If We Woke up in Debt | Fix Your Finances
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- Опубликовано: 26 мар 2015
- UPDATE: Watch our follow-up video here:
• Why Get out of Debt an...
How would we get out of debt if we woke up one day with student loans and a credit card balance? By taking extreme measures to cut spending and earn extra income.
We discuss everything from cutting up our (hypothetical) credit cards to selling our excess furniture and gadgets on craigslist. Although it's easy to stand on the sidelines and say "that's what I would do," we hope this is a help to someone out there.
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I just stumbled onto your channel and really like your approach. Though I disagree with the idea of not tithing while getting out of debt, everything else is spot on. Thanks for putting these videos out.
Of course, the choice would be yours. But in my life, I have discovered whenever I stop paying tithe, things just don't work our so well. As soon as I start up tithing again, things amazingly get straightened out. That is my experience. Hope it helps. God bless!
All valid points, you're preaching to the choir with most of your subscriber base! Still, the mindset is extremely important to convey and you guys have done a great job in doing that. For someone who 'walked into' debt, seeing hard numbers may be a good visualization tool that they can adapt to their own situation. Some people need a bit of guidance and this video is a great start.
Shahrukh Bakar Thanks. It's hard to tell what's too "basic" for this basic personal finance series, but we've got to start somewhere!
I think the lesson before this one should've been WHY it's so important to get out of debt. Most people are too apathetic concerning their debt. Everyone's doing it, right? Debt is the American way. People need to have serious motivation to pay off debt like you propose. DR's gazelle intensity, or MMM's OMG my hair is on fire! How do you get someone to see how life changing the debt-free lifestyle can be?
Riffman42 This video actually had a whole section on exactly that. But it got cut for two reasons. First, it sounded like we were really talking down to people. Maybe it was just the way we said it. Second, I'm not sure you can ever "argue" someone into feeling the crushing burden of debt. It's kind of like addiction; until someone hits rock bottom on their own, you're not going to convince them otherwise.
On the other hand, someone has to tell people that debt is not OK. Maybe we should do a follow up video about why getting out of debt is so important. We just have to figure out a way of doing it without using the phrase "debt is slavery" because it's been said so much it's lost all impact.
Mike and Lauren The "how" doesn't much matter without the "why." Telling someone that the way to become debt free is to spend less than you earn is like telling someone the way to loose weight is to burn more calories than they eat. The motivation is the key to this. If I were properly motivated to get debt free, I wouldn't need anyone to tell me how; I'd figure out a way.
What is rock bottom for a debt addict? Bankruptcy? Do people really have to dig themselves that deep to realize that they need to change their ways? Or perhaps most people don't realize that there is a different way to live than debt. You'd think that it'd be so obvious: well, duh. But look around; it ain't.
If we didn't want all the material things that are marketed to us, if we accepted the fact that stuff doesn't bring us happiness, if we woke up to the out of control consumerism of our society, then simply not buying so much crap would translate into prosperity. FU money. Financial independence. Early retirement. Having the freedom to be the person we were truly meant to be. What fulfilling life will you have when you don't have to work 9-5 anymore?
Riffman42 I guess it feels like most of our videos cover the "why" and show a different way without living in debt. This was intended to be a "how" video. And no, rock bottom is not bankruptcy. Rock bottom is always being worried about where the money is going to come from tomorrow and the next day. How low you're able to tolerate the subtle suffocation of that burden is different for everyone.
Good job, guys! I think the seriousness/extremeness of your approach helps convey the importance of getting out of debt. I don't think you guys will be going into debt!!
jkopvo Thanks, we don't plan on it!
Question on stopping retirement accounts. What about tax implications. For some people it brings their tax rates down to next category with other tax deductions. If it is equivalent to interest on loans or more than interest on loans would it be better to prolong payments on loans.
Jayakrishna Bommasamudram We have a marginal tax system so there's no "next category." Only the income over the next tax bracket is taxed at that rate. In other words, your entire income is not taxed higher because of a missed deduction.
Mike and Lauren Hey guys thanks for responding. Would like to show an example using 2014 tax rates.
turbotax.intuit.com/tax-tools/tax-tips/IRS-Tax-Return/2014-Federal-Tax-Rate-Schedules/INF12044.html
Say wife husband made $84,800 in 2014 and both saved in Trad IRA at 5,500 a piece 11k total.
The 11k if they did not do Trad IRA would be taxed at 25% or you are paying federal $2,750 (plus state, city SS etc.). By putting into Trad IRA or 401k they saved $2,750. What if the interest rates are lower on your loans maybe with everything you are paying 1k in interest. Is it worth it?
Jayakrishna Bommasamudram That's getting a little to specific for me to have an opinion without being a licensed advisor or accountant. It would also be highly dependent on other deductions and credits.
Also there's the whole emotional side of debt which can sometimes trump mathematically correct decisions. If that's your situation, I would definitely pay the $100 bucks to go consult with an accountant.
