Debt Reduction

Posts of the Week

by Flexo on August 1, 2009

in Personal Finance

For some fun reading, I recommend these articles written recently and published across the internet.

Estate Planning: Are You Ready When Your Time Comes? Lazy Man narrowly avoided death recently, but it is my grandmother’s condition that leads me to link to this timely post. Here, Lazy Man offers several tips to help prepare the loved ones left behind for handling your responsibilities following your passing.

What Works for Me: Debt Reduction Mindset. It’s always fascinating to see someone else’s motivating factors in any task. Motivation varies greatly from person to person. In this article NCN describes what motivates him to getting out of and staying out of debt. You may come away with some suggestions for keeping yourself on the debt reduction path as well.

Want a High Paying Job? Do the Math. Mr. Tough Money Love points out a recent survey that shows that the college majors resulting in the top job offers in terms of starting salary are strongly weighted towards those requiring strong math skills. Most of these jobs are various forms of engineering.

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50 Actions You Can Take Right Now to Pay Off Debt

by Flexo on July 23, 2009

There are many differing opinions about whether you can assign a quality like “good” or “bad” to debt. In general, I tend to believe that if debt is providing access to a necessary asset, like an education, a car, or a house, debt is at the least understandable. With debt, there is always a risk, and when you owe money to any other entity, you are often forced to live by their rules. So if freedom, financial and otherwise, is a goal, one of the major strategies on the path towards that goal is to eliminate your debt.

In an economic environment where your income is more at risk, you may choose to beef up your emergency fund rather than pay off debt. In other situations, debt is often not worth the interest you are required to pay.

Here are 50 things you can do right now to help you get out of debt. Some of these tips will directly help you pay off debt while some will help you save money so you have more cash available to eliminate that debt.

Link your debt account to your savings account and set up automated payments.
Stop using your credit cards.
Decide on a debt repayment method that makes sense for you while understanding the pros and cons of each.
Plan a party for each milestone, but don’t go into debt in order to celebrate.
Pay cash.
Empty the change from your pockets into a change jar each day.
Deposit that cash each month and transfer the amount to your larges or most expensive debt.
Make a second mortgage payment or car payment each month if you’re not penalized for doing so.
Cancel magazine subscriptions and divert that money towards your debt.
Postpone your vacation until you are out of debt.
Track your spending.
Stop watching television, particularly the commercials.
Don’t fall for Keeping Up With the Joneses; they’re in more debt than you.
Avoid scams and gurus that promise to make you rich quickly.
Learn how to cook rather than dining out.
Downsize your lifestyle: move into a less expensive house or apartment.
Divert the full amount of your raise directly to your debt.
Sell your unneeded stuff on eBay or Craiglist.
Give away anything you can’t sell.
Dispose of anything you can’t give away.
Put your credit cards in a cup of water in the freezer.
Call the credit card issuers to selectively cancel your credit cards.
Review your three free annual credit reports to ensure you’re aware of all of your debt.
Get your free credit score from CreditKarma as often as you like.
Involve your family and friends by letting them know of your plan.
Start a personal finance blog to chronicle your debt reduction adventure.
Use the library rather than buying books at the bookstore, renting movies from Netflix or the store, and buying CDs from Amazon.com.
Realize the ability to eliminate debt is completely within your control.
Use extra time to turn your hobby into a money-making business.
Modify your budget and find room to use more of your income to pay off debt.
Grow your own food in a garden.
When you need to replace your car, buy a used model with a great track record.
Wait before adopting the latest technologies until they are no longer the “latest.”
Remove the temptation to spend on things you like rather than the things you need.
Use smart credit card balance transfers to make your debt less expensive.
Improve your health to lower your health care expenses, and use those savings to reduce debt.
Quit smoking to save money and health expenses.
Read more blogs and personal success stories about getting out of debt.
Cancel your cable service.
Gradually increase your thermostat one degree each week during the summer or decrease it one degree each week during the winter.
Eliminate expensive hobbies that do not provide a return on your investment.
Stop trying to time the market and invest in individual stocks, and use that money to pay off your debt.
Downgrade your phone from your expensive iPhone or BlackBerry plan to a basic service without extra features.
Set up motivational reminders or alerts in your calendar software.
Save first, then spend, for everything.
Create subaccounts at ING Direct to identify money destined for eliminating debt.
Organize your bills in a system that ensures you won’t lose them or pay them late.
Always pay your bills on time, the earlier the better.
Don’t acquire more debt.
Speak up! Be part of a community; any tough task is made easier by working together and sharing ideas.

