month, then you can use an accelerated payoff plan (AKA: “roll up” / “roll down”) to avoid paying insane amounts of interest and get out of debt faster.
You can use the Dead on Last Payment-or DOLP™- method as mentioned by David Bach or a system that pays off the highest interest rate card first, such as the debt calculator included in the Mvelopes Personal Budgeting System (saving you the most money and getting you debt free faster).
But what other options exist?
• Did you know that credit counseling could significantly reduce your interest rates and get you debt free faster?
• What about debt settlement? Did you know you could be debt f