It’s interesting.

Whenever I announce bad news I seem to get more response than when I announce good news.

So if I say I’ve gone deeper into debt — or had some unexpected expenses — people respond with sympathy and encouragement.

But when I say I’ve paid down my debt by a thousand or two, there is a noticeable silence.

I mention this because I’ve noticed this pattern not only on my blog, but on other financial blogs as well.

It seems the choir of misery chimes in whenever there’s darkness on the horizon.

But when the sky is bright and shining, the choir goes mute.

I have a theory about this…

Anybody who is in debt already feels a bit of shame and regret for getting in debt in the first place.

And it’s encouraging for an in-debt person to see other people screw up… because… it makes that person feel better, even if he or she is not currently doing anything to get out of debt.

I know it sounds sick, but I think there’s truth in it.

It’s like a fat person chuckling at another fat person and thinking, “Well, at least I’m not as fat as her!”

Of course, there’s an inverse relationship here as well.

When somebody is making more progress than you are, it can be difficult to offer authentic praise because you might be feeling a twinge of envy. YOU should be getting ahead, not that OTHER person!

Said another way: It’s hard to feel good about the success of others when you’re still failing.

Wouldn’t you agree?

Have I hit the nail on the head — or totally missed the mark?

Leave a comment below and let me know.

• My post “Why I Like Fixed-Rate Loans” was featured in the Carnival of Debt Reduction #149: The Secret to Life Edition this week.

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Here’s a New York Times article worth reading.

The title: “Given a Shovel, Americans Dig Deeper into Debt”

(This fits in perfectly with my article Debt Is a Hole in the Ground.)

Anyway, I’ve linked to the Digg page that links to this article so you can actually read it.

==> Armed with Shovels, Americans Are Digging Deeper into Debt

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Time flies when you’re paying off debt!

Last month I reported that I was in “maintenance mode” — basically paying my minimum payments and building up my cash reserves.

This month is very much the same. I didn’t make any “over and above” payments. But yet I’m still making progress.

As you can see from this snapshot, I paid down my debt by more than $1,000 last month — about 2.3% of the total outstanding.

In other news, I’m in the middle of creating and promoting a coaching program for freelance copywriters. And I did invest $108.99 in an out-of-print advertising book I found on Ebay (Reality in Advertising by Rosser Reeves).

This particular activity has to do with Step #5 in my 5-Step System for Paying Off Debt.

I am getting ready to pay off one or two balances, so I expect to have more exciting news next month. Stay tuned…

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As I reviewed my debt numbers recently, something stuck out to me. That is, the majority of my debt is now in the form of fixed-rate loans.

The two biggest fixed-rate loans I have are through Honda Financial Services (for my van) and Prosper (a consolidation loan).

The remaining balances have interest rates that can fluctuate, but are usually fairly stable.

Of my five balances, I like the fixed-rate loans best because every payment I make reduces the principal balance by quite a bit. This is unlike minimum payments to credit cards, which usually result in very little principal reduction.

In the past, paying down debt required a lot of conscious effort. That’s because most of what I owed was owed to credit card companies. To make any real progress, I had to pay far more than the minimum payment — usually at least double.

All that has changed. Now I make my monthly payments… and I see real progress. In other words, I don’t feel like I’m having to work as hard to get ahead. It’s just happening naturally.

Of coures, I’ll still need to make “over and above” payments if I want to be debt-free as soon as possible. But at least I’m making progress even during months when I’m not able to make an “over and above” payment.

Two insights:

1. If you can, consolidate some of your debt into fixed-rate, fixed-payment loans. Chances are you’ll see your debt evaporate more quickly and with less effort.

2. It’s always harder when you first commit to paying down debt. But the longer you stay committed, the easier it becomes. Your balances get smaller and smaller and your monthly cash flow gets larger and larger.

You can do this!

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Topics: Credit Cards, Debt Reduction | 2 Comments »

It seems Americans have a new pain point when it comes to filling up their SUVs, and it happens whenever it costs more than $100 to fill a tank with gas.

According to this article, $100 for a Tank of Gas?, many SUV and truck owners are now doing more frequent partial fills simply to avoid a three-digit price tag at the gas pump.

From the article:

Hummer clubs are hurting, too. In Nebraska, Ric Hines of the Omaha Hummer Owner Group — known as Omahog — stopped doing off-road trips this summer and started riding his recumbent bicycle instead.

