I’ve done a good job of sharing my disdain for Dave Ramsey’s popularization of a method of getting out of debt that caters to unmotivated individuals, the “Debt Snowball” method. That doesn’t mean I don’t agree with his principles or his intentions. I just think he, as one of the most popular “gurus” in personal finance, has to cater to the masses. It makes sense for him to profess a methodology that is simple reaches people on an emotional level. Real financial planners who work one-on-one with individuals to get out of debt and formulate a lifetime financial plan would be able to supply better options.

Dave Ramsey does offer something I like, his “Baby Steps.” These are seven suggestions that, when followed sequentially, will do wonders for helping people struggling with their finances to take ownership of the money in their life and start moving towards a more prosperous future.

Here are Dave’s suggestions, verbatim:

• $1,000 to start an emergency fund
• Pay off all debt using the Debt Snowball
• 3 to 6 months of expenses in savings
• Invest 15% of household income in Roth IRAs and pre-tax retirement
• College funding for children
• Pay off home early
• Build wealth and give!

In general, I like this plan of action. These “baby steps” help someone ease into a pattern of new, financially responsible behavior, with small mini-goals which when taken in full view go a long way to help ensure financial stability.

These “baby steps” are designed to appeal to a large mass of people. This is not advice based on any one individual’s real situation, so it’s fair to apply some customization and perhaps even improvements. Here are a few small criticisms.

Is $1,000 enough or too much for an emergency fund base? Dave Ramsey suggests shoring up a $1,000 cash cushion before beginning to pay off debt. Although $1,000 is a finite number of dollars, its value has a different meaning to different people or to different families. A family with an income of $250,000 a year and $1,000,000 in debt may not consider $1,000 to be much of anything, while a family earning $20,000 per year and $100,000 in debt might find the saving of $1,000 to be a struggle. So what’s a better option? I would suggest that this base savings, what is needed to lay the groundwork before embarking on the great debt reduction journey, should be one months’ expenses, whatever they happen to be. That sets a high enough starting goal.

The “Debt Snowball” method is not so great. Despite its popularity and proven track record with a million dollar business marketing this method, I’d like to see more people give a real try to the Debt Avalanche. They’ll save money and time in the long run if they are intrinsically motivated. I’ve discussed this at length before.

Is it too soon to worry about college funding for children? I’ve heard experts suggest that parents should make sure their retirement is fully funded before worrying about funding education for their children. I don’t think saving 15% of household income, unless begun at a young age, will get most parents to a secure retirement, but that depends on the family’s needs at that later date. There are too many variables to predict that with any accuracy. The reason most experts suggest this is because you can borrow money for college, but you can’t borrow money (as easily or inexpensively) for retirement.

I strongly believe that parents have a responsibility to ensure that the best educational opportunities are available to their children, but with the prices of tuition increasingly well beyond the rate of inflation, I’m not sure how well that philosophy will work in the future.

Why pay off the mortgage early? Dave Ramsey is strongly against holding all forms of debt. Mostly, I agree. If the mortgage rate is low enough, and you have the fortitude, risk tolerance, and availability to invest the funds you would otherwise use to accelerate your mortgage payment in an asset allocation designed with a long-term time horizon, it may make more sense to pay just your minimum to the mortgage. But I won’t stop anyone who wants to pay off their mortgage early, even if they might end up with a lower net worth than if they had invested. The market is unreliable, but when paying off a mortgage early, you’re guaranteed to “earn” the rate of interest you’re being charged. It’s not a precise way of figuring the math, but knowing that you don’t have to pay interest that was originally included in your amortization is good.

Thanks go to Dave Ramsey for popularizing good general advice.

General advice for an imaginary average person

Personal finance advice comes in many forms, running the gamut from Dave Ramsey’s philosophies on getting out of debt to Suze Orman’s no-nonsense anti-stupidity spending advice. Opinions vary wildly as you stroll down the promenade from the broker, a salesperson, to the financial planner paid by the hour rather than commission. Mass media, by definition, must appeal to the masses, so unless you’re working individually with a professional, the advice you hear is geared towards the “average” individual.

