Posts Tagged ‘debt reduction’
Attacking Your Debt: What’s the Best Approach?
You may know the feeling: You’re at the bookstore and spy a wonderful new reference book that’ll help with your art….or you’re at the clothing store to pick out an outfit for an audition, and the perfect fit is just outside of your price range.
What’s a little credit card debt, right? You’ll be able to pay it off later. Hopefully.
Whether you took on debt by overspending on your craft, or your job doesn’t pay enough, debt is a weight that’s hard to relieve. That said, getting rid of debt is the first step when creating the Abundance Bound mentality. According to financial site NerdWallet, the average household in the U.S. carries $15,422 in debt. Ouch. More meaningful is the fact that once people have debt, they’re likely to use credit more and more often. The flip side? 53.3% of the American population carries no debt at all.
We can’t solve the American debt problem, but we certainly can help add you to the 53% without debt, can’t we? How should you pay it down?
Much has been made in the financial press lately about how you should attack your debt. Researchers recently concluded that often what people think of as the smartest option hasn’t been the most effective way to pay down debt. Let’s look at two popular methods and review why you might want to choose the sub-optimal method to pay down your debt.
The Mathematically Sound Method To Pay Debt
If you want to take the fastest path to debt relief, and can stay on it, here’s the obvious solution: (more…)
Here’s a trick I like: round your debt (including your mortgage) to the next round number. If your minimum payment is $45 on a credit card bill and you can’t pay more toward the balance, just round the bill to $50. Sure, it isn’t much, but most people can afford a few dollars extra toward debt repayment. What feels like a small amount can add up to much quicker payoffs.
Should I pay extra on my mortgage? I’m making a little extra money right now and I’m thinking paying off my house is a good idea.
This is an intensely personal question. Certainly, less debt is always a step in the right direction, but there might be better choices to grow your net worth more quickly.
Here are a few areas to think about before tackling extra mortgage payments:
- Is your credit card debt paid down? If not, this is a greater priority. Credit card debt is more harmful to your credit score and is usually at a higher interest rate.
- Do you have an emergency fund? If not, put extra money into a savings account so that if you have financial trouble down the road, you’ll have funds available.
- Are your long term goals met? If you’re saving enough for retirement, college or other priorities, then pay down your mortgage.
A mortgage is tax deductible, low interest debt in most cases. Because money paid into a mortgage can’t be used for other goals, I usually look toward other options before paying it down.
Interest rates are low. Most of the time it’s wise to ignore anyone who tells you “you really need to….”, but believe me, you should check the interest rates of all your debt before interest rates rise.
…and when are interest rates going to rise? That’s the problem; I don’t know. Therefore, I recommend you do it right now.
Before We Begin
Make sure you read my post from two weeks ago: How to Take Advantage of Low Interest Rates. It lays out the simple steps to check your credit. You don’t want any surprises if you end up filling out applications to lower your interest rate.
Today, we’ll focus on three areas: your home, auto and credit cards.
How to Refinance Your Home
1) Compare rates through several lenders. This is done easily through a mortgage broker or an online comparison site. While many lenders appear to have different rates, you’ll find those with lower rates generally have higher fees. On the inverse, those with higher rates often have lower refinance costs. Generally, I prefer lower cost mortgages (which often means a slightly higher rate).
2) Gather information about each type of mortgage. Home lenders offer two basic types of mortgages: fixed or adjustable. While there are many iterations of each type, here are some you’ll see regularly during your search:
a) A basic fixed rate mortgage comes in a 15-year and 30-year variety. Usually, a 15-year mortgage will have a slightly lower interest rate than a 30-year option.
b) Adjustable rate mortgages often keep the rate stable for 1, 3, 5, or 7 years, before changing. Usually the rate will change annually after the short fixed period.
Ah, late January… a time of colder temperatures, snuggling around a warm fireplace…and December’s credit card bill waiting like a bomb in your mailbox.
Did you overspend during the holiday season? If not, many people you know made up for you. According to this Bloomberg Businessweek article, consumer debt rose more in November of last year than it had in 10 years.
