No one can argue that college costs have become exorbitant. Even during the recent recession, schools continued increasing tuition. Student loan repayments are thus taking even longer to pay off, as college graduates are having trouble finding a decent job, or any job at all.

Amidst this gloom and doom, there is some positive news. President Obama seeks to accelerate changes to Income-Based Repayment, a student loan repayment program available for many federally-guaranteed student loans.

Geared for low-income families, the unemployed, and people with lower-paying, public service jobs in education or non-profit organizations, this program caps monthly payoff amounts at affordable levels relative to your income, family size, and the state in which you reside.

Currently, the IBR program forgives debt still owed after 25 years of consistent repayment, and caps payments at 15 percent of discretionary income. Under the President’s proposal, students who took out their first loan during or after 2008 and opened at least one additional loan during or after 2012 will see the cap drop to 10 percent and the forgiveness period reduced to 20 years.

This change would not only expand the number of people who are eligible for this program, but also make it even more useful to qualifying students. Is this a program that will benefit you? Here’s what you need to know.

Who is eligible for IBR?

This program is available to federal student loan borrowers in both the Direct and Guaranteed (FEEL) loan programs, and covers most student loans, with the exception of those made to parents.

This includes all Stafford, PLUS, and Consolidation Loans, but not ParentPLUS or Consolidation Loans containing Parent PLUS Loans. Private student loans don’t qualify for IBR. Bottom line: to qualify for a reduced payment, you must have enough debt relative to your income.

How are payment amounts determined under IBR?

This program uses a sliding scale to determine how much students can afford to pay. For example, if you have a family income of $40,000/year with four family members, you would pay 2.4% of your income towards student loans. That amount jumps to 8.9% if your household has only one family member.

If your income is $100,000/year and you have a family of four, you would pay 10% of your family income versus 12.5% if you were in a single-person household. Under this program, you are required to submit updated income documentation each year.

Obviously, the repayment amount will increase if your income rises.

What about interest under this program?

IBR typically extends the loan’s term, so be prepared to pay more interest than you would with a traditional 10-year payoff period. You should also be aware that, in some cases, the IBR payments may not cover the interest on your loans.

If this is the case, the government will pay interest on Subsidized Stafford Loans for your first three years in the IBR program. After this period, and for other loan types, interest is added to the total amount owed. Keep in mind that loan amounts still owed after 25 years of qualifying payments (or 20 years when the President’s IBR changes are implemented), are automatically forgiven.

What are IBR’s qualifying payments?

According to the Department of Education, payments that count toward IBR’s forgiveness period include payments made in the Income Contingent Repayment (ICR) plan before July 1, 2009; all payments made on or after July 1, 2009 in the IBR, ICR, and Standard 10-year Repayment plans; if your income is at or below 150% of the poverty level and you have calculated a payment of zero in IBR or ICR; and periods on or after July 1, 2009 if you have been granted an economic hardship deferment.

What are the advantages of IBR?

Not only will monthly payment amounts be less under IBR than under a 10-year standard repayment plan, but the government will pay your unpaid accrued interest on Subsidized Stafford Loans for up to three consecutive years from the date you began repaying your IBR loan.

In addition to having your loan forgiven after a period of time, if you work in public service, the IBR payments will count toward the required monthly payments for you to receive loan forgiveness through the Public Service Loan Forgiveness Program.

What are the disadvantages of IBR?

It’s important to note that you may pay more interest under this program, since it typically extends your repayment period. Also, you are required to submit annual documentation about your income and family size to qualify. If you don’t provide this, annual payment amounts will change to a 10-year standard repayment plan based on the amount you owed when you began repaying under IBR.

Your student loan servicer can provide additional information about IBR, including whether you qualify and how to apply.

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Despite high unemployment and lingering financial turmoil from the recent recession, American workers continue to earn pay raises each year. According to the Bureau of Labor Statistics, the typical worker earned an average pay raise of 1.9% last year, and they are on tap to earn a similar raise in 2012.

These annual pay raises will help wages keep up with inflation. While a 2% to 3% raise may not seem like a lot of money at first glance, it can equal $1,000 or more per year for a family earning $50,000. But the real question remains, what should you do with your new pay raise after you earn it?

If you do not take an active role in putting the money to good use, then you are more inclined to simply find it disappearing into your monthly budget before you can even realize the money is gone. Below are five ways to help you put your new pay raise to good use.

Pay off high interest debt

Using a new pay praise to pay off high interest debt is typically a wise move. Having credit cards that charge you 18% or more in annual interest can quickly start to add up. Paying off credit cards with a high interest rate with a pay raise is like earning the same amount from an investment.

If you were paying 18% each year in interest on a credit card and paid off that card with your new pay raise, it is just like having earned 18% annual rate of return on your money. While the stock market zigzags like a roller coaster, paying off your high interest debt can be as sure a return as possible.

Build up your emergency fund

One thing that I personally struggle with is having a fully funded emergency fund in place. Most financial experts recommend that you have three to six months of living expenses set aside in an emergency fund. What many people do not often realize is that six months of expenses is actually quite a large amount of money in many cases. It can quickly equal $10k-$20k for some families. Living on your previous income and saving your new pay raise is a great way to help boost your emergency fund if have not quite reached your goal of six months of living expenses.

Boost your retirement savings

Using your pay raise to build up your retirement savings can be a great plan. You have until April 15^th of each year to finish contributing to an IRA. If you receive a year-end bonus or a pay raise at the beginning of the year, you can put that money to good use by finishing up maximizing your retirement account contributions.

A pay raise is also a great way to build up to maximizing your 401(k) retirement plan contributions. In 2012, you can contribute up to $17,000 to your 401(k). That is a lot of money, especially if you are just starting out in your career. But, you can incrementally increase your 401(k) contributions each year until you reach your maximum contribution level. If your small increase is timed with your new pay raise you won’t even notice the difference.

Double check your insurance coverages

Do you have enough insurance coverage? Far too many people find themselves underinsured in many aspects of their lives. Do you have umbrella insurance to protect yourself from being sued? Do you have flood insurance on your house? According to FEMA, over 30% of all home damage from flooding occurred on homes that are not in a federally designated flood zone. Purchasing flood insurance if you live outside of a flood plain is very inexpensive. Spending money now on the proper insurance coverages can help you save on insurance in the long run.

Splurge on yourself a little

I am not talking about spending your entire pay raise by purchasing things for yourself. But, you did earn the money, and you should enjoy it. Many financial experts recommend taking a small portion, such as 10%, of your raise or any year-end bonus you earn and spending it on something for yourself. Doing so will help you stick to your other plans for the rest of the money. This is similar to having a cheat day on a diet. If you are too strict with yourself and how you spend your money, you will be more inclined to fall off the wagon and be resentful to your new financial goals.

Are you one of the lucky ones that will receive a pay raise this year? What will you do with your new pay raise? Will you just absorb it into your monthly budget, or will you use it to increase your financial wellbeing? Living on your previous year’s income and using your new pay raise to accomplish your financial goals is a great use of the new money. What do you like to do with a pay raise?

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There is not a month that goes by where I don’t receive a solicitation pushing for me to pay off my mortgage more quickly by participating in a biweekly mortgage payment plan.

You’ve probably heard that accelerating your mortgage payments can substantially reduce the amount of interest you’ll pay over the life of the loan. Even with today’s rock bottom interest rates, extra payments may make sense for you.

Unfortunately, many of the accelerated payment programs can be confusing, and companies may be exaggerating how much you can save over time. Given the number of options out there, it’s important to be clear what the terms are before making the commitment.

The three most common ways of accelerating mortgage payments are paying bimonthly, paying biweekly, and paying extra principal. Let’s look at each one.

Paying bimonthly. In this context, bimonthly means twice a month. With a bimonthly mortgage payment, a payment service takes half the monthly mortgage payment from your bank account twice a month, but payments are only applied to the loan once a month.

Paying biweekly. With a biweekly plan, you’ll pay half your monthly mortgage payment every two weeks. Since there are 26 biweekly periods a year compared with 24 bimonthly periods, biweekly schedules produce the equivalent of one extra monthly mortgage payment each year.

Paying extra principal. Each month you have the option of paying an extra amount over and above your minimum monthly payment. While your minimum payment goes to both principal and interest, any extra amount you pay towards principal further reduces the amount you owe, which reduces the amount of interest charged on all future payments.

What’s the difference to the bottom line? For our baseline, let’s start with a 30-year fixed-rate mortgage with a balance of $200,000 at 6% APR. In round numbers, if you made 360 minimum monthly payments of $1,199, you’d pay a total of $431,676 (principal and interest only, not including taxes and insurance). Now let’s see the effects of each type of accelerated payment program.

Bimonthly payments

In a true bimonthly (or semi-monthly) payment plan, you pay half your monthly payment twice a month. In our example, you’d pay $599.50 on the 1^st of the month and another $599.50 on the 15^th of the month. You’ll make 24 payments a year as opposed to 12, but your total monthly payment is the same, $1,199. As a result, your total payments are still $431,676.

Most true bimonthly programs simply hold your first payment until the end of the month and then send both payments to your lender at the same time. You won’t see much, if any, savings because the lender is still amortizing based on monthly payments. Your only benefit is the ability to split your mortgage payments each month, which might be better for your cash flow situation.

Biweekly payments

Paying biweekly (every two weeks) means you’ll make 26 payments a year instead of 24 (or 12), effectively making one extra mortgage payment a year. Assuming your lender credits the payments as they are received (for which they may charge a fee), the benefits are not only a faster payoff, but also lower interest costs over the life of the loan. If you get a paycheck every two weeks, it might make sense to time your mortgage payments to match.

In our same example, paying $599.50 every two weeks will pay off the 30-year mortgage within 24 years for a total of $382,094, or a savings of $49,582.

To experience the largest cost savings, this true or simple interest biweekly payment must be credited immediately upon receipt by the lender as opposed to once a month. Interest also must be calculated for two-week intervals and the biweekly payments less the interest must be applied to the mortgage amount in order to reduce its principal every two weeks.

Extra principal payments

Instead of signing up for an accelerated payment program, what happens if you simply make monthly payments and add something extra each month to pay down the principal? Using our same example, paying an extra $100 per month (one-twelfth the monthly payment) will pay off the 30-year mortgage within 24 years for a total of $382,538, which is very close to the biweekly option, but without the added cost of paying someone else to set up the program.

Before committing to any new mortgage payment schedule, it’s important to confirm, not only the payment amount and frequency, but also the timing of when the payment will be credited to the account, which will impact the interest payments over the life of the loan. By doing this, you can better determine the overall savings on your mortgage amount.

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Check this out… According to TransUnion, which is one of the big three credit bureaus, credit card delinquencies are currently at their lowest level in 17 years.

Surprised? I am. Given all the tight job market, stagnant wages, and increasing food prices (among other thing), I wouldn’t have expected it.

At the same time, however, more Americans are falling behind on their mortgages. According to Charlie Wise, TransUnion’s director of research and consulting, “Consumers are protecting their credit cards. It gives them financial flexibility.”

Back in 2008, 4.3% of consumers were current on their credit cards but behind on their mortgages. Fast forward to 2010, when that number climbed to 7.4%. On the flip side, the number of consumers that are delinquent on their credit cards but current on their mortgages dropped from 4.1% to 3.0%.

So the numbers here aren’t huge, but there’s a definite pattern — and the relative changes are quite large. But why? Historically, people in financial trouble have tended to pay stay current on their mortgages while letting their other obligations slide. So why the reversal?

Experts say it’s because the housing market is so bad that consumers are being forced to make tough choices. As it becomes clear that they’re going to lose their homes, more people are choosing to protect the few financial tools they have left.

Whatever the cause, it’s an interesting — and potentially troubling — change.

Source: AJC.com

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As if we needed another reminder, the Today Show had a piece this morning on the dangers of payday loans. They did, however, include some interesting numbers that really drive home how bad these loans can be.

For example, they highlighted a borrower named Mary who took on a $400 loan in a pinch, opting for a payday loan because “a commercial loan would’ve taken days.” Unfortunately for Mary, the interest rate was so high that she wasn’t able to pay of the loan immediately, so the payments continued to accrue.

By the time Mary finally paid off her loan a year later, she had paid $1420 in interest alone. That works out to well over 300% over the course of a year.

While some states have started regulating payday loans, others haven’t, and the industry is apparently flourishing. At the same time, the Better Business Bureau reports that they’ve received more payday lending complaints so far in 2011 than in all of 2009 and 2010 combined.

While payday loans can arguably be helpful in an emergency — assuming that you actually pay it off at your next payday — they can result in financial disaster if you’re unable to pay off your loan quickly.

Jean Chatzky, Today’s financial editor, also pointed out that payday loans are rarely a one-time thing. While the typical payday loan may only be for a few hundred dollars, the average borrower will take out nine such loans over the course of a year.

Chatzky went on to argue that credit card cash advances or your bank’s overdraft protection — products that she normally warns consumers about — are actually much cheaper options, and should be used before you ever consider a payday loan.

While these sorts of things don’t really help the unbanked, they could be decent alternatives for those with access to them. Of course, at the risk of beating a dead horse, nothing beats having ready access to an emergency fund at your favorite bank or credit union.

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The accompanying letter reads:

Another year has passed and the holidays are approaching quickly. To help you make the most of the season during these tough economic times, [your credit union] is pleased to offer you the option to skip your November or December 2011 installment loan payment.

It’s easy. Simply indicate which month you want to skip on the certificate below and return it to [your credit union].

[...]

Use the extra cash for anything you need like shopping, parties, or to keep some extra money in your pocket during this busy time of year.

We truly appreciate your business and the excellent way you’ve managed your account. So please accept this offer to skip you loan payment in November or December. We hope it will make your holidays even more enjoyable. Mail or bring in your Skip-A-Month Certificate today.

Wow. That’s just wrong on so many levels. For starters, there’s a $35 fee for this “service.” And if you read the fine print, you’ll see the following:

“This offer is a bonus skip payment. Interest will continue to accrue on our loan and your original loan term will be extended.”

So yes, you get to skip a payment. But you also wind up extending the term of your loan (not surprising, since you still owe the outstanding balance) and you increase the total amount of interest that you’ll pay over the life of the line. All for the low, low price of $35.

Really?

Maybe I’m just being a Grinch, but here’s a tip… If you can’t afford to meet your financial obligations, then you should probably shop less and throw fewer parties. Skipping a payment while incurring interest costs simply isn’t worth it in the name of “keep[ing] some extra money in your pocket during this busy time of year.”

Based on a bit of Googling, this seems to be a pretty popular promotion at credit unions across the country, and all seem to have similar terms. You pay a $25-$50 fee for the privilege of extending your loan and increasing your total interest cost. And, in most cases, this seems to be an annual thing.

With rates on signature loans hovering in the 9-13% range for qualified applicants, a single skipped payment could easily add $100-$200 or more in interest payments over the life of a loan (depending on balance, term, etc.) and that’s not even including the service fee.

And if you do this every year over the life of a multi-year loan, the damage grows. And grows. And grows.

My advice? Instead of stringing out your debt, you should be trying to pay it off as quickly as possible. Yes, you might need to make some sacrifices in the short term, but in the long run you’ll thank yourself.

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Have you looked at mortgage rates lately? They are (once again) crazy low, with 30 year fixed rates averaging just a shade over 4%. I feel like I’ve been saying this over and over, but rates can’t get much lower than this, so if you’re looking to refinance refinancing your mortgage, now is a great time.

That being said, I wanted to shed some light on a possible downside of refinancing that many people overlook…

In the good old days of ever-appreciating property values, many people were treating their homes like piggy banks, and refinancing to pull out equity that they could spend on something else. Nowadays, the economic landscape has changed, and most people are refinancing to reduce their interest costs and improve their cash flow.

While a healthy chunk of the apparent cost savings associated with refinancing comes from getting a better rate, it’s also important to keep in mind that you may wind up resetting the mortgage clock when you decide to refinance.

Mortgage refinancing: an example

Consider the following…

Ten years ago, shortly after getting married, Bob and Sue took out a $240k, 30-year fixed at 6.5% APR. They’ve steadily made their required payment of $1,517/month (principal + interest), and their mortgage balance has shrunk to $201k (rounding off). If they now decide to refinance to a new 30-year fixed rate mortgage at 4.5%, their payment will shrink to $1033/month.

Wow! That’s great! They’re “saving” nearly $500/month. What’s not to love?

Well… The interest rate savings is only a part of what’s driving down their monthly payment. The balance is coming from the fact that they’ve reset the time horizon to 30 years from now. Instead of being mortgage free 20 years from now, it take them 30 more years — for a grand total of 40 years!

Let’s take a look at the underlying math… Consider that, had they kept the original mortgage, they would have made $278k in total interest payments. Even with the mortgage interest tax deduction, that’s a huge chunk of money.

