Breaking Free of Financial Bondage

I wrote this monograph in the early 90's so some of the terms may be antiquated BUT the financial principles have remained the same.  I hope these principles help you.  Financial freedom is possible!

by Dr. Ken Matto

DEBT! The very word reeks of slavery. How many times have you made a final payment and felt a feeling of relief? You realize now that you have made a financial accomplishment by getting out of debt. But you did not purchase this monograph for me tell you congratulations for getting out of debt, you purchased it because you are in debt and you need to come out of it as soon as possible, no matter how it hurts and believe me it is going to hurt.
The reason you are in strapping debt is because you lack one required fundamental principle of living and that is "DISCIPLINE." A person who lacks discipline in finances, lacks discipline in every other area of life. Getting into debt does not require a decision, it represents a lack of decision because if you are thinking rationally, why would you want to enslave yourself with thousands of dollars at 16-19% interest. Don't think at this time that if you had a lot of money or if you hit the lottery your financial problems would be over. HOOEY! Having much money without discipline will wind you up in the same hodgepodge you are in now except the debt would be larger because the toys you buy would be much larger and more expensive.
I have seen people on TV who hit the lottery or these $10 Million dollar sweepstakes and go out and buy 4 cars. Before they hit, they owned 1 car, why would they buy 4 cars? They have no discipline because they are deceived into believing that $10 million dollars is an endless pot. It is not, because the most they can spend is $10 million. It sounds like a lot of money, and it is, but normally it is paid off over time, normally 40 years, which means $250,000 per year. Now if the fellow that bought 4 cars instantly paid $100,000 for them, he has already spent a good portion of it because out of that yearly check comes taxes which normally amount to about $80,000 per year. His first year he already lost:
$100,000 on 4 vehicles
$ 80,000 on taxes
Leaving a total of $70,000 for the first year.
If he quit his job and If he owns a house, that $1347 per week must sustain all living expenses like home, life and health insurance, groceries, emergencies, etc. If he spends over his $70,000, then he goes into debt counting on future checks to alleviate the debt and has become like many who pre-spend what they do not have.
I know what financial bondage is and how it can ruin a life. In 1981 I was between $12-15,000 in debt and that was putting me in a difficult position because my salary was $13,500 and this debt was above and beyond necessary bills. I had a rich friend who was very cheap and to impress him and other around me, I would take out loans to show others I had a good income too. I was lying plus I never impressed anyone. The only one who was impressed was me. It was self-deception outright.
I was almost ruined because I worked for my creditors and was unable to get myself into positive balance or better known as "in the black." I thought nothing of whipping out my credit card and buying something. I had credit cards with high credit limits which I approached because of my rampant disregard for credit and its destructive nature. Credit, when used properly and in the right situations can be an asset. I incurred charges and cash advances without concern for payback time. I paid out tremendous amounts of interest because rates were 18.6%, like today. When I was in heavy monetary bondage, I more fully understood why people commit suicide because of the unending misery of receiving a statement every month and seeing the interest compounded with more interest. The minimum payment would cover the interest charges and just a very minimal amount of the principal. It is designed that way. I was an impulse buyer and purchased things on the most thinnest excuse I could muster at the time. I would buy things that I thought would bring happiness to me but did not fill the void. I was a buyer and seller. I would buy things and if I did not like it, then I would buy another model. Of course, all on my credit cards because I was unable to save while operating in a personal debt economy. This was my personal testimony of how I got into debt. What evil path did I follow? I WAS SPENDING TOMORROW'S INCOME TODAY! I was not considering the fact that in the future there would be layoffs, emergencies, or sickness, etc. A very dangerous thing to do and it is the basis of 99% of all debt entrapment.
It is the "who cares about the future" attitude. Go ask that question of all the Senior Citizens who must work at fast food restaurants till all hours of the night to supplement their Social Security benefits. Retirement should be a time of relaxation and enjoyment because it is the final chapter in a person's life. A retired person should be able to putter around their house or volunteer help in an organization, in other words be free to enjoy what they couldn't when they were working. You are not free when you have to watch the clock, put your grandchildren down and get dressed to go to work at 6 PM till midnight. I personally know a woman who is 76 years old and puts in a full day's work in a factory and works overtime when needed. Does she have to work? NO! She wants to work. That is the difference, do you want to work or do you have to work? Abusing debt will force you into the "have to work" mode. It is a sorry scenario to see a person go from the job right to the cemetery, in other words from boxing up chicken to being boxed up permanently.