Although analysts call this a “good sign” for the economy, doesn’t this statistic frighten you? Weren’t we just talking recently about many people losing their homes because of too much debt? People in the arts, especially, shouldn’t take on debt they can’t afford. In many cases, our income streams bounce around enough that we shouldn’t be spending next month’s paycheck that may never arrive.
But, if you overspent over the holiday season, there’s nothing to do now but clean up the mess. It won’t be easy, but with a good plan and the right tools, you’ll be back on your financial feet in no time. Here are my four steps to curing your credit card hangover: (more…)
Remember the three little pigs? Sure you do. The moral of the nursery rhyme was simple: build your house right the first time and it won’t be blown over.
In the arts, we’ve all heard this advice before. It’s the quality of our work that brings people back. We’ve watched suspiciously as performers with gimmicks shoot to the heights of fame for a few brief moments; but it’s only quality work that helps ensure a long, prosperous career.
Or in other words, using three little pigs speak: If you’re building your house, make it brick.
I’ve often heard financial planning referred to by professionals as a house. A foundation laid on the sandy ground of debt and scattered income is bound to fall later. For the average person, building consistent, dependable income and paying down debt are jobs number one and two.
But we aren’t average, are we? (more…)
I was out to dinner the other night with some friends and we were laughing about the questions strangers will ask as soon as they find out your profession. One friend who is a doctor – always gets a medical question. Our lawyer girlfriend is often asked whether certain (sometimes dubious) behavior is legal. Me? When I tell folks about Abundance Bound I can pretty much count on being asked for “just a few simple tips” on how to save money.
And truthfully – even though I’ve been asked in some strange places (waiting for a taxi at the airport, during the intermission at the opera, and even on line for the restroom…) this might be my favorite question! There are so many ways to save. Everyone’s situation is different, which can make it difficult to hone on in a few generic tips. Still, here are some ideas that help many people:
If you’re looking to save a few dollars:
- Focus on the grocery store. Between better coupon clipping, being conscious about where you shop, paying attention to sales, and eating out less, you can save a significant amount of cash. In 2010 I cut $2400 off of my family grocery total for the year just by changing the store where I purchase all of our produce!
- Shut off lights and sprinklers, and unplug utilities when you aren’t using them. Utility companies offer budget plans, which allow you to pay the same amount every month.
- Bike or walk if possible instead of driving. Do you know that over 44 percent of all car rides are less than two miles? As gas prices rise it bites more and more into the budget. Are there places you could get to easily without taking the car? If so, you’ll receive a triple benefit; first, you’ll save money on gasoline, but you’ll also feel great about helping the environment AND getting out exercising. (more…)
I pulled my car into a garage to have the oil changed this week. I realized during this process how closely some of these financial topics mirror auto repair jargon. Sometimes it takes all of my acting experience to pretend I know what a mechanic means when he’s explaining the difference between types of oil. I’m terrified he’ll recognize me as the not-sure-where-the-oil-goes person I am, and suddenly the cost of my car repair magically skyrockets.
As I’m smart enough to realize that there are auto-related facts I must know to keep my costs down, it’s similar with some financial concepts. One number may save you more money than any other in your financial life. It’s called a FICO score. This number tells lenders how reliable you are with payments to debt. People with high credit scores are offered lower interest rates to borrow. They’re also often given better repayment terms.
Knowing your score became more important than ever a couple months ago when Bank of America changed their fee structure. (more…)
Owwww!!! You spend and I suffer???
CONGRESS appears to be nearing a fight about debt. I don’t want this to be a political discussion, but often current events can help us look at our own financial picture more objectively. Some members of Congress assert that they will not allow the United States debt ceiling to rise. Others, recognizing the huge gulf between the amount of money available and the amount that needs to be cut in order to balance the budget, seem willing to talk about cuts but want a more reasoned approach. However it ends, this fight is long overdue. Imagine if you managed your financial house this way, constantly adding new debt without a plan to repay it?
Long time readers of this newsletter know that I’m on a mission to free the creative community from the pain and stress of out of control debt. I’ve watched more people’s dreams crumble under the weight of debt than from stock market declines or rising health care costs. Debt can bring a person to her knees quickly. Just one more credit card can be the tipping point between financial solvency and ruin.
But what happens when you must take on debt? What if there is no other way?