I don’t know any average individuals. This concept is a fictional statistical human being, an amalgamation of a sample population, with no defining characteristics. Mass advice cannot cater to the most diligent or intelligent of the crowd, because invariably less apt individuals overestimate their abilities, attempt techniques designed for the more able, and fail. Thus, advice is often “dumbed down” or simplified to meet the lower qualifications of a larger group.

Take, for example, the case of the best way to pay off credit card debt. I call it the “Debt Avalanche” but it certainly wasn’t my invention. While there are exceptions, this method of debt repayment calls for credit card debt always being paid off by focusing on the debt with the highest interest rate first. But people don’t always want to take this approach. They may receive more “satisfaction” by paying off the debt with the lowest balance first, which they believe will motivate them to continue paying off debt. Money, after all, is emotional more than it is mathematical.

Unfortunately, it’s this mindset which helps many people fall into debt in the first place (or repeatedly), and it is not correct. The best way of reaching a specific financial goal will always be the mathematical way. If not, your true goal is not purely financial. For example, is your true goal to get out of debt quickly and efficiently or is it to feel good about your debt situation? You will feel better in the end knowing you took less time and spent less money to get out of debt. If not, then perhaps you haven’t learned much from the experience and will find yourself succumbing to the “emotions” of money again and perhaps falling back into debt.

There are legitimate places for emotions when dealing with money, but debt reduction is not one.

Self-limiting philosophies and beliefs

You may hear that “doing what works for you” is the best way to approach a financial situation, but it’s often not a good idea. Doing what works the best mathematically is the ultimate approach. Other approaches may help you reach your goal, but not in the best way possible. “Doing what works for you” is an admission that you feel you have no need to improve yourself. This philosophy tells the world that you’ve learned everything you need to learn and are satisfied with your choice, even though you know it may not be the best. Or worse, if you have not learned all you need to know about your situation, you may not even realize that what you’re doing is in fact “not working.”

“Doing what works for you” is one of a number of self-limiting philosophies, excuses that people will use to convince themselves that they don’t need to strive for excellence. Here are some others:

“Luck and chance affect me more than my effort and skills.” Do you attribute a missed career opportunity to bad luck or not enough hard work? When you received a good grade on a college exam, was it due to the ease of the test or your preparedness? Those who attain their goals are more likely to be those who believe their own decisions and actions affect outcomes, good or bad. Those whose philosophy of outcomes is built around an internal locus of control have been shown to reach their goals more often.

The locus of control is one way psychology pays a significant role in your goals, financial or otherwise.

“Anything is better than nothing.” When it comes to saving, reducing debt, and investing and planning for the future, I agree. You have to start somewhere, but it is only a start. But if you believe that your financial condition in the future is important, the minimum is not enough. Don’t stop at “anything,” even if it is better than “nothing.” This is like saying it’s fine to feed your children one meal a day because one meal is better than no meals. Everyone is busy, but if the minimum is all you have time for, don’t expect results.

“At least I’m better than average.” The New York Times recently cited the Federal Reserve Board with an “average household credit card debt” figure of $8,565. Owe less than that and you’re in good shape, right? It’s unclear how that figure is determined. It may in fact be the average credit card debt of only households that have credit card debt. Include debt-free households in the calculation and the figure will drop. A number this high lulls many people into a false sense of security with the belief that with their balance of $6,000 in credit card debt, they’re “doing better” than most of the country.

This “security” leads to inaction and, in this case, to the glee of credit card providers, merchants, and manufacturers around the world.

Getting over it

The result of a lifetime with these beliefs is guaranteed mediocrity. While removing self-limiting philosophies doesn’t guarantee excellence and the ability to reach every goal, keeping these philosophies guarantees that you will not do your best. I do not know any man or woman with children who is satisfied with being anything but the best father or mother he or she could possibly be, so why are so many people satisfied with being an average personal financial officer?

There is usually a perfect mathematical solution to financial goals, like the Debt Avalanche mentioned above. Although Dave Ramsey says that most people have more success with a different, more expensive and time-consuming technique, that doesn’t mean you shouldn’t strive for the better solution. Just because perfection is not always attainable doesn’t mean that it’s worthwhile to stop striving for that approach and settle for lackluster results, especially if the better approach is not more difficult than the alternatives.