With the refinance, they paid nearly $134k in interest during the first ten years, and with the new mortgage, they’ll pay an additional $166k of the next 30 years, for a grand total of $300k in interest payments. Yikes! Even though the refinance greatly reduced their monthly payments, it wound up costing them $22k in additional interest payments.

Now consider what would have happened if they had used their heads, and shortened the term of their new mortgage. Given that shorter term mortgage typically have lower rates, let’s say that they manage to find a 20-year fixed rate mortgage for 4.25% (i.e., 0.25% less than the 30-year mortgage).

In this case, their payment would drop to $1,245/month, a savings of $272/month over their original loan. Not as good as with the 30-year option, but still quite good. And we’re not done yet…

In this scenario, they’d still be on the hook for $134k in interest payments during the first 10 years. But during the next 20 years (the life of their new mortgage) they’d paid just $98k in interest. That’s a grand total of $232k in interest payment — a $68k savings over their original mortgage scenario!

The point here is to not get wowed by the monthly payment. Run the numbers and figure out both your monthly payment and the total cost to own your home. It’s possible to reduce both. But if you’re not careful, you’ll wind up reducing your monthly payment while simultaneously increasing your costs.

Note: Yes, I totally ignored the cost to refinance, the payback period on these costs, etc. Those points are generally well understood, and I didn’t want to muddle the current issue with unnecessary details.

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If you’re in a position to refinance your mortgage and haven’t done so already, now’s a great time to lock in a very low rate. And even if you have refinanced, it might make sense to refinance again.

You’ve likely heard about the “historically low” mortgage rates over the past few years, but 15-year fixed rate mortgages dipped to an all-time low of 3.50% last week. And for their part, 30-year fixed rate mortgages averaged 4.32% last week, which is nearly an all-time low, and the lowest rate in the past nine months.

With rates this low, there’s a pretty good chance that you could score a “no-cost” refinance – wherein you accept a slightly higher than market rate in return for the lender covering your closing costs – and still come out way ahead.

In fact, these rates are so low that I almost wish we had a mortgage to refinance. Almost.

Source: USA Today

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It’s been awhile, but we’ve once again found ourselves in the crosshairs of a collection agency. Long-time readers might recall that we were contacted by a collection agency a few years ago in relation to a medical debt that wasn’t actually overdue. In fact, that collection notice arrived less than 30 days after the first bill was sent, and it crossed in the mail with our check to the payee.

This time around, we’ve found ourselves in trouble with a local medical facility, albeit a different one. Our oldest son visited the emergency room at the end of April and that visit cleared insurance in early May. The bill was supposedly in the mail shortly thereafter, but we never received it.

Around here, it’s standard practice to send a bill with a due date 30 days in the future, and then to send at least one, if not two (or even three) followup notices before sending a medical bill to collections. That would mean that we should have received a second bill in July (marked 0-30 days overdue) and another in August (marked 30-60 days overdue).

Instead, it appears that they sent us to collections in mid-July, about two weeks after the initial due date. That was it. No second notice or followup of any kind. Gee, thanks… A possible ding on the good old credit report thanks to a slightly late $20 charge that we never received.

Given that we hadn’t received any sort of documentation, I had to do some digging to figure out what this bill was related to. Fortunately, our health insurer has all of that information on line so I was able to look it and figure it out. From there, it was a matter of contacting the billing office.

Sure enough, she confirmed that they sent a single bill, and then turned us over to collections shortly after it was due. Great policy, huh? The good news is that she said we have 30 days to pay before it would be reported to the credit bureaus. I had the choice of paying them directly or going through the collection agency, and I opted to pay on the spot.

I’m now in the process of drafting a letter to the collection agency challenging the validity of the debt. This may be overkill, as it sounds like the billing office and collection agency are in fairly close contact, but now that the bill has been paid, I don’t want the collection agency hassling us or mistakenly trashing our credit.

As before, I’m keeping it short and sweet, simply stating that I’m writing to dispute the validity of this debt, and letting them know that it’s been paid and that we can provide proof of payment. As per the Fair Debt Collection Practices Act, they can’t contact us, attempt to collect, or report anything to the credit bureaus if they can’t validate the debt. And they won’t be able to because we’ve already paid it.

If you find yourself in a similar situation, be sure to follow up in a timely manner – within 30 days of the date on the collection notice at the very latest. And be sure to communicate in writing, via certified mail if at all possible. That way they can’t deny having heard from you.

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The other day, while chatting with an acquaintance, the topic of the economy came up. We talked a bit about the recent market turbulence, the debt ceiling debacle, the S&P credit downgrade, etc. He lamented that his 401(k) was taking a beating, and that this was coming on the heels of everything they dealt with in recent years.

He didn’t offer details, and I didn’t feel comfortable asking, but they apparently lost their house, at least one car, their boat, etc. He then said something interesting:

“It’s not like we were rich. We were just credit rich. I was young and stupid and made a lot of bad decisions because I thought we could afford that stuff. Turns out I was wrong.”

And in that one simple phrase – credit rich – he summed up what’s at the heart of our economic problems. In terms of both personal finance and government spending, we’ve been relying far too much on borrowed money. You’ve heard over and over that you should spend less than you earn, but many don’t. Even now, after the hard lessons that we’ve learned over the past few years.

It’s very easy to look around yourself and see people living in huge houses, driving fancy cars, and playing with all sorts of cool toys, and to think that you “deserve” the same. But the fact is that you deserve better. You work hard for your money. Don’t use it as a weak foundation for a massive house of (credit) cards.

This isn’t to say that you shouldn’t take out a mortgage to buy a house. We did. And we’ve since paid it off. Credit, when used responsibly, can be a powerful thing. But when it’s used recklessly, it can be even more powerful – in the opposite direction.

Sure, even without over-extending ourselves, our family could afford a larger house, a fancier car, or a nice boat. But we choose not to spend our money on such things, as we’d rather have a paid off mortgage and a growing investment portfolio.

Don’t get me wrong… We still live in a nice neighborhood, we travel, and we have decent cars. But we also try to live by the mantra that good enough is good enough. First and foremost, we take care of our savings and investment goals. Once those things are taken care of, we more or less let the chips fall where they may – but we never finance our purchases, or otherwise spend more than we earn. Ever.

Yes, this is a lot easier than it used to be, as our household income has risen over the years, and we have more leeway than we used to. But even when you’re just starting out, it is possible. Live cheap. Scrimp and save. Build up a small cash cushion to cover any short-term challenges, and don’t ever lose sight of the big picture.

You’ll thank yourself in the long run.

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A woman came in to my office the other day and asked this exact question. Actually, she didn’t ask the question – I did.

She had $50,000 in credit card debt (clicking away at 12%). What surprised me was that she had the $50,000 to pay off the credit card debt, but she didn’t plan on paying off the card. She wanted to invest the money instead. She estimated that she could earn much more than the 12% she was paying on the credit card so she concluded that paying it off was a silly thing to do.

It turns out that this woman was in hock all over town even though she had substantial assets. Never mind that her credit score was in the dumpster, she wanted to invest. I had to convince her to reconsider.

To you and me, the answer in this person’s case might be a no-brainer. But other situations aren’t so clear cut.

To address this issue, you have to understand all the components of the question.

First, there is the financial question which is rather simple. Ask yourself which number is greater; the return on your investment or the interest you are paying. If you are paying more interest than you could earn, you are far better off by paying down the debt.

For example, assume you owe $10,000 on a credit card. Say you actually have $10,000 in the bank which you could use to get out of debt completely. The credit card interest rate is 10% and the bank is paying you 1%. At first, this seems like a slam dunk. Pay off the credit card. Right? Not so fast.

Assume you also have an opportunity to invest $10,000 in your brother’s “can’t lose” vending machine business. He tells you that investments are earning 30%. Now, the choice becomes more complicated.

If you pay off the credit card, you are making a guaranteed 10% because that’s money that you’ll keep in your pocket rather than send off to Visa or Mastercard.

If you invest in the vending machine business, you are guaranteed nothing. You might earn 30% – or more. But you could also lose everything. It’s happened once or twice in the past when people invest in small business.

So which is greater? A guaranteed 10% or a possible 30%? The only way to approach this is to estimate the likelihood of earning that 30%. If the chances are high, you might go for it. If not, you might pass.

But there are other scenarios. What if the cost of that credit card debt was only 5%, and your alternative to paying that off is to invest in some mutual funds? What if your time frame was 5 years for those mutual funds. Assume you estimate that the average return of the funds over that period of time will be at least 8%? Which do you choose?

While you still have to do the above calculation of estimating the likelihood of achieving those results, you have the added element of time to consider. What is the expected return of the alternatives over the given time horizon?

So from a financial stand point, you have to consider alternatives, the cost of the debt and the likelihood of potential alternatives coming about and the downside risks over a given time frame. It’s a lot to consider.

Beyond these financial considerations, there are also the emotional points. How would you feel if you paid off the debt? How would you feel if you don’t invest? How would you feel if the investment doesn’t work out?

I have found that these emotional questions are just as important as the financial questions. What good is it to make an otherwise smart financial decision if at the end of the day you are left feeling miserable?

In most cases, you can simply ask yourself a few questions and come up with a really solid decision to address both the financial and the emotional issues:

1. What happens if you pay off the debt and the other investment does well?

Your answer will be unique depending on the situation. If the investment turns out great, how might it change your life? Are you giving up your chance of a lifetime? Or are the upsides of the investment actually very limited? What are you giving up in order to pay off the debt? Does it make sense to make that decision?

2. What happens if you pay off the debt and the other investment does poorly?

If this happens, you’ll probably feel like a genius. No problem here.

3. What happens if you don’t pay off the debt, make the investment and it turns out well?

What is a reasonable expectation for a good outcome and what does that look like? Can your money double? Triple? Or is the upside, even in the best case, so limited that it just isn’t worth it? What is a reasonable expectation?

4. What happens if you hold the debt, make the investment and it turns out badly?

Can you afford to lose the money and be stuck with the debt? A man I know borrowed money to invest in the stock market. Not only that, but he invested very aggressively and lost 30% in 3 months. At the end of the day, he was $150,000 underwater and needed to pay 10% to his lender. This bad decision forced him to sell his business and declare bankruptcy. Clearly, he never thought about the downside before choosing the investment over staying out of debt. He was an optimist who never considered the risk.

I have found that by asking myself these 4 questions, I make better financial decisions between two competing alternatives. How do you decide between paying down debt or investing?

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I recently ran across an interesting article over on CardRatings.com about whether or not credit cards are addictive. The article highlighted a recent academic study by Marsha Richins of the University of Missouri that focused on the relationship between materialism and overspending.

The study was based on a survey of 400 consumers of various ages and income levels, and the central thesis was that “transformation expectations” – the idea that consumers expect products to have transformative powers on their life – are the mechanism through which materialism drives credit card abuse. Unfortunately, these transformations (assuming that they occur) are short-lived, leaving the consumer looking for another fix.

Richins was able to identify four major types of transformations that are especially prevalent in people with debt problems:

• Self improvement: Over-spenders often believe that their purchase will make them a better person – like the woman who thought cosmetic dental surgery would make her more confident and successful.
• Improved relationships: Over-spenders often believe that their purchase will make it easier for them to connect with others – like the man who thought installing a swimming pool would improve his relationship with his daughter.
• Sense of fun/adventure: Over-spenders often believe that their purchase will make them more fun and/or fulfilled – like the expectation of fun that might come from an ATV or boat purchase.
• Greater effectiveness: Over-spenders often believe that their purchase will make them more effective/efficient – like the idea that a new car will make you more self-reliant, or than an iPad will make you more efficient.

In other words, certain consumers (typically those with mountains of debt) have a tendency to think that the products make the person – as if a purchase will help to re-define you, or change your standing in society. This isn’t to say that the rest of the world doesn’t fall prey to these expectations. It’s just that these tendencies are far less prevalent in “average” consumers.

Richins also believes that people are “hard-wired” to want new things that promise to make your life better. She chalks this up to the fact that primitive people who had better tools were more likely to survive, and thus passed on an innate sense of attraction to things that make survival (or life in general) easier.

The good news is that most people realize (sooner or later) that, while some tools are important, others are a waste of money. Unfortunately, others don’t make that realization, and wind up on the hedonic treadmill.

So… The next time that you’re considering a purchase, stop and think. Ask yourself why you’re interested in making the purchase, and take a very critical look at your answer. Are you looking for a quick fix? Are you expectations too high? Or is this something that you truly want or need?

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Even if you’ve been less than stellar with your finances in the past, you can still borrow money that you might need from family or friends. This is especially important if you currently pay high interest rates and want to refinance at a lower rate. If that describes you, your friends and family are a great alternative to things like credit card debt.

The first step is to be absolutely clear on how much money you need, why you need to borrow the money, and (most important) how you’re going to repay the loan.

You’d think that most people know exactly how much money they need, but that’s not always the case. Tim, a young man I know, recently went to his brother so he could realize the full value of his college education – by completing it. He asked his brother for $5k to cover his upcoming tuition payment. But when they looked at the issue more carefully, they realized that $5k was only the tip of the iceberg.

Tim would need money for room and board and books a few months after his tuition was due. It would have been difficult for Tim to keep going back to his brother for more money because he’d lose credibility.

It’s far better to be clear on your objective and think about the total costs you’re going to incur. Then add 10% (at least) before you go looking to borrow money. This way you won’t have to go back to the well.

And while we’re talking about steps you need to take before you ask anyone for a loan, make sure you hammer out a solid repayment plan. If you don’t have a plan on exactly how and when you’re going to repay your debt, get one. If it includes looking for a second job, go get the job. If it includes selling your junk on eBay, start listing your items. Whatever you do, don’t ask anyone for financial support unless and until you have a solid plan for how you’re going to repay the money.

This step is as much for you as it is for the potential lender. I say this because it’s important you have self-confidence when you approach people. Your repayment plan will give you that self-confidence. It has to spell out exactly how much money you’ll be paying and how often. Don’t promise anything you can’t live up to, but make sure you do whatever you have to do in order to come up with a solid plan.

Once you’ve come up with your plan, it’s time to list the people you think might be interested in doing business with you. Jot down their names and what interest they may have in loaning you money. Those interests probably include helping you out, getting their money back and making some interest. Are there any other motivations this person has? What are they? List them and next to those motivations note how this loan gives them what they want.

Write out how this loan is going to help you. How the loan will make a difference in your life. Next, detail how you’re going to repay the loan so they feel confident they’ll get their money back. Finally, make sure to insist they get a good return on their money. This way they’ll consider it an investment rather than charity.

There is a reason you should write this out before the meeting rather than winging it. By reducing your thoughts to writing, you’ll be ingesting it and making the plan a part of you. Also, when you meet with potential investors, show them what you wrote down. It demonstrates that you are taking this seriously, and that will instill confidence that you’re going to stick with your plan to repay the loan.

Approach each person one at a time. Do not have an expectation that they’ll automatically lend you the money, and don’t resent them if they turn you down. It doesn’t mean they don’t care for you. Just go to the next person on your list. (That’s another reason why you created a list of potential lenders.)

Of course, if all this seems like too much work, there are plenty of ways to borrow money without going through this process. They are simpler and less stressful, but potentially more expensive. They include taking out a bank loan, peer lending, cash advances, and payday loans. These may not be particularly attractive ideas, but they’re relatively easy.

You can and should give your friends and family the opportunity to invest in you. If you show them how much you’ve put into this process, the chances are high that they’ll be willing and eager to do so.

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It was a typical evening in the mid 1980s, and I was working late at my job as an advertising copywriter in Chicago. Down the hall, a colleague named Mary, not many years out of college, was also toiling away in overtime. I could hear her in her office, humming, shuffling papers and twirling the dial on a desktop radio.

Suddenly there was a shriek, followed by footsteps briskly toward my office. “Jeff! Did you know about this? I just heard on the radio they’re bringing out a new credit card. You get cash back for purchases by using the card!”

Yes, it was the unveiling of the Discover Card (“The card that pays you back,” as the oft-heard promotions promised), and with it a new era of earning points toward purchases simply by flashing your card.

This was big news to Mary, who dove into a chair in my office and explained she’d had a long history of using – and overusing – credit cards.

Credit card debt built up

While in college, she related, she’d built up tens of thousands of dollars in credit card debt that later had to be settled by selling off stock bequeathed her by her grandmother. Why, I asked her, had she piled up such enormous sums of credit card debt as a student? Didn’t she think she’d have to pay it off?

“Well, you know, in college I was really popular, and I dated a lot.”

Yeah … ?

“Well, I dated a lot of guys who were pre-med and pre-law.”

And your point is?

“See, I figured I’d wind up getting engaged to one of them, we’d get married, he’d get a six-figure job and he’d just pay off all my credit card bills.”

The Goof’s Guide to Money

Why recall that conversation a quarter century later? Because it may have been the moment I began cataloging the daffy approach to spending so many Americans embrace. Call it The Goof’s Guide to Money Management.

