Discover Debt Freedom!

The Carnival of Personal Finance is being hosted by Gather Little By Little this week. Some very good reading to be had this week for your personal finance fix; including:

• Being Frugal and the 168 Tips to Survive a Recession
• Million Dollar Journey and The Best Time to Start is Now
• Financial Dot Com provides Home Improvements That Really Increase Property value
• Destroy Debt tells us All I really Needed to know About Managing Money I Learned from Music

When people go out to buy a new car, major appliance, or other expensive purchase, more often than not they use the store’s financing options or throw the purchase on their credit card to pay for their purchases. It’s very rare that people pay cash for such purchases now of days, and it seems that financing just about everything is a way of life. There are people that use their credit cards to borrow money for purchases even as small as one dollar.

Of course this borrowing is not without a price. When you borrow money, you’re going to have to pay more money than if you had just paid case for the purchase. There are some “zero percent’ loans, but they are deceiving, because the interest is built into the cost of the product and you would be able to get a discount if you paid in cash and asked for one. Paying interest is the nature of the beast that is debt and that’s just the way it is. Paying a little bit of interest isn’t necessarily a bad thing, however a lot of consumers abuse their credit borrowing on so many different things that the majority of their paycheck goes to payments, and they’re losing hundreds of dollars each month to loan interest. Don’t worry, there’s a way that you can avoid ever having to borrow money in the first place.

When it comes to avoiding debt, there are no magic secrets, just common sense. A lot of debt happens because people just do not plan. When one’s car breaks down for good, they have to buy another one. Most of the time we don’t plan for such things so we don’t have any money in the bank to pay for one, rather we just borrow the money, make the monthly payment, and forget about it. This cycle repeats its self ad naseum and people end up paying too much for vehicles for life. If people planned for their next car purchase after they got a car, they would not have to borrow money for their next car purchase. All one would have to do is save the amount of their car payment every month, and by the time it was time to buy a new car, they would have plenty of money to pay cash for a vehicle. Instead of paying the bank interest, they’re now paying themselves interest while saving for the next automobile purchase.

This same principle works for just about everything that people borrow money for. You know that you’re going to have to buy things within a certain amount of time, yet most people think that they don’t have enough money to save for such things. This is because most people don’t budget their income and just let their money slip away from them rather than telling their money what to do on paper on purpose.

What about those things that you can’t plan for, such as an automobile accident? In this case, you need to build yourself an emergency fund of three to six months of expenses so that when something unfortunate happens, you can just pay cash to get whatever broke fixed without having to borrow money.

There’s never really a situation where somebody needs to go into debt, but a lot of people end up in debt because of poor planning. You know that you’re going to have to make some rather large purchases in the next few years, why not save up and pay cash for them? You might argue that you can’t afford to save, but the fact is that you can’t afford not to save, or you’ll only end up deeper into debt. If there’s no money for you to save, you either aren’t doing a budget, or are stuck an immature entitlement mentality, and that’s reality.

Many people know how a credit score works and how it can affect their ability to receive credit cards at a reasonable interest rate in the future.  What many people do not understand is that a bad credit score has the ability to affect other areas of their lives as well.  There are a number of different ways that a bad credit score can affect other areas of a person’s life and the three ways listed below are some of the most common ways that a bad credit score can hurt you unexpectedly.

1.  Housing
Another area of your life that can be affected by a bad or low credit score is where you are able to live.  Most people know that a bad credit score can disqualify them from purchasing a house, but many people are unaware that having a low credit score can disqualify them from renting a house or an apartment.  Although most cases are determined on a case by case basis, individuals with very low credit scores have a much harder time being approved for a rental than individuals with higher credit scores.

Landlords review the credit scores and credit histories of their possible tenants to determine the amount of risk they pose to the property or to the landlord’s finances.  Individuals with low credit scores are viewed as less trustworthy than a person with a higher credit score, so the landlord may refuse to rent to individuals with a credit score below a certain threshold.  As long as the application is not denied on the basis of race or sex and all applicants are treated equally, the landlord’s actions are perfectly legal.