If you’ve found something that “works for you,” don’t assume that there isn’t something else that works better for you. Follow the best examples, not examples set by the fictional average individual. If your financial security is important to you, don’t settle for mediocrity. You won’t always reach your highest goals or always be excellent, but you’ll never be excellent if you limit yourself.

In about 6.5 months, I will be free of credit card debt for the first time since 1998. Much like Inigo Montoya and the “Revenge Business”, now that it’s over, I don’a know what to do with the rest of my life.

Readers of Consumerism Commentary have proven their wisdom many times over, so I’d like to take that into consideration. Please visit my YayBoo page on the subject and help me prioritize my next steps.

Or, you should be able to use the widget below:

(If you follow Consumerism Commentary through an RSS reader, you may have to visit this page directly to see the widget.)

This week, the Internal Revenue Service of the United States will begin sending direct deposits to those who qualify for the economic stimulus tax payment and checks soon after. Everyone who is interested in the tax ramifications of this payment should now know that the money received as a result will not be counted as “income” for federal tax purposes and that the payment is an advance of a new credit introduced for 2008’s income tax calculations.

The way I see it, the question in the minds of many is more immediate: What should we do with our stimulus payment? This deposit of $300, $600, or more is in some ways an unexpected gift. Though some could rightly argue that it is simply more of our own money returned to us, it is unexpected and thus not planned for. Some could also argue that it is wealth redistribution, as some low-income taxpayers may receive a payment larger than their total tax liability for 2007. (Note that the government changed their terminology for this program in March from “rebate” to “payment.”)

Regardless of opinions, here are some of the more popular options for dealing with an unexpected sum, either from the government or from any source.

If you have high-interest credit card debt, consider using your found money to reduce your interest payments. Credit card debt is an unnecessary expense. Unless you have an introductory rate or a special deal, chances are that you cannot earn a higher rate of return in an investment, particularly a liquid investment, than what you are paying in interest. Reduce your total debt and your interest payments by applying the total amount of your stimulus payment towards the balance on your credit card with the highest interest rate.

If you’re taking on the debt avalanche (a method mathematically superior to the snowball method), your payment will go far towards reducing your total debt.

If you have a mortgage on your primary home, consider making an extra payment to your principal this month. While it’s unlikely to make a noticeable dent in the short term, even one extra payment will reduce your total spent on mortgage interest significantly over the next few decades. To illustrate, a $500,000 loan over 30 years, starting June 1, 2008, with an interest rate of 7%, will benefit from a $8,400 reduction in total interest paid over the life of the loan if an extra payment of $1,200 is processed on June 1.

If you have no immediate savings, consider depositing the payment in a high-yield savings account. This is an important step to building a tiered emergency plan. While this money may not earn as much return over time as an investment in the stock market might, having funds available in a semi-liquid account allows you not to dip into debt as quickly or sell investments incurring fees and tax consequences.

You can count on an emergency arising at some point, and it’s advisable to be prepared.

If you are debt-free and you have an emergency fund, consider devoting this money to retirement. Saving for the future will increase the possibility of having the ability to stop trading your time and effort for money. In other words, if you’d like to retire from working someday, you’re going to need money to sustain your ability to pay for your expenses. Money invested in the stock market now has a good chance of earning a good rate of return when your time horizon for needing the income is several decades away.

I suggest opening a Roth IRA with Vanguard, invested in VTSMX, the Vanguard Total Stock Market Index Fund. (And no, they don’t pay me for this recommendation.) The fund has a low fee and a low barrier to entry for Roth IRAs.

If you have a Roth IRA, you can invest this money in your 401(k). This option isn’t as straightforward as sending a check to your 401(k) custodian, though. You can’t just deposit money into your 401(k) as you would be able to with another investment account. You’ll have to temporarily increase your 401(k) deferment by the amount of your stimulus payment and then reduce your deferment afterward. Assuming you’re not already maximizing your 401(k) contributions, this is a roundabout method of investing your found money in an tax-deferred account.

