Are you in debt (besides the mortgage)?  Do you have thousands of dollars worth of student loan debt and/or credit card debt?  If you are struggling to make your payments, one of the best things you can do is to stop using credit and begin to use cash.

I know, I know, in today’s world, who uses cash?  If you use cash, you have to actually walk into the gas station to pay for your gas rather than just swiping your card at the pump.  More importantly, you have to remember to actually carry cash.  After years of using credit cards to pay for all of your purchases, it may be difficult to remember to bring cash when you leave the house.

While there are certainly inconveniences to using cash for all of your purchases, the rewards will be great.

Let’s be honest; many people who have credit card debt will have it for the majority of their lives.  They will continue to use their cards each month, paying off only what they charged that month, or worse, only the minimum payment they have to make.  There is no end in sight.

However, if you quit using the cards, get back in touch with your spending patterns by using cash and only buying what you can afford, you will be in a better position to pay off your debts more quickly.

Let’s say you currently owe $12,000 on a credit card at 11.99% interest.  If you only make the minimum balance on the credit card (2% of the balance), you will be debt free in 25 years, 11 months!  If, instead, you take this month’s minimum payment of $240 and pay that same amount every month, you will be credit card debt free in 5 years and 9 months.  If you can ramp up your payment and pay $60 more a month, making a payment of $300 each month, you will be credit card debt free in 4 years 3 months.

Yes, extra payments help you pay off the credit card faster, but even if you do nothing more than make the same payment your are making now and quit adding any new credit card charges, you will be credit card debt free in less than six years.

You will be off the endless credit cycle.

If you find using cash to be too difficult in some situations, consider using a debit card when you need to reserve a hotel room or pay for a purchase online.  However, learning to not spend more than you make is vital.  Not incurring new debt as well as making the same payment you are making now for the life of the loan will get you out of debt.  Even if you do nothing more than that, you will be debt free in a few years.  Isn’t it worth it to revert to cash for awhile until you no longer owe?  Think of the financial freedom you will have.

I will be inconvenienced by using cash any day if it means I will one day no longer be inconvenienced by debt and limited cash flow.

As a child, you may have played the game of LIFE and enjoyed those moments you get an unexpected windfall.  The same can happen in real life.  A few years ago, many Americans got an unexpected windfall when President Bush offered a tax rebate to a majority of U.S. citizens.  Some people get an unexpected windfall when they get a larger tax return than they were expecting or a relative dies and leaves them an inheritance.

If you get an unexpected windfall, it is important to have a plan to decide what to do with the money before you spend any of it.  In addition, if it is a large windfall, you may want to put the money in the bank and not spend any of it until you have had a few weeks (or months) to decide the best way to utilize the money.

Here are a few ideas how to use an unexpected windfall:

1. Pay down debt.  Many Americans have “bad” debt such as credit card debt.  If that is true for you, take some or all of the money and pay down your debt.  Doing so will increase your monthly cash flow and reduce the amount of money you are losing to interest payments.
2. Bulk up your emergency fund.  Some experts now recommend that families have up to 8 months in an emergency fund.  An unexpected windfall can help you reach this goal.
3. Pay monthly expenses for the entire year.  Many organizations you pay monthly such as your child’s school (if he is in private school), afterschool daycare, sports organizations and others will give you a discount if you can pay the entire year upfront.  For example, my child takes dance class, and I received a 10% discount by paying for the entire year upfront in September.  Not only will paying for the entire year perhaps give you a discount, but it again frees up monthly cash flow.
4. Invest in yourself.  If you have not completed your college degree or you are looking to get your Master’s, an unexpected windfall may help you do that.  Investing in yourself can help extend the power of your windfall because you will probably make more money through the years thanks to improving yourself now.
5. Pay down your house.  The last few years have reminded many Americans that the safest financial move is to have your house paid in full.  If you unexpectedly lose your job, you don’t have to worry about also losing your home due to foreclosure.  If the market reduces the value of your home, you are somewhat insulated from that because the home is already paid for.
6. Put money in your retirement fund.  If your retirement is less than it should be for your age, consider using the windfall to bulk up your retirement accounts.

