Archive for the 'Debt Repayment' Category

17
Mar

Would You Refinance Your Debt at 7% Interest?

By David 0 Comments
Categories: Debt Repayment and Scenario

I believe I have the golden opportunity, here. For once, my financial aid finally went through for school, and while I wasn’t approved for “free money” like grants or need-based scholarships, I was approved for federal stafford loans. Not only does this mean I can go back to school in summer, but it also means I will have an extra $3000-8000 to work with, if I so choose. Here’s the deal; most of that is in unsubsidized stafford loans. This means the loans sit there, gaining interest, until I enter repayment. This means a higher initial principal, but I don’t have to worry about high interest rates. However, when you compare that to credit cards, astronomical rates, and generally feeling like a ruined man, I think there is only one path forward.

I’m going to pay off my credit card debt with student loans.

Here’s my train of thought. I pay $300 per month in credit card minimums, normally about $500-600 per month as I can. At this rate, it might only take me a year to finish paying everything off, assuming I can find ways to add to that snowball. So over a year, I’m not really paying a ton in interest rates if I continue this method, but I’m still paying about an extra $1k in interest over that period. And as I learned when I lost my job, nothing is permanent. At any moment something could sweep by and ruin my whole plan. If that happens, I don’t want to be stuck with high interest rates. Enter the student loan. If I still put $500 or more per month toward that loan, it will take me between 11-13 months to pay off the debt, only a few less than my current method. However, the money I pay each month goes largely to principal, and if something happens to wreck my plan (losing a job), I’m not even in repayment yet! Not only will I be able to pay off this loan, but it should free me up to be able to pay off more than this student loan by the time I graduate. Meaning I graduate owing less in student loans than I already do right now.

I think it’s the smart move to make. If my future was certain, I’d just continue my current plan and get it paid off. However, I know with my job comes a direct pay increase once I get my degree, so I can count on making more money when I actually enter repayment. If something does go wrong, it’s effectively like hitting a pause button; I’m no worse off for it. With regular credit cards, they are not too keen on giving you free money. The best case scenario is that I pay off my debt even earlier, and the worst case scenario is that I freeze my debt where it currently is.

Some side benefits are peace of mind, likely a giant leap in credit score, the knowledge that if something happens to my situation I’ll be ok, and the ability to start putting money towards solid investments greater than 7% return (peer to peer lending comes to mind). I can’t think of any downside to this plan. Granted, I technically can’t use student loans to cover debt repayment, but I can use them for food and rent, and then rebudget that money to pay off the credit cards. The net result is that by August, I will have no debt at an interest rate above 6.8%! You can’t touch that type of refinancing with a ten-foot sub-prime pole!

Can anyone foresee any problems with this arrangement?

11
Aug

Backbone Growth

By David 2 Comments
Categories: Attitude Adjustment and Debt Repayment

Note: This post has been featured in the 100th edition of the Carnival of Debt Reduction, hosted by No Credit Needed. Please check out this carnival, as it includes a ton of good articles!

One of the major things I have noticed during my journey towards a debt-free lifestyle is how little of a backbone I used to have! And sadly, still do in some areas. These are things that even before creating a mindset to become debt free, I knew were signs of weakness and were my own fault. Some come down to laziness and the strange idea I could wake up tomorrow a millionaire and all my problems would go away. However, they all come back to the root issue that when it comes to my wallet, I had no backbone.

Here are some examples of my spineless financial behavior:

