When are you really out of debt?

Suze Orman says there is bad debt and good debt; and that at times credit card debt can be good debt but those times are rare.

Good debt would be a home mortgage (building equity for the future) and/or student loans to improve your education so you can increase your earnings.

Bad debt is any debt that lets you buy your wants and pay for them later (in the context of wants vs actual needs) and allows you a feeling of false security.

So my philosophy is debt free is being free from the overburden; being able to save; knowing I can pay my bills on time and not running up charges on the credit cards; yes I use cc’s but I pay them off that month or within a month or two. I can sleep at night without my mind running endlessly about how to pay this and where am I getting the money to pay for that.

So, our best bet would be to pay off all credit cards, then pay off our RV and truck, then work on the house? Now, the big question, do we pay off all debt THEN save or try to save along the way even if it takes longer to pay off debt? I’ve heard mixed opinions on this.

Paying off all debt vs some debt

You should focus on what makes you the most/costs you the least … so if paying off credit cards at 15% – 30%; then focus on the credit cards as you wouldn’t make near that from earning interest on a savings account.

Worst case scenario; if you needed cash in a hurry for an emergency thing; you still have the credit cards to use (and for real emergency stuff only) so in this case savings is secondary to paying off those high interest credit cards.

I agree 100%. In my dept payment strategy, I’m knocking off everything that I can in extra payments. If an emergency come up, then I have a credit card that will help me through. If not, my debt is getting cleared up. The interest rates on savings accounts are really low, when compared to credit card rates.

Making offer to pay off debt

I checked again and it shows that I owe $2000 actually, 1700 for one of them, and 300 for another one. Both are going to the same collections agency. I tried calling the hospital and see if they couldn’t handle it instead of the agency, and they said they’re the ones that handle it. Both of ’em are about 3 years old and, even the few bucks I did send them, apparently they never received (it was literally only a couple bucks).

This debt is from a hospital bill btw. How low should my first offer be for them to clear my debt I owe them? and would my credit show that the debt was paid? how would it look on my credit report?

I know we’re all here because we want to get out of debt. What exactly are we saying by that? For example, is it a bad thing to be paying a mortgage? Or a car payment? Here’s our personal situation: We have a truck payment, a trailer payment (RV), a house payment and a few credit cards to pay off. We make enough that we have never missed a payment, but at the end of the month there is nothing left for savings. We were able to pay a big chunk of the credit card debt with our tax refund and may be able to pay more when my husband gets his bonus in April.

Our main concern in our credit card debt, of course. After that is paid off, are we to say that we aren’t financially free until we have no payments whatsoever, even a mortgage? If so, then we would be depriving ourselves of all the fun things of life until we have paid everything off just in time to be too old to enjoy it!

Hope my question makes sense.

Because my goal is to pay off everything and owe nobody anything. That includes house, car, everything.

The only way to have financial victory is to spend less than you make. If you have nothing left for savings, then you need to make adjustments to your income and/or outgo.

I paid off my first house so it’s possible but I have another mortgage now plus lots of other debt. I guess the trick is to pay them off (work on it) and NOT get into debt again which is so easy, especially when you have no debt, then you think a few small things will be ok and then the debts just seem to grow after that kind of thinking.

Some families do actually become debt free.

We achieved debt freedom in the month of Dec 2004. That is we own our home, two cars and have no cc or other debt. We were able to become debt free by setting up a budget sticking to it and living below our means. When one is debt free one can build assets which pay you monthly income instead of paying monthly on liabilities which is debt. One should buy assets that pay you monthly instead of buying liabilities which take money from you monthly. Pay your self 10% first to build an emergency fund, after you are debt free then you have all that money that was going to pay liabilities is now available to buy assets that pay you monthly toward financial freedom (early retirement). It is not how much income you make it is how much of it you keep.

We are always paying others our money ie. mortgage, auto loans, cc companies, utilities, why not pay yourself 10% first before paying the others. Marriages are falling apart due to the stress of debt. Being debt free is real freedom and peace.

When one gets into debt it is over a period of time so it will take time to get out of debt.

Don’t lose hope it is a process but well worth the effort.

Clarification about 401k situation

Just to clarify, if we could just get rid of this huge debt ($20k) we will be in a position where we are making more than we spend. We can afford to pay the $1,000/month for my youngest’s school if we scrimp. The problem is the $20k that’s hanging over our heads.

However, I am certainly going to look again where we can trim and pay some more attention to the advice on this list. Maybe I can work something out with the school if I can pay little by little?

Thank you for your advice.

You know I was thinking about your situation today and honestly, if it was me I would take $$ out of the retirement. My biggest concern is that you would allow yourself to fall into the same old habits that got you where you are in the first place. Know what I mean?

