Discover Debt Freedom!

The new year has turned and April 15th is coming fast. We are all working hard to file our taxes so the IRS doesn’t come and arrest us. If you are like most Americans, there is a pretty good chance that you will get some sort of money back from the Internal Revenue Service after you file your taxes. Before we proceed any further, take this hint of helpful advice. Stay away from refund loans, they are very high in fees and can often leave you in trouble if your tax filing doesn’t go quite as you had hoped. Be patient, and wait. When you finally do get your tax refund in hand, consider one of these great ways to spend your tax refund!

Pay off Debt. Most of us have some rather large consumer debts we like to pretend doesn’t exist. This can be credit card debt, an automobile loan, or some back-alley deal with a loan share. If you owe it, your tax refund will be well used if you use it to pay down some of your debts.

Use it to Help Others. There are so many unmet needs in North America, consider using the money to help others. You can use it to help fund your local church, support a worthy charitable, or you can follow the lead of the “Secret Santa” and just hand out money on a street. It will be one of the most rewarding things you can ever do.

Save for the kids college. If you have kids, they’re probably not going to want to work at Wal-Mart for all of their life, so it might be a good idea to save some money in a 529 plan or an educational savings account. This will help them avoid massive amounts of debts when they become undergraduates.

Replace aging vehicles or appliances. If your car, washing machine, refrigerator, or television is about to bite the dust, it might be a good time to replace them. This way you won’t end up financing that purchase when it needs to be made.

Save it for emergencies. There are things that come up and knock us all off our feet. It could be an unexpected medical expense, an automobile break down, or a job loss. We know some of these things will happen sometime, but we’re not sure what our when. Consider saving the money so you can take care of an emergency when it does happen.

You will definitely note that none of these suggestions involve spending money on some extravagant trip or purchase you don’t need. This is because this is extra money that you didn’t have before, so don’t blow it like most people do! Use the money wisely.

If you are about to purchase a home or are considering the possibility of refinancing your home loan, you should be sure to get the right type of home loan for you. If you get the wrong kind of mortgage, you could lose thousands of dollars in interest and potentially even lose your house! Here are some things that you should consider when picking out a type of mortgage loan that is best for your financial situation.

There are two categories of home loans that will be available to you when it comes to the interest rate of the mortgage. They will be either fixed rates or variable. Adjustable interest rate (ARM) mortgages come with a slightly lower interest rate, but have so much more risk that they generally are not a good idea. If interest rates skyrocket, you are stuck paying thousands more in interest, and the interest gets so high that you cannot afford to make your mortgage payment, you lose your home. Get a fixed rate mortgage regardless of your financial situation to avoid any interest rate surprises.

Next you will want to figure out what the term of the mortgage that you want to get. How long you refinance your loan for will determine how much your monthly payment is. A general rule of thumb is that the longer you borrow the money for, the lower the amount of payments you will have. You should also consider though that the longer you borrow money, the more interest you will pay. You will easily pay two and half times the interest with a 30 year mortgage compared to a 15 year mortgage, so try to pay off your home in as short of a period as possible.

Don’t get your mortgage to be too short that the payment is astronomical and there is no way you could possibly pay the payment. Avoid having monthly payment that is more than 25-30% of your monthly take home pay. If it’s any more than that you will start to get in a realm that so much of your money is going to your mortgage that you begin to be unable to afford to do other necessary things.

There are just some types of mortgage which everyone should avoid. Interest only loans are a really bad way to go because you will be in debt forever. Often times these interest only mortgages have adjustable rates which are also to be avoided. You might hear a lot of other creative ways to finance a home, but usually they are bad for the consumer. Get a fully amortizing fixed rate loan over a period that you can afford that is a reasonable percentage of your take-home pay to get the right mortgage for you.

If you ever want to hear a good story, talk to a financial counselor. I know an individual who happens to be one and he told me the story of a woman named Beatrice. Beatrice’s father told her from a very young age that it was very important to protect her credit score. She had called my friend the financial counselor and told him that she had not eaten in two days; however she made all of the minimum payments on her credit cards. Those are some seriously screwed up priorities. Americans have been indoctrinated to worship at the altar of the FICO score, and it’s time for that to stop.