If you are set for retirement, consider saving this money for your children or other relatives to help pay for higher education. I haven’t decided whether I am a fan of 529 accounts which only offer tax-free earnings when funds are withdrawn for educational expenses (and in some cases, the rules are strict about which schools’ expenses will qualify), but helping to pay for education—so your children don’t have to work as much during the time they should be concentrating on learning—will be beneficial for their future earning potential.

And if you plan on growing old, your children’s future earning potential may be quite relevant. They may have to help support your health in your later years.

If you have no saving or investing holes to be filled, consider charitable giving. While $300 may not be much to you, there are many organizations who would be happy to receive the money to help fund a program. This is a highly personal decision, so you should find an organization that has personal meaning.

Religious organizations and churches are popular choices, and some people prefer to support scholarships pertaining to a meaningful field of study. Organizations that support social, arts, and athletic programs constantly require funding. If a health condition has affected your family or friends, chances are there is a related organization supporting research towards treatment and a cure.

All out of ideas? Buy something, either for someone else or for yourself. MyMoneyBlog has some tips on where your money will go the farthest, with several stores offering a 10% bonus on your money when purchasing a gift card or a pre-paid credit card. Watch out for these types of benefits. Often, and where not prohibited by law (ie., California), gift cards lose value over time or charge a fee, reducing your bonus (if any). Some of the stores offering a 10% bonus include Kroger Supermarkets, K-Mart, Sears, and Radio Shack.

In some cases, you have to bring your actual stimulus check to the store to receive the bonus. For those of us who are efficient and will receive their payment via direct deposit, we would not qualify.

The stated purpose of this economic stimulus plan, as devised by both the White House and the Congress, is to stimulate the economy by getting money into the hands of who might spend it, particularly on American-made products. The political purpose is deeper yet more superficial: to ensure that both the Democrats and the Republicans appear to care about the economy as the presidential election draws nearer.

The economy is often a matter of psychology rather than pure financial statistics, so it’s unclear whether these payments will have any measurable effect on the economy. If economic sentiment changes from negative to positive, it’s unlikely that one could prove that the stimulus package would be the cause.

How do you plan to invest or spend your stimulus payment?

A new study by researchers at Vanderbilt University Law School and University of Oxford reveals a strong correlation between approvals for payday loans and bankrupcty filings. Considering that people who are rejected for payday loans have other (limited) options for credit, it’s surprising that the rate of bankruptcy isn’t as high with this group. It’s quite possible that this can be interpreted as a cause-and-effect relationship. That is, being approved for payday loans increases the probability of filing bankrupcty.

Individuals who have been approved for payday loans have a probability of filing for bankruptcy within two years 2.48 percentage points higher than the probability for individuals who were rejected for payday loans.

It sounds obvious, but scientific findings that payday loans contribute to bankruptcy confirm any hunches. Payday loans a short-term loans with fees which, if viewed in terms of interest rates, are very high. Rates of 100% APR or higher are common. The loans are designed to be paid back in two weeks, however, so you only see a 100% interest rate if you roll over from one loan to the next for an entire year.

Most people who have the need to get cash quickly in the form of a payday loan don’t continue the cycle continuously for a year, but many do become repeat customers. The typical payday loan borrower will apply for about five more payday loans totalling over $1,500 within one year after the initial acceptance.

The study shows that interest from payday loans accounts for about 11% of the a bankrupty filer’s total interest burden, and this 11% could be what finally pushes an individual into declaring bankruptcy—the proverbial straw.

These results are consistent with the interpretation that payday loan applicants are financially stressed; first-time loan approval precedes significant additional high interest rate borrowing; and the consequent interest burden tips households into bankruptcy.

The authors of the research discount the idea that individuals preparing to declare bankruptcy quickly accumulate as much debt as possible to maximize bankruptcy’s “benefit.”

While it’s certainly possible to borrow money through a payday loan, pay the entire balance plus interest when it is due, and never become a payday loan customer again, this is not a typical scenario. Furthermore, those who have low credit scores may be rejected by payday loan companies and turn to pawn loans instead, with similarly high interest rates. Yet, the payday loan customers have the increased incidence of brankrupcty.

