Budget … Getting Water from a Rock 

I don’t make enough money to save.”

This statement is probably the most powerful statement an individual can make as it relates to finances. Someone who makes a statement such as this has already waved the white flag in their quest to move forward financially.   It is a defeatist statement that gives way to the self-fulfilling prophecy that one has no power, control, or authority over their state of poverty.  Poverty is not only a physical state of being, it is also a mental state of being. What is happening in the mind, as it relates to one’s belief in their ability to change their current fiscal state for the better, is the alpha and omega of the financial battle. It may seem like getting water from a rock, but we must prepare our minds to believe that we actually have the ability to save, even if it is only $1 per week.  

There are only three actions that can be taken with your money:

  1. You can save your money.
  2. You can give your money away.
  3. You can spend your money.

The three actions above represent everything you can do with your money; it also outlines the most basic budget you can assemble.  How much you are putting into each category will determine your progress to meet your financial goals. Putting a budget together that allows you to save begins with these three actions. 

Many times the working poor (i.e. individuals who are employed but who, despite their employment, are still living in poverty) wrongfully suggest they don’t have enough to save or to give. I wish I had a dollar for the number of times I have put together a budget for a person and discovered there was actually water in that rock if we squeezed hard enough. 

Here are three basic steps you can take to put together a responsible budget:

  1. Put together an ESTIMATED budget by placing every forecasted revenue and expense on a piece of paper.
  2. Complete a 30 day spending diary where for the next 30 days you write down every revenue and expense on a piece of paper. Whether you pay a bill, go shopping, get paid, or throw a penny in a well to make a wish, you must write it down. (Try to do this exercise during a “normal” month where your expenses are not too erratic, like when traveling or during the holiday season.)
  3. Now put together an ACTUAL budget at the end of the 30 days by writing down your actual expenses, making adjustments according to what you learned about your spending patterns from the diary. Perhaps you are spending too much on take-out dinners or perhaps your “miscellaneous” spending is unnecessary. I guarantee you that when looking at your spending patterns objectively you will see some unnecessary expenditures. Bottom line, once the adjustments are made to your original spending patterns, the actual budget should include money in each of the three action categories (saving, donating and spending).

There are many ways to create a budget. You may not want to use a piece of paper for your budget, but instead feel more comfortable using an excel spreadsheet.  You may want to use the envelope method which is a popular method for visualizing and maintaining a budget (The key idea is to store the cash to meet separate categories of household expenses in separate envelopes.)

No matter which method you use, there are two criteria to look at once your budget is in place to ensure that you will maintain the budget over time.

  1. Ease/Convenience – If your budget system is not easy or convenient to use, you will be discouraged from maintaining it over a long period of time.
  2. Supported – Pull family and friends together to make sure you support each other in you budget. Husbands and wives have a natural support system. Children can be involved in the process to get early exposure to money decisions. Friends can come together to ensure the other is not spending excessively.  I have even seen churches put on “money fasts” where the congregation agrees to stay away from excessive spending for an extended period of time.

Here are a few extra tips to make sure you are doing all you can to squeeze water from that rock:  

  • Cancel the gym membership and work out from home.
  • Get a second job if possible.
  • Downgrade your cable plan or cut it off completely.
  • Cancel those online or magazine memberships that you never use.
  • Take up extreme coupon usage. Many people save HUNDREDS of dollars each month because of coupon shopping.  
  • Forgo the weekly eating out at restaurants and reserve a place in your budget that allows for inexpensive monthly entertainment.  
  • Record each debt you owe, then call your creditors and negotiate lower interest on your debt. I believe that every interest rate is negotiable. My Grandmother used to say, “A closed mouth don’t get fed!” With that in mind, make at least a few calls on each item of debt to attempt to get that interest rate lowered.  I have helped many to save as much as $200-300 per month through this measure alone. 
  • Take a close look at the due dates for your bills since paying a bill late will almost always result in a late fee and those late fees add up.

Again…budgeting is a mental exercise that starts with a positive attitude. I can teach you the mechanics of how to do it, but I can’t make you believe it will work. I hope that you will be as positive as you can about this process as you move forward and soon enough, with enough optimism, you will see that rock start to drip water!

Help! …Establishing an Emergency Fund, Part 1

Help! …Establishing an Emergency Fund, Part 1

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt - Part 1

Dealing With Debt - Part 2

Dealing With Debt - Part 3


Help! …Establishing an Emergency Fund, Part 2

The Structure of Your Emergency Fund

As I mentioned in Part 1, it is important to have six to nine months of living expenses saved, but there is a specific way that you can structure those funds to be most effective. Using the example from Part 1, if one has $2,000 of monthly living expenses, he/she would need to have a total of $18,000 to have a full emergency fund of nine months of living expenses. However, it is not important to have it ALL in cash.  Here is a breakdown of where these funds should be located.

1 Month of Living Expenses

These funds should be held in a checking account so that you have immediate access to these funds at all time.  In the above example this individual should have a minimum of $2,000 in their checking account. If your checking account has 1 month of living expenses in it, one needs to act as if they have no money in the account and never go below that level.

5 Months of Living Expenses

These funds should be held in high yield savings account and you should be able to have access to these funds within 1-3 days without penalty or fee.  In the above example, if your monthly living expenses are $2,000 one should have $10,000 in a high yield savings account (how to choose a high yield savings account is below).

3 Months of Living Expenses

These funds are not cash at all, but you have access to these funds in a line of credit through a credit card.  As stated earlier, the only time that one should be using a credit card is to improve upon his/her FICO score or in the case of emergencies. So to go along with the earlier example, if your monthly living expenses are $2,000 one should have at least $6,000 in a total line of credit in case of emergencies.

So, if there is ever an emergency in your household and your emergency fund is full, you should first tap the cash in your savings account. Secondly, if those funds become depleted you should use your line of credit to help provide for your monthly living expenses.

