Getting out of Debt Advice

[LouisEly]

For those who can manage money, keep track of finances, and pay their balances every month, credit cards = a very good thing. If someone cannot manage their money or pay their balances every month, credit cards = a very bad thing. Personally they have helped me build a fantastic credit score, but I have friends who have gotten five figures in debt with them. They are a double-edged sword.

 

Don't do credit cards for "points" or "rewards" - on average a point is only worth a penny, so you are only getting about 1% back on your purchases. Many are less than 1%. Never get a card with an annual fee, unless you are spending a boatload on it (own your own business) and it has phenomenal rewards. A $50 annual fee cancels out the rewards value of the first $5000 you spend on it. When interest rates were higher the "float" could make you money, but now except for CDs it is almost impossible to get more than 0.5% interest on any bank/savings account, so at best you are making 1.5% on your money.

 

I highly recommend getting personal finance software like Quicken where you can download all of your credit card transactions and balances - that way there are no surprises when the bill comes. You can keep track of your cash balance in your bank/checking accounts and when/how much your paycheck is vs. your credit card balances to make sure you don't overspend. Every January/February you can go to office supply stores (Staples, Office Depot, Office Max) and get free personal finance software and free anti-virus (after rebates) with the purchase of tax software. So for ~$30 after rebates you can get Quicken/MS Money, TurboTax/TaxCut, and one year of an anti-virus software.

 

As for the pay the small balances off first, that is purely psychological. If it makes you feel better by paying off the small balances first so there are less total bills then go for it, but the best financial bet is to put money towards the highest interest rates.

[craigharmann]

Try reserving a hotel room in advance, rental car, airline tickets, etc. without one.

Done all 3 with my debit card. No problems, and it all came out of the money that I had at the time.

[FVBrewerFan]

Don't do credit cards for "points" or "rewards" - on average a point is only worth a penny, so you are only getting about 1% back on your purchases. Many are less than 1%.

Every offer/card is different. I recently signed up for the Delta American Express card because I got 25,000 miles for signing up, then another 25,000 miles if I spend $10,000 in 6 months. (Which I've already done in 4 months.) So that's 60,000 miles already and I'll have enough for 3 free flights before long. To me, that's a no-brainer. The 1% is deceiving also, because many of these reward programs will give you double points for various purchases.

 

So I've helped my credit score even more, and earned 3 airline tix with no annual fee. But you're right, now that I've earned the benefits, I will cancel after a year if they won't waive the annual fee again.

[JJHardy7]

The 1% is deceiving also, because many of these reward programs will give you double points for various purchases.

 

That's true. 1% also doesn't sound like much, but for many things that you have to pay for anyways it can add up. My Discover card rotates each quarter for special 5% items (gas, groceries, etc). That is an added plus IMO.

[PeaveyFury]

I highly recommend getting personal finance software like Quicken where you can download all of your credit card transactions and balances

 

I agree- I used to track by spreadsheet, but switched to Quicken back in May and will never, ever look back. Great software, especially if you have investments and such to track as well.

[homer]

I use Mint.com

 

It's free and does everything I used Quicken for.

[LouisEly]

So I've helped my credit score even more, and earned 3 airline tix with no annual fee. But you're right, now that I've earned the benefits, I will cancel after a year if they won't waive the annual fee again.

 

Exactly - it's worth $50 for 50,000 miles, but not worth the annual fee without the bonus miles. The point I was trying to make though is some people just think about the rewards but don't realize the real cost/benefit. My corporate AMEX charges $75/year and now that I don't travel much for business anymore I'm not spending much more than the $7500/year to break even. In fact, most of AMEX's rewards are actually $0.50/point, so you have to spend $15,000 per year just to break even on most rewards.

 

I use Mint.com

 

I would never, ever trust any website with my personal finance information. I can put in my account numbers in Quicken Deluxe for my credit cards, IRAs, and 401Ks and download those transactions - would never in a million years do that with a website.

[homer]

I can put in my account numbers in Quicken Deluxe for my credit cards, IRAs, and 401Ks and download those transactions - would never in a million years do that with a website.

________________________

 

You're probably almost as vulnerable having it on your computer and being hooked up to the internet.

 

Also, do you do use Turbo Tax? It's on the web. And I think there's a version of Quicken for the web too (And Quicken just bought Mint for what it's worth).

[ewizabeff]

Quicken bought Mint, so it's the same company having potential access to your info.

