Four Ways Creative Thinking Can Eliminate Debt - Essay Example

Four Ways Creative Thinking Can Eliminate Debt Financial debt is usually a very heavy stress factor in the lives of most individuals and families. The reasoning behind that is very simple. Most people are wage earners, and that actually allocates a certain amount of time to the money they earn. In the U.S. in fact it is said that most people work till May of each year just to pay their taxes, so this would mean, that by the time they pay all their debt payments, a substantial portion of their year has gone. Unsurprisingly, most Americans rarely have any savings. This problem is further compounded with a high degree of consumerism which is prevalent in the U.S. A good percentage of Americans try to live above their means, be it the car they buy or even the house. This has lead to some very creative debt instruments which they can tap into. If just the minimum payment of a credit card it made every month, the card will not be paid for over thirty years. Then there are housing loans which have a Interest only payment option, which means the home owner has the option of paying only the Interest every month and the principle balance never gets reduced and since most use this option on a frequent basis, the balance on the debt remains at close to the initial level. And in the past few years, a new debt instrument has come up which actually allows debtors to pay less than the interest amount , which means that the principle balance can actually go up. How does this impact anybody wanting to take a loan to buy something Let us suppose a person can afford a payment of $ 1000 a month towards his house. In a normal loan he possibly could afford a $100,000 house, If he chooses the Principal only option, he could possibly go as high as a $ 150,000 house , a negative amortized loan could get him as much as a $ 200,000 house. American consumers owed a grand total of $1.9773 trillion in October 2003, according to the latest statistics on consumer credit from the Federal Reserve. Thats about $18,654 per household, a figure that does not include mortgage debt. The number is up more than 41% from the $1.3999 trillion consumers owed in 1998.i The Mortgage Debt is about 25 trillion. The figures become even more staggering when you see that 43% of the Americans spend more than they earn each year. These Americans are like the bound prisoners in the Plato's Allegory of a caveii. They see only way to prosperity and that is through accumulation of debt. And that is because they see their neighbors in affluence, little knowing that it hides, most likely a horrendous amount of debt. But these people do not simply know any other way. And the current subprime crisis in the U.S. Mortgage market is because of just such people just wanting to live beyond their means and paying the penalty for that by losing their houses and the very affluence which they wanted. But as much as Plato's Allegory showed the dark side of Human conditioning, Jacob Bronowski's The Reach of Imagination showed us the amazing gift which we have which is the gift of imagination iii Almost everything that we do that is worth doing is done in the first place in the mind's eye. The richness of human life is that we have many lives: we live the events that do not happen (and some that cannot) as vividly as those that do. Which actually gives us a unique advantage, we do not have to stuck in any rut, we have myriads of possibilities available to us. And even in an apparently hopeless situation such as overwhelming debt we have many possibilities available to us. In Asimov's Eureka phenomenon there is a reference to intuition as a sense of something beyond that which is evidentiv. These papers and theory's were written well before anybody saw the current debt crisis which the Americans find themselves in. And the apparent hopelessness could never be visualized by anyone before this crisis. But this situation is not hopeless and that is because the creativity of the human mind is such that it can get solutions to a problem , however big it might be. Way 1 : Living within your means This is a real radical concept , but clearly a lot of Americans simply do not understand this concept and it actually is very simple. There is a certain amount of money which comes in every month. That amount of money should be sufficient to pay all the bills which includes debt payments and expenses. If this total is more than what is made as income, then fresh debt is required. Living within your means also means buying a car which you can afford and living in a home which you can afford. Indeed it is easily possible to get a house, perhaps on negative amortization which could be much more than you can afford, but what would be the point of that. Trying to keep up with Joneses may not be a bright idea, if the Joneses are going down the path of financial ruin. This also means that a radical concept like paying of a credit card in full every month would have to be regular practice. Now how does this equate to eliminating debt Well when you fix a pipe , you first want to make sure that there are no more leakages possible and the only way to do that is look at all current and potential leakages. Elimination of debt starts with knowing how to handle debt in the first place. Way 2 : Knowing where you stand It is very important that you know, what the total extent of your debt is. The truth like in the allegory can perhaps hurt the eye at first, by its intensity, but it needs to be seen. All the debt needs to be tabulated and the terms should be known on each debt, so a projected payment plan is in place. Each debt should also have alternate solutions, perhaps looking at paying extra principle as against paying the minimum payment. There should be other avenues which should be explored in each debt. Can that debt be refinanced Can the debts be consolidated Many times credit card debts can be consolidated into home equity loans. The problem of course with that is that the credit cards become available to use again. So this also requires an assessment of your personal discipline in handling and incurring more debt. Way 3: Putting a Plan together Once you know where you stand, it is very important to figure out realistically, what you can afford to pay every month. There are some guidelines as in your monthly payment on your housing expenses should not exceed 25% of your total income. But this is a personalized plan to your situation, you may have some very specific needs in your life which have to be met and some expenses , such as children going to college which have to be taken into account. A Plan should be built which is realistic and achievable. The assumptions should always be on the conservative side. There may be additional income in the future , but maybe that should not be considered , on the other hand there should be something budgeted for savings and unexpected expenses. Way 4: Contacting Your creditors Many Creditors only want their payments. In fact may unsecured creditors know that their entire balance can be wiped out in a bankruptcy . Even secured creditors like Mortgage holders know that it is expensive to foreclose, and the security itself may lose value in the process , so they are willing to work with debtors to avoid these options. So do contact the creditors , well before you consider mundane and destructive options such as bankruptcy. You may be surprised at all the possibilities that are available to you. Reference: Read More