Selecting the Right Emergency Fund

There was an elderly man who was sitting on a bench with a dog sitting next to him. A young man walked by him and asked, “Hello Sir…does your dog bite?”

The elderly man stated, “No…my dog doesn’t bite.”

The young man walked over to the dog and reached out his hand to pet the dog. The dog snarled loudly, and bit the young man hard on his hand, causing him to bleed.

The young man grabbed his hand in shock and yelled at the elderly man, “I thought you said your dog didn’t bite!”

The elderly man casually looked at the young man and said, “That ain’t my dog.”

We always need to have the good practice of asking the right questions or risk getting bitten. This is true in finance and especially true when selecting an emergency fund.  Below is a list of basic questions that should be asked and answered before you select the bank which will hold your emergency fund. Remember that this should not cover all of your due diligence, as you must still read those long boring disclosures that are on the company website and in most sales literature.

What is the APY that I will earn in this account?

This is the amount of money that you will be earning on this account on a yearly basis. It is important to note that online, high yield savings accounts have lower overhead than traditional banks; therefore, they will probably have higher savings rates than traditional bank accounts. Also, I am a strong advocate of joining local credit unions that you are eligible to join. Credit unions don’t have the problem of having to please shareholders, so they are usually able to provide higher interest rates on their savings accounts than traditional banks as well. Also, when you join a credit union you essentially become an owner of the organization and reap the benefits accordingly, which include higher interest rates on savings, lower interest rates on loans, and more effective services. Credit unions are not concerned about profits because they are non-profit organizations; they are only concerned about you.

Is this account FDIC insured?

One of the great programs that spurred from the Great Depression of 1933 was the Federal Deposit Insurance Corporation (FDIC). The massive amounts of bank failures forced the US Government to create this corporation that alleviated the concerns of the public that they would lose their money in a bank if it failed. The FDIC is an agency of the US Government that insures deposits in banks as well as thrift institutions. They also supervise the risks associated with the banks that they have insurance and limit the negative impacts that can be caused when a bank or thrift institution fails.

The FDIC insures up to $250,000 of the following kinds of deposits.

If you have $260,000 in your emergency fund/savings account (which is a very large emergency fund for most in America) $10,000 of your funds will not be insured.  If the institution fails that his holding your funds there is a possibility that you could lose $10,000 of your funds. However, it is a pretty safe bet that the insured being held in your account are safe because the FDIC has never lost a penny of funds that it has insured.

Within the past few years because of the recession, the limits of insurance were extended from $100,000 to $250,000. There are discussions of whether or not they are going to continue to keep the levels where there are currently, so you need to make sure that you are fully abreast of the amounts of coverage being provided by the institution that you choose. There are banks and thrift institutions that are not insured by the FDIC so be mindful to look out for the FDIC logo before depositing your funds.

Is this account protected under the NCUSIF?

If you decide to choose a bank or thrift institution you need to look out for the FDIC logo.  However, if you are a part of a credit union, they have protection that works in a similar way as the FDIC. The National Credit Union Administration (NCUA) administers the National Credit Union Share Insurance Fund (NCUSIF) for the purpose of providing insurance to protect the deposits of credit union members of the insured institutions in the United States.  The NCUSIF was created in 1970 shortly after the creation of the NCUA as an independent regulator of credit unions. The beauty of the NCUSIF is that it is funded completely by participating credit unions, the tax payers have never been called to bail out a credit union, and it has the backing of the full faith and credit of the United States government for amounts of up to $250,000.

What are the fees of this account if any?

The worst thing to unexpectedly realize is that you are being charged a monthly or yearly fee in your account. I remember reading the fine print on an account and discovering that if a customer didn’t use their funds, or had a period of inactivity, the bank would begin to charge that customer a monthly maintenance fee.  Ideally, you wouldn’t have ANY activity in your emergency fund after you have fully funded it because you want to only touch that account in times of emergencies. The last thing that you would like to have happen is that you are being responsible by not touching your account and because of that you begin getting charged.  So make sure that you are aware of ALL the fees that are affiliated with that account. Inactivity fees, fees for dropping below a minimum level, withdrawal fees, and any other fees are required to be listed in the disclosure…READ IT!

What is the minimum deposit required to open this account? Must this deposit be maintained and is there a fee involved if it isn’t?

Have you ever seen an ad for a savings account that has an extremely attractive savings rate only to find out that you need to deposit $50,000 to qualify for it? The way that banks make money is to take your money and then invest it for a higher return. The more money that they get from you the more money they can earn. So it is beneficial for them to offer you a slightly higher interest rate if you deposit more money because they will earn more money from your deposit. However, the less money that you deposit, the less they earn. This is why many banks will charge a monthly fee on your account because they want to find a way to make money from you somehow. Don’t take it personally, it’s only business. You have a right to shop around for those banks that don’t have a minimum balance and don’t charge a fee if you dip below a certain level. You can find out all of this information at www.bankrate.com.

Is there a minimum amount of withdrawals that are allowed on this account per month?

There are banks that only allow a maximum amount of withdrawals per month. This is important to know, but when you are using an emergency fund, your withdrawals should be very limited. This IS NOT a checking account and as far as you are concerned, unless it is an emergency you should act as if these funds don’t exist.  So just be cognizant of the amount of withdrawals that you are allowed and take note. You never know of what type of emergency you will run across in life and you will need to have this information to help with your planning if/when that time comes.

Does this account provide 24/7 telephone banking services and do I have 24/7 access to my account online? Are these services free?

In times of an emergency you want to be able to have access to your account 24 hours of the day because emergencies don’t have a time limit. If you need to expedite the transfer of funds into your account because of a costly emergency, you don’t want to have to wait until the morning during company hours.

Can I electronically link this savings account to my checking account for transfers?