[LouisEly]

If Quicken bought Mint, the odds of Mint staying free are very slim. Expect it to charge a fee really soon (why would they allow something else they own to cannibalize their own software revenue) or be eliminated/rolled into Quicken.com.

 

And I'd rather have it on my computer - all of my account numbers and/or passwords are masked in the program, and I have plenty of firewall/antivirus/passwords to make it pretty darned challenging to hack this puppy. I know the security of my own computer, but I don't know the security of theirs, and if they are holding the financial information of thousands of people then it is a much bigger target for hackers than my little pissant PC.

[sgtcluels]

But on the inverse, when your PC breaks you probably don't have a tested/regimented backup solution.

[ewizabeff]

The announcement stated that Mint will remain a free website, and the founder will be employed by Intuit (Quicken). The email that Mint users received:

 

Thank you for being a part of what's becoming a revolution in active personal financial management. I'm excited to say that Mint.com and Intuit are coming together to take personal finance to the next level. Mint.com has entered into an agreement to be purchased by Intuit. Once the acquisition closes, Mint.com will have the opportunity to spread that revolution to more people, more quickly, together with one of the world's strongest software brands. The acquisition is expected to close by the end of 2009.

 

What's not going to change

Mint.com will stay the way you like it: free, easy-to-use and constantly improving.

 

What will change

As outlined in today's press release and my blog post, after the acquisition closes, the Mint.com team will contribute to improving the financial lives of tens of millions of consumers and small businesses. I'll personally be taking on the role of GM of Intuit's Personal Finance group responsible for online, desktop and mobile consumer personal finance offerings. Joining Intuit enables us to bring our vision of helping consumers understand and do more with their money to millions of Intuit customers. This is a compelling combination of our innovative product, technology, and industry leading user interface design with one of the most trusted brands in software.

 

I look forward to executing on that vision --- for you.

Thanks for your support,

Aaron Patzer

Founder and CEO

[LouisEly]

But on the inverse, when your PC breaks you probably don't have a tested/regimented backup solution.

 

Except my old PC that just needs a new power supply. I can live with the ol' 3.2e gHz processor for a while until I can get the dual-core box fixed. Or I can just pull the hard drive out and put it into a new box (or have my neighbor who has a computer repair business do it while I'm at work). It's really easy to connect a hard drive to another computer and pull all of the files off of it - I've done it before (only once in the 12 years that I've owned a PC).

 

Still, I ain't puttin' my financial data on a website. No way, no how, no when. I had my identity stolen once, and I'm not taking any chances that someone can hack their data base and find all of my finances looted. I just had one of my credit cards canceled by my credit card company and a new one reissued because a merchant that I did business with had their data base hacked/"compromised".

[valpocrewsader]

The biggets problem with using credit cards is that even the most disciplined and conservative spender will fritter away extra money here and there due to the painlessness of plastic. Walk into a Target needing only anti-persperant, somehow walk out with $30 in impulse buys. Paying with a debit card, on the other hand, is a little more discouraging to these practices since you know you're losing liquidity instantly. Better still, nothing keeps you right in line as a spender like using regular old cash like grandma. It's painful taking $10s and $20s out of your wallet, keeps you right in check on buying only the necessities. Same thing applies, perhaps moreso, when you're out at a restaurant, a bar, on vacation -- basically anywhere you might spend money. Standard & Poor's published a study on this subject, with the results saying you spend something like 10%-20% more with plastic.* Dumping the credit card habit and switching to cash is one of the biggest reasons I've been able to pay off $13,000 in debt over the last 10 months on a pretty modest salary. My discipline has never been this good.

 

Regarding securing financing without credit, it's not entirely true that you'll absolutely need good, built-up credit when the time comes. Yes, if you walk into a mega-bank where everyone's lost their ability to think and use common sense and all they look at is the ALMIGHTY FICO score and computer models, you're probably not getting a loan. That said, there are still operations with their brain intact like Churchill Mortgage that do manual underwriting, actually looking at the applicant's capacity to pay -- income and assets compared to debt. In many cases, such applicants can still get A+ rates.