I want to tackle this subject in hopes of preventing financial ruin by misuse of credit. Subtle traps are laid out for people to seduce their thinking. Some sayings that prey on the lusts of the mind are:
Notice they all start with YOU because no one else is to blame for your situation. These guidelines will help you identify problem areas in your life which may be the result of financial bondage. Remember, the creditors want you in bondage because they must lend to stay in existence, this is why they attempt to trap you by systematically raising your credit limits. :Let me tell you how I know this is true. My father was in the process of purchasing a used car for $6650 but he did not have any cash on him and he does not believe in credit cards, so he was unable to put a down payment on the car to hold it. So I took out my American Express Gold Optima Card which had a credit limit of $7500 at that time so I could hold the car till my father went to the bank.
When the dealer called AMEX and asked for confirmation of the total of $7116, AMEX questioned me but nevertheless approved the transaction. AMEX was worried because I never had a charge that big. My father paid by check and the AMEX transaction was not processed. Within 3 months, my Optima credit limit went from $7,500 to $11,100 even though I did not process that charge. They thought here is a high roller so let's get his credit line increased. It's amazing, the same company that was worried I couldn't pay, suddenly raises my credit limit by $3,600. Then they write and say that you are to be congratulated because you are now a privileged customer. The only privilege I see is the privilege to become more of a slave to their loan shark interest rates.
These are some root suggestions to help you build a cash flow. Of course, these are only suggestions but the principle can be carried over to and conformed to your situation. If you follow these principles you will begin to climb out of the pit. Do not take any of the saved cash and put it toward a bill. Let me explain. Let us say you followed these suggestions and saved $150 per month in cash. If you put this toward a bill and an emergency expense comes up then you will be adding more debt by charging the expense. If you have the cash ready to pay for it, you will have avoided another charge, saved the high interest and you have taken a step toward freeing yourself.
Now let's suppose you paid a bill for $75 out of your saved money of $150. That leaves you $75. Combine that with next month's savings of $150 and you have a total of $225. Once I needed new shoes and sneakers and had about $130 in change saved. I purchased 3 pairs without charge cards or denting my budget. The "leftover cash" principle works. Start today and begin to feel freedom when you start paying with cash.
Do not cut them up because in a moment of weakness it is too easy to call the credit card company and say your card was lost. Then the new cards will be sent to you in a few days and you will be back in bondage but if you give your cards and checks to a friend then the account stays open and you have no way of accessing that account without the cards or checks. The only thing you can do is pay off your balance and not create any more debt. Remember you will start using your saved cash for purchases instead of the cards. As I ponder this, tear up those credit checks and use them for compost. Those checks make it look like you are spending money and not incurring debt. Remember, deception is a great tool of the lender BUT IT WORKS.
One of the ways a lending institution rewards its good customers is to offer them the opportunity to become a greater slave to them. Many banks increase credit lines and tell you it is your reward. Call immediately and have your credit line lowered. Many banks give out credit lines of $5,000 and up without batting an eyelash. Call your creditor and tell them (don't ask) that you want your credit limit lowered to $1,500. If they refuse, then tell them you are closing the account, they will lower it and then in a few months will probably raise it up again. Remember, it is important to understand that banks need you in debt to procure interest because without it they cannot exist. Do not become a slave to a bank, the rewards are only heartache.
Banks are constantly sending out pre-approved credit cards which offer lower interest rates. Those rates are only good for an introductory period like 6 months. READ THE SMALL PRINT! The large print giveth and the small print taketh away. Tear up the application immediately. You only need one Mastercard or Visa. Where they take one, they normally take the other.