Do Payday Loans Cause Bankruptcy? [Paige Marta Skiba, Vanderbilt University Law School and Jeremy Tobacman, University of Oxford]
via Research Recap via pfblogs.org

This article was written for Consumerism Commentary by Adfecto, a mid-20s guy with a masters degree in engineering. He aspires to be wealthy and writes frequently for his own blog, Adfecto Abundantia.

When I purchased a home it was not a lifetime commitment. I view a person’s choice of housing first as a financial decision and second as a lifestyle decision. A house gives you place to live and the added bonus of potential price appreciation and tax deductions. If it is cheaper to rent then by all means that is the way to go. Owning your own home can also give you a tangible increase in your standard of living, but personally that is considered a distant second when compared to the financial benefits. What I find interesting is that so many people tend to make emotional decisions about the home rather than rational ones.

Frequently, when home owners find themselves with a little extra cash at the end of every month, the idea of paying off the mortgage is often brought up. Is early payment the right way to use the money? Should the money be invested instead? Is my real motivation to build wealth or to play it safe?

The first step in analyzing this decision is to compare the interest rate on the mortgage to expected investment returns. Historically the S&P 500 with dividends reinvested has returned 10.43% annualized from January 1926 to December 2007, and the current rate for a fixed 30 year mortgage is about 5.76% according to www.bankrate.com. Based on this simple comparison it is plain to see that in the long run you will build more wealth by investing than by prepaying your mortgage.

If you want to further hone this comparison of rates, next you can consider not just the entire history of the stock market, but also every 30 year rolling period of stock market data. Since 1953 the S&P 500 has returned at least 9.34% over every 30 year period which is again well above the interest rate for a 30 year mortgage. Plowing your money into prepaying your mortgage has a huge opportunity cost that will hurt your ability to build wealth.

Why then would people consider prepaying their mortgage? Most people consider their home as a safe investment, and paying off a mortgage as a guaranteed return. A certain piece of mind comes from owing the bank less money. There is a big problem with this argument; there is still a great deal of risk involved with your primary residence!

Additional risk comes from the fact that until your loan is paid in full, the bank still holds the mortgage on the property. The bank will not give you credit for the extra payments made to pay down the debt if you start to struggle further down the line. Even if you are way ahead on your mortgage, a hardship may cause you to miss payments. The bank can foreclose even if you spent years paying down the mortgage balance early.

Investing your free cash into your mortgage is very similar to investing in a bond. It may seem odd, but you are literally investing in a fixed income asset, the mortgage, lent to yourself. The return you get will be equal to the interest you would otherwise pay on your mortgage. One problem that arises is that the bank has first crack at the collateral; your house. Even worse, your mortgage isn’t even a very good deal when compared to the types of bonds; for example, Toyota AAA rated bonds currently pay as much as 7.652%. I bet your mortgage rate isn’t that high.

Furthermore, understanding the nature of your mortgage as a bond brings to light another risk; improper asset allocation. Mortgage prepayment shifts your asset allocation to rest more heavily in fixed income type investments than you might otherwise consider. A 40 year old person should have at least 60% but more likely 80% percent of his/her portfolio in stocks, but add in all of that mortgage prepayment in the bond category and you may find yourself far out of line from you ideal asset allocation.

Another risk related to mortgage prepayment is a lack of diversification. You may think that your mortgage is not very risky because you believe in your own ability to pay. This personal bias can cloud a person from see the true risk factors such as job loss, poor real estate conditions, natural disaster, and a plethora of others. A single unfortunate event can wipe out a large chunk of the equity. A single job loss may bring about a short sale or foreclosure that could wipe out the value of your home. Would you advise someone in your circumstances to invest in individual mortgages? I sure wouldn’t, and neither should you.

Deciding whether or not to prepay a mortgage is another financial and lifestyle choice which depends on several factors, but most of all it is a choice between building wealth (logical) and piece of mind (emotional). People who focus on paying off their mortgage seem to be more in love with their house and the idea of having it paid off than the goal of building wealth. These people are also blind to the risks that come from investing too much of their finances in a single residential structure. I think that for the majority of people the ‘right’ decision would be to keep the mortgage and invest the extra money.

