Discover Debt Freedom!

There are many different things that can affect our finances negatively, but there are a few actions that we can take to guarantee that we stay in debt forever.  Some of these things are easier to accomplish than you would think and many of these actions are things that we do unthinking, never realizing that are actions are causing financial devastation until it is too late.  If you really want to destroy your financial security, here are some good ways to do it.

Carrying A Credit Card Balance

Carrying a credit card balance is one of the best ways to guarantee that you will stay broke for the foreseeable future.  Credit card balances cost a fortune in interest payments, service fees and account fees, sucking up a great deal of your disposable income and putting you at the mercy of the credit card issuer.  Many people spend decades trying to pay off credit card debt, spending thousands of dollars in additional money to pay off purchases made long ago.

Paying Too Much For Your Largest Expenses

You are never going to come out ahead financially if you are paying too much for your largest expenses, such as your mortgage payment, your rental payment, or your car payment.  If you are consistently spending more than 30% of your take home pay on your housing or more than 10% of your pay on a vehicle, you will find yourself chronically short on cash and having difficulty saving.  In these cases, the only other option you have is downgrading to a place that is more affordable on your salary.

Confusing What You Want With What You Need

There are very few things that we as humans really need, like food, clothing, and shelter.  The problem comes in when we start confusing the things that we actually need with the things that we merely want, like cable television, multiple pairs of sneakers, or dinners that we don’t have to make.  Mistaking the things that you want for the things that you need is a surefire way to ensure that you continually spend more than you have to.

Focusing On The Short Term

Businesses are great at getting people to focus on the short term costs of a purchase instead of the long term costs and consequences.  For example, on a new car loan, the new payment may be lower than what you were paying for your old car, but you are not taking into consideration that you will be paying that new car loan for a longer period of time, resulting in a significant increase in expenditure.  Companies are experts at diverting you from looking at the total cost of the items that they are selling and not calculating the true cost of the items that you are buying is a good way to remain broke for the foreseeable future.

There are many things that people think are true about credit cards that are not true at all.  This type of misinformation can cause people to make bad financial decisions and to accumulate unmanageable debt, which can lead to financial devastation and bankruptcy.  Here are some of the most common myths about credit cards today.

Myth 1 – Just Pay The Minimum

Many people make only the required minimum payment on their credit cards each month, reasoning that they will just pay whatever the credit card issuer says to pay as the minimum and they will eventually pay off the debt.  Most of these individuals do not understand that the minimum payment amount will only cover the monthly fees charged to the account and one-percent of the actual balance, as required by federal law.  This means that if you stopped charging purchases to the credit card today and made only the minimum payments each month, it would take you at least 100 months – 8.3 years – to pay off your balance.

Myth 2 – Go For The Rewards

Most of the people who hold a credit card with a rewards program specifically targeted that credit card because they desired the rewards associated with the program.  What many of these people do not understand is that the rewards are still costing them plenty – through program fees, account fees, finance charges, and interest charges associated with the credit card.  With some of the more popular rewards programs, you would have to spend a minimum of $5,000 with the credit card each year to earn a reward equal in cost to the annual rewards program membership fee.

Myth 3 – Paying With Cash And Paying With Credit Costs The Same

Many people make no distinction between paying for an item with cash and paying for that same item with a credit card because the total on the register is the same in both cases.  The truth is that this is only correct if the person pays off the balance of their credit card each month.  If a balance is carried on the credit card, then the cost of that purchase will increase quickly due to finance charges, interest charges, and fees related to carrying a balance on the credit card, adding 20% or more to the original cost of the item purchased.

It is hard for experts to explain why so many people in the population resist creating a budget to manage their monthly finances.  Budgeting is a necessary evil for any person that has the potential to overspend or has a set amount of income that they can use each month.  The only way to truly tell how much money you are spending and what you are spending that money on is to create a budget and track your expenses to ensure that you are not spending more than you intend on certain spending categories.

Budget Creation

Creating a budget for tracking expenses will typically require three steps to be followed.  The first step is to find out what you are spending money on and how much you are spending on these items each month.  You cannot create an accurate budget if you do not know where your money is going or the amount that you are spending.  Tracking your spending in this way will also allow you to identify any areas where spending can be cut or eliminated.

The next step is to allocate spending to each category that is necessary, such as housing, transportation, and savings, and each category that is optional, such as entertainment.  This allocation should take into account any long term financial goals or short term plans that are being considered.  After the money has been allocated, it is very important that spending is tracked accurately to ensure that the spending is falling within the guidelines of the budget.

