Solving The Debt Reduction Mystery

How to reduce debts can seem like a real mystery. You can spend a long time working hard at trying to pay down debts only to find the debts actually going up instead of going down. Being debt free can seem like a task that will never be accomplished but by getting in control of your debts and setting yourself some goals and plans, you will be amazed at how much you can achieve.

Below is a case study of young family and we would like you to meet and how they Solved the Mystery of Debt Reduction.

Sharon and Jason Jackson

Sharon and Jason Jackson are a regular Australian family with 2 young children. They own their own home and live in a suburb about 15 kms from a captial city. They have a mortgage over their home and a debt that they are battling to pay off.

Over the past few years though, without realising it, Sharon and Jason have started to go further and further into debt, by borrowing extra money to fund some of their lifestyle. It was only when Jason realised that both of their credit cards were maxed, that he realised their spending habits were starting to get them into financial trouble.

Reading through Money Detectives How to Get out of Debt section of the website, Sharon and Jason realised that they certainly needed to get in control of their debts before the situation got any worse. Debt reduction became a major priority in their lives, and they started to work together on their situation to get in control of their debts and finances. Here is how they tackled the mystery of debt reduction.

Step 1: Find out exactly what debts you have

Using Money Detectives Debt Tracker, Sharon and Jason sat down and worked out exactly how many debts they had and what was owed on each debt. This took some time as they had to research their records and jump onto their internet banking site. It was an eye opener to see the situation they were in. They were pleased they could record their debts in this manner and establish the exact position they were in.

This is what Sharon and Jason’s Debt Tracker looked like:

Step 2: Work out how long your debts are going to take to repay and how much interest you will pay over this period of time

Using Money Detectives Debt Reduction Calculator, Sharon and Jason then analysed their different debts. They reviewed each one of their loans and how much interest they would be paying over the period of the loan. They were stunned with the results. Jason prepared a summary of their true situation:

Both Sharon and Jason were amazed at how long it would take to pay off their loans – over 6 years to pay off a credit card!!! Over 2 years to pay off a digital camera!!! In addition the interest costs on their loans were extraordinary – in most cases Sharon and Jason were paying up to 70% of the original loan amount in interest.

Of concern were the loans that weren’t being paid down at all, such as the $3,500 credit card debt and the Store card. Sharon couldn’t believe that they had allowed this to happen. They were totally unaware of their true position.

Step 3: Work out a priority of which debts you will pay down first

Sharon and Jason started to prioritise their debts as they needed to work out which ones they should pay down first. They had a few options and were toying up which debts to tackle first:

• whether to clear the smallest debts first as they would be cleared and gone quicker or
  
• whether to clear the debts with the highest interest rates first even if they took longer to go or
  
• whether to clear the debts that were not going to be cleared under the existing repayment plan or
  
• whether to clear the oldest debts first

After some serious thinking about their position, Sharon and Jason decided that they were concerned about the debts with the higher interest rates such as the store card and credit card debts. These became the priority to clear first as they were the most costly. Also the digital camera finance was currently on an interest free period, however once it came off its free period Jason and Sharon didn’t want to be paying 38% so this debt was also given a priority.

Step 4: Get the budget in order

Sharon and Jason decided that they had to put some measures in place to stop the overspending and to ensure the debts were given a priority to be paid down as quickly as they could. They realised that by not having a family budget this was where the trouble started. In the past it had been really easy to put everything on the credit card especially if they had no money in the bank to meet the payment of goods needed. They realised that they could no longer do this.

Reading through the Money Detectives How to Budget section of the website, Sharon and Jason decided to put together a comprehensive budget and started to track where their money was going.

As paying down the debts was a first priority, some smaller luxuries were cut from the budget. These included:

• Takeaways every week - this was now made a monthly treat – a savings of $100 a month
  
• Making lunches everyday for everyone– a savings of $100 a month
  
• Disconnecting the pay T.V. – a savings of $100 a month
  
• Sharon committing to get the grocery bill down by $50 per week – a savings of $216 a month
  
• Jason refraining from purchasing sports magazines – a savings $30 a month
  

They managed to cut their spending by $546 a month. Sharon and Jason also made a few other adjustments to their budget and were able to find another $70 per month to bring their total spending cuts to $616 a month.

Without too much sacrifice, there was $616 a month that was currently being spent unnecessarily that Sharon and Jason could put toward reducing their debts.