Frankly, I think this is a real example of positive change.

Far more good comes from riding a bike than from off-roading in a gas hog.

And $4-a-gallon gas forces people to analyze the miles they’re driving and why — instead of just driving anywhere, anytime on a whim.

Unfortunately, not everybody has a clue. Again, quoting from the article:

Colleen Hammond of Chagrin Falls, Ohio, loves packing her three kids and all their soccer gear into her 2000 GMC Yukon XL. But she hates paying $160 to fill the 38.5-gallon tank. Last month, she parked the Yukon in her driveway and borrowed her friend’s Toyota Land Cruiser.

“I don’t know if it gets better gas mileage, but I like her car because it costs $100 to fill it,” said Ms. Hammond, 40. “I think $100 for a tank of gas is cheap now.”

Riding a bike instead of driving a Hummer = good decision.

Driving a Toyota Land Cruiser instead of a GMC Yukon XL = stupid.

I’d recommend SUV owners swap for more fuel-efficient sedans. Unfortunately, it’s extremely difficult to sell or trade SUVs right now. So a better option may be to simply drive less.

Your thoughts, dear reader? Leave a comment below.

• Yesterday, my 5-Step System for Paying Off Debt was featured in the 147th Carnival of Debt Reduction.

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After reading my update about my Outstanding Debt as of June 2008, Kate left this comment:

I applaud you posting your progress for the world. Have you shared your process yet? If you have, let me know the link, I’d like to read it. So far my favorite has been Dave Ramsey’s debt snowball effect.

I thought this was a good question, so rather than respond by leaving another comment, I decided to respond by writing a blog post.

First, you should know I’ve written three posts explaining my view on how to get into — and out of — debt:

• What Causes People Get into Debt
• Why People Stay in Debt
• How to Get Out of Debt

I confess I haven’t studied Dave Ramsey much. But I’m familiar with his concept of the “debt snowball.” It’s the same concept as John Cummuta’s “accelerator margin.”

In both cases, you focus on paying off a low-balance, high-interest card as quickly as possible. Then you take the minimum payment you were paying toward that account and apply it to the next balance.

As each new line of credit is eliminated, the amount of money you can use to pay down debt grows, which accelerates the speed with which you can pay off debt.

While I fully endorse and support this approach, I take a slightly different view because I’m self-employed. I don’t have a regular paycheck.

So the common advice to create a budget and stick to a rigid repayment plan doesn’t work for me because my income fluctuates month-to-month, as do my expenses.

With that as background, here’s the “system” I’ve used to pay off debt since October 2007. This is the same approach that’s allowed me to reduce my debt by 33% in a period of 7 months — from $75,286 (in November 2007) to $50,343 (in June 2008).

Step #1: Commit to Getting Out of Debt

We all get into debt in a similar fashion. It starts with a few innocent purchases and then spins out of control.

In a sense, we are all a bit like the frog who is boiled to death slowly. By the time we realize how hot the water is getting, it’s almost too late!

For me, my commitment to pay off debt began when a credit card company jacked up my interest rate. This alone was bad, but it was made worse because I felt it was unjust.

As I made phone calls and found out how powerless I was, I realized my best and only recourse was to pay off the credit card and never do business with the company again.

To say I was livid would be an understatement.

But rather than internalize my anger, I translated it into a commitment to become debt free — and a virtuous cycle of daily action to pay off debt as quickly as possible.

So the first step for me was making the commitment to become debt free.

Step #2: Get a Grip on Your Spending

I’ve never been an out-of-control spender, but I still had plenty of “fat” to trim from our monthly expenses.

Since I’m self-employed, I have a number of recurring monthly expenses to pay for business tools, education, etc. I examined these expenses first and canceled anything I wasn’t using or didn’t need anymore.

The biggest decision for me was firing my brother. That freed up $2,500 a month. And while this was a difficult decision, it worked out really well for both my brother and for me.

After analyzing the business side, I moved to the personal side. We canceled our YMCA membership. We cut back on our Starbucks visits. And we adopted a mindset of not buying things unless we truly needed them.

So we’ve made some minor (and some major) changes in how we live and how we spend our money. This has freed up cash flow that we now use to pay down our debt.

