It’s time to review several things we’ve covered in past BWE posts – Part II

By BOB CUNNINGHAM

Continuing with the post from last week, in which we are examining some basic financial principles from a “fantasy and reality” perspective:

“Invest in your company’s 401K Plan.”  The most common workplace retirement savings vehicle is a 401K Plan, which is a qualified (i.e. government-sponsored) account in which the company holds your money and pays a brokerage to invest it for you into various securities.

FANTASY:   Max out your 401K Plan (the government places limits on how much you are allowed to contribute annually) as soon as you can.  The government is truly generous in allowing us an account that can grow tax-deferred.

REALITY:   Doing so means you’re trusting others to manage your money, in markets that are risky and volatile, and forfeiting access to your money until you’re age 59 1/2 (unless you want to pay a 10% penalty on top of standard taxation) and the account has been in existence at least five years.  It’s true that many companies offer a match up to a certain percentage of your income.  As a secondary retirement savings instrument, I’m fine with maximizing the company match (example – company matches 25% of the first 5% you have deducted from your paycheck to be put into your 401K).  Otherwise, there are better places to put your savings where you have safety and complete control. And once and for all:  Tax-deferred doesn’t mean tax-free, and it doesn’t result in more compiled money once you’ve paid income tax at the back-end.

“The most important aspect of investing is Rate of Return.” How much compound interest your money makes as it is invested in stocks, bonds, precious metals, real estate, or any other from among a host of investment choices IS something you’re going to want to track.  But there are other factors.

FANTASY:  You should be investing your money where you can earn the highest returns.  The stock market has risk, but it has gone up steadily over the long-term so if you leave your money in the markets, you’ll most certainly come out ahead.

REALITY:  I can’t quite recall where I first read the following, but the adage is oh-so accurate:  The most important part of savings and investing isn’t the return on your money.  It’s the return of your money.  I’ve never fully understood why otherwise sensible people have allowed themselves to become convinced that they should put their hard-earned life savings at significant risk.  In 2008-09, I personally knew folks who saw their nest-eggs drop by 40 percent.  They are just now fully recouping those losses, and that’s amidst the longest-lasting bull market in any of our lifetimes.  Remember, in a previous post we demonstrated how a 5% return every year can out-perform and average of 10 percent over the same period, in the same way that a 50% gain followed by a 50% loss results in a 25% net loss (Don’t believe me? Try it starting with $100 to make the math simple).  Slow and steady wins the race.  Just ask either the tortoise or the hare.  Better yet, ask them both.  Wouldn’t steady gains with no market risk – that’s zero risk, ladies and gentlemen – seem to be more intelligent when it comes to something as important as retirement savings? As opposed to hoping your funds return double-digits and avoid big declines along the way?  The answer is yes, because it is,

“Buy term and invest the difference.” This expression, of course, is referring to life insurance.  There two primary types – term and permanent.  Term insurance is solely a death benefit in exchange for a monthly (or annual) premium.  Permanent insurance includes products like whole life insurance, and can be set up to function in several capacities in addition to providing a death benefit.

FANTASY:  Because term is cheaper, it is advisable to buy term and then take the amount of money you’re saving on premiums versus permanent insurance and invest it in the stock market or other vehicle for long-term returns.

REALITY:  It sounds logical enough on its face, but two big problems here.  First, the vast majority of folks who intend to follow this strategy won’t “invest” the difference.  They will spend it… on stuff that depreciates.  And I simply don’t believe in unrealistic advice, even if the logic is sound (which it really isn’t here).  Secondly, there’s an obvious reason that permanent insurance tends to be more expensive than term.  IT DOES A LOT MORE FOR YOU!  Dividend-paying whole life, the product choice for permanent insurance suggested by this blog, offers a host of “living benefits” in addition to the fundamental death benefit.  The premiums are higher because the product is superior, on numerous levels. To recommend term strictly because it’s cheaper demonstrates a lack of reasonable research and comparison.

I hope you enjoyed this review and reaped some additional wisdom, or at least some reinforcement, from it.  Once again, thank you for taking time from your busy schedule to join us weekly on this site.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

 

It’s time to review several things we’ve covered in past BWE posts – Part I

By BOB CUNNINGHAM

(Note to my readers:  My apologies for being a day late with this post.  This marks a permanent change to Tuesday morning release of my new post each week.  The change is due primarily to professional convenience.  Thanks for your understanding.)

This website is, first and foremost, dedicated to coaching people how to best go about the various tasks related to savvy personal finance.  Achieving success can be accomplished through a mixture of some sound fundamental principles, combined with the reality that many strategies which are considered advisable by the masses are, instead, more beneficial to others.

What does that all mean?  Translated into one expression,

    “Unconventional wisdom, in many cases, is better than conventional.”

As you read, listen, watch, and research the world of personal finance, you will encounter some common themes preached by everyone from the most famous gurus to the tiniest out-of-the-mainstream blogs (I’d like to believe I’m somewhere in between, but closer to the latter than the former.)

This blog has been dedicated to assisting you in deciphering what to believe and trust, and what not to.  We’ve taken individual topics and broken them down into pieces small enough to digest in a way that allows us to effectively learn just how such habits can affect us, short- and long-term.

What I haven’t really done, until the paragraphs to follow today and next week, is put together a summary of the major points made through this blog’s seven months of existence.  So let’s get to it.  I’m calling this, “Personal Finance:  Fantasy and Reality.”  Part I is below, with Part II to run Oct 17.

“Pay Yourself First.”   This is arguably the most common adage in the world of money.  It simply means that you should set aside money for savings and/or investing before you earmark funds to pay your bills and for everyday expenses.  The theory, of course, is that if you get in the habit of doing this, you’re guaranteed to save more and anything is better than nothing.

