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An advertisement on the side of a bus in Tucson, AZ.

"It's not what you make, but how much you keep!!!


Some Debt Statistics

US Credit Card Debt has surpassed a trillion dollars
The Federal Reserve announced that outstanding credit card debt hit a new high in November of 2017, increasing by $11.2 billion ($11,200,000,000) to $1.023 trillion ($1,023,000,000,000). "This record should serve as a wake-up call to American consumers to make 2018 the year they get their credit card debt under control," says Matt Schulz, the senior industry analyst at CreditCards.com. Click Here to see the article.

(Note – this article is an attempt to sell you on moving your credit card debt to no or low interest rate cards, which isn’t a bad idea, but it should be noted that there is also a way to accelerate the pay-off of a credit card without increasing the payments.)

US household total debt soars to over $13 trillion
According to the Center for Microeconomic Data of the Bank of New York Federal Reserve, the total household debt hit an all-time high of over $13 trillion at the end 2017. This was the fifth consecutive year for annual household debt growth in the mortgage, student, auto, and credit card categories.
Tae Kim | @firstadopter - AgoCNBC.com

General US Debt Totals:
Per Chris Brady, the CEO of LIFE Leadership:
  • 73% of people die with debt, which has to be paid off, leaving an average of only $66,000 to their beneficiaries.
  • US Student Loans total $1.4 Trillion - an average of $33,000 per borrower.
  • Average US Household debts:
    • Credit Cards - $16,000
    • Mortgages - $172,800
    • Auto Loans - $28,500

21% of Americans have no retirement savings:
While this may not appear to be a debt issue, we will show you further down that there is a direct coralary between debt and retirement savings.
Fox - 21% of Americans have no retirement savings, At All!!!

Budgets and Spending

In engineering terms, your “household budget” is a process that has inputs (income) and outputs (expenses). Your income tends to be fixed because it is typically based on your salary. However, “expenses” are fluid and fluctuate depending on personal choices and needs.

The following is a brilliant SNL skit that shows an all too common problem people have:

Click Here to watch the video.


Typical Home Expenses.
The major “expenses” experienced by most of the homes in the US are:
  1. The cost of Living – food, utilities, living expenses, etc.
  2. The cost of Debt – the fees and interest you pay on your mortgage, cars, credit cards, etc.
  3. Taxes – what the government is charging you for its "services"
  4. Inflation – probably the biggest threat to your future financial security.
  5. Excessive Life Style – where you choose to live beyond your means.
A rule of thumb is that the average household is spending about one-third of its income on taxes and another third on servicing debt, which leaves only about one-third of your paycheck to spend on your chosen lifestyle.


Lifestyle and Debt.
Too many people believe that what the bank will lend them is what they should spend on their car or home. However, just because the bank tells you that you qualify for a loan on a $300,000 mortgage doesn't mean that you can afford a $300,000 house. And just because the bank tells you that you qualify for a $30,000 car loan doesn't mean that you can afford a $30,000 car.

The financial institutions are selling you the DEBT to pay for your dreams
so they can harvest your money for the rest of your life.

Letting the banks pick purchase prices contributes strongly to nearly half of the US households having less than $500 in savings. That is because buying the most expensive car or house possible ties up money that could otherwise be invested or saved. Having nothing left over after making these excessively large payments is what is known as being house or car "poor".

By over-buying, they have joined the 78% of US households that live paycheck to paycheck, being only one paycheck away from disaster. Our US consumer debt is currently $71 Trillion ($71,000,000,000,000) while the consumer debt world-wide is $217 Trillion, which contributes to those well known marriage-ending financial arguments. Few marriages are able to withstand this toxic atmosphere.

Do you have any idea how much a Trillion Dollars is?
Think of what you could do with an allowance of $1,000 per day?
  • If you spent a $1,000 a day, that would be $365,000 in a year
  • in about 3 years that would have spent a million dollars ($1,000,000)
  • it would take you another 2,997 years to spend a billion dollars ($1,000,000,000)
  • it would take you a total of 3 million years to spend a trillion dollars ($1,000,000,000,000)

Taxes.
Because of how and where we are taxed, most people don't realize how much their total tax bill really is. We can easily see what's taken out of our paychecks, but we don't pay as much attention to other taxes, like the taxes on purchases and gasoline.

Did you know that your total tax bill, including sales tax, now exceeds what you are paying for food and clothing - combined; that gasoline is taxed at about 48 cents per gallon; plus everyone pays property taxes either through an escrow account or their rent?

We wanted to provide a comprehensive list of taxes, but since there are more than a dozen of them, we realized that we didn't have time to find all of them or space to list them. We tend to pay these additional taxes without thinking about it; and to add injury to insult, your total tax bill has increased 41% since 2013.