Step #3: Liquidate Possessions of Value to Cancel Debt

After eliminating expenses and getting a grip on our spending, I focused on how I could make the biggest dent in our debt with as little effort as possible.

The answer: Sell any items that we had used as security for a loan.

Secured loans are usually given for cars and houses. In our case, we had loans secured by a van, a motorcycle, and a house.

So I sold my motorcycle (even though I didn’t want to). And we even sold our house and got a rental near our parents. (We still have the van and the loan attached to it.)

The sale of the motorcycle reduced our debt significantly. What’s more, it freed up $344 a month that can now be used as an “accelerator margin” to reduce other loans.

And by selling our house and getting a rental near our parents, we reduced our housing expenses by at least $100 a month — while getting an extra 300 square feet of living space at the same time.

Step #4: Consolidate High-Interest Debt into a Low-Interest Loan

Personally, I find it very troublesome to juggle multiple credit cards and loan balances. The more of them you have, the easier it is to overlook a statement or bill and get slapped with a late fee and a higher interest rate.

So in addition to paying off certain loan balances, I also consolidated a couple of high interest credit cards into a single fixed interest rate loan from Prosper.

I chose a Prosper loan because it was a fixed interest loan with a firm start and end date.

Although I’m not against zero interest offers from credit cards, I personally choose to avoid them when possible. I do this because zero interest offers come with a whole host of stipulations.

By making your minimum payments, you will probably not be able to pay off the balance by the end of the zero interest period. And if you’re even one day late with your minimum payment, you’ll be greeted with a new interest rate so high it’s criminal.

Furthermore, zero interest offers are designed to get you “stuck” with an even higher balance.

Basically, if you do a balance transfer to a zero interest card, and then continue using that card to make purchases, you become subject to a “hierarchy” of how the balance is paid off.

Every time you make a payment, it will pay off some of your zero-interest debt, but none of the debt that’s accumulating interest charges. So if you transfer $5,000 at zero interest… and then charge $1,000 in new purchases… you will have to pay off the $5,000 balance first before you can pay off the $1,000 balance.

This allows the credit card company to charge you 18% or 25% interest (or whatever) on that $1,000 new purchase balance for a long time.

You can use this information however you want. The key thing is to reduce the number of loan balances you’re paying and to consolidate them (if possible) into lower interest loans.

Step #5: Increase Income & Use It to Pay Off Debt

The fifth and final step of my personal system for paying down debt is to increase income. This is one of the most overlooked but highly effective opportunities for getting out of debt fast.

Basically, I have looked for ways to create more value for my clients, customers, and subscribers. This has directly increased my income during the last six months.

If you have a job, perhaps there’s something you can do on the side to earn a little extra money. You can sell stuff for cash, start a tutoring service, get involved in network marketing, or even embark on a new self-employed service career.

And if all that sounds like too much work, start by holding a garage sale.

Sometimes, all you need to do is take a little step to get started.

The way I see it, every single step in my system is important. But you can only reduce your monthly expenses so much. There is a limit to how little you can live on.

On the other hand, there is virtually no limit to how much you can earn. So Steps #1-4 are more important in the early stages of your debt reduction journey, while Step #5 becomes more important as time goes on.

Because, ultimately, increasing your income could have the largest impact on your ability to get out of debt.

These are the 5 steps in my personal system for paying off debt. Perhaps they will be of help to you as you seek to become debt free.

******

Check it out… my post “A Brief History of Grass Lawns” was just selected as an Editor’s Choice in the 146th Carnival of Debt Reduction:

• Financial Independence Day: Carnival of Debt Reduction #146

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What is a brief history of grass lawns doing on a debt blog? I’ll tell you…

The reason we have grass lawns is the same reason we fall into debt.

Let’s start at the beginning.

Grass lawns originated among the wealthy landowners in England. This was possible because England received more than enough rain to support healthy lawns. Furthermore, the wealthy were the only ones who could afford to pay laborers to scythe the grass (they didn’t have lawn mowers).

As you can imagine, the English lawns and gardens became the stuff of legends. The beautiful paths, the rolling meadows, the gorgeous trees–it was an environment to fall in love with.

So what happened next?

To put it simply, Americans became “green” with envy.

And so they exported the concept of the English lawn to America, despite the more arid climate in most parts of the U.S.