FANTASY:  Saving even the smallest amount on a regular basis will eventually lead to significant holdings, from which you can build on additionally.

REALITY:  While it’s true that something is always better than nothing, there has to be a definitive goal for increasing savings regularly, and it should only be undertaken after expensive personal debt, such as credit cards that can have APRs well more than 20 percent, is eradicated.  One of the most common mistakes is to save slowly in an account earning less than 1% while simultaneously carrying a balance on a credit card charging 23.9% interest compounded.  Spend every extra dime paying off the card, stop charging stuff unless you pay it off entirely by the due date, and THEN ratchet up the savings to blow away what you would have accumulated – and wasted – otherwise.

“You need to save at least 3 to 6 months of living expenses in an emergency account.”  The idea is that if you have this kind of a reserve, loss of your job for an extended period won’t put you in the poorhouse – or worse, your parents’ basement.

FANTASY:  This is one of my favorite finance fables.  Some pretty well-known gurus claim it’s better to have a year’s worth saved.  Sure, and it would be better if my retirement savings had one or two additional zeroes, too.  In truth, for 95% of the population on this planet it is a complete fantasy to have a liquid cash reserve of $10,000 or more and be willing to leave it alone for a rainy day.  There’s a better HD television available.  It’s an emergency!!

REALITY:  A much savvier plan is a basic reserve fund of $1,000-$2,000 for things such as auto repairs.  But actually, I propose to use your credit cards as your emergency fund.  As long as you’re disciplined – and let’s face it, discipline is required when utilizing any type of advisable strategy – you can use a credit card to charge a true emergency and then formulate a plan to pay off the card with minimal damage.  Saving more than the aforementioned $1K-$2K means you’re not utilizing legitimate funds properly.  You should be investing those funds in debt elimination, or a dividend-paying whole life insurance policy, or if you must, low-cost index funds, or even in your work’s 401K plan (more on that next week).  All are preferable to letting inflation eat away at the buying power of a tidy sum dedicated to nothing… and earning next to nothing in a regular savings account.

“Avoid credit cards.”  Because they are debt instruments, many gurus advise to ignore them entirely, except perhaps for one card that can be used only in a “true emergency.”

FANTASY:  Just pay cash for everything, and you won’t need cards.  Credit cards only benefit the companies who issue them.  They victimize their customers unfairly.

REALITY:  Credit cards are great, but ONLY when used wisely and properly.  Running up a balance on an account charging such high interest rates is fiscal mutilation.  But if you are able to obtain 3-4 cards, each with cash-back allowances (preferably in rotating categories offering as high as 5%), and you use them for everyday regular expenses while ALWAYS paying off the entire balance prior to the next minimum payment being due, you not only avoid unnecessary costs, but also accrue small refunds, and at the same time build a favorable credit history.  Plus, your purchase of tangible goods are often insured by the card company, a service not provided by cash or a debit card.

“When strategically paying off credit card debt, pay off the smallest balance first.” As opposed to eliminating the account with the highest APR, many financial advisers propose the “snowball” strategy versus the “avalanche” approach.

As the AFLAC duck often exclaims, “Huh??”

FANTASY:  Paying off your smallest balances first, before working on the larger ones, yields quicker results and gives you a sense of accomplishment. This increases your chances of sticking with the program.

REALITY:  I won’t argue with psychology because I’m not educated in that area beyond my Psych I college course explaining the difference between Sigmund Freud’s id, ego, and superego.  But our goal is to save money on interest, so why would I pay off an account charging 16% before one jacking me for 24%?  The latter is going to require a larger minimum payment, so I want that one outta-here ASAP.  Look, if you have two accounts of very similar rates (like, within 1% of each other) and you choose the smaller one in order to get rid of it quicker, knock yourself out.  But don’t leap over dollars for psychological nickels.  Just dedicate yourself to the task with the knowledge that it is what is best for your long-term financial health, and save every dollar you can.

That’s it for Part I.  See ya next week for the conclusion of our review.

As always, thank you for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

What you should know about car loans, when obtaining one is your only option

By BOB CUNNINGHAM

Most personal finance gurus agree that the one type of debt that is acceptable to have is a home mortgage.  As soon as you can reasonably afford such a hefty monthly output, and provided you have some money for a down payment and closing costs, it’s generally better to buy a residence than to rent.

I agree completely with the second part of the above statement, but not the first sentence.  Well… not exactly as it is written.

I have learned that a home loan is, indeed, okay as long as you’ve avoided going in over your head.  I also believe that under the right circumstances, obtaining auto financing is just fine in the big savvy-money-management scheme of things.

To be clear, not everyone who desires new wheels should be out applying for a car loan. If you’re already in a lot of debt (i.e. credit card debt), and/or don’t have steady employment or another reliable source of income, locking up $300 or so per month for the next five or six years is foolish.  You likely wouldn’t qualify anyway.

However, the old-school thinking that you should pay cash for everything except your house, under all circumstances, is unrealistic and sometimes downright ill-advised.  Under certain reasonable but necessary parameters, you should feel fine about going into some debt for your car.  Why?  Because the risks of buying only what you can afford by paying cash often outweighs the temporary negative associated with using credit, even on a depreciating asset.

In a perfect world, you WOULD avoid traditional financing.  A dividend-paying whole life insurance policy, such as what this website has been detailing periodically since its inception, with sufficient funds in its cash value is a far superior method for buying a car because it is “self-financing,” and allows the policy owner to continue growing his/her money even while tying up funds in the new ride.  Set up properly, you wouldn’t lose the growth that money would earn had you not went car shopping.

It’s a really cool and wise way to go about it, but this particular post isn’t dedicated to that, because I realize many of my readers are younger and either don’t yet have the insurance policy or don’t have enough saved in cash value to collateralize a loan sufficient to buy the desired automobile.