  1. While activating the credit cards that led to my demise, I would agree to sign up to the so called “Credit Protector” and “Identity Manager” programs these services offered. Many times, these programs would account to $15.00 per month or more! Just to get the people off the phone, I’d agree to the first free month. However, I would let these charges ride for months, even years due to laziness, and guilt that I was already paying hundreds in interest each month, what is $20 more. I estimate I’ve lost several thousand dollars due to this. All it would have taken is a firm “no” and I might be farther along my path to debt freedom.
  2. Something I know I will be buying down the road is on sale today, so I flash the plastic and it’s mine. Sounds good, but after a year I’m still paying for that shirt, and have probably already doubled the non-sale price in my interest payments! Yes, it was on sale, and if I had the money in my budget it might have been smart, but I wound up getting a worse deal. Do this with technology, and it not only doubles in total cost, but you also get an inferior model compared to if you had saved and waited. All it would have taken is a little more backbone to say no to my inner desires and bad mathematics. This is the primary reason for 90% of my current debt. I’m still paying off a laptop I bought 4 years ago, and sold last year for almost nothing.
  3. When the budget (what little I had) ran dry and my credit payments were going to be late, I ignored the calls from creditors. I racked up tons of late fees, and got myself into a situation where it was almost impossible to get out of the cycle of late payments. If I had answered the phone and been forthcoming that first time it happened, they could have easily helped me out, and it might have been the difference in several thousand dollars of my current debt. Not to mention my credit score might not be in the low 500s right now.
  4. For some reason, I always just “expected” to win that lottery (even though I never had tickets for it!) or get that major raise, or have a creditor magically erase my debt. Maybe the creditors would forget about the debt until I finished school and could pay them off. Because of not standing tall and really evaluating my current situation and finding a way to solve my problems, I spiraled down into a situation that actually has become nearly impossible to fix. If I had really evaluated it back then, I could have easily fixed my problems in just a few months, and would be on track right now to perhaps owning a house, or at least being free from debt.
  5. For awhile, I let my insecurities play out in terms of me having to buy cool things. I didn’t just get the cheap Ipod, I had to get the best and biggest. I didn’t just get a basic stereo system for my car, I had to get the best audiophile quality out there (ironically, I don’t even have that car anymore, but I do indeed miss that system). By not having confidence in who I am as a person, that little piece of plastic used those insecurities to make me buy more stuff. Right now, I’m finally at a place in myself where I only buy what I need to get by, and occasionally some of my long-term wants.

Of course, there are many more reasons my spine, or lack thereof, has caused a lot of my debt issues now. They always say the first step to anything in life is admitting you have a problem. I think the second step is admitting that problem is likely inside yourself! Most people skip that, and blame creditors, or fancy marketing, or whatever the villain of the day is. For me, the problem was (and still is, to some extent) inside myself. It’s my own lack of backbone that has caused me to spiral down the path of bad financial decisions.

So how do I fix it, and how can you fix it? First, stop blaming circumstances and others. While it may be partially their fault, that doesn’t help your situation. What does help your situation is to accept the blame yourself, and figure out why you do the things you do. Before you even sit down and list your debts, start an emergency fund, etc., you need to evaluate yourself. In fact, I have a weekly ritual where I check my credit report (one service that has been invaluable), check my accounts online for any strange activity, evaluate my spending and budget, and also evaluate my psychological state towards finances.

Each week I try to find one thing I had problems with in the past, write it down (or blog about it), and become determined to not behave that way again. This week is Spine Week. I’m going to call and cancel those services I still have. I’m going to try to sell the things I bought on credit long ago, and hopefully let it help pay themselves off a little bit. Moving forward, I have learned my lesson and will not slip up again.

In fact, you can do this in any area of life of which you’ve had problems! If you are religious, incorporate prayer or meditation into the process if you wish. For the area you are having a problem with, think back to the situations that got you there. Now, inside each situation, ask yourself what internal mechanism caused that to happen, rather than the external circumstances. Then, think of different ways to correct that personal flaw, and resolve to not behave that way moving forward. Find a few concrete things you can do to combat it right now (calling creditors, whatever), and write down a statement of intent that you read every day in that week claiming you have changed as a person. My statement for this week that I will read every day simply reads:

I resolve to stand up for proper financial decisions when faced with insecurity, external manipulation, or laziness, and commit to always look at the long-term picture before making any financial decision.

Just think, spending a few minutes each week meditating about yourself, in 52 weeks you will have corrected 52 internal problems! For me, being out of debt by the end of 2008 is important, but knowing I will have corrected over 75 internal flaws by then is worth even more. It’s the same idea as debt management, small incremental changes to make a very large long-term change. In a year, I will be a completely different person, but this week I only need to worry about a little backbone growth.

01
Aug

When it Makes Sense to Consolidate

By David 4 Comments
Categories: Debt Repayment and Scenario

My roommate is in a similar position to me, but without quite as much credit card debt. He is faced with about $3,000 in credit card debt, and about $14,000 left on a car note. He looked at his situation, and is really not able to put more money each month toward the credit card debt. He has enough for minimums plus maybe a little bit extra. His credit cards are around 22-24% APR, and his car note is around 7-7.5%. He has four years left on his car, and by paying minimums about a century left to pay the credit card debt off.

He has been looking into consolidation lately, and visited Wells Fargo, who denied him a consolidation loan for the credit card debt. They said to come back and refinance the car along with it, and they could probably do something. So after estimating that a 4-year refinanced note for $19,000 (to pay off cards, car, and establish an emergency fund to keep from using cards again) at 10% would be about the same monthly payment he’s already making now. While he’s taking a bit of a hit on the car portion, it enables him to eliminate all credit card debt faster than he can pying minimums. I agreed it might be good to look into, so he went to Wells Fargo again.