Spend a little time watching, and on any given day you can see folks in little ways, big ways, and every way in between – many using credit cards as toys rather than tools – making the Goof’s Guide their personal fiscal Bible.

See the guy throttling past you on a city street, racing past $4-a-gallon-for-regular gas signs, so he can throw on the brakes and skid 200 feet to a stop at a red light? That’s goofy. How about the packs of folks wedging themselves in the doors of the local coffee house trying to beat each other to $5 cups of frothy hot liquids they could concoct themselves for 23 cents? That’s goofy.

And how ’bout the gal loading up at the mini-mart on junk food, lottery tickets, and cigarettes? That’s goofy, goofy, and goofy again.

That so many gain guidance from the guide is witnessed in the sprouting of casinos, the lines of folks itching to buy a new phone sure to be obsolete next month, and the tendency to start saving four decades after the start of earning.

No wonder credit card debt is so high

Multiply by the tens of millions who apparently use the Goof’s Guide as an indispensable reference wherever they go, and it’s no wonder that (according to IndexCreditCards.com) average credit card debt per household that carries a balance is $9,858.

And what of Mary, my colleague once so sure she would wed a doctor who would cure all her credit card ills? Later, a few of our colleagues and I were guests at her wedding, watching her walk down the aisle to a groom who eked out a meager living as an entry-level chef. Sooner or later, we all have to come to grips with our goofy, goofy ways – cash back on purchases or not.

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This is a guest post from Jennifer Rose Hale.

You filed your taxes 12 days ago, and the “ding!” from your computer is an e-mail alert from your bank. You’ve got money! Sure enough, it’s your tax refund. If you got one, you’re not alone: the most recent figures from the Internal Revenue Service show that over 111 million individuals received refunds in 2010, with the average amount close to $3,000.

Your refund, whether it’s close to the average or just big bucks in your life, is calling to you to spend, spend, spend. So, to borrow from Dennis Hopper in “Speed,” what are you gonna do?

Let’s look at some common ways you could blow that money, and some alternatives to increase your savings rates — and improve your life — instead.

Big vacation… Or a better job?

If things are going rough at work, it’s tempting to use your refund on a getaway, to buy yourself a week (or even two) to forget your projects, your boss… Heck, even the name of your company, if you do it right.

In the long run, though, a bad job situation will just boomerang back to you as soon as your plane’s wheels touch down again at home. Maybe it’s time to pick up some online training or buy a copy of “48 Days to the Work You Love” or “What Color Is Your Parachute?” Aim yourself in a better direction with a small purchase, and put the remaining savings to work for you in your retirement fund — that big getaway at the end of your career.

Eventually, you’ll get the chance to say goodbye to your boss altogether, but you might as well enjoy your job while you get there.

New wardrobe… Or a new you?

You’ve been waiting for those hundreds — maybe thousands — of dollars to refresh your wardrobe, and you’re planning a big run at Macy’s (if you expect hundreds) or Anthropologie (more likely thousands) to get a whole new look.

Instead of a new wardrobe, focus on a happier, healthier you. Join the Y and pick up a cookbook with healthy recipes. The money you save cooking at home could be tucked into a high interest savings account, and a fully-stocked emergency fund will lower your stress levels.

HDTV… Or high-def relationships?

Electronics are often at the top of the shopping list when the refund comes. Staying at home with a movie on a widescreen HDTV — with 3D, even — is a big temptation. But as weeks and months pass, you may find yourself seeing your friends less and less, and your couch more and more.

Spend a few dollars on a bottle of wine and some ingredients for dinner, and invite your friends or family over for a game night. You can take the savings and put it toward a down payment on a home loan with good mortgage rates, for a more comfortable setting to host your parties in the future.

If your friends complain about the size of your TV screen, tell them you’ll happily accept an early housewarming present.

Car down payment… Or a payment-free future?

That $500, $1,000 or $3,000 may seem like the perfect amount to put down on a new car purchase or lease. It may feel pretty tired to schlep around town in the hatchback that took you through college and beyond, and it seems like everyone you know has a hybrid — or at least something without French fries mashed into the rug.

That lease or six-year loan, however, will cost you a fortune in interest or balloon payments — and you’re signing up for a big bill for years into the future. Instead, shop around for online savings accounts, CDs or money market accounts with high interest rates. These FDIC-insured accounts are low-risk enough to hold your money’s value for the near future and will build enough interest to sweeten the deal. Add to it steadily, and within a couple of years you may have enough to buy a respectable used car outright.

The ground-in French fries? They add character.

Fritter it away… Or build new habits?

The easiest way to spend your refund is to just… Spend it. Dinners out, a game console, a new set of wine glasses, movie tickets and season passes. Before you know it, your hundreds or thousands are all gone, the party’s over, and you have nothing much to show for it.

Instead, you could look at this as an opportunity for a great new habit: paying yourself first. Follow the core advice from personal-finance tomes such as “The Wealthy Barber” and start investing for your future — not just for retirement, but for all the wonderful wants and needs you’ll have 10, 20 or 30 years down the line. With this new habit, and a little patience, all the rest of your wants can be achieved — comfortable home, fun toys, cool cars — and a life with a little less stress.

So that “ding!” from your e-mail alert could be the path to short-term spending… Or long-term contentment.

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As a general rule, I encourage you to avoid debt like the plague. I stand by that in the vast majority of cases, but there are some situations where you really benefit by having debt. For example, as long as you know how and when you’re going to pay it off, have the lowest interest rate possible, and no for certain how and when you will pay it off, debt can be a useful tool.

Here are five cases where having debt can actually pay off:

1. Low paying jobs

You read that right. It could be a brilliant move to take a low paying job – if you’re smart about it. You might have a great opportunity to take a great job that has tons of opportunity in the future. Just because the pay is low to start doesn’t mean you have a dead-end job. Even if you have to take on some debt to finance your lifestyle during this time, it could be a smart move.

Of course this assumes that you’re living a very Spartan life and that you slash your expenses to the bone.

The best example of this is starting your own business. When I launched mine, I had zero salary, and it took awhile to ramp up. Fortunately, it turned out to be a great investment in my future. Just the same, my wife and I tightened our belts big time when I started the company, and we had a spending plan from day one.

2. Education

Depending on your career path, you’ll probably need some education. I personally feel very strongly that you can get a great college education without spending big money. After careful consideration, you might also conclude that a traditional college education isn’t for you, and that you can save time and money by attending a private career college to get vocational skills.

In either case, when you go to school, you will incur some expenses and your immediate income will be reduced. As long as you slash your expenses during that time and make sure you get the education you need at the least possible cost, there’s nothing wrong with a little debt. Again, I’ll only give you my blessing if you do this mindfully, and with a well-defined plan as to when and how you’ll pay it back. I’ve seen too many people in their 40s and 50s still carrying student loan debt that they incurred back when they went to graduate school. That’s not a path to financial freedom.

3. Mortgage

Many people argue that it’s cheaper to rent than to own a home. As an added benefit, when you rent, you have no mortgage debt. It sometimes seems like the renters are right. For example, just look at what’s happened to homeowners over the last several years. But at the same time, most of the people I know have done quite well owning real estate – despite the recent collapse of the real estate market.

Of course, this pre-supposes that you are able to make your payments comfortably, and that you are in it for the long-run.

4. Investments

I do not recommend that you take on debt to invest in the stock market. Doing so is a high-risk maneuver, and you’re likely to get burned. But you might have an opportunity to invest in something like a small business and, if the only way to do so would require you taking a loan, it could still be a smart move. This includes investments related to side businesses or weekend jobs. Let’s say that you decide it’s time to start being self-employed. If it costs you $4000 to buy a truck that will allow you to earn $1000 a month in your weekend catering business, you’re a smart cookie for borrowing that $4,000.

5. Emergencies

I don’t need to tell you this, but if you have a medical or other true emergency, you may have no choice but to borrow money. Even if you have a healthy balance in your savings account, sometimes “life happens.” You shouldn’t feel bad about this. What you should do is make sure that you pay as little as possible for that debt, and set up a budget to rebuild (and enlarge) your emergency fund down the line. This way, when the next emergency happens, you won’t be forced into debt.

Closing thoughts

Notice that the following situations that don’t appear on the list: travel, fancy cars, lifestyle enhancements, etc. While debt can be a handy if used properly, it can really drag you down if you use it to supplement your lifestyle. As I said above, whenever you borrow money, be sure to pay as little interest as possible, and the least interest possible and make sure you have a plan to pay the debt off as quickly as possible.

What about you? Do you have a story where debt turned out to be good for you?

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It wasn’t the Ritz, but we enjoyed our time there and have some happy memories. We spent a decent amount of time finding this apartment, and it was well worth the effort. While many of our friends were confused that we purposely chose a small place based on only one of our incomes, we found it was a great start for our marriage. If you’re trying to decide on your first place as a couple, here are some factors to consider.

Big pros for our small space

I want to share some of the immediate and longer-term benefits we’ve had from renting a small apartment.

• Lower rent: Our rent was very reasonable for the area, and we had a great location across the street from the beach. That gave us more money in our pockets and a bigger buffer for our monthly cash flow. An added bonus with our small apartment was that the building had a laundry room. We had to schedule our laundry times with neighbors occasionally, but it was less than 30 feet from our front door.
• Less stuff to buy: The temptation to fill your apartment with stuff just isn’t there with a small apartment – there’s no space for it! Given our limited budget, this was a huge benefit.
• Encouraged us to explore: A smaller place encouraged me to get out of the house to stretch my legs and explore the world around me. Our location was convenient to many free and low-cost activities, and we discovered a number of ways to have fun without spending a ton of money.

I know some people would say that we lacked some convenient features in our apartment, and they’re right. After all, our little place didn’t have a dishwasher, and the layout was a bit odd. But these minor issues didn’t stop us form enjoying our home.

Why we chose a smaller apartment

At the time of our wedding, I was a full-time college student and starting an internship. The pay was good for the area, and even better for a student, but there was a long commute. Living in an area with a lot of traffic, I had to be smart about when I left for work and when I headed back home. My goal was to complete the internship assignment for the semester – there were no guarantees that it would continue, and I didn’t know how quickly I’d be able to find comparable work and pay if/when it ended.

At the same time, my husband was a recent college graduate who had been working for his new employer for less than a year. We looked at our budget and decided to focus only on apartments that we could afford with my husband’s salary.

We had specific goals that we wanted to reach, and keeping our housing costs down would help us get there sooner. One financial goal was to pay off our car loan. It was a good chunk of our monthly expenses, and the car was rapidly depreciating in value. We also wanted to build up our savings for the long term goal of buying a house. Having lower housing expenses allowed us to meet both goals and build our credit score as well.

When we moved out-of-state, we rented a larger apartment, but we still based it on one income. With no car payments at this point, the money that we saved was going toward our savings, and we eventually started house hunting.

Big help for us on house hunting

Being patient and keeping our housing expenses relatively low was beneficial for a few reasons. When were were preparing for the house hunting stage, we knew what we wanted in our first place based on our previous experience and that of our friends with their own places.

We also were used to resisting the pressure of buying a bigger space and moving out of the comfort zone of our budget. Believe it or not, it was the financial “experts” at the banks that were pushing us to looking at bigger mortgages. Buying a house was only one of our goals, and we knew that getting the biggest house we could afford would hurt us in the long run.

Thoughts on living in a small space

Have you ever made a conscious decision to live in a relatively small space? If so, what were some of the benefits and drawbacks that you experienced? Is there anything in particular that people should watch out for? And do you have any tips for finding a great deal on an apartment?

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For background, I should note that Bob and Sue were part-time homebuilders for the better part of the past decade. While Bob worked full time and Sue stayed home with the kids, they also built houses on the side. Every couple of years, they’d start building a new house. When it neared completion, they would put it along with their current house on the market, and then live in whichever one didn’t sell.

Raising the stakes

This worked so well for them for several rounds that they eventually decided to start building more expensive homes – homes that they couldn’t actually afford to live in themselves if they didn’t sell. Unfortunately for them, they made this decision right around 2007. I’m sure by now you can see where this is headed…

As their the mega-house they were building neared completion, the bottom dropped out of the housing market (and the economy in general). Real estate stopped selling almost overnight, and they were stuck with two houses. They put the new one on the market for awhile, but there were no potential buyers.

Eventually, they put their current house on the market in hopes of salvaging the situation. Their plan was still to sell the mega-house if they could. But if they couldn’t, they would buy time by selling their regular home and using the proceeds to keep themselves afloat. Since they couldn’t afford the mega-house in the long run, they’d move into it, but leave it on the market and move again went it (hopefully!) sold.

Hitting rock bottom

After a few stressful months, they sold their regular home and moved to the mega-house. Sue also went back to work to help makes ends meet, and it seemed like they’d be able to stay afloat, at least for awhile. Unfortunately, “awhile” recently ran out. They fell behind on their payments, and the bank ultimately foreclosed on them. They’ve lost nearly everything.

In retrospect, it’s easy to say that they should’ve just let the mega-house go when the market tanked. Sure, that would’ve ruined their credit, but they were already in a house that they loved, so why not dump the mega-house and move forward? Now they have no house, no credit, and presumably little to nothing in the way of savings.

Well, for starters, Bob and Sue were intent on “doing the right thing.” They got themselves into this mess, and they were intent on getting themselves out of it. I respect them for that even though they’re now paying a huge price. At the same time, I don’t think they wanted to admit to themselves just how big a hole they’d dug for themselves.

Lessons learned

With the story above as a backdrop, I wanted to share some financial lessons that can be learned from Bob and Sue’s plight. It’s too late for them to change course, but it’s not too late for others to learn from their mistakes.

Don’t be greedy

As much as it pains me to say it, Bob and Sue are victims of their own greed. Things were going so well for them that they decided to up the ante and start building huge homes that they couldn’t afford to keep. Sure, the profits would be bigger with their new strategy, but the risks were astronomically higher. In the end, they reached for the brass ring and wound up losing everything.

Respect risk

This is related to the point above, but it’s important enough to split out on its own… Risk is a funny thing. If you’ve ever read a financial book, you’re aware that “with risk comes reward.” But what many people often fail to realized is that investment risks are very real, and they’ll often rear their ugly head at the worst possible time.

It’s easy to be blinded by the potential upside, and to simply declare that they’re sufficiently risk tolerant to reach for higher returns. In Bob and Sue’s case, they let their risk/reward ratio got out of whack.

Let’s say they would’ve made $50-$100k by building and selling a “regular” house, and that the mega-house would generate $100-$200k in profits. In this case, they would’ve doubled their potential gain, but at what cost? Their downside risk went from being a manageable setback to complete financial disaster.

Leave a margin for error

And finally… Bob and Sue’s prospects apparently took a turn for the worse when he was laid off from his job. While they would have been able to pull this deal off if everything had gone perfectly, they didn’t have any wiggle room. And things didn’t go perfectly – the house didn’t sell, their income took a hit, and so on.

Unfortunately, even with Sue going back to work, they didn’t have enough cash reserves to carry them through the lean times. They took on such an extreme financial burden that they simply couldn’t make their plan work unless everything worked out perfectly – they had no margin for error.

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I have a question about marrying someone who will go through bankruptcy BEFORE marriage. Other than having difficulty with getting a loan, what other effects should I expect in the future?

The bankruptcy had to do with a prior divorce, and ownership of more properties than one should own at any one time, so I’m not worried about his spending habits. What do you think?

This is a great question, and needs to be addressed from two different angles.

Everyday impacts

First, you each have your own credit history so his poor credit rating won’t impact your good credit score. Of course, if you apply for a loan together, his dark credit past is going to hurt you.

My suggestion here is for you to apply for big-ticket credit items like mortgages by yourself. You will get a better interest rate than if you apply with your fianc̩. But this leads to the second issue Рassets.

You may try to keep your assets separate and, as long as you do so, you might be okay. But you have to be careful. For example, if your sweetheart doesn’t discharge all of his debt, you wind up marrying into a financial mess. Let me explain…

Let’s say he ends up with a tax lien and the two of you file a joint tax return. In that case, the IRS is going to want it’s money before it gives you any tax refund. And debt relief from the IRS doesn’t come easy. Are you ready for that?

And the problem doesn’t end with tax liens. The same goes for things like student loans or government loans. You’ll also have to pay close attention to the laws of the State in which you live. This is especially important if you live in a “community property” state like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.

Let’s say that you own your own home, but you commingle funds to pay expenses associated with the property. Your new husband helps pay the mortgage and utilities from your joint savings account, where he also deposits money.

The above fits the definition of commingling and, depending on the state in which you live, the property might then be considered partially his. If he hasn’t discharged all of his debts, his creditors could come after the property in that case. Not a good outcome for you.