This is a level of convenience that is being provided by most banks and credit unions, but you want to be sure that your institution of choice is up to date with the times.  Having to mail a check to deposit into your savings account can be a hassle, as well as having to do the same to take funds out of your savings and insert them into your checking account. However, this blessing can also be a curse.  Don’t let the increased ease of access to your funds tempt you into dipping into your account for anything but an emergency. And, NO…a new sale at your favorite store that only lasts until midnight is NOT an emergency!

 

Help! …Establishing an Emergency Fund, Part 1

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt - Part 1

Dealing With Debt - Part 2

Dealing With Debt - Part 3


Help! …Establishing an Emergency Fund Part 1

I remember the Detroit teachers’ strike in October 2006.  I offered financial literacy courses to help them navigate those hard economic times. The strike was not even a week old when many found themselves on the brink of bankruptcy. The stories of the teachers who were forced to stand in the long lines at the Detroit Teachers’ Credit Union because they needed to take out a loan to help them pay for basic necessities, piled up.  Many were unable to support themselves without outside assistance. Many were essentially in on the job training when it came to the importance of establishing an emergency fund. There is a problem that too many of us feel it is necessary to prepare for a fire only when we smell smoke.

 

There is an Aesop’s Fable that I recalled after witnessing so many teachers in despair. It reads as follows:

 

The Ant and the Grasshopper

 

In a field one summer’s day a Grasshopper was hopping about, chirping and singing to its heart’s content.  An Ant passed by, bearing along with great toil an ear of corn he was taking to the nest.

 

“Why not come and chat with me,” said the Grasshopper, “instead of toiling and moiling in that way?”

 

“I am helping to lay up food for the winter,” said the Ant, “and recommend you to do the same.”

 

“Why bother about winter?” said the Grasshopper; we have got plenty of food at present.” But the Ant went on its way and continued its toil.  When the winter came the Grasshopper had no food and found itself dying of hunger, while it saw the ants distributing every day corn and grain from the stores they had collected in the summer. Then the Grasshopper knew…

 

I was watching CNN and saw an older gentleman being interviewed who was worth over two million dollars. That might not sound amazing to you, but it is very amazing when I learned that he had never in his life earned over $11/hour.  He made a practice of investing his money and living beneath his means. He made sure to include another monthly bill to pay himself within a savings/investment account on a monthly basis. Investing is not just for the rich, but for all income and age levels.

 

It is important to have 6-9 months of living expenses saved before you begin to invest.  Additionally, these investment savings should be placed in a high yield savings account. “High yield” refers to the interest rate on the account.  In a regular checking account known to have as low as a .35% interest rate or even 0%, you are losing money when you factor in inflation.

 

Inflation is the rise of the general level of prices in the nation related to the increase in amount of money in circulation.  The result of inflation is the loss of value of currency. Inflation is why you could by a candy bar in the 70s for nickel but have to pay as much as a dollar at many stores today.  Inflation is the reason that gas prices continue to increase, making it more expensive to drive. If you are keeping your money under the mattress, in a safe in the basement, or anywhere that is not earning interest then your money is losing value as you read this.  Putting your money into a high yield savings account will ensure that your money will earn interest that will outpace inflation thereby retain its value and even grow in real value. Good examples of high yield savings accounts are ING Direct, Emigrant Direct, and One United Bank.  However, don’t take my word for it…visit www.bankrate.com and they will provide you with a listing of savings accounts with the highest yields.

 

Many of you might be thinking, “Six to nine months of living expenses!? I can barely make enough to pay the bills that I have now…much less save for 6-9 months of living expenses!” Well, let me remind you of the wealthy mindset I’ve been talking about in the webinars.  If this is your mentality you will never reach this goal. It is funny how when we want to save to purchase items such as a car, a television, that expensive necklace for a loved one for the holidays, or any other high-priced material item, we can become disciplined. The essence of “lay away” is the store forcing consumers to become disciplined to purchase material items.  Why can’t we force ourselves to have a “lay away” of an emergency fund and act as if it is just as important as the flat screen that you have been dying to have. People are motivated to invest in things that they deem to be important, and our values as a society has placed the purchase of material items above the financial security of our households…we need to change!

 

Making Molehills from the Mountain

 

Here is a quick tip that I like to give to those individuals who feel that they are unable to accumulate 6 months worth of savings.  Let’s say that after you have done your budget, you have calculated your monthly living expenses were $2,000. This means that for you to have an emergency fund you should have $12,000 in a savings account.  This may seem like a huge mountain to climb and because it is so enormous many might lose motivation. We need to keep you motivated in this process so let’s make a practice of “making a molehills from your mountain”.

 

I actually got this idea from an episode of Sesame Street that I saw many years ago that helped me to do my homework. There was an episode where a character was doing his homework and Big Bird was helping him. The character had a HUGE pile of homework in front of him and was so frustrated because he felt as if he would never get it done. Big Bird gave him some great advice. He made the character (who I forgot his name, but he was in a tree of some sort) put all of his homework away out of sight and take on only one assignment at a time. Psychologically the character didn’t feel like it was such an overwhelming task to see and do only one assignment at a time.  After awhile he was able to complete his entire task.

 

This is how we are supposed to take on our emergency fund. Using the previous example, if your emergency fund goal is $12,000 one shouldn’t try to take on saving $12,000 all at the same time. Making a molehill from your mountain means that you might not be able to come up with $12,000, but you might be able to come up with $500.  If you can just do that 24 times in the next two years, your emergency fund will be completed. This isn’t including any tax returns that you receive, bonuses at work, or any other unexpected windfalls that you can put towards your savings. We have all seen those who put things on lay-away, schedule a payment plan to purchase that new jacket in one year, and magically they are able to find the funds to complete the purchase in four months! If you are as aggressive as some are in purchasing material items, then you will have your emergency fund completed in no time at all.