Of course, if you receive a large windfall, it is always best to speak with a professional to make a sound plan for how to use the money.  If it is a smaller windfall, your natural instinct may be to first think of ways you will spend it.  Instead, think of ways you can invest in yourself and your future and make your finances more secure.

Photo courtesy of Tax Credits via Flickr.

The average college student graduates with $25,000 in student loan debt.  Many more students have higher balances than this.

If you are repaying your student loans, there are several strategies you can utilize to pay less in student loan interest.  Consider the following:

1. Automate your payments.  If you have direct student loans, automate your payment to come from your checking account for a set amount on a set date, and you will get .25% off your interest rate.
2. Pay as quickly as you can.  Direct loans offer many different payment plans.  The one that will get you out of debt most quickly with the least amount of interest paid out of pocket is the standard repayment plan that allows you to pay off your loans within 10 years.  The other repayment plans can stretch your payments over 20 to 25 years.  Yes, that makes payments more affordable, but you also pay a great deal more in interest, sometimes almost as much as the principal itself.
3. Consolidate your loans.  If you have a high interest rate student loan, consider consolidating all of your loans.  If you take this option, you must be careful because you are only allowed to consolidate once.  Consolidation will give you one payment a month instead of several, if you have several different student loans.  Your overall payment may also be lower than you were paying before you consolidated.  Usually, consolidation is the smart option, but if you have low interest student loans and consolidating would cause you to have a higher interest rate, you may want to avoid it.
4. Transfer some of your balance to a zero APR credit card.  Admittedly, this is a risky move, but if you have a zero percent APR credit card, you may want to transfer some of your student loan balance to the card.  Keep in mind that most credit cards have 0% APR for a limited time, often 12 months, so don’t transfer more than you can reasonably pay off in 12 months.  Also, be aware of the risks—if you lose your job or experience some other type of hardship, you can always defer your student loans, but you cannot defer your credit card payments.  You must make your minimum credit card payment every month or risk affecting your credit score.  In addition, if you misjudge and are unable to pay off the credit card balance before the 0% APR expires, you will have to pay at the higher interest rate, which is often over 12%.
5. Pay the interest on unsubsidized loans while still in college.  Subsidized loans pay the interest for you while you are in college; however, if you have an unsubsidized loan, interest will accrue while you are in school.  When you graduate and begin repayment, you may have accrued from several hundred to several thousand dollars in interest depending on the size of your loans.  Your payment and interest will then be based on the total amount of your loan including principal and accrued interest.  If you instead pay the interest in school, you can save yourself paying more interest throughout the life of the loan.

More and more students are relying on student loans to get through college, and the payments can put a serious financial strain on your budget.  With careful planning, you may be able to save some money on the interest you pay, which will save you money overall.

**Photo by watchingfrogsboil**

Many people think that homeownership is the American dream, but I disagree.

I’m a proud renter, and it’s not that I can’t afford a house – I can actually afford a really nice, big house. I just choose to rent a nice big house instead. Here’s why…

Staying Debt Free

I am very anti-debt and so is my wife, and we’ve agreed to be debt free. When thinking about buying a house and looking at how much I can borrow, it made me pretty uncomfortable. It was scary to think that for just a few signatures, I could borrow over $500,000 for a home, which could lose value! We used a mortgage calculator to figure out how much out monthly payments would be, and found out that it was quite a bit more than our rent for a similar sized property.

In addition, if we’re to buy a home we’d have to take a huge chunk out of our savings for a down payment. And unless you qualify for one of those “buy to let mortgages,” most lenders are requiring 10-20% down right now.

