Simple Debt-Free Finance » Debt

3 Ways To Negotiate a Credit Card Debt Settlement Yourself.

Joe — Wed, 11 Apr 2012 02:25:55 +0000

If you’re one of the millions of credit card holders who has found themselves buried in credit card debt with a balance you can’t hope to pay down, then you may be wondering if you can Negotiate Your Credit Card settlement yourself. Well, it is possible to do, but it’s not easy.

3 Ways To Negotiate a Credit Card Debt Settlement Yourself.

The first thing you need to consider is what kind of arrangement you are going to seek. Let’s be honest, you’d like your credit card company to forgive all your debt and pretend it never happened, but short of bankruptcy, that isn’t likely to happen.

Once you’ve accepted the reality that you will need to pay something, you need to determine what that something will be. Here are 3 possible debt payment solutions to offer to your credit card company when you make the call.

I. Lump-sum settlement.

This is by far the easiest to understand and to sell to your credit card company, but it’s often the hardest to carry out, because you need a large sum of money available.

Since most credit card issuers aren’t going to negotiate until you are behind, one strategy is to stop making payments to the credit card company and put that money (and as much extra as you can afford) into a savings account for a few months.

This is what many debt settlement companies do for you, or at least it’s what they say they will do for you. In many cases, they hold the money and let the credit card company come after you for the full debt owed anyway. It’s a big reason why debt settlement is not a good idea in many cases.

If you have access to a chunk of money, they you can make an offer to your credit card issuer for a 1 time payment that is less than the full amount you owe.

WARNING: This technique will likely hurt your credit score, but then again so will having a high debt balance and not paying it off…

II. Workout arrangement.

This is a much easier option to carry out than the lump sum. The Workout arrangement is when the bank agrees to freeze your interest payments and late fees while you payback your balance. This is also the most ethical solution in my opinion, because you’re telling the credit card company that you will meet your obligations and pay back what you owe, as long as they agree to stop pushing you back under while you do it.

WARNING: You will most likely no longer be able to use your credit card, since the bank will probably lower your limit. This is a good thing in the long term though, since it will keep you from racking up even more debt. However, the lower credit limit will increase your debt-to-income ratio, and lower your credit score.

III. A Forbearance Program.

This one is probably the easiest solution to sell to the credit card company, but not the best for your bottom line. A forbearance program is an agreement by the bank to pause your payments and interest fees while you get your finances back on track. This is like taking a timeout to gather your resources for the next play.

The next play though is usually getting back on a payment plan in which you agree to pay the full amount owed and any interest and late fees accrued – forbearance is not forgiveness.

Final thoughts.

Whichever solution you choose, keep in mind that these are tough times for everyone – credit card companies included. They can’t get blood from a stone and they know that. Credit card holders still have a lot of leverage and everything is negotiable. Job loss and negative home equity have put the squeeze on banks trying to collect full payment.

You can use one of the debt solutions from above as a starting point, then see what else you get bargain down in the process. For example, you might get the bank to forgive all late fees and interest fees and give you a forbearance if you agree to pay the full principal. It all depends on your situation, and is up to the individual creditor.

Regardless of which solution to choose, be sure to get your credit card issuer’s agreement in writing before you send them any money.

Also, be sure to read How to Negotiate Your Credit Card Debt for more detail on the actual process behind making the call.

…and for your own sake, stop living beyond your means or you’ll find yourself back in the same place further down the road. It’s the number 1 reason why Debt Settlement And Loan Consolidation Don’t Work.

When a $50,000 Salary Can Feel Like Minimum Wage.

Joe — Mon, 05 Mar 2012 18:05:08 +0000

How can $50,000 seem like minimum wage? According to the Social Security Administration’s National Average Wage Index, the national average income for the USA in 2011 was $41,673.83. That means that to half the country, $50,000 a year would be a $8,326 raise, and yet this woman says $50,000 feels like minimum wage !

Well, if you read her story it makes a lot of sense.

Basically, she went from working at home to a full time office job and once she totaled the change in her spending she realized she was making about $7.50 per hour.

Here are some of the things she attributes to lowering her effective income:

Commuting costs – increased wear and tear on her car, the cost of gas, etc…
Childcare expenses
Eating out more – less time to prepare meals at home means eating out or buying take out more frequently, which is more expensive.
Increase in clothing and personal care expenses (i.e. hair and nail care, proper office attire, etc..)
Coping with stress by spending more on vacations, or entertainment.. buying more wants than needs.

Her change in lifestyle brought about a change in spending with no increase in saving. It happens to a lot of people and it’s not always easy or even possible to fix. She could do some things differently. She probably doesn’t need to spend $40 a week on clothes, and she could plan ahead to prepare more meals at home, but that takes work too.

This is the kind of situation my wife and I work very hard to avoid. We avoid debt whenever possible to keep as much of our income as possible. I work hard to secure a steady income, and she works hard (sometimes harder) to make that income go as far as possible.

She’s the coupon clipper and meal planner. She’s turned comparison shopping into a competitive sport. She scours thrift shops and consignment stores for children’s clothes, and puts a healthy low cost meal on the table every day of every week all year long.

It’s not easy, but it’s cheaper than if she went back to work full time. And we believe it’s better for the family. Living on a single income is not easy, but it is possible and I believe better in most cases for families. The key is twofold: 1) limit expenses as much as possible, and 2) increase income.

It’s really no different than what most people should be trying to do regardless of their employment situation, but as the Yahoo! article makes clear, it’s so much easier to lose control of your spending when both people work out of the house. Those little money leaks turn into an effective loss of income over time.