It didn’t go well, to make a long story short. The best they could offer is $19,000 at 22% interest for 5-6 years. Obviously he could see it made no sense at all to do this and left right away. However, when I had a chance to use some calculators, I’m actually glad they didn’t give him the deal I’d estimated. Just goes to show your head can be a bit tricky, and you should always verify a scenario using actual math.

Adding the numbers for long term cost, he will have paid $8,000 or so on those credit cards, and about $16,000 on the car, for a total of $24,000. Even if he got the consolidation at 10%, he’d still be paying about $23,500 towards his total debt. In this situation, it might not make sense at all to consolidate. Since the primary portion of his debt is lower interest, it would be better for him to keep finding other ways to pay off the credit card debt sooner. I am going to advise him to try to get his interest rates lowered (he has made good payments for awhile, so that will help his standing). Luckily, in just a month his FICO score improved about 30 points, so that can’t hurt either. I will also advise him to try to pay even $25 per month extra on his cards. If he can even pay just $25 extra per month, he’ll have it paid off in 3 years. If he can pay an extra $55/month, it would shorten it to right over 2 years, and he’ll only pay a total of around $4,200, which is a much better deal than if he were able to consolidate.

I learned a few lessons from this, which I hope will keep me from making the mistake of consolidating when it doesn’t make sense.

1. Never consolidate upwards. The fact that $14,000 at ~7.5% would be moved upwards at all is a pretty good indicator it would never work. You almost always lose money this way. While adding the car enabled him to get a loan at all, even at a low interest rate of 10%, it does not make sense. I imagine raising the rate only works when the low interest debt is a tenth or so of your total debt, or at least less than a quarter.

2. Credit Unions aren’t always the best deal. I find it absurd they didn’t see the opportunity to make interest they would not have been able to make otherwise. The minimums would have stayed the same and his credit score is improving, so there is little risk in defaulting. It would have been an easy $6,000 income for Wells Fargo. While local credit unions usually have a good reputation for really looking at the customer’s needs, it was clear the guy didn’t even have a clue here. I’m pretty sure that’s turned me off of Wells Fargo, if they can’t even understand math any high schooler could do. Granted, if the person is in financial trouble, they may be willing to sacrifice and get a higher rate for a longer term (I imagine most refinance deals are like this), but my roommate was clear that he simply wanted to be able to pay off his debt earlier. It was obvious he got some sort of standard treatment instead of someone paying attention to his debt and giving him a workable solution.

3. The raw power of extra payments. Even $15 extra per month cuts the total credit card payment term in half or more. It is clear that to pay off any debt, you should first try to put extra money into it, then try to get the rates lowered. Only when you find lower interest rates should you move money around. But anyone can come up with an extra $25 per month and be out of debt in three years, and most can find $55 for only two years. Even if you sacrifice something little, it’s totally worth that extra bit. Even $10 extra per month takes years off your repayment schedule.

So, while it’s disappointing he won’t get the easy way out (we single guys love the thought of only having to pay a single bill towards debt), at least there is a more workable solution than the credit union could offer. While it’s certainly not always fun to lower your standard of living to make extra payments to debt (it’s more fun to buy than pay for things you bought a long time ago), it certainly makes mathematical sense. Here’s hoping he can squeeze in some extra payments, and perhaps his creditors will give him a little break on his rates.

02
Jul

Debt vs. Retirement - Perspective From A Young Person

By David 0 Comments
Categories: Attitude Adjustment, Debt Repayment and Investments

Yesterday, Trent from The Simple Dollar posted a rebuttal to a comment stating that sometimes it is more appropriate to invest than pay off debt. I mostly agree. After all, if your monthly payments are $200 per month and you have $300 extra, it can decrease your debt repayment time by many years; years in which you can invest $500 or more instead of the $300. Even if the percentages are equal (return vs. debt), it at least makes psychological sense to pay off debts before investing.

However, I know in my case, I have a retirement account that I contribute to faithfully, even though I have a ton of debt. I suspect that most younger people are in a similar situation; a ton of credit card debt, about $200-300 extra per month that can be invested, and an immense hope that they’re a more savvy investor than others. Even though that sounds like trouble from the start, I will give the reasons I choose to invest and why it makes sense in a long-term perspective.

1. Employer Matching

This one is way too overlooked in calculations I see online. A friend of mine refused to start a retirement account because he “had plenty of time to worry about that”, “Social Security would help him out”, and “that’s 5% I can use to pay off my debts”. However, what he did not calculate is employer matching at 3% (as well as the fact that Social Security will never last long enough for current twenty-somethings to benefit). While I could use my contributions to pay off my debt a little faster, the fact it has employer matching and it’s in there working for me right now is literally the difference in $300,000 when I retire compared to using that money to pay off debts right now.

