Bible Money Matters » debt

Being “Normal” Costs An Average of $600,000 Over a Lifetime: Here’s Why We Are Fighting Back

Melissa — Tue, 22 May 2012 14:55:05 +0000

Dave Ramsey is fond of saying that you don’t want to be normal because “normal” is broke. Now, CreditLoan has graphic proof of that in the infographic, “A Lifetime of Debt: The Financial Journey of the Average American.” Comprised of information from several sources, this infographic, which is laid out like the Life board game, shows Americans’ journey into debt. Would you believe that it begins in high school?

Debt Often Begins In High School

By high school, the average American has a department store credit card. While many teens want to be independent and show that they are grown up, is incurring debt the way to do this? I would prefer that my kids show they are grown up by avoiding credit until the end of their college career, but that doesn’t happen typically. In fact, according to the infographic, 84% of college students have credit cards, and the average undergraduate carries a balance of $3,200. Only 2% of college students do NOT have a credit history.

I don’t know about you, but I didn’t earn much money in college. I did have credit cards, and I was “normal” and carried a balance. All I could afford was the minimum payment, which was often just enough to pay the interest for the month. Let the enslavement begin.

Student Loan Debt

The infographic explains that the average undergraduate graduates with $20,000 in student loan debt; if they go on to graduate school, they amass $17,000 more for a total of $37,000 in student loan debt.

Unfortunately, once again I was completely normal. My mom was a widow who had never worked outside the home until my dad died, so she didn’t have any money to pay for my college education. I got the first two years of college free by attending a community college’s honors program, but I amassed $20,000 in student loan debt for my last two years of undergraduate work. I took two years off after that and worked and paid down as much debt as I could before going to graduate school, which is the only reason why I left grad school with “only” a combined total of $22,000 in student loans between undergrad and grad school instead of the “normal” amount of $37,000.

Sadly, I am still paying down my student loan debt, in part because my husband and I thought we could afford our lifestyle when we should have been paying down debt. However, the student loan is my next target on my debt snowball, so I expect it to be gone by this fall. Yeah for giving up a lifetime of normalcy!

Home Loans And Auto Loans

According to the infographic, after students graduate college and move on to adulthood, they continue to amass debt. The average home loan is $240,000 and after 30 years of making payments, the homeowner will have paid a total of $580,000 over the life of the loan. (Suddenly the monthly payment doesn’t seem so affordable. I wonder how many new homeowners take the time to compute exactly how much they will pay over the life of the loan. I am guessing that most blissful believe they are paying down $240,000.)

Most “normal” Americans own two or more cars and take out a car loan of $30,738 for 6 years. Their average interest rate is 7 to 9%. (This infographic was created in 2009, so I am guessing the interest rate should be lower now, but on a loan of more than $30k, you are still paying quite a bit of interest.)

A Lifetime Of Debt And Interest

The most staggering fact of all—over a lifetime, a “normal” American pays out $600,000 in interest for all of these loans they take out over a lifetime.

Paying cash and paying for only what you can afford is considered weird, but it is no wonder “weird” people get ahead in life—they have an extra $600,000 to use or invest that they are not paying out in interest.

Until last year, I was living a very “normal” life. However, last October we swore off credit cards and have paid down nearly $10,000 in debt in 7 months. We are on our way to being “weird” and couldn’t be happier.

How about you? Have you thought about being weird and swearing off debt?

Can You Afford Your Lifestyle?

Melissa — Mon, 14 May 2012 14:07:35 +0000

About six years ago, my husband and I had a fairly comfortable lifestyle. I worked full-time and my husband worked part-time as a graduate assistant. We had one child, and we had no credit card debt. We did have my student loan debt from graduate school, though it was less than $10,000. We budgeted and set aside money for yearly expenses such as home insurance and twice yearly expenses such as car insurance, as well as car repairs. My employer automatically withdrew 8% of my salary and deposited it in a retirement account.

Sounds good, right? We thought so. We thought we could afford vacations and a weekly outing to our favorite sushi restaurant at the tune of $50 a visit. After all, we were able to pay in cash.