I have a credit score of zero, and I love it. A few weeks ago, I tried to pull my FICO score from Fair Isaac, and they told me that my score was so low that they could not even calculate it because I have not had any credit activity in over a year. The error message even went as far suggested the reasoning for this is that I might very well be deceased!

How did I attain this very low score? I do not borrow money, period. I have accepted that ‘no’ is an acceptable answer to my wants and that if I do not have the cash to buy for something I simply cannot afford it.

At this point many will be asking, “Don’t you need a high credit score to get a home loan, automobile loan, get a credit card or rent an apartment?” In some cases yes, but I don’t borrow money; I don’t mind explaining to the apartment manager that because I’m not deeply in debt I actually have money to make my rent checks. The only thing that a high credit score enables you to do is get deeper into debt. No one wants to be thousands of dollars in debt and in a very deep financial hole, but so many people do it because they have fallen for the myth that you need to have debt as part of your financial life.

The only way to have a high credit score is to be in debt for great amounts of money over long periods of time. This isn’t exactly a winning financial plan. The FICO score is based on your debt payment history, your amount of debt, the length of your credit history, the types of debt that you have and any new credit that you attain! As the famous financial counselor Dave Ramsey puts it, a “credit score is an I love debt score”.

Does my FICO score of zero indicate that I couldn’t repay a loan, or that I am somehow not good with money? Of course not, it indicates that I don’t owe anyone in the world and have not for a long period of time and that I actually have some money. You can keep your FICO score.

Dave Ramsey has had a great amount of success with his radio show that teaches good old fashioned common sense financial advice. He is certainly not without his detractors though. There are a lot of people who describe his advice as out of the main stream and mathematically incorrect. Both of these statements are true, but that is precisely why he has gotten so popular. Ramsey has made an observation that very few people have. Personal finance is much more about personal behavior than it is knowledge about money itself.

Ramsey is often criticized for teaching people to do things which technically defy mathematics. Recently one blog called Territory Michigan attacked Ramsey for suggesting that people pay off all their debt. The blogger gives an example in which a person with a low interest rate student loan can make more money in a money market and pocket the difference then pay the loan off payment by payment over the next decade.This is where this blogger and many other of Ramsey’s critics get it wrong. Ramsey often makes the statement on his show that, “If we were doing mathematics, you wouldn’t have borrowed money in the first place!” Often people will ask him if they should pay off their debt largest interest rate to smallest, but he teaches that you should pay off your debts smallest principal balance to largest. The reason he teaches this is because personal finance is much more about behavior than any knowledge you know about finance. Paying off a few small debts first will give you some easy wins, making you feel that, hey, this plan really works, and will encourage you to continue!

People who criticize him often aren’t thinking straight, because they do not factor in risk which is a needed part to any financial calculation. You could go to Vegas and put all of your money on 28 black, but you know you wouldn’t do this because there’s so much risk of not winning, even though the rate of return would be enormous! Whenever you borrow money, there’s risk involved that somehow you will get behind because of a financial problem, or that the company will mess with you financially (it does happen!).

These critics often also use very unrealistic examples. The blogger at Territory Michigan uses an example of a 3% student loan, which almost no one has! Dave Ramsey’s mathematics may be incorrect, but they actually work! He has over 3 million listeners and is a multi-millionaire. His teachings have gotten hundreds of thousands of people out of debt, they work! Who are you going to listen to, a critic with a Weblog, or a guy with a lot of money and thousands of success stories?

If you perform a simple Google search for debt reduction, you’ll find over three million results of companies which claim to help to eliminate and reduce your debt dramatically. This really shouldn’t be all that surprising considering how much consumer credit people are making use of in this modern era. Credit cards, home equity loans, title loans, payday loans, 90 days same as cash, auto loans, you name it; people are borrowing money through it. A lot of people are up to their eyeballs in debt, and want out. There are a number of companies which prey upon consumers that will claim to eliminate your debt without all of the work, however they’re scams, and you should avoid them.

One of the major scams in this field is the “debt elimination letter” scam, they’re all scams, stay far away. The basic premise of this scam is that for a rather large fee, the “debt elimination agency” will send you a letter which you can show your creditors to get your debts waived. A lot of people would love this type of letter, but they have no legal basis in the real world. Most of the time if you try to use one of these letters the company will just laugh at you. Instead, actually use that money to pay down some of the debt instead. A lot of these agencies falsely claim that some of the fees credit card companies charge are illegal so the entire debt should be void. Sometimes these letters are called “redemption certificates and “bondage for discharge of debt.”