8 Tips to Reduce Your Debt This Holiday Season.

Joe — Thu, 22 Dec 2011 02:32:00 +0000

The Holiday Season is the busiest time of year, full of family and friends, good food – and spending. Between the parties, travel to be with family, and gift-giving, it’s practically inevitable you’ll be dishing out a lot of dough. But you don’t have to go into debt during the Holidays that leaves you financially hungover in January and behind for the rest of next year. Plan ahead to minimize your debt, or better yet, not rack up any at all! Avoid the debt collectors by following these 8 simple tips to keep your Holiday spending on track:

Get on a Budget – Start the season out right by planning how much you can reasonably afford to spend and limit yourself to that, no ifs, ands, or buts. This means you’re going to have to budget for those unexpected holiday expenses that tend to pop up.
Treat All of Your Expenditures Like Cash – Don’t set yourself up for failure by walking into the glitzy shopping mall with three credit cards and no idea of what you plan to buy. Preferably pay in cash, but if you use a credit card, treat it like cash – plan to pay off the balance at the end of the month to avoid incurring interest fees.
Don’t Use the Store Retail Cards – These may be tempting, but don’t fall into the habit of applying for store credit cards simply for the 15% off coupon they’ll give you. Each time you apply for one of these it will hit your credit report and can make you look desperate for credit lines. Plus, these cards generally carry high interest rates – often at percentages in the 20s! Steer clear of this shiny Holiday shopping lure.
Be Creative With Your Gifts – Think from the heart instead from the wallet for a change this season. Are you an aspiring artist? Do you have the best gingerbread recipe in town? Consider something homemade, sentimental, for a gift. Chances are you’ll save money and your loved one will appreciate the gift all the more for it!

If you’re like most Americans, you will manage to rack up a measure of debt during the Holidays despite your best efforts. Don’t despair; you can still right the ship financially without spending the whole year trying to pay it off. It will just take a little planning:

Set a Definite Payoff Date – Try to put a plan in place right away to pay your debt off as soon as possible. Maybe it’s March 31^st, the end of the first quarter, or maybe you want the debt gone by the time the kids are off school for the summer. Stick to your plan and know exactly how you will pay it off in order to make all you financial decisions fall in line.
Scrimp and Sacrifice Where You Can – Are you getting a Starbucks every morning before work? Make coffee at home. Are you eating lunches out during the work day? Bring a sack lunch. Cut down on dining out, entertainment, and the cable bill – wherever you can. You probably received some gift cards during the Holidays, so make good use of those.
Pay off Your Debts in a Smart Order – Plan to pay off your cards with the highest interest first, making the maximum payment you can afford on those and just the minimum payments on the others. Work your way down the line with your cards so you can avoid paying high interest rates if possible.
Plan for Next Year’s Holiday Season – It’s okay if you take advantage of post-Holiday sales, so long as you’re doing it for the right reason. That cashmere sweater that went on sale for $90 from $120? Probably not the best choice. But decorations, household goods, and practical things you can save until next season will help you curtail spending next year and stop the revolving cycle of debt.

There’s no way to get around it – you’re going to be spending money during the Holiday season. But if you plan early and spend wisely, you can make sure that this Holiday season is one full of merriment instead of financial misery.

Larry P. Smith & Associates, a Chicago Law Firm, focus on consumer rights protection. If you are having difficulties with bankruptcy, identity theft, debt collection or consumer fraud, request a free case review with Larry P. Smith & Associates.

Five Common Debt Solutions.

Joe — Thu, 01 Dec 2011 17:25:28 +0000

Debt is an ongoing problem that plagues consumers around the world. Heavy debt is caused by various factors. Loss of job, divorce, and over extending one’s financial abilities are just a few ways debt sneaks up on hard-working people. If you are having a problem with debt, you are most likely wondering how to get out of it. Here are five common solutions.

1. Bankruptcy

Many people get scared and naturally want to solve debt by filing for bankruptcy. Bankruptcy is a legal status that clearly defines one’s inability to pay creditors. Depending on the chapter the debtor files, he or she may be excused from making any payments.

The downside to choosing bankruptcy as an option is the resulting credit status. A bankruptcy will remain on the consumer’s credit report for a period of seven to ten years. This status will make it difficult for that person to obtain any credit during that time. Bankruptcy should be used as a last resort when no other options seem feasible.

2. Debt Consolidation

Debt consolidation is another common method to solving the problem of overwhelming creditor bills. The process involves merging all open accounts into one account. A consolidation can be done in several ways. One way is for the debtor to apply for a consolidation loan. The lender will write out a check big enough to cover all of the debtor’s open accounts. The debtor will then make payment to this single creditor.

A debtor could also perform a self-initiated consolidation by applying for a high limit credit card that would cover payment for all existing accounts. This is also a great method because some high limit credit cards offer excellent APRs. The down side is availability. If the debtor has already experienced several negative notations on his or her credit report, lenders may be reluctant to help. In addition, if that individual’s income is not enough to cover the debt payments, a consolidation will not be very beneficial.

(Read more about Debt Consolidation and Your Credit Score.)

3. Credit Counseling Services

Credit counseling services can provide consumers with advice on how to manage their bills. They offer a wide range of solutions from financial planning, to payment tips, to writing letters to creditors. Credit counseling services are not a bad idea. However, they are not free. So, the customer risks paying for something that may not work.

4. Debt Management Company

A debt management company is a company that also offers a wide range of services to consumers in need of assistance. One thing they can do is negotiate with the lenders. They will attempt to convince lenders to lower interest rates and finance charges on the debtor’s behalf. Another service that these companies offer is a third party debt consolidation. In this situation, the debtor makes a lump sum payment to the debt management company and they pay of his or her creditors. DMC companies can possibly help to lower an individual’s debt. However, the bill can get costly and not every DMC is trustworthy.

5. Nada

Some people actually opt to do nothing to fix credit. They let the debt rack up in hopes that the seven-year period will pass before legal action wipes them clean. This is definitely not an intelligent idea. A smart debtor needs to be proactive for effective debt repair. With the right attitude and the will to make the situation better, a debtor can get from under the heavy weight.

This has been a guest post from Leah Fields. Leah likes to write about home improvement, personal finance; she writes for creditreport.org.

