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Financial Literacy: Breaking the Debt Trap

September 11, 2013
Photo: Alan Cleaver, Flickr

Photo: Alan Cleaver, Flickr

As summer comes to an end and school starts back up in a few short weeks, we become aware of the money we may have spent on summer vacations, the cost of new school clothes, and the cost of tuition for our college students, along with the textbooks required for each class.  Let’s look at some statistics on American debt (courtesy of Dave Ramsey) and suggestions to break out of the debt trap. Pass these on to college students to help ensure that they do not make the same mistakes that most Americans are making regarding debt.

The truth about debt in America:

  • The average American spends 122% of their income by using debt to sustain their lifestyle.
  • 180 million Americans have a credit card.
  • 47% carry a balance on their credit card.
  • The average APR for credit cards is 15%.
  • The average American owes $34,000 in student loan debt.
  • The average 28-year-old owes $78,000 in debt.
  • Only 2% of U.S. homes are paid for.
  • 46% of U.S. homeowners under 40 are underwater on their mortgage.
  • Almost 10% of all outstanding debt is delinquent.
  • Debt and financial strain is the #1 cause of stress and divorce in America.

How can we avoid becoming part of the debt trap?

  • Recognize the Trap. Traps work because they’re disguised – they’re not easily seen or recognized. A trap is a lie.  Ask yourself these questions: What’s the lie of debt? How is it disguised?  Here’s how it is commonly misrepresented – “You need to build your credit to improve your FICO score., You deserve it!,  It’s a part of the American Dream., Everybody’s got debt.”  Who would want you to believe a lie about debt?  Credit card companies, banks, credit institutions make TONS of money when you live in debt!
  • Escape the Trap.  GO, to the point of exhaustion!  Don’t sleep until you’re free!

Three steps to getting out of debt:

(1)    Stop borrowing money!

  • You can’t get out of a hole if you keep digging it.

(2)    Get gazelle intensity.

  • You don’t ease your way out – you break out.
  • Cut spending.
  • Go bare-bones.
  • Sell stuff.  You’re in debt because you bought stuff you couldn’t afford – sell some of it!
  • Get a part-time job.  Not a long-term workaholic, but this is a sprint – get crazy.

(3)    Attack debts one-by-one.

  • Use the “Debt snowball” technique.

If you made your decisions based on MATH, you wouldn’t be in debt. Debt/money is EMOTIONAL – use that to your advantage. There’s ONE MORE THING TO DO…Destroy the Trap. HOW? By SAVING!

Two simple saving steps:

(1)    Save $1000 for emergencies immediately.

  • Do this before you do the debt snowball effect.

(2)    Once you’ve eliminated all debts except your mortgage, save at least three months worth of expenses.

Then, even when life happens, debt has no hold on you. You’ll no longer feel caught in the debt trap because you’ll have destroyed it!

Kristi Jones, Southern Regional Director, Nelnet Partner Solutions

Kristi Jones, Southern Regional Director, Nelnet Partner Solutions

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