 

I've been too chicken so far to cut up and cancel my plastic, so I can't really tell other people to do the same. I do strongly believe that the American culture needs to change in this area. The culture that says credit is absolutely needed, that buying a car requires going into debt, that buying furniture or appliances means taking on payments, that going to school for an unmarketable degree is worth thousands in loans. The young couples who need to instantly reclaim the lifestyle it took their parents 25-30 years to build, doing it all on credit and loans and house payments they can't afford. This recession has been a blessing in this regard, people are starting to realize how careless and risky their behavior has been.

 

Dave Ramsey is a god.

 

 

*EDIT: Brain fart, "Standard & Poor's" should have been "Dunn & Bradstreet". Actual numbers are 12%-18% higher. Here's a link: http://www.associatedcontent.com/article/142336/do_we_really_spend_more_with_credit.html?cat=3

[valpocrewsader]

Menotti, my first piece of advice to you (worth what you paid for it, ha) is to get on a written budget. Take out a legal pad, put your take-home pay at the top, and work your way down deducting your expenses. Necessities at the top- shelter, food, lights, water. Then move on with the rest. By giving every dollar a name, a purpose, before the month starts you stay in total control of your money. (Provided you stick to it.) Seeing it on paper, certain expenses might look ridiclous and you'll decide to cut them back or get creative. Also, getting it on paper, you'll often discover extra money at the end of the rainbow, like getting an unexpected $100-$200/mo raise. If you can resist the temptation to fritter that money away, you've just found more money to throw at your debt. If you want to get really serious, use an envelope system. If your budget is $250 /mo for groceries, you take that money out in cash, put it in an envelope labeled "Groceries" and you spend not a dollar over what's in the envelope.

 

Next advice, SELL THE FREAKING CAR. $550 /mo for a vehicle is disgusting. Now you've got it down to $250 /mo with the credit card debt stacked on top of it, stretched out over 5 years. That's insanity. You can't win financially with that philosophy. Go with a ~$3,000 ride -- you'll find one that's good and reliable if you're careful and don't let pride get in the way -- and pay cash for it. (Or pay it off very quickly.) Suddenly you've just greatly reduced your debt to Landmark AND opened up more cash each month to throw at your debt!

 

Next advice, if your emergency fund is anything higher than $1,000 cut it down to $1,000 and throw the difference at your debt.

 

It's too bad you consolidated your smaller credit card debt into that auto loan, it would have been a great starting point to gain momentum and get intense about paying off your debt. Now you've got a larger loan, which -- pyschologically -- is just easier to ignore or feel defeated about, easier to treat like a pet that you just feed periodically and it's bound to be around for a long time. To succeed in abolishing debt, you need to be fierce and intense about it -- and you need to follow through. Quantity and quality. You have to hate the debt and be aggressive about eradicating it and constnatly keep up the intensity. There's no quick-fix, microwave solution -- this is a crock pot. There's nothing mathematically different about having $2000 + $2000 + $10000 in debt compared to having one $14000 debt (truthfully, the math could even work in your favor consolidating) but as humans we need our little victories and need to see progress. The prognosis would be better if you could see one of those $2000 debts dissappear and then later the other $2000, picking off the evil bad guys one by one like some super-heroic financial gladiator warrior. Earlier in this thread there was a debate about which debts to pay off first, the smaller amount debts or the higher interest debts. If all we were guided by was math, the answer would obviously be the higher interest debt, but personal finance isn't done outside the context of being human and having emotions. I'm a firm believer that you're better off snowballing your way through your debt crusade. Make minimum payments on everything but your smallest debt and knock off the little guy with big payments, then take that payment and apply it to what you were already paying to debt #2 and knock it off, then snowball that into #3 and so on. It's tremendously rewarding watching debtors one-by-one be removed from your life. It inspires you to stay the course with the same intensity. That momentum is invaluable. Mathematically, you might come out a few dollars ahead chasing the high interest rate angle, but the key is actually getting it DONE, and the snowball approach makes that success most likely.

 

Just my 2 cents....

[PeaveyFury]

Next advice, if your emergency fund is anything higher than $1,000 cut it down to $1,000 and throw the difference at your debt.

 

I think this is very dangerous. You almost always want to have 3-6 months of your net salary saved up in case of injury/disability/being fired/laid off/etc (ie, something completely unforeseen that would be catastrophic), especially in a recessionary economy with rampant unemployment. Otherwise, if your income were to change, you have no way of paying some of your bills/debt even with the most strict budget, because it will be completely and alarmingly unusable at that point.

[JJHardy7]

Menotti, my first piece of advice to you (worth what you paid for it, ha) is to get on a written budget.