What Is a Bad APR?

Joe — Tue, 25 Oct 2011 16:05:24 +0000

I received an email from a reader who wanted to know what is considered a bad APR, but this is really the wrong question. Instead of focusing on what is a bad or good APR, you should be looking at the APY. Here’s why.

Focus on APY instead of APR.

First, let’s define the Annual Percentage Rate, or APR. The APR of a loan is the annual interest rate that is charged for borrowing. This is often portrayed as the total cost of borrowing money per year (excluding 1 time fees or application costs), rolled into a single number. The idea is that it makes comparing loan offers much easier. The problem is that it is not always accurate.

The heart of the problem is Compounding Interest.

For example, let’s consider a simple credit card offer. The offer states that the interest rate (APR) of the credit card is 12%. But once you look at the details, you see that interest is compounded monthly.

This means that were you to carry a balance on the card for a year, the actually interest rate you would end up paying is 12.68%.

This is where APY comes into play.

APY is the Annual Percentage Yield and is the same concept as APR except that it takes into account the effect of compound interest throughout that year.

*** WARNING : MATH AHEAD ***

Here’s the formula for computing the APY of a loan:

APY = (1 + periodic rate)^(periods) -1

in the example above, the periodic rate is 1% and the number of periods is 12, since the interest is compounded monthly and there are 12 months in a year. This makes the rate charged per month 1% since the APR is 12% per year (12% / 12 months = 1% per month).

So let’s look at the two costs of borrowing – the APR vs. the APY…

To keep things simple, we’ll assume a balance of $10,000 on the card carried for the year…

APR.

Computing the cost using just the APR gives us: $10,000 * .12 = $1,200 per year (or $100 per month).

APY.

Now running the same $10k through the Annual Percentage Yield formula [APY = (1 + periodic rate)^(periods) -1] gives us:
(1 + 0.01)^12 -1 = 12.68% OR 12.68% * $10,000 = $1,268 per year (or $105.66 per month)

So, what does this mean?

If a person has a balance of $10,000 on this credit card for a year, it’s the difference between what the offer leads him to believe it will cost and the actual cost is $68 per year, or $5.66 per month.

Not a big deal, right?

Maybe not for a $10,000 loan. But when you’re considering the cost of a mortgage in the hundreds of thousands things add up pretty quickly.

Note: These are simple examples to illustrate the difference between APR and APY and the importance of knowing which to pay more attention to when applying for a loan.

The other important thing to consider is what is this loan for?

Interest rates differ by loan type.

It’s impossible to answer the question of “what’s a good (or bad) APR” because there’s no context given. Is this a loan for a new car, a credit card or a mortgage?

For credit cards, 16% may be average but if you have excellent credit you may get an offer for 8%. While the 30-year mortgage rate is currently at historic lows of 4%. New car loans may be as low a 0% for certain models, or as high as 10% for borrowers with a poor credit score.

If you take away only 2 things from this article, make it these:

APR is relative to your credit score and the type of loan
APY is really a better gauge of what you’ll pay than APR.

In the end, shop around and compare by APY whenever possible.

Further recommended reading: APR and APY: Why Your Bank Hopes You Can’t Tell The Difference

Who are The Rich in America Today? Introducing The Frugal Rich.

Joe — Wed, 07 Sep 2011 17:51:39 +0000

Who are The Rich in America today?

Most of the wealthy in America are 1st generation wealthy, meaning they earned their wealth and didn’t inherit it. So who are The Rich? They are mostly entrepreneurs and small business owners.

According to Thomas Stanley and William Danko, “Wealth is what you accumulate, not what you spend.”

Stanley and Danko are the authors of the fascinating book, The Millionaire Next Door (Surprising Secrets of America’s Wealthy), and they’ve made a study over the years of the habits of the wealthy in America.

What they learned about America’s wealthy is summed up in this quote from the book:

“It is seldom luck or inheritance or advanced degrees or even intelligence that enables people to amass fortunes, wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self discipline.”

There are many lessons in this book, and that quote touches on a few of them. The most important lesson is that you don’t need to be born into the right circumstances to become wealthy. It sometimes takes luck, but mostly takes self discipline and perseverance. In short, stop finding excuses – you too can become rich!

I know, that probably sounds a bit like an infomercial for some get rich quick scheme, but it’s not. They never say you can do it over night or that its something you can do on the weekends in your spare time. Quite the contrary. It takes years of planning and discipline, but that’s not to say it takes as much as a career or full time job. You just need to have a plan and keep at it.

OK, enough cheerleading about how you can do it… let’s answer a basic question: What is wealth?

The definition of wealth.

Wealth can be defined in many different ways, but in its most common use it equates to a person’s net worth. That is, the value of everything a person owns, minus what a person owes.

That’s overly simplistic, but you get the idea. Having a fancy Mercedes Benz in the driveway doesn’t make you any more wealthy if you owe more on the loan than the car is worth… or if you’re leasing it and don’t actually own it at all. That’s because the car is a liability, not an asset. An asset is something that either puts money in your pocket, or can be sold to generate cash. A liability is something that costs you money.

But there’s a difference in assets too. Some are liquid, and some are not. Stocks for instance are generally more liquid than real estate, since you can sell a shares of a stock much easier than you can a house.

How the wealthy view (and use) money.

The wealthy get rich by maximizing their return on investment. They may still spend big bucks on discretionary items, but they view those purchases as investments, not mere expenses. They are more apt to maximize quality and value, regardless of price. But that’s not the same as buying expensive name-brand merchandise for the sake of owning expensive name-brand merchandise. This has especially been true of the rich during the recession.

There are definitely plenty of people with money who act rich, but when their finances are viewed more closely it’s clear that they are only suffering from Affluenza (The All-Consuming Epidemic).

Don’t be one of them.

The rich and debt.

