Finally, I’m getting some real traction.

In the last 30 days, I’ve reduced my debt load by $5,702.39. That represents a reduction of 11.6% in one month’s time.

I paid off the Wells Fargo Personal Line of Credit, as well as my American Express business credit card.

I’m now down to only three loan balances: my Prosper loan, my USAA credit card, and my van loan from Honda Financial Services.

Which makes my life a lot easier.

Fewer balances means fewer payments and due dates to think about.

And, currently, I make payments to all three debtors electronically. There are no paper statements involved.

Here’s a picture showing my progress…

I expect that when I report in September, I will have cracked the $40K mark on my march to zero.

I certainly hope so.

In case you’re interested, the interest rates on my outstanding debt are as follows:

• Prosper Loan - 11%
• USAA Credit Card - 4.9%
• Honda Financial Services - 4.9%

I don’t know if it’s worth it, but I’m considering taking advantage of a zero percent offer to further reduce the interest I’m paying.

If I did this, I’m fairly confident I could pay off the debt before the zero interest period expires.

Your thoughts?

Should I get yet another card… or simply stay the course?

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Too much debt leads to all kinds of symptoms.

For instance, stress. Late fees. A sense of impending doom.

We even have a phrase to describe the symptom of spending too much on a house. We call it being “house poor.”

In other words, you’ve got all your money tied up in the house — so you can’t afford anything else.

These symptoms are bad, of course. But they are not nearly as catastrophic as the new symptom of too much house debt.

It’s called a “voluntary default.”

I’ve mentioned it before on this blog. And now, voluntary defaults are becoming so commonplace that it’s being covered by mainstream media.

The potential for a voluntary default happens when:

1. A homeowner has overextended himself to buy a house he can’t really afford.

2. The price of the house drops below the mortgage balance.

3. The mortgage interest rate begins to ratchet up, thereby increasing the monthly payment.

When this happens, a homeowner wonders: “Why am I paying more money every month for a house that couldn’t even be sold to pay off the mortgage balance?”

Rather than continue paying, the homeowner decides to walk away.

Hence, “voluntary default.”

Many times, the homeowner won’t even contact his bank to try to renegotiate the terms. He’ll simply move out and get a rental before his credit score drops.

The BBC describes the current housing market in the U.S. as a “time bomb.”

If things don’t change, we could see a tsunami of voluntary defaults that brings the banking industry — and the world economy — to its knees.

It seems the consequences of too much debt is finally catching up with us.

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Over the weekend, I wrote a “Pros/Cons” list to help decide whether we stay in our current rental home or try to buy a home.

After finishing the list, I had four items listed as “negative” and 16 items as “positive.” The cons were against buying a home, while the pros were in favor of buying a home.

Big difference.

So this weekend we spent time looking at “inventory” homes — basically, new homes that had been built on speculation, but hadn’t sold yet.

There are literally hundreds of these homes available in almost every major city. They’re sitting empty, so they cost the builder money every single month.

When the builder starts to have cash flow issues, he’ll heavily discount a spec home just to get it out of his inventory.

Often, when a builder has a large number of spec homes, he could be forced into bankruptcy.

This is just what’s happening in the Denver area.

In the Sunmarke neighborhood south of where I live, the builder pulled out, leaving empty lots filled with weeds sandwiched between owner-occupied homes.

A builder of paired homes in the same area has a handful of units he can’t sell — and he was already telling me how much he was willing to reduce the prices before I even expressed any interest.

And another builder (Neumann Homes) went bankrupt, leaving a similar situation as that in Sunmarke: Empty weed-filled lots, brand new bank-owned homes, and (I’m sure) many disgruntled home owners who feel stupid for buying in that neighborhood.

So the outlook is not good for sellers. But it could potentially be good for buyers.

And we wanted to at least investigate before we made a firm decision.

Our conclusion: It’s best to stay where we’re at for now.

Home prices are still simply too high. Anything worth buying out here starts in the low $300s. Homes in this range are usually nice homes, but are poorly located. For instance, they might butt-up to a major road or intersection.

The prices go up from there, of course. To get a really nice home in a good location, you’d pay about $375K to $425K.

And remember: Our family is a bit unique. Since we have three kids and I work from home full-time, we need at least a 3-bedroom home with a study; preferably 4 bedrooms and a study.

So the decision, for us, is to wait a little bit longer — despite having more reasons to move than not to move.

Which brings me to a question: What’s better — a higher home price with a lower mortgage interest rate… or a lower home price with a higher interest rate?

I bring this up because a TIME magazine article posed this scenario in an article published in February 2008. One of the builders (Village Homes) had made photocopies of the article and was using it as a marketing piece to encourage people to buy now instead of later.

