Monthly Archives: May 2016

download (21)Christmas and holiday spending can be brutal on any household budget, considering most families significantly overspend during the holiday season. It is estimated that the average American household has more than $8000 in credit card debt. After all the fun and festivities are over, you should take control of your household budget and expenses. Unfortunately, one of the biggest yet most controllable expenses for most individuals or households is their revolving debt. The payments may not only handcuff your spending ability, but they can limit your financial options to purchase a car or house. In order to escape from the trap of credit card debt, you will need to determine the best way to pay down and eliminate your debt. The following is a list of suggestions on how to pay down your debt and improve your financial situation.

• Collect Your Information - Gather your last pay stub and all your latest credit card statements. Write down the name of the creditor, balance, interest rate, due date, and the minimum payment for each card. Then add up all the minimum payments for each account. Based on your disposable income after you pay your mortgage, utilities, and other necessities; do you have enough money left over each month to make the minimum credit card payments? Also, write down how much interest you are paying monthly and annually. This is the amount of money that is being wasted.

• Make a Plan - Once you have a basic budget that includes your income and debts, you can then decide if you want to consolidate your debt, start to reduce your debt by paying off the cards with the highest interest rates first, or start by paying off the cards with the lowest balances first. Choose a plan you can stick to, no one knows your financial situation better than you do.

• Consolidate Your Debt - Turn your revolving debt into a term loan. If you close your credit cards after consolidating them, you will no longer have the ability to add to your debt. Also, part of your payments will be reducing the principal balance of your debt, unlike minimum credit card payments that are usually just paying the interest on the outstanding balance. Therefore, you will be paying down your debt and the consolidation loan should be paid off within a certain number of years. If you are financially capable, it would benefit you to make more than the minimum payment, thereby reducing the principal balance on the debt faster. If you decide to consolidate your credit card debt, take the time to thoroughly compare your options and shop for an interest rate that is lower than your credit card interest rates. Also, set up an automatic payment arrangement for your consolidation loan. This will prevent you from falling behind in the payment and potentially facing penalties and/or a higher interest rate.

• Debt Settlement - This is the program that is an alternative to bankruptcy. When you go through your finances, if you find out that your monthly payments exceed your financial ability, you will need to seek alternative options, such as: working with a financial institution to consolidation your credit, discuss your options with a bankruptcy attorney, or talk to the credit card companies directly to reduce the principal balances owed on your debt.

• Stop Charging - Once you make your plan to pay off your debt, you will need to be committed to stop charging on your credit cards and creating new debt until your finances are under control. Your plan will not work unless you reduce your spending.

Taking control of your finances may create short-term hardships and limit your ability to purchase items over the next few years, such as: a new car, new house, or a vacation. Nevertheless, it is imperative that you control your spending, so you can improve your finances and get out of debt. Once your debt is paid off, you will have a significant increase in disposable income. In addition, you should have higher credit scores and a lower debt to income ratio; therefore in the future, you should qualify for preferential rates on auto and home loans.

images (18)You may ask - what is the difference?

"They are the same thing - loaning money I don't have - I'd rather not risk my lifestyle having a debt!"

The best way to define a "bad" debt, is when you borrow/ leverage money to purchase something that generates a loss (also known as a liability). A good example of this is a car, flat screen TV or a doodad, simply because they depreciates in value. The best way to define a "good" debt, is when you borrow/ leverage money to purchase something that generates profit (also known as an asset). A good example of this is an investment property.

Most people generally tend to have more bad debt than good, such as;

- Credit cards
- Car loan
- Personal loan
- Holiday finance
- White goods finance

Sounds familiar doesn't it! Don't get us wrong, it's not an offence or anything, but keep this in mind - by decreasing these debts, you are more likely to steer yourself in the right path of financial success.

On the other hand, some people think having a debt is a taboo/ sin/ whatever they want to call it - so they don't believe in buying a property until they have earned their money to pay their house in cash. That can do - it's just going to take them longer that's all. Yes, debt is a risk, it is leveraging the bank, and you may not be able to repay that if you quit/ lose your job.

That's why without a doubt, you must budget. Manage your finances as early as possible. Good debts are risks worth taking, so you can generate more income. If you don't take the risk, you won't know what you can achieve.

Likewise, bad debts are risks too. Having them might be inevitable but sometimes you can prevent it! A simple formula to avoid bad debt is: if you can't afford it, don't buy it.

If you decrease your "bad" debts the banks are actually more likely to provide you with "good" debts such as home loans, which if you use correctly, will grow your wealth.

TIP: Chat with a mortgage broker about your ability to leverage "good" debt. They should let you know if your level of "bad" debt is acceptable to the banks or not, and how to get rid of these as soon as possible.

images (19)It certainly isn't hard to get into debt today. Businesses create compelling ads that entice you into buying things you don't really need. Paying cash is a thing of the past. Items can be easily purchased on credit or debit cards, either in person or on-line. This results in careless spending and improper financial planning that can quickly throw you into the debt trap. Then once you are caught, it is very hard to get back on track again.

Why do so many people get caught in the debt trap? This is mainly because we have developed an entitlement mindset and believing that we deserve to have everything we want. We don't even need the cash to cover our purchases, all we have to do put it on our credit cards and pay for it later. Sometimes we even ignore the needs of our families and waste money on things we don't need instead of paying for important things like bills and groceries.

We continually hear these statements: you deserve the best, shop till you drop, just charge it, treat yourself, pay later. What sounds like a good idea ends up becoming a burden when the credit card statements come and there isn't enough in our bank account to cover the minimum amount.