You may think that the wealthy eschew debt and pay only in cash, but that turns out not to be the case entirely. Stanley and Danko found that most American millionaires tend to pay for large ticket items like cars, homes and boats with cash and to the extent that they use debt it is for investment purposes. This is likely a big difference between the middle class wage earner and the millionaire, but if the wage earner can get to a point where he can buy those big ticket items without debt, then he’s well on the road to a more financially free lifestyle if not the road to riches.

Tips for increasing your wealth.

OK, enough about how we’re different from the rich. Here’s how to become more like them financially:

Don’t look to debt to fund your lifestyle – this includes getting a college degree. Going $30,000 into debt for a degree and getting a job with an income ceiling of $30,000 probably isn’t worth it in the long run.
Have cash on hand to cover your unexpected expenses (emergency fund).
Live below your means – spend less than you earn and avoid Lifestyle Creep !
Plan – plan for today, tomorrow and 30 years after retirement.
Diversify – invest in mutual funds and bonds, not just cash. Add exposure to commodities and real estate.
Don’t use credit for purchasing – unless you can (and do!) pay off the balance each month!

If I had to distill the lessons learned in The Millionaire Next Door into one simple concept it would be this:

Break out of the debt cycle; plan, save and work to avoid going into debt for any reason.

If you master that, you’ll have the tools and resources on hand to accumulate wealth instead of payments.

Source

U.S. Debt Comparisons (infographic).

Joe — Wed, 31 Aug 2011 17:35:10 +0000

I don’t have a lot of time (still cleaning up after our messy houseguest, Irene) so here’s a quick post… the U.S. National Debt – in pictures!

In case the sheer magnitude of the U.S. deficit was lost in the political circus that was the “debt ceiling crisis” of the summer of 2011, here comes an excellent site to bring it into focus.

They start with a $100 bill, then jump to $10,000 and so on, all the way to the $15 trillion deficit that the big spenders in Washington D.C. will hit by years end. It doesn’t stop there though, it keeps right on piling up to the $114.5 trillion (unfunded liability) skyscraper that would dwarf the World Trade Center.

(click for larger view)

That $114.5 trillion is all the promised entitlements (social security, medicare, medicaid, Obamacare, etc..) that the government does not have the money for.

We can argue about the specifics of the metrics used for figures like the above, but just consider the $1 trillion graphic for a moment. The Obama administration has run a yearly deficit of *over $1 trillion* since taking office. That’s more than enough $100 bills to fill a football field – every year !

(click to view larger image)

And yet the political class insists on pretending they don’t have a spending problem.

Courtesy of Kleptocracy.us

Does Paying Old Debts Actually Hurt Your Credit Score?

Joe — Mon, 01 Aug 2011 16:55:09 +0000

This is a common question, as well as a common misconception. The short answer is “no”, paying off old debt does not hurt your credit score. It also doesn’t improve your credit score that much either. Here’s why..

Once a debt hits the 180 days past due mark, it is recorded on your credit history and carries forward as a negative mark for 7 years. Nothing you can do will remove this prior to that 7 year expiration, so in effect the damage has already been done. Paying off that debt is the responsible thing to do, but you won’t be rewarded with a higher score for doing so. It does look better to lenders that you paid it off however, no matter how long it took.

So for debts 180 days past due, it’s better to pay them than not but don’t expect a big bump in your score for doing so.

The underlying reason for this is that creditors weigh your ability to remain current with your bills more than your ability to pay them back eventually. The better way to improve your credit score is to remain current on your debt and pay your bills on time. If you’re just focusing on paying off debt and some of it is past 180 late, then start at the most recent or current debt and work your way back, paying off the 180+ days late debt last.

Here’s an accompanying video clip in which Farnoosh Torabi, Jean Chatzky and David Bach field this question and more. (feed readers may need to view the complete post to see the embedded video)

Visit msnbc.com for breaking news, world news, and news about the economy

3 Types of debt consolidation.

Joe — Wed, 06 Jul 2011 18:07:31 +0000

What does debt consolidation mean? The term seems to have different uses among different people, but here are 3 different types of debt consolidation.

Debt consolidation loan

When most people talk about debt consolidation, they mean a debt consolidation loan. Find out more what a debt consolidation loan is here.

If, for example, you owe money on two credit cards and a loan, it may be better to take out one large loan, big enough to pay off all three debts at the same time. That would leave you with one payment to make every month instead of three.

Making one payment every month is just easier than arranging and budgeting for three separate payments – and you will only have to deal with one creditor.

You could even reduce the amount you pay every month if your loan has a longer repayment period. However, paying off your loan over a longer period could also increase how much you pay overall, due to interest.

Anyone interested in debt consolidation loans could try an online debt consolidation calculator. They help you to estimate your monthly repayments once you’ve entered a loan amount, interest rate and repayment period.

If your earnings change from month to month, or you’re not sure you’d be able to make regular repayments, you might find a different approach is more appropriate.

Balance Transfer

Another way to consolidate debts, which can work well for credit card debt, is to transfer multiple debts onto a 0% credit card. ‘Balance transfer’ cards don’t charge interest for a set period, after which time the card starts charging interest.

For that reason, a balance transfer could be ideal if you are able to clear the balance before the interest-free period ends. Otherwise, it may be possible to transfer the balance to another interest-free credit card. However, you’d normally be charged a transfer fee each time, something like 3%. For large balances, that could be quite expensive.

Other forms of debt consolidation

There are other ways of consolidating problem debts into one monthly payment without borrowing any more money. These include IVAs (Individual Voluntary Arrangements) and debt management plans.

Useful websites:

This is Why Most American Millionaires Did Not Inherit their Fortunes…

Joe — Fri, 24 Jun 2011 19:55:56 +0000

It’s a common misbelief that many of the wealthy in America inherited their money. In fact, most of the wealthy in America are entrepreneurs. Warren Buffett and Bill Gates are two of the most well known and celebrated self-made men of modern times.