This is why you might want to wait to tie the knot until his bankruptcy judgment is final. That way, you’ll know exactly what you’re stepping into. If your soon-to-be groom goes Chapter 13, he won’t discharge his debts. And even if he files Chapter 7 bankruptcy (which discharges most debt), not all debts are discharged.

After he’s been through the bankruptcy process, you’ll know which debts will be staying on the books. If you live in a community property state and he still has a lot of debt, you should definitely consult an attorney to determine if it’s possible to commingle while steering clear of risks associated his debts.

The bottom line is that it’s going to take this gentleman time to get out from under. That means the money he earns that should go toward building a future with you is going to his past creditors. Thus, even if everything else works out, you’ll be directly impacted by his debt problems for years to come.

Don’t forget the big picture

I would also recommend putting strict boundaries between your new husband and your own finances. With all due respect, this man has made some pretty serious errors in the past. Sure, divorces are devastating, and anyone who goes through one could end up in financial trouble. But the fact of the matter is that he wound up owning too many properties and he failed to plan for the future.

It’s fine to build a life with a wonderful person despite past indiscretions, but be very careful about letting him get to involved with your finances until he’s really proven himself. For example, he may be convinced that he’s got an unbeatable investment strategy but give it some time before you hand over any money.

One last thing… In case he doesn’t already know, you might want to ask him how his bankruptcy is going to impact his credit score. If he doesn’t already “get it,” encourage him to check it out himself.

What advice would you give this person?

If you were in her shoes, what would you do? Would you consider marrying someone who is going through extreme financial difficulties, up to and including bankruptcy?

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According to a recent press release, Lending Club has increased the upper limit on loan requests from $25,000 to $35,000. According to Lending Club CEO Renaud Laplanche, this change was “prompted by customer demand.”

This is the second major change in their lending policy over the past year or so. The first was when they introduced five year (60 month) loans to complement the original three year (36 month) term.

As for me, I have little interest in five year loans, and I’m also not interested in funding mega-loans. In fact, I don’t typically invest in loans over $20k – partly because they rarely meet my note selection criteria, and partly because it seems like fraudsters are more likely to go for the big score.

Despite my trepidation about larger loans, Lending Club claims that loans in excess of $20k actually perform better than smaller loans, returning 10.30% annualized vs. an overall average of 9.68%.

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» Lending Club Update – December/January Performance

Lending money to family or friends can be an awkward decision. On the one hand, you want to help out a loved one in need, but will you ever get your money back? If you want to help, but think that helping them out with a loan will only make things worse, then here are some things that can help improve a stressful situation.

Give a smaller gift

If you don’t feel comfortable lending money to people in your life, then consider gifting them a more acceptable amount. When you give a gift, you’re not expecting to see the money again, so you don’t have to figure out a payment plan or worry that they won’t pay you back.

Benefits

By giving a smaller amount, you won’t be putting your finances in danger when giving a smaller amount. Also, by making it a gift, there are no strings attached, so there won’t be any reason for hard feelings down the road.

Offer to help with a budget

If you honestly feel like this is a situation that will repeat itself, then you may want to offer help with budgeting. Perhaps you could show them how you’ve been able to improve your finances with some simple tricks.

If they don’t want to open up about their finances with you, you could offer some other helpful gifts:

• Quicken: This is a great piece of software and if they are tech inclined, it could help their finances tremendously by streamlining it. They can do cash flow projections, budgets, and track their investments and savings. It’s a very handy gift to share.
• The Total Money Makeover by Dave Ramsey: This is a wonderful guide on how to get out of debt, get started on savings, invest for retirement and college, etc. Dave Ramsey’s method works, so if you want to help jumpstart someone’s finances, this is a great book. I’ve given this book out to others and, while some don’t follow it (“it’s too hard!”), many of them have picked up some tips that have helped.
• I Will Teach You to Be Rich by Ramit Sethi: This book, like The Total Money Makeover, is more than theory; it shows you step-by-step how to organize finances into an extremely manageable system. There are actual scripts that can be used to get fees waived at the bank, interest rates lowered on their credit cards, and so on. It’s also very pointed, so it may be the kick in the pants that they need.

I also recommend Your Money or Your Life and The Millionaire Next Door as great gifts, but they are more food for thought. When your relative has gotten out of their current crisis, they may be more inclined to sit down and examine the big picture when it comes to money.

Benefits

By giving these sorts of gifts, you’re teaching your family or friends to fish rather than buying them fish every time they’re hungry. If they respond to what you show them, then you can help them improve their finances.

Empowering loved ones to understand and use basic money principles can not only keep them from asking for money, but it can also help your relationship. They’ll be more independent and in control.

If they don’t listen, at least you’ll know that you gave them the tools to succeed. Every time they ask for a bailout, you could ask them if they used the software or read the book. You’ll then have a better idea if this is a situation where you want to help them or not.

Lend money on your terms

Perhaps you’ve decided that you want to help out by lending them some money, but you want to make sure that you’ll get paid – and that you won’t have to be the bad guy if things don’t work out as planned. Consider encouraging them to borrow via a peer lending platform.

Lending Club

While it might seem strange to use a third party to broker the loan, this might be the perfect solution. Lending Club can vet their application, and also help to reduce your financial commitment – after all, other “investors” will have the option to pitch in and help out.

Advise your would-be borrower to fill out the paperwork and apply for a loan. Lending Club will be able to measure objectively whether or not they are a good candidate for a loan.

What if they get rejected? That could be a sign that simply lending them money won’t help to solve their financial problems. You can then decide if you still want to go ahead and lend them the money on your own – probably not a good idea – or choose another path. It may be a jolt to their ego if they get rejected, but it’ll also give them a chance to see their financial situation clearly.

Just say no…

This can be hard to do, but sometimes saying “no” is the best way to wake someone up to their financial problems. If you think that saying no is too harsh, here’s a suggestion that can help you get your relative to a more proactive role in their finances…

SmartyPig

If your relative is hard up for money, you might want to turn them on to SmartyPig, which is essentially a high yield savings accounts with a social component.

Not only do they give you bonuses if you’re saving for purchases at specific retailers, but they also provide a mechanism for sending gifts. Gifting a small amount into their account can be a great way for you to get them started on their way and to encourage them to save for their goals.

Your thoughts on lending to family

Have you ever given a loan to a family member or friend? If so, was it for a significant amount? How did it work out? Did you get your money back? Were there any hard feelings? And would you do it again in the future?

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Certain personal finance gurus such as Dave Ramsey argue that you can (and should) ignore your FICO credit score. Others, like Suze Orman, advocate taking control of your score. So who is right?

Given how often credit scores are talked about in various books and on TV, I wanted to dig deeper and see how much impact your credit score can have on your life.

What is a FICO credit score?

Fair Isaac and Company (FICO) has developed a system to help creditors determine a person’s credit risk based on their credit history. Lenders rely on these scores when determining whether or not they should lend to a prospective borrower.

You may be surprised to learn that you actually have three scores instead of just one. That’s because each credit bureau can generate their own score for you based on the information that they have.

How is your FICO credit score calculated?

Your FICO score is determined by what’s in your credit report. While the exact formula is a secret, here are the factors that affect your credit score and approximately how much weight is given to each.

• Payment history – 35%
• Amounts owed – 30%
• Length of credit history – 15%
• New credit – 10%
• Types of credit used – 10%

What’s frustrating with this formula is that your credit score can actually decrease if you make a financially sound decision, like paying off debt.

For example, Nickel discovered his credit score went down when he paid off his mortgage. I also saw my score drop by seven points when we paid off my car loan.

While there are various opinions on what constitutes a good FICO score, a score of 760 or above is generally enough for you to get approved for a loan at a favorable rate.

Who uses FICO scores?

So when does your credit score actually come into play? If you’re applying a loan, your credit score will almost certainly play a role in your approval. Your score can also play a role in determining the interest rate you’re offered.

While some mortgage lenders do “manual underwriting,” they are in the minority. That being said, Dave Ramsey advocates using this sort of lender in his Total Money Makeover program.

Aside from lenders, it’s important to know that other companies are starting to look at your credit scores. They include:

• Car insurance – Did you know that your score can affect your car insurance premiums?
• Landlords – Depending on where you’re looking to live, some landlords are running credit checks to protect themselves from bad tenants.
• Potential employers – Like landlords, some employers see credit scores as an indication of a candidate’s reliability.
• Utilities – Some companies use your credit score to determine if you need to put down a security deposit.
• Banks – Many banks, both online and local, will check your score before opening an account – especially if you are applying for overdraft protection.

While you may not be crazy about the many ways in which your credit score can influence your personal finance, it definitely pays to stay on top of it.

Maintaining a good score without debt

Dave Ramsey has commented that if you avoid debt, then your score will go down to zero. While Dave may not care about his credit score, the fact is that your credit score can impact various facets of your life. But is it necessary to carry debt to maintain a decent credit score? Not necessarily.

You should never borrow money just to build your credit score. Likewise, you shouldn’t carry a balance on your credit card in hopes that it will boost your score. To maintain a decent score, simply keep an eye on your limits and always make your payments on time.

Credit scores are really just a snapshot of your financial life, and much of the information is drawn from recent statements. If you max out a credit line shortly before applying for a loan, that can negatively impact your credit score even if you intend to pay it off in full.

That’s one of the big problems with credit scores – they don’t necessarily reflect your long-term financial health.

Thoughts on credit scores

It surprises me a bit to see how much your credit score can affect your daily life. We’re not doing anything special to manage our scores, but they are important to us.

My husband and I have a single credit account that we use occasionally, but we pay it off in full every month. We also have a mortgage that we’ll probably have for another 15 years based on current payments.

How important is your credit score to you? Have you done anything special to improve or maintain your credit score? Have you ever had any problems getting a loan or in other areas due to a low score?

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The next time you go to a book store, take a stroll through the “Personal Finance” section. You’ll literally see hundreds of books all saying just about the same thing. Oh sure, some say it better than others, but… At the end of the day, it’s all about spending less and earning more. It doesn’t matter if you’re trying to get out of debt or retire now.

The reason the stores are full of these books is because people like you and I buy them. I’m not a huge fan of people buying new books in the first place, but that isn’t why personal finance books make people worse off.

The reason that most of these books are dangerous is because people often act as if the purchase itself is the answer. I’m not saying you shouldn’t educate yourself. Reading to learn about finance is great. It’s important. But whether you want to get out of debt quickly or invest your money properly, you don’t need lots of different ideas at the same time. You need to take action.

We don’t like to admit it, but most of us are procrastinators. We don’t like to finish what we start, mostly because we don’t like the work involved. That’s why we buy books. They make us feel good about ourselves for awhile… And then (often) we don’t do anything.

I once read that most people who buy books only get to the first chapter and then lay them aside forever. Don’t believe me? Look at your nightstand. How long have those books been laying there? If you’re like me, way too long.

Do you know why bookstores have a return policy? Because it helps you make a buying decision with (perceived) low risk and then do your thing… Which is to procrastinate. Even if you want to return the book, you probably won’t get around to it. Again, the problem isn’t the waste of money on personal finance books. The problem is a lack of focus.

The act of buying a personal finance book or (worse) some expensive CD program helps us stay stuck. The cycle looks like this:

1. You realize that you are having trouble with debt, investing or some other aspect of your financial life.
2. The trouble becomes a problem to the point that you commit to doing something about it.
3. You buy a book (or another book) that looks like the “silver bullet,” and you start going through the exercises.
4. You don’t get out of debt instantly, improve your credit score overnight, or whatever, and you quickly lose interest.
5. You set the book aside for awhile since you aren’t getting that instant payoff. And before you know it, six weeks have passed and you haven’t done any of the prescribed work.
6. Your financial situation gets even worse and the pain starts building. At this point, you re-start the cycle back at step 1. You convince yourself that the problem isn’t your lack of action or patience, it’s that you simply have the wrong “silver bullet.”

I’ve done this, and I bet you have, too. We do it with money, we do it with productivity, and we do it with health and fitness. These are often the hardest things in our lives to change, so we seek refuge in books.

Do you know why there are so many books on these subjects? Because people buy them. The book itself becomes the relief mechanism, and it blocks you and I from finding real solutions and taking action.

So what’s the answer?

One teacher at a time

You probably have several good personal finance books. I’m not worried about that. Focus on the problem you want to solve, and then find the best teacher possible to address the issue. Remember… You only get to choose one.

Clear the decks

Get every other book off your nightstand. Take everything else off your desk. If the problem you are addressing is serious, it requires all of your attention and focus. You can’t afford any distractions.

Commit to attacking the problem

You may already know that I am a huge fan of having an accountability partner. You can’t commit to results, but you can commit to doing the work and following through. Create an accountability document where you record what the problem is, the steps you are going to take, and when you will take them. Then, update that document every day or week and make it available to your accountability partner.

Acknowledge your weakness

You will want to quit. When things get tough or you’re not quite sure what to do next, you’ll look for comfort by doing something else to distract you from those feelings of inadequacy. Who knows, maybe you’ll respond by running out and buying a different book on the subject.

Resist the urge to quit (or take a break) at all costs, but be aware that you will likely feel this way. I know this is difficult. In just the time spent writing this post, I’ve wanted to stop several times and check my e-mail 3 times.

Get back on the horse

If you do fall off the horse, don’t beat yourself up. Just get back up there and get going again. If you get distracted and start looking for a different “silver bullet,” recognize what you are doing, chuckle at yourself, and get back to work.

Nobody is perfect. We’re just human. Genius isn’t perfection. Genius is fortitude and action in the face of imperfection.

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It seems like it’s been a long time since we’ve had good news on the 0% balance transfer credit card front, but here we go… Discover has a couple of new balance transfer offers for those that are looking to transfer their balance and get a break from their interest payments.

Discover More: 0% for 18 months

One of the biggest changes that occurred when credit card issuers started tightening their belts was that they slashed the length of the promo periods. Whereas 12-18 month balance transfers were once standard, card issuers cut them to 3, 6, or 9 months.

The good news is that longer offers are now starting to appear, including this 18 month 0% promo from Discover. There is a balance transfer fee of 3%. So if you’re looking for a nice long promo period, this card might be worth exploring.

Discover More: 0% for 15 months

Another big change that occurred on the balance transfer front was that pretty much every card issuer started instituting balance transfer fees. While no fee offers used to be the rule, they were quickly replaced with cards charging 3%, 4% or even 5% transfer fees.

You can still get another 3% balance transfer fee with the Discover More card. The 0% promo period runs for 15 months, and you also get 0% on purchases during this time.

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Wow. While watching TV the other night, I saw an ad for a lending service that promised to put $2500 in my checking account overnight. There’s no collateral required, and no fees for early payoff.

Sounds good. Where do I sign up? Hmmm. On second thought, maybe we should check out the terms first.

Upon arrival at their website, I saw the following:

Application time less than five minutes! Not a payday loan!

Oh good, it’s not a payday loan. I’ve heard that those have high rates, so it’s probably best to avoid them. This, on the other hand… Well…

The woman in the commercial admitted that “the money is expensive,” but assured me that I can minimize my costs by paying it back as fast as possible. And besides, it’s not a payday loan, so it can’t be that bad. Can it?

Let’s take a look at the rates:

You can get a $2600 loan, which works out to $2525 after deducting the $75 “loan fee,” in return for just 36 monthly low monthly payments of $298.94. For the math impaired, that $2525 loan will cost you a total of $10761.84 (plus the $75 fee). That works out to an APR of 139.34%.

If you don’t need quite as much money, you can get a $1500 loan, which works out to $1000 after deducting the $500 “loan fee,” in return for just 24 low monthly payments of $166.95. In other words, that $1000 loan will cost you $4006.80 (plus the $500 fee). That works out to an APR of 194.70%.

But look on the bright side… At least it’s not a payday loan.

While I realize that there are extreme instances in which a short term, extremely high interest loan is preferable to the alternatives, it pains me to see these sorts of things being advertised on late night television knowing full well that their switchboards are lighting up. If they weren’t, they wouldn’t keep running the ads.

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I’m a little late to the party on this one, but the link still works, so I thought I’d share it here… If you act fast, you can get a free pdf download of David Bach’s new book “Debt Free for Life.” It was supposed to be yesterday (1/5/11) only but, like I said, the link still works.

Here’s the direct download link: Debt Free for Life

If you’re not familiar with Bach, he’s written several other finance books, including:

• The Automatic Millionaire
• The Automatic Millionaire Homeowner
• Start Late, Finish Rich
• Start Over, Finish Rich
• Smart Couples Finish Rich
  

Enjoy!

Hat tip to WalletPop via MyMoneyBlog

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While you don’t have to wait for January to start working on your finances, this is often a great time to try a new approach. If you’re thinking of making some changes, you may be wondering where to start. Here are some ideas for optimizing your finances.

Clean up your bank accounts

If you have multiple bank accounts, make sure they’re all necessary and doing their job. If you have extra accounts that you no longer need, consider consolidating them. There’s no need to have checking and savings accounts at multiple banks unless you’re actually using them.