 

Couldn't you just use a spreadsheet? Your advice is good, but everybody has different methods. I would think the most important thing IMO is to have some type of budget and start from there. If writing it down helps, that's fine. I have a new tab for every month of the year. This way I can project and look at actuals in terms of past months and also the amount of money we've saved.

 

I do think it helps to have some type of goal. If you're just saving to save, that's fine. For me, if I have a goal of saving xyz for a month or the year it makes me focus on the goal a lot more.

 

Also, I agree 100% on your thoughts about a vehicle. IMO it's the biggest money waster in some cases. I know some need certain vehicles for work or family, but I have plenty of friends who have high car payments for no reason. I know everybody is different, but IMO if you buy a car and make big payments it's not the end of the world...as long as you got a good deal and plan to drive the car into the ground. I got a good deal on a newer Jeep a few years ago, but when the auto industry was going down I sold it and I'm happy I did. The payments really didn't make sense for how much we used it. The only bad thing is I'm stuck driving my 'sports' car...a 1997 Saturn sedan!

 

Mathematically, you might come out a few dollars ahead chasing the high interest rate angle, but the key is actually getting it DONE, and the snowball approach makes that success most likely.

 

It'd likely be more than a few dollars...and it would be more money to save or pay debt. I would definitely recommend running a cost analysis for each type of debt. You could easily save hundreds (maybe thousands) depending on one's situation by paying the higher interest rate off first.

[craigharmann]

Next advice, if your emergency fund is anything higher than $1,000 cut it down to $1,000 and throw the difference at your debt.

 

I think this is very dangerous. You almost always want to have 3-6 months of your net salary saved up in case of injury/disability/being fired/laid off/etc (ie, something completely unforeseen that would be catastrophic), especially in a recessionary economy with rampant unemployment. Otherwise, if your income were to change, you have no way of paying some of your bills/debt even with the most strict budget, because it will be completely and alarmingly unusable at that point.

Right on. According to Dave Ramsey, the first thing is to get $1000 in savings. As you're paying off your debts, when something happens (not if), you use the emergency fund, and then rebuild the $1000. Once you've got all of your debts paid off, then you get 3-6 months of income in savings. Obviously, if you know something is coming up, like being laid off, you adjust accordingly. But it's a matter of planning for things, so that when they do happen, you're not in panic mode and use the plastic. Christmas comes every year. Cars need repair.

[JJHardy7]

I agree with PF 100%. Ramsey is a decent guy and his common sense has made him a wealthy man. If someone were to get laid off though and only had $1k saved, they could easily lose their house, car, etc. due to lack of cash on hand. I'm sure it's a balancing act, but I'd much rather have 3 - 6 months saved up if possible than potentially losing a house or something of that nature.

[homer]

$1000 seems like a really miniscule emergency fund.

[Menotti80]

thanks for all the responses guys. valpo, i will address some of your points/suggestions first:

 

get on a written budget - i have used 3 different methods of tracking expenses and budgeting. Some have had some success, other have not. I will explain what I mean in a different post. But I currently do every single thing you mentioned in our first paragraph BESIDES the envelope system, which I have thought about doing several times already...

 

SELL THE FREAKING CAR. $550 /mo for a vehicle is disgusting - i bought a car over 2 years ago. i was ok with the high payments at the time because after 3 years, i would have about 35-40k miles on my car and i would have zero car payments. and i would have that car for another 5+ years, and to me that was worth it. so i do plan on having it for a LONG time. i dont mean to offend anyone here, but i wanted my first car to be a new car that i liked. i had been borrowing cars and using my mom's car for too long.

 

Now you've got it down to $250 /mo with the credit card debt stacked on top of it, stretched out over 5 years. That's insanity. You can't win financially with that philosophy - maybe i'm just not smart at all when it comes to $, but i dont understand what's wrong with combining the $7,000 left on my car and about another $7,000 in 2 credit cards with ridiculously high interest into one payment with a LOW interest rate.

 

Here's how I look at it. i was paying $545 a month, and paying $100 - $200 on each card each month cause that's all i could afford. so that's $850 a month, and it's all paid off in about 2 years. now i am paying $240 a month for 5 years, and with the amount of money less i am paying each month, i will be paying it off a lot earlier than 5 years - and there is no penalty for doing so. and now those 2 accounts have a ZERO balance, and this way i am not charging anything on them cause i want to keep it that way. when i was paying $150 a month on these cards that had balances, i was still putting stuff on the card each month.