 

The less you earn, the more important it is to be mindful of your expenditures.  Less income means less financial protection to provide a cushion during financial setbacks (job loss, salary reduction, rising gas prices, or medical emergencies).  Regardless of your income or financial position, it is up to you to make the decision to begin saving towards financial independence today!

 

Stay tuned for part 2…

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt - Part 1

Dealing With Debt - Part 2

Dealing With Debt - Part 3


Dealing With Debt, Part 3

Debt is like a slippery slope--you can slide down very easily but if you want to climb back to the top it can feel almost impossible. High risk debt is such a slope. What exactly is high risk debt? It’s any debt that has an interest rate that can go sky high if you don’t pay it back.  Examples are cash advances, payday loans, monies owed to the IRS and collections, and credit card debt (the most common type and primary focus here). These debts, with their high interest rates, and their ability to give consumers a headache are the primary reason that most of America operates their households in a deficit.  It is hard to get ahead in your savings if all your capital is going to fill the pockets of your credit card company through your interest payments.  

 

Debt Elimination Strategies 

 

A common question I get when discussing paying down debt is, “should I pay off my debt completely before I start investing into my emergency fund or saving into my 401(k)?” The answer to that is, “It depends.”  Mathematically, a major wealth building principle is to make sure that interest is always working for you and not against you. If you are earning 2% in an emergency fund but paying 15% in credit card debt it makes numerical sense to pay off that credit card debt first.

 

However, if we spend all of our days paying down credit card debt and continue to see a big fat zero on the savings account we can suffer what I like to call “fiscal fatigue”. There is something about seeing growth in your savings account that gives someone motivation to keep going. 

 

So when determining whether or not to pay down your high risk debt, or to invest into your emergency fund and 401(k) the answer is probably to do a little of each.  After you have done your budget and determined that you have a $200 surplus (money left over after all expenses are paid), a 50%/25%/25% split could be appropriate. With 50% ($100) of your funds going towards your credit card debt, 25% ($50) going towards your 401(k) (or possibly more if your company matches), and 25% ($50) going towards building your emergency fund in a high yield savings account.

 

The Snowball Method

 

One of the best ways to pay down your debt is the snowball method.  This method is established by using all or the majority of your budget surplus to “attack” the small item of debt owed. After you eliminate this debt, your surplus is increased by the minimum payment of the recently eliminated smallest debt, and you use your newly enhanced budget surplus to pay down the next smallest debt owed…and so on. This method essentially allows you to build momentum as you pay, gives you motivation to continue, and forces you to organize your debt efficiently.  

 

Hopefully by now you have organized all of your debt. Fill out all of your debt in the grid below from the largest amount owed to the smallest owed:

 

Company Owed Phone Number Mailing Address Due Date Minimum Due Balance Owed Line of Credit Interest Rate
Bank 1 XXXX XXXX 1/15 $50 $4000 $5000 13%
Bank 2 XXXX XXXX 1/15 $75 $2000 $3000 7%
Bank 3 XXXX XXXX 1/15 $100 $1000 $3000 10%
Bank 4 XXXX XXXX 1/15 $50 $400 $1000 10%

 

In the snowballing method, once you have organized your debt, make sure that you have a sound budget to calculate your monthly surplus (the amount of money you have left over after all of your expenses are paid).  Your budget should include within it the minimum due of each monthly debt.  

 

Using the above example, let’s say that you have $200 left over after expenses to comprise your entire monthly surplus. You take the $200 and apply it to the LOWEST AMOUNT OWED.  In this example you would pay down “Bank 4” debt by an extra $200. After two months of paying an extra $200 per month to your Bank 4 debt you will have paid down the $400 and eliminated the Bank 4 debt.  Now you have an extra $50 free because the minimum due on the Bank 4 debt was $50 and your entire surplus increases by $50 to $250.  

 

Now you need to apply the $250 to “Bank 3” debt.  After four months of paying $250 to Bank 3 that debt will be eliminated. Your surplus increases by $100 (the minimum due on Bank 3) and you now have a total of $350 which can be applied to the debt owed to “Bank 2.”  After about 6 months the Bank 2 debt will be eliminated and you now should have a $425 surplus ($350 previous surplus + $75 minimum due on Bank 2 debt). In approximately 9 – 10 months, paying $425 towards the debt owed to “Bank 1,” and if you add the minimum due of that debt to your total surplus you will then have $475 per month to invest in other areas.  

 

If you notice Bank 1 has the highest interest rate, but is the last to be paid off completely. That’s okay-- I have found that the progress that people see and feel by actually eliminating debt, is worth more in motivation than the extra money being paid in interest. When someone can physically see a bill eliminated, it gives them a sense of accomplishment.  Now, if you feel that you would rather organize your snowball strategy and pay your debt down from highest interest rate first, that is your call. Just be aware of that “fiscal fatigue” that can come into play when you are paying the same debt down for months and still have multiple bills to be paid off. Either way, just keep in mind you are doing the best thing possible for your financial health.

 

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt - Part 1

Dealing With Debt - Part 2


Dealing With Debt, Part 2

In every webinar, there will be at least five attendees who have concerns about dealing with creditors. With over 700 million credit cards in circulation and an average credit card balance owed of $7,000, it is not hard to guess why so many people are having these concerns. Here are a few steps that you should take when negotiating your debt balance with your creditors:

 

Step One: Take a Deep Breath…RELAX!

 

Whenever I get a question about debt, it usually comes with this look of great despair. Listen, you are not the first to get into debt and it is NOT a poor reflection of your character. You have done nothing so wrong that your confidence should be shattered-- as long as you are doing what needs to be done to handle the situation.

 

Step Two: Develop the Strongest Weapon

 

The strongest weapon is a good FICO score. Those who have the highest FICO score, 750 or higher, have an easier time getting their rates reduced and annual fees waived. Make sure that you are doing an all out blitz on every step mentioned in Part 1 about improving your FICO score.