Keep this principle in mind. CREDIT CARDS ARE NOT MONEY, THEY ARE DEBT INSTRUMENTS! If I have $1000 in savings and a credit card with a $2000 credit limit, I do not have $3000, I have $1000. You must begin to retrain your thinking. Who stands to make the most out of your uncontrolled debt? YOU or the bank? Think of yourself in business terms. What are your assets versus liabilities? Financial survival depends on this fundamental principle. You need to think of yourself as Chief Financial Officer of your Life. Business utilizes 2 ways of capitalization: 1. Selling Stock which is called an equity security; 2. or, Selling Debt such as bonds, debentures, commercial paper, etc., these are called debt securities. Did you notice what did not appear under Capitalization? BORROWING! Why? Because borrowing is not capitalization, it is DEBT! Just like credit cards, when you use them they are not raising capital but acquiring debt. DEBT IS NEVER CAPITAL!
If the need for a car arises while you are in financial bondage, buy a used one or find out how much it would cost to change the engine if the body is in good condition. Let' say you have a car with a good body and the engine costs $4000 to replace (4K is high end of spectrum) and you get a 50,000 mile guarantee. It sounds like a lot of money. Your friend goes out and buys a new car for 12,500. Pays it out for 4 years. You take the $4000 and stretch payments out for 2 years. Let's pretend a perfect world, no interest charges. You both average 10,000 miles per year.
Your monthly payment is: $177 (includes sales tax)
Your friend's monthly payment is $273 for the car. (includes sales tax)
Your insurance premium stayed the same and you paid only $240 in sales tax.
Your friend's premium increased about $500 per year. (conservative estimate)
After 2 years your bill is paid with 3 years left on guarantee.
After 4 years your friend's bill is paid. Here is the stark reality of buying a new car:
Sales Tax 6% ------------------600
Payments -------------------12,500
Insurance increase---------2,000
Total-------------------------- 13,700
By having your engine replaced instead of buying a new car, the first 2 years you saved $2610 but the second 2 year time period you saved $6850, bringing your total savings to $9450 over 4 years, which averages out to $197 per month that went to you, not the finance company. If you would place that $197 per month in a fund or savings plan which paid 10% ANNUALLY, you would have $11467. By doing it this way, guess what, you can buy a new car and pay it out cash.
When you are out of financial bondage, then you may buy a new car, provided you can put down at least 50% of asking price. The balance can be financed with controlled debt. (I will speak on controlled Vs. uncontrolled debt a little further on.)
This is a personal principle which can work quite effectively. Previously I mentioned in my "Symptoms of Financial Bondage" section that you have borrowed from everyone as one symptom of financial bondage. The difference between then and now, is before you were borrowing in an uncontrolled manner, now you are borrowing to reduce debt. Let me explain.
I was $4,000 in debt as a result of a car accident and job loss prior to this, so the bills I had were at the interest rate of 17-18%. I was steadily employed at the time. I went to my parents and asked for a loan of $4,000. I VOLUNTEERED to pay them 7% interest compounded monthly. I saved 10% off interest charges and they made 1 1/2% more on their money than what they were getting in their passbook account. Owing to the reduction in interest rates, the loan was paid off earlier than expected and I was not a victim of loan shark interest rates. I told them they made more money dealing with me than the bank.
Remember, do not force or guilt manipulate anyone into doing this, just give them the facts and figures and how much they will prosper and how much you will save. To get the savings figures, run an amortization schedule from a program like Quicken and give it to them. Allow them time to think, since they may view you as a bad risk, since it was your mishandling of money that got you into this mess. If you get the loan from them, as soon as you pay off the high interest rate accounts, close them. I did and you cannot get hooked in bondage when you stop the fountain of borrowed funds. Emergencies cannot be avoided but once you know the proper steps of debt and money management, you will establish a repayment plan in a controlled environment.
Not long ago I had the ability to charge $50,000 If I wanted to. I had taken the offers from several banks and because of my AAA credit rating, I was given ridiculously high credit lines. Of course I sent them back but I wanted to see how many cards I could collect for an experiment. Keep in mind the following principle concerning available credit lines. If you go to buy a car and they check your open lines of credit and see you have the potential to charge $40,000 above and beyond the price of the car, they may be hesitant to loan you the money. You may be considered a risk. Close accounts you have not used.