Keeping Out Expenses Down

Beyond the mortgage, owning a home involved so many more expenses that we just don’t have a renters. First, we don’t pay any property taxes and that is great! I couldn’t image having to pay another $5,000 to $6,000 per year in taxes beyond my regular income tax.

Also, we pay a lot less insurance, since we keep our renters policy to just cover our possessions. If we had a home, our insurance payments would increase substantially.

Finally, forget maintenance. When the toilet clogged, I don’t have to deal with it. I just call the landlord, and he takes care of it. If I was a homeowner, I would have to deal with both the hassles of problems arising, as well as the monetary cost.

Saving More

Renting also just allows us to continue saving and live the lifestyle we want. By avoiding those expenses, we have saved and feel comfortable traveling whenever we want, and we don’t sweat going out to dinner if we feel like it. I couldn’t imagine the burden of a home at this point, both the financial cost and emotional stress of having to make so many different payments.

We may change our minds in the future, but for now – we are perfectly happy renting!

Photo by Universal Pops**

Are you in debt?  If so, you are in company with millions of Americans.  However, 2012 can be the year that you resolve to be debt free or to significantly reduce your debt.

My preferred method of paying down debt is two pronged—use the debt snowball (pay down smallest to largest debts, regardless of interest rate, and apply as much as you can to the lowest debt while paying minimums on all of the other debts) and snowflake money (find extra money throughout the month to apply to your debt immediately, as you earn it).

Since late October, my husband and I have been using this two pronged strategy to pay down nearly $5,000 of our debt.  We were able to make progress so quickly by snowflaking.  Here are a few ways we have been able to successfully snowflake:

1.  Sell your “stuff”.  Look around your house.  What do you have that you haven’t used for awhile?  Do you have a treadmill that you hang your clothes on and haven’t actually used in three years?  Sell it.  Old textbooks lying around from last semester?  Sell them.  Outgrown baby clothes?  Yep, you guessed it, sell them.  In a six week spurt, we sold most of our kids’ outgrown baby clothes and gadgets like high chairs and bouncy seats on Craigslist and eBay.  We also sold a dishwasher we no longer needed.  In the six weeks, we made a little over $700.
2. Use your “found” money.  Until you pay attention, you may not realize how much found money you have every month.  (Found money is money you get that you weren’t expecting or money that you thought you would have to pay out but didn’t.)  My son attends a private afterschool program two days a week, and in both November and December, we had to pay $110 less than we normally pay monthly because of vacations and holidays.  That was money we would have paid anyway, so it was easy to snowflake.  Other sources of found money could be rebates, money you save by using coupons, change you save during the month, insurance reimbursements, flexible spending reimbursements, and monthly bills that are cheaper than you expect, to name a few.
3. Get extra work.  Perhaps you can find an extra job in addition to your full-time job.  If you make an extra $200 a month at your second job, snowflake all of that money on your debt to see it disappear faster than you thought possible.  I took on one extra job specifically to snowflake.  I can decide to work one to four hours a week with this job, so I am motivated to work as much as I can because all of the money will go to my snowflake.

If you are trying to pay down debt, don’t dismiss the idea of selling stuff around the house.  Once you look around, you may find many things that would better serve to be sold and pay down your debt rather than sitting in your closet gathering dust.  Likewise, many of us have the unfortunate habit of simply absorbing any extra money we make or “find” into our regular budget.

Instead, snowflake it immediately on your debt.  Using these strategies, we have been able to make a significant dent in our debt and shave off the number of months it will take to become debt free.  I am confident you could have the same success.

More information about debt snowballing: http://www.thinkmoney.com/debt/debt-snowball-0-2646.htm

*Photo by LaoWai Kevin*

Those dedicated to strengthening their financial situation often find themselves facing the decision of paying off debt or building a large emergency fund.  There are benefits to both, and the final decision will ultimately be based on your personal preference, risk tolerance, and priorities.