2.  Fixed Limits

Benefits of Roth IRA’s are well known. However, when 2007 is over and you only contributed $2,000 to your IRA, that’s $2,000 you can never put in later. In most jobs, at least in my field, salary increases over time at a rate higher than inflation. This means that my current $8,000 credit card debt may be a big chunk of my current salary, but drawn out over a decade, it will be a pretty minimal amount to what I should be making then. However, a good Roth IRA can also easily beat inflation, meaning that in looking at VALUE of your debt versus the investment, you wind up with more money at the end, taking long term inflation and salary increase into account. Missing out on maximum contributions at such an early age winds up making the difference of hundreds of thousands of dollars at retirement.

3. Learning Experience

I know for me, I read about investing all during high school, and played with a few hundred bucks to test the waters. I also lost it all (mainly due to fees). The point is, it’s difficult to learn proper investing without having your money wrapped up in it. Since opening a retirement account, I have learned how mutual funds work, how to direct your financial adviser to wait longer between buys to save on fees, how to calculate return on investment, and tons of basics about investing that books can’t really teach you. When I finally open an IRA, I will learn more about the stock market and how to predict when things are going bad, how to read the latest news on the company, how to pick long term and short term winners based on the current state of the union, etc. The earlier you start, the more wisdom you gain along the way. Once you wait a year, you will never get that year back. My aforementioned friend is just now opening a retirement account. I’m three years ahead of him in learning how to manage those funds. I will always be three years ahead of him in investing, save for some lucky break. Time is money, and starting early is always a good idea. I only wish I would have started seriously around junior high.

Basically, there are many good reasons a young person should start investing even if he or she owes a lot of debt. It heavily depends on the person’s will-power. Do they have enough will to both invest properly and pay off more than the minimum debt payments (for those debts that are higher APR than their current investment return)? Can they make the proper calculations for their specific situation and see how it plays out in the long run? Is the debt causing mental stress that requires it to be payed off sooner, at emotional expense otherwise?

Personally, I have not opened a Roth IRA and will not until my major debts are payed off. As soon as the high interest credit card debt is gone, I will fund that IRA to the limit, as time is indeed money. Right now, however, I do have an employer-matching retirement plan gaining considerable snowball effect, and calculating the difference that makes in my nest egg, I will never regret that decision. Yes, it put a bit extra time on my debt repayment, but it’s a small price to pay for the benefits that investing early has given me, both monetarily and education-wise. I have run the calculations and my Roth can wait until 2009 with not too much loss on my future retirement, at least compared to the anxiety the debt is causing me right now. Nor would I be able to fund it fully with my current monthly payments.

The true answer is never clear-cut, and I’ve come to find it’s almost never purely mathematical. I think the benefits to investing at an early age easily transcends the obvious mathematical benefit to early debt repayment. For those of us who expect drastic salary increases due to years of experience and getting a degree, it may make more sense to not worry too much about drastic debt repayment measures. For me, it’s a challenge and that forces me to take some frugal steps. But I think for most people there is a happy medium in which you can both repay debt and invest intelligently.

08
Jun

Finding The Joy In Frugality

By David 9 Comments
Categories: Attitude Adjustment and Debt Repayment

Though it is still quite early in my progress to becoming debt free, it has already been a hectic ride! It has been little more than a week, and already my life has been full of making calls to creditors, finding tools to help me budget and plan, cancelling services I don’t need (or can find a free substitute for), and trying to squeeze every last nickel out of my budget. And yet, completely contrary to my initial assumption about debt management, it is actually fun!

Despite how fun it is to save, I know that to make this a permanent lifestyle change, my attitude about finances has to shift. To some degree, it is about growing up. As a child, I was shown that money brings gratification. I would browse the toy aisle, knowing that just a few small bills was enough to get me the toy I so desperately wanted. As a teenager, I knew that money allowed for me to go on dates, and watch movies, and go on trips. As a college student, money is what got me “good” food, nice road trips, cool electronic equipment, and new books instead of used ones. All throughout my childhood and adolescent years, money was equated with gratification.

The problem is that money alone cannot gratify completely. It’s a hackneyed statement for sure, but it is so true. Nobody would be in such terrible debt if a $500 credit card could truly bring happiness or comfort into our lives. So we spend more and sometimes even justify it by putting legitimate needs on yet even more credit, but the conclusion is always a pile of bills and more stress. The vicious cycle continues, forcing us deeper and deeper into the hole. Now that I’m on the “other side”, or at least in the process of switching to the other side, I see an even greater happiness than acquiring stuff: living without being overshadowed by debt.

