4 Strategies To Help You Live Debt Free

“Americans collectively spent more than we earned after taxes for the past two years in a row,” says SmartMoney in their latest cover story, “Live Debt-Free”. Their point: we spend a lot of time thinking about how to save and how to invest, but not enough time working out a healthy debt strategy that doesn’t eat away at our happiness, not to mention our retirement savings. They offer four different strategies for reducing your debt to little or nothing, so that you can apply your income to more worthwhile activities than fighting off your liability monster.

“Change the monthly mind set”
No more “low monthly payments” for you. This means their answer to the windfall question is to apply it all to a high-interest credit card account, for example. The sooner you pay these sorts of loans off, the more you’ll save. If you pay 1/12th more each month on your home loan—the equivalent of one extra payment a year—you can shave 7 years off a 30 year mortgage.

“Fix it and forget it”
Get out of your ARM loan as soon as you can, and if you have good credit, look for the elusive fixed-rate credit card. SmartMoney suggests you check out CardRatings.com.

“Shuffle the cards”
Take advantage of zero-interest transfer offers from credit cards, not so you can run up the card with new charges, but so you can pay off your debt faster—which can lead to a better credit score, which makes you a more attractive customer to credit card companies, which means you can shop for better offers and lower rates.

“All under one roof”
Consolidate your loans into one payment at a lower rate, usually through a home equity loan if you can get one.

“Live Debt-Free” [SmartMoney]
(Photo: Getty)

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  1. InThrees says:

    Something occurred to me while reading that article – home mortgage interest being tax deductible, isn’t that effectively government subsidation of the banking industry, on a large long-term scale?

    The example used in the article was a man who came into a large amount of money, enough to pay off his mortgage in one fell swoop, but after analyzing his options he found that it was better to take the tax credit each year and save $4000 in income taxes.

    So here we have the government giving (not charging) a man money in return for not paying off his loan, which means he is paying his lender interest.

    Cut out the middle man and we have the government paying this man’s interest.

  2. Crazytree says:

    “Get out of your ARM loan as soon as you can…”

    Poor advice for the financially responsible.

    I just refinanced a business loan… choice was 9.25% fixed or 7.15% variable.

    I knew the Fed was going to lower rates because of the SUBPRIME INTELLIGENCE CRISIS, so I elected variable.

    Good choice!

  3. @Crazytree: True, and SmartMoney hedges on this in the full article and says ARMS are “not always bad deals” if you choose wisely and understand the risk involved. Also, congrats on the better deal.

  4. weave says:

    My best advice is to get rid of or minimize reoccuring monthly expenses. When we were buying our last house several years ago, I made sure it was near a decent transit line and hence we could get by with just one car. Only bought the minimum house we needed in an old established neighborhood which mean lower payments plus the added bonus of not moving into a new neighborhood with people who a good portion were going to get their houses repossessed (higher rental units and foreclosures means higher crime).

  5. Jeff_McAwesome says:

    Solid advice, until:

    “All under one roof”

    Are you fucking stupid? Let’s take a 5 year car loan, a 5 year student loan, and 5000 dollars worth of credit card debt. Now *poof* we roll it into a 30 YEAR mortgage. Great, you are marginally better off in the short term, but over the life of the loan you are paying eight times the interest! Not to mention a higher mortgage payment for 30 years.

  6. tadowguy says:

    What about “stop eating out”? Eating out (in normal America, not California or NYC), eating out costs probably $8 per lunch per person and $10-$15 per dinner per person. Based on my friends activities, they eat out lunch 5x a week and dinner 3x. That ends up being about $560 a month, which is more than my second mortgage payment + my wife’s student loan payment.

  7. tadowguy says:

    Here’s one more simple one:

    Email (or call) your current CC company and ask for a lower rate. I emailed Chase using the “email from the site” feature and I had a 10.5% rate the next morning. I usually have a low balance, but sometimes unexpected expenses come up and with my tuition on there (until the company finally processes the reimbursement), the balance is around $4k, so its going to save me some cash. I have also done this previously with a Citibank Mastercard, so it should work most places.

  8. Rusted says:

    Simplest thing is to analyze and change one’s habits and start reducing debt. Reducing interest rates and refinancing won’t do a thing until the Needs vs Wants question is addressed.

  9. anatak says:

    @Jeff_McAwesome: Yeah. Debt consolidation: Terrible advice. Especially doing it by a home equity loan. Lets take all of my small debts that I’m too lazy to pay off and roll them into one long-term loan. AND put my home at risk in the process. Its stupid on top of stupid.

    @Rusted: “Shuffle the cards”: not a strategy. Reducing your credit card interest: not a strategy. Permanently changing your habits: now you’ve got something.

  10. RandomHookup says:

    I was ready to read the article, but all those ads with the 101 year old lady distracted me too much.

  11. Myron says:

    @InThrees: The mortgage interest deduction directly subsidizes home ownership.

  12. SadSam says:

    My 2 cents. My husband and I will be debt free at the end of this year (except for the mortgage). How did we do it?
    1. Stopped adding debt, we cut up the credit cards and committed to only using cash or debit for day to day spending.
    2. We created a budget and a schedule for paying off our debt ($50,000+) and we’ve stuck to it.
    3. We drive older paid for cars (key to being debt free).
    4. We save up for big ticket and unbudgeted items, we set aside cash each month for home insurance, real estate taxes, travel/vacation, newer cars, new furniture, gifts, etc. When those expenses come up we have the cash (kept in a high yield savings account), like Dave Ramsey says its easy to plan for Christmas expenses b/c Christmas is in December each and every year.
    5. We love our friends but we ignore their comments about our non-flat screen t.v. our non-leased luxury cars, our non-European vacations, etc. We actually live a very good life we just don’t keep up with our friends who are all broke.