Get free checking

Some banks are cutting back on their free checking accounts by nickel and diming their customers. If your bank is charging any of the following unnecessary fees it’s time to shop around.

• Minimum balance fees: Many banks will charge you if you have less than a certain amount in your account. Requirements vary from one bank to another, so make sure you know it for yours.
• Overdraft fees: While charging for overdrafting is fair, the amount that many banks charge can be insane. Did you know that you can avoid overdraft fees entirely with ING Direct? Instead, they offer an overdraft line of credit and charge a small amount of interest when you use it.
• ATM fees: ATM fees have risen to $2-3 for out of network use, and you’ll often get charged by both the ATM owner and your own bank. These fees can quickly add up, so shop around for a bank with low or no fees and/or ATMs where you need them.
• Fees for online billpay: These fees are less common than they used to be, but some banks still charge a fee for using their online billpay service.

Double check your recent bank statements to find see if you’ve been incurring any of these fees. If you can’t get your bank to waive these fees, then switching banks might be your best option.

Are you saving enough?

Automating your savings is one of the keys to financial success. But have you really though about much money you’ll need for various expenses? To figure things out, you need to sit down and list your needs and goals. Here are some ideas:

• Emergency fund
• Vacation fund
• House down payment
• Medical expenses for the year
• Car replacement fund
• Baby fund
• College savings fund
• Retirement fund

Every family will be different, as everyone has different goals. You may not want to be homeowners, or maybe travel isn’t a priority. Whatever your list looks like, it’s important to sit down and hash things out.

Spruce up your paycheck

Another good thing to do at the start of each year is to take a close look at your paycheck. Is your tax withholding right? Are you being paid what you’re worth? Can you think of other ways to earn extra money?

Look at your W-4

If you receive a tax refund, you should consider adjusting your withholding for 2011. While you’ll reduce your tax refund for next year, you’ll get more money in your pocket each pay period.

At the same time, you should set up (or adjust) an automatic savings transfer to make sure you don’t squander this “extra” money.

Ask for a raise

It may seem counterintuitive to ask for a raise when economy is still stumbling, but you should still take a close look at your circumstances. If you’re underpaid relative to others in a similar position, you should consider asking for a raise – especially if your employer has successfully weathered the economic storm.

Before talking to your boss, you should get your ducks in a row. Make a list of successes you’ve played a role in, and progress that you’ve made over the past year or so. You need to make a compelling case for why you’re due for a raise. You might not get as much as you want, but you’re unlikely to get anything if you don’t ask.

Make money on the side

If you’re having trouble making ends meet, you should consider moonlighting. It doesn’t matter if you wind up freelancing some of your professional skills, tutoring, or even delivering pizzas. What matters is that you earn some extra income to fill the gap.

Whether you plan on paying down your debt or building up your savings account, having an alternative income stream can help make your goals a reality.

Your thoughts

Now… I’d love to hear about your goals for 2011. Have you started working on your finances for this year? What’s your biggest financial goal for 2011? What steps are you taking to reach it?

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Doing anything fast usually has limited and temporary success.

Think about it… Lose 10 pounds in a week! Get out of credit card debt in 90 Days! Turn your investments into millions in a year!

All of these promises are pie in the sky. They might get results for some people, but it’s usually the people who sell the programs, not the people who buy them. You know this, of course, but here’s why you get taken advantage of anyway:

You want the easy way out. Unfortunately, things like getting out of debt are hard, and the debt itself is downright unpleasant. Creditors call you asking about their money. Your phone keeps ringing. The letters are even worse. You don’t even open the mail anymore. The pain builds and builds.

Then, just when you think you can’t take it anymore, you hear about a program that promises to get you out of debt in 90 days or your money back. Before you can say, “Suze Orman” you whip out your credit card and order the program.

As soon as the package arrives you rip into it and diligently put the principles to work.

Then, after just two weeks, you get tired of all the hard work. You don’t see the promised “instant results,” so you put the books aside for a few days. Before you know it, it’s been a month since you last visited the program, and now you’re deeper in debt than ever. You tell yourself that nothing works, so you give up completely. That is of course until the pain builds up again and you repeat the cycle.

Are you seeing a pattern here? Do understand now why you should not try to get out of debt fast, raise your credit score overnight, or lose 10 pounds in 10 days? It’s because you’re impatience sets you up for failure.

You and I are procrastinators at first. We wait until the problem becomes unbearable and then we become impatient, demanding instant solutions. These “solutions” never work and, once we realize that, we become disillusioned and our motivation goes out the window.

Vendors understand our character defects and take advantage of it to the hilt.

They sell us on the “instant results” we want and give us a “money back guarantee.” These companies know we’re motivated by immediacy. They also know that most people never even open the box after they buy something. It just sits on the shelf. The manufacturer has nothing to lose no matter how poorly their products perform for you and me.

I don’t blame people who sell this stuff. Nothing I do or say is going to change them. But we can change ourselves. We want solutions, but are we willing to do the work to get the results? Are you?

A better approach is to break down your ultimate objective down into achievable daily goals. Let me explain.

Let’s say you want to re-make your financial plan. This is a pretty big exercise, and one that I’m in the middle of as we speak.

The first task I had was to create an action list.

I needed to look at my spending, savings, life insurance, investments, liability, disability, car, and homeowner’s insurance, continuation plan, and legal documents.

Was my spending in line? What did do we spend? Is our spending going in the right direction?

How much do we need to save? Are we doing it? What is the expectation for those savings going forward (given that I have 2 kids in college). Am I going to be able to save more or less over the next several years?

How have our investments performed? Am I over-weighted in any particular area?

Is my trust up to date? Are all the legal documents in order to protect myself and my family?

Do I have enough life insurance? Am I paying too much for it? How about disability? Since I’m self-employed, disability insurance is an especially big deal.

This is just a partial list of questions of course. Also, my experience tells me that once I do a bit of research and answer one question, it’s entirely possible that 4 other questions might pop up. This is not a process you embark upon with the idea of finishing in one sitting.

With so much to do, it was easy to procrastinate. It just seemed like I never had the kind of time I needed to take a big stab at this.

What I did was schedule an hour at a time to work on it. I didn’t give myself a deadline to complete the project. I just cleared my desk at home on a Sunday afternoon and went at it. After I complied the “to do” list, I chipped away at it, one item at a time. And I told myself from the get-go that this was going to take some time.

I needed to get input from lawyers, accountants, and insurance agents. I also had to go over everything with my wife. On top of this, I understood that the process was dynamic, and that I’d probably have to do it again in the near future.

To be completely frank, I’m not done with updating everything but I’m a lot further than I was before I started. Once I let go of the manufactured need to complete this immediately, I actually started making progress – and once I started working on with very focused time. I made headway much faster than I expected.

What have you been putting off? Are you willing to forge ahead despite the fact the you’re not going to get instant results? Can you break your ultimate objective down to daily tasks? Are you willing to let go of quick results?

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Briefly, here’s the situation. I “inherited” a vehicle from my ex-wife through divorce. She declared bankruptcy and, rather than have the vehicle included in that (it had my name on the lien as well as hers), I took over the payments. The payments are very high [and] are a strain on my budget. I have some options, and that’s where you come in. Which of the three following choices make most sense?

• One, just pay it off and tighten my belt. I have 11 payments left.
• Two, use home equity credit to pay it off, and then pay that off over 20 months.
• Three, use my savings to pay the balance of the car loan off, then try to pay myself back.

I have another vehicle and don’t need this van, though it’s nicer than my car.

Nickel and I both had the same response – that he should try to sell the car and use the proceeds to pay off the loan, dipping into savings if necessary. This is certainly a tough situation, so I wanted to put together some thoughts on making it happen.

Assessing the car’s value

The first step in getting out of your car loan is figuring out what it’s actually worth on the open market. If you price it too low, it’ll sell fast but you won’t get enough for it. If you price it too high, you might not be able to sell it at all.

• Consider the demand for your car. If you’re trying to unload a convertible, you’ll probably be able to sell it for more when the weather is warmer. A family sedan isn’ seasonal, so you may be able to get a fair offer whatever season you sell it.
• Check out Kelley Blue Book as a starting point. But don’t just rely on the numbers from their site. You should also check out local prices on Craigslist, eBay Motors, etc.

Now that you have an idea of what you can get for your car, it’s time to see if you can get a bank to finance the difference.

Handling or financing the difference

While it would be great if everyone could just pay off their loan after selling their car, that’s not always an option. If you have a bit of money saved up, you might be able to use that to cover the difference between the sale price and what you owe on the loan. Just make sure you still have some money left in your your savings account for emergencies.

If you’re looking for possible lenders to cover the gap, here’s a list of some possible avenues to investigate:

• Local Credit Union/Bank: If you’re a member of a credit union or local bank, check with them first to see if they are willing to work with you on an unsecured loan. Many of them offer competitive rates and the fact that you’re an existing customer may increase your chances of getting approved.
• Lending Tree: If you’re looking to connect with several lenders, Lending Tree can be a helpful resource. You submit a single loan request and they provide the information to multiple lenders.
• Lending Club: Peer to peer lending has grown more popular over the last few years and for some people, it’s a great solution to their problems.

Before going down any of these roads, make sure you have all of your financial documents in order and prepare a logical pitch for why your loan should be approved. Build confidence by creating a realistic budget where you can pay back the amount in a timely manner.

Maximizing your selling price

You can’t just put a for sale sign on the car and hope someone gives you the money you need for it. Instead, you’ll need to think of ways to increase your sales price without spending a ton of money.

Prepping your car for sale

If you want to get top dollar for your car, you should take some time to make it look good.

• Vacuum the inside of the car thoroughly. If you have stains that aren’t coming off, consider buying a seat cover.
• Dust the panels and dashboard.
• Empty all junk from the trunk.
• Wash and wax the car to keep it pristine.
• Avoid heavy scents on the inside. Use a light air freshener to appeal to more buyers.
• Clean both sides of the windows. Dirt can accumulate on the inside as well.
• Replace windshield wipers if they are in bad shape.
• Check and replace your car’s fluids.

All of these steps are relatively cheap and in many cases just involves some good elbow grease. By making the car look as fresh and new as you can, you’re giving buyers the impression that you were a careful owner.

Think like a buyer

Just like selling a home, you have to get into the mind of the buyers. If they are buying from a private seller like yourself, they’ll be wondering how well you’ve maintained your vehicle. Gather and organize all the paperwork you have on every car repair and check up done. Be ready to answer questions about how recently certain work was done. A knowledgeable seller makes it easier for a buyer to trust and hopefully buy from.

Thoughts on car loans

One other point I’d like to add for those in a similar predicament is to avoid the temptation of rolling your old car over into a new car from a dealership. I knew someone who did this and it made their finances even tighter. If you absolutely need another car, find a reliable used car as cheap as you can and stick with that until your finances improve.

I hope this guide proves helpful for some people. I’m definitely open to hearing any practical tips or ideas that you might have. Have you ever had an upside down car loan? If so, how did you get out of it?

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About three weeks ago, we took a closer look at Dave Ramsey’s new mansion just south of Nashville. In case you missed it, his home spans more than 13k square feet (including a nearly 1500 sq ft garage!) and it has a total assessed value of just shy of $5M.

A common theme in the comments on that post was “Wow, I wonder how much it costs to maintain a place like that!” Well, I’m pleased to say that I can now provide a bit of insight into that question…

The good folks who published the original account have done a bit of digging*, and have learned that Dave’s electric bill has averaged $1285/month over the past year. Wow. Nearly $1300 on electricity alone. Then again, on a 13k sq ft house, maybe that’s a bargain?

What do you think? Surprised by how much it costs to power a home of this magnitude? Or did you think it would cost more?

Note: I was surprised to learn that this information is freely available. They simply called the local electrical utility and asked.

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This is a guest post from Stathis Papas, Ph.D.

A study conducted at the University of Mainz in Germany has shown that over-indebted people are more than twice as likely to be obese as their financially stable counterparts. Dr. Eva Munster, who led the study, defines over-indebtedness as the inability to redeem one’s debts due to an insufficiency of income to meet the cost of living, even after a substantial cutback in the standard of living.

The number of people in high-income countries who meet the definition of being over-indebted has risen dramatically since the beginning of the worldwide economic crisis. In Germany, approximately 7.6% of households are currently over-indebted.

Can debt affect your body weight?

The purpose of this study was to measure the health standing of individuals who are over-indebted by comparing the results of two surveys. The first survey was conducted by telephone and included 8318 respondents that were representative of the general population.

The second study took the form of a questionnaire that was presented to the customers of debt counseling centers, resulting in 949 over-indebted people responding to the questions. Both studies obtained information about smoking behavior, body mass index (BMI), depression levels, and the socio-demographic parameters of sex, age, income and education.

Gender was found to play no role in over-indebtedness, since both men and women were equally likely to be indebted. However, among over-indebted participants, there were several common characteristics: compared to the general population, over-indebted people were on average younger, had lower income and education levels, consumed more tobacco on a daily basis, and exhibited greater depression levels. One of the most interesting findings from the survey was that the over-indebted individuals were more than twice as likely to be obese.

The link between debt and obesity

Previous studies have found a strong link between poverty and obesity. Scientists have suggested that this relationship is primarily due to an inability to afford healthy food. There is an inverse relationship between calories and cost: high calorie foods are less expensive and low calorie foods more costly. This leads people of lower socio-economic status to consume high calorie, fatty foods rather than healthier alternatives.

Although people of low socio-economic status may not have access to healthy food, they may still be able to meet their monthly financial obligations. Over-indebted individuals, however, have debts well beyond the simple cost of living, which is why radical cutbacks in the standard of living may still leave them unable to meet their debts.

In addition to not being able to afford healthy food, the over-indebted person is more likely to suffer from psychological distress. This accounts for the increased smoking behavior. Similarly, depressed emotions can lead to overeating, known as a hyperphagous reaction, which provides short-term positive feelings and gratification.

Over-indebtedness was also found to aggravate certain risk factors for chronic diseases. For example, leisure activities tended to be more sedentary in nature. Over-indebted people were also found to be more likely to lapse into unhealthy behaviors, such as smoking and over-eating, even though they knew the behavior was harmful.

Implications of the debt-obesity link

In Germany, one out of every three residents can be classified as obese. This has given the nation its reputation as Europe’s fattest country. The German government has begun an anti-obesity campaign in an attempt to reduce Germans’ waistlines. The new study provides additional ammunition that can be deployed in eradicating sociological factors that lead to obesity.

Unfortunately, obesity rates in America are similar to those in Germany. In the United States, roughly one out of every four people qualifies as obese, and the number is expected to rise. If the German study’s results are found to be applicable to other countries, the link between over-indebtedness and obesity is cause for concern, as record numbers of Americans have been filing for bankruptcy.

The United States is “obesogenic”

Obesogenic is the word used by the CDC (Centers for Disease Control) to describe the United States. This means that society itself sets the stage for obesity. Government policy, in particular the congressional farm bill, subsidizes fattening foods, making them more affordable. The nation’s workers are increasingly sedentary and the car culture encourages driving over walking.

Could the newest obesogenic factor in American society be over-indebtedness? If yes, then in this country racked by record levels of personal debt, the obesity rate is set to skyrocket.

Extrapolations

The findings of the Mainz study suggest that over-indebtedness is a risk factor for obesity. But the opposite could be true as well. Compared to normal people, obese individuals may be less successful as job prospects because of the social discrimination they face and their own psychological barriers (negative body image).

New studies will be required to determine the direction of the causality in the obesity-indebtedness association and whether these two are linked inextricably. If the premise that becoming over-indebted leads to weight gain is accepted, the next question will be whether losing weight could improve one’s financial prospects.

About the author: Stathis Papas, PhD is a research scientist who follows health trends in obesity, diet, and weight loss, and their relationship with fluctuations of the global economy. He runs Weight Loss Triumph, where he shares information about popular weight loss programs. His site currently features articles on weight loss programs including Medifast and Nutrisystem.

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That brings to the number of states eligible for borrowing through Lending Club to 42. Only Idaho, North Dakota, Nebraska, Iowa, Illinois, Tennessee, Mississippi, and Maine residents are unable to borrow using the Lending Club platform.

While I’ve only been an investor with Lending Club, and have never borrowed, former FCN staff writer Matt Jabs used them to consolidate his high interest credit card debt and had a great experience.

I actually invested in Matt’s loan to the tune of $500 and earned a nice 9.32% return until he paid it off early. While writing this post, I shot Matt a quick IM to ask if he’d use Lending Club if he had to do it over.

Here’s his response:

“In hindsight, borrowing from Lending Club turned out to be the best decision we could have made. If I had to do it over again, I wouldn’t hesitate to borrow through them.”