Still, you would think that the children of such successful entrepreneurs would increase the other side of the statistic, and over time more of the wealthy would be those who had inherited their wealth. Why doesn’t this happen?

Well, I came across this article today that does a good job of highlighting some of those who’ve inherited their wealth, and what typically happens to them.

It’s about Patricia Kluge who has filed for bankruptcy. She “once hosted parties for ‘royalty, corporate chieftains, celebrities, and literary figures.’ She lived in a 23,500-square-foot mansion, owned a winery and, by all accounts, lived the good life.” Sounds like the picture of success, right? So what happened?

Like every person who inherited their wealth, she never earned it! It seems she was famous for being “the wealthiest divorcee in history.”

Inheriting your wealth is a lot like winning the Lottery. You wake up one morning and BAM! you have more money than you know what to do with. But since you didn’t have to work hard to earn it, you don’t know how to properly manage it and how precious it is.

The article also mentions Barbara Hutton, heiress to the Woolworth fortune. She was involved in a string of serial marriages (including actor Cary Grant!) and lost everything due to poor money management, and bad advice to die at the age of 66, with $3,500 to her name.

Johnson and Johnson heiress Casey Johnson also lost everything by the time she died, cut off from the family fortune and owing more than $100,000 .

Athletes and entertainers also belong to this group, though at first glance you’d think they don’t since they didn’t inherit their fortunes. But does anybody seriously believe for a minute that the M.C. Hammer’s, Michael Jackson’s and Lady Gaga’s of the world earn the money they make? Are they really worth that kind of wealth? Of course not. They simply hit a fad in the right place at the right time and became mega-stars. Next thing they know, BAM! a pile of money falls into their lap.

But they too lack perspective on creating wealth, have little to no clue how to manage money and often go broke soon after hitting their peek.

This, my friends, is the future of Paris Hilton as well.

As for Kluge, one final piece of irony: she is now employed by the winery she once owned. Maybe now she’ll learn a thing or two about earning and managing money.

Consumers changing their spending habits.

Joe — Fri, 03 Jun 2011 01:00:37 +0000

According to a survey by insolvency trade body R3, over 80% of the British population have changed the way they spend their money over the last year.

More than half (51%) of the population aren’t buying as many non-essential items such as DVDs and clothes, while almost half (47%) said they are now shopping around before they buy something to make sure they get the best deal. Just over one fifth (22%) said they no longer purchase non-essentials from specialist retail chains – they buy them in the supermarket instead.

The findings of the research revealed that women are ‘leading the charge’ when it comes to cutting back on spending – with more women switching to ‘value’ or own-brand products (42%), compared with 32% of men.

Almost half (44%) of women have started using discount vouchers when they go shopping, with just 31% of men doing the same.

Meanwhile, nearly one quarter (23%) of women now set themselves a budget – whilst just 15% of men do the same.

Frances Coulson, President of R3, said: “It is encouraging to see that a considerable percentage of people are actively trying to lower their expenditure as this will help them to live within their means. However, it is a shame that budgeting remains quite low down on people’s agenda. Setting a budget enables you to clearly see how much you spend against your income. A budget is probably the most powerful financial weapon in the fight against debt and its value should not be underestimated.”

Budgeting – how it can help ‘fight’ against debt

After that comment about budgeting being a powerful weapon in ‘the fight against debt’, we’re going to take a brief look at how your budget could help you fight against debt.

Your monthly budget can allow you to see pretty much everything about your finances: where your money is coming from, where it is going – and more importantly, where you may be able to save money.

If, for example, you can see that you’re spending too much money on non-essentials, and can’t afford your debt repayments as a result of this… this can help you cut back and free up the money you need for your debts.

That’s one reason having a budget is so important in the fight against debt – because you can clearly see where you’re spending too much money and make the necessary changes yourself.

Sometimes, however, cutting back might not be enough… and your debts may start to grow and become unmanageable.

If you can’t afford your payments and it doesn’t look like cutting back will be enough for you, you may find that debt management is a suitable solution to your problem. This site explains debt management in more detail, but you could also speak to a professional debt adviser for some advice on what you could do to help your situation.

Debt management isn’t without its drawbacks – repaying your debt more slowly can cost you more in the long run, for example – but it could still be the best way for you to address your debts.

This has been a guest post from the folks at Debt Advice Now, who provide advice and a wide range of solutions for people in debt. Visit www.debtadvicenow.co.uk to find out more.

Dumb Money Tip from SmartMoney Mag.

Joe — Mon, 02 May 2011 17:00:52 +0000

Here’s a great example of how “smart” money people often get lost in the details, and make bad choices (or in this case, bad recommendations to people). I’m talking about a recent SmartMoney article where they espouse the virtues of borrowing from your 401k.

The basis for their recommendation that “never borrow from your 401k” is outdated financial advice is that they believe a 401k loan is:

“The most affordable loan available.”

This is true – up to a point. They’re mostly just looking at interest payments, and ignoring all the other effects and risks of a 401k loan. When you simply examine the interest owed and compare that to other loans, then a 401k loan does seem like a clear winner.

According to the Profit Sharing/401(k) Council of America:

“Approximately 90% of employers offering 401(k)s permit employees to borrow from them, according to the PSCA, and the loans can last for up to 15 years.”

But just because you can do it, doesn’t mean borrowing from your 401k is a good idea.

Let’s look at this a little deeper..

Why borrowing from a 401k is a good idea (sort of)

The pundits at SmartMoney would have you believe that borrowing from your 401k is a smart money move, at least in the current economic climate. But does this really make sense beyond the simple comparison of interest paid after taxes?

Here’s SmartMoney’s spin:

“Advisers, for example, typically discouraged clients from taking a loan from their 401(k) – but this is now the cheapest way to borrow money, with the average rate at 4.25%, lower than most personal loans”

Their cursory comparison of interest breaks down like so:

Average credit cards interest rate: 14%
Average home equity lines of credit interest rate: 5.22%
Average 401k loan interest rate: 4.25% (“prime (currently 3.25%) plus 1%, “)

Some of their other arguments in favor of borrowing from your 401k are:

The money you pay the loan back with goes into your 401k, instead of to a bank.
Paying a 401k loan off is easier than other loans, because the contribution you would normally be making go toward the loan 1st.