Here is their hypothetical case study:

As you can see, the author of the article, Dan Kedlec, uses this example to make his case against waiting to buy.

He argues: “Finance costs will rise as the economy recovers, so trying to time real estate might not pay off.”

Translation: If you wait, home prices may drop, but interest rates will rise, negating any advantage you might have gained from waiting.

That’s his logic.

But does it hold up?

I don’t think so. Here’s why.

When you buy a home, the price is the most important factor, not the interest rate.

That’s because you can’t change the price of the home after you buy. After you’ve bought, you’re “locked in” so to speak.

Interest rates, on the other hand, fluctuate quite a bit. So while you might pay a higher interest rate later (emphasis on might), chances are you’ll be able to refinance to a lower rate sometime down the road.

Furthermore, Kedlec’s conclusions are based on the idea that you will make minimum payments and take a full 30 years to pay off your mortgage.

But what if you want to pay off your mortgage sooner? Would you rather pay off $197K or $218K?

The answer is quite obvious.

All things being equal, I would MUCH prefer to buy a home at a lower price with a higher interest rate vs. a home with a higher price at a lower interest rate.

That’s why I think Kedlec’s argument against waiting to buy simply doesn’t work. It looks good at first glance, but doesn’t stand up to scrutiny.

Given the current market conditions — and the probable economic crisis that’s coming — I feel it’s best to exercise some patience and postpone a home purchase for at least six months.

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Topics: Economics, Foreclosures, Mortgages, Renting | Give Your Two Cents »

What happens when debt levels spin out of control?

Bankruptcy, of course.

And foreclosure.

Banks have seized so many properties that 18.6 million houses, apartments, and condominiums now stand empty.

In case you didn’t know, that’s an all-time record.

But don’t wait for a recovery any time soon. We’ll probably see foreclosures spike during fall 2008 and spring 2009.

Which means even more empty houses.

This is the single biggest reason why I don’t plan to buy a house for at least another year.

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It’s interesting.

Whenever I announce bad news I seem to get more response than when I announce good news.

So if I say I’ve gone deeper into debt — or had some unexpected expenses — people respond with sympathy and encouragement.

But when I say I’ve paid down my debt by a thousand or two, there is a noticeable silence.

I mention this because I’ve noticed this pattern not only on my blog, but on other financial blogs as well.

It seems the choir of misery chimes in whenever there’s darkness on the horizon.

But when the sky is bright and shining, the choir goes mute.

I have a theory about this…

Anybody who is in debt already feels a bit of shame and regret for getting in debt in the first place.

And it’s encouraging for an in-debt person to see other people screw up… because… it makes that person feel better, even if he or she is not currently doing anything to get out of debt.

I know it sounds sick, but I think there’s truth in it.

It’s like a fat person chuckling at another fat person and thinking, “Well, at least I’m not as fat as her!”

Of course, there’s an inverse relationship here as well.

When somebody is making more progress than you are, it can be difficult to offer authentic praise because you might be feeling a twinge of envy. YOU should be getting ahead, not that OTHER person!

Said another way: It’s hard to feel good about the success of others when you’re still failing.

Wouldn’t you agree?

Have I hit the nail on the head — or totally missed the mark?

Leave a comment below and let me know.

• My post “Why I Like Fixed-Rate Loans” was featured in the Carnival of Debt Reduction #149: The Secret to Life Edition this week.

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Here’s a New York Times article worth reading.

The title: “Given a Shovel, Americans Dig Deeper into Debt”

(This fits in perfectly with my article Debt Is a Hole in the Ground.)

Anyway, I’ve linked to the Digg page that links to this article so you can actually read it.

==> Armed with Shovels, Americans Are Digging Deeper into Debt

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Time flies when you’re paying off debt!

Last month I reported that I was in “maintenance mode” — basically paying my minimum payments and building up my cash reserves.

This month is very much the same. I didn’t make any “over and above” payments. But yet I’m still making progress.

As you can see from this snapshot, I paid down my debt by more than $1,000 last month — about 2.3% of the total outstanding.

In other news, I’m in the middle of creating and promoting a coaching program for freelance copywriters. And I did invest $108.99 in an out-of-print advertising book I found on Ebay (Reality in Advertising by Rosser Reeves).

This particular activity has to do with Step #5 in my 5-Step System for Paying Off Debt.

I am getting ready to pay off one or two balances, so I expect to have more exciting news next month. Stay tuned…

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As I reviewed my debt numbers recently, something stuck out to me. That is, the majority of my debt is now in the form of fixed-rate loans.

The two biggest fixed-rate loans I have are through Honda Financial Services (for my van) and Prosper (a consolidation loan).