In retrospect, we were misguided. We couldn’t afford our lifestyle. Here is why:

We didn’t have a big enough emergency fund. We did have an emergency fund of about 3 months of living expenses. In an era where “fewer than four of 10 American adults have an emergency fund to fall back on in the event of some financial disaster, according to a nationwide Bankrate.com poll” (Bankrate), we were doing good, but we stopped saving when we hit 3 months of saving. We should have kept saving until we reached 6 to 12 months, but we didn’t.

If we had, it is very likely that when we had two more kids back-to-back and I quit my job because daycare was going to eat up so much of my salary, we would have avoided racking up much of the credit card debt we are now trying to pay off. We would have had a large cushion, which, in retrospect, I would have taken over weekly sushi dinners any day.

We didn’t fund Roth IRAs. Yes, my employer automatically took 8% of my salary for retirement, for which I am very glad, but we didn’t save independently for our own retirement. We should have set aside an amount every month to contribute to our Roth IRAs. Just making a few simple changes to our lifestyle or our bills could have helped us find more ways to contribute to our retirement. We became complacent because my employer was deducting money for retirement.

We didn’t fund an educational savings account. We now have three kids and no money saved for college. Our oldest is almost eight, so college is only 10 years away. Our youngest two are much further away from college, but when they go, we will have to pay for both of them at once because they will be only one grade apart in school. We have a lot of catching up to do, as does most of the country. The New York Times reports, “The findings of a survey of 1,200 parents of children under age 18 . . .by the Gallup Organization and Sallie Mae reveal families, on average, save $2,676 annually for their children’s education, for a total of just uner $14,000.”

We didn’t save for a house. We live in an area where homes in less desirable neighborhoods go for $300,000 (and that is after the housing market bubble) and property taxes average $8,000 to $12,000 a year. Thankfully, we didn’t fall into the trap of buying a home we could not afford. However, in the next few years, we plan to move to an area of the country with a lower cost of living. In anticipation of this move, we should have been diligently saving for a house, but we didn’t.

We thought that we were living a comfortable lifestyle that we could afford, but we left out several important aspects of a strong financial position. Now, we have to pay off debt before we begin to tackle the missing components of our financial lifestyle. Had we realized earlier that we couldn’t afford our lifestyle, we might not have so much debt to pay off.

Can you afford your lifestyle, or do you just think you can?

Paying Down Debt With Gazelle Intensity? How Much Of An Emergency Fund Do You Need?

Melissa — Wed, 18 Apr 2012 12:57:21 +0000

I am a big fan of Dave Ramsey, and as my husband and I pay down our debt, we follow a hybrid approach to his debt snowball method. Followers of Dave Ramsey know that another part of his debt reduction plan is to first save $1,000 in an emergency fund before beginning aggressive debt reduction. Yet is this good advice for everyone? Should some families have a larger emergency fund? What is the right amount for your family to set aside in an emergency fund?

Peter has stated that while he and his wife paid off debt, they had a $2,000 emergency fund (which they have grown considerably now that they are debt free except the mortgage). My husband and I cut it closer and only have a $500 emergency fund. As can be expected, this amount was too small, and we recently experienced a mini-financial crisis. For us, a $1,000 emergency fund is too small. We have decided to initially create a $2,000 emergency fund with our tax refund and then to divert some money to increasing the emergency fund to $5,000 while still paying down debt.

Considerations When Creating Your Emergency Fund

What is the best way to determine how much you should have in your emergency fund while reducing debt? It ultimately depends on your own comfort level for risk and several other factors:

How much debt do you have to pay off? If you have less than $8,000 to $10,000 in debt, chances are you can pay it off fairly quickly, so you may be able to get by with a smaller emergency fund. If you have a much larger amount and know it may take you longer than a year to become debt free, you should probably set aside a large amount because emergencies over the course of several years are likely to occur.

How stable is your job? In this economy, it sometimes feels like no job is truly stable and secure, but if you have a job with fluctuating income, you’ll need a larger emergency fund to see you through those periods of low income. I am a freelancer and make ½ to 2/3rds of our family’s income depending on my work for the month. I have been a freelancer for 14 months and have been fortunate to see my work increase every month until last month when I lost several clients who lost their own source of income. This was a wake up call that we need a cushion for those times when my income ebbs.