2.  Other Creditors
Although most people are aware that a bad credit score can affect their future ability to obtain credit, many do not know that a bad credit score can affect their existing credit accounts and their ability to obtain other types of loans from creditors, such as a car loan or a home equity loan.  If a person’s credit score falls below a certain rate, they may find that the interest rates of the credit cards that they have held previously have skyrocketed because that person is now considered to be a credit risk.  Higher interest rates on previous balances combined with an inability to obtain more credit or any type of loan has contributed to numerous individuals having to file bankruptcy in recent years.

3.  Employment
For many individuals, it is difficult to imagine how a credit score and being able to obtain employment may affect each other, but the fact is that a bad credit score is one of the leading reasons for a person to be passed over for employment or a promotion.  Certain types of employers look at an applicant’s credit score to determine how trustworthy and responsible the person is and any position of trust, such as an employment position with the government or in law enforcement, will review the applicant’s credit score to determine their security clearance.

When people go out to buy a new car, major appliance, or other expensive purchase, more often than not they use the store’s financing options or throw the purchase on their credit card to pay for their purchases. It’s very rare that people pay cash for such purchases now of days, and it seems that financing just about everything is a way of life. There are people that use their credit cards to borrow money for purchases even as small as one dollar.

Of course this borrowing is not without a price. When you borrow money, you’re going to have to pay more money than if you had just paid case for the purchase. There are some “zero percent’ loans, but they are deceiving, because the interest is built into the cost of the product and you would be able to get a discount if you paid in cash and asked for one. Paying interest is the nature of the beast that is debt and that’s just the way it is. Paying a little bit of interest isn’t necessarily a bad thing, however a lot of consumers abuse their credit borrowing on so many different things that the majority of their paycheck goes to payments, and they’re losing hundreds of dollars each month to loan interest. Don’t worry, there’s a way that you can avoid ever having to borrow money in the first place.

When it comes to avoiding debt, there are no magic secrets, just common sense. A lot of debt happens because people just do not plan. When one’s car breaks down for good, they have to buy another one. Most of the time we don’t plan for such things so we don’t have any money in the bank to pay for one, rather we just borrow the money, make the monthly payment, and forget about it. This cycle repeats its self ad naseum and people end up paying too much for vehicles for life. If people planned for their next car purchase after they got a car, they would not have to borrow money for their next car purchase. All one would have to do is save the amount of their car payment every month, and by the time it was time to buy a new car, they would have plenty of money to pay cash for a vehicle. Instead of paying the bank interest, they’re now paying themselves interest while saving for the next automobile purchase.

This same principle works for just about everything that people borrow money for. You know that you’re going to have to buy things within a certain amount of time, yet most people think that they don’t have enough money to save for such things. This is because most people don’t budget their income and just let their money slip away from them rather than telling their money what to do on paper on purpose.

What about those things that you can’t plan for, such as an automobile accident? In this case, you need to build yourself an emergency fund of three to six months of expenses so that when something unfortunate happens, you can just pay cash to get whatever broke fixed without having to borrow money.

There’s never really a situation where somebody needs to go into debt, but a lot of people end up in debt because of poor planning. You know that you’re going to have to make some rather large purchases in the next few years, why not save up and pay cash for them? You might argue that you can’t afford to save, but the fact is that you can’t afford not to save, or you’ll only end up deeper into debt. If there’s no money for you to save, you either aren’t doing a budget, or are stuck an immature entitlement mentality, and that’s reality.

One of the most important things that you can do to get yourself out of debt is to quit paying your creditors and start paying yourself.  I am not talking about avoiding paying your bills, getting deeper into debt, and destroying your credit score.  I am talking about not creating situations where you need to charge the purchase to a creditor and then pay interest on the purchases, which increases the overall cost of the item that was purchased.

In the recent years of easy credit, low interest rates, and zero money down, individuals across the nation became very comfortable with charging whatever they wanted to their credit cards and paying for it in installment plans.  Now many of those individuals are getting a nasty shock as credit card companies skyrocket the interest rates on some of those cards, even for their most responsible card holders.