Simple Tips

You may want to use budgeting software to help you create an accurate budget and help you accurately track you expenses.  These software programs are designed to be user-friendly and simple to use, but may not provide the level of detail that you are looking for without editing the fields used by the program.  It is important that you not drive yourself crazy by fixating on all of the little details of the budgeting program, but can use the program to assist you in taking control of your finances.

When tracking your spending initially, it is important to include all transactions in your calculations, small and large.  Many people are astounded to learn how much they are spending each month in fast food, ATM fees, and vending machine snacks once they have actually identified their spending patterns.  Remember, spending over limits is how people get into debt and continuous overspending will eventually result in bankruptcy.

Making financial goals is a good idea but creating a plan to achieve those goals is necessary if you want to make sure that you achieve these goals.  Getting started on creating a plan to reach your financial goals can be difficult and time consuming, but the benefits associated with having a financial plan to follow is well worth the time it takes to create the plan.  Here are some tips on how to achieve your financial goals.

Debt Elimination

If it is difficult for you to pay all of your bills each month and you are just barely getting by, it is past time for you to make a plan to eliminate your debt.  One of the best ways to eliminate high interest debt is to refinance it under a lower interest rate and then dedicate any additional money you earn to paying off the balance.  For example, the typical interest rate for a credit card is over 16% but the average interest rate for a home equity line of credit is around 8%.  If you were to use the home equity line of credit to pay off your high interest credit cards, you would be reducing the amount of interest you are paying on the balance by half.

College Saving

Saving for college for your children is one of the hardest financial goals to reach because you must begin while the child is still to young to know what they will be majoring in, whether they will be going for Master’s or Doctorate degree, whether they will using grants or financial aid, or whether they will be attending college in the state that they currently live in.  Saving for college must cover a number of unknown criteria and the costs of college continues to rise each year.  The 529 savings plans offered by many banks allow college savings to grow tax free each year until the money is needed for college expenses.

There are also Coverdell Education Savings Accounts that can be used to pay college tuition.  These accounts allow savers to place up to $2,000 into the account every year to earn interest until the money is withdrawn tax free to pay for tuition.  If an account was begun when the child was born with the annual maximum deposited and earning 8% interest, on the child’s 18th birthday the account would be worth more than $80,000.

Retirement Saving

Many people believe that when they retire, they will only need 70% of their previous income to live comfortably because they will no longer have the expenses associated with working a full time job outside of the home, such as transportation costs and work attire.  What these individuals forget is that the cost of other items, such as utilities, hobby expenses, and travel expenses, will increase when they are home for a majority of the time.  It is best to prepare for retirement as if you would need the same income that you are making today.

The traditional pension plans offered by many businesses will only cover a fraction of the salary that you were earning when you were working full time, so it is very important that you make a plan to save additional money to finance your retirement.  There are a number of different savings plans that can be used to save for retirement, including 401(k) plans, 457 plans, and 403(b).  The more that is contributed to the plans today, the faster your money will grow and the more you will be able to withdraw during retirement.

Most banking institutions offer a wide variety of different types of bank accounts in order to ensure that they have an account type for every type of customer that walks through their doors.  This selection can make it difficult for a person to know which type of bank account would be the best for their financial situation.  There are a few things that should be considered when looking for a bank account and following these guidelines will ensure that you sign up for the best type of bank account for your needs.

The Average Balance Of The Account

Knowing how much money you intend to keep in the bank account can help you select the right type of bank account for your situation.  If you intend to keep a high balance in the account, then you may be entitled to an account free of any usage fees.  The amount of money that is to be retained in the account can direct your decisions on everything from whether to choose an interest bearing or non-interest bearing account, whether you can meet the minimum balance requirements for certain types of accounts, and whether you will have to pay a monthly account charge for your account.

The Average Number Of Withdrawals Each Month

The number of withdrawals that you intend to make each month will also have an effect on the decision of which type of bank account to sign up for.  Some accounts limit the number of times that you are able to make teller withdrawals, ATM withdrawals, and write checks before the bank begins to charge a fee for each transaction over the limit.  If you know that you will not be going over the established transaction limits, then the associated fees will not be a concern for you.  If you know that you will be making many withdrawals from the account on a monthly basis, you will want to choose an account that does not have transaction limits or transaction fees.