Do you own a home? If you own a home, you will likely face unexpected repairs, sometimes costly ones. Is $1,000 in an emergency fund enough to cover a sudden roof repair if you want to avoid debt? The answer is no. While you wouldn’t need the entire amount set aside, you should have several thousand dollars set aside for unexpected housing repairs.

How old is your car? A car that is only two or three years old is less likely to need expensive repairs than a car that is seven or more years old. If you have an older car, you need to have enough set aside for unexpected emergencies.

How many kids do you have? The larger your family, typically the larger your expenses and the more you should have set aside. We have 3 kids, and while they are healthy, unexpected expenses can still come up such as the three cavities the dentist recently said my son has.

Do you have insurance? If you do, how good is your insurance? If you don’t have insurance, the first thing you should do is get insurance because one accident or injury could lead you to bankruptcy. Even if you have to just have major medical or have to cover your children through state funded care, insurance is essential. However, many people do have insurance, but the coverage is poor. How much do you have to pay annually out of pocket? What is your maximum deductible? All of these answers will help you determine how big your emergency fund has to be.

How much to save in an emergency fund when paying down debt is a personal decision. We have taken risks with a very low emergency fund of $500, and we were caught off guard when several reimbursements were very slow in coming, resulting in a significant budget shortfall. That situation combined with my income actually decreasing for a month led us to the decision to increase our emergency fund. This might not be the right strategy for everyone. Use the list above to determine how likely you are to face an emergency and how much money you should set aside.

How much do you have saved in your emergency fund? Do you feel like it’s enough?

Which Method Is Best To Pay Off Debt: Lowest Balance To Highest Or Highest Interest To Lowest

Melissa — Mon, 02 Apr 2012 14:41:32 +0000

There is frequently a debate between financial gurus as to what method of debt repayment is best.

Lowest Balance to Highest Balance

Of course, Dave Ramsey advocates the debt snowball method where you list your debts with the lowest balance to the highest balance with no concern for what the interest rates are. Then, you pay the minimum payment on every debt except the one with the lowest balance. The one with the lowest balance is the one on which you apply as much money as you can. Once that one is paid off, you take the payment that used to be applied to the debt you just paid off to your next debt with the next lowest balance. As this cycle continues, the amount you apply on the next card in line increases as you pay off your debts one by one, which is how your debt snowball becomes larger and more formidable.

Critics argue that Dave Ramsey’s approach is not cost effective—you pay more in interest by following the debt snowball method. Dave Ramsey argues that personal finance is not only about math, it is about psychology as well, and the psychological boost of seeing at least one of your debts disappear quickly helps greatly in debt repayment. There is real motivation from seeing immediate results.

Highest Interest Rate to Lowest Interest Rate

On the other hand, financial gurus argue that the most effective way to pay off debt is by paying the debt with the highest interest rate first, no matter how large or small that debt is. By paying off the debt with the highest interest rate, you are freeing yourself of a debt that takes more and more of your hard earned money simply for interest, rather than principal.

Recently, the April edition of Kiplinger’s included an essay by Robert Frick, senior editor at Kiplinger’s. He argues that we should pay off our cards based on the highest interest rate, but we don’t because “our brains aren’t adept at quickly calculating” the financial implications of paying the debt with the lowest balance first. He explains, “Think of $10,000 in credit card debt with an interest rate at the national average of 14.9%. You want to pay off that debt aggressively, so you figure you’ll pay 4% of the balance,or $400, on the card each month. Quick, how long will it take to pay it off? You may think, Twenty-five monthly payments would be $10,000 then add in some interest. The debt will disappear in a couple of years. In fact, you’ll be paying for 31 months and will rack up more than $2,400 in interest.”

Pick a Plan and Stick with It

Both parties make compelling points, but the argument reminds me a lot of weight loss. One person may advocate a low-carb diet while another may advocate a structured diet plan like Weight Watchers. Actually, if you stick to your weight loss plan, either plan will give you results because the bottom line is that you are consuming less than you previously did because you are following a plan.

Don’t struggle with which debt repayment plan is better—paying off the lowest debt first or paying off the highest interest rate first. The important decision here is to decide to pay off debt and make a plan for how you will tackle that debt.