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Changes to Student Loans Coming July 1

by Flexo on June 15, 2009

While it’s great to avoid debt whenever possible, if you have to deal with federal student loans, including Stafford and PLUS loans, you might qualify for some better deals starting July 1.

Interest rates will be at the lowest rates in years. If you can consolidate, lock in rates after July 1. They will be at the lowest levels since the inception of the federal student loan program. The interest rate for graduates who are in a grace period is 2.00%.

Former students now in the process of repaying their variable rate federal student loans will be able to lock in a rate of 2.50%. Parents who have taken PLUS loans will be able to consolidate at 3.38%.

There aren’t many places to find cheaper money than this, but there are a few of limitations:

Former students who have already consolidated are not eligible for these low rates.
These rates are only valid for loans originated before July 1, 2006.
Borrowers who are still in school do not qualify for consolidation.

There is more good news.

Income-based repayment. If a borrower is not earning enough to make monthly payments, they can apply for income-based repayment. The lender can extend the life of the loan and lower your payments to 15% of your income.

Student loan forgiveness. Borrowers who work for non-profit companies or the government will qualify for student loan forgiveness. After 120 payments (ten years), the government will write off any balance remaining on the loan. Student loan forgiveness applies to people who do not work for the public sector as well if they are repaying on an income-based repayment plan. In this case, 25 years of payments are necessary before the remainder of the loan will be forgiven, but will be considered income for tax purposes.

Rates for new student loans. Subsidized Stafford student loans will sport a new interest rate of 5.6% if the first disbursement is taken between July 1, 2009 and June 30, 2010. This is the second of four annual interest rate drops for new loans.

Increased Pell Grant scholarship maximum. Low and middle-income families might qualify for a Pell Grant scholarship. The maximum a student might receive from this federal program will increase on July 1 to $5,350.

These programs can save families thousands of dollars throughout the life of the repayment.

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Medical Bills, Even if You Have Insurance, Can Cause Frustration and Debt

by Flexo on April 30, 2009

in Health

When I write about advocating for the consumer when he or she is in debt, I usually receive a good amount of feedback blaming the consumer for his or her situation. Yes, in many cases, households fall into debt because they buy more things they cannot afford, whether knowingly or unknowingly. In many cases, they ignore their own financial condition without worry for their future or while knowing that a declaration of bankruptcy can save them when life gets rough.

Not everyone falls into these categories, I remind the critics. Medical emergencies are expensive and cannot always be adequately planned for in advance. Credit card debt maybe the only option, or sometimes just a slightly better option that financing your bills directly from the hospital. Here is one example from the New York Times:

Mr. Kupka has multiple sclerosis. The Kupkas, who live in Lindstrom, Minn., have an annual income of $45,000 — a combination of her salary as an office manager and his disability payments. More than 20 percent of that income goes toward health care. Their annual insurance premiums total $5,400, and then there’s the $4,000 Mr. Kupka spends on drugs, doctor’s visits and lab fees before he fulfills his policy’s deductible.

In the three years since Mr. Kupka’s disability forced him to stop working as a mental health therapist, he has accumulated $12,000 in debt. “It’s frustrating,” he says. “We earn too much to qualify for state and county assistance, but not enough to stay ahead of the bills. I’ve thought maybe my wife and I should get divorced. But not only is it against our faith, it turns out it wouldn’t help…” [A]s Mr. Kupka’s situation illustrates, it’s not just uninsured patients who rack up large bills. Nearly two-thirds of those with debt problems… had health insurance.

The article offers tips for dealing with insurmountable medical expenses:

Confront, don’t ignore, your situation. If you don’t pay your bills and the hospital decides to use a collection agency, your hardship will increase. Your credit report and credit score will be adversely affected.
Review your bills. Health providers make mistakes on bills all the time, but many errors are not caught. Some procedures or services may have several names, identical is everything except price, so it helps to work with a medical expert if you have any questions. You can also resubmit your bills to your insurance company if coverage is denied. If you are still not satisfied, your bills may qualify for a third-party review.
Hire an expert. The article suggests working with the Medical Billing Advocates of America to find a qualified mediator to negotiate between yourself and the health care provider.
Don’t use a credit card. If you can help it, avoid paying your bill on a credit card if you can’t pay off the balance quickly. Interest charged for your use of someone else’s money will increase your debt. Watch out for credit cards offered by a hospital with immediate approval. These are like store credit cards; they might offer a 0% interest rate up front, but you might fall into a trap and owe much more interest than they’ll tell you when they’re busy saying, “You’re approved!”
Don’t let debt collectors take advantage of you. Know your rights for dealing with debt collectors in your state. They may only call you during certain hours, they may not harass you, and they may not threaten you. If they break the rules, you can file a complaint with the Federal Trade Commission.