So that means your choices are, 1) walk/ride the bus/ride a bike, 2) buy something so cheap for cash that it could break down at any moment, as mentioned above, or 3) qualify for a loan in order to buy a car that will likely last for several years.

It’s fairly obvious, I would think, that a huge majority in such circumstances will opt for Choice #3.  So here are some tips for making a smart purchase, and getting yourself financially to a point that this doesn’t hurt your ultimate bottom line much, if at all:

1. Buy pre-owned, not brand new.  The beauty of buying a car that is two or three years old is that you can save a higher percentage off the new model’s sticker price than has been spent in terms of the pre-owned car’s expected lifespan. Yes of course, I will explain.

For example, say you’re after a Toyota Corolla.  Not sexy, true, but usually super reliable. A brand new one typically goes for about $23,000, as per my research, but an average of the half-dozen or so appropriate pre-owned Corollas I found was about $14,000. The latter refers to a 2015 model or newer, less than 40,000 miles, and an average of no more than 15,000 miles per 12 months of the car’s life since it was originally bought new (I recommend 12,000 miles).  Most auto-buying websites list not only the year of the car, but info such as when the car was originally bought, month and year.  If you don’t have that information, a CarFax report – free for the asking from dealers – will show it.

OK, so $14,000 is about 61% of the car’s new price today (another way of stating this is the pre-owned car is discounted 39% from new), but 40K miles is only about 20% of the very reasonable expected lifespan (if maintained properly) of 200,000 miles.  That difference (19% in this example) is value for you.  Let the person who originally bought the car absorb that excessive depreciation.  KBB.com indicates a new car loses an estimated 20%-25% of its value as soon the buyers leaves the lot with it.

2. Get pre-qualified for a loan BEFORE you go see and drive cars. You have a lot more leverage knowing what you can pay ahead of time. But don’t qualify for the maximum your credit and other circumstances allow.  Be content to buy a little under your means, so that you have a comfort level with the payment and also have the option to pad the minimum required payments if you wish in order to reduce the principal balance faster and pay off the loan sooner.

Speaking of paying it off, do not apply or sign for a loan of more than five years (60 months).  It’s silly to pay for six or seven years on a car that, in great likelihood, you won’t have or want to retain before the end of the term. Plus, of course, you will pay more interest over the longer the term if you make just the minimum payments.  (Take note, however, that if the interest rate is identical on a six-year term vs. five years, which it frequently is, and you KNOW you have the discipline and willingness to pay at least 10% extra every month, it makes sense to go ahead and get the 72 months.  But ONLY if the above is accurate for you and your circumstances)

With the above said, it is generally best to go with the shortest loan term you can afford considering the aforementioned “padding” and comfort level for the required minimum payment.

3. Know the Kelley Blue Book (or comparable) values of your target car before you head to the lot.  It is important that you make your buying decision based on the total price of the car, and NOT based on the monthly payment.  Auto sales reps make a good living showing prospective customers how they can actually afford the car of their dreams (translation:  a car they really have no business buying) with the loan stretched out far enough.

With that in mind, know what your target car is worth and should sell for, allowing for a modest profit for the dealership – a good rule of thumb is no more than 10% above private party value.  Don’t be concerned with dealer retail or average price of similar cars sold in the area.  You can do better if you’re willing to work at it a little (see No. 4).

Lastly, it’s obvious that you must test drive your car of choice.  But when you do, really put it through its paces.  Ask the salesperson to direct you to a quiet side street and try an abrupt stop to test brakes, complete a sharp u-turn to test radius, and do a three-point turn to assure the transmission’s smooth functionality going from drive to reverse and vice-versa.  Ask for a certificate from the dealership guaranteeing all buttons, switches, lights, etc. are in good working order.  If that isn’t available, personally inspect and test everything.

4.  No-haggle pricing is NOT to your benefit.  Have your info, and stick to your guns while being reasonable.  Many car dealers are advertising no-haggle pricing in an attempt to cater to those who find the car-buying process stressful or even distasteful.  This is nonsense.  Haggling is to your benefit.  Arrive at what you’re willing to pay for the car based on the above parameters… and don’t buckle when the salesperson tells you their price is, “the best we’re going to be able to do I’m afraid.”  I can practically guarantee you that if you’re reasonable in what you’re willing to pay, and you’re willing to leave the lot if you don’t get close to what you’re requesting, the deal will get done to your satisfaction. The dealership wants and needs your business a lot more than the few hundred extra dollars they appear to be unwilling to discount for you.

5.  Make your car payments automatic through your bank’s online bill-pay. Set it to make the payment each month 3-5 days before it is due, and forget it.  And preferably, add at least $25 or 10% – whichever is greater – to the minimum payment when you set up the automatic payments.  You’re unlikely to feel the extra out-go in your monthly budget, and yet you could knock six months, a year, or more off the loan term.

There’s a lot to consider when buying a car, especially if you’re willing (and qualified) to make a long-term commitment by borrowing funds. Use the above as a basic guide, and you will undoubtedly come away pleased, while having not fallen into the trap of over-paying.

Once again, thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Seven steps for successfully beating the credit card companies at their own game

By BOB CUNNINGHAM

There are many folks out there who believe the credit card companies (more specifically, banks and other institutions which offer credit cards) are evil entities, with no other earthly purpose than to suck as much money from unsuspecting card holders as is inhumanly possible.

Yeah, that’s pretty much it. Who else would have you pay more than $17,000 for a $5,000 loan by essentially tricking you into paying a smaller monthly (minimum) payment when you could easily afford more in order to pay less interest?

