America has been built on a system of credit. For better or worse, itís the only way in which the vast majority of Americans can make big ticket purchases and obtain what they need to get themselves started in life. Buying a home, getting a car, purchasing furniture, maintaining utilities and services ó all of these things can or will depend on credit to be obtained.
This is a very powerful system which enables people to acquire what they need quickly without finding themselves stuck and unable to proceed with modern living. The opportunity to obtain goods before paying for them in full is very intoxicating however, and often leads to living beyond ones means to make displays of success. Eventually for some, credit becomes less of a tool and more of a means of getting what they need to make themselves look like theyíre better off than they actually are.
That sort of behavior is very dangerous when it comes to personal finances, because it can only lead to severe debt. Even for individuals who make a considerable amount of money ó around $60k or more ó theyíre susceptible to the effort of ďkeeping up with the JonesesĒ, so to speak, which puts them beneath what they can actually afford. For every raise comes an even more expensive home or piece of property that represents the accumulation of material goods as a sign of wealth.
Trimming Your Debt
If you were a little, say, heavy-handed with the plastic this past holiday season in 2007, you may find yourself regretting that behavior when the bills roll in. Why? Banks and credit-card companies must follow new federal guidelines from the Office of the Controller of the Currency that require minimum payments to cover interest and fees plus at least 1% of the principal. For the 7% of consumers who pay only the minimum, that will mean writing fatter checks. But what if you're sick of the whole plastic ride and really want to put a serious dent in your debt? Here's how to get started.
LIVE JUST A LITTLE LESS LARGE
When you think about how you got into this mess, chances are it's a result of spending a little too much for a little too long. My book Pay It Down, now out in paperback, contains a step-by-step plan based on the idea that digging out of debt means reversing the process. So think about expenditures that you can trim. The faster you want it to happen, the bigger the cuts you have to make. While eliminating a daily latte will do a bit of good, you'll do better to focus on the dramatic. Do you really need that third car, for example? What if you cut back to basic cable or a bare-bones cell-phone plan, or (if you can't do that) got rid of your landline entirely? Perhaps this summer you could vacation at home instead of spending $2,000 for a week at the beach, or trade two weeks for a seven-day getaway.
REFINANCE YOUR MORTGAGE
In recent years about a third of all mortgages issued have been adjustable. That's the highest percentage since 1990, when the Mortgage Bankers Association began tracking such numbers. When rates adjust, says Keith Gumbinger, vice president of HSH Associates, a publisher of mortgage-rate information, you could find yourself looking at an interest rate of 7%. Bring down the rate by locking into a 30-year fixed-rate mortgage at today's 6.3%. On a $275,000 mortgage, you'll save $128 a month, or $1,526 a year.
GET TECHNICAL WITH THE IRS
More than two-thirds of Americans received a tax refund last year, and that return averaged $2,200. To get your refund back as quickly as possible, consider filing your taxes electronically, and then elect to have the refund deposited directly into your account. You'll have your money in 10 days to two weeks rather than six to eight weeks if you file by snail mail.
CREATE NEW FINANCIAL HABITS
Once you've made those sacrifices, be sure to make them stick. How? Use a debit card rather than a credit card, so that you're spending money you have, not money you don't. And start keeping track of where your money is going so that you can stop yourself from overspending in 2009.
The Cost Of Using Credit Cards
Credit Cards - Do we REALLY Need Them?
LESSON 1 Setting priorities Here's help for the first -- and often the hardest -- step in achieving your financial goals: deciding which goals to pursue. LESSON 2 Making a budget How to bring your spending under control, so that you get the most out of every dollar. LESSON 3 Basics of banking and saving Here's how to get the best banking services at the best price, either online or off. LESSON 4 Basics of investing An introduction to making money in stocks, bonds and mutual funds.
LESSON 5 Investing in stocks The market can be a great place to turn savings into wealth -- or to lose your shirt. Here are some fundamentals of investing wisely.