The remaining balances have interest rates that can fluctuate, but are usually fairly stable.

Of my five balances, I like the fixed-rate loans best because every payment I make reduces the principal balance by quite a bit. This is unlike minimum payments to credit cards, which usually result in very little principal reduction.

In the past, paying down debt required a lot of conscious effort. That’s because most of what I owed was owed to credit card companies. To make any real progress, I had to pay far more than the minimum payment — usually at least double.

All that has changed. Now I make my monthly payments… and I see real progress. In other words, I don’t feel like I’m having to work as hard to get ahead. It’s just happening naturally.

Of coures, I’ll still need to make “over and above” payments if I want to be debt-free as soon as possible. But at least I’m making progress even during months when I’m not able to make an “over and above” payment.

Two insights:

1. If you can, consolidate some of your debt into fixed-rate, fixed-payment loans. Chances are you’ll see your debt evaporate more quickly and with less effort.

2. It’s always harder when you first commit to paying down debt. But the longer you stay committed, the easier it becomes. Your balances get smaller and smaller and your monthly cash flow gets larger and larger.

You can do this!

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It seems Americans have a new pain point when it comes to filling up their SUVs, and it happens whenever it costs more than $100 to fill a tank with gas.

According to this article, $100 for a Tank of Gas?, many SUV and truck owners are now doing more frequent partial fills simply to avoid a three-digit price tag at the gas pump.

From the article:

Hummer clubs are hurting, too. In Nebraska, Ric Hines of the Omaha Hummer Owner Group — known as Omahog — stopped doing off-road trips this summer and started riding his recumbent bicycle instead.

Frankly, I think this is a real example of positive change.

Far more good comes from riding a bike than from off-roading in a gas hog.

And $4-a-gallon gas forces people to analyze the miles they’re driving and why — instead of just driving anywhere, anytime on a whim.

Unfortunately, not everybody has a clue. Again, quoting from the article:

Colleen Hammond of Chagrin Falls, Ohio, loves packing her three kids and all their soccer gear into her 2000 GMC Yukon XL. But she hates paying $160 to fill the 38.5-gallon tank. Last month, she parked the Yukon in her driveway and borrowed her friend’s Toyota Land Cruiser.

“I don’t know if it gets better gas mileage, but I like her car because it costs $100 to fill it,” said Ms. Hammond, 40. “I think $100 for a tank of gas is cheap now.”

Riding a bike instead of driving a Hummer = good decision.

Driving a Toyota Land Cruiser instead of a GMC Yukon XL = stupid.

I’d recommend SUV owners swap for more fuel-efficient sedans. Unfortunately, it’s extremely difficult to sell or trade SUVs right now. So a better option may be to simply drive less.

Your thoughts, dear reader? Leave a comment below.

• Yesterday, my 5-Step System for Paying Off Debt was featured in the 147th Carnival of Debt Reduction.

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After reading my update about my Outstanding Debt as of June 2008, Kate left this comment:

I applaud you posting your progress for the world. Have you shared your process yet? If you have, let me know the link, I’d like to read it. So far my favorite has been Dave Ramsey’s debt snowball effect.

I thought this was a good question, so rather than respond by leaving another comment, I decided to respond by writing a blog post.

First, you should know I’ve written three posts explaining my view on how to get into — and out of — debt:

• What Causes People Get into Debt
• Why People Stay in Debt
• How to Get Out of Debt

I confess I haven’t studied Dave Ramsey much. But I’m familiar with his concept of the “debt snowball.” It’s the same concept as John Cummuta’s “accelerator margin.”

In both cases, you focus on paying off a low-balance, high-interest card as quickly as possible. Then you take the minimum payment you were paying toward that account and apply it to the next balance.

As each new line of credit is eliminated, the amount of money you can use to pay down debt grows, which accelerates the speed with which you can pay off debt.

While I fully endorse and support this approach, I take a slightly different view because I’m self-employed. I don’t have a regular paycheck.

So the common advice to create a budget and stick to a rigid repayment plan doesn’t work for me because my income fluctuates month-to-month, as do my expenses.

With that as background, here’s the “system” I’ve used to pay off debt since October 2007. This is the same approach that’s allowed me to reduce my debt by 33% in a period of 7 months — from $75,286 (in November 2007) to $50,343 (in June 2008).

Step #1: Commit to Getting Out of Debt

We all get into debt in a similar fashion. It starts with a few innocent purchases and then spins out of control.

In a sense, we are all a bit like the frog who is boiled to death slowly. By the time we realize how hot the water is getting, it’s almost too late!

For me, my commitment to pay off debt began when a credit card company jacked up my interest rate. This alone was bad, but it was made worse because I felt it was unjust.