Why a 401k loan is a bad idea

OK, so by those numbers, a 401k loan doesn’t seem so bad. But here are some things not considered:

Time stops working with you, and starts working against you. When you stop saving for retirement, you put that day you can retire further off in the future – lengthening the time you’ll need to work.
Increased taxes. You end up owing more in taxes due to the lost deduction when you stop contributing to the plan to pay off debts and other loans.
Decreased gains. You lose much of the gains in your 401k because you have less money “at work” compounding gains for you.
The entire loan amount will become due within 90 days should you leave your job or lose your job. Failure to pay that amount results in the outstanding balance being treated as taxable income and you get hit with an additional 10% early withdrawal penalty if you’re younger than 59 1/2.
Welcome to servitude. Besides the very real risk of losing your job in a high unemployment environment, this is in effect making you even more of an indentured servant to your employer as you lose a significant amount of job flexibility. You will not be able to take a new opportunity at another company without a financial penalty (see above) if you cannot pay back your 401k loan in full first. Think about that.

Final thoughts

Well by now you can tell I’m no fan of 401k loans, but like so many things in finance there is no hard-fast rule here. Borrowing from a 401k may make sense for some people in dire straights, but even considering such a move should be viewed as a sign that you’re on shaky financial footing.

To me, a 401k loan is a last resort and even then only to be considered along with some serious soul searching and self evaluation as to how you got in the situation where this even sounds like a good idea to begin with.

The SmartMoney article claims that:

… right now, the cheapest bank for many borrowers—especially those who feel secure in their job–is their own 401(k).

But who really feels secure in their job right now?

They also say that you’ll be paying yourself back with interest instead of paying a bank. The implication here is that a bank would just be taking your money for profit in form of interest, while interest paid on a 401k loan is money in your pocket. But with a 401k loan I think you’re really only stealing from your future.

Besides the financial penalties discussed above, borrowing from your 401k sets you back on the road to retirement and for many people that leads to increased risk because they feel the need to “make up for lost time” and invest in more aggressive (i.e. risky) funds then they should.

Still, if you find yourself in a position where you’re being crushed with high interest debt and your retirement savings are at risk anyway (perhaps through a divorce settlement?) then it may be the path of least pain and get you back on the road to retirement quicker. Just think over the implications first.

Are GOP Spending Cuts Too Extreme?

Joe — Mon, 04 Apr 2011 17:01:52 +0000

Chuck Schumer let the “secret” slip in a recent phone call:

“I always use the word ‘extreme’; that’s what the caucus instructed me to do the other week.”

It’s not really a secret, after all Democrats have been calling any proposed spending cuts ‘reckless” and “Extreme” for weeks or more.

Democrats are trying to tag any Republican proposed spending cuts as extreme, and they are resorting to everything from the usual fear tactics to the outright absurd.

Democrats have offered a $33 billion compromise and are simply not serious about real reform.

Meanwhile, Republicans don’t seem to be that serious either – bickering over a meager $6 billion in cuts.

That was the continuing resolution passed in mid March. The cuts currently being proposed are in the $61 billion range.

To put this in perspective, let’s look at the GOP proposal, the Democrat compromise, interest on this year’s debt, the deficit and the overall spending for the 2011 fiscal year:

As you can see, it’s all peanuts. If you could add the GOP cuts and the Democrat compromise together it wouldn’t be enough to make the interest payments. Compared to the $1.64 TRILLION deficit, the cuts are almost non-existent. Yet somehow we’re supposed to believe these cuts would do serious harm to the country?

Mind you – this is all over this current year’s budget… the budget that should have been passed at the end of last year by the 111th congress.

When you consider the above, and you look at how the federal deficit has grown over the last 5 years you see that it’s not the cuts that are extreme, but the spending.

In my opinion, extreme situations call for extreme measures. Washington has been spending money on a level that would embarrass even the proverbial drunken-sailor for the better part of a decade. It is unsustainable and perhaps the biggest threat to personal freedom and the American way of life we face, and if our congress men and women don’t get serious about cutting the size of government soon, we may well indeed be looking at the end of the American way of life generations before ours enjoyed as more and more people need to work simply to support government spending, rather than enjoying the fruits of their labor.

Could You Erase $70,000 in Debt in 1 Year?

Joe — Sat, 02 Apr 2011 00:00:40 +0000

Kiplinger.com recently profiled a young woman who was determined to wipe out her $70,000 in debt in order to stay at home and start her family. As regular readers of this blog know, I am a big supporter of living on a single income to raise a family. That being said, I acknowledge it is a lifestyle choice that is not for everyone.

But the fact remains that getting out of debt is always a good thing, and it’s especially helpful if you do need to live on a single income. After all, when a sizable chunk of your income is going toward paying off your lifestyle of the past it leaves you somewhat handcuffed in times of emergency or financial hardship.

So, how did Jaime Tardy (the woman in the Kiplinger article) accumulate her $70k in debt? Well, it broke down like this:

About $26k in student loans
$25k home equity loan
$20k car loan

Looking at the breakdown of her debt, it seems to me like a fairly average breakdown for most people.

Her secret to getting out from under all this debt – and gaining a $23,000 surplus in savings?

Hard work, downsizing and determination to doing what it took.

That’s it folks. It’s not Rocket science. Getting out of debt is simple, but that doesn’t mean it’s easy. Jaime and her husband took on extra work where they could. The downsized their lifestyle by trading in their new car for a used car, canceling the cable and cell phones. They then took all the money they were saving and the extra money they were making and whacked off the debt.

