Discover Debt Freedom!

Emily Starbuck Gerson of Taking Charge hosted the Carnival of Personal Finance #162.  Some of my favorite posts she included are:

• The Money Answer Guy helps consumers decide if they should hang onto their gas guzzlers.
• Not the Jet Set tells how the envelope system works and why it has been so successful for his family.
• Antishay Ventenne once thought credit cards were evil, but after becoming debt free, she has come to realize that they can be useful tools
• American Small Business News explains to small business owners the importance of employee evaluations
• Destroy Debt exposes the real “trick” to saving money.
• Uncomment Cents lists seven ways to travel frugally

Most adults across the nation have at least one credit card and use that credit card to make purchases on a monthly basis.  Credit card companies love the fact that these people are using are using their credit cards more often because it gives the company more chances to try to extract more money from these consumers by charging higher interest rates and fees for using the cards.  There are some ways for a consumer to beat the credit card companies at their own game and reduce the amount of money earned by the company in credit card fees.

Trick 1 – Pay Your Credit Card Bill Early
Making a payment on your credit card late gives the credit card company numerous opportunities to make money off of you.  The first charge that they will levy against your account will be a late payment charge, which could be as high as $39 per occurrence, even if the payment is only a few hours late.  If the person is close to their credit limit and this late payment penalty fee pushes them over the limit for the card, the credit card company will use this as a reason to charge the account an over-limit fee, which could add another $39 charge to the balance of the account.

If this was not punishment enough, many credit card companies use the fact that you have missed a payment due date to skyrocket the interest rate for the card to the highest allowable limit, which could be as much as 30% for some cards.  In order to avoid all of these problems, it is best to make a payment on your credit card as soon as possible after you have received your bill to make sure that your payment will not be received late.  Some credit card companies will even allow you to pay your bill online, so the payment will post to your account no later than the next business day and you can print out a receipt saying that the transaction has been processed.

Trick 2 – Pay Your Credit Card Off In Full Every Month
Credit card companies are required to give each account a grace period for paying off the charges before they can start charging a finance charge to the account.  This grace period is typically between 25 and 30 days, meaning that if you can pay off the amount that you have charged to the credit card in this amount of time, then you will not be charged the extra finance charge for borrowing the money.  If you are able to pay off your credit card each month, make the full payment and avoid paying extra money to the credit card company.

Trick 3 – Use Cash Whenever Possible
Credit card companies have started to offer rewards points and other perks to people that use their credit cards at everyday places, such as gas stations, grocery stores, and fast food restaurants, to convince more people to use their cards more often so that the credit card company can charge them more fees.  What many people do not realize is that the credit card company is making much more money off of these individuals in fees than the people are receiving back as perks.  It is better to use the credit card as little as possible and to pay cash for small everyday purchases to reduce the amount of money that you are paying to the credit card company each month.

Many people have a hard time saving money because there are so many things that they want to spend their money on.  There are bills to pay and food to buy, clothing to replace and gas to purchase, and that doesn’t even begin to get into all of the optional purchases that we are faced with every day.  In the face of all of this temptation, it is no wonder that many people are having trouble saving for their future, but there is an easy way to make sure that you are saving a good amount of money each month and that is by taking away your ability to spend it.

Many people have found that the most effective way for them to save the money that they need for the future is to place the money into a savings account as soon as they get it so that they are not tempted to spend it on everyday items.  As soon as the person is paid their salary or hourly wage, they take 10% of the money that they have earned and place it into an interest bearing savings account where it remains until needed for an emergency.  By taking this money out of the equation before the person really has a chance to realize it is there, it is greatly reducing the risk that the person will spend the money instead of saving it.

How This Helps You

If you talk to any person in the nation, they will be able to tell you a story about how they walked into a store to purchase one thing and came out with more items than they intended to buy.  Retail stores are experts in trying to trick you into spending more money than you intend to and the constant bombardment by advertising and crafty displays make it very difficult for some people to pass up items that they perceive as a bargain or as a necessary item at a good price.  These people may not be able to resist the allure of a bargain, but they do have the willpower to resist spending money that they do not have, so if the money has already been taken out of the person’s checking account they will not count it as extra money to spend.

What If I Don’t Make Much Money?

The truth is that no one should have to spend everything that they make each month.  If you are living paycheck to paycheck and all of your money is being spent before you make it, then a serious reevaluation of your life needs to occur to find out why you are not able to save at least 10% of the money that you earn.  For many people, this is a case of confusing the things that they want with the things that they really need to have and spending too much for luxury items that the person can really not afford.