 

the amount of interest i would have paid on those cards before paying them off would be about the same if not more than the amount of interest i will pay at landmark, which is a FIXED cost. if my logic is still flawed, please let me know. i admittingly am not the best with money, but i'm trying to learn. the bottom line in my mind is that for me, having credit card balances at zero along with a smaller overall payment each month (that is fixed), it's a lot easier not to get into more bad habits...

 

 

It's too bad you consolidated your smaller credit card debt into that auto loan, it would have been a great starting point to gain momentum and get intense about paying off your debt. Now you've got a larger loan, which -- pyschologically -- is just easier to ignore or feel defeated about, easier to treat like a pet that you just feed periodically and it's bound to be around for a long time.

- i understand what you saying, and i agree in general what you and others have said about knocking out small debts first, but 2 things: #1- i have tried it and i failed. i am more disciplined now, but i am at the point now where i dont need a small balance to get "intense" about paying off my debt. for me, this loan is making it easier for me because there is a fixed ending point - 5 years. and that's at the latest. with credit card balances, it could just keep going forever.

 

i now have a plan. in about 4 years, i will have paid off my car and 2 credit cards. i also am on a plan to pay off credit card #3 (my last debt) (not counting the house) in 3.5 years. i decided to "hide" the card so i wont ever use it and i will pay $500 a month on it. and it will be gone in 3.5 years. shortly after that, i wil have paid off landmark, and i will be about to enter my 30's debt free.

 

you guys are awesome. i hope this thread sticks around for all 4 years while i own this debt thing. getting several emails a day saying that there has been another post to this thread is a constant reminder of what i am setting out to do. and it helps - big time. i hope people continue to add comments, tell their stories, and i want this thing to become like 50 pages long. that will only make it easier for me! http://forum.brewerfan.net/images/smilies/smile.gif

[valpocrewsader]

$1,000 is a starter emergency fund, a real emergency fund equalling 3-6 months of expenses in liquid savings comes after you've kicked Sallie Mae out of the house and told Visa and the other baddies to go pound sand 'cos you're done with them. Obviously, if you have reason to believe a storm is coming, an impending layoff or a medical issue you're not certain about, you'll want to pile up cash and build up your emergency reserve -- dropping your debt payment down to minimum payments during that time. If the storm blows over, you can kick the intensity back up on the debt payments and clobber it with the stash you built up.

 

The $1,000 is meant to catch the small things that must be dealt with. A new altenator, a leaking roof, a band-aid furnace fix to get you through another year, etc. No, it won't allow you to continue living your current lifestyle if you lose your job without warning. But even in an unlikely scenario like that, you could be out delivering pizzas, mowing lawns, stocking shelves, and whatever else it takes to make ends meet until your employment is back on track.

 

The way I look at it, there's about a 0.001% chance that I will encounter an emegency that $1,000 can't handle in a span of 12-18 months. I'll take my chances, throw the thousands of extra dollars at my debt to expedite that step greatly, exit the woods smiling, and sit pretty 18-24 months later with no debt (no payments to anyone except mortgage) and a fully funded emergency fund. (At which time real wealth-building can begin!)

[PeaveyFury]

The $1,000 is meant to catch the small things that must be dealt with. A new altenator, a leaking roof, a band-aid furnace fix to get you through another year, etc. No, it won't allow you to continue living your current lifestyle if you lose your job without warning.

 

I understand what you're saying, but I don't agree with the concept. You can rackup over 1,000 pretty darn quickly and it wouldn't take a whole heck of a lot (what happens if you need a new alternator, then a week later your furnace goes out?). Heck, where are your property insurance deductibles set? Out of pocket expenses for your medical insurance? I just don't think your .001% estimates are even in the ball park. It seems like you're setting yourself up to HAVE to go back to the credit cards because you're not sufficiently prepared and take a huge step back in your efforts, if not completely derail them.

[homer]

I just don't think your .001% estimates are even in the ball park.

__________________

 

Agreed. Probably have about a 5% chance of getting in a car wreck and a 1% chance of having injuries from that car wreck.

[wallus]

Yes but if you get laid off you will have unemployment to help you. Personally, I could live off of unemployment for quite some time if I had to. I have $3000 on backup and I have a relatively secure job. (only nervous one time of the year)