While my wife and I were (thankfully) never quite so far in debt when we decided to get our financial house in order, we followed many of the same steps. We’ve cut our cable bill by $40 a month, traded our costly monthly cell phone plan for a pay-as-you-go Tracfone and bought a used car instead of a new car when we needed something bigger for the expanding family.

It’s not always easy, but it can be done. It’s amazing how much you can do when you put your mind to it and you realize it’s for a short period of time. And chances are, after that period of time where you’ve cut costs and busted your rear to make that extra you’ll discover you’ve changed your whole outlook on money an materialism. You’ll likely discover you’ll lead a simpler, happier life as a result

You can follow Jaime on her new goal of amassing $1 million on her blog: http://www.eventualmillionaire.com/

Is Your House More Important Than Your Family?

Joe — Mon, 28 Mar 2011 18:31:54 +0000

Pop quiz: What’s more important, your home or your family?

I’m not going to pretend that this is one of those trick questions designed to make you consider your priorities in life and there’s no right or wrong answer.

There is definitely a right and wrong answer here.

Check out this AP article about a Nevada family’s everyday struggles amplified by Poor Choices.

The AP tries to make the case that Tera Berbank and John Clark are in the dire financial straights they’re in because the state of Nevada is nearing an economic depression , but that’s only half of the story.

The economic state of Nevada makes the couple’s situation harder, but it is only part of the problem. The rest of their problem is poor priorities and bad choices.

Priorities

For Burbank, surviving means ensuring her children’s success and protecting the one place they could ever call home.

“It’s our everything,” said Burbank, 34, of the family dwelling. “They can take the car and we will eat cat or dog food. Come what may I’ll keep that house.”

There’s a case of priorities that are way out of line. If you’re OK with your kids eating cat food just so you can keep your house, you need to seriously re-evaluate your situation.

She may think she’s “ensuring her children’s success” but her children’s performance in school tells a different story:

The oldest daughter, 14-year-old Brooke, earned D’s and F’s at school. Amalea’s guidance counselor asked about problems at home.

It looks like their current path isn’t working. In the article, she talks about the impact of the family financial situation on her marriage, and it isn’t pretty. She wonders how long it will be before they get a divorce.

Bad choices

Her poor choices started when she was young – she dropped out of school at 14. Fast forward to 2009, and she and her now husband were married and bought a new home. The home they bought wasn’t ridiculously expensive. It was about 2x their combined annual income, which is well within the usually recommended norm. It obviously turned out to be a bad time to buy, and especially in Nevada. But what made this even more risky was the fact that both she and her husband worked in construction.

I don’t mean to come down too hard on her because she made some bad choice early in life, Everybody makes mistakes. But when I read stories like this I always put myself in that position. I ask, “What would I do if I woke up one day in this life?”

In short, what I’d do in this situation is everything I could to ensure the survival of my family – as a family.

I’d say “to hell with the house”, find out where there were jobs and what kind of jobs they were – and move there. I wouldn’t care if it was in another state. I wouldn’t care if I had to lose everything and start over – as long as my family was together and I was doing what I could to provide for them. But that’s just me.

Instead, Tera Berbank seems focused on doing everything she can to hold onto her house, which she will likely lose along with her family.

If this is truly representative of America today, then we are in dire straights indeed.

Let this be a wake up call.

Let this be a reminder that an education is as important as location when it comes to finding and keeping a job.

Let this be the motivation we need to put a financial plan in place.

Which is Larger: Your Credit Card Debt or Your Savings Account?

Joe — Sat, 26 Mar 2011 18:21:58 +0000

Here’s an interesting infographic from BankRate.com that shows a slim majority of respondents have a larger emergency saving fund than a credit card balance, but it’s not all good news.

For example, it’s kind of frightening to me that 6% have no idea! How do you not know?

I find it interesting that a very clear majority (59%) of those under 30 have a larger emergency savings fund than credit card debt. It certainly seems that this younger generation does not share it’s parent’s love of leverage.

What do you think of having no debt and no savings? Is that better or worse than having more credit debt than savings?

It’s encouraging, but there is a lot of progress to be made, as Greg McBride says.

Debt Collectors Using Facebook to Collect!

Joe — Mon, 14 Mar 2011 17:19:54 +0000

Debt collectors using Facebook seems to be all the rage, and it seems to be causing some rage too. While they are legally able to contact you online and even use your friends, family and employer network to find you, there are rules on how and when they can do so.

Rules for Debt collectors using Facebook

A debt collector’s rules of engage for Facebook are similar to their rules for contacting and collecting debt outside of the digital realm.

Debt collectors rules for real-world contact:

Collection agencies are not allowed to call you between the hours of 9PM and 8AM.
They are prohibited from using abusive and threatening language.
Collection agencies must contact you only in writing if you make such a request.
If such a request is made by your lawyer, then the collector must communicate exclusively with him from that point on.
If asked, they are not allowed to contact you at work.

Rules for Debt collectors using Facebook :

Any debt collectors using Facebook must disclose who they are and why they are contacting you. They cannot contact you under false pretenses.
They cannot disclose the details to your friends. Debt collectors using Facebook can contact your friends and family in an attempt to locate you, but they are prohibited from revealing that they are trying to collect money from you.
Once they locate you, any contact with your friends and family must cease (unless they are co-signers and liable for the debt being collected).
Debt collectors using Facebook are required to provide notice in writing within five days of contacting you of the debt owed; the amount of debt and to whom it is owed.

Final thoughts

Just as there are ways top deal with debt collectors when they come calling, there are ways to deal with then in cyberspace too. In fact, the best thing to do with debt collectors using Facebook to contact you or your family and friends is direct them to contact you through snail mail and not Facebook at all.

Communicate in writing, preferably through a lawyer. If you can’t afford a lawyer or want to try dealing with them yourself, make sure you deal with debt collectors the right way, and know your rights.