There’s also the “illegality of the credit card” scam. It’s similar to the debt elimination letter scam, but instead they claim that the entire credit card system is illegal, and since the system is illegal they cannot legally charge you for your debt. They will often charge thousands of dollars for such letters, stay far away from them.

Finally, there’s the “new credit identity” scam. In this scam, companies will offer to create a how new social security identity for you so that you don’t have to live with your past financial sins, and get a clean slate for your credit record. It’s actually very illegal to do this and will probably get you in trouble with the feds.

If you are in debt, there’s no magic formula. If you absolutely think you have to go to a debt consolidation company or a debt reduction company, go to Consumer Credit Counseling Services, and nobody else. Chances are you don’t even need CCCS, instead just work very hard and work to eliminate your debt quickly and systematically. Take extra jobs, cut down on your living expenses; that’s the only way to do it.

Oddly enough, large amounts of consumer credit is a relatively new phenomenon. Our great grand parents thought debt was a sin! 100 years ago credit was considered stupid, and now it’s a “necessary” part of everyone’s financial life according to some financial writers. More and more wise consumers are realizing that the only people who make money off of you using credit cards, home equity loans, are banks and finance companies. Debt free is the way to be.

So let’s say you decide that you want to get rid of all of your debt and actually pay cash for things instead of financing everything up to your eyeballs. The first thing you have to do is make a realization. Debt is not the problem, debt is the symptom. You have to realize why you got in debt in the first place. One of two things happened, you lived above your means and spent too much money , or you are simply not working enough. Treating the symptom is not enough, you need to start living on less than you make and saving more so that you don’t incur any additional debt in the future. Paying off all of your debt won’t do you any good unless you change the behaviors which got you there in the first place.

The Bible tells us that when we are in debt, that we should escape it like a gazelle from the hand of a lion. When you pay off debt, it will only work well if you make it a priority, not just a priority, THE PRIORITY. You have to get rid of debt like it’s the plague. If you will get all fired up and work extra jobs for a year or so and live on nothing, most everyone can be debt free with the exception of their home by then. When you are in debt, work as hard and as fast as you possibly can to get out of it!

Finally, the third rule is that you shouldn’t stop at zero. Once you finally have all of your consumer debt paid off from your extra jobs and living on nothing you can’t stop there. You are living too dangerously close to the edge to stop. You should save at least 3-6 months worth of expenses in a money market savings account with check writing privileges and start putting money in a retirement account to ensure that you have a financial future that’s worth having!

There has been a new trend in the financial world in the last year or so in which consumers pay-checks are direct deposited directly onto their mortgage, and then consumers pay their monthly expenses out of what is essentially a home equity line of credit, and any money that one does not spend is extra principal paid on to their mortgage. In essence, you’re forcing your self to send all of your extra money each month on your mortgage, which will cause your home to be paid off on a much quicker basis.

These products have taken a lot of different forms. With some of the accounts, you keep your existing mortgage and get a home equity line of credit, others you do a refinance and get a different type of loan. The fees vary from company to company, as does the type of loan you’ll receive. None of these plans are a great idea to put in your financial life. They’re certainly not scams, and some are a lot worse deals for the consumer than others.

The real problem with this account is that it makes paying off your mortgage the number one and sole priority in your financial life. All of your extra money goes onto your mortgage. You don’t choose to send some of your money to a Roth IRA account, some more of it to help your aging parents, some to plan for your children’s college, it just all goes to the mortgage by default. It seems to make a lot more sense to keep the money in your possession rather than send it all to the mortgage company and then borrow money on a home equity loan to pay for your expenses.

There are a number of other problems associated with money merge accounts. Often the mortgages that you will be refinanced into will have higher interest rates and variable interest rates. If you’re in a good fixed rate mortgage at 5% or 6%, you’ll end up paying a higher interest rate in the new mortgage that you are given.