 

Step Three: Learn Your Rights

Debt collectors can usually sniff out an uninformed consumer, so make sure that you know your rights. There are a few resources that will help you find out about the most current laws that impact you, including the following:

 

  • The National Consumer Law Center – Call them at 617-542-9595 and ask for a “What You Should Know About Debt Collection” brochure. Their website is www.consumerlaw.org.
  • Your State Attorney General’s Office – Many laws pertaining to debt collection differ from state to state; make sure that you know the laws in your state.
  • The Federal Trade Commission – This site will provide you the rules that the debt collectors must abide by.  Their website is www.ftc.gov.  They have a click-thru labeled “Debt Collection” on its home page; this link will provide many rules that will assist you in becoming more knowledgeable.

 

Step Four:  Lay Out a Plan of Attack

Before a climber scales a mountain, he or she will make sure that to know exactly how high the mountain is, where the camp sites are located, what the weather will be like, and everything needed to make sure that he or she can reach the summit. Can you imagine how frustrating it might be to just start climbing the mountain and not know how far you have to travel? The same goes for negotiating with creditors.  Writing out all the debt that you owe is a crucial part of laying out your plan. Below is a sample table of the headline categories that you should put together before you begin negotiating:

 

Company Owed Phone Number Mailing Address Due Date Minimum Due Balance Owed Line of Credit Interest Rate

 

You can also go to annualcreditreport.com and get your credit information to obtain your debt owed.  It is worth repeating that you should go to all three credit bureaus (Trans Union, Equifax, Experian) because they more than likely will have different information.  Once you have successfully written down all of the items of debt owed, you are now ready to begin the negotiation process.

 

Step Five: Play Hardball!

When negotiating, here are some rules to follow:

  • Your family is always first.  Never let a debt collector talk you into paying a bill that causes you to fall behind in paying for basic necessities for your family.  If it is a choice between appeasing a nagging bill collector and feeding your family or paying your rent, the bill collector will just have to wait.

 

  • Always offer less than you can afford to pay. Let’s say that you owe $2,000 and after you do your budget you find out that you can afford to pay $1,500…offer to pay less than that amount.  Understand that usually after 6 months, the credit card company will write your debt off before the end of the year so they can declare it as a loss on their income tax.  That being said, if they have sold the debt already, they have sold it for far much less than you owe. Using the same figures, because the bank already has written off the debt for a loss, they might have sold your $2,000 debt for as little as $500.  This is why many people are able to settle their debt for half of what they owe. In this case if you offered $1,000 to the collection agency they still would make a $500 profit. Always shoot low!

 

  • Keep your stories brief. Just think about what it would be like to hear down-on -your-luck stories all day everyday. This is why many times the person on the other side of the line seems cold and heartless…they have heard it all before. Save your effort of the lengthy explanations and stick to the facts of what you can and can’t afford to pay.

 

  • Keep private information private. They are going to try to obtain as much information as possible about you.  The address of your job, the phone number of your mother’s home, the phone number of your significant other, and anything that you offer WILL be used to contact you!

 

  • Tape the call if it is allowed in your state.  In most states, you are allowed to secretly tape the phone conversation.  In the other states you are allowed to tape the call with the permission of the other party.  No matter what, you want them to know that the call is being taped, as it will keep them honest.

 

  • Keep an accurate record of the call.  Make sure that you make it a point to get the creditors first and last name in such a way that he or she knows that you are taking note of it.

 

  • “Paid in full” is better than “settled”.   The debt collector has the ability to remove any negative items from your report, and this should be a part of the agreement. If you weren’t able to get them to budge on terms, try to get them to state on your report “Paid in Full” as opposed to “settled.”

 

  • Know WHEN to negotiate.  Debt collectors are paid each month a percentage of the amount of debt they are able to collect. This is their incentive to call you so frequently…the more they collect the more they get paid. If you negotiate in the end of the month as opposed to the beginning, the debt collector will be more apt to want to give you a good deal to boost his or her commission check.

 

  • Be the squeaky wheel that gets the grease. Many times negotiating depends upon not when you call, but who you talk to. I have helped many clients by calling two or three times and because the first person was having a bad day they weren’t willing to work with us.  Don’t get discouraged if the first person says no, never be afraid to call multiple times, and sometimes it is good to ask for the manager.

 

  • Get the agreement in writing before paying a dime.  If the creditors say that they will accept a $250 payment on a $1,000 debt, make sure that they send it to you in writing.  While they are sending a letter, you send a letter to them as well outlining the full agreement of payment. Yes…you should also send them a letter because you want to have a record of what YOU UNDERSTAND the terms of the new agreement to be and not leave it in the creditor’s hands in case of they make an error. Send the letter via certified mail so that you can get a delivery confirmation. No matter how much the debt collector pushes and pushes, nothing gets done until the agreement is solidified in writing.

None of these steps are guaranteed, but done together and aggressively they will highly increase your chances of getting a better deal.

 

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

Dealing With Debt - Part 1


Using and Selecting the Right Credit Card

Once, I was walking through the airport and I saw an airline sales rep was handing out applications for their company credit card.  I noticed in the crowd two young college students. I was sure they didn’t know that 10% of their FICO score was related to credit inquiries. 

The students did not know that as soon as they filled out that credit card application their FICO scores would immediately decrease!

I walked over to the two young men and whispered, “Did you know that as soon as you fill out this information your credit score is going to go down?”

They looked at me as if I was crazy, but after I showed them my business card they listened to what I had to say. 

Many people believe that obtaining a credit card is as simple as filling out any application that you come across—without negative consequence.  Most folks do not do any research either.  

Due to the fact that credit cards can be so dangerous if used inappropriately, each decision to apply for a credit card should be deliberate and done with tremendous care. 

Whichever card you choose, do NOT use this card for everyday use.  

The purpose of this credit card should be twofold:

  1. To establish a credit history
  2. To give you extra protection in case of an emergency.

 

Establishing a good credit history helps lenders to establish clear evidence that you are a responsible lender and increases your ability to purchase a home, car, etc.  