Image credit: Oracio
If you enjoyed this article, please visit Adfecto Abundantia to read more from this guest author. Consider subscribing to Adfecto’s RSS feed as well.

On December 30, 2006 I officially announced my financial goals for 2007. Before I set new goals for 2008, I should take a look at my progress this year. Below, I’ll cite the goals I set a year ago and evaluate my progress.

Income: Generate $40,000 in revenue outside of my day job. I think this is attainable. My side income has seen fairly consistently growing and as long as I keep working hard, I should be able to reach this amount. One challenge related to the environment becoming increasingly competitive. Stretch goal: $60,000.

Income results: Passed with flying colors. Preliminary numbers show that I significantly exceeded my stretch goal. I’ll still have to make some adjustments as I received income for some other individuals that still needs to be distributed, but I should clear $70,000 in income related to internet publishing. Most of that comes from advertising on Consumerism Commentary, but an increasing portion comes from affiliate sales. While I am grateful for my success thus far, I am still blogging because I enjoy writing and building online communities. The satisfaction in blogging is generated by regular readers, but the income comes generally from passers-by who are generally looking for something else.

Spending: I’ve managed to keep my spending fairly low over the last few years, except for gift season and food expenses, like dining out and groceries. I’m fine with the spending on gifts but my goal for 2007 will be to create a budget for food and stick to it. This will involve buying smarter and healthier groceries, cooking more, and eating out less. If I can stick to $100 a month for groceries and $100 a month for dining out, it would be a big improvement. Stretch goal: $80 and $80.

Spending results: Failed. On average, I spent $117 per month on groceries and $167 per month on dining out. Both numbers are slightly up from last year, probably reflecting a higher cost of food rather than a change in behavior. If anything, I shopped more efficiently and ate out at restaurants less this year. Including both the “dining out” category and “convenience food” category (which includes lunch at work and snacks), I spent $190 per month this year compared with $230 last year.

However, spending in general has increased. Earlier this year, I moved into a new apartment that is larger, more comfortable, and more inviting than my old location. Over the last few months, I’ve purchased some things that make my time in said apartment more enjoyable, including a high-definition television, an HD DVD player, and an XBOX 360 game system. I don’t expect this type of spending to continue, however.

Investing in 401(k): I’m currently investing 12% of my day-job income into the 401(k) my company offers. The only reason I can afford this is through the help of my side business income. My goal for 2007 is to increase this to 15% by July. This should be possible with a little income bump. Stretch goal: max out the 401(k) with an investment of $15,000. That will be a significant stretch.

401(k) results: Exceeded my goal. In May this year, I increased my 401(k) deferral from to 25% after an earlier increase from 12% to 16%. That’s not quite enough to max out the 401(k) in my low-paying job. According to my last pay stub of the year, I contributed about $10,000 to the 401(k). My employer matched some of that contribution, as well. Investing this much for retirement is only possible due to the additional income mentioned above.

Investing in Roth IRA: I already max out my Roth IRA investment. My goal for this is for nothing to change.

Roth IRA results: As expected. It’s no surprise, but I fully contributed to my Roth IRA this year. Doing so may have some unintended consequences, unfortunately. I’ll have to check after preparing my 2007 tax return, but I may have to withdraw a portio of my Roth IRA contributions. For 2007, if modified adjusted gross income exceeds $99,000 then the IRS won’t allow a full contribution to a Roth IRA. With an income above $114,000, the Roth IRA is completely unavailable. At this point, it’s too early for me to tell whether I’ll have to withdraw funds from my 2007 Roth IRA at the last minute.

Saving: The account I have marked for emergencies would cover one month of my current expenses. If I were to be in an emergency situation (i.e., no job) for longer than a month, I still have other cash I could use before resorting to credit, but that would involve borrowing from other savings goals. I’d like to double the size of my emergency fund by the end of the year. I’d also like to double the percentages of my day-job income I devote to long term savings goals, like relocation (a house, hopefully). Stretch goal: triple the percentages.