Some of the biggest culprits contributing to this mindset are housing costs that equal more than 30% of the person’s total income and car payments for new cars that are extracting more money from the person’s paycheck than they can afford to spend.  Other items that are wants generally classified as needs are cable television, high priced grocery items, and weekday lunches at restaurants.  By reevaluating your expenses, you may find a number of different areas where you can downgrade and the money that is saved can be placed into a savings account and used for any emergencies that arise in the future.

Over the last several years, many new types of financial product have been create by the financial wizards of the day and marketed to the public as some of the greatest financial products ever.  What they are not telling you is that these financial products are the greatest thing ever for the companies that sell them, not the consumers that are buying them.  There are many financial products that you should be wary of if you do not understand them completely but these 3 financial products should be avoided at all costs because they do very little to help you but can hurt your financial situation in a significant way.

Product 1 – Payment Protection Insurance For Credit Cards
This type of insurance product was created by the credit card companies and advertised as a safety net for insulating a person from credit cards debt if the person becomes disabled, seriously ill, or loses their job.  The problem with payment protection insurance is that the premiums for the insurance are ridiculously high and there are so many exclusions for the policies that very few people actually qualify for the benefit if a situation arises where they are unable to pay their credit card bills. 

This means that many people are spending a great deal of money on the payment protection insurance for little to no benefit.  It would be smarter and more economical to place the money that would have been spent on payment protection insurance into an interest bearing savings account that can be used for emergencies, such as losing your job and being unable to pay the minimum payment on your credit card accounts.

Product 2 – Payday Loans
Payday loans are one of the worst financial products on the market today for a variety of different reasons.  The interest rates on these loans are astronomical, averaging 300 – 500% per loan which is conveniently disguised as a fee for taking out the loan.  There is also a very short grace period for repaying the loan, often as little as two weeks, which is not nearly enough time for a person to make up the income that will be needed to pay off the loan.

Researchers have found that as many as 85% of the people that take out a payday loan get trapped into a virtually endless cycle of debt, where they have to take out new payday loans to pay off the previous loans that were taken out.  It is estimated that many people pay more than $500 in fees for floating the payday loan for multiple cycles until they can pay off the loan without facing a financial hardship in other areas of their lives. 

Product 3 – 401K Debit Cards
If you are putting money into a retirement account, that is where the money should be staying until you reach a retirement age, but many companies are now creating ways for people to tap into their retirement accounts to pay for the items that they desire now.  This is slowly eroding the financial safety net that many people will need to use for their retirement and each dollar taken out of these 401K accounts is another dollar that is not earning interest towards the person’s retirement.

If you really want debt freedom, you’ll need some high-quality tips for paying off debt and help from some good debt freedom and debt help companies.

An increasingly popular option for Americans who are wealthy or in their retirement years is to move down to Mexico or another Central American country. They do this because the cost of living is often a lot lower and they can stretch their retirement dollars much further if they could than if they were to stay in the United States. The weather is also a lot warmer in many of these countries which is an added bonus. Many people who decide to retire to one of these countries in Central America find themselves in a situation where they would like to buy a home to live in, but how does one start the process of finding Central America real estate?

The requirements of purchasing real estate in other countries will vary dramatically depending on where you are. For example, in Mexico, non-citizens cannot purchase land anywhere within 50 miles of a coast line. You will need to spend a significant amount of time researching the real estate laws and customs of each country.

One thing that you should do regardless of whether you’re buying Costa Rica real estate, Guatemala real estate or Mexico real estate is that you should always get a home inspection. Many Central American countries do not have the same stringent building codes as are done in the United States, so you want to ensure that you are purchasing a structurally sound home without any major problems which could be financially costly down the road.

Another thing to consider is the exchange rates. If you wait to convert your money to the local currency at a point when the dollar is relatively strong compared to the destination currency, you will be able to buy your home for a lot cheaper. The amount of foreign currency you’ll get will vary day to day, and you might consider waiting until the dollar reaches a 52 week high against whichever currency you are converting to in order to make the switch. This could easily save you anywhere from 5% to 10% of the cost of your home.

Moving to a Central American country definitely has its benefits, but it’s not for everyone. When buying real estate in Costa Rica or anywhere else in Central America, make sure that you move slowly and seek counsel from those who have done it before.