Make sure that you are able to get a sufficient line of credit.  Ideally, the credit limit of the card should be able to cover at least three months of expenses barring an emergency. 

NEVER spend money, outside of an emergency, that you can’t reimburse immediately.  

This card as part of an emergency fund should not replace your personal building of savings.  Use the card as a subsidy to whatever amount of emergency fund you have left to establish.  

Secured Card:  If you are not eligible to receive a credit card because of poor or no credit history, apply for a secured card. This is a card that is linked to a savings account that may be claimed by the bank if you fail to make the necessary payments.  

This arrangement of providing collateral “secures” the loan and allows the bank to take on riskier clients. With a secured card you give the bank a certain amount of capital to hold as collateral and the bank then gives you a line of credit for the amount that you have provided. 

You can then use your card as you would any normal credit card and will help you to establish a credit history.  Go to www.bankrate.com and seek out the best secured cards with no fees and good rates.  

Here are a few tips when looking at the services of various cards.

    1. Make sure  there are NO hidden fees for having the card.
    2. Check the interest rate.  If you have a decent credit history, you should be able to get an introductory rate below 10%.  This rate typically lasts for 6 months to a year. You might even be able to get a 0% rate for this period.  FICO score is a key number in this situation. If your score is above 750, then you should be able to get an excellent rate.  If it is below 750, you might benefit from getting your score above 750, and then apply for a card.  
    3. Figure out how they calculate the minimum due. Cards calculate the minimum due by charging around 1.5% to 2.5% of the outstanding balance.  The lower the number, the lower you have to pay back per month. However, the less you have to pay off, the more interest is allowed to build up.  I strongly urge that you always pay off more than the minimum due when you can. 
    4. Pay on time!
    5. Look out for mistakes.  Many times credit cards double charge you for items purchased, may fail to record a payment, or may charge too much interest on your balance.   

Dealing With Debt, Pt. 1

Once, I was coming home from a trip and walking through the airport. There was an airline sales rep handing out applications for the carrier’s credit card. I was really annoyed and about to walk away until I noticed two young college students in the crowd. I was sure they didn’t know that 10 percent of their FICO score was related to credit inquiries. They didn’t know that as soon as they filled out that credit card application, their FICO score would immediately decrease.

I walked over to the two young men and whispered to them, “Did you know that as soon as you fill out this information your credit score is going to go down? I know you don’t know me from Adam, but I just couldn’t help not coming over here and letting you both know.”

The two young men looked at me as if I was crazy at first, but after I showed them my business card, they listened to what I had to say. As I was speaking to the two young men, a few others joined in and there was a lively discussion, albeit under our breaths so that the airline rep didn’t hear us. It was quite a funny spectacle!

Many people believe that obtaining a credit card is as simple as filling out an application and don’t do any further research.  Because credit cards can become a major part of your budget and are so dangerous if used inappropriately, each decision to apply for a credit card should be deliberate and done with tremendous care. Below is what I feel are the most important things to keep in mind while selecting a credit card.

Whichever card you choose, do NOT use this card for everyday use.  When you get a card, store it in a safe place in your home, where you are not tempted to utilize it frequently.  The purpose of this credit card will be twofold:

 

  • To establish a credit history

  • To give you extra protection in case of an emergency

 

Establishing a good credit history helps lenders to establish clear evidence that you are financially responsible, which increases your ability to purchase a home, car, or many other things that are necessary in life.  With number one, you want to be extremely careful. NEVER spend money, outside of an emergency, that you can’t reimburse immediately.  If you want to purchase a book, and want to use your card to establish a credit history, don’t buy the book if you don’t have the funds to immediately pay off the bill.  When I use my credit card, I charge whatever item I use, then pay off my credit card no later than the following day I. If you can’t do that, then you do without the item (unless it is a serious NEED such as food, water, lodging, or clothing).

 

Number two, make sure you are able to get a sufficient line of credit.  Ideally, the credit limit of the card should be able to cover at least three months of expenses barring an emergency.  This card as an emergency fund should not replace your personal building of an emergency fund. (You ought to be saving on your own to establish 6 months of living expenses.)  Save, and use the card to subsidize whatever amount of emergency fund you have left to establish.

 

Quick Tip: If you are not eligible to receive a credit card because of poor or no credit history, you could apply for a secured card. This is a card that is linked to a savings account that may be claimed by the bank if you fail to make the necessary payments.  This arrangement of providing collateral “secures” the loan and allows the bank to take on riskier clients. With a secured card, you give the bank a certain amount of capital to hold as collateral and the bank then gives you a line of credit for the amount that you have provided. You can then use your card as you would any normal credit card and will help you to establish a credit history.  Go to www.bankrate.com and seek out the best secured cards with no fees and good rates.

 

Here are a few tips when looking at the services of various cards.

  1. Make sure there are no hidden fees for having the card.
  2. Check the interest rate.  If you have a decent credit history, you should be able to get an introductory rate below 10%.  This rate typically lasts for 6 months to a year. You might even be able to get a 0% rate for this period.  FICO score is a key number in this situation. If your score is above 750, then you should be able to get an excellent rate.  If it is below 750, you might benefit from getting your score above 750, and then apply for a card. You will be able to demand lower rates with such a high score, and will really be in the driver’s seat.
  3. Figure out how they calculate the minimum due. Cards calculate the minimum due by charging around 1.5% to 2.5% of the outstanding balance.  The lower the number, the less you have to pay back per month. This can make a difference if you need the cash.  However, the less you have to pay off, the more interest is allowed to build up. So I strongly urge that you always pay off more than the minimum due when you can.
  4. Pay on time!
  5. Look out for mistakes.  Many times credit cards double charge you for items purchased, may fail to record a payment, or may charge too much interest on your balance.