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Some people turn to “title loans” to give them a quick infusion of cash to tide them over until next paycheck. Are title loans a good option when you’re tight on money or are they a rip-off? And how exactly do they work?

How car title loans work

As the name suggests, a person can borrow money with their car title as collateral. Typically with these loans, there’s no credit check and your application is processed quickly. They’re mainly used as cash advances, and their term is usually 30 days.

The maximum amount someone can borrow varies, but it’s usually no more than 50% of the car’s value. To qualify for the loan, the borrower needs to own the car outright. After assessing the value with an inspection, there is usually a small amount of paperwork and then the money is loaned.

As with payday loans, there are term extensions that some borrowers can take out, but many times this will lead to a cycle of debt with the constant threat of repossession.

Big fees and interest rates

Title loans are not cheap. They tend to have higher interest rates than banks, credit cards, and in some cases, payday loans. As always, there’s a high price for quick cash, and it’s usually to the borrower’s detriment.

When people take out such loans they may see the amount due on the loan, but if they calculated the APR it can be over 100%! Some states, like Florida and Illinois, have placed restrictions on the interest rates and fees charged by these companies. The end result is rates that are still quite high – often around 30% – but more reasonable than in other places.

Too much risk

Putting your car on the line is leaving yourself open to a financially devastating situation. What if an emergency happens and you lose your car? Not only will you be stuck without transportation, but you’ll have given up your car in return for only a fraction of its value.

I think that if someone is having a difficult time paying bills to the point that they need to get a title loan, there is a strong possibility that they can’t afford to replace their car if they lose it.

Don’t think they’ll go after you or they’ll cut you a break? Some title lenders require GPS tracking, and may ask you for a copy of your car’s keys. Lenders do not give out money unless they expect to get it back

How to avoid taking a car title loan

In general terms, you can avoid financial disasters, or at least minimize their impact, by planning ahead and building up an emergency fund. Eliminate excess expenses temporarily or permanently from your budget. Pack your lunch, stay home instead of going to the movies, and cut the cable bill if you have to – any of these are far better than jeopardizing your financial future.

If you can’t cut your budget any further, then consider taking on a second job as an added source of income. Be a waiter or deliver pizzas – do whatever necessary to get more money into your budget. You don’t have to stay at your second job forever.

Save up a comfortable cushion of at least 3-6 months worth of your expenses and you should be able to ride out most emergencies that crop up. If you’re not comfortable at that level, work your way up to 12 months worth of expenses. Stash you funds in a dedicated savings account where you’ll be able to keep it accessible but resist the temptation of dipping into it.

What if you need the money now? Many of the above tips apply. Cut expenses, increase income, etc. If that’s not enough, check with your bank for a short term loan, sell some of your stuff, compare rates against credit card cash advances, or apply for a peer-to-peer (P2P) loan from an outfit like Lending Club. Whatever you do, please think twice before getting a car title loan.

Your thoughts on car title loans

What do you think about title loans? Do they serve a useful need, or are they predatory loans? Have you ever used one? If so, what was your experience like?

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I decided that enough was enough, and I finally stopped communicating with them on the phone. I was getting nowhere, so I kept any communication I had with them in writing. I know I’m not the only who has had problems with collection agencies, so I prepared some information for tackling this trying situation.

Tricks of the Trade

While not everyone working in the call center is a crook, there are too many horror stories about nasty collectors who threaten and harass you into sending them money. For example, CNN Money had a piece on previous debt collectors who shared their stories about the industry.

Here is a summary of some of the underhanded activities that went on:

• Admitting at times that he had to have a ‘black heart’ to survive, a collector threatened debtors and intimidated them to get payments.
• Contests at a particular collection agency to see who could get the most people to cry.
• A debt collector took advantage of debtors’ ignorance and identified himself as legal counsel, and would ask questions that they had the right to refuse to answer.
• Neighbors and family members were targeted to pressure the debtor to make payments.

There are plenty more stories, some much worse than what I highlighted, but you can see that you have to stay on your toes when working with debt collectors. If the debt is your responsibility, you should pay your debt off as quickly as you can.

However, you shouldn’t be bullied or intimidated by someone to handle your finances. Don’t be a victim; know your rights and how to handle them.

Your rights under the FDCPA

Your best protection with a collection agency harassing you is the Fair Debt Collection Practices Act (FDCPA). Why was the FDCPA created? There was a study that found the following practices in its investigation of the debt collection industry:

There is abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors. Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.

Source: FTC.gov

The FDCPA is there to help minimize this problem as the laws at the time didn’t cover the issues adequately. While there is a lot of material in the Act, I just want to highlight a few key provisions.

What’s allowed under FDCPA

• Reasonable hours for phone calls – Debt collectors can only call you between 8am and 9pm.
• Verification – You have the right notify the collection agency within 30 days that they need to verify the debt if you doubt their claim.
• Request no contact – You have the right to instruct them to cease contacting you by sending your request through certified mail with a return receipt. They can only contact you to confirm that they received your letter and/or if they are filing a lawsuit. The debt doesn’t go away, you’re still responsible for it, but they have to stop hassling you.

What’s not allowed under FDCPA:

• Harassment – They cannot use profane language, or repeatedly call you for the sole purpose of bullying or abusing you.
• False statements – They cannot misrepresent themselves (either as law enforcement or part of a credit reporting agency), give you a false amount of your debt, or claim that you’ve committed a crime.
• Invasion of privacy – While they may call your family to get contact information, they cannot speak to anyone but you and your lawyer about your debt.
• Peace at work – While they can call you at your place of employment, you can request in writing that the cease. If they continue calling you at your job, then they are violating FDCPA.

Talking with debt collectors

Working with a collection agency can be difficult, especially if they’re aggressive. Here are some things you need to keep in mind when working with debt collectors to protect yourself.

• Double check that it really is your debt. You’d be surprised at how some credit collector mistake you for someone else with the same name. You also want to check to see if you were a victim of identity theft with this debt.
• Never agree to a payment plan you can’t comfortably afford. Debt collectors want their money, they’re not thinking about how it affects your grocery bills or your rent. They will push you to pay the maximum they can get.
• Make sure they send you the payment plan in writing before you give them money. While many of us are honest people, but you can’t guarantee that the person on the other line is, too. Protect yourself and tell them that you need the paperwork first before you’ll send in a payment. Some may scream, yell, or argue with you, but you have to stand your ground on this.
• If all else fails, communicate only by certified mail. If they are being bullies with you, then keep all communications traceable. Contact your state’s Attorney General if they flagrantly violate your rights.

Your debt collector stories

I’ve heard some scary debt collection stories. I hope none of you have gone through the nightmare that some people had to deal with, but I know some of you probably have.

Have you been harassed by a collection agency? Were you ever bothered by a debt collector even though the debt wasn’t yours? How did you resolve the situation?

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In the war on waste, we’re a credit to our communities. Our habits and our habitats are “greener” than ever. Sadly, in the war for our wallets, we’re still letting plastic beat paper. In the interest of “greening” our finances, here are seven solid ways to pay off credit card debt. For best results, do them in this order.

1. Own what you owe

It sounds so basic, but you can’t formulate a plan to pay off credit card debt if you fail to recognize you have a problem with plastic in the first place. This is easier said than done, as it’s not easy to admit to ourselves that we’ve been living a lifestyle beyond our means.

However, once you come to that conclusion and take ownership of it – I got myself into this situation and I can get myself out – the results can be both liberating and empowering.

2. Re-evaluate your spending habits

Once you recognize that a “plastic problem” exists, you need to take a good honest look at your spending habits and establish new priorities. Although taking short cuts by “guesstimating” will be tempting, nothing will give you a clearer picture of your actual wants and needs than itemizing all of your monthly expenditures.

The words “all” and “monthly” appear in bold to remind you that you must write down every single expense, no matter how insignificant it may seem at the time, for a time period of no less than 30 days. Only then will you be armed with the information necessary to take the next step.

3. Negotiate down your debt

Although many people look at this step as something to be saved when times get really desperate, the old adage “it couldn’t hurt to ask” applies here more than ever. After all, why go to all the time and trouble to formulate a pay-off plan based on the current credit card interest rates you are paying when it’s likely that some or all of those rates could be lowered significantly just by asking.

Like all of us, creditors want to be paid what’s owed them. Therefore, any effort on your part to make lenders aware of financial hardships, as well as your intentions to stay current and avoid defaulting, will most likely result in your being offered lower interest rates and/or longer repayment schedules. You have nothing to lose, and this step alone could save you literally thousands of dollars.

4. Formulate a pay-off plan with realistic goals

Nothing will give you a new perspective on the power you have to change your financial situation than the realization that you can control to a great degree, maybe not how much money comes in, but how much money goes out. Unfortunately, along with this newfound power comes the tendency to plan a pay-off strategy that is too aggressive.

Remember, just as most credit card debt is incurred over time, it will also take time to pay that debt off. Setting unrealistic goals that involve paying too much over too short a time period only invites discouragement as those goals fail to meet your high expectations. True empowerment comes from basing your strategy on realistic goals that can be met.

5. Maximize your pay off power

One of the best ways to realize your long-term goals is to take short-term steps of empowerment along the way. With this in mind, depending on the extent of your credit card debt and your ability to stick to a plan, it might be best to first pay off, not the card with the biggest balance and interest rate, but a card carrying a debt you can pay off more quickly.

Keep in mind that you should pay the maximum amount over the minimum monthly payment that you possibly can and budget accordingly. Then, when the card is paid off, you’ll have the gratification of having set and achieved a financial goal. With this shot in the arm, you can evaluate the next best debt to conquer, using the same monthly amount you paid on the first card, plus an extra amount your early success will motivate you to find.

This is not to imply that the process will be easy. However, early rewards will reinforce the fact that the sacrifices you are making are worth it.

6. There’s no substitute for self-discipline

As debts are paid off and cash flow improves, the tendency might be to pull out your low or no-balance credit cards from time to time. Don’t do it. Even worse, as you successfully pay off other accounts you may start getting new credit card offers in the mail, dangling the tempting offer of the 0% balance transfer credit card.

Trash-can these come-ons immediately. Balance transfers are temporary band-aids at best, and should never be considered as part of a long-term strategy to pay off plastic debt.

7. Reward yourself along the way

Although patience and perseverance can be their own rewards, it doesn’t hurt to reward yourself as you meet your short term goals. Obviously, the reward should be modest. You won’t be leasing a new Mercedes with your newfound funds. However, a nice night out at the restaurant you used to frequent, or a small, non-impulse purchase would be considered appropriate – just as long as you pay cash.

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Five Cent Nickel has previously featured articles on Alternative Approaches to Investing with Lending Club and My Lending Club Loan Selection Criteria.

When I was offered the chance to co-author The Complete Idiot’s Guide to Person-to-Person Lending, I jumped at it. I just love the whole concept of social lending.

The person-to-person (P2P) lending industry has changed a lot over the past couple of years, especially since the SEC began regulating the industry. Social lending isn’t quite as personal as it once was, but at its core, it’s still all about people helping people. And if you’re the borrower, you have a chance to explain to lenders why you need the money and why you’re a low-risk borrower. You can try this at a bank, but it’s tough to pull that off right now.

Here are five things you need to know before you apply for a P2P loan:

#1: Check your credit report

You’re can get a free credit report each year from each of the three major credit bureaus (Equifax, Experian, and TransUnion) by visiting AnnualCreditReport.com. You should check your report before applying for a P2P loan to make sure there aren’t any errors. If you find any incorrect information, you will need to correct the errors on your credit report before applying for a loan.

You’ll also want to know what’s on the report, especially if you’ve made a late payment recently. Basically, you want to find out ahead of time if there’s anything on your credit report that might keep you from qualifying for a P2P loan, or which might need explaining.

#2: Check your credit score

Unfortunately, your credit score doesn’t come with your credit report. While you can sometimes find offers for free credit scores, you might end up having to pay to see your score. I would recommend checking both Equifax and TransUnion. Why two? Because each bureau may have a different score for you due to differences in your credit reports.

Experian uses a different scoring system. Their site often has promos for getting your score for as little as $1, but beware… If you sign up for this deal, you automatically get a free trial subscription to their credit monitoring service. If you don’t opt out before the trial ends, you’ll get billed $14.95 per month.

The reason you want to know your score before you travel further along the P2P path is because the major sites have minimum FICO score requirements. To get a loan with Lending Club, you need a minimum FICO score of 660. At Prosper, you need a minimum score of 640.

#3: Determine your debt-to-income ratio

This sounds complex, but it’s really simple. Your debt-to-income ratio (DTI) compares the amount of money you earn to the amount of recurring debt you owe to creditors.

Here’s an example:

Let’s say James makes $72,000 per year as a manager for a paper products company in Scranton, Pennsylvania.

Gross monthly income: $6,000
Recurring debt expenses: $2,200
DTI ratio: $2,200/$6,000 = 36.7%

Honestly, James has a problem because 36.7% is high. Lending Club, for example, requires a 25% DTI ratio. Think of your DTI ratio as the opposite of your FICO score—the lower the number, the better. If your DTI ratio is over 25%, you might not be in good enough shape to get a loan.

#4: Research P2P lenders

Researching P2P lending websites has never been more important. Some of the websites I wrote about in my book have disappeared from the P2P scene. Not all of them had viable business models. But the big ones — Lending Club and Prosper — are still there. If you’re considering a site that hasn’t been around long, research it to death. Seriously.

In fact, unless you’re seeking a loan to pay for something like college, I suggest sticking with either Lending Club or Prosper. At the moment, I lean towards Lending Club. In the recent past, both Lending Club and Prosper had to redesign their lending platforms to comply with the SEC. Lending Club made the change first and has had more time to work out the kinks. But the management at Prosper is a very capable group, so I expect the site will be fine in the long run.

Whichever P2P site you choose, spend time on the site and read the FAQs. If the site has a forum, participate and ask questions. And don’t hesitate to e-mail the site and ask more questions. It’s also a good idea to ask to speak with someone who got a loan on the site. This is the way to get the real scoop on what it’s like to borrow through that company.

If you’re looking for a loan to pay for college, you should also take a look at PeopleCapital.com. This P2P site is SEC compliant and specializes in providing student loans. Instead of using a FICO score, it uses a Human Capital Scoreâ„¢. This score is based on future income potential and includes factors such as your GPA. Lenders use this score to determine if a student has the capacity to repay a loan.

#5: Know that you can repay the loan

Don’t let desperation for a loan lead you to take on a debt that you can’t repay. Be sure you have a budget—on paper or online—that shows how much you can easily spend on a monthly P2P loan payment. Look at the numbers closely and make sure you can handle this financially.

If you fail to make a loan payment, P2P lending websites will report you to the credit bureaus and ultimately send you to collections. And yes, this will make your FICO score go down. But if you make your payments on time, you’ll have an opportunity to increase your FICO score.

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I recently ran across an interesting article that provided details about Ramsey’s new mansion just south of Nashville (pictured below). Based on what they had to say, it seems that Dave has a taste for the finer things in life…

According to tax records, Dave’s house spans more than 13,307 square feet – not including the 1,454 square foot garage – and sits on a parcel of land that Dave bought or $1.5M back in 2008. Though the market value of the land has reportedly dropped to $750k, the total assessed value of his home is $4,909,200.

Curious what it look like on the inside?

From what we hear Dave’s home office, including the sliding library wall ladder, is made of solid mahogany. The shower in the master bathroom is rumored to have 18 shower heads and is larger than the jacuzzi tub. Cathedral ceilings throughout. The local who we spoke with felt the basement was by far the most impressive. Full bar with whiskey barrels built into the walls, media room and several bedrooms make up the broad lower basement level you see from the distance, wrapping around the tip of the mountain.

Oh, and if you’re wondering… There’s no record of a mortgage on the property.

If you’re interested in moving into the area, you can make an offer on Lee Ann Rimes’ house right next door. While the $6,499,900 price tag might seem a bit shocking, that’s a bargain compared to the original listing price of $6,950,000. Beyond that, she’s apparently never lived there, so it should be in great shape.

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The other side of the coin is that, as you progress, you’ll find that you’ll encounter some situations you hadn’t thought of before. If you have successfully paid off your debt after years of work and have an emergency fund in place, what do you do next? Do you invest all that money for retirement or do you pay off your mortgage sooner?

I wanted to highlight some of the specific hang-ups people have with building up their finances. Some may be very familiar to you, while others could be challenges you’ll face down the road. I’ll also include some ideas as solutions to those problems.

Developing a spending plan

Having a budget or a spending plan is important if you want to build your net worth. You need some sort of accountability for how you handle your cash flow.

There are two big issues with budgets that I’ve seen (and experienced). While they may seem daunting, you can overcome them.

Making plans, but not following through

You can whip out budgets and spending plans quickly and easily. You’ve read every personal finance book from Dave Ramsey’s “Total Money Makeover” (which you memorized) to J.D. Roth’s “Your Money: The Missing Manual.” You know exactly what you need to do.