Planning for retirement is one of the hardest financial decisions for a person to make because there are so many unknown factors that could affect the outcome of the decision.  Many people do not want to put too much into their retirement savings because it could affect their quality of life today, but do not want to under fund their retirement because that will make it harder to live comfortably during their retirement.  So how much should an individual put into their retirement savings?

The Rule Of Retirement Funding

A good rule of thumb to use for determining the amount of money an individual should be putting into their retirement savings is to save 10% for the basic needs, save 15% for comfortable living, and save 20% to be able to travel.  This rule of thumb is intended for the people that begin to save for retirement at age 30 or before and is a pretty good measure of how much money you will need to maintain your current lifestyle during your retirement years.    If you are starting to save for retirement after the age of 30, you will need to add 5% to the amount of money that is recommended for saving in order to be fully financed when you reach retirement age.

The 10% savings rate that is recommended to cover the basics will ensure that the person will have their basic needs taken care of during their retirement.  This includes housing, utilities, food, and clothing, but not much else.  If you are not making very much money, or your family obligations do not leave a lot of extra room in the budget for retirement savings, then saving 10% is a good beginning to make sure that you have some money for retirement.

To maintain your current standard of living, experts recommend that you save at least 15% of your earnings in a retirement savings account.  This will ensure that you have enough money to cover the basics, plus some extra cushioning for emergencies and small luxuries.  Although this will not allow you to live a life of luxury during your retirement, you will be comfortable and be able to handle any small emergencies that come your way.

If you would like to travel around the country or see distant lands during your retirement, then you should be saving at least 20% of your income in a retirement savings account each year.  Traveling can become very expensive and, even if you only plan one or two trips each year, the expense of traveling can quickly deplete your retirement savings.  By following this retirement rule of thumb, you can make sure that you will be living comfortably and have the funds to do the things that you would like to do after you retire.

The news media reports every day on the amount of foreclosures sweeping the nation as more and more people find themselves unable to pay their mortgage and being forced from their homes.  Although a portion of the foreclosures are due to people losing their jobs or crippling medical bills, a larger portion of the foreclosure mess is due to people signing mortgages with terms that they did not understand to buy homes that they could not afford.  If you are looking for a home in the current market, it is important that you know how to avoid the common mortgage traps that have caused so many problems for so many people in recent years.

Trap #1 – Signing Up For Adjustable Rate Mortgages
Adjustable rate mortgages, or ARMs, have become a dirty word in many financial circles because of the mess that they have created in the housing market.  Adjustable rate mortgages may seem like an attractive option for some people because the initial interest rates may be lower than those for a fixed rate mortgage and the lender may tell you that you will save money if the interest rates go down.  But your payments will increase if the interest rate goes up, sometimes dramatically, and if you are already stretched thin, you may not be able to afford the higher mortgage payments.

Trap #2 – Signing Up For Interest Only Mortgages
Interest only mortgages are used by lenders to help people buy more home than they can truly afford.  The mortgage holder makes the interest payment for the loan only for the first year or so of the mortgage agreement, which is often less than half of the amount that they really should be paying because they are not paying any of the principal of the loan.  Once the principal of the loan reaches a certain percentage, payments on both the principal and the interest of the loan become due, often skyrocketing the payment to well above what the mortgage holder can afford to pay.

Trap #3 – Signing Paperwork Without Reading It
This is the trap that many people who obtain mortgages fall into and is the hardest to remedy if you come out on the bad end of the deal.  Although the paperwork for obtaining a mortgage is long and the lender may reassure you that everything is fine with the paperwork, it is important for you to read every word of the documents.  This will ensure that you are getting the rate that you were promised, that there are no hidden fees added to the total, and that you know exactly what the terms of the mortgage will be.  Do not get bullied or coerced into signing paperwork for a mortgage loan without reading it first.

Trap #4 – Signing Up For A Mortgage Product You Don’t Understand
There have been many different types of exotic mortgage products created in recent years designed to qualify people for mortgages that they would not have qualified for under normal mortgage terms.  Many of the people that have signed up for these exotic mortgages and have gotten in financial trouble have found that they would have qualified for a traditional loan for a lower amount of money but the lender never disclosed this to them, so they signed up for mortgages with terms that they did not understand hoping for the best.  If you do not understand a mortgage product or the lender is unable to explain the terms to you in a way that clears up the confusion, chances are that you should not be signing up for that loan and if the lender tries to pressure you into signing, you should look for another lender.