Usually there’s a pretty hefty setup fee to get into a money merge account to begin with. There are many companies that are charging consumers upwards of $3,000 to start using a money-merge account. Considering that you can accomplish the exact same thing by paying off extra principal on your mortgage each month for literally nothing, $3,000 is tantamount to highway robbery.

Money merge accounts aren’t a scam, but that doesn’t mean they’re a great deal either. You’re putting your sole focus on your mortgage, which often should be secondary to other debts and obligations and paying a high cost to do so.

When it comes to dieting and personal finance, there are some really interesting parallels. There are millions of dieting products and most of them appear really good, but most of them are unable to deliver the instant weight loss with little to no exercise that they promise. You would think by now that people would wake up and realize that these diet products just really don’t work, and there’s no cure for good old fashioned exercise.

Much in the same way, there are a lot of really bad financial products out there that people are sold every single day. People are sold home equity loans and debt consolidation plans every day to “pay off their debts.” These products just do not work. There’s a myriad of products which are even worse that any sane millionaire would stay miles away from, such as a rent to own company, a check cashing service, payday lenders, and yes, even credit cards. These products serve no other purpose than to separate you from your money, yet people make use of them every single day.

The parallels continue. Dieting and financial products are both marketed as heavily as anything else. You’ll see diet pill adds on TV, in magazines, online, and I actually even saw an advertisement for a weight loss product in a urinal once. The world of finance is no different, there were six billion credit card offers sent to 300 million Americans last year. It doesn’t end there, solicitations for bad financial products are absolutely everywhere.

Let’s talk about the actual issue of weight loss. Any wise person who has ever lost a significant amount of weight knows that there is no magic pill which will make you thin. There’s no secret diet that Hollywood celebrities use to make them selves paper-thin, or some magical new treatment that will help you shed dozens of pounds. The only way to actually lose weight that actually works is good old fashioned eating less and exercising more. Don’t let anyone tell you otherwise.

The only way to become financially healthy that actually works is good old fashioned spending less and saving more. Don’t let anyone else tell you otherwise. There are no shortcuts to anyplace worth going. You can be the most well versed financial person in the world, but if you do not practice basic sound financial principals, such as living on less than you make, saving lots of money, and avoiding debt, you will end up with nothing to show for your financial sophistication. It’s not enough to know every list bit of knowledge about personal finance, you have to actually do what you know is right. We know that we have to diet and exercise to lose weight, yet very few of us do it. It’s all about motivation and actually doing it.

When it comes to dealing with some parts of the debt collection industry (the mortgages section is a bit of an exception), it can often be much more akin to dealing with a scummy neighbor rather than an actual professional business. A portion of the debt collection industry will do whatever they can, regardless of how immoral it may be, to get the money they think they are owed. They will call children when their parents aren’t home and tell the children that their parents will go to jail if they don’t pay their debts. They will call several times a day and disrupt your life as much as possible. They’ll call your neighbors and tell them that you’re a deadbeat. They’ll even try to get your family members to pay on the debt. This industry is out of control. Some debt collection agencies are now trying to collect upon debts that are past the statute of limitations and breaking the law to do so, fortunately you can fight back.According to federal law, you have no legal obligation to pay any debt that has had no activity in the last 7 years. If you had some bad credit card debt in college a decade, you legally don’t have to pay it. There’s still a moral obligation to be a good citizen and make good for the debt that you have, but you’re not bound to pay it according to the law.
If you borrowed money in January of 2001, it’s very likely that in December of 2007, just before the statute of limitations expires on your debt, you’ll start receiving calls from debt collection agencies trying to get money out of you. It’s very likely that they illegally changed the date on the debt. They will claim hat there is some sort of activity on your account making it active again, resetting that 7 year expiration clock and continue to try to collect the debt even though the statute of limitation on collecting that debt has expired.

Collection agencies are increasingly changing the date on debts, even though no activity has occurred. According to the Federal Fair Debt Collection Practices Act, this practice is illegal. If a debt collection agency does this to you, you can sue them in small claims court at your local courthouse, and they’ll have to come and defend themselves. You’ll likely be able to get that debt removed from your credit report once and for all and potentially receive some sort of punitive damages.

If a debt collector tries to collect a debt that’s past the statute of limitations, you have no obligation to pay it. They will probably illegally change the date of the debt and try to collect it, but you don’t legally have to pay it, and you can fight back.