Debt Reduction

Paying Off Debts Pays Off

September 28, 2017 By Twila VanLeer

Debt is the ultimate treadmill. Sometimes it seems no matter how hard you try, the load never gets lighter. Don’t despair. If you are serious about wanting to whack down some of that debt, it can be done. Just be prepared for the fact that it doesn’t happen fast.

There are several approaches to the issue. Let’s start with the “Snowball Method.” That means you start your attack on the accounts with the smallest balances. That might give you the greatest boost as you see the accounts disappear. But the “High Rate Method” has the most potential for actually saving money. That’s when you concentrate the accounts with the highest interest rates, chewing them down a little at a time and reducing the amount of interest you pay.

Before making a choice, make an assessment. List all of your debt balances from lowest to highest so you can actually see what might be the best plan of attack. When you pay your monthly bills, pay the minimum amount on each account.

Then, if you have chosen the “Snowball” approach, take any available cash you have and apply it to the account with the smallest balance. If two accounts are close, choose the one with the highest interest rate. Even a very small amount of extra payment adds up over time and it always reduces the amount of interest you will pay. When you get one of your smaller debts paid off, the trick is not to use it again until you have the total debt under control. If you have to hide your card from yourself, freeze it in a block of ice or simply close it, resist the urge to start the process over again.

After you have paid off a debt, take the money you had spent on payments and use it to make additional payments on the next smallest account. Repeat this process and you’ll soon have a considerable amount of extra money to tackle the larger accounts. You’ll be surprised how fast that can happen. The “Snowball” effect really works.

If you have opted to start with the accounts with the highest interest, your first step is the same. List your debts, but according to the interest rate, from highest to lowest. Again, pay the monthly minimum and then use any extra cash you can muster to add to your payment on the one with the highest interest. That means that each month, you will pay interest on a smaller amount of principle.

Do the same thing with the account with the next highest interest payment. Over time – and it isn’t likely to be fast – you will find you have manageable debt. Unless, of course, you don’t resist the urge to fill up the cards again. Having them free and clear is a powerful incentive to start the process again, but resist. Make careful choices between what you really need and what you only want.

Which approach to debt reduction you choose is up to you and must fit your personal financial realities. But those who have take the steps to get control of debt will tell you that you just can’t put a price on the peace of mind that comes with freedom from debt. Get help from an accredited consumer credit counselor if necessary.

Pay Down Debt Or Build Savings?

October 7, 2016 By Twila VanLeer

People who take personal finances seriously sometimes have a decision to make. If you have money left over after taking care of essentials, is it better to use it to pay down debt or put it into savings? It’s an ongoing debate with no absolute answer and you should make a decision based on your own personal situation and goals.

Factors to consider, according to financial planners, include the type of debt you are considering, the amount of interest you pay and how long your obligation will last.

Some advisers see debt as the fatal flaw in personal finance plans and they advise getting rid of it as quickly as possible. Consider the cost: As of late May this year, the average fixed interest rate on a credit card was 12.52 percent. Variable rate cards come with an even higher rate – 16.03 percent on average. That’s a compelling reason to opt for the pay-down-the-debt approach. Ultimately, having more money at the end of the process is a cogent argument.

Mortgages

Mortgages often are the largest debt a person or family carries. They don’t usually come into consideration in this debate. Mortgage interest rates generally are lower than those on consumer debt. Also, they are tax-deductible.

Retirement Savings

On the flip side, consider these facts about saving. The most frequent target of savings is retirement. Workplace plans that sometimes offer an employer contribution also make this option desirable. Look into 401(k) or 403(b) opportunities.

Such plans withdraw the employee’s money before it is considered income, so there are tax savings. The arguments for putting your money into retirement options is great since many Americans find themselves facing the rocking chair with not enough padding to live on.

Still there are those who argue that having a cushion for retirement while still dealing with debt is not a good place to be. Make your decision based on the facts of your personal finance picture.

Of course, there is no rule that says you can’t do a little of both. Looking for an adequate but not cushy retirement option while putting the rest of your excess into debt payment may be the road you want to travel, Run the numbers and make them fit your own circumstances. Either way, there is compounding to consider: The interest on either debt or retirement savings goes on just the same. Take that into consideration while you ponder the question. There’s a good middle ground for you.

Emergency Savings Tips

July 7, 2016 By Twila VanLeer

Make sure you rebuild your emergency savings if you've had to use it. — Make sure you rebuild your fund if you’ve had to use it.

Using your emergency savings to pay off credit card debt may look like a good idea at first glance, but there are some things to consider, according to Jean Chatsky of Bankrate.com.

Size Of Debt

If the size of the fund meets or exceeds the amount of the debt, it may be all right, but you should then begin to rebuild the emergency cushion. Then if the emergency comes, you are still ready.

Use Fund Not Credit Card For Emergencies

Using the emergency stash is preferable to having to meet an emergency with a credit card, Chatsky says.

Rebuild Fund When Used

If for whatever reason, paying off debt or meeting an actual emergency, your cushion is depleted, start immediately to build it up again. Set a goal and faithfully infuse new funds into it. Think of three categories: minor emergencies such as small car or home repairs and health care deductibles. Major repairs and having to meet a health care max would fall into the second category. Job loss is the third unexpected calamity that might demand that you dip into the emergency fund.