The common sense thing to do would be to avoid using those credit cards for purchases and pay off the balance of the credit card so that you can stop paying for past purchases.  In reality, many individuals will have to be completely reconditioned about their financial situation to be able to adhere to this recommendation and begin getting themselves out of debt. 

In the United States, a large number of individuals have been conditioned to purchase things that are not really necessary (example: people who switch cell phones every year to have the next greatest thing) but have not been conditioned to save their money to purchase the things that they want.  The result is the average American citizen owing thousands of dollars to credit card companies and banks for the privilege of purchasing things that they do not need.

The first step in reversing this trend is to stop purchasing frivolous items with the credit cards.  If you like that little red dress in the store window or that new golf club, wait until payday, pay all your bills, and with the money that is left over, decide whether you can afford to purchase the item that you want.  By paying cash for the item, you are making sure that you won’t still be paying for the item years later in the form of interest payments to the credit card company.

Many individuals do not check their credit report on a regular basis for a variety of reasons. Some individuals believe that they are careful enough with their personal information and they will never be a victim of identity theft. Other individuals believe that there is nothing you can do to change the information in your credit report so checking it is a waste of time.

The truth is that checking your credit report on a regular basis can save you money by helping to ensure that you are not a victim of identity theft and by identifying any mistakes in your credit history that may lead to higher interest rates or the denial of credit. People who check their credit report on a regular basis are more aware of their financial situation and are able to identify problems quickly so that they can limit the amount of damage done to their finances and their credit score.

For most cases of identity theft, the victim is unaware that accounts have been opened in their name or purchases have been made that they are responsible for until they are denied credit or debt collectors begin to call to collect on the account. Most financial transactions have a limited amount of time available to dispute charges or identify cases of fraud so finding any problems promptly will help limit the liability of the victim.

By checking your credit report on a regular basis, you will be able to see if there are any accounts linked to your name and social security number that you did not open. Alerting these companies to the fraudulent nature of the account quickly will limit your liability for the charges and stop the criminal from using the account.

As much as we want to believe the information that the credit bureaus have on all of us is correct and infallible, the truth is that most of the information is added to computers by humans and mistakes can happen. It is important to view your credit reports for these mistakes because a major mistake on your credit report has the ability to lower your credit score, which in turn will qualify you for higher interest rates and may cause you to be denied credit.

All three major credit bureaus are required by law to investigate and correct any mistakes on an individual’s credit report so the reports should be checked on a regular basis to make sure that all of the information contained in the report is correct. Having any mistakes that are found corrected by the credit bureaus may raise your total credit score, which in turn will save you money in the long run.

In the last Congressional session, there some rather questionable actions by some congresspersons and senators which lead student loan rates all the way up to 6.8%, one of the highest rates it’s ever been. This of course was at a time when mortgage rates were near 5%. Banks plenty of extra federal money, and students were left high and dry. Fortunately the new congress is taking some steps to reverse this process, and in the future we might see a drop in rates. The House has already passed legislation which would drop the student loan interest rate down to 3.4%, and the legislation is pending in the senate. As expected, major banks are furious about the plans to cut interest rates on student loans.

If this initiative passes both the house and the senate and is signed by the president, it could affect college students in a positive manner. Their unsubsidized student loans would collect less interest while they are in school, and would have a lower rate after they graduate. Subsidized loans would not be affected because students do not pay interest on subsidized loans while in college. This would certainly save students a lot of money, but since the money would be so cheap, it could encourage them to go into some un-necessary loans putting them deeper into debt after graduation.

If you have graduated college already and have already consolidated your student loans, this piece of legislation won’t be of use to you. You can only consolidate your loans once, and you’re stuck at whatever interest rate you agreed to. This is why a lot of people were recommending that you consolidate your student loans last summer before the increase in rates.

If you are about to graduate or have graduated and have not consolidated your loans yet, it might be a good idea to wait and see what congress does. It doesn’t make sense to get stuck paying around 6.5% on your money when there’s a pretty good potential that you could get a rate around 3% if this legislation passes. Track the legislation’s movement in the senate and the house and if it makes progress, waiting would probably be a good idea. You’ll only lose a few dollars in interest during the waiting period for not consolidating, and you have the major potential to save a lot of money if the legislation which drops federal student loan rates passes.