More financial literacy articles from Ryan Mack

Marriage and Money Part 1

Marriage and Money Part 2

Marriage and Money Part 3

 

 


Negotiating Balances Owed With Creditors

Step One: Take a Deep Breath…RELAX!

 

Whenever I get a question about debt, it usually comes with this look of great despair. Listen, you are not the first to get into debt and it is NOT a poor reflection of your character. 

 

Step Two: Develop the Strongest Weapon

 

The strongest weapon is a good FICO score, 750 or higher. have an easier time getting their rates reduced and annual fees waived. 

 

Step Three: Learn Your Rights

Debt collectors can usually sniff out an uninformed consumer, so make sure that you know your rights.   There are a few resources that will help you find about the most current laws that impact you, including the following:

 

  • The National Consumer Law Center – Call them at 617-542-9595 and ask for a “What You Should Know About Debt Collection” brochure. Their website is www.consumerlaw.org.  
  • Your State Attorney General’s Office – Many laws pertaining to debt collection differ from state to state; make sure that you know the laws in your state. 
  • The Federal Trade Commission – This site will provide you the rules that the debt collectors must abide by.  The website is www.ftc.gov.  They have a click-thru labeled  “Debt Collection” on its home page; this link will provide many rules that will assist you in becomong more knowledgeable.  

 

Step Four:  Lay Out a Plan of Attack

Writing out all the debt that you own is a crucial part of laying out your plan. Below is a sample table of the headline categories that you should put together before you begin negotiating:

 

Company Owed Phone Number Mailing Address Due Date Minimum Due Balance Owed Line of Credit Interest Rate

 

You can go to annualcreditreport.com and get your credit information to obtain your debt owed.  It is worth repeating that you should go to all three credit bureaus because they more than likely will have different information at each one.  You are now ready to begin the negotiation process.  

 

Step Five: Play Hardball!  

When negotiating, here are some rules to follow:

  • Your family is always first.  Never let a debt collector talk you into paying a bill that causes you to fall behind in paying for basic necessities for your family.  If it is a choice between appeasing a nagging bill collector and feeding your family or paying your rent, the bill collector will just have to wait.
  • Always offer less than you can afford to pay. Let’s say that you owe $2,000 and after you do your budget you find out that you can afford to pay $1,500…offer to pay less than that amount.  Understand that usually after 6 months, the credit card company will write your debt off before the end of the year so they can declare it as a loss on their income tax.  That being said, if they have sold the debt already, they have sold it for far much less than you owe. Using the same figures, because the bank already has written off the debt for a loss, they might have sold your $2000 debt for as little as $500.  This is why many people are able to settle their debt for half of what they owe. In this case if you offered $1000 to the collection agency they still would make a $500 profit. Always shoot low!  

 

  • Keep your stories brief. Just think about what it would be like to hear down-on -your-luck stories all day every day. Save your effort of the lengthy explanations and stick to the facts of what you can and can’t afford to pay. 

 

  • Keep private information private. They are going to try to obtain as much information as possible about you.  The address of your job, the phone number of your mother’s home, the phone number to your significant other, and anything that you offer WILL be used to contact you!  

 

  • Tape the call if it is allowed in your state.  In most states, you are allowed to secretly tape the phone conversation.  In the other states you are allowed to tape the call with the permission of the other party.  No matter what, you want them to know that the call is being taped, as it will keep them honest.  

 

  • Keep an accurate record of the call.  Make sure that you make it a point to get the creditors first and last name in such a way that he/she knows that you are taking note of it. 

 

  • “Paid in full” is better than “settled”.   The debt collector has the ability to remove any negative items from your report, and this should be a part of the agreement. If you weren’t able to get them to budge on terms, try to get them to state on your report “Paid in Full” as opposed to “settled”.  

 

  • Know WHEN to negotiate.  Debt collectors are paid each month a percentage of the amount of debt they are able to collect. This is the incentive to have them call you so frequently…the more they collect the more they get paid. If you negotiate in the end of the month as opposed to the beginning, the debt collector will be more apt to want to give you a good deal to boost his commission check.

 

  • Be the squeaky wheel that gets the grease. Many times negotiating depends upon not when you call, but whom you talk to. I have helped many clients by calling two or three times and because the first person was having a bad day they weren’t willing to work with us.  Don’t get discouraged if the first says no, never be afraid to call multiple times, and sometimes it is good to ask for the manager.  

 

  • Get the agreement in writing before paying a dime.  If the creditors say that they will accept a $250 payment on a $1000 debt make sure that they send it to you in writing.  While they are sending a letter, you send a letter to them as well outlining the full agreement of payment. Yes…you should also send them a letter because you want to have a record of what YOU UNDERSTAND the terms of the new agreement to be and not leave it in the creditors hands in case of they make an error. Send the letter via certified mail so that you can get a delivery confirmation. No matter how much the debt collector pushes and pushes, nothing gets done until the agreement is solidified in writing.  

 

None of these steps are guaranteed but done together and aggressively they will highly increase your chances of getting a better deal.

 


Marriage and Money Part 3

Here are some additional questions for a couples..

You both ask these of each other.  These are not meant to be one-word answers, but well thought out conversation starters.  You might want to take notes, but for those who have a spouse who doesn’t like to discuss money that might not be wise because that might make it too formal for him or her. Plan a couples retreat where you can get away from home, and take 3-4 hours to ask these questions of each other. The goal is to be away from the house to put you into the mindset of handling business with no distractions. TURN YOUR PHONES OFF!!  Take some champagne (or some other fun item) and put it prominently in the room so your spouse knows this weekend isn’t ALL about money. Bring their favorite foods to have a lunch break; divide up the 3-4 hours into two sessions.  When you all get through with these questions below, go out to a club or someplace, like you were teenagers again… and have yourself a GOOOOOD time!