Often times, just making them aware that you know your rights – how they can and cannot contact you – is enough to keep them in line. Other times, you may need to sue them for their illegal practices. Either way, if the debt is yours, then so is the responsibility to repay the debt.

Source

JaMarcus Russell About to Lose his Mansion to Foreclosure.

Joe — Tue, 08 Mar 2011 18:46:31 +0000

I don’t know if this is a sign of the times, or more just a commentary about how money alone does not solve problems, but JaMarcus Russell is facing foreclosure on his $2.4 million mansion.

According to TMZ:

” If he doesn’t pay the $195,512.05 he owes in the next three months, he’ll lose the house.”

This is a guy who signed a $32 million guaranteed contract in 2007, and now he’s broke? Well, he’s behind on his mortgage payments. The article doesn’t say he’s going bankrupt. So he either cannot afford his lifestyle, or he’s choosing to walk away from his mortgage obligation. One is the result of poor financial skills, while the other is irresponsible.

It’s probably a little bit of each. He could probably cough up enough to pay the mortgage, but he just doesn’t want to. Still, it never ceases to amaze me how celebrities can blow through millions like it’s chump change and squander an opportunity most Americans would do almost anything for.

Don’t Let Credit Card Bonus Offers Turn Into Debt!

Joe — Mon, 07 Mar 2011 16:16:13 +0000

For many, credit card bonus offers can be a great perk but they can also be the gateway to debt.

Have you ever bought something at the store because you had a coupon for it, only later to realize you don’t really need or even want the product? Well, it’s not only the retail industry that uses this technique, but also credit card companies. As we all know, they frequently offer miles, points or cash back to try and get you to apply. Both major and store credit cards do this.

But do thses credit card bonus offers ever make sense or are they just a debt trap? Well here are three questions you should ALWAYS ask yourself beforehand…

3 Questions to consider before accepting those credit card bonus offers.

(1) Do you always pay your balance in full every month?

If your answer is “no” then you can go ahead and skip the next two questions, because I can tell you right now that credit card bonus offers are something that you should 100% completely avoid. If you are the type of person that is prone to getting into credit card debt, then it would be pure stupidity to sign-up for “10% off today’s purchase” or “$50 cash back” only to be left with a piece of plastic that will tempt you day in and day out to spend beyond your means. In a nutshell, credit cards don’t make sense if you are someone that uses the “credit” part of them!

(2) Why do you want the offer?

Just like the coupon example I opened with, some people signup for credit card bonus offers when they don’t really even want the card to begin with. This is worsened by the fact that we get pressured to apply at a very inconvenient times. Airlines do this – they set up their booths in the terminal, hoping you will make a rash decision and signup without missing your flight. Department stores do this – they ask for you to apply at the spur of the moment during checkout.

I give people a simple litmus test to gauge whether they should signup “How long have you wanted this card offer?” If the answer is 2 minutes, then they obviously haven’t had time to think about it. However if they’ve been deliberating for a while, then that’s a healthy sign. And sometimes, credit card bonus offers can be beneficial.

For example, my mom and I have been planning a trip for this spring and have been keeping our eyes and ears out for ways to reduce the cost of it. We had come across the Hyatt credit card offer last September which seemed good – we figured we could use the two free nights at Hyatt and then stay the other four nights at a different hotel more appropriate for our budget (like Super 8 or a local motel). But even though we both initially liked the idea, we thought about the Hyatt credit card for three full months before actually signing up for the offer. I think when in doubt, you can never take too long to make your decision with finances.

(3) Will the credit card cause you to spend more?

Getting 5% cash back, double miles, or whatever the reward may be won’t actually save you money if it causes you to spend more. For example, will higher rewards at the grocery store cause you to buy things you normally wouldn’t? Or would 5% at drugstores cause you to go to Rite Aid to buy your toothpaste and shampoo, instead of going to Target or Wal-Mart where you can get it significantly cheaper?

The bottom line is that the rewards from credit card bonus offers only make sense if you are earning them on purchases you would be making regardless. This especially holds true for airline cards – they typically give 25k miles at signup but often times you may need 25% to 50% more miles than that just to get one flight. Will that deficiency cause you to spend extra? If it will, then you shouldn’t have the card!

Conclusion?

For the right person, credit card bonus offers might make sense in certain situations. For many others, it is nothing more than a hook, line and sinker that leads to debt. Make sure you know what category you fit into before you ever bite the bait!

EDITOR’S NOTE: The following is a guest post by Michael, who runs CreditCardForum.com, which is a forum and blog about credit cards. On the topic of debt, he recently wrote a post about credit card default consequences.

Ron Paul on the Game The Federal Reserve Plays, and Why. (VIDEO)

Joe — Fri, 04 Mar 2011 18:20:42 +0000

Ron Paul on the Game The Federal Reserve Plays, and Why.

Ron Paul is obviously not a fan of the U.S. Federal Reserve. In fact, you could say he wrote wrote the book on why we should end the fed. I’m not a big supporter of Ron Paul on some issues, but he’s sounding more and more like a lone voice of sanity in an increasingly financially insane world.

Here’s a video where Ron Paul talks with Fox Business’ Judge Andrew Napolitano about debt, deficits, taxes and more. The first half of the interview focuses on the economy, federal reserve money policy and inflation (i.e. why the Fed seeks to create inflation, and how we all pay for it). The second half is where he loses me. That part of the interview focuses on foreign policy, and we part ways when he claims that Iraq is a failed state with a U.S. puppet government (Iraq is one of the few Mid-East countries to hold actual elections, for crying out loud!).

Anyway, love him or hate him he offers some food for thought.

Simple Debt-Free Finance » Debt

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Priorities

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Let this be a wake up call.

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Final thoughts

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Don’t Let Credit Card Bonus Offers Turn Into Debt!

3 Questions to consider before accepting those credit card bonus offers.

(1) Do you always pay your balance in full every month?

(2) Why do you want the offer?

(3) Will the credit card cause you to spend more?

Conclusion?

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