I wish I was making this up but this is a step by step guide on how I got into a ton of debt over the years. My goal here is to help you avoid some of the mistakes that I made and hopefully set you up for a better financial future.
Step 1
Get a student loan and ask for more than you need.
Post secondary education is a very valuable asset and a worthy pursuit; unfortunately this can come with a very large price tag. I wasn’t fortunate enough to qualify for a scholarship and had to foot the bill on my own. Lucky I managed to avoid taking out a student loan and went to a local college where I could afford the tuition (barely). Many of my friends are still paying off their student loans today.
Student loans can burden you for many years after you graduate and if your chosen career doesn’t work out it could take you a very long time to pay the loans back. If you can find a similar program at a local college or university seriously consider attending and save some big money and stress. (if you have kids set up a college fund for them now and ease the burden later)
Step 2
Get a credit card and use it for everyday purchases.
I used to buy groceries, gas and convenience store items on my credit cards with the intention of paying them back right away. While I did manage to collect some big rewards I managed to accumulate a small balance each month that seemed to grow bigger every week until I could only afford the minimum payments.
Many people will tell you to never get a credit card, and for many people that have poor spending and budgeting habits such as I did when I was younger that is sound advice. If you are not an impulsive buyer or use it for everyday purchases though a credit card may in fact be beneficial in helping you build a good credit score. A good credit score is essential if you want to buy a home in the future and not get a terrible interest rate. That is if you are planning on getting a mortgage.
Step 3
Leasing a new car
My first car I ever owned was leased, it looked great and I loved it. After about a year or so the novelty wore off and I was stuck with a 1 year old car that was worth much less than I owed on it. 4 years after that and I decided to buy it out (with borrowed money of course), for about $1000 more than it was worth and then had to pay to have it certified. It took me 8 years to pay for this new car, not to mention the thousands of dollars I paid in interest. Avoid leases and payment plans, if you need a car buy used and save up for a new car.
Step 4
Buy a house with a 25 year mortgage
Did you know that you can buy a home with $0 down? I did and I almost lost it. After a few months I was in over my head.
As a rule you should aim for no more than a 15 year mortgage and put down at least 25% of the purchase price as a down payment. You can get away with 20% in some cases, other than that you should rent and save until you have enough. When it comes to payments if your mortgage payments are more than 40% of your gross monthly income, you can not afford it. (I would go even lower and limit it to 35%
Step 5
Don’t pay a cent for a year - Furnish your new home on store credit
Those deals seem great at the time and you have every intention of paying off the furniture (couches, TVs, kitchen appliances) before the year is over but sometimes life gets in the way and at the end of it you don’t have enough to pay it all off. Then they get you for the whole amount plus interest (28 % for the whole year. ouch).
That happened to me on my first LCD TV I purchased $1400 turned into $1820 after interest and fees. Save up for these big purchases and pay for them in cash. You would be amazed at the deals you can get just by pulling out a wad of cash and making an offer to pay for the item on the spot.
That is basically how you can a mass a huge amount of debt in a relatively short amount of time. I realize I left out the wedding and the kids but those came after I got my financial act together.
The scary thing is that this is the route that millions of people are taking these days and they are in for a major shock when the debt gets so large that the “consumers” will get “consumed” by the payments until they lose it all or make some major lifestyle changes.
Tags: credit card debt, debt elimination, debt elimination plans, Debt Management, debt programs, debt reduction