I could be wrong and I am sure others will let me know if I am…..LOL…but I can certainly understand your wanting to just pay the debt and be rid of it. How much longer would you have to pay the family loan?

As far as your budget is concerned, even cutting corners a little bit more could add up. For example, in my phone bill I realized we were paying for services (such as three way calling etc.) that we never used. So I had them turn those off. I also called up my cell phone company and had them take off other services I never used. Like the text messages. My provider now charges .20 per text. Their package costs $5 a month. I would have to text 25 times and I never come near that. So, I just pay the .20 when and if I text. Not much but if you add it up it will count.

Anyways – since I had re-thought what I had originally written I thought I should write again. 🙂

Innnnnteresting….. I appreciate your writing again. I have the exact same concerns, because we have “resolved” to change old habits but have fallen into debt again….. but at least it was less the second time around! So I would definitely need to figure out a safe game plan that we STICK TO……

Also I realized that between now and June we will be paying about $4000 toward this year’s tuition, leaving $13000 due, not the $17k I was figuring on…… So we’ll have to throw that in the mix…..

Unfortunately we are dealing with two new situations in the next school year: One child in public high school, and one child homeschooling, and we’re not sure how much all that will cost. So we want to estimate high…….

It just drives me nuts to spend all those extra thousands to get out of debt! BUT I guess it would be worth it if it means the END of the debt…..

As for the debt to my family, my wonderful brother loaned us $40k and said it’s his youngest child’s college fund, so we have 15 years to pay it back…… but we’ll pay more into it as we can.

Thanks again!

The ONLY way to get out of debt is to:

STOP BORROWING FROM ANYBODY FOR ANYTHING … family, friends, loan companies, credit card companies or anyone.

Cut up the cards, throw away every loan application, and save to pay cash, or do without.. If you still decide to get quick cash loan online – do your best to pay it off as soon as possible!

Then be sure you’re spending less than you’re earning and apply as much as possible to the debts.

God bless…

Re: Should we bust open a 401k to get out of debt?

The school may not be optional but you can’t afford it. I understand that I do not know the other info as to why you have to go to the private school but that line just jumped out at me. There’s always an option. We all have choices. Could be something personal that I am missing but that’s my thoughts.

As far as taking out of the 401k savings I would NOT recommend it. I would recommend that you halt any and all contributions which should free up some money.

I know that you “think” that you have shaved as much as you can but you would be surprised at the ingenuity that can be found in this group. I posted my info and received TONS of solutions. Most I had thought of but many I had not and I was able to trim some fat off a budget that I thought was already lean.

Part of the general understanding in this group is to spend less than you make. You aren’t doing that. Think about if you had cashed your check each week with no ability to obtain credit/loans. Once that money is gone…..it’s gone. End of story.

If you are serious about getting out of debt then you have to make some serious sacrifices and some really tough choices. In the end, it will be worth it.

Also, watch what Dave Ramsey answering your question:

Should we bust open a 401k to get out of debt?

Here’s the situation: Currently we owe our kids’ private school $17k for the 2005-2006 school year. They have been very patient, and while we’ve been paying $1600 every month for the kids’ education, that all just went to LAST year’s tuition, which just got paid off. We haven’t even STARTED paying this year’s tuition, even though the school year is over in two months. It needs to be paid and we can’t afford to keep making payments on top of what we need to pay for next year. This is a religious school and it is not optional for us. The $17k INCLUDES a substantial scholarship (three children). (Big comfort: Next year the oldest will start public high school, and the middle will homeschool, so the bill next year will be much lower–about $1000/month.)

On top of that we just found out we have to pay $2300 in taxes.

We have paid all the credit cards off by getting a loan from family, which we are paying back at the rate of $300/month until we can pay more, eminently reasonable.

We have about $60k in a retirement account–the only nestegg we have. We have very little equity in the house, not enough to take a loan off. We’ve shaved our budget as low as it can go.

The question is: Should we tap into the retirement account? We calculate that in order to get the $20k that we need to pay off the school tuition and the tax bill, we would need to take out $26k to cover taxes and penalties. $6k is an awful big hit to take, but it would eliminate all debt except what we owe family. We might be able to take a couple hundred a month and put it into a CD, in order to re- build some of our savings.

I should mention that at some point in the next ten years or so, we are expecting to inherit at least $100,000, and probably quite a bit more. Nothing to plan on, but nothing to ignore either. That will be able to be invested into retirement planning.

My husband thought that maybe we should take out another $5k to pay off an old car loan, so we can have that much more financial freedom, but I’m already VEEEEERY leery about taking ANYTHING out of our very last nestegg.

What do you think? Any and all advice would be SO appreciated, I really do not know where to turn and can’t decide on my own what to do!

Thanks so much!