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Estates are bled dry by family debt
Nothing great in the world has ever been accomplished without passion.
- Georg W Hegel
I hope your weekend was as restful as ours!
But no matter what happens on the weekend, one of the highlights of my week is sitting down to write these blogs. I love the feeling of reaching out and virtually “sitting down over coffee” to offer encouragement and hope-as well as advice on how to be prepared for whatever comes.
And, we’ve seen some interesting public events come our way, haven’t we? It can sometimes seem that events are beyond our control, and we’re just along for the ride.
Well–here’s something you CAN control.
When we sit down with clients, and take a look at the asset picture, occasionally we run across some problems that could have been avoided with better planning. And I’m not referring to asset allocation.
Let’s talk about debt, shall we?
“Straight Talk” Personal Strategy
Don’t Let Your Family Be Bled Dry (Part 1)
The most heartbreaking emails we get from our correspondents are from those who have gotten themselves deep into debt, and don’t know where to turn.
In the next few weeks, I am going to make the effort to address the very real concerns of those who have debt problems. I will speak practically for everyone, but it is intended to help families get out of debt so that they can start saving–and build something even more substantial to pass to their loved ones. Everyone knows a family with financial debt. This series will help them. Feel free to pass it along to those who you know might benefit…
The average household credit card debt is $7,564 and the average credit card interest rate is 18.9%.
In the good old days, guys who charged that sort of interest had a sideline business of breaking legs. We called them loan sharks. With those statistics, the average monthly payment for *interest only* is $119.13. If you invested $119.13 in a stock mutual fund and it appreciated at the 11% annual average rate of the market, you would have more than $100,000 in less than 20 years. You would have over $1,000,000 in less than 40 years.
Here’s where I’m selfish: We are losing many potential estate planning clients because of credit card debt! But I know that families in debt feel it much more than we feel that particular pinch.
But here’s the very good news: The difference between those in debt and millionaires is as small as slight changes in financial lifestyle. I’ll address those more soon.
Additional statistics are not encouraging:
* Credit card companies solicit the average American 7 times a year through the mail.
* The average household has 10 credit cards.
* Americans paid out approximately $65 billion in interest last year alone.
* The typical “Minimum Monthly Payment” is 90% interest and 10% principal.
* Almost half the households in America report having difficulty paying their minimum monthly payments.
* Late fees are now $29.00, (if not received on the payment due date).
* Bankruptcy is becoming the only alternative for more and more Americans.
* Last year over 1.41 million Americans filed for bankruptcy, the highest in our nations’ history.
How are you doing? One measurement you can do is to compute your “debt to income ratio.”
To calculate your Debt To Income (DTI) Ratio, divide your debt payments by your income. For example, a person making $20,000 a year gross income with $10,000 of yearly debt payments has a 50% DTI Ratio.
For debt payments, add up all of your debt payments including: house payment, car payment, credit card bill, etc. Try adding up one month’s worth and multiplying by twelve. If your DTI Ratio is over 40%, you are in trouble. If you are under 15% you are doing well. Families who are over 40% will usually have to accept higher interest rates when applying for loans because lenders see them as “overextended”.
The first step to break out of the bad bracket, is to stop the bleeding. Simply stop using your credit cards. Pay cash or write a check on an account with sufficient funds for every purchase you make. Every day, one day at a time, pay cash.
This is tough love, and a hard pill to swallow. I’ll address how it can be made easier next week.
Let me know if this is useful to you! Leave me feedback…
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