Trip to Boston Science Museum

Last Saturday Nina, Mom, Cousins Sam and George all visited the Boston Science Museum. We visited the butterfly gardens. It was great!

Check out cousin Sam peering over my right shoulder.

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A Dark Article

A Dark Article with some brilliant historical insight.

How To Get Out Of Debt

How To Get Out Of Debt 

Lesson 1: Setting the Foundation 

Key points

As a financial topic, debt is simple. There are no complicated secrets, but -- unfortunately -- there are no easy solutions either. It's going to take discipline to bury the debt monster.  Anybody who says otherwise is probably just after your money.

It doesn't take a reckless person or a wild spending spree to create a debt crisis. A consistent pattern of spending just a little more than you make, over time, can lead to a serious problem.

Compound interest is a powerful force that works either for you or against you. If you want this force on your side, you'll have to rise above the advertisers and bankers that are used to having the force on their side.

"Good debts" combine a low, tax-adjusted interest rate with the potential to gain something that appreciates in value.

Welcome to The Motley Fool's quick course on beating debt! We Fools are highly committed to turning net debtors into net savers, replacing the slavery of monthly payments with the joy of expanding investments. We sincerely hope that this series is a big step in that direction for you.

Since you've decided to take a debt seminar, we're going to guess that money problems are at least nipping at your heels. Or perhaps -- worst case -- an overwhelming debt burden is pushing you to the edge of financial disaster. Since we don't know exactly where you are, we take a big-picture approach in this first lesson.

If you are already suffering a debt crisis, however, you should probably skip this lesson for the moment and start with the optional Lesson Five: Debt Triage. Once you get your financial life to a stable state, you'll be ready to take in the rest of the seminar and set the foundation for a lifetime of successful debt management.

If debt is not currently a problem -- you're just here to learn and head off future problems -- let's get started with the basics of managing debt and the fundamentals upon which you will build your financial success.

First, though, please take a few minutes to download your seminar workbook, which will be your trusted companion throughout this seminar -- along with that big bag of potato chips. You'll start putting it to use right after this lesson. Download the workbook by clicking here. Go ahead -- we'll wait!

Beating Debt Is Simple, But Not Easy

Getting out of debt and staying out of debt is actually pretty simple, at least compared to most money management topics. It boils down to spending less money than you make, on a consistent, long-term basis. That's it. Nothing else will get the job done. Nothing.

And it's easy too. Right? Wrong! While conquering debt won't send you scrambling for thick math textbooks, it's an ocean away from easy. One moment of weakness -- or worse, one cruel act of fate -- and you're scratching and clawing your way back out of the hole. It's not easy.

So, how did something so simple get to be so hard? Because beating debt demands a lot of will power over a long period of time. If you've been a human being for any length of time, you know that this is one tough combination to nail down.

We know we're preaching and it's a pretty depressing sermon. But we're afraid there's no getting around it. Over the long term, regularly spending more than you make -- even just a little more -- will bring your financial house down, even if you are the most responsible of bill payers. Until this basic lesson is taken to heart, even bankruptcy is just a temporary solution.

How Careful Do You Have to Be?

Consider two simple examples, starting with a positive one. Let's say that you begin setting aside $75 every month, in savings earning 5% interest. If you can pull this off for five years, you'll end up with a comforting $5,100 in emergency savings.

Now, let's turn this picture on its head, and assume that you come up short by the same $75 per month, on average, over the same five years. Further, assume that you routinely patch over this difference with a credit card. Note that we're talking about less than $20 per week here -- hardly a symptom of reckless "retail therapy." Nonetheless, at the end of five years you'll be looking at more than $7,200 in debt, assuming an 18% credit card interest rate.

That's an extra $2,100 in debt, beyond the $5,100 earned by saving $75 per month. This is the difference between saving and paying down debt. Saving is hard enough, but paying down debt is $2,100 harder!

And this difference just gets bigger as time goes on. While your bank savings work hard twenty-four hours a day to make you more money, any outstanding credit card debt is likely to be working three times harder, charging a much higher interest rate than your savings pay.

Moreover, as a saver you have the force of compound interest on your side, the idea that your balance starts to snowball as you earn interest not only on your deposits but also on the interest payments you leave in the account. As a debtor, this same powerful compounding force works against you, and the higher the interest rate, the faster the snowball builds.

Good Debt versus Bad Debt

We've been talking tough about consumer debt, but we do realize that some debts are an inescapable part of life for most of us. Still, even when we carry debt, there are some basic debt management rules that will keep the lid on problems:

Be especially wary of double-digit debt -- credit cards and loans that charge 10% or more in annual interest. At this level, balances snowball quickly, and it's tough to get a return on the borrowed money that beats this cost.

Good debts, like some mortgages and student loans, combine two things: 1) a relatively low, tax-adjusted interest rate; and 2) the potential to invest in something that, over the long run, will grow in value.

Ignore banker's rules for "acceptable" levels of debt. These are designed by banks to maximize their income. Their calculations cleverly keep you far enough under water that you continue to pay them interest, but not so deep that you go broke. Don't be a slave. Set tighter rules on your own.

Summary - The Personal Finance Divide

Somewhere in every mountain range there is a line that divides water flow. On one side of the line, for example, water flows east. On the other, it flows west. Regardless of direction, these rivers and streams start out as a trickle but quickly pick up speed as they head down the mountain, finishing as raging torrents.

Money and wealth work exactly the same way. Over time, you'll end up on either the savings or the debt side of the personal finance divide. It doesn't take much to nudge you one way or the other, but once a direction is established, the momentum tends to build and it gets harder and harder to go back.

If you want to "nudge" yourself in the savings direction, just remember that it all boils down to spending less money than you make, on a consistent long-term basis. (We're hoping you've noticed that this is an important point.)

Take the time now to head on over to your workbook, where you'll begin to get an idea of what your personal financial picture looks like.

 

This Seminar contains the opinions and ideas of The Motley Fool. It is provided with the understanding that The Motley Fool is not engaged in rendering financial or other professional services. The Motley Fool specifically disclaims any responsibility for any liability, loss, or risk, personal or otherwise, which is incurred as a consequence, directly or indirectly, of the use and application of any of the contents of this Seminar. Legal Information. Copyright 1995-2001 The Motley Fool. All rights reserved.

Candidates as Cell Phones

More Family photos

Sabir, Cousin Miles, Margie, Aunt Natalie and Cousin Lena

Bama and Momma

Remember the old Sheraton Arms abandoned lot at the corner of Updike and Peace?
This is our new playground.
Neighbor Doug Victor has been the chief spokesperson for this project.
The recent upgrade has inspired a renewed interest in the Peace and Plenty Community Garden.