Although the US dollar is relatively low to European currencies right now making international travel somewhat cost prohibitive for some people, there are still plenty of opportunities to travel within North and South America without getting beaten up by the exchange rates. The US Dollar is relatively even to the Canadian Dollar and has not moved too much compared to some of the South American currencies. If you’ve been looking to take some vacations and have never been to South America or Central America, now might be your chance.

There are plenty of destinations to choose from in South America. The most popular of places to visit is certainly Brazil because it’s somewhat more modernized than some of the other countries. In fact, Brazil powers most of their vehicles on ethanol from sugar cane rather than traditional gasoline. They’ve already become close to energy independent because of their large sugar cane crop. Some of the other countries are not as developed, but there are certainly some parts of those countries that would be interesting to visit.

Cost is definitely something to consider. Some cities will focus on catering to tourist who are perceived to have a lot of money, so locals will charge much more for hotel rooms, foods, and other services that you might make use of. Consider visiting a town that isn’t normally frequented by tourists to get a better deal.

Instead of staying in a hotel, consider staying in a vacation rental. These are often town-homes or condominiums that are rented out by owner or by a company. For example, you can save a lot of money in the country of Panama by getting quality Panama vacation rentals. They are much cheaper than some of the hotels in that country, which will enable you to stay longer and do more things while you are there because you reduced the cost of your lodging.

You can find Panama vacation rentals by searching online through sites such as Vacation Rentals By Owner (VRBO) and other foreign equivalents. Often times you will save a substantial amount of money over staying at a traditional hotel.

There are more people in debt across the nation today than at any other time period in history, as many people have been using credit to spend beyond their means and purchase large homes that they can not afford.  Many of these people are now having trouble paying all of their bills and are growing increasingly desperate as they find themselves falling farther and farther behind.  Many of these people may be tempted to turn to a debt relief company to help them eliminate their debt, but in some cases, turning to these companies can cause more harm to your financial future.

Although there are some debt relief programs that may be able to help you reduce the amount that you owe to creditors or help you make a plan to regain your financial freedom, there are also many debt relief companies doing business that will not do anything to help you reduce the amount of money that you owe and may even drive you deeper into debt by charging excessive fees for doing little to no work on your case.  Some people are so desperate for debt relief that they ignore the warning signs that the company may be scamming them and end up getting deeper into financial trouble.

There are some things that should be kept in mind when looking for a company to help you with your debt to keep you from making the wrong decision and owing more money than you currently owe.

1.  If it sounds too good to be true, then it is probably a scam.
There are many debt relief companies that promise to settle your debt for pennies on the dollar, wipe away your debt without hurting your credit score, or repair your credit in a quick and easy manner.  None of these actions can be accomplished legally and attempting to settle your debt or repair your credit in these ways can create just as many legal problems as financial ones.  If a company is telling you that they can do this for you, avoid this company like the plague because they are lying to you.

2.  The company is charging high up front fees.
If the company is requiring you to pay high fees, often more than $500, up front before they begin to work on your financial situation, this may be another red flag that the company is more concerned about padding their bottom line than with helping you with your financial problems.  The owners of companies offering debt relief are being sent to prison in increasing numbers because they have charged their customers outrageous fees, $7,500 per customer in one case in Ohio, for debt relief help that they would not or could not perform.  Even if these scam artists get sent to prison, that does not mean that the fees that you have paid will be refunded to you, meaning that you will be deeper in debt than when you began.

There are several legal ways that can be used to reduce the amount of debt that you owe to your creditors or lower the interest rates that are being charged on your debt, but they all involve talking to the creditors and explaining your financial situation.  Many of these creditors will be willing to work with you because obtaining some of the money that is owed is better than receiving nothing because the person was forced into bankruptcy.  There are a number of different government programs that can assist a person with navigating through these financial systems and getting the assistance that they need and these government agencies will not charge you thousands of dollars for the help.

Might Bargain Hunter brings the Carnival of Personal Finance to us this week, with a tribute to the American Flag and lots of great articles to get or keep us on track financially.  Here is a sampling:

• Free Money Finance says: “You can save money by weighing your produce
• The Personal Financier teaches kids about finance through Monopoly
• Money Answer Guy discusses the benefits of a cash-only lifestyle
• Beating Broke tells where they began their journey at reducing their debt