Benefits of Paying off Debt First

- You free up income
- The burden of debt is lifted
- Usually leads to higher credit score which can lead to lower insurance premiums
- The math supports paying off debt first as the interest of most debt is higher than the APY of savings accounts

Build Savings First

- Security against unforeseen circumstances
- Buffer in case income source is reduced or terminated
- Peace of mind

No matter what you decide, at the very least a minimal cash reserve should be set aside.  Should you grow this to 6-8 months of expenses while paying the minimum on debt?  Or should you throw everything you can at debt while slowing down, if not stopping your emergency savings funding?  Once you begin to annihilate debt it can become very tempting to throw every penny towards debt reduction, however you’ll want to make sure you are not putting yourself in a position to use credit as a crutch should your income cease or decrease.

Take this short quiz to help you decide if you should build up savings or pay off debt.  This is not a scientific quiz, for entertainment purposes only.  As always, you should consult a financial professional before making any major decisions.

1. Describe your househould income:  a. Single Income (1)    b. Dual Income (2)
2.  Describe your job:  a.  Irregular salary (1)     b.  Regular salary (2)
3.  Do you have dependents?  a. Yes (0)    b.  No (1)
4.  Do you have multiple steams of income?  a.  Yes (2)    b.  No (1)
5.  If you lose your job or primary source of income, how long would it take you to replace it?  a. 0-3 months (2)    b   4-6 months (1)     c.  6-12 months (0)

Add up the points corresponding with your answer.  If you scored:

Between 3-5 points:  You may want to err on the side of caution and build a larger emergency fund.  Your financial situation is somewhat volatile and an unforseen disturbance may make it difficult to rebound.

6 points:  You’re in the middle of the road and could sway either way.  You have enough liberty to focus on debt payoff, however stashing a little more in savings wouldn’t hurt either.

Between 7-9 points: You have enough freedom to attack debt.  Your diverse income gives you enough flexibility to adapt and adjust as necessary.

My Strategy:

I’ve used a modified Total Money Makeover approach.  Dave Ramsey suggests saving $1,000 minimum, then attacking debt.  My risk tolerance is not high enough for that, so I opted for a larger emergency fund before I shifted my focus to OPERATION DESTROY DEBT.  I still fund the emergeny savings, but not with as much intensity until debt is eliminated.

What about you?  What’s your strategy?  What’s your outcome according to the quiz?  What other questions / factors would you add?

I am NOT a fan of debt, so why in the world wouldn’t I pay off my student loan with “gazelle like” intensity?

The screenshot below will explain why I considered a less than aggressive payment strategy for my student loans.  Think back to 2002-2003, college consolidation loans hit an all time low interest rate.  Everyone was talking about consolidating!  I couldn’t surf the Internet or watch TV without hearing about consolidation before the new rates applied.  I consolidated and got locked into a 3.75% fixed interest rate.  I don’t remember what it was before, but if I had to guess it would be around 6-8%.

Typically, I would recommend paying off debt before investing.  For example,  someone with credit card debt at 8% APR may be tempted to invest and hope for a 10-12% return.  The problem is, you have a guaranteed debt vs. a probable return….it is apples and oranges.  But what if you could guarantee the interest earned could be greater than the interest paid?

My original plan was not to include my student loan in my debt snowball because I was sure I could find an investment vehicle that would guarantee higher than 3.75.  I got an ING Direct account in the good ol’ days when the APY ranged from 4-5%  and 5% CDs were available at every bank.    Well, in preparing this article I search for CDs, Money Market Accounts, and High Yield Savings Accounts that offered a 4-5% rate of return…and here is what I found out…they don’t exist!  At least not in 2010.  It’s a different world than it was 7 years ago.  Here are the highest rates from bankrate.com at the time of this article:

• 5 yr CD: 3.49%
• 5 yr Jumbo CD: 3.20% (If I had $100,000 for a jumbo CD, my student loan would be paid off!)
• Savings Account: 1.50%
• Money Market Account ($10,000 balance to open): 1.50%

I even looked at government bonds (which are not guaranteed, but very low risk) and the rate of return is not above my loan interest rate of 3.75%

When I first started writing this article it was titled: Why I’m NOT in a Hurry to Pay Off My College Loans but when I took a close look at the numbers my game plan started to change.