  13. CumaeanSibyl says:

    Foolishness. Why would you replace an unsecured debt with a secured one? Unless you like to live life on the edge, there’s just no good reason to risk your house for some credit cards.

    Besides, part of the housing bubble crisis is that people did this exact thing — tapped their equity based on bubble sales prices to pay down credit cards or whatever — and now they’re upside-down in their houses.

  14. mac-phisto says:

    i had a fixed interest card with mbna at 13.99%. boa bought it, changed it to variable, hiked it to 19.99% & refuses to move it. =(

    on the upside, my CU credit card has been 11% fixed since i got it over 10 years ago. =)

  15. phrygian says:

    Speaking from very recent experience, I’ll add:
    - Don’t get laid off.
    - Don’t have an unexpected medical emergency.

    I can’t imagine that taking out a home equity loan to pay off debt is very good advice. Eventually, you do have to legitimately pay the money to someone. Most of the people I’ve known who took out hom equity loans saw it as a way to get their debt paid off for free. Loans are never free — would you rather be paying on your Visa bill for 5 years or 30?

  16. @phrygian: I’ll add:
    – Don’t be in a car accident

    Reducing your credit card interest: not a strategy.
    @anatak: It isn’t? I would think that if you want to pay off your debt it’d be easier to do if the interest was lower.

  17. @tadowguy: I talked to a financial counselor who specialized in helping young people buy their first homes. He said he wouldn’t even take people as clients who didn’t brownbag it to work at least 4 days a week. He said that daily eating out showed they simply weren’t committed to budgeting and long-term financial thinking.

    (Mostly it’s healthier, too, at least when you take the time to plan ahead instead of throwing crap in a bag on your way out the door. Which is what I usually do because I’m never that organized!)

  18. MyCokesBiggerThanYours says:

    People need to quit with the BS. ITs easy to live without debt – dont use credit cards. Buy only what you have enough cash for. 5 years ago I owed $18,000. I simply stopped using my cards. Today I owe less that 900.

  19. Tank says:

    how about “paying everything off” in a chapter 7, or “consolidating” with a chapter 13?

    my attorney says my credit will be like new, plus, i won’t owe anyone anything…

  20. Tankueray says:

    @Tank, are you kidding? This site is for responsible consumers. Take your crap and go play in someone else’s sandbox.

  21. mac-phisto says:

    @Tank: & how much did your attorney charge you before he gave you that advice? $2000? $3000? i always found it odd that people could come up with a few grand for a bankruptcy lawyer, but don’t have money to pay their bills.

    some things your lawyer should have told you:

    -EVERYTHING you include in a bankruptcy shows up on your report as BANKRUPTCY/CHARGE-OFF for 7 or 10 years (i forget which). your credit score will be in the can & you can expect to be denied financing by many lenders & forced to pay extortive rates by others (18-30+%). expect to buy your next car at a used dealership that “finances anyone”. miss one payment & don’t be surprised if your car “disappears”.

    -anything securing a loan (for example a car or a house or furniture) will have to be returned to the lender UNLESS you reaffirm your debt & keep paying them. bankruptcy does not let you keep your car & stop paying your car loan.

    -new bankruptcy rules (BAPCPA) have redefined the bankruptcy landscape. if you have “a means” to pay back your debt, you will be disqualified from chapter 7.

    -BAPCPA also redefined what can be liquidated by the bankruptcy trustee. repeat filers often hid their wealth in accounts that were sheltered from liquidation under bankruptcy law. BAPCPA allows funds to be liquidated if it can be determined that the accounts were funded with the purpose of hiding them from liquidation.

    -you cannot absolve student loans, government debts (tax liens) & you may be required to pay taxes on any debt that has been absolved (it may or may not be considered income by the IRS, i forget).

    -you cannot file again within 8 years, so if you get in trouble again within that time period, you’re screwed. generally, the type of company that lends to post-bankruptcy clients is very astute at recovering their money b/c they know you can’t escape it.

    bankruptcy is designed to be a method of last resort. before you believe your attorney (who stands to be the only one to really benefit from this), you may want to consult a financial adviser.

  22. CumaeanSibyl says:

    @Tank: HEY I WANT TO LET YOU KNOW I AM VERY IRATE

    SO IRATE I CAN’T TELL I’M BEING TROLLED.

  23. Rusted says:

    Tank, that bankruptcy is going to be on your record for a loooonnnnngggg time. True, You may not owe anyone anything, but….

    1. Prospective employers are going to look at your credit history and decide that you are a poor employment risk.
    2. renting an apartment will not be easy since they check too.
    3. Borrowing money is going to be near impossible at decent rates especially for real estate or large ticket items.
    4. Some banks will check your credit history before letting you open a checking account. Wachovia checked mine.

    Yeah….suggest you make one final attempt to avoid the Big B. Pain now always hurts less then pain later.

  24. anatak says:

    @Rectilinear Propagation: Easier? Maybe. It likely won’t amount to that much to make a significant difference.

    We paid off our debt using the debt-snowball – organized smallest debt to largest debt. (and it works great, btw) If it were a small debt with high interest, then the money saved likely would have not amounted to much. High interest on high debt – by the time we were on the big debts, we were throwing $3k+ per month at them. Likely would not have made enough of a difference to get us out faster. Save a few bucks? Sure. Is it a strategy. NO.

  25. Tank says:

    eek – i guess my sarcasm didn’t come thru like i expected – i’ve got great credit, no bankruptcy attorney, and apparently a sense of humor too dry to not be obvious. sorry it took me so long to notice the responses to my post.