The lawn may never have taken such a firm hold in America without these two significant influences:

• The invention of the push-reel mower in the 19th Century. (With the invention of the mower, one man could mow his lawn. No hired labor was required.)

• The publicity and marketing efforts of The American Garden Club. (According to this site, “they convinced home owners that it was their civic duty to maintain a beautiful and healthy lawn.”)

And that was that.

The grass lawn became the de facto form of landscaping.

To this day, most people don’t realize grass lawns were imported to America because of envy. And most people don’t realize the incredible amount of money, water, and energy that goes into maintaining even a small lawn.

Researcher Christina Milesi’s estimates reveal a startling fact: Grass lawns are the largest irrigated “crop” in the entire U.S. It’s too bad you can’t eat a lawn when you’re hungry!

Anyway, the whole purpose of this blog post is to point out a simple fact: Your average American is saddled with an expensive lawn because Amercians became envious of the English way back when.

And your average American is saddled with too much consumer debt because he became envious of his neighbor way back when.

And we’re still paying for the price of envy years later.

• Check out the Summer Solstice Edition of the Carnival of Debt Reduction over at Squawkfox.

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The U.S. economy is growing weaker by the month. Here are four major factors that will cause the U.S. economy in particular, and possibly the world economy in general, to collapse during the next 6-18 months.

Factor #1: Foreclosures

The housing market continues to take a beating. All you have to do is search for “home sales” on Google News and you’ll see dozens of dismal headlines. The rate of foreclosures is increasing every single month.

And the worst is yet to come. Here’s why:

Starting in April 2009 we could see a major acceleration in ARM recasts. Basically, when an Adjustable Rate Mortgage (ARM) recasts, the interest rate ratchets upward. Since most Americans are tapped out as it is, even a small increase in mortgage payment can put them on the brink of foreclosure.

And that’s exactly what experts are forecasting. According to an excellent BusinessWeek article “The Next Real Estate Crisis”:

With the subprime mortgage crisis already crippling the U.S. economy, some experts are warning that the next wave of foreclosures will begin accelerating in April, 2009. What that means is that hundreds of thousands of borrowers who took out so-called option adjustable-rate mortgages (ARMs) will begin to see their monthly payments skyrocket as they reset.

[…]

According to Credit Suisse, monthly option recasts are expected to accelerate starting in April, 2009, from $5 billion to a peak of about $10 billion in January, 2010.

The article goes on to quote William Purdy, a lawyer at Simmons & Purdy in Soquel, Calif., a firm that specializes in home refinance issues. Purdy says, “This year is going to be a blood bath.”

Proof: By some estimates, one out of every four homes for sale will be bank-owned by the end of 2008.

This will put an incredible amount of downward pressure on home prices. Home owners who are resistant to lowering their asking prices will be forced to compromise as banks slash prices to unload foreclosed properties. Not a pretty picture.

If I were the late ’80s action hero Crocodile Dundee, I might compare what’s already happened in the housing market to what is expected to happen like this: “That ain’t a crisis… this is a crisis.”

Factor #2: Inflation

Inflation is the systematic destruction of the value of a dollar.

Example: If there are 100 dollars in circulation and you add 100 additional dollars, the value of each dollar in circulation has effectively been cut in half.

This is happening at a rate never before seen in American history.

The trouble with inflation is that the prices of goods always go up before wages, which reduces your purchasing power.

Furthermore, additional dollars injected into the economy benefit those who receive those dollars first–before they’ve had enough time to actually effect the economy.

So average Americans like you and me feel the pain of inflation acutely.

Every week there is news of record prices for crops, oil, and other commodities. Some of the high-price issues we’re facing are caused by shortages. But they are compounded by inflation.

Ron Paul writes in The Revolution:

Any government that inflates the money supply runs the risk of hyperinflation, which occurs when the money supply is increased so much as to render the currency completely worthless. It can occur very quickly and suddenly, and has a very rapid snowballing effect. (p. 150)

What happens when a fiat currency is destroyed by hyperinflation? Take a look at Germany in 1923. Paul writes on page 151:

The result was the complete ruin of the German mark, which German children began gluing together to make kites and German adults burned in order to keep warm.

If you’re interested in learning more about inflation, I recommend reading this brief article: “Silver, Gold, and the IRS.”