Inflation.
Inflation is the systematic loss in the value of money over time. In our opinion, it is the greatest of all dangers to your money because it can rob it of half of its value in as little as 15 years. To put this into perspective, the $20 bill in your pocket is just about the right amount to get you and a friend into the movie theater tonight, but after fifteen years of 5% inflation, that very same $20 bill would only be enough to get you in.

In order to offset the affect of inflation, you will need to increase your savings and income by more than the current rate of inflation. That means that if inflation is 5%, then the combination of your annual raise and interest on investments have to be in excess of 5% or you will be worth less at the end of the year than you were to begin with. By getting at least a 5% increase on your money over a 15 year period, your $20 from above will have doubled to become $40 and you can still get two tickets to the movie.

While we no longer have anybody on our team with financial licenses, we do have significant knowledge of the types of investments available today. Contact Us to arrange to learn more about how to beat inflation.


Would you agree that we have a nationwide debt problem?

Overview
The biggest concern of people approaching retirement today is that they will outlive their money. The current expectation is that only 4% of households will retire totally Self-Reliant. Most people will be dependent on retirement money that is outside of their control, like Social Security. The reason that they don't have control of their retirement is because they have failed to save up the money that they now need to live off of.

As was explained in the earlier section on "Lifestyle and Debt" many people never have any funds available to invest in themselves because they bought the most expensive car or house that the bank would let them have. They had nothing left over after making these excessively large payments, while at the same time racking up credit card debt to support their lifestyle. As was also pointed out previously, the average inheritance is only $66,000, which suggests that this was all that the average person had saved up in excess of his or her debt.

In our opinion, our country's love affair with debt is largely due to a serious lack of Financial-Literacy training coupled with the barrage of false information from people hoping to sell you something that you don’t really need. There is also misinformation coming from politicians and government officials who may benefit from misleading you into voting for them or backing their programs. One example of misleading information:

Renting vs Owning
People are constantly told that, "owning a home is better than renting because renting is a waste of money." The common belief is that buying a home is an investment and that the house will sell at a price that covers all of your costs and more.

What the lenders don't tell you is that this claim is based on the assumption that housing prices will always go up. However, the reason it is called the Housing Market is because home prices fluctuate like in the stock market. Nobody knows if a home will be worth more in the future, and in the last several years we've seen our share of housing market crashes and upside-down homes.

Something else the lenders don't spend very much time talking about is the interest on the loan. While most people are aware that their initial payments are mostly interest, they typically don't understand what that looks like. In fact, very few people understand how an amortized loan works.

For example, for the first 5 years of a loan your payments will be about 80% interest and 20% principle. That means that out of an $800 payment only $160 actually goes to paying off the loan.

The mathematical truth of a home loan is that a disproportionate amount of the interest is paid early in a loan. In a 30 year loan you will pay a quarter of the total interest in the first 5 years and two-thirds of the interest at the half-way point of the loan.

Unfortunately, the trend is for people to refinance or buy a new home every 5 years, which is when you're paying 80% interest. This is obviously counter-productive to getting out of debt and building an effective retirement.

The next misdirection that Lenders are frequently guilty of is not telling you how much the loan is really going to cost. They don't like mentioning the fact that at a 5.5% interest rate you will pay twice the original cost of the home and at 9.5% you pay triple the original cost of the home.

These and some other important numbers are in the federally required "Truth in Lending" document, including the APR (Annual Percentage Rate), the amount financed, and the total payment. The APR is the real interest rate and will always be more than the bank rate that was quoted. The APR includes all of the fees, charges, and points; one of which is the cost of getting the loan (Loan Origination Fee), which is typically around $3,700.

(Note - sometimes a lender will claim that there are no up-front or closing costs, but that typically means that the costs are buried somewhere in the loan and you will be charged interest on them, which will cost you more in the long run.)

The other two important numbers prominently featured at the top of the "Truth in Lending" report are: 1) the "amount financed", which is the total interest that you will pay, and 2) the "full amount" that you're scheduled to pay over the course of the loan.

We've been involved in a number of these transactions and our experience has been that these numbers are often glossed over. We have also learned that once we finally got to the "closing", all we really wanted to do was get the papers signed and take "ownership" of the home.

The person facilitating the "closing" knows this and wants to get you through this final daunting exercise as quickly and painlessly as possible, for your benefit and to avoid having you back out at the last minute.

You should get a preliminary copy of the report prior to the closing and it would be wise to take a good look at these numbers so that you'll know how much the loan is really costing you. This is also a good place to determine what your total interest for the first 5 years will be.


Interest Payments on a $165,000 home
APR Total 5 yr Interest Total 30 yr Interest Total cost of the loan
4.0% $29,659 $118,635 $283,635
4.5% $33,990 $135,960 $300,960
5.0% $38,445 $153,780 $318,780
5.5% $43,065 $172,260 $337,260
9.5% $83,614 $334,455 $499,455
(Note - interest rates appear to be on the way up, again.)