But I’m not really down on these financial firms.  The folks at Bank of America, Capital One, Chase, and Wells Fargo… at Visa, Mastercard, and Discover are like virtually all businesses out there.  They want to make a profit in order to grow their business to, in turn, make more profit.  It’s an American mindset that has worked well for a lot of folks, and allowed a lot of other folks to obtain gainful employment.

Still, trying to learn the subtleties of how credit cards work – what you can be charged for, how much interest you pay if you run a balance, and how best to take advantage of the myriad of offers for new accounts – is a daunting task, especially for younger adults and families trying to navigate their way out of too much month at the end of the money.

So with that in mind, here are seven steps for the personal finance newbie to consider that will allow for befriending the credit card companies and coming out ahead of them in their own arena.

1) Start off by obtaining one new card with a small line of credit in order to begin establishing a credit history.  Even if you’re fresh out of high school and have never had your own credit card of any kind, it’s fairly easy to obtain one if you have a job. And if you do encounter difficulties getting a traditional card, contact a company like Premier Bank that will allow you to pay into a card account in advance, then charge off your established balance.

2) With your new card, go ahead and make one or more SMALL purchases, adding up to no more than $200, and start paying it off with monthly payments.  The purchase doesn’t have to be something separate, and certainly doesn’t need to be anything you wouldn’t otherwise buy.  Use your card for gas and groceries a few times, for instance.  When you have roughly $200 charged, plan to make four monthly payments of about $50.

By doing this, you are establishing a credit history.  In four months, the account will be paid off (do NOT charge anything else during the period you’re making the monthly payments).  And you will start receiving offers for more credit, from other companies with higher credit limits, including perhaps an offer or two of 0% APR promotional rates.

The cost for this exercise in credit-building?  About $14, based on the average newbie interest rate of 21% (according to BankRate.com).  So if you pay off your $200 in four months – or, one third of a year – the full-year interest you would pay would be $42, divided by three = $14.  Fourteen bucks is a small price to pay when you consider all the benefits you will ultimately reap from a quickly-established positive credit history.

I should point out that stretching the $200 purchase into four payments is a much better and more effective way to establish credit than paying off the whole $200 during the first month.  Why is this?  Because the credit card companies want you to carry a balance.  They make a lot more money if you have a monthly balance owed, and they prefer you pay the minimum payment – a practice we will never, ever do during our life of savvy money and credit management.

3) If you’re offered a 0% APR promotional rate card, it’s okay to accept it but be 100% sure you understand all the terms.  Some cards simply want to acquire you as a long-term customer in the hopes you will buy stuff after the 0% intro period expires and end up owing interest.  This is fine, because you will learn the discipline and strategies to avoid that scenario.

There are other companies, however, that will try to small-print you past an annual fee of as much as $69… just to be an account holder.  Note this here and now:  NEVER PAY AN ANNUAL FEE ON A CREDIT CARD ACCOUNT.  If a company says it will charge you, tell them you’ll cancel the account and go elsewhere.  Simple as that.

4) Determine the length of the promo period on your new 0% card, decide a comfortable amount you’re willing to dedicate per month to pay off a purchase before that period expires, and pull the trigger.  Any time you can use OPM (Other People’s Money) to buy or invest without paying a fee or interest to do so, the only decision you need to make is whether you should make the purchase at all, because the method of payment has been intelligently determined.

For instance, let’s say the promo period is six months, there is no annual fee, and you are comfortable spending $50 per month for this purchase.  That means you can spend $250 – not $300, because we generally prefer to pay off the purchase a month or so before the expiration of the promo period.  This is simply a buffer to allow for unforeseen circumstances that might interfere with this payment.  Make the buy, pay $50 a month on it (always pay the monthly payment a few days before the minimum payment is due, and use online banking to establish the payment in advance so it becomes automatic), and have it paid by the end of Month 5 of the six-month promo period.

The idea behind this is two-fold.  First, you’re continuing to establish a better credit history.  Secondly, you’re learning the basics for OPM use that, down the road, can be done on a much larger scale with the purchase of asset-bolstering investments rather than a new gizmo or blouse and matching skirt.

5) Request credit limit increases on both of the first two cards you have obtained and used.  This can be done on-line at the card issuer’s website, or by phone to a toll-free customer service numbers.  You’re not interested in buying more stuff or more expensive stuff – that’s wrong-headed.  Instead, what you want is to maximize the available credit in your name but not utilize it.  That’s a key factor in establishing a great credit history that will allow you to qualify for the best-available financing on your first home, and/or maybe a car (although there are better ways to buy a car).

6) Seek out one or two more credit cards, focusing on those that offer cash-back rewards, but don’t get carried away.  Applying for credit means credit history inquiries, which are a temporary hit to your credit score, so they should be kept to a minimum.  That said, the small score deduction you will endure in the short run will be more than offset – fairly quickly – by having more available credit in your name, and the pay-off can add up fast if you’re able to acquire a card or two with meaningful cash-back rewards.

There are cards on the market currently offering quarterly cash-back of as much as 5% on certain types of purchases.  For instance, as I write this in August of 2017, the Chase Freedom card is offering 5% back at restaurants and movie theaters.  Others offer a flat rate of cash back on all purchases.

7) Use the cash-back card(s) smartly to maximize your benefit. This is very important, so please note:  Do NOT start buying things you don’t need, can’t afford, or wouldn’t buy were it not for the card and its associated perks.  If you typically go out to dinner once a week, for example, don’t start going six times a week.  But for that typical date-night dining, use the card with the 5% back on restaurants, and be sure to pay the entire balance off before the next minimum payment is due.

Look, we are no longer trying to establish credit.  You’ve achieved that already.  Now our focus is to take advantage of the available rewards without paying for the privilege in the form of interest.  DO NOT carry a balance!

Follow these steps, in order, and you will be a happy carrier of multiple cards, boaster of an impressive credit history, and will have paid a grand total of about $14 in the first four months for the accomplishments.  Pretty shrewd, dude!

Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Neither consolidation nor settlement is wisest for those seeking debt elimination

By BOB CUNNINGHAM

You’ve seen the ads plastered all over the internet:  “Pay off your debts for a fraction of what you owe!,” or “Consolidate your credit card debt into one, easy monthly payment.”

When you’re deep in debt, credit card debt in particular, it’s easy to fall into the trap of seeking easy answers to suddenly and miraculously rid yourself of that burden.  Paying off four and even five figures worth of debt can be daunting, and seemingly impossible to achieve.  But as someone who has been there, I can tell you without reservation that you CAN do this on your own, and by avoiding the temptation for radical shortcuts, you WILL be much better off in the long run.

Before we go further, let’s make two separate but related points.  1) There is a moral, ethical obligation to pay all of an owed debt.  You borrowed the money, you should be willing to pay it back 100 percent (plus reasonable interest), 2) We will not be discussing bankruptcy here, because that is literally NEVER your best option, regardless of what some attorneys claim.#

#To reinforce my disclaimer that comes at the bottom of every post I write, this statement is an opinion only, and is NOT intended to be taken as specific legal advice.  I am a financial coach and licensed life insurance agent. I’m not an attorney.

There are, however, two somewhat radical yet more industry-accepted measures that can be taken for those in deep debt:  Debt Consolidation, and Debt Settlement.

Consolidation refers to hiring a company which specializes in the reduction and eventual elimination of unsecured debt.  The company helps you organize your debts and can negotiate on your behalf with the credit card companies for reduced interest rates, 0% periods to help you pay your debt down more quickly, and can arrange to take in your payments and then forward negotiated payments directly to the creditors.  Let’s be clear:  Consolidation companies help you with something you can readily do on your own, and charge you a monthly fee for the service.  But in certain circumstances, they can be of some assistance.

However, there are two primary negatives with working with a consolidation company.  First, as I just indicated, they’re not really providing any service that you couldn’t do on your own with a little effort.  You can call your creditors and ask for rate reductions, or request to have payments lowered and spread over a longer time frame in an effort to stay current.

The second downside is that signing up with such a company usually will be reported on your credit report, and can take as long as seven years – from the date of your final payment made to/through the consolidation company – before it is expunged from your record.  This information can lower your score and, thus, make it more difficult to qualify for more beneficial types of financing such as a home mortgage.

In most instances, consolidation is unnecessary and not helpful enough to justify the price – in terms of the monthly fee (typically $35-$75 monthly) or the detrimental credit hit.

Debt settlement is a much more aggressive strategy in which you’re essentially hiring lawyers to negotiate discounted settlements of the debt.  Say you owe Capital One $8,000, and you have no feasible way of keeping up with the minimum payments, and certainly no chance of paying more than the minimum in order to pay the balance off anytime soon.  The company might approach Capital One on your behalf and offer to pay a flat $4,000 within the next 30 days in order for the entire debt to be forgiven.  This is referred to, should Capital One agree in our example, as a “charge-off.”

Hold on!, you may be saying.  You’re telling me I can pay off an $8,000 debt for just $4,000?  Where do I sign?

Yes, it may sound like a Godsend, until you really peek under the hood of how this engine functions.  First off, where are you going to get the $4K to pay off the account within 30 days?  If you’re hoarding cash, you should have already used it to pay down your debt.  Assuming you don’t have that kind of scratch available, you’d have to turn around and borrow it from someone else.  How, in the name of sound financial planning, does that eliminate debt?

Another problem is that in most cases, and depending on the state where you live, that $4,000 “discount” on what you owe is recorded as income for you for tax purposes.  You would be liable for income tax on $4,000 at the end of the fiscal year… on money you never actually saw.  Be sure to consult with an accountant or tax attorney for specific details on your situation.

And the settlement company needs to get paid.  Want to know how?  By charging you a percentage of what they save you, sometimes as much as 25 percent according to Experian.com.  In the above example, that means $1,000 of the $4K discounted off the Capital One balance would be paid to the settlement company.

Also, the knock on your credit report for charge-off’s is significantly worse than just utilizing a consolidation company, and can take a decade to come off your report, says FairIsaac.com.

And didn’t I already mention the audacity it takes to justify paying less than what you actually, legitimately owe?  Sure, the credit card companies are rolling in it, and they often charge ridiculously high rates of interest.  Won’t hurt them much to contribute a little back to the common folk, right?  Perhaps, but it still ain’t right to pay $4,000 for an item you agreed to pay $8,000 for.  Period.

The truth is that you do not have to resort to such drastic measures, nor should you.  A little common-sense planning and spending reduction, following the advice of this blog and others like it that propose you handle your own issues prudently, and you can escape your debt much more quickly than it may seem now.

Forget consolidation, settlement, and other non-traditional methods.  Do the right thing, and pay your debt off as quickly as you can using good, savvy savings strategies.  You’ll feel a lot better about it, AND be fiscally better off as well.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Credit cards are only detrimental when they’re not used properly

By BOB CUNNINGHAM

In a perfect world, everyone would carry about four or five credit cards yet no one would have a balance at the end of the month.

And now back to reality…

Okay, I suppose I should lend some clarification to that opening paragraph:  The truth is that credit cards can be our friends, and actually enhance our wealth (primarily on a smaller level) IF they’re not misused and/or abused.

There are varying attitudes about plastic money – ranging from considering them indispensable to labeling them as downright evil. Mostly, though, they are simply misunderstood… and most definitely improperly utilized. Bottom line, if you use credit cards with some intelligence – and a big heaping helping of common sense – you will benefit.