Have you ever considered how much money you spend on stuff you don't really need? There is a huge difference between needs and wants. We might really believe that we need something when in fact, we really don't need it, we just want it. Here is a quick list of some costly wants:

  • COFFEE - If you buy 2 coffees a day costing $1.60 - in one year you will spend $1,168.00.
  • EATING OUT - If you eat out at a restaurant once a week and spend $80.00 - in one year you will spend $4,160.
  • TAKE OUT - If you bring home food once a week and spend $40 - in one year you will spend $2,080.
  • CLOTHING - If you buy 1 new item of clothing each week and spend $50 - in one year you will spend $2,600.
  • GROCERIES - If you buy extra snacks, sweets and treats each week when you buy groceries and spend $40 - in one year you will spend $2,080.

If you total all these things, they come to over $12,000! Yikes. This could buy a car, a down payment on a house or even be saved towards the future.

Think about the things that you buy that are totally unnecessary. It may not seem like you are spending much money at the time, but it really adds up. Don't put yourself in debt over unimportant things. Digging yourself into debt is not fun and it takes a long time to recover. Make sure you are spending your money wisely. Don't get yourself into a debt trap.

 

images (17)Getting out of debt is on the hotlist of New Year's resolutions for so many people, yet there always seems to be something standing in the way of truly eliminating mounting debt. The car needs repairs and so does your home. Your kids always need school supplies and new clothes constantly as they grow. Don't forget retirement savings and pet food for the dog; insurance bills, medical bills and the like. Where does all the money go every month? If you're like most people, getting out of debt seems endless and daunting. Debt can sometimes be so overwhelming that we get stuck in indecision, which, by the way, is also a decision. Don't give up. There's hope and help, but it's up to you to find the right direction that will save the most time and money.

If you want to achieve a goal; if you really want it, you will get there. However, you also have choices on how you arrive at your destination. You can pay your debt off like a "gazelle;" you can negotiate and settle most past due debts directly with the creditor; refinance or consolidate all debts into one giant loan; or consider a bankruptcy option to help get there. Each of these options for eliminating debt has its pros and cons. The benefits are all the same, meaning that debt will be eliminated. However, there are landmines and pitfalls everywhere.

For example, paying off debt like a "gazelle" takes longer and costs more money, but there are bragging rights and pride in avoiding debt. Are you so proud to have avoided bankruptcy that you would spend tens of thousands of dollars and your future to get there?

Another example is that of debt settlement. Many good folks believe that settling past due debts is also another great way to avoid bankruptcy and get out of debt, but they are shocked when they receive a IRS Form 1099 for the cancelled debt. They work so hard to negotiate their debts, only to get a tax bill. Plus, the irony here too, is that the credit report may not be properly updated and debt settlement does not really help improve credit scores.

We know that life is a never ending cycle of your money seemingly running through your fingers. Isn't it time you put an end to the misery? My latest book, 5 Steps to Freedom From Debt is available on Amazon.com, but here are the steps outlined below:

1. Know the type and total amount of debt you owe

2. Set your financial goals

3. Explore all of your options for getting out of debt (including Bankruptcy)

4. Consult with your professionals

5. Make a well informed decision

These steps are important because so many people think that borrowing or cashing out retirement is an option for financial freedom, but they don't talk to their tax professional about the consequences of making such a choice to eliminate debt. Spending retirement savings to pay off debt is like stealing from grandma! Combining Debt into one giant loan seems to be another popular way that folks want to help them manage, and eliminate debt. The problem with rolling debt into a single loan is that it's more DEBT. So many honest folks will spend their future, or roll over the debt before tackling it with the bankruptcy option because they are emotionally attached to their credit score. However, when we look at all of the options for eliminating debt, we must ask ourselves, "Is this helping me get out of debt, or am I simply playing a "shell game" by shuffling the debt?"

My advice is consistent and simple, if it will take you longer than 5 years to get out of debt, you're wasting valuable time and money and it will take you longer to retire. To put it another way, every little thing you do financially, ends up having a compound effect on your financial future. If you're spending more than 5 years to get out of debt, you lose 5 years you could have been saving for that car, house, and retirement. You would never advise your friends to do that, so why should you?

Recently, Sally came in to my office for a consultation about her credit card debt. She was working hard to pay off her credit cards, but it seemed as if the balances never went down. For the past two (2) years Sally had struggled to keep up with minimum credit card payments and all her other bills, rent and food. I showed Sally how she could save $48,000.00 and eliminate her debt without making another single payment on it. Here's how:

Let's look at this from a numbers perspective:

  • $30,000.00 in unsecured debt at 18% interest with $500.00/mo. payments will take 13 years to pay off; paying a total amount of $78,000.00!
  • $30,000.00 can be FULLY paid in FIVE (5) years under a court ordered repayment plan in Chapter 13 Bankruptcy with a $500.00/mo. payments at 0% interest.
  • That same $30,000.00 can be discharged in Chapter 7 Bankruptcy with NO Payments. (Bankruptcy costs and Attorney fees vary)

Let's just focus on the difference between repaying all the debt using the "snowball" method and a bankruptcy repayment plan. The real difference here is the Eight (8) years of payments of $500.00/mo., which totals $48,000.00! So, the secret trick of facing shame and embarrassment will save both time and money.

Now imagine if you took the $48,000.00 savings and invested it in a mutual fund that earned 6% interest. After Eight (8) years, that amount would grow to be $63,744.82! The person that filed bankruptcy and fully repaid their debt in Five (5) years, who then took the $500.00 monthly payment, invested in a mutual fund that earned a 6% interest over the next eight years, not only paid off all their debt, but also made $15,744.82. Who does that? Those that take a different perspective to eliminating their debts; that's who!