Saving results: Succeeded. I have doubled the balance in the savings account earmarked for emergencies, which now would last about two months without income from either my day job or my side business. I still have various savings accounts earmarked for other goals that can be tapped if necessary. Unfortunately, with income coming from various sources and going to various accounts, it’s been a bit difficult for me to track the percentages. It’s safe to say that on average throughout the year, I saved or invested a larger percentage of my total income than I spent.

Debt: If I follow my schedule, I will pay off my car loan (at 2% interest from a relative) by September. The interest rate is favorable enough I’d rather keep the money in savings, so I’m not going to speed this up. On the other hand, I have about $18,000 in student loans remaining to be paid. The interest rate isn’t as favorable at 4.25%, but the interest paid is tax-deductible.

Debt results: Achieved the goal ahead of time. I paid the remaining balance of my car loan off in July. While 2% interest wasn’t hurting, and I was earning more from interest in savings than paying in interest on the loan, I still wanted to rid myself of that debt as soon as possible. The money to buy the car was lent to me by a family member, so I felt like the right thing to do was pay it off as soon as possible. He could have been earning higher interest with that money in a savings account.

I still have a balance on student loans, a combination of money used for undergraduate studies and my MBA. My masters degree was 90% paid for by my employer, but I didn’t always use the reimbursements to pay down the loan. When I originally started the MBA, the financial adviser for the university suggested I get a loan anyway and use reimbursements to pay back the loan. Looking back, I probably should have used the reimbursements to pay the school directly, avoiding any involvement of debt.

Charity: The non-profit organizations I’ve worked with in the past appreciate volunteers who give their time, and this is the approach I generally take. I like that 100% of the time I give affects the organization. When you give money, a portion is kept by the organization for administrative expenses and will never make it to the programs sponsored by that organization. While I understand that administrative expenses need to be paid for, I believe I have more of an effect by directly involving myself. Despite this, my goal for 2007 is to select an organization that means something to me, one that I cannot spend time with and one I know the money will be put directly to its purpose, and donate $1,000. Stretch goal: $2,000.

Charity results: Met, with explanation. On my expense sheet, I donated $5,127 to charity this year. This includes an arts organization that supports youth musical education and performance, the pfblogs.org Financial Literacy Challenge at DonorsChoose and a charitable gift fund. Since I did not yet choose a recipient for the $5,000, it’s hard to say that I fully met the goal. I’ve written several times about my difficulty in choosing recipients for charitable giving. I’ll have to perform some deeper research and get involved with something new next year.

Soon I will decide and post my goals for 2008, which is sure to be an exciting year.

Image credit: Daquella manera

Kimberly Lankford from Kiplinger recently handled a question from a reader. Capital One raised her interest rate from 9.9% to 15.9% on her account, and she’s wondering what her options are.

You could decline the rate change and continue to pay off your balance at the old rate… Capital One would then close your account and notify the three credit bureaus when you finished paying off the balance…

Kimberly explains that closing the account can be detrimental to her credit score, especially if this is one of her longest standing credit card accounts. Closing the account could negatively affect the reader’s total credit history, average credit history, and debt utilization ratio. The optimal solution is to pay off the balance as quickly as possible but leave the account open and inactive.

Even before taking any of the above actions, I would suggest simply calling Capital One and asking if they could lower the rate. In the past, this has been somewhat effective for some people, but the credit landscape has changed and the companies seem to be more likely not to budge. It’s worth a try, in my opinion. I wouldn’t even give up until I’ve talked to several different customer service representatives and their supervisors.

In March, a Consumerism Commentary had a similar question about closing her Capital One credit card. I provided my suggestion based on Capital One’s method of reporting credit limits to the bureaus that provide credit reports and scores at the time. This method was designed to hurt customers’ credit scores. In that case, her Capital One card was the oldest account, but I didn’t rule out canceling the card because of those reporting practices. The company has since switched gears and has adjusted their policy to report true credit limits.

Coping With Credit-Card Rate Increases [Kiplinger]