LESSON 6 Investing in mutual funds It's a mutual-fund jungle out there. Here's how to create a simple portfolio that works. LESSON 7 Investing in bonds Bonds can provide a steady and reasonably secure income, while adding ballast to your portfolio--but only if you really understand what you're buying. LESSON 8 Buying a home Owning your home is part of the American Dream, but if youíre not prepared, buying it can be a nightmare. Here are some fundamentals for buyers and sellers. LESSON 9 Controlling debt You've got to know when to hold debt--and when to fold it. This lesson shows you how to accomplish your financial goals by making debt work for you. LESSON 10 Employee stock options More companies are handing out stock options, and to a much broader group of employees. This lesson gives you vital information on how to handle ESO's.
LESSON 11 Saving for college It's not rocket science, just common sense. By starting early and investing regularly, your children may have a wider choice of colleges, and paying the bill won't hurt as much.
LESSON 12 Kids and money Up until they start earning a living, and sometimes well beyond that, kids are apt to spend money like it grows on trees. This lesson will help you put your children on the road to handling money responsibly.
LESSON 13 Planning for retirement Achieving a comfortable retirement in the 21st Century requires a new approach to retirement planning.
LESSON 14 Asset allocation The single most important thing an investor can do is practice asset allocation. Here's how. LESSON 15 Hiring financial help What to keep in mind when when seeking professionals to handle your financial planning, stock trading, insurance coverage and tax returns. LESSON 16 Health insurance Whether your employer provides you with a group medical plan or you need to buy coverage on the individual market, understanding how health insurance works is the best way to get your money's worth. LESSON 17 Buying a car Buying a car is like no other shopping experience. The choices seem to be endless. This lesson helps you sort through your options. LESSON 18 Taxes Among the long list of necessary evils we must encounter throughout our lives, perhaps the most constant -- taxes -- is also the least understood. But the whole process isn't nearly as baffling as you may think. LESSON 19 Home insurance Homeowners' insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you have to use it. Here, you'll learn how to purchase peace of mind now and later. LESSON 20 Life insurance Life insurance is critical to financial planning. It's a necessity for anyone with dependents who would be affected financially by your demise. Yet life insurance is one of the hardest financial products to understand and it's sold by agents who are sometimes more concerned with their commissions than your needs. This Money 101 lesson is all about a better way to buy life insurance.
LESSON 21 Estate planning Americans are in the midst of one of greatest inter-generational transfers of wealth in history, yet few of us have done any planning for it. Here's how to start. LESSON 22 Auto insurance Auto insurance can be a nightmare. It's costly, confusing, and unrewarding -- until you need it. Here's how to purchase peace of mind now and later.
LESSON 23 401(k)s It's the most important tool you've got for retirement. Here's how to make the most of it.
Take a quick look through your wallet. How many credit cards do you have? Are you one of those credit card fanatics? Are you like one of those individuals who get hold of as many credit cards as possible? Firstly, you better make sure you understand that this may get you into a serious financial bind. Sure, credit cards are a great way to deal with unforeseen expenses, and at times can save your butt. On the other hand, these tricky little plastic cards can also trick you into spending carelessly. We all know their typical story. Every credit card company knows exactly what you want to hear. Hence, thatís the reason why your mailbox is constantly filled with offers for 0% April credit cards. They simply love to pitch that, don't they? The truth is we all light up at the number 0. It instantly tells us that we have nothing to lose. Ha! Now thatís a good one. But, while these 0% April credit cards start out benign, they soon turn sinister. All of a sudden, the April hits the roof, and you're shelling out loads of cash for interest rates each month.
Our 12 Step Get Out Of Debt Program
The 12 Step Get-Out-of-Debt Program
Debt is a major problem for a lot of people these days. The problem is, even if they know they want to get out of it, they have a hard time figuring out how to start. If you fit this description, this 12-Step program spells it out for you. Now, there isnít one way to get out of debt, and the best program should be tailored to each personís individual situation. But if you feel like you just donít know how to begin, this program is designed to give you a sort of guide ó one that should be adjusted to fit your financial situation. Itís aimed not at people who have their finances together and are just trying to pay off a credit card or two. Itís aimed at those who have trouble finding any extra money to pay off debts, who seem to find themselves getting deeper and deeper into debt, and donít know how to stop it. In other words, itís a bit of an emergency program. Disclaimer: Iím not a financial advisor, and if you are in need of one, I suggest you find a qualified advisor. My only qualification is that Iíve made great strides in getting my finances under control, in starting an emergency fund, in paying all my bills on time, in not getting further into debt, and in eliminating my debt (I should be done by the end of this year). This program is based on my experiences, and on the large number of books and websites Iíve read.