Emergency Savings Calculator

The old goal of saving enough to pay expenses for six months is a rule of thumb, but you may want to assess your own situation and make an upward adjustment. HelloWallet has a calculator to guide you if you need help making an analysis. Bankrate also has an emergency savings calculator.

Automatic Transfers

If you use a calculator and the recommended savings seem beyond reach, begin with the small emergency category, then move up as you are able. Reaching small goals gives you incentive to work for a higher level. Automatic transfers from your bank account into your emergency fund is one way to alleviate some of the pain. Don’t give yourself the opportunity to spend what you intended to save. If you wait until the end of the month to cough up the emergency fund payment, it is less likely to happen.

Bottom line: An emergency account is essential to a healthy personal finance scheme. Give it some priority.

Quit Making Excuses. Be Debt-Free

May 3, 2016 By Twila VanLeer

Quit making excuses when it comes to eliminating debt. — Making excuses only keeps you in debt.

Excuses are one of the most available of commodities. Easy to find. Easy to use. But if they are what’s keeping you from becoming free of debt, ditch them and get on with making your personal finances more healthy.

Sometimes, it’s attitude more than finances that keep you shackled to debt. Some self-examination of your beliefs may convince you that you can do better. Here are five common reasons that people stay debt-bound:

I Deserve It

This attitude leads some people to opt for a pricey vacation or a new car of electronic gadget (on credit, of course) that would require only a swift glance at the budget to see it is clearly out of reason. What you’re really saying is “I deserve to be in debt.” And it’s true. The result, however, is more stress, less savings and planning for retirement.

I Don’t Know Where To Start

If you don’t want to look honestly at your debt and accept responsibility for it, this may be the point at which you stop trying. It can be overwhelming to see what a mess you’ve created. But there are some options to consider. Debt consolidation may give you some more wiggle room. Balance transfer credit cards may offer lower interest. Or go to an expert for help. You have to be willing to face the magnitude of your debt load, but keep always in mind that things will be better if you get a handle on it.

I’ll Deal With It Later

The procrastination approach is just another excuse. Waiting for a better job, for your rich uncle to die and leave you wealthy – whatever allows you to delay the process will do just that – delay the process. This is one of those situations in which there’s no time like the present to act. It falls into the same category as the “I’ll diet next week, as soon as the company party is over” delaying tactic.

I Only Need To Make The Minimum Payment

Paying as much as you possibly can on credit card or other debt is a wise move. They longer it takes to pay off a balance, the more interest you pay and the longer you are burdened with the debt. Don’t look at your monthly statement and focus on the lowest figure that catches your eye. Adding a little extra to each payment, even if it is a small amount, will erase the debt faster. And of course, adding to the balance faster than you pay it off will leave you scrambling forever. You damage not only your current financial state, but may rack up less-than-satisfactory credit reports.

I’m Not Responsible

Placing blame on other people or circumstances, even emergencies, is the ultimate excuse. It allows you to refuse to accept responsibilities for your actions. Emergencies happen to all of us and do, inevitably, require changes in financial arrangements. Many creditors recognize genuine budget stress and will cooperate. But too often, debt is caused by trying to live like an upper-class family on a middle-class paycheck. When you get serious about debt reduction, you may have to steel yourselves to bypass your favorite high-end shopping outlets, avoid friends who tend to encourage free spending, and economize on things like eat-out lunches and high-cost entertainment. The best thing you can do is accept that your debt is your debt and you are responsible for it. Getting control of it may be the best feeling you’ve ever had.

Giving Money to Relatives Or Friends Common

April 26, 2016 By Twila VanLeer

Many households give or lend money to help others out. — Many people give or lend money to help family and friends out.

Opening one’s wallet to help a family member or friend is “a hidden dimension of the financial system,” according to a study from the Pew Charitable Trust. “Transfers of money across household lines are really important for keeping families afloat.”

25% Of Households Lent to Friends Or Family.

About 25 percent of American households gave or lent a median of $1,000 to friends or family in the past year, the study showed. More than 7,800 households were included in the survey. Black households are most likely to give or receive such help, but the practice is spread among all demographics.

Burden Created.

It isn’t always easy. One in five of the respondents said the “gift money” creates a burden on the giver. Not unexpectedly, the households with the least income saw their donations as a difficulty. But even those making $85,500 per year reported that their generosity was a burden.

Single Mothers Receive And Give The Most.

Single mothers are among the most common recipients, but they also are more likely to give when necessary. Half of all the single-mother households either received or gave help, compared with 30 percent of two-parent households. Some 75 percent of the single parents said it was hard to give, but they also are the group that recognizes it may need a boost at some time. They are, in essence, investing against future need, creating a safety net that they can use to tide them over emergencies.

More Common For Parents To Help Adult Children.

The study showed that adult children in the period from 2005 to 2013 were more likely to draw on cash from their wealthy parents than was common in the 1980s. About 10 percent of those in the more recent group received help with a home purchase, Pew found. Slightly more than 30 percent were given money to help with education costs, enhancing their ability to become more wealthy in the future.

The bottom line of the Pew Study: Poor people tend to help each other out so they can get through tough times. Wealthy families benefit financially when they donate to kin.