As I made phone calls and found out how powerless I was, I realized my best and only recourse was to pay off the credit card and never do business with the company again.

To say I was livid would be an understatement.

But rather than internalize my anger, I translated it into a commitment to become debt free — and a virtuous cycle of daily action to pay off debt as quickly as possible.

So the first step for me was making the commitment to become debt free.

Step #2: Get a Grip on Your Spending

I’ve never been an out-of-control spender, but I still had plenty of “fat” to trim from our monthly expenses.

Since I’m self-employed, I have a number of recurring monthly expenses to pay for business tools, education, etc. I examined these expenses first and canceled anything I wasn’t using or didn’t need anymore.

The biggest decision for me was firing my brother. That freed up $2,500 a month. And while this was a difficult decision, it worked out really well for both my brother and for me.

After analyzing the business side, I moved to the personal side. We canceled our YMCA membership. We cut back on our Starbucks visits. And we adopted a mindset of not buying things unless we truly needed them.

So we’ve made some minor (and some major) changes in how we live and how we spend our money. This has freed up cash flow that we now use to pay down our debt.

Step #3: Liquidate Possessions of Value to Cancel Debt

After eliminating expenses and getting a grip on our spending, I focused on how I could make the biggest dent in our debt with as little effort as possible.

The answer: Sell any items that we had used as security for a loan.

Secured loans are usually given for cars and houses. In our case, we had loans secured by a van, a motorcycle, and a house.

So I sold my motorcycle (even though I didn’t want to). And we even sold our house and got a rental near our parents. (We still have the van and the loan attached to it.)

The sale of the motorcycle reduced our debt significantly. What’s more, it freed up $344 a month that can now be used as an “accelerator margin” to reduce other loans.

And by selling our house and getting a rental near our parents, we reduced our housing expenses by at least $100 a month — while getting an extra 300 square feet of living space at the same time.

Step #4: Consolidate High-Interest Debt into a Low-Interest Loan

Personally, I find it very troublesome to juggle multiple credit cards and loan balances. The more of them you have, the easier it is to overlook a statement or bill and get slapped with a late fee and a higher interest rate.

So in addition to paying off certain loan balances, I also consolidated a couple of high interest credit cards into a single fixed interest rate loan from Prosper.

I chose a Prosper loan because it was a fixed interest loan with a firm start and end date.

Although I’m not against zero interest offers from credit cards, I personally choose to avoid them when possible. I do this because zero interest offers come with a whole host of stipulations.

By making your minimum payments, you will probably not be able to pay off the balance by the end of the zero interest period. And if you’re even one day late with your minimum payment, you’ll be greeted with a new interest rate so high it’s criminal.

Furthermore, zero interest offers are designed to get you “stuck” with an even higher balance.

Basically, if you do a balance transfer to a zero interest card, and then continue using that card to make purchases, you become subject to a “hierarchy” of how the balance is paid off.

Every time you make a payment, it will pay off some of your zero-interest debt, but none of the debt that’s accumulating interest charges. So if you transfer $5,000 at zero interest… and then charge $1,000 in new purchases… you will have to pay off the $5,000 balance first before you can pay off the $1,000 balance.

This allows the credit card company to charge you 18% or 25% interest (or whatever) on that $1,000 new purchase balance for a long time.

You can use this information however you want. The key thing is to reduce the number of loan balances you’re paying and to consolidate them (if possible) into lower interest loans.

Step #5: Increase Income & Use It to pay off debt

The fifth and final step of my personal system for paying down debt is to increase income. This is one of the most overlooked but highly effective opportunities for getting out of debt fast.

Basically, I have looked for ways to create more value for my clients, customers, and subscribers. This has directly increased my income during the last six months.

If you have a job, perhaps there’s something you can do on the side to earn a little extra money. You can sell stuff for cash, start a tutoring service, get involved in network marketing, or even embark on a new self-employed service career.

And if all that sounds like too much work, start by holding a garage sale.

Sometimes, all you need to do is take a little step to get started.

The way I see it, every single step in my system is important. But you can only reduce your monthly expenses so much. There is a limit to how little you can live on.

On the other hand, there is virtually no limit to how much you can earn. So Steps #1-4 are more important in the early stages of your debt reduction journey, while Step #5 becomes more important as time goes on.

Because, ultimately, increasing your income could have the largest impact on your ability to get out of debt.

These are the 5 steps in my personal system for paying off debt. Perhaps they will be of help to you as you seek to become debt free.

******

Check it out… my post “A Brief History of Grass Lawns” was just selected as an Editor’s Choice in the 146th Carnival of Debt Reduction:

• Financial Independence Day: Carnival of Debt Reduction #146

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