How Many Financial Services You Need

You have a greater chance of getting breaks on the fees associated with bank accounts if you have multiple accounts with the same banking institution.  Having your checking account, savings account, mortgage loan, auto loan, and/or credit card account held by the same bank will increase your standing as a customer of the bank and may entitle you to discounts on the services that you have chosen.

Saving and investing are the only true methods of creating wealth and reducing the risk of financial devastation.  So why is it that many people do not have any savings in reserve for handling a financial emergency or planning for the future?  There are many reasons that may be given by a person to justify why they do not have any savings, but few are a legitimate reason for neglecting to plan for the future.  Here are some of the worst reasons for not saving money for a rainy day.

I Don’t Make Much Money

The most common excuse for not saving money in a savings account is that the person does not make enough money to pay their bills, pay for food, and save money too.  The people that generally use this excuse are people that pay all of their bills first, then they spend money on the things that they want, then they think about saving money as their last priority.  By simply changing the order of this list of priorities, you can begin saving a significant amount each month and increase the balance of your savings account quickly.

By paying your savings account first, you will ensure that you are saving some of your disposable income and you will be less likely to spend your additional money on frivolous items that are not really needed.  You can start small, by having 5% of your paycheck directly deposited into a savings account when you get paid.  If you can save this much each pay period without significantly reducing your quality of life, you can slowly increase the percentage over time to save more money quickly.

I Will Do It Later

Another terrible reason for putting off saving money is that you believe that you will be able to make more money later in life and will compensate by saving more money then.  In a perfect world, this scenario would work out every time, but unfortunately this is not how life typically works and chances are that you will need to have savings to handle a financial emergency much earlier than you would like to think.  Slowing increasing your savings at a reasonable pace over a long period of time is much more manageable than attempting to save large chunks of money at certain periods throughout your life.

I Like Buying Nice Things

Everyone likes to buy nice things with the money that they earn.  That is one of the reasons that so many people work so hard at their jobs day in and day out.  But the desire for nice things should never come at the expense of your financial security and spending money on luxuries before having money in reserve for handling financial emergencies is always going to end badly.

A better way to approach this spending is to make it a point to save as much as you spend.  If you have to have that $100 pair of boots, make sure you place $100 in your savings account first.  This may also decrease your overall spending as you take a second look at what you are spending your money on.

You hear it all the time at the checkout counter.  “Would you like to apply for a (store name) credit card?”  Sometimes it seems as if every store now has its own store branded credit card that their customers can use to purchase products at their locations or other locations around the city.  These credit cards are typically billed as a fantastic deal for the consumer, but are store branded credit cards really the deal that they are said to be?

Discounts Associated With The Credit Card

Most of the people that sign up for store branded credit cards do so because the store is offering a deal or a discount with the approval of the credit application.  This discount is applied to the purchases made on the day that the application is submitted.  Although this can be a significant amount if you are purchasing a large quantity of items, the money that is saved during the initial transaction is often dwarfed by the amount of interest paid on the balance of the credit card during the first year that the account is opened.

Limited Amount Of Credit Available

The amount of credit given for a store branded credit card is typically much lower than the amount of credit issued with a general purpose credit card that can be used anywhere.  Because the credit limit is so low, often under $1,000, it is very easy for a larger purchase to cause the person to use more than 40% of their available credit, which can negatively impact their credit score.  The only thing that will restore the credit score points lost by maxing out a store branded credit card is paying the balance down below that 40% threshold.

Usage Restrictions

In many cases, a store branded credit card can only be used at the stores that issued them and on the website of the company.  Unfortunately, many people do not do all of their shopping at a single store and must get multiple store branded credit cards to be able to use credit in each of these places.  Having several credit accounts with several different retailers increases the chances that a payment date will be missed and can result in penalty fees and higher interest charges.

Every person with a checking account knows that the fees that banking institutions charge for these checking accounts can add up quickly, with many costing consumers around $200 per year.  Most people would avoid these fees if it were possible to without having to put forth a great deal of effort.  There are a number of different ways to reduce the cost of having a checking account and many of these actions take little to no effort to complete.

Don’t Buy Bank Checks

Purchasing checks to use with your checking account can be a major expense, especially if you are the type of person that writes many checks throughout the month.  The checks that are purchased at a bank will typically cost around $25 for a box of 200 checks, but you can save more than 50% by purchasing your checks from a reputable printing company.  These companies charge around $10 for a box of 200 checks and typically have a wider selection of check designs than the banking institutions.  These checks can be ordered by mail or online at the website of the printing company.