The 12-Step Get-Out-of-Debt Program
Acknowledge the problem. The first step is admitting you have a problem. The first week, all you have to do is say to yourself, ďI have a problem with debt. I got into this because I spend money I donít have. But I believe that thereís a way out, and I can do this. I can control my spending, make a plan, and slowly get out of debt.Ē Thatís a major step. Now set aside just 30-60 minutes a week to deal with your finances ó make it a set day and time, and donít let yourself miss this appointment.
Stop digging. If youíre in a hole, the first step is to stop digging, and thatís what youíre going to do this second week. For 30 days, see if you can stop any non-essential spending. If you have a major problem with credit cards, cut them up. If youíre not so bad with credit cards, at least put them away and donít buy stuff online for one month. Whatís essential? Obviously your bills, housing, auto, gas, groceries Ö that kind of stuff. Non-essential? Clothing, CDs, DVDs, books, magazines, gadgets Ö you know what I mean. Just 30 days. After that, you can decide how much to spend on these things.
Make small cutbacks. This third week, take a look at things you normally buy and see if you can cut out a few of them, or spend less on them. Groceries? See if you can buy house brands instead of name brands. Coffee? Make it yourself at home instead of buying out. Lunch? Try packing it to work instead of eating out. Add up what your cutbacks will save you this month.
Start an emergency fund. This fourth week, set up a savings account, if you donít have one already, for an emergency fund. Now take the amount you saved in Step 3 (and even in Step 2 if you think you can make them last for awhile) and set up a regular automatic deposit from your checking to this emergency fund savings account for this amount. Itís important that before you start paying off debt, you have at least a small emergency fund. Aim for $1,000 at first, and you can grow that later. The reason: if unexpected expenses come up, and you donít have an emergency fund, you will skip your debt payments to pay for the unexpected expenses. The emergency fund protects your debt payments.
Take inventory. OK, this is a step that we donít like to take. But take a deep breath. You need to do this. Remember what you said in Step 1? You can do this. This fifth week, set up a simple spreadsheet. In one column, list all of your debts ó credit cards, medical bills, auto loan, etc. You can leave out your mortgage, but put everything else. In the second column, put the amounts you owe for each debt. In the third, put the minimum monthly payment, and put the percentage interest in the fourth column. Total up the second and third columns to see your total debt owed and how much you have to pay, at a minimum, towards debt each month.
Make a spending plan. We donít like to do this step either. But itís not going to be as painful as we think. This sixth week, set up another simple spreadsheet. In one column, list your monthly bills (rent or mortgage, auto payment, utilities, cable, etc.) ó everything that is a regular monthly expense. Then list variable expenses (things that change every month) like groceries, gas, eating out, etc. Later you should add irregular expenses (stuff that comes up once in awhile ó less than once a month) such as auto and house maintenance, clothing, insurance, etc. But we wonít get into that now, as we want to keep it simple. In the second column, put down the amounts for each. Be sure to put enough for things like gas and groceries, as you donít want to be short. Be sure to also include your minimum debt payments and your emergency fund deposit. Now, list your income sources and monthly amounts. There. Youíve got a temporary spending plan (youíll want to add the irregular expenses later). Now, if the expenses are greater than the income, youíll need to make adjustments until the expenses are equal to or less than the income.
Control spending. If youíre into your seventh week of this debt plan, you may find it hard to keep track of your spending and ensure that youíre sticking to your spending plan. Hereís the key: first do the emergency fund deposit. Then do the debt payments. Then do your monthly bills. Then withdraw the variable amounts in cash, and put them into separate envelopes. Itís old-fashioned, but it works, as you donít have to worry about overspending. When your envelope is empty, you canít spend anymore. Continue to cut back on non-essential spending as much as you can at this point, so youíre able to stick within your spending plan.
