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How Money Works and How to Get out of Debt

Anne | 3/4/2009, 7:50 p.m.

You know the old saying, €money is the root of all evil?€ In today€s economy, from Bernard Madoff€s Ponzi scheme, to our government continuously bailing out big business, financial institutions, and other government funded programs; and with the continuous rise of unemployment; this saying is proving to be more true. However, if we really learn to grasp how money works and how to get out of debt, money doesn€t have to be the root of all evil.

Undoubtedly, money plays a central role in all of our lives. Yet, we must have a clear understanding of what money is and how it works. Simply put, money is something generally accepted as a medium of exchange, a token, which is used to obtain goods and services. Money can be in the form of currency, credit, trade-off agreements, gold, silver, etc. Of course we all want more currency in our bank accounts but, we have to learn how to use the other forms of money as well in order to have more liquid currency.
Now the way that money works is very surprising if you don€t fully understand the concept. All money systems are based on debt. We own cars and homes, pay rent, buy food, have credit cards and shop. As long as more and more €stuff€ is being produced, the more we buy. With the more we buy, also comes the extra costs that are being passed on to us such as hidden fees (surcharges, distribution charges, store stocking fees, overhead charges, supply charges, etc.), taxes, and interest rates that many of us are not aware of when we make purchases.

Simply put, when we purchase stuff, we are also paying the debt of the manufacturer who supplies us with stuff. Thus, the need for more stuff equals the need for more money. Unfortunately, unless you grow and make everything yourself, there is no way around it. If we become wiser at spending, saving, investing, and eliminating debt, you can and will have more money.

So, how do you go about eliminating your debt? Well, the catch 22 is that you have to stop spending. This doesn€t mean that you don€t buy groceries, don€t pay your bills, or continue to pay for or buy other living needs. But, you have to stop spending frivolously. You have to stop buying stuff you don€t need. Emphasis on the word need, not want.

Next, take at look at how much you are bringing in every month versus how much is going out and where your money is going. Eliminate the €wants€ for now. Do you have a recurring fee for a membership or subscription service you rarely ever use? Do you really need the premium channel cable service? If you are hardly ever home, would it be more cost effective to subscribe to basic or limited service? Do you have a landline phone service and cell phone?

Examine your situation and decide do I really need both? For example, someone who is single, no dependents, usually out a lot, having a cell phone as your primary phone service may not be such a bad idea. Once you see where you can eliminate some of the unnecessary expenditures, this will free up some money to pay for other debts such as credit cards, loans, etc.

One question that continues to come up is how to pay off credit cards. Some say pay off the smallest balances first. This could be fine if all of your credit cards have the same interest rate. However, in most of our situations, this is not the case. Most of us have varying rates on our credit cards. On a piece of paper, write down the names of your cards, the balances due, and the interest rate for each. You want to pay the cards off with the highest interest rates first.

The interest you pay on your credit card balances are compounded monthly. This means that each month, you pay interest on the interest from the month before. So, let€s say you were being charged an interest rate of one percent per month which should equate to an annual percentage rate of 12 percent. In reality, you are paying around 14 percent because you are carrying over a monthly balance.

This is how the credit card companies pick additional points of interest each month and why it seems your payments are not making a dent in the amount you owe. You pay more but you don't know you're paying more. So, with the money you have freed up, your goal should be to pay at least twice the minimum payment. This doesn€t mean that you don€t pay anything on the others. If you have to pay the minimum on the others until the highest interest rate card is paid off, then do so.

Next, re-shop costs for other expenditures you have such as car insurance, mortgage insurance, life insurance, health insurance, etc. There are more affordable programs that will give you more benefits. Even if you are older, premiums have gone down over the last several years so your current policy may be out dated and could be costing you more than what it is worth. You also want to work on your savings (for short term goals and emergencies) and investments (for long term goals such as retirement or college funding). Although you are paying down debt, you want to build for financial security later. Next month, we will follow-up more on how money works and how to secure your future through an insurance policy.

For questions or comments about this article contact Jennell Burke at 301-324-1346 or send an e-mail to BurkeFinancial@gmail.com. Or go to Web site: www.Burke1Enterprises.com for more information.