My theory was that I could find some sort of savings account with a rate of return higher than my loan interest rate.  I would save the money and at the end of the year I would apply a percentage of the interest towards my student loan and reinvest the rest.  This plan was erroneous for the following reasons:

1. I was comparing fixed rate interest vs. variable rate interest: My loan interest rate is 3.75%.  Period.  However, the interest rates of CDs and Savings accounts vary over time.  So even if I was able to find a 5 year CD at 5% interest (virtually impossible), there is no guarantee that I would be able to find the same interest rate again after the initial CD matures.

2.  When an inflation is calculated, the difference in savings practically diminish.  The graph below is from US Inflation Calculator however, I have plotted the average inflation rate over time (2000-2009) to be 2.87%.  So a CD with an APY of 5% is only generating 2.13% return when inflation is factored in.  Considering the average rate of inflation, I would need a return of 6.62% just to break even.  I think it is safe to say nothing guarantees that high yield.

The bottom line – it is still  DEBT!  The Bible says the borrower is slave to the lender, and we are admonished to pay back what we borrow.  Do I really want to be bothered with this monthly payment for the next 10-15 years?  I don’t think so!

Also, there is risk involved in prolonging repayment.  God forbid, but in the case of financial hardships that debt still has to be paid when it could have been paid off years ago.  The unique thing about student loans is it’s pretty easy to get financial hardship deferments (almost too easy), however…while your loan is deferred that interest is still accumulating adding to your mountain of debt.  Furthermore, student loans are not dissolved in bankruptcy (no, I am not advocating bankruptcy but I do realize for some it is a reality).

So, will I be adding my student loans to my debt snowball?  I’m leaning towards yes!  However, I also want to increase my retirement savings as I am nowhere near maxing that out.  Gazelle like intensity on the student loan debt?  Maybe a jack rabbit!

Are you paying off your student loans as quickly as possible or investing at the same time?

 

“Health is not valued till sickness comes.”

 

Please answer honestly, this will be for you to retain. Many of the questions are subjective, they are designed to get you to think about the impact of financial decisions and debt.  On a sheet of paper, number 1 through 12, for each question write yes or no.

1. Are your debts adding negative pressure to your home life?

2. Is your FICO credit score less than 620? (Also answer “yes” if you do not know your score)

3. In the past year, have you been charged an insufficient funds or overdraft charge from your bank more than 3 times?

4. In the past year, have you used a payday or title loan?

5. Have you ever made unrealistic promises to your creditors or given them false contact information so they could not bother you?

6. Does the pressure of your debts make you careless of the welfare of your family?

7. Do you ever fear how you would financially support yourself and family if you lost your job?

8. Do you typically pay the minimum required on debts?

9. Have you ever borrowed money without giving adequate consideration to the rate of interest you are required to pay?

10. Do you usually expect a negative response when you are subject to a credit investigation?

11. Have you ever developed a strict regimen for paying off your debts, only to break it under pressure?

12. Do you often find yourself unable to account for the money that has been spent?

Count the number of questions you answered “yes” to and write that number below

______________

There is no score to determine how “good or bad” your situation may or may not be.  Obviously, the more questions answered “yes”, then the more work will need to be done to improve your financial health.  Isolate the problem areas.  What action steps can be done to transition that yes to a no.  Record the number of “yes” responses.  Map out your action plan and take the assessment again in 6 months.  Has the number of “yes” responses gone down?

At one point, I answered yes to over half of these questions, I am happy to report that today I can answer “no” to all of the above questions.

It’s your turn!

What additional questions would you ask?  How would you rate your “debt health”?  Good, fair, poor?
Do you know someone in “poor financial health?  What can you do to help them?