My wife and I will never again enter debt that doesn't increase our income. As a teacher, the level of higher education that I attain determines my salary. We could see student loans as a justifiable debt here, but we're still reluctant to use it. I'm tired of looking at debt even as a tool.
Scott Schaffer I'm with you on that. If debt feels like it's hindering my independence or freedom to move or change, then it must be a very calculated decision with an exit strategy.
Would you suggest such a drastic approach on a single student loan debt, and no revolving or CC debt? I'm at the cross roads where I don't know what's more important, saving into the savings/IRA or taking that money and paying off the student loan. Keep in mind I am already paying ahead by a small amount. Thanks!
A lot of people out there will tell you to try to balance both. They will state that your student loan has a lower interest rate than the average rate of return in the market, so you will be better off to continually put money towards retirement while paying down your loan. I do not subscribe to that, and it appears from this video that Mike and Lauren do not either. It really comes down to risk.
There is a huge difference between losing your job or facing a financial burden while you are in debt versus out of debt. If I were in your shoes, I would focus ALL my efforts on paying down that student loan debt, including putting a pause on retirement. In this way, you then do not have something hanging over your head that you have to worry about if you were to lose your job or undergo a financial burden that requires a lot of cash flow to resolve without going into additional debt. You can always catch up on retirement later. People will tell you that you are crazy and that you will miss out on these compound interest gains, etc. They are actually making the mistake of believing that in normal conditions that you would be contributing 100% of the amount you pay towards your debt towards retirement.
Just for simplicity, lets pretend you make $100,000. Lets pretend that if everything in your life was going fantastic, you would contribute 15% of that money into retirement ($15,000). Lets pretend that you have a $30,000 student loan. Lets say you decide to put retirement on pause while going intense-mode on your loan. You want to pay your loan off in 1 year. So you drop $30,000 on this loan in one year and miss out on $15,000 in retirement. In the following year, you put $30,000 towards retirement (which should be doable, because you just lived on a budget to achieve paying that same amount on your student loan). The critics will tell you that "You missed out on the compound growth of $30,000 in the stock market! You are an idiot!" But that isn't really true, because you would have actually only have put $15,000 towards retirement in the first year if you had not been in debt in the first place. So by undergoing the scenario above, you would actually have "caught up" in a sense (minus a tiny bit of growth) to exactly where you would have been... the difference now? You have no debt hanging over you! You budgeted hardcore to achieve freedom! This is, of course, a very simplified scenario with a wonderful salary, but the general sentiment still applies. The type of intensity that I am conveying to get out of your debt is for you to pay wayyy more than you would be normally contributing to retirement anyways, which means that in the follow-up years you can more than make up for the "lost gains," that your financial gurus will complain about.
Why was this video made when it ranks 11th on the "Pick Our Next Video" from the web-site? Is that functionality on the website still going to be a driving factor in how video topics are chosen or were the survey results going to take precendence. I'm asking mainly so I can stop voting if that feature isn't going to be used... (I still love the videos and have and will continue to watch them all)
Ben Hackney We still use the voting feature. It has just become more of a guiding tool for us. We make the videos that get us excited and when we're deciding between two we pick the one with more votes.
We also like doing similar videos in groups. For example, the "does homesteading save money" video will come after I rebuild the chicken coop. That way we have examples and footage to make the video more interesting.
Throw children and living off one wage in the equation and all this needs to be recalculated.
Would you continue to invest during this time, or would all of your income go toward paying off debt? Unfortunately my husband and I have student loans and our goal is to have them paid off by the end of the year. Almost all of our income is going directly to it and we are living off the bare minimum, even living with family until it's paid off. We want to pay them of as quickly as possible so we are slaves to debt for the next 10+ years. If I could go back in time I would have never taken a loan...... I see now how "normal" debt seems to most Americans and I want to run far far away from that mindset!!
Excuse the typos
Ashley M Congrats on having a plan to get rid of the student loans. I would say that's probably 75% of the battle and you've already done it! I guess I'll preface by saying that most financial advisors would recommend you keep investing while paying off student loans since they are considered "good debt." Most people look at them the same way as mortgages and slowly pay them off as they go about their normal lives.
We still see them as a burden. If a loan payment has any control over your life, then I think it's bad debt. We personally would stop investing to pay it off, but only if we were in extreme savings mode to do it (which it sounds like you are). The only exception would be if the interest rate on the loan is super low, say 4% or less.
Hope that helps!
It's a lot easier to live off banana's and potatoes. Instead of rice and beans.
I'm sorry but no one is going to get rid of their cell phone, cable, and ALL discretionary spending. Getting rid of that amount of debt is going to take some time but you can't live in the dark in the corner of your house to get rid of it. That's not sustainable
People do it all the time, my friend! If that is what it takes to put a family back on track to live outside the realm of uncertainty and financial peril, then there are certainly people who will step up to the plate. It sometimes takes a catastrophe before people realize the severity of the situation, but once it "clicks," in a person's mind, they will likely be motivated to get out as quickly as possible.
"pays cash" --> escape taxes. Yup .. suggesting we do something illegal?