Factor #3: War with Iran

The question is not if, but when.

Israel wants to bomb Iran… and soon. Their biggest fear is if Iran develops an atomic bomb. And so they’re intent on doing whatever they can to stop Iran before that happens.

The current political climate in Washington, D.C., is favorable to bombing Iran. Of course, Israel would love it if the U.S. would bomb Iran on their behalf. But their second choice would be to bomb Iran themselves with the approval of the U.S.

And so Israel is already planning to bomb Iran before President Bush leaves office. That is the hard deadline they’re facing. If they wait until after the election, the political climate could change so that the U.S. would no longer support an unprovoked attack on Iran.

Here is an excellent article that explains Israel’s position: “‘Mission Doable’: Israeli Ministers Mull Plans for Military Strike Against Iran.”

Of course, I’m firmly against any military action against Iran. But if the U.S. decides to become involved in any such military action, it will be funded by taxpayer dollars and–what else?–inflation! They’ll simply print the money they need to pay for the war.

The Global Europe Anticipation Bulletin (GEAB) concludes, “Iran: 70 percent probability of an attack by October 2008 confirmed.”

Factor #4: Price of Oil

Last but not least, the price of oil is the fourth major factor impacting the American economy.

Where I live, gas has cracked the $4 a gallon mark. It has dropped a bit since then, but I expect we’ll be seeing $4 gas for a while.

This impacts Americans on many levels. It reduces the total disposable income that can be produced by a job that requires you to drive to work. It cuts into the profits generated by the sale of physical products (both for manufacturers and retailers). It hurts airlines and truck drivers directly and tourism indirectly (because of the high cost of travel).

I just noticed an article today that reports a massive plummet in RV sales. Winnebago, an RV manufacturer, reported a 73% drop in 3rd quarter profits from a year ago.

I imagine this is not only a result of tightening credit, but also of high gas prices. Many Americans simply can’t afford to fuel an RV.

First, one industry goes; then another and another and another. It’s the domino effect. And since so many industries are dependent on cheap energy to survive, I expect businesses will continue to be negatively impacted.

******

These are the four major factors influencing the U.S. economy. Each one has significant implications for how we should live and how we should plan.

How long before the economic lights turn out? And what do we do until then? Perhaps I’ll write an article with some recommendations in the near future.

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Topics: Economics, Foreclosures, Mortgages | Give Your Two Cents »

How quickly a month passes!

It seems that only a few days ago I was updating you on my outstanding debt for May 2008. And here we are halfway through June.

Last month was a good month. I finally feel that I’ve fully recovered from the last six months of out-of-the-ordinary expenses.

I haven’t made a big push to pay off debt this last month because I’m building up my cash reserves and planning for January 2009 (when my taxes will be due).

Nevertheless, our debt went down by a good chunk. Here are the numbers…

As you can see, we reduced our debt by $1,396.57 last month. Not great, but not bad either.

In other news, my articles were featured in the following Carnivals last month:

• The 140th Carnival of Debt Reduction: Circus Day Edition
• The 144th Carnival of Debt Reduction: Advice from Dad Edition

If you have any interest in participating in the next Carnival of Debt Reduction, you can submit your blog post here.

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Topics: Carnivals, Case Studies | 5 Comments »

I expected the offer of a free book would interest more than four people. But perhaps, since Rightsizing Your Life is not directly related to debt, it is of interest to fewer readers.

Nevertheless, this meant very good odds for the four people who DID take the time enter in the giveaway.

In fact, each person had a 25% chance of winning!

Anyway, I used this random number generator to pick the winner. I instructed it to pick one random integer between one and five (since there were five comments, including mine). If number two had been randomly selected (the number of my comment), I would have simply had the system select again.

But that’s not what happened. The system randomly selected number one as you can see in this image…

This means that Merlene Paynter wins the free copy of Rightsizing Your Life by Ciji Ware.

Merlene writes: “The book sounds like exactly the sort of thing I’m looking to read right now. I’m in the middle of downsizing from my house which has 2200 sq ft of living space (plus garage, 2 patios, garden shed) to an 800 sq ft apartment with no storage other than the bedroom closets.”

It sounds like this book is coming at the perfect time for Merlene. Congratulations!

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Topics: Books, Giveaways | 2 Comments »