Michael Emilio

One of the biggest problems of this century is consumer debt. There’s never been a time like the one we’re in right now when families have such a financial burden hanging over their heads.

The truth is that 75% of Americans are in debt - with an average debt in the household of $35,000! It gets worse - Americans owe $2,000,000,000,000 (that’s 2 trillion dollars) in non-mortgage consumer debt. That amounts to about $7,500 in consumer debt for everyone in the United States. With 500 million credit cards issued by banks to Americans, there’s more than $600 billion in credit card balances out there. Of course this isn’t just an issue for Americans, it’s a world-wide challenge we’re facing here. Most people think the only way they can get out from under their massive consumer debt is by hitting the lottery or somehow inheriting a huge amount from a long-lost rich relative. Problem with the lottery is that lottery odds are about 18,000,000 to 1. Compare this to 4 golfers hitting a hole-in-one on the exact same hole - the odds of this are only 17,000,000 to 1.

Most people are out there feeling so strangled by their debt that they feel like the ever-rising mountain of debt they have will never disappear. A lot of people feel like their drowning - and that they’ll paying bills and consumer debt payments till the day they die or they hit bankruptcy, only to start the cycle again. If you’re in this situation, this doesn’t have to happen, but you have to act now!

If you’re in a debt situation, what you need is a systemized plan to pay off your debt. It may take you a few years to pay it all off if you have a lot of debts and loans to pay off - but just imagine how good it’ll feel to go to sleep knowing you won’t have to worry about your bills anymore or owing money to other people. You only have to think about your regular expenses like food, insurance, and utilities - and you can spend your income the way you want to, not the way your creditors want you to!

Imagine that sense of freedom you’ll have once you’re out of the virtual slavery of consumer debt. You’ll have the freedom to buy what you want, when you want, however you want.

There are many reasons why average people like you and me get locked into the destructive cycle of consumer debt. In fact, it may surprise you to know that there are a lot of people on this Earth whose job description includes getting people into debt. Now, I’m not saying at all that these are bad people, that they’re trying to get you in debt for malicious reasons, or anything like this. But just understand that the organizations they work for make a profit by getting people into debt. You don’t have to be a victim - you just need a strategy.

These people wanting to get you into debt are three, with a neat acronym to categorize them: BAA. Just like the sound of consumers constantly consuming products like sheep, the sound “BAA”. This stands for:

• Banks (and Lenders)
• Advertisers (Marketing)
• Advisors (Financial Advisors)

Banks

Banks are in business because they make money. They make this money by doing everything they legally can to make a profit - with no regard to your own personal best interests. The lending industry is based on this - of course, individual bank tellers or bankers are usually great people - but the business itself revolves around pure profit. This profit by banks and lenders is attained through major interest charged to you and the little fees that gnaw at you little by little. The goal is to get you to be a debt slave to them. It’s all about the monthly payments on a regular basis from you to them - and then from your heirs when you pass away.

Credit cards are a huge money-maker for banks. They’re given to you with small monthly payments on purpose. This is so you’ll never pay your cards off. It’s in the banks best interest for you to never pay your credit cards in full. If you only pay the minimum payment every month, the average credit card would take 15-20 years to pay in full. Even worse is that you’ll end up paying about 4x what the item originally cost, due to the high credit card interest fees. Think about this one: a brand new LCD television costs $1500. You purchase it from a local consumer electronics store with a minimum monthly payment of $30 a month with an interest rate of 20%. This means it’s going to take you 9 years to pay this off if you pay the minimum every month. Of course, that TV set isn’t going to be worth anything near than $1500 and will most likely not even be functioning while you’re still trying to pay it off. It’s also going to cost you more due to the interest - you’ll have paid $3243.24. That’s the power of the bank using small monthly payments with a high interest. The moral is this: be careful when banks try to seduce with low first year credit card interest rates or easy monthly payment financing.

Residential real estate debt is one of the biggest debt burdens on families today. Most households take out 30 year loans on their home. This is great for the low monthly payments. However, know that the typical homeowner moves every 7 years on average. The worst time to be paying your mortgage is in the first few years, as the borrower is paying almost 100% interest. The longer your mortgage, the more the amortization schedule favors the lender in the first few years of your loan. The way you can win is by reducing the length of your mortgage - this increases the amount you’re paying on the monthly payment that’s going to the principal instead of the interest. If you’re going to be taking on a mortgage make sure to run the numbers to see how much you’d be paying monthly on a fixed 15-year loan term as opposed to a fixed 30-year loan term.

Advertisers

Most consumer advertising is made for one thing: to get you to need whatever it is being advertised. It’s everywhere. You turn on the television, the non-stop McDonald’s commercials are there. You turn on the radio, you hear the commercials telling you the perfect gift for your husband or father on his birthday is a Rolex watch. You open the newspaper and you see the ads for the latest sale at the local Lexus dealership.

A lot of times, these ads really make you think you need - desperately - that item that’s being advertised. How about the slogan: “Charge it!” Of course, everything has the “flex pay” option, with “easy monthly payments”. Almost all commercials for luxury commercials base themselves on a few psychological topics. These center on making you feel “lesser than” or “not as cool” if you’re not using that company’s products (think the PC vs Mac commercials). Or they base themselves on the premise of: “Don’t you deserve this item? You’re worked hard enough, reward yourself with this!” It’s all about consume, consume, consume and spend, spend, spend and want, want, want.

What you want to do, if you want to live without debt in your life, is to only buy what you can pay for in cash. What you can actually afford. Don’t fall for the “flex pay easy monthly payment plans”.

Advisors

Financial advisors, generally speaking, are salespeople. Many times these financial advisors are in worse financial situations than the clients they work for! A lot of the advice these advisors give their clients is the same regurgitated material that’s handed out to them by big companies and it’s the same misinformation given for years. For example, don’t be fooled into thinking that your mortgage is a pure investment and is an asset. Sure, the equity is extremely valuable. But I find it hard to accept that something is an asset when you have these huge monthly payments with massive interest! Over the course of your mortgage, this ‘investment’ is costing you big if you purchase your home without having a solid financial foundation in place. Don’t be fooled that the tax benefits are great on getting a huge home loan - no consumption debt is ever a good thing.

I’ll give a piece of advice that’s usually contrary to what most financial advisors suggest - and I know there’s going to be people that disagree with me. The first thing you should do when you get any sort of surplus cash is to pay off your consumer debt. You do not have the luxury of storing 3-6 months of emergency funds in your bank like most advisors suggest. Once you get your consumer debt under control, then you can take the safe route. But if you’re struggling with mountains of debt it makes no sense to hold a reserve fund. If you want to feel safe, keep a credit card that has no annual fee and keep it just for a true emergency - but make sure to only use it in case of emergency. Remember that financial advisors usually work for big corporations so you can guess what’s top priority for them - yes, profit is number one, not you. These advisors are usually getting big commissions for recommending you to their company’s products.

The point is to make conscious buying decisions. Don’t let other people control your financial future whether directly or indirectly - you always have full control over the direction of your personal finances.

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• 8 Ways To Improve Your Credit To Get a Mortgage
• The 10% Debt Reduction Plan
• Rule to Grow Rich By #2: Refinancing Your Home
• Getting Prequalified For Your Home Loan
• Reasons Why You Should Own Your Home
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