Reaching My Debt Set Point

I used to have a higher threshold when it came to how much debt I could tolerate. According to financial author and expert Suze Orman, everyone has a debt set point. In her book, "The Courage to be Rich," Orman says everyone's debt set point is different. "I believe that each of us has within us a point at which anxiety over our debt turns into panic, and it is at that point that we are finally moved to take action," Orman writes. She has observed that the lower a person's self-esteem, the higher their set point or tolerance for debt. I remember also hearing Orman notice a correlation between piling on weight and piling on debt.

Getting out of debt at 30

I definitely reached my debt set point in my mid-20s. I made a command decision to get out of debt by age 30 no matter what. I had more than $50,000 worth of debt including credit card and student loan debt. I also owed money to my grandmother for a car loan, after successive car accidents including a run-in with an alligator.

Facing my debt

One of the keys to getting out of debt was following Orman's advice to face my debt by telling other people about it. I told my best friend and family members about my plan to get out of debt. My best friend, who is now worth more than $1 million, helped me come up with a plan to double my income so I could quickly pay down my debt. I wrote down what I had to do each day in order to earn enough money for the month to be out of debt by age 30.

Making a financial vow

After reaching my debt set point, I was able to become intense about paying off my credit cards and other debt. I made a vow to never get into debt again. I wasn't going to let myself slip up by buying things I didn't need or using shopping as a form of retail therapy. When I decided to get married after turning 30, I made sure I talked to my husband about debt. We agreed to stay out of bad debt, which we defined as anything other than our house.

Getting rid of financial clutter

After getting married, we worked together to get rid of all the financial clutter including old bills and taxes that were more than 7 years old. We started organizing all of our financial records so that we would never be late about paying bills. My husband and I set up online banking as well as automatic deductions from our paychecks into our retirement accounts. I think having so much clutter in the past made it easier to fall into debt because we were in denial.

Now the only debt we have is the so-called "good debt" of owning a home. I've discovered that I have a debt set point even when it comes to my mortgage debt. I don't feel comfortable owing more on my home than I have in savings. We have about $100,000 of mortgage debt, but only a small amount in our emergency savings. Instead of paying credit card and student loan debt, we pay ourselves by diverting our extra money into savings.

Read :-

1. Binary Signals aka Option trading

Considerations for student loan consolidation

Considerations for student loan consolidation

Considerations for student loan consolidation

Considerations for student loan consolidation

Personal Finance: Living Debt Free

Many people have found becoming debt free requires a trip through a lifestyle that feels like deep poverty. Living debt free is far from it. As your debt falls away, you earn interest instead of paying it. Your ability to negotiate prices increases dramatically. You work for your benefit and not to enrich creditors. A number of differences surface as you adjust to living debt free.

1.) Make savings deposits instead of debt payments.

Most of your payments become deposits. That $400 per month for a car can add up very quickly in a savings account. An $800 per month mortgage goes a long way toward funding your 401k and Roth IRA accounts. It does not take long before you realize just how much extra cash it required to service month after month of crushing debt.

2.) The joy of paying cash.

Paying cash is fun once you learn how. When you wave cash in a seller's face, prices drop and deals are made in the blink of an eye. You not only will stop paying interest to the finance company, but you will also find far more bargains are in the world of paying cash and living debt free.

3.) Vacations are more relaxing.

Almost everyone has had the troubling experience of being on vacation and trying to remember if all of your bills were paid before you left. Leaving your financial boat to drift along while you are out of town is a scary experience when you are dragging along large amounts of debt. Coming home from vacation without ever-increasing debt is like leaving vacation to go home to a vacation.

4.) Holiday buying does not dig a debt hole.

Gift-giving at the holidays is often overshadowed by the realization that you may have just added on months or years of debt payments. When you can walk away from Christmas knowing that everything has been paid for, it will make your holidays much more joyous. If you will develop the habit of making a special account to save your holiday spending money, it will even take the guilt out of those spending excesses that sometimes accompany that time of the year.

5.) Never get a collection call.

