September 9th, 2008 — Debt, Personal Finance, bad debt, credit cards, credit score, good debt
Millions of Americans have found out this year that they are in dire financial straits and this came as a shock to most. Whether it’s a new variable rate on a mortgage, higher gas prices or just the higher cost of living, many of us are not as financially secure as we would like to be. So, what can we do to get back on track? Here are some hints to get you started.
1. Stop overspending.
This is a no-brainer, but many of us really don’t realize how much money we spend every month. Take a hard look at your budget and get serious about getting rid of non-essential spending. It may take a little time, but you can train yourself to follow a decent budget that doesn’t require scrimping.
This is the simplest way to get back into a secure place financially. Whether it’s from a second job, a raise or a new business venture, it is vital right now to have more than one stream of income. If necessary, think about leveraging some debt to open a new stream, such as with investment property since rentals are very hot right now.
3. Pay down those credit cards.
We’re not advocating consolidation loans, especially since they commonly require home equity and right now, that is not a wise decision. However, by paying a little extra each month, you can greatly reduce the overall amount that you owe on your cards. Whenever you have some extra cash, use it to get those balances back to a more manageable level.
4. Stop using credit cards as often.
Adopt the mindset of “If I can’t pay cash for it, I don’t need it,” with most of your purchases. Don’t close those accounts, you’ll need them to keep your credit rating intact, but you don’t need to use them as often. Granted, in emergencies, they are necessary, but you can greatly reduce your debt if you stop using them for frivolous items that you really don’t need.
5. Downsize if necessary.
If you have been living beyond your means, wringing your hands about it won’t do much good. If you are in a financial bind, the time to act is right now, before it gets worse. There is no shame in getting control of your spending and living within your means. It can be tough at first, but you will be able to get back on track towards saving money and having more financial freedom.
6. Strip away the non-necessities.
What is more important – cable or electricity? If you are in the midst of a serious financial situation and you can’t pay your bills, it is time to start doing away with everything that you don’t really need. It may be just until you get back on your feet, but by learning smart money management, you’ll be able to reorganize your priorities and start spending wisely.
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September 1st, 2008 — Banking, Budget, Financial Security, Goal, Long Term, Money, Personal Finance, Wealth
Unless you’ve taken some courses on handling finances, there is a chance that you may not be aware of a few of the key points about budgeting, managing your money and planning for the future. While a lot rests on common sense, there are a few techniques that everyone can use to correctly manage their finances and stay on top of their bills. Let’s look at some of the best tips that you can put to use right now.
1. You need to pay yourself a salary.
Sounds a little odd, doesn’t it? However, setting aside a portion of your income every month that will go into savings is one of the first steps on the road to financial security. The best amount to put aside is 10% of your gross earnings each month, but this may not always be possible. Try to get as close to that number as possible and watch your savings grow!
2. Always have money in case of an emergency.
The problem with emergencies is that you never know when they will happen. From losing your job, to a car accident, to an unexpected repair bill, there are financial disasters lurking around every corner. To protect yourself, you need to create an emergency fund that will not be touched unless you have an actual emergency. We recommend putting about four months of your salary aside for this fund if possible, however, anything you can put aside for a rainy day will be useful.
3. Always have a budget.
Even if you’re not restricted on your spending, you may need to be. Everyone can benefit from a budget and chances are, you’ll end up spending less every month. Take a hard look at your regular monthly expenditures and see where there is room for improvement. You should always have at least some money left at the end of the month, so aim for this goal when making your budget.
4. Paying your bills on time really does matter.
Even if your phone company doesn’t report late payments to the credit reporting agencies, this doesn’t mean that you should be late. Paying your bills on time forms a good habit and it will last throughout your life. Work your payment dates into your budget so that you always have enough put aside to handle all of your bills. If necessary, when you get paid, add up all of your set bills and then put that money aside immediately to be used when they are due.
5. Remember the key financial equation.
The key to getting ahead is to always make sure that you are spending less than you earn. It sounds very simple, but it’s not always easy to accomplish. The amount that you charge should be figured in to this equation for the best results. By keeping your spending under control, you’ll be able to start planning for the future right now, instead of when it may be too late.
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August 7th, 2008 — Debt, Goal, Personal Finance, bad debt, credit cards, good debt
Although debt is a dirty word to many, the fact of the matter is that the vast majority of us are in debt in some way or another. No matter how hard we try, there are times when you simply need something and cannot afford to pay for it straight off. For example, school tuition is the most common form of debt, and most of us cannot afford to pay for our educations up front. Discharging debt doesn’t have to be difficult.
So, most of us are dealing with debt in some way or another, but are we managing it correctly? Let’s look at a few signs that may indicate that your debt is taking control of you, instead of the other way around.
1. You can only make the minimum payment each month, and even that is a stretch.
This is a very bad sign, especially if you have more than one credit card. Your monthly minimum payment is only a suggestion from the credit card company and usually is not enough to pay down the interest that the account racked up for the month. This means that you are caught up in a spiral that may take years to correct.