Unfortunately, many people stop right there, and don’t wind up doing anything different. They may have the best spreadsheets and the know the numbers, but actual change doesn’t happen.

Fix it: Be accountable to someone. Share your goals with your family or friends and create a buddy system to help you stay on task. For myself, I’ve found that writing a blog has been extremely helpful.

Perfectly planned budget

You’ve written the ‘perfect’ budget, with very penny accounted for and no unexpected cushions included. Unfortunately, you and your family love to eat out, but you’ve budgeted nothing for that category. You believe you’ll be gazelle intense and will NOT eat out at all. Two weeks later, your budget is broken.

Fix it: Base your budget on your real life, not the ideal situation. Do you have an older car that needs repairs from time to time? Set up a recurring payment that you transfer into savings for when it happens.

If needed, use a tool like Mint or Quicken to keep track of all of your transactions.

Paying off debt

You’ve reached a point where you’ve had enough and want to be out of debt as soon as possible. Besides getting started with reducing my debt, I had a hang up with my debt snowball.

Where to start with your debt snowball

People can have a hard time figuring out what debt needs to be paid first and how they should pay their debts off. I wasn’t sure if I should pay off my credit cards first, or if I should pay off my car loan (both had bad rates).

Fix it: Figure out YOUR priorities instead of adhering to some financial guru’s view. If you have a family loan at 0% that you want to pay off vs. a credit card debt at 23%, that’s your choice. Just take action.

The advantage of paying off your smallest debts first is that you’re getting some quick wins, which can spur you on to continue with your debt reduction plan.

On the other hand, if you pay of the highest rate first, you’ll save money in the long run. Only you know what would work best for you. That’s the benefit and responsibility with personal finance.

Building savings

Sooner or later, you’ll want to stop be reactive (eliminating debt) and start being proactive (building your savings). Two of the most common issues are having too small of an emergency fund and having no plan to save.

Inadequate emergency fund

People don’t save enough because they aren’t realistic with what their needs are. They imagine that it will be fixed magically or by someone else. Instead, some people put themselves back into debt by using credit cards to bail them out.

Fix it: Review your budget and see how much you really spend. Choose how many months you would like covered if you lost your job. How long do you think it would take for you to get back on your feet?

Go ahead and set up a transfer into your savings account to cover for those unexpected expenses, and don’t touch it unless you’re facing a true emergency.

No structured savings plan

As you get familiar with building some savings, you begin seeing that there is more than just putting aside money. You have goals for your money. Many of us will have the a lot of the same expenses – people get married, buy houses, take vacations, etc.

Fix it: Planning ahead and saving for these events makes financial sense, even if they are years away.
How can you accomplish it?

• List all upcoming expenses. Do you plan on buying a house within the next 5 years? Do you want to travel to Italy next summer? Write down all your future plans on paper to make it concrete.
• Research the average price for each. Look online, ask friends, or check sources to see about how much you should put aside for each goal. A wedding in New York City is probably more expensive than most places.
• Automate your savings.
  Go ahead and transfer a set amount from your checking account into savings for that specific purpose.

Worst case, you won’t use the money for the specific purpose that you envisioned, but now you have a nice chunk of money to spend on something else that you love.

Investing for the future

You’ve taken care of your debt, you have six months of savings, and you have monthly transfers for the dream car you always wanted to buy. Now you’re trying to optimize your investments. What are some problems you may encounter?

Following the latest stock tips

Some people love invest in hot stock picks. Every month, personal finance magazines highlight the best funds to buy or the top companies to add to your portfolio. TV gurus are even worse, as they do this on a daily basis.

Fix it: Ignore the hype and simplify your investments so you can stay on track for retirement. Focus on investing in low cost investments with solid returns like index funds. Also, you should regularly review your asset allocation to make sure your portfolio isn’t too conservative or too aggressive for your time horizon.

Pay off the mortgage or invest?

Some argue that you should invest any extra money that you have on hand since the stock market has returned a historical averaged of 11%. Others claim that paying off your mortgage faster is better since you’re eliminating a big expense from your budget and you’re saving interest from paying it earlier.

Fix it: Congratulations, friend, you have a great problem. Either option will benefit you. Investing the money while keeping your current mortgage can give you more money when you retire due to compound interest and the historical return on investing in the stock market. But paying of the mortgage gives you a guaranteed return, and can also provide you with peace of mind.

Thoughts on achieving financial freedom

The evolving nature of our finances is exactly why personal finance bloggers can write about the topic for years on end. It’s a dynamic topic. Everyone has to tackle their own financial issues and celebrate their personal victories.

I’d love to hear your thoughts. What difficulties have you faced as you’ve been working to improve your finances? Any tips for overcoming these obstacles? What about milestones that you’ve achieved? Is there anything you’d like to brag about?

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Over the past couple of years, as the country sank into recession, the debt settlement industry boomed. This explosion was accompanied marketing campaigns promising to wipe away the majority of your debt with minimal downside.

But is that really the case? As I’ve noted in the past, there are a number of dangers associated with debt settlement, including damage to your credit score, income tax consequences, and the threat of lawsuits. Oh, and don’t forget the fees.

With the FTC’s new rules in place, however, debt settlement companies have to reign in their marketing. Among other things, they’re now required to disclose:

• How long it will take to see results
• How much it will cost
• The negative effect of debt settlement on your credit record
• Key details related to any “dedicated” accounts that might be used to hold the consumer’s cash during the debt settlement process

They’re also specifically prohibited from misrepresenting their services by, for example, promising to wipe away half your debt with few or no consequences. The FTC is also extending the rules governing telemarketing in this area to include calls inbound calls that you make to the company.

Another major change, effective October 27th, is that debt settlement companies won’t be able to collect advance payment. In other words, they’ll have to actually do something before getting paid instead of skimming their fees off the top before making any payments, negotiating better terms, etc.

All in all, I’d have to say that these rules are a step in the right direction, though some have questioned if they really go far enough.

What do you think? Should the FTC be stepping in to protect consumers from debt settlement companies? If so, do these new rules go far enough?

Source: FTC.gov

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One option for consolidating your debt is rolling it into a HELOC. But first… You might have some questions.

What is a HELOC? Is consolidating debt with a HELOC a financially sound decision? What problems might arise if you use your HELOC to reduce your debt?

What is a HELOC?

The term HELOC is shorthand for “home equity line of credit.” Home equity is defined as the difference between what your house is worth and what you owe on the mortgage. This home equity line of credit essentially let you borrow money using the equity in your house as collateral.

Lenders typically calculate the line of credit based on a percentage of your home’s appraised value. For example, if you have a house that is appraised at $200,000 and your principle is $135,000, he lender may calculate your home equity line as:

$200,000 * .80 (it varies among lenders) = $160,000
$160,000 – $135,000 = $25,000 HELOC limit

The percentage of your home’s appraised value depends on the lender, but it’s generally 75-80%. With houses appraising for much less than they used to in some areas, many homeowners have had their HELOC reduced or closed.

Why you should use a HELOC

The big plus with using your home equity line of credit to consolidate your debt is that you’ll almost certainly reduce the amount of interest that you’re paying. Since it’s a secured loan, your HELOC will typically will have a much lower interest rate than your credit cards.

If you’d like to play around with just how much you can save, I highly recommend the online calculator over at Dinky Town.

Another good reason to use a HELOC is that, assuming you itemize you tax deductions, the interest on your HELOC is tax deductible. Thus, you’re not only paying much less in interest, but you’re also catching a tax break, thereby reducing the cost further.

Why you shouldn’t use a HELOC

The other side of the coin when using a HELOC to consolidate debt is that you’re taking unsecured debt (credit cards) and tying them to your home. This can be a risky bet – what happens if you lose your job and can’t pay your HELOC? You risk losing your house, that’s what.

Also, getting a HELOC isn’t necessarily cheap. There are several possible fees associated with it that add to the total cost. Some of the fees you might face include:

• Appraisal fee
• Application fee
• Annual fees (some, not all lenders charge this)

Ultimately, you’ll have to weigh the costs of opening an account against simply using a debt snowball, or similar approach, to get out of debt.

It’s also worth noting that lenders have gotten much more strict when it comes to approving loans, so if you’re looking at getting one, be sure that you can qualify.

Another minor downside is that when you apply for a HELOC, they’ll do a hard credit inquiry which can hurt your credit score. It’s not much of a hit, but it’s worth keeping in mind.

Thoughts on using a HELOC for debt reduction

In my opinion, if you can get yourself out of debt in two years or less, I wouldn’t bother with a home equity line of credit. If you’re struggling with high interest rates, try negotiating with the credit card companies or look into doing a balance transfer to a card with lower interest.

Personally, I’m not a fan of converting unsecured debt (credits cards) to secured debt (HELOC). Yes, you can save money, but… With people getting laid off and paychecks being cut, your plans could fall through and you could lose your home.

There are other options besides using a HELOC if you’re looking to consolidate your debt. For example, you could try to get a personal loan through your bank or credit union, or you could consolidate your debt with a loan from Lending Club.

Your take

Have you ever used a HELOC to consolidate your debts? How did it work out for you? Would you do it again? Why or why not?

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“Be weird. Live debt free.”

This message was part of a pitch for Dave Ramsey’s “Financial Peace University,” a Biblically-based personal finance course with a major focus on debt reduction.

This got me to thinking… While I realize that they were just trying to be cute and catchy (it worked), have we really gotten to a point where debt freedom is “weird”?

I was raised in a family that never carried consumer debt and, aside from our mortgage (now paid off), my wife and I have never been in debt ourselves. In other words, debt freedom has always been normal for us.

What about you? What’s your debt situation? Do you have a mortgage? Student loans? Credit card debt? One or more car loans? More importantly, do you have a plan for getting out of debt?

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The bad news is that the fees associated with many of these offers are climbing. The good old days of no fee balance transfers within a promo period of 12-18 months are (for the most part) long gone. Instead, most 0% offers come with a transfer fee and/or a much shorter introductory period.

While these fees used to be in the 1-3% range, and were often capped at a max of $50-$100 per transfer, credit card issuers have been ratcheting things up. In fact, according to a recent study by the Pew Charitable Trusts, balance transfer fees climbed from 3% in July 2009 to 4% in March 2010.

And guess what? The longer the intro period, the higher the cost, with promos lasting 14 months or longer costing as much as 5% of the total amount transferred. In other words… You need to look critically at any offers that you receive, and don’t forget to factor in the transfer fees when doing the math.

Source: Consumer Reports Money Blog

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Anyway, I don’t usually look at our credit card statements too closely, as we pay our credit card bills in full every month. I usually just skim over the transactions to make sure everything looks right, and that’s about it.

This time around, however, my eye was drawn to the “Minimum Payment Warning” box, pictured below. I’ve talked in the past about recent credit card statement changes, and this is one of the new additions.

For context, our closing balance was $2720.12, the APR is 15.24%, and the minimum required payment is $54. As you can see from the image above, if we made that minimum payment each month and never made another charge, it would take us 21 years to pay it off. 21 years!

Not only would we be paying for our July 2010 purchases through the year 2031, but it would come at a total cost of $5,936. That’s 118% extra. 118%! If that’s not motivation to get out of debt, I don’t know what is.

The whole point of this table is to make it clear to people just how much money they’re wasting by carrying a balance. They do their best to obfuscate things in the next line, however, where they present an alternate payment scenario.

Guess what? If you pay $95/month, you can pay it off your balance in three years while “saving” $2,525. That’s all well and good until you remember that this “savings” actually represents nearly $700 in extra interest payments vs. paying it all off up front.

Hmmm. No thanks. I think I’ll keep paying my bill in full. What about you?

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On the face of it, getting out of debt seems simple; spend less than you earn and pay back what you owe with the difference.

So why is it that it’s so hard to actually do?

There are a few reasons.

First, trying to get out of debt is intimidating. It’s like having to climb a very tall mountain starting from a very shallow valley.

Most of us stare at that mountain in awe. We think about how much work it’s going to take to get to the top. As a result, we stay anxious and paralyzed. And we stay in the valley.

But how does a mountain climber approach this task?

One step at a time.

They don’t think about the torturous days ahead. They just think about putting one foot in front of the other.

When you’re trying to get out of debt, you might face a mountain of bills, and your debt might be so great that it gives you a nose bleed just thinking about it.

In that situation, I know it’s really tough to think about taking one step at a time but let me tell you a secret.

That is the only way you’re ever going to get out of debt.

In fact, this is exactly what’s behind your struggles. You start off very motivated but little by little, you change your focus to the mountain rather than the step in front of you.

As a result, you give up.

Think about the challenge of losing weight.

Let’s say George wants to lose 20 pounds, and he’s been trying to do it for years.

He’s tried lots of diets – and they all work.

For awhile.

Then, he slips back and ends up heavier than ever.

Why?

Let’s take a look a closer look.

Every time George steps on the scale, it reminds him that he is 20 pounds overweight. Let’s say he decides to do something about it.

He joins a gym and starts working out.

He gets serious about eating well.

After a week, he’s shed 2 pounds.

But when he looks at the scale, you know what George sees?

Failure.

He still sees that he’s 18 pounds overweight.

Those 2 pounds were tough enough to lose. He tells himself that he’ll never lose 18 more. He gives up.

The only way George is really going to lose those 20 pounds is to lose them 1 at a time.

And the only way you’re going to get out of debt is 1 dollar at a time.

What we really need to do is remain focused on taking one step at a time.

How do you do this?

1. Slow down

Get the word “fast” out of your vocabulary. When you want “fast” results you’re setting yourself up for failure. Resolve yourself to the fact that it may take time to get out of debt. Make a commitment to yourself and someone else that you’re going to stick to it.

2. Redefine success

This is also a critical step. If you define success as “having no debt” you’re actually setting yourself up for failure – just like George did every time he stepped on a scale.

Success has to be available in smaller increments, so let’s break it down.

In order to get out of debt you might need to do any number of things. There are two main areas; stop creating more debt and paying off existing debt.

In order to stop creating more debt, you need to get a tight grip on spending. That may require finding and implementing a budgeting system and having a family discussion about the new focus on spending cuts and getting out of debt.

There may be other steps as well – like renegotiating or consolidating debt. You also might have to go through all your expenses. Rather than cutting, you might need to shop for lower cost replacements. (Life insurance is a great area where a little shopping could save you a nice chunk of change.)

Each of these are steps and offer you “success.”

Get out a piece of paper.

List all the steps.

Break each step down further. What are all the steps you need to take in order to accomplish those steps?

You might have a list of 30 items. That’s great. You now have 30 “success” steps.

Assign each step to a member of the family with a due date.

Once you complete these steps, you’re going to be much closer to getting out of debt.

Keep in mind that some steps, like following your budget, are ongoing. That’s great, because such steps offer you daily success. All you have to do is follow your daily budget today in order to have success.

If you want to get out of debt, you don’t need to buy another book and you don’t have to start living like a monk. All you have to do is break down your goals into bite-size chunks and start taking care of business – one day at a time.

Your thoughts on debt reduction

Have you faced challenges like these? Did you get out of debt? How?

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But what then? Once you’ve defaulted, you won’t be able to get a new mortgage for a long, long time. Well… According to a recent Bloomberg article, some homeowners are starting to “buy and bail.” In other words, they’ll acquire a new house before they walk away from the old one.

While “buy and bail” constitutes fraud if the borrower lies on their loan application, this strategy is most often employed by those with a big paycheck and relatively little debt, as they’re more likely to legitimately qualify for financing on a second home. Lenders are then left holding the bag.

What do you think?

Are there any circumstances under which you’d consider a strategic default?

Source: Bloomberg via Consumerist

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But there’s good news for those of you that are looking to transfer a balance… The credit card landscape has improved dramatically in recent months. While balance transfer fees have become fairly standard, the 0% promo rates have stuck around, and the promo periods have gotten longer and longer.

Take, for example, the Citi Platinum Select MasterCard…

This card is currently offering 0% intro APR on purchases for 18 months and balance transfers for 18 months. Yes, there’s a 3% balance transfer fee, but the longer promo period means that you’ll (hopefully) be able to kill off the balance before the 0% rate expires and you’re forced to either pay interest or execute another transfer.

A word about balance transfers

Balance transfer credit cards are (in my humble opinion) an excellent tool for minimizing interest payments while you climb out of debt. That being said… You need to stop taking on new debt for it to work. If you don’t, you’ll wind up in an even deeper hole than when you started.

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Some fraction of these people will (like us) be looking to pay down their mortgage loan with their tax refund. Instead of simply paying extra principal toward their mortgage, however, there’s another option to consider… They could recast, or re-amortize, their mortgage loan.

Each approach has pros and cons, and different people will arrive at different decisions depending on their goals and circumstances.