When you do choose to consolidate, make sure you get the best deal out there. Compare a number of different potential banks and make sure you are getting the best rate available to you with the best feature set on the loan.

Many individuals are interested in saving money, but find themselves struggling to put a little bit of money away each month as bills loom, food prices rise, and energy prices soar. For these individuals, the hope of saving some money for a rainy day gets placed on the back burner while reality intrudes and sucks their pockets dry.

Saving money doesn’t have to be painful because there are many quick and easy ways to save money without changing your lifestyle in any great way. Anyone can save money by following a few simple tips and at the end of the year, you will be amazed at how much money you have put away.

One of the easiest ways to save money is to pay yourself first. This means that every time you get paid or receive a paycheck, you should place a predetermined amount into a savings account first before you start spending the rest of the money on bills, entertainment, etc. Many employers who allow their employees to direct deposit their paychecks will often have an option where the money from the paycheck can be placed into more than one account, so the bulk of the pay can go into the person’s regular account while 5%-10% can automatically be withdrawn from the amount and placed into a savings account.

Another easy way for an individual to save money is by reducing their extra expenses. Imagine how much money you could save if you traded in your $3 daily latte for a cup of coffee from the coffee pot at home, which may cost $0.05 per cup to make. The money that you have saved by cutting out that one item from your daily routine can add up to $88.50 per month or $1062.00 over the course of a year, which is a great start for a savings account.

For most people, there are many of these little items that can be reduced from the person’s regular routine to help them save money. Although giving up these small comforts does take willpower, most individuals are glad that they gave up the item when they see how much money they have saved. It is very important that the money saved from eliminating these items from your daily routine be placed into a savings account because, if not, chances are that the money will be spent on some other frivolous item.

Every major personal finance counselor has a financial plan that they suggest everyone follows. Dave Ramsey teaches his listeners to follow “The Baby Steps.” Loral Langemeier offers what she likes to call “The Wealth Cycle.” Everyone has their own plan that they think you should follow, even some personal finance bloggers have jumped on the band wagon and suggested their own financial plans that you should consider following. Are these plans worth following? If so, which are worth following and which should be ignored?

All of these plans focus on getting your financial life in order. Usually it involves saving up money for emergencies, reducing your debt, investing for retirement, and paying off your house. All of these are great things to do for their own reasons.

Let’s look at Dave Ramsey’s financial plan. First he suggests that you put $1000 in the bank for a beginner emergency fund. Secondly, he suggest that you pay off all of your consumer debts from smallest to largest. Following such, you are to put three to six months of expenses in an emergency fund. Then you are to start putting 15% of your income into retirement, start savings for the kids college, and then pay off your home and build wealth.

Ramsey’s plan is certainly one of the better constructed plans, however it’s not without its shortcomings. It doesn’t work for everyone. If you’re more prone to emergencies, you’ll want a lot more than $1000 to start off for an emergency fund. If you got stuck with some very bad pay day loans, you’ll want to clean those up before putting money away for emergencies. If you have some extremely low interest debt, there’s no reason to pay it off in a hurry, but Ramsey suggests that you do so anyway. His plan also assumes that you have children and are a home-owner. There are a lot of assumptions made about you in this plan.

This is not to say that Dave Ramsey’s plan is any worse than anyone else’s, in fact it’s a very good plan, but the problem is that these cookie cutter financial plans just don’t work for everyone. There’s no way they can take into account your specific situation, and often times they just don’t work for everyone. Each and everyone of our financial situations is different, but these cookie cutter financial plans don’t take this into account. Often times radio hosts of these shows have to tell callers to do something slightly different than their financial plan because of their unique situation.

Fortunately, there’s an alternative which will work for everyone. You need to do your own financial plan which takes into consideration all of the financial concerns in your life. You can create one of these by doing research, prioritizing and working with a good financial counselor or a friend who’s smart with money. Your financial plan might not be the world’s greatest plan, but it will better match your situation more than one by someone who’s never met you. As long as you have focused intensity and are working toward your goals, you will do well.

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