My husband and I are taking a hybrid approach. We are paying down our debt first by category. Our priority is to first pay off all credit card debt before moving on to student loan debt, even though my student loan has a lower overall balance than one of our credit cards. We have been paying down the credit cards based on Dave Ramsey’s suggestion of paying down the lowest cards first. Doing this gave us an immediate shot of energy when we paid off the credit card with the lowest balance in the first month of becoming gazelle intense. Yet, following this method, we are saving the largest credit card, which is also the credit card with the highest interest rate, for last. Are we paying more in interest? Yes, but I stay motivated by seeing debt disappear.

When paying down debt, determine which strategy works best for you and then stick with the plan. Don’t concern yourself with how much interest you are paying, unless that motivates you to pay down debt more quickly. Instead, just focus on how you can pay down the debt, in the order that works for you, as fast as possible.

5 Things You Should Not Do If You Have Debt

Melissa — Mon, 26 Mar 2012 13:57:15 +0000

If you have a significant amount of debt, there is no easy way around the fact that you must change your behavior to eradicate the debt. However, sometimes what people know and do are two different things.

While you may disagree, here is a list of five things you should NOT do if you have a significant amount of debt:

1. Go back to college and fund your education with student loans.

Within the last few years, many Americans have found themselves out of work and in debt. Often, the solution is to go back to college and survive on student loans. This is generally a bad idea. Many of these people then graduate college with another degree or an advanced degree, and they still can’t find a job. Now, instead of their original debt, they also have several thousands to tens of thousands of dollars of additional student loan debt. If you are going to go this route, make sure to choose an in demand field such as nursing.

2. Keep using your credit cards.

If you have credit card debt, there is only one sure way to pay it all off—stop using the cards and make your monthly payments (plus extra if you can) every month. With no additional work on your part, you will be out of debt at some point in time. However, if you keep using your credit cards, what typically happens is that you tend to pay off only what you charged the previous month, if that. My husband and I tried to convince ourselves that we could still have the convenience of using our credit cards while simultaneously trying to pay them off; instead, we slowly started accruing a bigger balance. It has now been 5 month since we have used them, and we have paid off 35% of our balance, but we didn’t have any success until we stopped using them completely.

3. Pay aggressively on your debt without having an emergency fund.

Paying aggressively (or being gazelle intense, as Dave Ramsey says) is a great way to eliminate your debt quickly. However, make sure to first save a small emergency fund of at least $1,000 to $2,000 so you are prepared for unexpected expenses. We got gazelle intense and then had several unplanned expenses this month. We only had $500 in our emergency fund since all of our extra money was applied to debts. Since we had no extra money, we had to be creative with selling things around the home and working even harder to make up the difference. Once we recover from this month’s unexpected expenses, we plan to slow down on debt repayment long enough to build our emergency fund a bit.

4. Make major improvements on your home.

While it is good to maintain your home and make improvements to increase its value, nothing more than required maintenance and repairs should be done while you are trying to get out of debt. There will be time to remodel your kitchen or add on a deck after you are debt-free.

5. Take a vacation.

Vacations are both fun and useful. You get to have time to relax, travel to new destinations and spend time with the family. However, if you have debt beyond the mortgage to pay off, you really shouldn’t take a vacation to the Caribbean or Disney or any other destination you may be considering. That isn’t to say that you shouldn’t take time off and spend time with your family. Perhaps instead of traveling, while you are paying down debt you can have a staycation and stay home and visit the local attractions in your home town. You still get to relax and have fun, but you save a few hundred dollars or more by not traveling.

Getting out of debt requires discipline and perseverance as well as an attitude change. It may not be fun to give up things that you enjoy such as a vacation or things that you think will improve your life such as another college degree or an improvement on your house, but foregoing these things now means you can be out of debt more quickly. Then, and only then, you can live like no one else, as Dave Ramsey says. Isn’t it worth a bit of sacrifice now?

How To Negotiate With Your Credit Card Company: What Options Do You Have When It Comes To Credit Card Debt?