Solution: Consolidate several cards into one low interest card. Make larger monthly payments to pay down that interest as well as the actual debt.
2. You use your cards for the majority of your purchases.
Credit cards should be used really only in times of emergencies or when you would like to take advantage of the ability to get a larger ticket item and pay it off gradually. Many of us fall into the trap of using our cards for gas, groceries or things that we really don’t need. Over time, these purchases really add up.
Solution: Only use that card for a real emergency. Set up a budget for yourself and remove your cards from your wallet if you have a hard time sticking to it. Never spend more on your credit card than you can pay off in a month’s time if you had to.
3. Late payments and over balance fees occur commonly.
Once you’re trapped in a debt spiral, late payments start to become more common as you try to scrape together enough money every month to make those payments. If you’re already close to your limit (how a credit card limit is determined), a few late fees can put you over the top, and then you’re dealing with over balance fees as well. This can quickly get out of control, especially if you are only making minimum payments.
Solution: Always send your payment in 10 days before it is due. Many card companies use 9am on the morning of your due date as a time cutoff. If that day’s mail doesn’t have your payment, you will be considered late. If possible, try to pay your payments online so you don’t have to worry about it getting delayed in the mail, but watch out for surcharges that card companies will sometimes tack on for online payments.
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August 5th, 2008 — Budget, Debt, Goal, Investing, Money, Personal Finance, bad debt, credit cards, good debt
Credit card debt is a global problem that has led many to the poorhouse. However, with smart management, credit card debt can actually be a good thing. Let’s look at how to have smart credit card debt that will help your finances instead of hurt it. The premise may be a little odd to some people, but there is a way that you can use your credit cards to improve your credit rating and start investing in your future.
First, it is important to realize that credit cards are not free money – this is a problem that affects many when they get their cards for the first time. They run out and run up the balance until they are completely maxed out. The secondary problem with this is that many of these same people will make only the minimum payments on those cards. Suddenly, they are in way over their heads and it could take decades to pay off that debt, depending on how much it is.
Now, let’s take a look at how to use credit cards in the smart way:
1. Never max out your card.
Set a limit for yourself and don’t use the card limit as a guide. (How A Credit Card Limit Is Determined.) You should never have a credit card balance that is greater than three months of your current salary. Less is definitely more when it comes to credit cards. Strive to have a balance of less than $100 on most of your cards. Put aside a special card for emergencies and keep a bare minimum of debt on that card to keep it open.
2. Make monthly payments higher than the minimum amount.
This is an easy way to eat away at your debt and keep your credit rating high. Making regular payments is the best way to achieve a good credit rating, but making higher payments will also help. You should also putting a charge cap on your cards, and try to never spend more than you will be paying for the payment each month.
So many of us use our credit cards for frivolous items that will only lessen in value. If you took that same amount of money and used it to invest, you would actually start seeing a return. Suddenly, your credit cards are working for you and you’ve created a secondary income stream that can reduce your reliance on your paycheck. However, you should start small with your investments and make sure that the risks are as low as possible to avoid having this plan backfire.
4. Take advantage of low interest rates.
Look for credit cards that have a very low introductory rate and then a permanent rate that is fixed and low. These cards are much more beneficial. You need to also make sure that you make those monthly payments on time, since many cards do have an interest penalty if you are late. The lower the interest rate is, the lower your total amount of debt will be. Be sure to check out these credit card reviews at Credit Karma.
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July 31st, 2008 — Debt, Diversification, Financial Security, Income Streams, Investing, Leverage, Money, Mortgage, Personal Finance, Real Estate, good debt
Not all of us have had the luxury of spending the last 20 years to secure our financial future. Most of the time, through no fault of our own, putting aside money for retirement takes a back seat to handling emergencies or schooling for our kids, or simply the daily expenses of life. If you’re looking down the barrel of 65 and you don’t have anything put aside yet for your retirement, don’t worry. It’s never too late to start planning for your retirement. It may take a little extra work, but you can secure your financial future.
Let’s look at one of the best ways to ensure that you’re going to have a steady income coming in after you’ve retired. Millionaires across the world have used this technique for centuries to produce multiple streams of income. When you are no longer reliant on your 401K, or even your social security check, you’ve got a lot more freedom and a lot less worry.
This technique is called debt leveraging. Simply put, you got into a little debt in order to create a new stream of income. One of the easiest ways to illustrate this is through the purchase of a new second property. Let’s say that you find a great deal on a house that is in pretty decent shape. It’s in a good neighborhood and it’s close to good schools. You don’t have the money to buy it outright, but you don’t want to let this chance pass you by.
You can go to the bank to get a mortgage on that property and then start renting it out. Make sure that the monthly rent exceeds your monthly mortgage payment. Now, you’ve got a new stream of income coming in and you’re really not working for it. If you clear an extra $1500 a month, that’s an extra $18,000 a year on top of what you’re already making – and that’s just for one property.