The vast majority of people, especially young adults as well as teens unlucky enough to have access, use credit cards to purchase “stuff” they can’t afford otherwise.  A new stereo system, the most up-to-date cellphone, that dope blouse she just has to have… these are items that fall under the immediate gratification category, and should only be bought with saved cash that has been set aside for that specific purpose.

We’ve all been in this situation, or at the very least known someone who has.  A giant credit card balance is run up, but when the bill arrives and only asks for a minimum payment of $25, we reason that we can afford that… so what’s the problem?

I just wrote about how credit cards work, their interest rates, and how paying off an account one minimum payment at a time is a long road to ‘Brokesville’ in a recent post.  Instead, what we want to touch on this time around is how Visa, Mastercard, Discover, and the rest can be used in our favor.

All those offers we receive from credit card issuers via spam or junk mail are due to what has become an extremely competitive industry.  Credit card companies realize you have a lot of choices, and they want to come off as having the best available perks.  This attempted “one-upsmanship” by these companies works in your favor, and you should be prepared to pounce – the correct way.

In fact, credit card companies will work so hard for your business, most are willing to pay you to use them. Seriously. They offer incentive in the form of rebates – cash credited back to you depending on what you buy, where you buy it, and how much you spend.  Used wisely, this is a boon for you.

For the sake of discussion, we are going to focus in this space on cash-back offers as opposed to frequent-flyer miles or any other type of credit card rewards. The principles I’m about to reveal are similar with all of the above.

Essentially, there are two types of cash-back cards.  Some, like Capital One, offer a flat percentage of cash-back on every purchase you make using its card.  I believe that rate is currently 1.5% back (at least, that’s what Jennifer Garner and Samuel L. Jackson have been telling us).  And those endorsers push the “we pay on everything” aspect very hard.  No messing with odd offers on specific items, they will tell you.  Just use their card anywhere and get a reward every time.

Others, like Discover and Chase, have promotional offers that usually go by quarters during the year – three-month time-frames.  This may sound somewhat limiting, but the fact is they represent a much better overall deal for you.  For instance, a card might offer as much as 5% cash back on gasoline purchases from January through March, then switch to groceries for April-June.  In addition, they typically offer a flat 1% on everything else.

Pretty sweet, I say.   If I spend $80 at the supermarket, that’s $4 refunded to me by my card. That’s enough to cover my box of protein bars. Works for me.

If you’ve read this far, you probably have a question similar to the following:  OK, the cash-back is nice and all, but it defeats the purpose to run up a big balance that charges 20% interest or maybe more. You can’t use a credit card to buy necessities!  That’s a sure-fire way to bankruptcy, isn’t it?

Am I warm?  Well, the answer is that running up a balance would be utterly stupid and would, indeed, nullify the advantage of these comparatively small cash-back offers.  But who said anything about running up a balance?

Bear in mind that these purchase examples are things you would buy anyway.  Most folks need gas for a car, or a motorcycle, or whatever… and EVERYONE needs to eat. The trick is simply to use the appropriate card when the items are bought, then have the basic discipline to pay the account in full during the grace period rather than allow the charges to accumulate.

Shazam!  Free money.

Of course, I’m guilty of glossing over the part about paying the balance in full each month.  For many, many people, there is NOTHING SIMPLE about paying off several hundred dollars in one click, swipe, or written check.  But for this to work for you, it MUST be done without compromise.  Every single month.

Think you can take advantage of this simple strategy without going into debt that lasts longer than a couple of weeks?  Great!  If you can, here are the steps to make things easier to get going:

1. Do some research into different card offers to see which offer what rewards in specific categories.  Ideally, you’d like to get access to as many 5% offers as possible for different types of purchases. (Note:  At this writing, American Express is offering a card with a short-term 6% cash-back on groceries, but the card carries an annual fee and some other disadvantages.  Be sure you know exactly what is required and included before you apply).

2. Try to end up with three cards – one you can use for groceries, one for gas, and a third for eating out – restaurants are a common category for cash-back promos but, of course, don’t over-use this to the point of spending more to eat than makes sense.  Be smart.  You may not find 5% cash-back cards for all three categories, and if you don’t, 3% is still decent.  Also, a fourth card for miscellaneous purchases with a steady cash-back percentage is nice to have available.  But again, discipline in its use is everything.  Only buy necessities you would have bought anyway.

3. Budget yourself so that you are not spending more on these various categories than you otherwise would, especially if you get a good restaurant cash-back deal.  Not to beat a deceased pony, but it makes zero sense to defeat the benefit of this strategy by over-spending.

4. Look up each account you obtain and note the monthly payment due date.  Prepare to pay off your monthly balances at least a week ahead of this deadline.  Don’t cut it close.

5. Stay on top of every account constantly.  One practice I do that helps me stay organized is to go into my online banking on my personal bank account and update the amount to be sent to each credit card issuer as I make the purchases.  I don’t suggest you rely on remembering to make these payments, or try to get cute in timing them.  Enter them well ahead of time and update the growing amounts until those payments are automatically paid on the dates you pre-set (remember, a week ahead of the actual payment due dates).

6. Have fun with your cash-back by putting $25 increments into gift cards for whatever.  Or better yet, if the card allows (most do), use the cash-back as a credit right back into your account.  This isn’t as fun, but makes better use of the funds you gained by using the cards.  It’s kinda cool to charge $238 worth of gas and pay only $213 because the other $25 came from rewards.  Over time, these savings really do add up to be significant.  To truly appreciate and enjoy the bounty, track these numbers and the overall return.

Credit cards are great if you use them smartly, and incredibly harmful if you don’t.  Be among the former.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part or all of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Profitability is NEVER guaranteed.  Invest at your own risk.

The real skinny on debt elimination

By BOB CUNNINGHAM

When it comes to strategies for accelerating the paying off of unsecured debt, I’ve seen a bunch of them.  Everything from straight-forward approaches based on math to “snowball” strategies that focus on the emotional gains that can be made by lower balances, depending on where you look.