Because you have no debt, collection calls will disappear from your life. Even car repairs and medical expenses can be handled as they arise. Most people would not be too terribly upset if debt collectors were out of business because there were no longer any debts to collect.

6.) Checks do not bounce.

As people shuffle which debt to pay first or next, available cash becomes a real problem. This cash flow issue can easily convert to overdraft fees at the bank. While you could be weak enough at personal accounting to still make a mistake that results in an overdraft, it should never happen when you are debt free. You have much less cash flowing out and more often deal with cash. This reduces the likelihood that you will have a bounced check ever again in your future.

7.) Car payments become a resource.

That car payment that you curse at every month will now become the way that you save up for your next car. With the interest that you bank will add to your account, you will pay far less for your vehicles. When you have a five or six year car loan, you pay between 1/3 and 1/2 more for the privilege of driving the same car as when you pay cash. This means that you pay $30,000 for a $20,000 car. By saving up the payment until you can pay cash, you may very well get that $20,000 car for $18,000 or $19,000. Bargaining power increases as the cost of the item goes higher.

8.) You cannot be evicted from your house because your mortgage is too expensive.

Never worry about being upside down on a house again. Your home is paid for. This means that you can live there year after year without writing out a monthly check to the mortgage company. Your appreciation on the property goes into your pocket.

9.) You can have a credit card.

Debt free does not mean no credit cards. It does mean no credit card balances that are not paid in full each month. Some people find that credit cards are a good alternative to having holds put on their checking accounts for car rentals and motel rooms. As a result, having a credit card may still be part of your life. Just control the urge to buy now and pay later or debt will creep back into your life.

10.) Financial emergencies are few and far between.

If you have cash in the bank, you can cover those unexpected expenses as they crop up. A $1,000 cash emergency does not seem too critical if you have $25,000 or $50,000 in the bank. The fact is that you will most likely stop seeing any of these occurrences as emergencies.

How to Build a Financial Safety Net

Money is security for a lot of people. If they can have enough in the bank, they feel safe. You need access to enough cash to cover at least the small financial emergencies that arise. Building a financial safety net will assure that you are able to weather most financial storms that pass through your life.

- A financial safety net does not just mean a pile of money.

While money is nice, few people have enough cash to qualify as a true safety net. This is especially true of those in the first half of their working lives. Younger people tend to rely on their parents as a financial safety net. Credit cards, home equity, friends, personal finances, insurance and additional income sources can all play a part in your financial safety net.

- Good credit can underwrite your safety net.

Although you do not want to rely on credit exclusively as quick source of emergency money, having good credit can go a long way toward getting you past a financial hurdle. There are times when you do not have financial disaster. You just need some fast cash to make up a shortfall. As long as this is not your only available source of money help, you should include some credit availability in your building your financial safety net until you have enough cash that credit is not necessary.

- Maintain relationships with those who can help you in an emergency.

Friends, family, and business associates may all have good reasons to help you through a tough financial time. A few hundred dollars here and there can add up to a decent sum when you have to have it. Family is an especially good resource because they usually want you to succeed. Gifts and loans from these sources can be invaluable when you are seeking immediate assistance.

- Structure your own finances with long and short term safety in mind.

Even your own money needs to be put in accounts that can be used when needed. Smaller sums tend to be needed quickly. Large amounts tend to have longer time lines attached to them. This means that you need a few thousand near your hand. The larger share of your personal money can be invested in ways that can require a few days or weeks to access it.

- Develop sources of fall back income.

Any source of income that provides you as much as $50 per month may be considered part of your safety net. This money can make the difference between being short a few dollars and having a little extra in the bank. Any income that can get you closer to the amount of money that you need is added security.

- Use insurance as a last line of defense.

Insurance takes some of the risk out of y.our life. Disability insurance means that you have income if you get injured or sick. Health insurance removes some of the risk of falling into medical bankruptcy. Having your home, car, and other possessions insured protects you against losses, damage, and other hazards that may come along to eat away your finances. Life insurance takes care of your family's finances if you die.