Now, multiply that by a few properties and you’re making enough to really start planning for your retirement. However the key of good debt leverage is to make sure that you are not too heavily invested in one area. You’re going to want to change things up a bit to make sure that if something goes wrong you won’t take a big financial hint.
In addition to that rental property, you could put some of the profits you’re making or even get a new debt loan to put money into a high interest bearing account. Now, you’ve got a second stream of income coming in that will shore up your financial defenses. You can just keep perpetuating this until you are making enough every year to easily put aside quite a bit of money for your retirement. The best part is, this money will continue coming in, even after you’ve left your regular job. The key to a happy and fruitful retirement is having multiple streams of income that keep paying off, even when you’re not working.
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June 19th, 2008 — Personal Finance
Many of us have been conditioned to think that living debt free is the only way to be. While there is some truth in this statement, if you’re completely debt free and using only cash, you’re hurting your chances of getting a new home, and you may end up in a situation that requires more money than you have without any recourse. Let’s find out why paying with cash is not always the smartest idea.
1. It hurts your credit rating.
You wouldn’t think this would be the case, but you do need to have some debt if you want to build up a credit rating. In some cases, people with absolutely no debt have a credit score in the mid 600’s, while those with two or three cards that they constantly pay on will have a score in the high 700’s. What’s the difference? In order to keep your credit rating high, you are going to need to have a little debt.
We’re not saying go run up ten cards and hope for the best. What we are saying is that having one or two cards with low balances is a great way to keep your credit score high. You’ll be getting the benefit of monthly reports on your credit history and you’ll be building that score up to the point where no one will be able to turn you down for anything.
2. Emergencies happen.
No matter how proud you are of being able to pay cash for everything – what would happen if you woke up tomorrow and discovered that you have a serious brain tumor that needs to be removed right away. The cost of the surgery is more than $300k and you don’t have any insurance. You’ve been paying with cash for years and your credit rating has suffered as a result.
In this situation, you may not be able to get a loan to cover your health costs and while some hospitals will work out a payment plan, they’re going to use your credit score to determine their risks. The problem with emergencies is that you never know when they will happen and they usually cost an arm and a leg. If you don’t have a savings account that is sizeable, you are literally one step away from financial disaster.
3. You won’t be making any extra money.
You know the old saying, it takes money to make money? If you’d like to get some extra income every month, you need to find a way to take advantage of opportunities for multiple streams of income, such as investments. Debt leveraging is one of the best ways to accomplish this since you won’t be using your primary funds for the new opportunity.
While debt has a bad reputation, there are good forms that are necessary if you want to make more money and have good credit. There is such a thing as good debt and if you manage your finances properly, there is no danger in having a little debt.
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June 4th, 2008 — Financial Security, Money, Personal Finance, Standard of Living, Wealth, retirement
As millions of aging baby boomers start contemplating how they are going to survive when they’re no longer working, retirement planning has hit an all time high. Whether you’re just starting out in the workforce, or you’re staring 62 in the face and wondering where the money is going to come from, it is never too late to start planning for your retirement.
There are many ways that you can start putting money aside to help you in your later years. First, you’re going to need to figure out how much money you need every single year to survive. Take 10% of that and add it on for emergencies. You’ll need to extrapolate a bit when it comes to how long you plan to live, but most people shoot for at least 30 years of retirement money. So, take that amount per year and multiply it by 30. This is the amount that you’re going to have to put away.
Pretty frightening isn’t it? Now, take that figure and divide it by how many years you plan to continue working. This will give you an idea of how much money you need to start putting aside every year. Subtract any savings or 401K plans that you have and you’ll have the bottom line. As an example, to illustrate this process, let’s say that you need at least $45k a year to pay all of your bills and live comfortably. You’re currently 35 years old and you plan to work until you are 65. This means you’ve got 30 years to save money.
To be on the safe side, we’re going to put away enough to last 30 years. Even if you don’t live that long, you’ll have plenty put aside for managed care or other health expenses that can crop up. In total, you’re going to need to put aside $1,350,000. Add in that 10% cushion and you’re at just under $1.5 million. Ouch! You’ve got thirty more years to save, so you’re going to have to put aside $50,000 every single year to meet your goal.
(Editor’s note added after publication: As pointed out in a comment below, I left out the power of compounding interest… but I also left out taxes and inflation… If you think you could live on 45k a year now you will need to adjust for inflation as well… Personally I think I will have a hard time living on only 45K per year. I don’t think I was misleading, but perhaps I was oversimplifying.)
Unless you make an incredible amount of money, chances are you’re not going to be able to put aside this much money. Even the best 401K’s rarely perform that well. So, in order to make sure that a soup kitchen isn’t in your future, you’re going to need to look into some investments and alternative streams of income. If you don’t have a lot of free income as it is, debt leveraging may be in order.
If you’re not familiar with this term, it basically means going into debt in order to take advantage of opportunities that will create new streams of income. When managed wisely, this is a very easy way to put aside more money. The key is finding the best opportunities or stocks and being cautious at first. With proper management, debt leveraging is in an incredibly powerful tool that can be used to secure your future.
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