The final potential problem with owning a home is that if and when you need to move, you have to sell the home or risk serious financial consequences. It's not been uncommon for homeowners to find themselves paying two mortgages or a mortgage and a rent payment while trying to sell the home. Some people have had to walk away from a home to avoid bankruptcy when they couldn't maintain both payments.

In conclusion, it is important to point out that the purpose of this section was not to say one shouldn't ever take out a loan to buy a house, car, or something else on credit, but to make you aware of some little known factors. One thing that we've learned in the financial world is that there is no such thing as One-Size-Fits-All.

What this means is that owning a home is not right for everyone, nor is renting because there are pro's and con's to both. Buying a home is a big commitment and you need to carefully evaluate your situation and then choose what works best for you. We just want you to be more aware of the aspects of owning your own home so you can make a better choice.

DTI - Debt To Income Ratio.
The Debt to Income ratio (DTI) is how much you're paying for auto loans, credit cards, etc. versus your current income. It figures heavily in a lender's decision on whether or not to loan you money. It is also a number that you should be tracking in your effort to take control of your finances. To calculate your DTI, divide your your debt payments (e.g., mortgage, auto, credit cards) by your pre-tax income (not your take-home pay).

Example of a Debt to Income Ratio Calculation
Monthly Payments Amount
Mortgage: $1,000
Auto Loan: $300
Minimum Credit Card Payments: $200
--------
Total Monthly Debt: $1,500
Total Monthly Income: $4,500
$1,500÷$4,500 = 0.33
--------
Debt to Income Ration: 33%


What should your debt ratio be?
The borrower's DTI is important to lenders because it gives the lender an idea of how much more debt someone may be able to handle at this time. A DTI ratio of 33% is generally acceptable, which makes one wonder how having one-third of one's income tied up in debt is OK? In fact, lenders are often willing to in-debt you to a DTI of 36%. Inexplicably, some government loans allow a ratio as high as 43%.

What's disturbing about these high ratios is that most people are also paying about a third of their income to taxes and paying for everything else (food, gas, utilities, insurances, entertainment, clothes, medical, car maintenance, retirement, etc.) from what's left of the check.

It's important to remember that just because the lenders are willing to in debt a third or more of your income, that doesn't mean that you should borrow that much. When you do, you are literally trading away your future well-being for a bigger house, car, or _______ today (fill in the blank).


What could go wrong with having a high DTI?
Alfred E. Newman of "Mad" Magazine used to ask, "What, me worry?" The question here is, what's the "worry" if you go for the DTI limit on your dream house? The answer is that you may find out that at some point you're not able to make your payments due to an accident, illness, job loss, divorce, downsizing, getting sued, a weak economy, inflation, or something else totally unexpected.

Do you understand that if you fail to make every single one of the mortgage payments, the bank can repossess your house and all of your equity in it and then turn around and sell it to someone else at full market value?

This ability to confiscate your equity when they repossess your home may contribute to why the banks set such high DTI Ratios. These high ratios are also probably the reason over 78% of US households are living paycheck to paycheck; 21% of the population have absolutely nothing saved up for retirement; and a large number of marriages are ending in divorce due to fights over money - EVEN IN FAMILIES WITH 6 FIGURE INCOMES.

What the lenders count on is the buyer getting so emotionally involved in owning a certain house or car that the buyer is willing to go to the maximum DTI that the bank will give them.

What the buyer either doesn't understand, or they forget, is that everything they have will be going to service their debt with nothing being saved for later. All too often the spouses end up blaming each other for the debt "hell" they created together and have put themselves at greater risk of bankruptcy and/or divorce.

While your DTI ratio is not part of your credit score (FICO) calculation, it does affect the quality of your life. The lower it is, the better your life will be.


In conclusion
The basic cause of debt problems is that most people spend money when they should be saving it and save when they should be investing it -- IN THEMSELVES!!!

Many people make the mistake of believing that Social Security or their work related investment plan, like a 401k, will be their retirement solution. Unfortunately, Social Security payments are slated to take a 21% pay-out hit in 2036 (see articles in the reading room) and most people's 401k's will be significantly underfunded.

What is also not understood is that to retire today at $50,000 per year, one would need at least a million dollars in the bank to have any chance of your money outliving you. And that doesn't take into account inflation, which cuts the value of your money in half every 15 to 20 years.

Experience says that one can't really be happy when burdened with significant debt as shown by the number of divorces resulting from arguments over finances and debt. In addition, it has been reported that a large number of people are losing sleep due to worrying about their debt.

One facet of our mission is to help people get out from under the burden of debt. We have found a system that has proven itself 100% effective in accomplishing this - when the program is strictly followed - often without the need of a raise or a second job.

Research has shown that a trait common to all Billionaires is that of "SHORT TERM DENIAL" - being able to put off purchases until they can be bought with cash, if at all.

"Most people spend their money when they should be saving and save their money when they should be investing - in themselves!"
~ Orrin Woodward, Co-Founder of LIFE Leadership


Contact Us for more on getting out of debt
 
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