Pay bills on time. This may be a problem for a lot of people. Itís important, if you want to get out of debt, to start paying all your bills on time. If you follow the payment plan outlined in Step 7, your bills should be paid before you get to any discretionary spending categories. At this point, you want to focus on getting those bills paid on time, and making it a habit. If you have trouble remembering, try one of these methods: 1) pay bills as soon as they come in ó take them to the computer and pay them online, or write out a check and prepare the envelope to be mailed the next day; or 2) set up a reminder in your calendar program to tell you when bills are due.
Start a snowball. Now that your finances are relatively under control, you can start a debt snowball. At this point, you should have the beginnings of an emergency fund, you should know how much you owe, you should have a temporary spending plan, you should be paying bills on time and controlling your spending. Now you can focus on paying your debt. Hereís what to do: If you can find at least $100 from your spending plan, use that to start your debt snowball. You may need to cut back on discretionary spending (as you did in Steps 2 and 3). Or, once your emergency fund is at $1,000, you can use the amount you were putting into that account for your debt snowball. If you have trouble finding $100 for a debt snowball, you need to look at what other expenses you can cut back on. OK, once youíve found at least $100 for your debt snowball (and more would be better), take a look at your debt spreadsheet. First, order the debts from the smallest amount owed to the largest. Now, look at your smallest debt owed ó you will start by paying $100 (your debt snowball) plus the minimum monthly payment on that debt each month, until the debt is paid off. When the debt is paid off, you will take the amount you were paying on it (letís say $50 monthly payment plus the $100 debt snowball for a total of $150) and pay it to your next smallest debt, until it is paid off. Continue to pay off your debts, one at a time, until they are all paid off. Now you have a large sum you can put into growing your emergency fund, and funding your irregular expenses, and finally start investing.
Find larger cuts. Once youíve controlled your finances and started your debt snowball, there are ways to increase the snowball ó and hence the speed with which you get out of debt. Look at your larger expenses ó are there ways you can eliminate or cut back on them? Can you sell your car for a smaller, used model? Can you find a smaller house or apartment to rent? Can you sell your house and rent a cheaper one? Can you get by with one car? Can you eliminate some services youíve been using? Whatever cuts you make, apply that amount to your debt snowball ó donít spend it.
Grow your income. Another great way to get out of debt faster is to make more money. Look at ways you can make money on the side ó or ask for a raise or get a better job. Take 30 minutes to brainstorm. Are there ways you can start a small business online? Sell your valuables on eBay? Start freelancing on the side? Get a part-time job? This only has to be temporary, but the more money you make, the faster youíll get out of debt. Be sure to apply your new income to your debt snowball.
Track your progress. On your debt spreadsheet, be sure to update it every payday (or however often you pay debt) so that you can see your shrinking debt amount. You should be able to calculate how many months you have left before youíre completely out of debt. It may be a long ways off, but itís within sight!
Bonus step: Celebrate! Itís important to celebrate, not only when youíre out of debt, but along the way as you eliminate each debt. Have fun! Make this an adventure. It can be amazingly satisfying to stop spending and gain control of your finances instead. Find free entertainment, make it a challenge to be frugal and save money and find cheap used stuff. Pat yourself on the back along the way.
CAPTION: SHOP TILL YOU DROP Sitcoms and comedians may poke fun at shopoholics, but for an increasing number of Americans, overshopping is no laughing matter. An estimated 17 million consumers suffer from shopping addiction, also known as oniomania --- a chronic, repetitive behavior that can destroy careers, families and finances.
WHAT IS "ONIOMANIA?" -- A "shop 'til you drop" behavior similar to other addictions. -- Overshoppers often buy to make themselves feel better -- They may buy things they don't need, never use or don't remember purchasing.
HOW TO PREVENT SHOPPING BINGES: -- Pay by cash, check or debit card. -- Make a list and stick to it. -- Keep only one credit card for emergencies. -- "Window shop" only after stores have closed, or leave your money at home. -- Avoid catalogs and television-shopping channels. -- Take a walk or exercise when you get the urge to shop. -- If you feel out of control, seek counseling or a support group.
The products and text on this website are for informational purposes only and not intended to replace the assessment, advice or treatment of a physician or therapist.
Images found for this site found from the following sources: Google Images, Animation Factory, exception personal image of Susan Young