So I figured it was time to clarify and summarize.

When we’re talking about debt elimination, we are referring primarily to unsecured debt.  Sure, a strategy for paying off all your bills, including your mortgage, has merit in the big scheme of things… but there is such a thing as “good debt.”  And in most cases, your mortgage qualifies as good debt.

When you have a large balance on a credit card, you’re at a distinct disadvantage because the rates, which can be as high at 27%, put you in the unenviable position of paying more in interest than you are towards the debt itself.  For instance, if you owe $2,000 on a credit card at 20% interest, the total interest for a year (assuming no added charges) would be $400.  That figure, divided by 12, would come out to about $33 per month in interest.

So assuming your credit card company requires a $50 minimum monthly payment, at the start of the aforementioned 12 months your payment would have $33 going to interest – pure profit for the credit card company – and only $17 toward reducing your debt.  So entering Month No. 2, your balance owed would not be $1,950 (after you paid $50 toward the $2,000 original balance) but instead would be $1,983.  If you were to attempt to pay off this account solely by making the minimum payment every month, you would need about 5 1/2 years and would fork over more than $3,300 for the right to borrow $2K – a 65% over-payment strictly because of interest.

Paying that way makes no sense, unless you prefer to grossly overpay for things, in which case I just put my 16-year-old Honda with 150K miles up for sale.  Fifteen grand, and it’s all yours.

No wonder Capital One can afford to pay Samuel L. Jackson and Jennifer Garner to hawk their cards.

Seriously, the need to pay off this debt is… well… serious.  So how best to do it?

If you have just one debt, say, the card balance just described above, you simply add every available extra dollar you can muster to that $50 payment – because every dollar you add will go directly toward the balance –  and pay the thing off much more quickly. Simple enough.

But what if you’re like most debt-challenged folks – with six different debts, ranging from a few hundred dollars to several thousand, each with unique APRs and minimum payments due.  What then?

Unlike many so-called finance experts, I will level with you and explain here that there is more than one responsible answer to this question.  But none are overly complicated.  And NONE require the help of a credit counseling service. You can do this completely on your own… trust me.  I’ve done it, long before I became the all-knowing wizard I am today (kidding, of course).

Here is the process, broken down into manageable steps:

1. List all your debts with the following information:  Creditor/phone number/account number, balance owed, minimum payment due, the day each month that the minimum payment is due, interest rate.

2. For any creditors who are charging you more than 12% interest, call their customer service departments and request a drop in your rate.  Explain that you have multiple debts, are making a concerted effort to reduce/eliminate your debt, and that their understanding and assistance would be appreciated. Point out (if it’s true) that you’ve made your payments on time and kept your account in good standing.  If the first rep you speak with indicates that he/she cannot help you, ask to speak to a supervisor.  If after speaking to management, you cannot get them to agree to a reduced rate, inform them that you will be transferring the balance to another card immediately and will never again use their card or services.  Be polite, but firm in letting them know that there is plenty of competition out there who will appreciate your business at a more competitive rate.  That often is the kicker to getting the company to agree to help.  And remember, even a 2% reduction in rate is better than nothing.  Don’t be greedy – just ask that they reduce it as much as possible. (some companies have been known to eliminate interest altogether for debtors in real trouble, but that is the exception rather than a rule).

3. Figure a year’s worth of interest on each debt by multiplying the balance owed and the interest rate.  Then take that figure and divide it into the minimum monthly payment amount.  Jot down the percentage you get. Why are we doing this?  Because we want to know which minimum payments give you the biggest bang for your buck each month, regardless of balance.

4. Now do some rankings – three lists, to be exact.  On List #1, rank your debts from lowest balances to highest.  On List #2, rank your debts from highest APR to lowest, and on List #3, rank the percentages you figured in No. 3 above in order from highest percentage going toward interest to lowest.

5. Now scan the three lists you just created.  Is there a creditor that appears to rank near the top on all three lists?  If so, that will be your first priority debt.  If it appears that two or more creditors are scattered among the top with no clear “winner,” you can either create a quick points system to rank them separately (only if you’re a numbers nut like me), or you can just continue reading here…

6. You now have a decision to make – how are you going to prioritize your debts, for the order you will focus on each one at the expense of the others. As I said early on, there is not just one answer here – because I like to incorporate the human element into this.  We are, after all, humans and not machines and we want realistic solutions.  If you are the type who needs positive reinforcement as often as possible, and truly enjoys the sense of accomplishment, go after the debt with the lowest balance first and use List #1 as your priority list. If you are mega-frugal and want to save as many pennies as well as dollars as possible, pick the debt with the highest APR first and use List #2.  I don’t recommend using List #3 exclusively – putting that together was just an extra tool for us.

7. Once you’ve decided on which list you will utilize, the remaining steps are these:  1) Add all extra funds to be dedicated toward debt elimination to the minimum payment on the first (priority) debt on your chosen list, and pay it ASAP.  Make the minimum required payment on all other debts ASAP (no later, obviously, than by the due date); 2) Do this each month until the priority debt is paid in full, then take the total payment amount you’ve been applying to the first debt and add it to the minimum payment on the second debt, and send that amount in to the second debt – the new priority debt – until it is paid off; 3) Continue taking the “snowballing” payment amount and adding to the minimum payment of the next debt on the list, until all your unsecured debt is history.

As you progress, the process rapidly accelerates as you dedicate the same amount of money monthly towards your total debt throughout.  DO NOT be tempted to decrease the payment amount at any time.

Nice!  Very cool accomplishment, that few folks achieve once they get in too deep.   You should treat yourself to an unscheduled nap in your favorite hammock.  WARNING!  Do NOT celebrate any part of this process by taking 14 friends out to a fancy dinner and putting the bill on one of your cards.  Think I’m joking?  You’d be surprised.