Peter Anderson — Tue, 28 Feb 2012 17:49:58 +0000

For many people in the United States the credit card is their only source for “backup cash” in case of an emergency of some sort, be it an unexpected medical bill, a burst pipe in their basement or a need to replace an appliance. In fact last year The National Foundation for Credit Counseling found in an online poll that fully 64 percent of Americans would use a source other than their savings account in order to pay for an unplanned $1,000 expense. When those unplanned expenses do arise, they’re not left with a lot of good choices beyond using credit.

“Without adequate savings, consumers have poor resolution choices when an emergency arises,” said Gail Cunningham, spokesperson for the NFCC. “People often say they can’t afford to save, but the truth is that they can’t afford not to.”

Money magazine once stated that 78% of us will have a major negative event happen in any given 10-year period of time. In other words, most of us are going to have a major negative event whether it be a health issue, a flood in our home or something else. At our house we’ve had a few of these major negative events, with a hospitalization costing almost $250,000 (paid for by insurance) along with other various health issues. We planned ahead with insurance and a 12 month emergency fund so we weren’t adversely affected. Having a problem is a near certainty, so it’s important to prepare yourself for that eventuality.

But what if you didn’t plan ahead for whatever reason – or you weren’t able to save up an emergency fund in time before your major negative event happened? What if you’ve already built up a bunch of credit card debt and are now having problems keeping up on the payments? What are your options for negotiating that credit card debt to a lower amount, getting rates reduced or otherwise getting help from the credit card companies?

Dealing With Credit Card Debt

I’ve only had to deal with credit card debt a few times in my life. For the most part I’ve never had more than a couple of thousand dollars on my cards, and was able to pay them off in a relatively short time frame. I’ve had family and friends, however, who haven’t been as lucky and have had thousands upon thousands in credit card debt racked up due to medical bills, property taxes and other things.

Dealing with credit card debt can be a painful and demoralizing experience. For a lot of people it is a scary process because there is so much confusing information out there about how to deal with the debt and work with the credit card companies (or others) in order to get the debts paid off, and they’re not sure what options are the best.

So what are some options when you find yourself deep in credit card debt?

Negotiate A Lower Credit Card Rate

One thing that I’ve learned over the past few years is that it never hurts to ask a company to help you out. Whether it’s asking your bank to remove an overdraft charge, your TV provider to remove a fee increase or negotiating a lower amount on your medical bills, it never hurts to ask. In many cases it will save you a lot of money.

Negotiating a lower rate on your credit card isn’t always going to be successful, but if it is you could save thousands in interest, depending on what rates you receive and for how long.

Debt Goal has a tool called Negotiate My Rate where you can go to see what your potential savings might be from getting a lower rate, as well as showing you what success other people have had getting lower rates from certain companies.

Some things that you should do when calling to renegotiate your rate:

Gather information on competitive credit cards: Save a few of the best credit card offers you get in the mail with lower rates than your current card and 0% introductory offers. Use these as a starting point for your negotiation, as a tool to get your own company to lower their rate – or risk losing you. Make a list of all the offers.
Call and ask for a supervisor: While you don’t necessarily have to talk to a supervisor right away, you will want to ask if the rep you’re talking to is authorized to lower your rate. If not, ask to speak to a supervisor.
Always be polite and courteous: As the old saying goes, you’ll catch more flies with honey than with vinegar. I’ve always found that I have better success getting what I want when I can be nice and get the rep on my side, instead of being threatening and angry.
Mention your history with the company: Mention that you’ve been a good customer for x number of years, and that you’d like to continue being a customer. If you’ve got a good payment and credit history, bring those points up.
Ask them to match offers or rates from other companies, or match their own offers: Ask the person with the authority to lower your rate if they will match the rate you could get with one of the other offers you’ve received and kept. Ask if they have any promotional rates you can take advantage of. Ask what you would need to do to qualify for a lower rate, and if you could qualify later.
Ask about hardship or workout programs: If you’re really struggling to make payments you can ask about any hardship or workout programs that they have available, and whether you would qualify. Your rate reduction may be even greater if you qualify, but sometimes you’ll also be required to close the credit card and convert your debt to an installment loan with direct pay from your bank. Other times the rate reduction is temporary.

One thing to remember is that you may have to call and ask for a reduction more than once. Be persistent.