Avoid Overdrafts At All Costs

One of the most expensive mistakes that you can make with a checking account is to overdraft the account.  Each instance of overdrafting that occurs with your account can cost you a fee of around $35 plus an additional daily penalty fee for each day that your account remains overdrafted.  You may think that you are safe if you have your checking account linked to your savings account to automatically transfer money if there is not enough in your checking account, but the bank will still charge you a fee of between $5 and $15 for the automatic transfer.

Use No-Cost Cash Withdrawal Methods

ATM fees for using an ATM not branded for your bank is a huge source of fees for the banking institutions, totaling billions of dollars each year.  Instead of paying fees of $1.50 or more to two separate banks for each of these transactions, use the internet to find out where you can withdraw your cash free from bank fees, such as stand alone ATM locations in parking lots, gas stations, and grocery stores, which are on the way to your destination.  You also have the option of obtaining cash from your checking account fee free during the check out process at your grocery store by writing a check or using your debit card and asking for cash back.

Did you know that credit cards are a fairly new invention?  In the recent past, people always saved up for the things that they wanted and paid for these items with cash that they withdrew from their bank account.  Today, people wipe their plastic for all sorts of purchases that our grandparents wouldn’t have thought of, like fast food meals or gasoline purchases.  There are many things that you probably didn’t know about credit cards that the credit card companies would rather keep under wraps, but knowing the truth about these financial products will help you make better decisions about your own finances.

1 – Interest Rates Have No Maximum

Every card holder’s agreement for every credit card marketed contains a clause that states that the credit card issuer can change the interest rate for the credit card at any time for any reason that they consider valid.  Although the new credit card laws issued state that these companies must now give a certain amount of notice before an interest rate hike and give the borrower the option to pay off the balance under the original terms, the new laws do not say anything about a limit to the interest rate that is charged.  Many of larger banking institutions are headquartered in states that have no usury rate, so they can charge their customers whatever interest rate they choose without any fear of legal repercussions.

2 – Paying Off A Credit Card Rarely Happens

The individuals that are using credit wisely attempt to pay off the balance of their credit card every month, but the vast majority of credit card users carry a balance on their credit cards from month to month and many of these individuals only pay the minimum due each month.  What many people do not realize is that the typical minimum payment only covers the fees charged for that month and 1% of the principal balance.  This means that it could take someone decades to pay off a credit card and that is only if they do not use the credit card again while they are paying it off.

3 – Rewards Programs Are Costing You

Many people sign up for credit cards because of the perks and rewards that they will get from using the credit card, but many do not realize that these perks are not free.  You are paying for these rewards through the interest payments, finance charges, and membership fees associated with the credit card account.  An analysis of one popular credit card rewards program showed that the credit card holder would have to spend at least $5,000 annually to break even with the membership fee for being in the rewards program.

Refinancing a home can be a simple and quick way to obtain additional cash, but it is not always a good idea to pull equity out of your home using refinancing.  There are a number of negative actions that can occur when you refinance a mortgage and it is important to be sure that the need is equal to the risks and penalties you will be taking on by refinancing.  Before you decide that refinancing your mortgage is the best solution for your situation, be sure that you are not draining the equity of your home for a bad reason, like the ones listed below.

Taking An Exotic Trip

Cashing out the equity in your home by refinancing your mortgage to take an exotic vacation is always a bad idea.  The benefits that you will get from these types of trips are minimal and fleeting while the penalties for taking a large chunk of money out of your home are long lasting and will continue to create repercussions for years to come.  Instead of taking the equity out of your home for a vacation, you should save up the money through paring down unnecessary spending and take a vacation that you can afford without refinancing.

Paying Credit Card Debt

Refinancing a home to pay down credit card debt is typically a bad idea because it does not address the reason for the debt creation.  Paying off credit card debt by refinancing your home is a quick fix that reduces the amount that you owe in the short term by paying it off over a longer term, but does nothing to curb the over-spending that caused the debt problems in the first place.  If you have high debt levels, then you need to trim your spending and pay off those debts without incurring more debt in the form of refinancing.

Lowering Interest Rate By A Small Percentage

Although a smaller interest rate will always seem attractive when refinancing, it is important to be sure that the drop in interest will be worth the effort and time that you are putting into the refinancing.  Many people forget that there are fees and costs associated with refinancing a mortgage loan which can quickly eliminate any gains obtained by a small percentage interest rate reduction.  If the interest rate will not drop more than a few percentage points or the payments will not be noticeably smaller by a significant amount, there is no reason to refinance at that time.