Situations deteriorate faster if you do not have health insurance. Find a way to get covered if you are not a member of plan yet.

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Suze Orman Says Stop Paying Off Debt

by Flexo on April 27, 2009

Recently, famous finance guru Suze Orman, who usually doles out sensible advice even if in an disrespectful manner, has advised the public to stop paying off credit card debt any faster than minimum payments allow in order to shore up a savings account that could last eight months in an income emergency. According to this recent advice, the economy has changed in such a way that interest payments on debt are small prices to pay for the disaster of a personal recession.

It’s fair to say that Orman has a valid point for some. For example, this advice should be directed to a person whose income depends on a job from which he or she might be soon laid off, if that job is in an industry in which it will be difficult to find a new job, and if he or she won’t settle for a lesser job in while searching for a full replacement. But that describes only a small sample of the population. Orman is painting the picture with too broad a brush.

Liz Pulliam Weston recently pointed out this disagreement with Suze Orman. Weston points out that paying only the minimum to credit cards identifies you as a risky customer. Risky customers are punished by credit card issuers with increased rates and lowered credit limits, in some cases, without advance notice. Besides the direct effect of less available credit and higher interest payments, these actions have an unfortunate downstream effect. It is likely that this will result in a lower credit score.

Again unfortunately, much of modern society relies on a credit score. Your credit is checked when you apply for a loan or mortgage. But it is also checked when insurance companies determine your rates. Auto insurers have found that low credit scores, or credit risk in general, correlates to a risk of dangerous driving. Therefore the insurers feel justified in charging customers with lower credit scores higher premiums for the same coverage. Some employers check credit reports and scores to determine whether hiring you may present an undue risk to the company. And landlords check credit reports and scores when deciding whether you are fit to lease an apartment.

It’s very difficult to function in modern society without a credit history, and a good credit score and clean report goes a long way to make sure you can operate and navigate through life smoothly. Suze Orman’s advice might put that at risk in exchange for an oversize emergency fund in an environment in which the interest you can earn on savings is very low. It could take years to build up eight months’ worth of expenses in cash reserves, and paying only the minimum towards credit cards during that time will prolong and increase the cost of debt. If the minimum payments don’t even cover the amount of new interest charged, by following Suze Orman’s advice, you would be condemning yourself to a life controlled by debt and the credit card companies.

Suze Orman’s advice might be sensible for some people, but it’s important to think about the consequences of all but abandoning the elimination of debt. Where do you stand on Suze Orman’s advice to forgo debt repayment in favor of an eight-month emergency fund?

A Change in Credit Card Strategy, Suze Orman, March 1, 2009
Bad advice from Suze Orman, Liz Pulliam Weston, MSN Money, April 23, 2009

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Eight Tips for Living Through a Recession

by Flexo on March 27, 2009

in Saving

If you have been affected by the recession, perhaps by losing a source of income, you may not want to hear suggestions for turning a bad situation into an opportunity. In fact, the idea of turning challenges around for your own benefit is in line with the annoying soundbites that productivity gurus sell. But I firmly believe that it’s best not to let things happen around you without reacting and adjusting. Here are some ideas to keep you moving while the world is slowing down.

1. Reassess your finances. If your income has changed, you may find yourself increasing debt at a faster rate or worse. I suggest going back to the beginning by following the map set forth in Take Control of Your Finances. This involves reevaluating your goals, your income, your expenses, and organizing your savings and investments.

2. Consider your primary and secondary skills. If you are out of work, and particularly if you have experienced difficulty finding a new place of employment, it is easy to feel your skills are not appreciated. Perhaps this is a good opportunity think creatively about different ways to apply your skills or hone your other talents. In college, did you have a minor in a different area than your major? If you did, chances are you have marketable skills in some other activity. During my first two years of undergraduate studies, I had difficulty choosing my minor, switching from computer science to psychology. If necessary, I would enjoy pursuing either of these paths.

