Got Debt? 5 Steps to Get out of Debt Faster

FAQs: What does a trillion-dollar federal deficit really mean?

On Friday, the Obama administration reported that the federal budget deficit for Fiscal Year 2010, which ended on September 30, came in at about $1.294 trillion.

In light of that information, a few FAQs:

How does this compare with past deficits?

It's huge. That's down from the record $1.4 trillion deficit in Fiscal 2009. But it still represents the second-largest deficit in history. In 2007, the deficit was only about $160 billion.

Can we afford to service this debt?

As is the case with mortgages, it's not so much the amount of debt you carry but the interest rate you pay that determines whether national debt is affordable. Interest rates have fallen rapidly in the past two years, and the government issues a lot of short-term debt. Last week the Congressional Budget Office estimated that the government spent $228 billion on interest alone in Fiscal 2010. That's about what the government spent on debt service in Fiscal 2006, when the national debt was significantly smaller.

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Why was the deficit smaller in fiscal 2010 than it was in fiscal 2009?

As the economy began to grow again, the amount of revenue the government collected grew for the first time since fiscal 2007 — by between 2 and 3 percent. Sharply rising corporate profits led to a large increase in the amount of corporate income taxes collected. Government expenditures fell for the first time since 1948.

Is the deficit "cyclical" or "structural"?

It's both. It's structural because, in the years before 2008, the system of taxes in place didn't collect enough money to pay for spending. Spending rose significantly in part thanks to the passage of the Medicare prescription drug benefit, the cost of waging two wars, and rising discretionary spending.

But cyclical factors — i.e. temporary factors related to the overall economic climate — exacerbated the structural deficit. When the economy falters, tax collections fall as corporate profits fall and the economy loses jobs, and expenditures on things like food stamps, Medicaid, and unemployment insurance rise. In 2008 and 2009, the U.S. suffered an extreme version of this cyclical condition. In fiscal 2009, revenues fell a stunning 16.6 percent.

The economic crisis also spurred extraordinary spending on initiatives like the TARP and the stimulus. And so in fiscal 2009, spending rose 17.9 percent. If revenues in fiscal 2010 had simply been even with the levels of 2007, the deficit would have been under $900 billion.

What does it mean for President Obama and the Democrats?

Not much good. The electorate doesn't seem poised to give President Obama and the Democrats much credit for reducing the deficit in fiscal 2010. For better or worse — mostly for worse — Obama and the incumbent Democrats now own the economy and the deficits politically.

The two options for reducing the deficit — slashing spending or raising taxes significantly — would likely cut into economic growth, thus dimming President Obama's chances for re-election in 2012.

[Related: Five steps to get out of debt faster]

What does it mean for Republicans?

Not much good, either. Republicans hope to recapture the House in November, which puts them in a position to be much more involved in the budget-making process. They've spent the last two years denouncing the rising deficits as a threat to America's economic well-being. But in order to extend all the existing tax cuts, they'll have to advocate for either (a) deficits that are as large or larger than the current ones; or (b) propose draconian and unpopular spending cuts.

What does it mean for you?

So far, not much. In theory, the existence of large deficits puts pressure on interest rates to rise and has the potential to ignite inflation. But interest rates have remained extraordinarily low, in part because the Federal Reserve has kept short-term rates near zero and investors fretting about uncertainty have parked cash in Treasury bonds. If signs of sustainable economic growth materialize, that could change. As Mark Zandi, chief economist at Moody's Analytics, told the Associated Press: "If we get to 2013 and policymakers don't look like they have a credible plan to deal with the deficit, then interest rates are likely to rise significantly and that will jeopardize the recovery we have under way at that time."

What's going to happen to the deficit next year?

I have no idea. Predicting deficits is like predicting the weather a couple of weeks out. You can find models and data that will give you guidance, but there are no guarantees. And with the deficits, there are too many wild cards: the level of economic growth, the performance of the job market, and how well corporations fare. The biggest impact is likely to come from the volatile political sphere. All the tax cuts passed in 2001 and 2003 are poised to expire in January 1, 2011, as they were designed to do. The extension of some, all, or none, of them would lead to hundreds of billions of difference in projected revenues.

Common sense info that far too many people don't follow.

This is the exact advice that you will get from Dave Ramsey. For those looking to eliminate your debt, I really reccomend his books. Some people are turned off to it because there are some religous sub-tones to it but it didn't bother me any and I am a "sleep in on Sunday" kinda girl. The book is an easy read and puts things in lamans turms for the average person.
Something Ramsey reccomends, in addition to paying off the debt item with the highest interest first, is paying off the debt item that you owe the least amount on first. These small victories keep you moivated to keep you on track. For example, it only took me a few weeks to pay off a 500$ Store card with incredibly high interest and since then, I have felt victorious and have continued mastering other debts.
(I couldn't get rid of my car though, it's no Jaguar, but I need something reliable and. I'm getting close to paying it off!)

all debt is not bad debt considering debt is a way of life that creates jobs

SL imo are NOT good debt, not by any stretch of the imagination. the trick is having the right amount - nothing too outrageous compared to your income b/c oftentimes SL will throw your DTI (debt to income) out of whack if you owe ALOT and make very little in relation to the amt. of your student loans.

What about keeping "good debt" like college loans (can help your credit score if you pay on time and consistently)?

Also, I don't think there is a such thing as good debt. Student Loans, when paid properly can be a good way to build credit but you also build credit through things that aren't indebting, such as paying your utility bills on time.

People say that there is no good debt. Well, the majority of us out here can't buy large items like cars without it. I think that as long as you find a good, low interest rate, and that you can afford the payments, then it's fine. It's when people buy more than they can handle that it becomes bad debt. One doesn't need a BMW to get from point A to point B. There are much less expensive cars that will get you there just the same. And your car insurance and repairs will be less as well on a less expensive car.

Paying utility bills on time does not improve your credit rating. Utility bills are not reported to the credit reporting agencies. Paying for everything in cash also does not improve your credit rating.

If you're aiming for a high credit score, you need to carry some level of debt, even if just making small purchases on a credit card and paying it off every month, or having a small personal loan.

On the other hand, if your goal is to live debt free, then by all means, carry no debt and pay your utility bills on time. Your credit score will suck, but you won't have any debt.

This is a great plan, and one we recommend at Bills.com. Still there are those who experiencing a serious financial hardship who will need to either work with their lenders directly to negotiate a settlement or engage a firm to help them save up the funds and negotiate with each of their creditors to settle the debt for what they can afford. There is an excellent article reviewing several options for people in that situation at http://www.bills.com/debt/
Thanks- Virginia at Bills.com