Shortening your mortgage term

I mentioned before that you can shorten your mortgage length paying extra principle on it every month. We’ve also covered some strategies for paying off your mortgage early. Making the extra payments can cut years off your mortgage and save you tens of thousand of dollars in interest, depending on your loan terms.

For example, with most 30 year fixed rate mortgages, you pay a huge amount of interest for the first seven years or so of your mortgage. As you get closer to the end of the life of the mortgage, more of your payments go towards principal.

The primary advantage with paying off your mortgage early (aside from peace of mind) is the big improvement in cash flow. Once your mortgage payment is gone, you’ll have hundreds (maybe a thousand or two) in extra cash each month that could be used for your other financial goals.

What is mortgage re-amortization/recasting?

Mortgage re-amortization is basically a loan modification that changes your monthly payments. Amortization refers to the paying off of a debt in installments over a set period of time. Instead of simply paying extra money towards principal, you may be able to use that money to reduce you balance due and re-calculate your monthly payments.

The advantage of re-amortization is thus that you can get lower monthly payments and have a slight, ongoing improvement in your household’s cash flow. It won’t be as big of a change as if you paid off the mortgage early, but you’ll get an immediate benefit.

You could then use the difference in the monthly payments to build your savings, pay down other debt, or build a retirement nest egg. Not all lenders offer this option, however, so check with your lender to see if you can recast your loan.

You should also check on what sort of fees are involved with, and what restrictions might be in place. Some lenders will allow you to do this multiple times, while others offer this as a one time deal.

Recasting vs. shortening your mortgage

You really have to know your plan for your mortgage and run the numbers to figure out the best option for you. If you plan on consistently over-paying your mortgage, then recasting won’t provide much of a benefit. If, however, you plan on just making a big payment once, and would rather reduce your monthly mortgage expenses instead of shortening the overall timeframe, then re-amortization may be something to consider.

Shortening your mortgage can have bigger costs up front as you’re putting more money in now, but your pay off will be on the huge decrease in your monthly expenses when it’s finished. You will also have saved tens of thousands of dollars in interest payments. Only you and your family have all the information needed to run the numbers properly and decide which option will put you ahead.

Sticking with paying off the mortgage early

When I looked at the numbers, recasting our mortgage wouldn’t make much of an impact on our cash flow. It would reduce our monthly housing expenses by only $50 or so. We think it would be better to just focus on going ahead and paying off our mortgage early. By focusing on getting a conservative mortgage amount, we’ve already created a little bit of a buffer between income and expenses.

Your thoughts

I’d love to hear your thoughts on this. If you had (say) $10,000 to pay down your mortgage, what would you do? Would you recast and go for lower monthly payments or would you shorten your mortgage? Why?

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It seems that they’ve decided to waive the balance transfer fee associated with several of their cards, including the Premium Rewards Travel Amex and the Visa Platinum Cash Back Reward card. While none of their cards offer 0% on balance transfers, they’re still a pretty good deal.

In addition to the waived fees (normally 2.5% up to $100), both cards offer a 24 month promo period with a balance transfer rate of 4.99%. Like I said, not as good as 0%, but 24 month offers are almost unheard of, and 4.99% is still a great deal compared to the much higher rates that most card issuers are charging.

That this rate is also significantly better than you can get from alternative lending sources such as Lending Club. Just keep in mind that this is a time-limited promo, expiring on June 30, 2010.

Note: This offer has expired, please see the list of 0% APR balance transfer credit cards for the current balance transfer credit card offers.

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One of the great problems on the internet, in periodicals, and in books is the consistent lack of translation from principles to action. Today, we’re going to dispense with principles and focus solely on the specific actions needed to eliminate debt in what some might consider ‘unusual’ ways. Some of these tools aren’t for the faint of heart, and many of them will leave a nasty stain on your credit report. However, if you’re ready to get out of debt, let us begin.

Get it together

Before you embark on any task, you need to get a firm grip on your current situation. It’s not enough to simply say, “There’s too much month left at the end of the money.” You need to take a closer examination of your financial condition and this means you need to make a *GASP* budget.

A budget doesn’t need to be fancy; you don’t need to purchase some cutesy financial software; and you certainly don’t need to categorize every last dime of your expenses. What you need is a simple, high level listing of your income and expenses.

In this budget, you should start with your fixed and recurring expenses that you pay regularly. From there, you can get down to as much detail as you want. The point is to be able to recite exactly what goes where in a matter of minutes (more on this later).

Beyond this, you need to create a detailed list of your debts that includes each debt’s name, balance, minimum payment, APR, payment status and contact information. By having all of this information at hand, you will know exactly what you need to do to ‘get to zero’.

In keeping with our pledge to focus on action, here is a downloadable spreadsheet that is pre-formatted for your ease of use:

• Budget/Debt Spreadsheet (Excel)
• Budget/Debt Spreadsheet (OpenOffice)

Sizing up the problem

After you have your budget assembled and debts listed, it’s time to size up the situation. Best case, you have a positive cash flow and a mole hill of debt. Worst case, you have a negative cash flow and a mountain of debt. Regardless of where you are, we’ll detail out tools that can help you terminate your debt.

Note: If you have a massive negative cash flow because of a job loss or other income disruption, stop here. Until you have enough income to have a fighting chance of paying off your debts, no debt reduction tool or plan will work for you. Fix the income problem first, then tackle the debt later.

The tools of debt elimination

From here, we’ll go through the list of tools available to you that can help you in becoming debt free. We’ll begin with the small stuff like screwdrivers and hammers and move up to the wrecking ball and good old fashioned TNT. Regardless of where you are with your debt, there will be something that follows that you’ll be able to put to use that will save you money.

The screwdriver: Fee waivers

This is the simplest tool available to you. If you miss a payment or accidentally go over your credit line, you can simply call your credit card company and ask for a fee waiver. The odds of getting one depend on your standing with the company.

If you’ve been a long time cardholder or are a profitable customer, you’ll likely get a courtesy waiver. If you’re behind and constantly late or over the credit line, it’s unlikely you’ll get the fee waived. Either way, it doesn’t hurt to ask.

The wrench: Interest charge waivers

If you’re one of those people that typically pays the balance in full each month, you might be able to get an interest charge waived if you forgot to pay your bill in a given month. Such waivers are increasingly difficult to get, but if you’re a good customer (particularly if you have other accounts with the company or a subsidiary), it’s possible to have interest charges removed. Again, to find out, pick up the phone.

The hammer: Lower my rate or I’m gone

With the most recent credit card legislation having become law, it’s more difficult for credit card companies to unilaterally raise your interest rate. However, because of this legislation, many credit card issuers preemptively raised interest rates to try to squeeze as much money out of cardholders as possible. If you’re unhappy with your interest rate and you have good enough credit to go elsewhere, tell them about it.

When you call, start by being cordial and saying, “The interest rate on my account is much higher than I can get through ABC Credit Card Company. Can you reduce this interest rate for me, or should I move my business to ABC Credit Card Company?” At this point, the representative will see if the interest rate reduction is possible.

If they can’t change the rate or the rate isn’t competitive with what you can get elsewhere, take your business to the other company, but don’t close the account until the balance is paid in full. If the rate is reduced to your satisfaction, tell the representative thank you and get on with your day.

WARNING: The following tools have a very good chance of hurting your credit score (sometimes severely). If you need credit in the next five years, think carefully before using these tools. Also, most of the remaining tools are best utilized by those already struggling to keep up or are already behind on payments.

The Black & Decker: Temporary rate and/or payment reduction

These programs usually last anywhere from three to twelve months and feature a reduction in interest rate and/or minimum payments. They are primarily used to get an account that is one to four months past due up-to-date by suspending fees and reducing interest charges (sometimes to zero). If you have a temporary income disruption or a temporary spike in expenses, this tool can help you get back on top of your debt.

To qualify, you’ll need to be in the collections queue of the card company in question. This doesn’t necessarily mean that you have to be behind on payments with them as credit card companies continuously scan your credit report to see if you’re falling behind elsewhere. In addition to being in collections, you’ll typically need to provide some information that often includes why you’re falling behind, your monthly income and expenses, and an overview of your total debt picture.

If a collector calls and you want to try this tool, say, “I’m really struggling financially right now because of X, Y, and Z. Is it possible that you could reduce my monthly payments temporarily until I can get back on track?” The collector will then check your account and possibly even your credit report to see if you qualify. If you do, they’ll ask for some additional information and you’ll have your budget and debt worksheet at your fingertips to answer their questions.

For accounts where you’re not yet in the collections queue, but you are with other creditors, call the customer service line and ask for the collections department phone number. Call the collections group, tell them your story, and go on from there.

The table saw: Debt consolidation

Each year, thousands of people lose parts of their limbs to the fearsome teeth of the table saw. Each year, many times that number use a debt consolidation loan with similar results. We list debt consolidation as an option, but the vast majority of people who use this will end up in just as much (or more) debt five years later.

If you want to consolidate your debt (and the odds of this tool succeeding in reducing your debt are worse than betting on black on the roulette wheel), go online to shop rates and try to find a loan. You can consolidate your debt using a secured or unsecured loan, with rates being lower for secured loans and higher for the unsecured variety.

Debt consolidation loans were easy to obtain before the credit crisis, but they are still available to some today. We could walk you through the process, but we generally dislike these loans because they’re an invitation to more debt.

The chainsaw: Permanent pay down

For anyone that’s been in and out of the collections queue for a period of time, a permanent pay down might be available to you. These programs are usually set up to be completed over a four to six year time period and feature a reduced, fixed rate and a slightly higher minimum payment. Credit card companies offer these on a more limited basis because the terms of the pay down are very favorable for customers.

To qualify, you’ll need to explain the reason you fell behind with payments and give a somewhat detailed accounting of your budget. Card issuers view these programs as a way to increase the probability that you will repay them, even if it means that you’re going to stop paying someone else. The bottom line is that if you can qualify for a program like this and you believe you can maintain the required payments, it’s a great deal.

A word of caution on this: Do not agree to this program if you don’t think you’ll be able to keep up the payments. These are often one-time only offers, and you don’t want to waste the opportunity.

To get set up on a program like this, talk to the collections group and say, “I’ve been in and out of collections for some time now, but I eventually get caught up. Do you have something where I can just pay a fixed amount and have this account paid in full over the next few years? It seems like I keep making payments to all of these different companies and never really see any results. Anything you can do to help would be great.”

The agent will check to see if you qualify and may even need a manager’s approval, but if it’s available and you’re confident you can maintain the payments, do it.

The wrecking ball: Debt settlement

Ah, the much talked about debt settlement. There are countless advertisements and infomercials from companies that say you can settle your debt for ‘pennies on the dollar’. While they’re right, they definitely oversell this debt reduction tool.

Before you can qualify for a settlement, you need to be in some serious financial pain, otherwise, you’ll never get one. If a collector sees that you’re struggling, but you’re going to come into some cash or have assets that can be sold (retirement investments, real estate, etc.), he or she may offer you a settlement. A typical initial settlement offer will be for 80 to 85 percent of your current balance (lower if you’re in horrific financial shape) which can save you a lot of cheddar.

While the savings is a major benefit, there’s also a catch. Whatever the unpaid balance amounts to, you will receive a 1099-C that will be added to your taxable income. This means that if you’re in the 25 percent marginal tax bracket and have $1,000 left unpaid, your tax bill will increase by $250. As an example, if the balance was $5,000, you paid $4,000 to settle it, and paid $250 in taxes, your net savings is still $750.

Settlements are usually structured as a lump sum or a series of payments over 90 days or less, and it’s usually not wise to pursue a settlement unless you have the money to make it happen.

If you find yourself in a position to do a settlement and don’t care about your credit score, you can initiate the conversation by calling the collections department and saying, “I’m struggling with my debt for X, Y, and Z reasons. However, I have some money available and I’m trying to work a settlement with at least one of my creditors so my total payments are more manageable. Would you be able to work something out with me?” Start the conversation there and don’t be afraid to negotiate, because that’s a normal part of the process.

Also, don’t be unreasonable or upset during any stage of your settlement negotiation. You have a limited amount of resources and the card company has a minimum amount they need to collect. To get the best results, always be friendly, courteous, and honest about your situation.

TNT: Bankruptcy

The last tool available is like taking a load of TNT to your financial life and setting it off. There are a lot of consequences to this action, and it’s definitely not something to do without a great deal of consideration. With that said, sometimes bankruptcy is the last best option for you if you’re facing truly insurmountable odds.

While the bankruptcy legislation that went through in 2005 made it tougher to file and even more difficult to have debts discharged, it remains a viable option if things are simply too much to handle. There is a very important reason that bankruptcy exists: it essentially recognizes that people can sometimes find themselves in a financial predicament that cannot be overcome without intervention from a third party – the courts.

By granting the power to courts to discharge or restructure debts, the burden of debt can be lessened or completely removed, allowing filers to get on with the rest of their lives.

To file for bankruptcy, you’ll need an attorney to help you sort out the details. Having your budget and a comprehensive list of your debts will be necessary in helping to decide which chapter to file. Shop around for an attorney that handles a good number of bankruptcies each year and one that charges a reasonable rate. Ideally, you’ll be able to give them a 30 second overview of your financial woes and they’ll give you an estimate of the cost.

Once you’ve engaged an attorney, follow the process to the letter and you should have things sorted in short order.

What this post is really about

While the title and the content makes this post seem like it’s about eliminating debt through action, it’s actually about the fundamental problem that economists call ‘asymmetric information.’ These programs aren’t a secret, and they’re available through just about every credit issuer in some shape or form. However, the creditor knows what they can do and it’s up to debtors to figure out how to navigate their way to being debt free.

Consider this: Two families in serious debt have the goal of being debt free, and each is exactly the same with one exception. The first family knows the information above. The second family does not. Who will be debt free faster?

A challenge for readers

The information presented in this post is a great start to solving the problem of asymmetric information as it relates to getting out of credit card debt. However, as a reader of FiveCentNickel, you can take this to the next level.

If you have a story about using one or more of the above tools, please share your experiences by posting a comment. Detail out which tool you used, with which company, when this occurred, and what the net result was. You can remain anonymous if you wish.

If you read this post and use any of the information presented, please post updates on your experiences with specific details. That way others can monitor the comments and gain even more.

That reminds me… Wasn’t there a famous guy who said something like ‘knowledge is power’? This can be some powerful stuff… If you participate.

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Years ago, in a world far different from the one we now live in, people only bought what they could afford. Then along came credit cards, and people realized they could buy whatever they want – and avoid paying until later. Sometimes much later.

Now, some people use credit cards much like a savings account. This can only lead to one thing – financial disaster!

Of course, credit cards are not evil “plastic” demons looking to overwhelm all those poor souls who use them. Many people use credit cards and pay off their balances in full every month. Others use them for rewards like airline miles, cash back bonuses, store gift cards, travel packages, and other fancy – or practical – rewards.

But for those of us who have fallen into the credit card “black hole” and are having trouble digging out – or for those who wish to avoid the black hole in the first place – here are some simple habits that will help you dig out from or avoid the debt trap:

1. Shop around. Not just for the obvious things like clothing and groceries, but for big ticket items like TV’s and even cars. Also consider doing it when hiring someone to do home improvement, prepare your taxes, and for monthly expenses like car and home insurance (sometimes you can save up to $500 a year). If you pay for it, you can probably pay less if you’d just shop around. Also be sure to make friends with websites like eBay and Craigslist.
2. Use your checkbook (or cash) when you buy things.
   Sure, using a credit card is easier, and often safer. But if you don’t have the discipline to pay off the balance in full, you should avoid the temptation. If you don’t want to use cash or a check, then use a debit card connected to your checking or savings.
3. Set goals. Get yourself a small notebook and write down all of your financial goals. Not just what you want to buy, but how much you want to save or how fast you want to pay off your debts. Anything dealing with money should go on the list. Next, write a target date for achieving each goal, and keep the list somewhere that you’ll see it often. That way you’ll be constantly reminded of your goals. Oh, and be sure to include whatever “fun” goals you might have, like saving for a big trip or other large expense.
4. Ask yourself “do I REALLY need this now?” BEFORE you buy. I know, I know… This one isn’t much fun at all. We’re used to getting what we want, and getting it when we want it. But if you want to be responsible with your money, this is a great way to do it. Of course, the next question to ask is “can I afford it?” But you’re more likely to ignore this second question if you don’t tackle the other one first.
5. Do it yourself. It’s much easier to go out to eat than to cook, or to stop at your local “fast lube” to get your oil changed, or to bring your taxes to a tax prep service. If you have the money to do these things, go ahead, and use your time for something more valuable. But if money is tight, learn how to cook, change your own oil, fix broken stuff around the house, and do your taxes. It’s not always easy, but it will save you some money!

So there you have it. These tips are so simple that anyone can do them. And before long, maybe they’ll even turn into habits. In the short run, you’ll save a few bucks. In the long run, you might just save yourself a LOT of financial stress!

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