3. Turn your hobby into your own business. I have found that many people are reluctant to take the avocation they enjoy and turn it into a profitable endeavor. I can understand this; I work almost constantly these days between my day job and everything else I do. But if that day job were to disappear, there would be no question that I’d use this as an opportunity to ramp up my projects. I have already turned my hobby — blogging and building communities — into a business. Now my newer hobby is photography. I have tons to learn about this new hobby (and I still have tons to learn about personal finance), but if blogging were my “day job,” I might have take on photography as a more serious hobby, and possibly turn that into a business of its own.

4. Go back to school. Modern educational technology has made it convenient to earn another degree. You can take classes online in the comfort of your own home or you can go on campus and hang out with the young co-educational students. Do not focus on the return on investment (ROI) for the funds you put into additional education. Learning a new skill or studying an interesting topic has intrinsic value that can’t be measured by a financial analyst.

5. Consider frugality. I admit I’m not a big fan of most frugality tips out there. In the past, many frugal tips have required a lot of effort and therefore remained under the domain of people without other timely responsibilities. But online coupon websites and other modern technologies take a lot of work out of frugality, so this now is an option for more people. Frugality means different things to different people, so today’s recession provides an opportunity to explore and decide on where you can intelligently save money.

Check out this extensive list of frugal tips from Being Frugal.

6. Eliminate your credit card debt. Credit card interest is expensive. You don’t have to be frugal to realize that interest is in most cases an unnecessary expense if you spend less than you earn. If you’re out of a job, this can be difficult, particularly if you do not have enough income to cover the minimum payments. Call your credit card companies to see if they can assist you by lowering or forgoing your payments until your income returns. If not, perhaps they will lower your interest rate. It never hurts to ask, and ask a supervisor if the first customer service representative won’t provide satisfaction.

If you do have income, start the debt avalanche, the least expensive, quickest, and most efficient way to get out of debt.

7. Eliminate meat from your diet. I love a perfectly cooked, rare filet mignon. But meat, even steak from the grocery store, is expensive.

If you drop red meat, poultry and fish from your diet, you’ll find plant proteins cheaper than the equivalent amount of animal protein. The cheapest cuts of beef, such as ground round, average $3 per pound in U.S. cities (lean and extra lean); boneless chicken breasts cost $3.40 a pound; and canned tuna is about $2 per pound. Contrast that with dried beans and lentils at less than $1 a pound and rice well below $1 per pound… Even tofu, the chicken of the vegetarian world, is usually well under $2 a pound. Go Vegetarian to Save Money, MSN Money

Healthy diets help you save money later in life with fewer visits to the doctor.

8. Sell your extra stuff. The great thing about eBay is its enormous reach, bringing people from anywhere interested in owning anything closer together. There’s a market for practically anything transferable on the auction website. Sell your clothes, your furniture, your electronics, your art, your classic video games, and your baseball card collection gathering dust in the attic. Don’t expect to consistently make a lot of money selling your old items on eBay unless you own something truly rare. One drawback of the aforementioned reach is that lots of people are selling the same things you are.

But if you can create something original and use eBay to sell that product, you may be in a good position to earn a consistent income.

What would you add? How are you surviving this economic recession?

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Publicly Shame a Deadbeat

by Flexo on December 24, 2008

Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.

That’s a well-known quotation from William Shakespeare’s Hamlet. Polonius was perhaps concerned about, among other things, the public shame that could come from being a deadbeat borrower. As he proferred this and other advice to his son, Polonius may have been thinking about the possibility of seeing Laërtes’ name listed on uradeadbeat.com (read: you are a deadbeat dot com).

Uradeadbeat.com lets anyone post messages and stories about a company or person who owes money. In addition to the public listing on the website, uradeadbeat.com provides a direct service. They will email the deadbeat to inform them of the listing. If you provide an address, the website will also send a postcard.

All deadbeats have a chance to respond to the accusation. According to the site owner, some deadbeats were inspired to pay back their debts as a result of this public shaming.

It’s free to post a complaint, but in the future it will not be a free service.

This probably isn’t the best way to get someone who owes you money to pay up, but it might be a good option as a last resort.

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Take Control of Your Finances Part 6: Get Out of Debt

by Flexo on November 21, 2008