Do you really need all those department store credit cards? Most of them are at 21% or higher! Do you really need a gold card plus 5 or 6 visas? You only need one not both. A $5,000 credit line is sufficient to handle an emergency. Credit cards are not to be a means of living. Credit Cards are a good servant but a fearful master.
This is one of the most critical steps to getting out of financial bondage and staying out. Budget everything so there are no surprises. Let me give you some examples of what to budget. Then I will give an illustration.
The key word is BUDGET. These are examples of what your budget should include. You know what your steady expenses are and these must be budgeted. It will be hard at first, but within 6-9 months you should be operating in a positive mode and your money situation will be well under control. You may not be out of debt yet, but you will be on the road to recovery.
Open a checking account and create an index card system. On each card write the category in which you are budgeting for along with the amount that you are budgeting. Let us set up a hypothetical budget:
Let us say your take home pay is $400 per week.
Telephone                     $   15
Food                              $   50
Car Insurance                $   12
General Fund                $   40
Rent                                $ 100
Debt Repayment           $  80
Utilities                           $   45
Savings                          $   20
Total                               $ 362
Pocket cash $38
The road to get into debt is easy but the road out is arduous. The principle to keep in mind is that it is attainable. It will take time to get out of debt but if you follow this simple principle, you will pay off all your unnecessary debt without increasing the amount of money to do it.
Let us say you have 5 credit card bills with the minimum payment due as follows:
Card 1 - Principal $ 4600 - Minimum Payment $ 81
Card 2 - Principal $ 3800 - Minimum Payment $ 72
Card 3 - Principal $ 2900 - Minimum Payment $ 61
Card 4 - Principal $ 2100 - Minimum Payment $ 42
Card 5 - Principal $ 1100 - Minimum Payment $ 26
As you begin to tackle the amounts you owe you start with the smallest principal which would be the $1100. The total for all 5 minimum payments is $282 which is your mandatory amount you must pay each month. However. the payment for Card 5 should not be $26 but $52 which is a double payment. So now your total allotted amount for debt erasure is now $308. For better understanding of this method of debt erasure, I am going to deal only with the principal. The interest will be a part of the repayment which means it will take longer than just dealing with the principal.
When beginning to tackle the lowest amount, simultaneously you are also making the minimum payment on the other bills, which continues to lower your indebtedness of both interest and principal. Might I add a variation to this method. Let us say that card #2 is at 21% while all the others are at 16%. If you choose you may start with card #2 instead of card #5. Double the minimum payment of card #2 until it is paid off and then go on to card #5. Paying down your highest interest rate first is an aggressive attack on your debt.
Card 1 - Principal $ 4600 - Minimum Payment $ 81
Card 2 - Principal $ 3800 - Minimum Payment $ 72
Card 3 - Principal $ 2900 - Minimum Payment $ 61
Card 4 - Principal $ 2100 - Minimum Payment $ 42
Card 5 - Principal $ 1100 - Minimum Payment $ 26
Card 5 when making a double payment each month will erase the debt in 22 months. Keep in mind that double payments have a tremendous advantage. The first $26 absorbs the interest but the second $26 is fully applied to principal. This method is only applicable in a situation of uncontrolled debt. Let's see what has happened in that 22 months.
Card 1 - Principal reduced to $ 2818
Card 2 - Principal reduced to $ 2216
Card 3 - Principal reduced to $ 1558
Card 4 - Principal reduced to $ 1176
Card 5 - Debt erased (22 Months)
In the past 22 months, your indebtedness was reduced by $6731. Now the $52 you paid Card 5, you now apply to card 4. This would make the monthly payment $94. Card 4 is paid off in an additional 13 months.
Card 1 - Principal reduced to $ 1765
Card 2 - Principal reduced to $ 1280
Card 3 - Principal reduced to $ 765
Card 4 - Debt erased (13 months)
In the past 13 months, your indebtedness was reduced by $3958. Now the $94 you were paying to card 4 is now added to the $61 minimum payment of card 3. Your monthly payment is now $155. Card 3 is now paid off in an additional 5 months.