I never imagined that trying to live cheaply would be joyful. Nor will I fool myself into thinking it’s all peaches and sunshine from here on out! But even as I have started cooking for myself, selling things on Craigslist, cancelling subscriptions, moving my hosting server to someone cheaper, and logging every penny I let go, I have definitely found a joy in the process! There is such a freedom in being debt-free, even if it means having less right now.

Even though it sounds like an incongruity, it is something that I have heard often from the pulpit. Proverbs 22:7 alone speaks volumes, even if you don’t particularly believe the teachings of Christ (or his church) on money. It’s a simple truth; we can either be lenders or borrowers, and there is no question which is the position of both happiness and success. Today, borrowing is equated to credit, and lending is equated to investments, but the truth still rings clearly.

When I can cook a $6 meal that will last me five nights, that is just awesome. That amounts to about $6-7 per night I am saving by not ordering take-out, and the food tastes good! When it is only halfway through my pay period, my bills are paid, and I still have money in my account, it makes me feel good! Knowing that by doing this, I will pay off my credit in a little over a year, saving me thousands of dollars in interest, I am happy. When I know that by the end of next year, creditors will no longer own me, I am happy. When I find a way to cut my cell phone bill in half, saving me an extra $20 or so per month, that makes me happy. When I turn $300 in overdraft fees into $300 towards credit card balances, that makes me very happy. After being enslaved by my own wallet for so long, every small success makes me feel like I am finally beating my creditors in the game of personal finance.

There is a reason nobody sees debt victims going around hi-fiving each other. When you are buried under a mountain of debt, you feel depressed and feel like hiding it from the world. You look longingly at things like the lottery, or high risk investments, because it feels like something big is the only thing that can fix the situation. The truth is that the little, purposeful improvements are the real fix. Even though it is not easy to change a lifestyle, the joy it gives you (and knowing the joy to be found when it’s over), makes the whole process worth it! And what is life, if we cannot have joy and pass it along to others?

03
Jun

Where I Am

By David 2 Comments
Categories: Credit Cards and Debt Repayment

Just like the importance of history to know where you’re going, you also have to know and be honest about where you are. I was actually surprised at how little I am bad off. The payments hit me hard every month, and I was expecting at least $10k in credit card debt. The fact that I don’t know the exact number is really indicative of why I’m having problems in the first place. At any rate, I’m now very motivated by the fact that since it isn’t even as bad as I thought, I can do this.

Basically, my credit card debt totals $8,486.40, with an interest rate range from 19.99% to 32.24%. My car note is around $10,000 left, but at an interest rate of 4.9%, since it’s under my father’s name. I’ll be working on credit cards first, then student loans, paying the minimum on my car note, since it will be the least interest rate the whole way. I do not have my student loans consolidated, and do not know the total amount, but I plan by the end of this year to have them both consolidated and have a plan to repay them quickly. As I said before, I do not have to worry about them quite yet, as I’m back in school and no longer need to make payments each month. And oh yeah, not consolidating them while I was in school initially was a bad mistake.

As far as good things I’ve done along the way, I have started donating to a retirement IRA, at 3% employer matched funds. The balance is up to about $6,200 right now, which means around $60k in retirement dollars, at easy levels of return. That was a good decision. Even though that 3% would have helped a little towards my debt, an extra $20/month is not worth missing out on getting an extra $20 and starting a decent retirement cache, especially at a young enough age to really make the interest work for me down the road.

The bad things I’ve done are mostly from being stupid, lazy, or procrastinating. The main one being that as I’ve analyzed my current state, I see that fees comprise about 28% of my total income. Meaning that because of overdrafts, late fees, NSF fees, checking account fees, and so on, I have wasted several hundred dollars every month. Right now, I don’t need to focus on making extra payments to the cards, I need to focus on making the minimum payments on time, to get my budget in order. To do that, I need to cut spending, and also from analyzing my payments I can see that eating out takes a big chunk of my money.

My goal for June is to start cooking more at home, and eat out rarely or never. I need to do whatever it takes to make my minimum payments on time. I have already enrolled in auto-payment plans with my credit cards, but in order to make that work I need to cut spending so I don’t overdraft. If I can have one month with no extraneous fees, that will be a giant step forward into figuring out how I even can budget to get rid of this debt. From calculation, it looks as if I will be able to initially put $300 extra toward repayment.

Each month I will make a new post, as well as update my debt ledger. I will also blog about the tools I’m using to accomplish this, along the way.

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