Step 5: Look for other ways to get more money into your debts

As Jason was a sports fanatic and now had more time up his sleeve (due to his sports channels on pay T.V being disconnected) he decided to seek out some Saturday work refereeing football and was able to secure a job as a linesman. Jason also took his son Thomas to the games to help out and they spent some quality father / son time together. This brought in an extra $50 per week to the budget during the footy season.

Sharon, an avid dress maker decided to create some children’s clothes to sell at her friend’s baby store. Sharon aims to regularly make $20 per week after materials and supplies.

This added an extra $70 per week or $303 per month to the budget.

When this money was added to the $616 per month that was trimmed from the budget, then a new amount of $919 a month was free to go into debt reduction. When you multiply this out over a year, this equals over $11,000 that can be paid off their debts in just 12 months.

Step 6: Set some goals, time frames and rewards

Now that Sharon and Jason were aware of the additional money they could put towards their loans, they started to get really excited and committed to the new challenges of getting rid of their debts as quickly as they could. They read through Money Detectives How to Set Goals section of the Website and then started to set goals and timeframes around when they wanted these debts to be paid down. To keep motivated and get the whole family on board, Sharon and Jason decided to set rewards for each goal they achieved.

• Pay out the store card loan within 4 months

Reward: a day at the beach, with fish and chips and ice-cream

• Pay out the digital camera loan within 6 months

Reward: a trip to the museum to see the Dinosaurs

• Pay out the credit card debts within 18 months

Reward: a dinner out at their favourite family restaurant

• Pay out the car loan within 2 years

Reward: a week away camping

• Pay out the home loan within 10 years

Reward: a holiday overseas

Step 7: Recognise bad habits / bad attitudes toward debt

Realising that fixing the budget was only solving part of the solution when it came to solving their debt problems, Sharon and Jason had to tackle some bad habits / bad attitudes towards debts that was contributing to their current financial situation. By individually completing Money Detectives Loan / Debt Quiz Sharon and Jason started to see some patterns in their behaviour. As Sharon and Jason were now aware of these unhealthy behaviours, they made a commitment to each other to work on their weaknesses and put in place measures to stop these behaviours influencing their spending habits.

Step 8: Explore options to reduce debt further

As Sharon and Jason were so committed to getting these debts under control and paid off as quickly as possible, they decided to look for ways to further reduce their debt including:

• Cutting up the credit cards and store card and not using these again.
  
• Jason looked at paying down the loans with the higher interest rate first with their increased savings of $919 a month. Under this option the Store Card would be paid off within 2 months, the digital camera finance would be paid off within 1 month and then the credit cards would be paid down 9 months after other debts were cleared. This would save them a significant amount of interest.
  
• Looking at cheaper credit card alternatives. Jason explored the internet and Sharon approached their current bank and other banks looking for cheaper options. They found a finance company that was willing to roll their credit cards into one facility with an interest free period on the rolled over debt for 12 months. After the 12 months the interest rate was 15% (which was still under their current rates). Sharon and Jason took their time reading the fine print on the Terms and Conditions page to ensure there weren’t any extra costs that they weren’t aware of. They thought this was a good option as they hoped to now have the cards paid back within 12 months.
  
• Sharon and Jason approached their bank about consolidating their loans. This was a big step to consider increasing their mortgage to pay for their lifestyle debts however they wanted to understand the numbers behind this option. Although it looked like a cheaper alternative as the interest rate was lower on their home loan, they were worried that with such an easy fix they would fall back into old habits. Sharon and Jason were determined to pay back the credit card loans and store cards without refinancing.
  
• Sharon and Jason also looked at consolidating the car loan and home loan. Under this option they would pay their new combined loan back with in 17 years as the money they currently put toward the car loan could go into the combined loan. This didn’t include the additional savings they could put towards the home loan once they had paid off their other credit cards. This was certainly an option Sharon and Jason were considering carefully.
  
• Sharon and Jason also decided to make more regular payments to their loans.  Both are paid on a fortnightly basis, however they only made their repayments to their loans monthly. By deciding to make the repayments to the loans fortnightly it meant that the interest charges would be less. It also meant that money wasn’t sitting in their accounts and tempting them to spend it.

A few months on and Sharon and Jason are happy with their progress. The new budget seems to be working, the kids are enjoying being a part of the new savings plan and Sharon and Jason are feeling in control. They realise that solving their debt situation will not happen over night, but with some determination and simple strategies they are feeling they will have their situation turned around within the next few years.