Questions To Ask

Negotiate My Rate offers some constructive questions that you can ask your customer service rep if they’re not willing to offer a reduction right away.

“Are you authorized to lower my rate?”

“Are there other people who have the authority to lower my rate? May I speak with them?”

“Do you have a promotional rate that I can take advantage of?”

“What would I have to do to get a lower rate? Can I call back later when I meet those criteria?”

“Can I qualify for a hardship program?”

Sometimes you may not be successful in getting a lower rate with your current company. In such a case you may want to consider transferring your balance to another card if you can find a good offer. Just be sure to take into account whether or not they have balance transfer fees, as fees can seriously eat into any savings you may see. Also know the terms of your new card as well, and how long promotional rates last.

Working With A Credit Counseling Agency

Sometimes you may not be able to get a rate reduction on your own, and you may be better off working with a credit counseling agency.

I recommend working with the National Foundation for Credit Counseling to find an accredited non-profit agency that can help you come up with a good plan for dealing with your debt. Steer clear of for-profit companies or those who charge outrageous fees upfront before settlements are made.

A credit counseling agency can help you to figure out what is the best course of action for your situation. Some of the options are discussed below.

Debt Management Plans

If you’re dealing with severe enough debt and you qualify, a credit counseling agency can help you to set up a debt management plan.

A debt management plan will allow you to pay back your debt over time, often at a reduced interest rate or with reduced balances. The counseling agency will meet with you and make arrangements with all of your creditors on your behalf. Typically all your cards will be included in the program, and your cards will be closed. You’ll typically make payments to your third party agency instead of your creditors, and depending on your debt can take anywhere from 3-5 years to pay off. Typically a credit counseling agency will charge a setup fee of around $30-$40, and then collect monthly fees of about $30 while you’re repaying debt.

Be careful to work with a reputable debt management company as many bad debt management companies have been sued by the FTC for taking people’s payments and then never forwarding them on to the creditors (and then working towards a settlement on the debts later).

Debt Settlement

Sometimes you can work with your credit card company on your own, or through a third party agency to settle your debts for less than you owe. It can be tough to get companies to agree to these types of things, however, unless you’re already in trouble (missing payments/etc). Make sure to get everything in writing when agreeing on a settlement.

Beware of third party companies who make wild claims about how they’ll get your debt settled for pennies on the dollar for an upfront fee. Quite often they’re not very reputable, and don’t offer any extra services than you could have done on your own.

If you do enter a debt settlement agreement be aware that it in some situations it may open you up to an IRS tax obligation. Any forgiven debt could be treated as taxable income, and you could end up with a big tax bill the next year. (This isn’t always the case)

Debt settlement will also damage your credit score as it will show as a debt settled for less than the full amount. Creditors don’t like to see that.

Bankruptcy

In some extreme cases you may want to consider filing for bankruptcy. If you aren’t able to make payments on your debts, and there isn’t a foreseeable future where your income and situation will be improving, it may be an option to discuss with a credit counselor or a bankruptcy attorney.

Just keep in mind that bankruptcies will look bad on your credit report, appearing there for 7-10 years. It can make it difficult to do anything for quite a few years as far as buying a home, renting, etc. As such it should only be considered as a last resort measure.

Conclusion

Dealing with credit card (and other) debt is not a fun thing to go through. Your best bet is to plan ahead so you don’t end up in debt, but in case you do, there are options. You can work with your credit card company to lower your rates, or to set up a hardship or workout program. If that doesn’t work out you can always work with a non-profit credit counseling agency in order to help you figure out what your best plan of attack is. They could help you to set up a debt management plan, work out a debt settlement or even advise you when bankruptcy may be an option to consider.

The bottom line is that there is hope, and there are options. Just make sure you know what you’re getting into, how much you’ll be paying, what the repercussions are to your credit and taxes, and whether or not the plan will actually improve your situation.

Have you ever successfully had your rate reduced? Had to work out a debt management program or debt settlement? Tell us your experience in the comments.

