Take a bite out of debt

Journal of the American Chiropractic Association, Dec 1998 by Kats, David B

How has your practice income been lately? The most recent statistics show a decrease in chiropractors' net income over the past several years-up to seven percent a year! Those in medicine report decreased earnings, as well. Many health care professionals have established lifestyles that cannot be supported by decreased incomes, and increased personal debt seems to be the unfortunate result.

Americans owe more money now than ever before. Over the past 10 years, total household debt, including mortgages, has soared from 88 percent of annual disposable income to 95 percent. A decade ago, the average American family saved seven percent of its income. Today, it's only four percent. As debt rises, the ability to save decreases. Therefore, one key to increased savings is reduction of debt. According to Gary Belsky of Money magazine, you can determine if you owe too much by checking the following signs. If two or more apply, you probably have a debt problem: You are unable to save at least 10 percent of your gross income.

You have more than 10 credit cards.

You habitually make only minimum monthly payments.

You have transferred debt from one credit card to another without paying it off.

You have asked someone to co-sign a loan because your credit record is weak.

You are unable to estimate how much money you owe.

Most financial planners say that monthly debt payment for everything but your mortgage shouldn't exceed 10 tol5 percent of your take-home pay. Even with your mortgage included, your debt payments shouldn't exceed 30 to 35 percent of your take-home pay.

There are ways to eliminate debt. No matter how much you owe, these steps can lighten the load:

1. Construct a loan repayment plan.

Most people with excess debt do not even know how much they owe. Make a list of your outstanding debts. Arrange them according to interest rate, from highest to lowest. Remember that interest on consumer debt is not IRS-deductible. Therefore, loans such as home loans and business loans should be calculated as though you were paying approximately two percent less in interest when compared to the interest rate of consumer debt loans. In other words, if you have a consumer debt loan on a car at nine percent and a home loan of nine percent, you should pay the nine percent car loan off first, since the home loan at nine percent has the net equivalent of a seven percent loan when compared with the car loan or other consumer debt.

Once you have determined which debt to pay off first, put as much money as you can toward retiring that debt. No matter how well the stock market may perform at times, it's unlikely that any investment you make will beat the return you get when you pay off high-interest debt. Many financial consultants suggest making double payments on the loan with the highest interest. Once that's paid off, proceed immediately to pay off the loan with the next-highest interest.

2. Unload unnecessary debt.

Many doctors continue to pay unnecessary bills. Review your canceled checks and automatic withdrawals for the past six months. Youll be surprised how many bills could have been avoided. Health club memberships that are paid for and never used, magazine subscriptions, employee payroll for unnecessary employees, unnecessary insurance, and storage and payments on a boat you no longer use are excellent examples of unnecessary debt that you pay each month.

3. Sell the unneeded.

One of the fastest ways to get out of debt is to sell assets that are no longer needed, but still have value. Used computers and x-ray machines are never going to be more valuable than they are today. If you have replaced your old equipment with new, don't store the old equipment. Sell it and use the income to reduce debt. Even if you are making payments on a piece of chiropractic equipment that you no longer use, you should sell it immediately and pay off the debt.

4. Swear off new spending.

Stopping debt accumulation must be a conscious decision. You can live debt accumulation must bee, or nearly so. Remember, sion. You can live debt free, or nearly so. Remember, you weren't born in debt and, in fact; didn't really accumulate any debt for the first 20 years of your life. You can be debt free again. Sometimes we have to say no to the pleasures of the day so we can say yes to the future. There are some alternatives to going into debt that will still allow you to have some of the things you desire. If something you want will be used only occasionally, it may be better to rent than buy. If you must buy, consider buying something used. Let someone else pay for the instant depreciation that occurs when a new product is purchased. Make do with what you have. Almost everyone can put off spending for at least a little while. Buy a smaller version. Bigger is not always betterespecially when it comes to payback time.

5. Refinance.

You can lower debt payment by combining several highinterest loans into one with a lower rate. If you are a homeowner with equity, you can probably secure a home equity loan. If your credit card balances total $10,000, you can save $4,000 in interest payments over five years by combining your credit card balances into a home equity loan at eight percent, and because interest on home equity loans is tax deductible, your after-tax savings could be substantial.