 

  • What is an individual goal you would like to achieve in the next five years?  (Take time to think and answer.) 10 years? (Take time to think and talk out the answer.) 20 years? (Take time to think and talk out what you are thinking about.) How can I better support you for each category? How are you tracking this goal? (Don’t get mad if they have not thought about their goals. LOVINGLY help them! Don’t push too hard, this might be a new process for him or her.)

 

  • What are some couple goals you believe we should achieve in the next five years? (Take your time and answer and talk through where you both feel you should be as a couple.) 10 years? (Take your time and talk this through!) 20 years? (TAKE…YOUR…TIME!!) What’s the best way to track these couple goals?

 

  • How many children do you want to have? Where and when should we start saving for their college if we haven’t already?

 

  • How long should our children be able to live at home? What happens if one of us feels our daughter or son has gotten too comfortable living at home? What is the best way to get our child ready to be independent? (Remember…there is no wrong answer. This is just a means to see how your partner thinks so you know how to respond and meet in the middle.)

 

  • Would you ever want your Mother or Father to move in with us? If so, should we be looking for a house with an adjoining carriage home or is the guest room fine? If not, how should we go about making sure our parents our provided for? Do we have enough LTC (long-term coverage)? Can we afford a retirement home for our parent(s)? Is a home even an option?

 

  • Do you see this home as the best place to live for the next 5 years?

 

  • What does an ideal vacation look like for you? Are we on the beach, in a city, or in the mountains?

 

  • Answer honestly…are there ANY expenses you think we incur that you feel we shouldn’t? (Be honest about your shopping and also be honest about buying those power up items for that dang game, for you adult gamers!)

 

  • When was the last time you felt you wasted money? What did you waste it on and how much was it?

 

  • How many times per month should we discuss our goals, budget, and other financial concerns? What can I do to make it easier for you to have this conversation? (For the people who have a “resistant” spouse, try to let them lead and introduce what they would feel comfortable with doing during this conversation. DO NOT beat him or her over the head or condemn them. This is obviously a very sensitive topic for them and this needs to be handled with a lot of love and patience, but it needs to be handled!)

 

Marriage and Money Part 1

Marriage and Money Part 2


Debt Elimination Strategies

Debt vs Savings

A common question I get when discussing paying down debt is, “Should I pay off my debt completely before I start investing into my emergency fund or saving in my 401(k)?” The answer to that is, “It depends.”  Mathematically, a major wealth building principle is to make sure that interest is always working for you and not against you. If you are earning 2% in an emergency fund but paying 15% in credit card debt it makes numerical sense to pay off that credit card debt first.

 

However, if we spend all of our days paying down credit card debt and continue to see a big fat zero on the savings account we can suffer what I like to call “fiscal fatigue”. There is something about seeing growth in your savings account that gives someone motivation to keep going. 

 

So when determining whether or not to pay down your high risk debt, or to invest into your emergency fund and 401(k) the answer is probably to do a little of each.  After you have done your budget and determined that you have a $200 surplus (money left over after all expenses are paid), a 50%/25%/25% split could be appropriate. With 50% ($100) of your funds going towards your credit card debt, 25% ($50) going towards your 401(k) (or possibly more if your company matches), and 25% ($50) going towards building your emergency fund in a high yield savings account (see later chapter).

 

The Snowball Method

 

One of the best ways to pay down your debt is the snowball method.  This method is established by using all or the majority of your budget surplus to “attack” the small item of debt owed. After you eliminate this debt, your surplus is increased by the minimum payment of the recently eliminated smallest debt, and you use your newly enhanced budget surplus to pay down the next smallest debt owed…and so on. This method essentially allows you to build momentum as you pay, gives you motivation to continue, and forces you to organize your debt efficiently.  

 

Hopefully by now you have organized all of your debt. Write out all of your debt on a sheet of paper below from the largest amount owed to the smallest owed.  I have placed a sample for you to follow.  

Company Owed Phone Number Mailing Address Due Date Minimum Due Balance Owed Line of Credit Interest Rate
Bank 1 XXXX XXXX 1/15 $50 $4000 $5000 13%
Bank 2 XXXX XXXX 1/15 $75 $2000 $3000 7%
Bank 3 XXXX XXXX 1/15 $100 $1000 $3000 10%
Bank 4 XXXX XXXX 1/15 $50 $400 $1000 10%

 

Using the above example, let’s say that you have $200 left over after expenses to comprise your entire monthly surplus. You take the $200 and apply it to the LOWEST AMOUNT OWED.  In this example you would pay down “Bank 4” debt by an extra $200. After two months of paying an extra $200 per month to your Bank 4 debt you will have paid down the $400 and eliminated the Bank 4 debt.  Now you have an extra $50 free because the minimum due on the Bank 4 debt was $50 and your entire surplus increases by $50 to $250.  

 

Now you need to apply the $250 to Bank 3 debt.  After four months of paying $250 to Bank 3 that debt will be eliminated. Your surplus increases by $100 (the minimum due on Bank 3) and you now have a total of $350 which can be applied to the debt owed to Bank 2.  After about 6 months the Bank 2 debt will be eliminated and you now should have a $425 surplus ($350 previous surplus + $75 minimum due on Bank 2 debt). In approximately 9 – 10 months, paying $425 towards the debt owed to Bank 1, and if you add the minimum due of that debt to your total surplus you will then have $475 per month to invest in other areas.  

 

If you notice Bank 1 has the highest interest rate, but is the last to be paid off completely. That’s okay-- I have found that the progress that people see and feel by actually eliminating debt, is worth more in motivation than the extra money being paid in interest. When someone can physically see a bill eliminated, it gives them a sense of accomplishment.  

 

Now, if you feel that you would rather organize your snowball strategy and pay your debt down from highest interest rate first, that is your call.  Just be aware of that “fiscal fatigue” that can come into play when you are paying the same debt down for months and still have multiple bills to be paid off. Either way, just keep in mind you are doing the best thing for your financial health.