Paying Down Debt Should Be Like Interval Training

Melissa — Mon, 27 Feb 2012 15:11:14 +0000

My husband and I have debt. A lot of debt. The majority of it is from student loan debt my husband accrued obtaining his Ph.D. I have a small amount of student loan debt left, and we have some consumer debt as a result of simple overspending and not having much income last year. We are followers of Dave Ramsey, and we became gazelle intense in October, 2011, as soon as my husband secured a post-doc research position. With gazelle intensity, even with our relatively low income, we have managed to pay down a little over $8,000 in four months. However, we are now on the verge of gazelle intensity burnout.

While we have made good progress, we still have more than five times the amount we have already paid down yet to go. It is hard to maintain gazelle intensity when you know you will be paying down debt for several years. Gazelle intensity at this level is akin to a runner sprinting through the first five miles of a marathon and becoming overwhelmed with the 21 remaining miles. Sprinting through a marathon is simply not possible.

Interval Training: Best for the Body, Best for Debt Repayment

If you are looking to improve your physical fitness level, experts tell you not to do the same exercise routine every day. You become complacent and your body does too. Your body learns how to not work as hard. Interval training is an excellent way to push yourself and still allow enough time in between extreme bouts to recover. The physical challenge followed by the rest period is what gets you into the best shape. So it should be when paying down debt.

Dave Ramsey doesn’t address gazelle intensity burnout. He advocates pushing as hard as you can until the debt is gone. While I like the theory, I don’t think it is reasonable when one has a significant amount of debt to pay off. Instead, treat gazelle intensity like interval training. Push as hard as you can for as long as you can, and then take some time to recover and rest. Then push as hard as you can again.

We are currently in the rest period as we are saving for a conference my husband must attend out of state in March. We are still paying extra on our debt, but now it is $50 extra a week instead of $300. After the conference is over, we will go back to gazelle intensity.

Advantages to Gazelle Intensity Interval Training

You have time to rebuild your passion. Your personal passion to get out of debt is what drives you to live like no one else and sell things and work an extra job to generate more income to use as debt repayment. While I was nearing burnout, now that we are in the rest period, I am itching to become gazelle intense again and watch our debt balances go down. My passion is returning now that I am rested, so to speak.

You avoid burnout. So many people commit to paying down their debt, but lose their passion and focus and remain stagnant, using credit cards throughout the month and paying down what was charged the previous month but nothing more. If you take a rest period from gazelle intensity and remain committed to not accruing more debt, you are still making progress toward your goal to be debt free, though not as quickly.

Gazelle intensity becomes a manageable way of life. Dave Ramsey says over and over again to eat beans and rice, rice and beans because they are low cost foods. My family likes both beans and rice, but if I fed that to them at every single meal, I would face a revolt. While we eat beans a lot, at least once a week we have something fun like homemade pizza. Having an occasional break from gazelle intensity, even in the realm of food, makes gazelle intensity more manageable.

If you have debt, first commit to not accruing new debt. Then, push as hard as you can in the beginning to pay down as much debt as you can as quickly as possible. Take a rest if you need to, and appreciate the fact that every time you have a gazelle intense period, you make the next rest period more fruitful because you will have less interest to pay overall thanks to the previous bout of intensity. Just like interval training, your finances will be in better shape if you alternate gazelle intensity with rest.

Dish Network Raised My Rates Again: Lawsuits, Price Hikes And Why We’ll Be Cancelling Satellite As Soon As Our Contract Expires

Peter Anderson — Mon, 20 Feb 2012 16:13:42 +0000

Over the weekend I was looking at some of our household bills that we’re currently paying and was looking for ways to cut back on some of them. One of the bills that I was looking over was the one from Dish Network. I hadn’t looked at it for a couple months since it is on auto-pay, so when I checked the statement I was surprised to find that my bill had gone up for the second time in 3 months. (Another good reason to cut the cord)

The first increase in our bill had been expected as we’re now in the second year of a 2 year contract. The first year we had received a promo price, after which our monthly bill increased by $20/month or so. We agreed to that stipulation when we signed up, so there was no problem there.

The second increase, however, as unexpected. We had another $5/month increase in our bill which had no identifiable source as far as I could tell. Time to do some further research.

Dish Network Price Increase

We signed up for Dish Network back in December of 2010. If it had been up to me completely I probably would have forgone the premium TV subscription, but my wife loves watching a few shows that you can only get on cable, and in the end I didn’t mind watching a few of my favorite sports teams on a regular basis. So we signed up.