8. OK, last item is to put your cards where you will not be tempted to use them again. Do not destroy the cards, and do not cancel or close your accounts. Doing the latter hurts your credit rating, and eventually I want to show you how the savvy use of credit cards can add money to your assets column.  If you lack the discipline to avoid using them right after having paid them off, put them in a can with water and freeze the can.  That makes it a big hassle to access them, and improves your chances of thinking twice before making a purchase you will later regret.

Eventually, you will be thawing them out, but not for a little while yet.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part or all of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Profitability is NEVER guaranteed.  Invest at your own risk.

Pay off debt or save? A quandary that is deceptively complicated

By BOB CUNNINGHAM

Another personal finance blog’s post on this subject caught my attention recently, and it got me to thinking that the question of whether to pay off debt as soon as possible, or maximize saving and investing, must be among the most-asked by Americans interested in smart money management.

The easy answer is to do both – after all, especially in the world of finance, how can diversification be a bad thing, right?  And the truth is, for most folks, paying off some debt and saving some money, too, probably IS prudent.

But there are factors that many gurus don’t properly consider, especially those who happen to come down particularly hard on either side of the aisle.

In the get-rid-of-that-nasty-debt-at-all-costs camp, the reasoning for paying off a 23% APR credit card ASAP is difficult to assail.  It’s sort of like an instant 23% return on your money… yeah, sort of.  Certainly, being able to ratchet that balance down rapidly is beneficial – a $120 minimum payment on $5,000 of credit card debt at 23% nets only about $24 going to principal, the other $96 pure interest profit for the company which issued the plastic.  That’s why you can end up paying nearly $20,000 to erase that debt if “you go the distance,” and just pay the minimum required each month.

But whenever you add money to the minimum, you have to figure the lost opportunity cost of not having that cash invested in a compounding account instead.  In other words, the interest goes both ways.  True, that performing asset is likely to fall way short of a 23% Rate Of Return, but in getting the money into the account earlier, you reap the rewards of more interest accrued long-term because of the magic of compounding.

The invest-as-much-as-you-can-and-don’t-worry-so-much-about-the-debt crowd, meanwhile, conveniently tends to overlook the lack of liquidity in most of the alleged best investments.  Want to build up your 401K and then use some of those funds to pay off that credit card?  Forget it.  Unless you’re turning 59 1/2 and are prepared to quit your job, it’s unlikely that will be an option for you.  And borrowing against your 401K generally defeats the purpose.

Also, don’t forget you will be paying taxes on your accrued savings when you finally do access it.  With the beefed up credit card payments, it’s after-tax dollars already so you get the full bang of your bucks toward eliminating principal.

I know… I haven’t really answered the question of which is wiser.  Well, here are some basic numbers using the following scenario:  An individual we will call Titus (why not?) is faced with a choice.  He makes $3,000 per month gross salary, has no savings yet, and owes $5,000 on a credit card at 20% interest with a minimum required monthly payment of $100.  His 401K at work offers a 50% match on up to 5% of his gross income, and is returning an average of 7.5% annually (figure 10% minus the typically exorbitant 2.5% of fees).  Lastly, Titus has determined he has $300 per month extra to dedicate either to savings or debt elimination.

If Titus opts to go after his credit card debt, at $400 per month ($300 extra plus the $100 minimum required payment), he will have his $5K debt paid off in about 15 months, after which he plans to put $300 monthly toward his 401K and improve his current standard of living with the $100 extra per month for discretionary spending.  After five years from the start of accelerating the pay-down of his debt, Titus has about $21,000 in his 401K with no debt. He achieved this with his $300 plus $75 from the company ($3,000 salary times 5% = $150 times 50% is $75), for 45 months. He went from minus $5,000 to plus $21,000.  Pretty sweet.

If there had been no company match, incidentally, he would have a little less than $17K.

On the other hand, if Titus chose to pay the $100 minimum on his debt and instead put the $300 toward his $401K, along with the $75 match, it would amount to about $27,000 in five years minus the $3,800 he would still owe on the card for a net gain of roughly $23,000.  Sans a company match, the net gain would be about $18K.

But before you key on $23K being more than $21K, one other factor needs to be considered:  Remember that Titus would not have the option of using the 401K money to pay off the $3,800 credit card balance, so that debt would continue charging 20% interest annually.  Chances are that this ongoing liability eats into (or completely decimates) what is otherwise a relatively small advantage for going the 401K route.

In the end, it is the company match of the 401K and the interest we credited in this example that pushed the pendulum towards not accelerating the pay-off of the credit card initially.  But what if we endured a down market during this five years and the return was only 3%?  Wouldn’t that make paying off the debt come out significantly better?  Yep.

Ah, and remember that Titus took $100 a month after the debt elimination and began using it as extra spending money.  He improved his budget flexibility, and that’s a tangible gain too.  I incorporated this into the example because it’s my opinion a large percentage of folks, faced with having $400 to “play with” after eliminating a debt, would choose to have fun with a portion of it.

Ultimately, in my opinion, a credit card debt at 20% interest should be your first and only priority because it is definitive, non-taxed progress.  Opting to contribute to the 401K up until the company match is maxed and then turning your attention to the credit card debt certainly is logical – you’ll never get a truly dissenting vote from me even if the math leans otherwise.

But ignoring the available acceleration of paying off big debt in order to pad your retirement account contributions is essentially leaping over dollars for quarters.

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DISCLAIMER:  This post represents the author’s opinion only, sometimes based on and supported by cited numbers and sometimes not. In no way should any part or all of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific strategy or investment.  Profitability is NEVER guaranteed.  Invest at your own risk.