Card 1 - Principal reduced to $ 875
Card 2 - Principal reduced to $ 488
Card 3 - Debt erased (5 months)
In the past 5 months your indebtedness was reduced by $2447. Now the $155 you paid to card 3 is now added to the minimum payment of card 2. Your monthly payment is now $227. Card 2 is paid off in 3 months.
Card 1 - Principal reduced to $ 632
Card 2 - Debt erased (3 months)
In the past 3 months your indebtedness was reduced by $731. You now take the $227 payment you were making to card 2 and add it to the minimum payment $81 for card 1. It will be a total of $308 and you will be out of debt two months later.
Now before you rejoice that you are out of debt, let us look at the somber statistic we have developed. It took you, under guided conditions, 45 months to come out of debt. Please keep in mind that interest will be compounding during the time you are paying off each bill and it will take longer to come out of financial bondage.
Just think for those 45 months if you were paying yourself at the rate you were paying your creditors, you would have in savings $13860. Just think if YOU were receiving compound interest at the rate of 17-18% instead of the creditors. When all is said and done, isn't unnecessary debt really foolish? Have you heard of rule of 72? You can calculate how long it takes your money to double by dividing 72 by the interest rate. At 18% it takes 4 years for your money to double. At 6%, 12 years, at 4% 18 years, etc. Using this rule and by going into debt at 18%, you lost $27720 in the 4 years it took you to come out of debt. One more insult to injury, by you not collecting interest on the $27720 you paid your creditors at 18%, you would have had $55,440 instead of just beginning to save. Now do you see the destructive nature of debt?
Previously I spoke of controlled debt Vs. uncontrolled debt. Here is the difference. An example of controlled debt is a car. You purchase a car for $6000 and you put down $3000. You finance $3000. When the bank or dealer finances that $3000, they include interest, let's say $700, then they give you a monthly payment plan which includes both interest and principal. Let's say $3700 is financed over 36 months. Your monthly payment is $103 and will never increase because the finance charges are included in that payment. This is called controlled debt. An example of uncontrolled debt is your credit card because the only control is the credit limit and far too many people go into financial bondage before they approach their credit limit which many times could be as high as $10,000 on one card alone. When you make payments on your credit card, what you paid back automatically becomes available for your use as debt again, thus allowing you to never pay down the debt AND BE FREE.
During the time you are in debt and having the ability to save while you come out of debt, you need to invoke a principle I call "The Negation Principle." What I mean by this is simple. You are paying 15-18% interest on your credit cards but simultaneously search for an investment vehicle that pays interest in nearly the same amount. A good place to find high returns is in the Mutual Fund Market (though not guaranteed). A point in fact is that the money you squandered in debt will never be available to you, it is gone forever. You must start again. Let us say you have a good financial advisor who gets you into a mutual fund that pays 16%. Now you are paying off 18% debt but simultaneously receiving 16% on your money, you are negating some of your losses, depending on how much you are able to invest. Remember previously I stated that I purchased a cellular but simultaneously did away with my Caller ID and Three-way calling which reduced my monthly bill. Use the negation principle for both investing and purchasing.
Now that you have been freed from financial bondage, there are some things that you can do to maintain a healthy financial picture so you will not be strapped by uncontrolled debt.
*If you are experiencing things like impulse buying, then leave your credit card home when you shop. Avoid the malls and find a small business that sells what you need, thus averting the possibility of going shopping. Many times small businesses are cheaper because they do not have to pay exorbitant mall rents. Determine that you will not charge anything under twenty dollars, gas included. If you must buy something, do it on your lunch hour, thus cutting down the time available for impulse shopping.
As you go along you will find and develop principles for financial soundness. Well, we have a come a long way and let me end by saying that debt slavery had a grip on my life for many years and this is why I want to help you avoid the pains that go with it. It hurts when all your friends can afford to go on vacation or go away for weekends, and you can't go because your debt has imprisoned you. The primary reason I authored this paper was to help you back on the road to fiscal responsibility and freedom. We started with the word "slave" and ended with the word 'freedom." I hope this is your testimony. If this monograph has been helpful, please let me know!