At the time we signed up we signed up for one of their lower tier packages, one of the ones that included the sports channels. After credits, DVR rentals and so forth our bill came out to about $40. After 1 year it would increase to about $60 or so.

Less than 2 months after we signed up, however, we saw an increase in our bill! Our bill went from $40 to $45+ after taxes. Something wasn’t right. Hadn’t we just signed up for a 2 year contract with a price guarantee, only to see an increase 1 and a half months later?

Calling Customer Service To Complain

Obviously i wasn’t happy about seeing a price increase so shortly after we signed up. I thought our price was guaranteed for the life of our contract? Apparently it wasn’t.

When I called customer service they had apparently seen quite a few calls from other confused customers about the price increase. Other customers apparently thought they had price protected packages as well. The customer service agent started reading from a well practiced script that told me how the fine print in my contract says that they can basically raise the price at any time due to price increases from TV networks/etc – and that there was nothing they could do for me.

Obviously I wasn’t happy about that since I had just signed up on a special deal – only to see the price immediately increase. I asked to speak to a supervisor and was transferred.

Once again I complained to the supervisor, and after quite a long call they agreed to give me a $5 credit for the remainder of my contract – almost 2 years. They said this credit would show up on my next bill.

When my next bill came the total was $5 less, so I assumed all was taken care of.

Conveniently Disappearing Customer Service Credits

This month I once again saw my price on my bill increase. I went to our Dish Network online account to do some investigation. I downloaded the current month’s bill and saw nothing to explain the $5 increase. So I downloaded the previous month’s bill and saw that there was a miscellaneous credit on my bill under “Monthly Savings” that said “Cr: Agent 12 of 12″. That was no longer on the current bill.

Apparently 12 of 12 meant that this $5 credit had expired. Then I realized what had happened. The agent how had given me that $5 credit originally hadn’t applied it for 2 years, but only for one. I still have almost a year on my contract and their promised 2 year credit had disappeared after 1 year!

Chatting With Customer Service On Their Site And Twitter

I immediately went onto the Dish website and started a chat with their customer service representative to get this all straightened out. I explained what I believe had happened and that the $5 credit need to be reinstated for the rest of my contract. The rep told me that she couldn’t do that as there was “no note” from the previous customer service rep on my account explaining the 2 year credit. No note from the rep, no reinstated credit.

I complained about this asking why I would have to suffer an increase because my customer service rep hadn’t done their job? They’re the one who didn’t make the note, but I suffer? After much back and forth I asked for a supervisor.

I was transferred to the chat supervisor and explained the situation again. After much back and forth the best they would do is a 3 month $5 credit. Not what I was hoping for but a little better.

Finally I complained about the situation on Twitter. The customer service rep for @dish_answers said they would look at my situation too to see if there was anything they could do. After a bit of back and forth they seemed confused about the situation saying that my promo price had expired. When i explained it wasn’t a promo price but a credit to make up for the immediate price increase, they went back to the line about there being “no note on the account”. There was nothing they could do.

So in the end, they risk a bit of bad publicity on my blog for a mere $40 or so in account credits. Maybe I shouldn’t be upset for such a small amount added to my bill- but it’s just the principle of the thing. They promised the credit then went back on their word, and denied it had ever happened.

Dish Network Has A Class Action Lawsuit Against Them.. For The Same Rate Hike

One funny thing in this whole situation was how shortly after they increased my bill, Dish started trumpeting how I wouldn’t see ANOTHER price increase for 2 years or something. The statement has this wording:

Here’s the DISH…As we committed, we are keeping prices frozen until Feb. 2013 for our America’s Top and DISH America Programming Packages. By comparison, our competitors’ core programming pricing is increasing by an average of $4 or 5% in the beginning of 2012.

So they’ve committed to not raising prices (again) on 7 of their popular packages. When you dig a bit deeper, however, you’ll see that their crafty wording has conveniently left out about 10 other packages and a myriad of services that they WON’T be freezing prices on. Go figure.

While I was researching this price increase and disappearing credit I found something even more interesting on one of my bills. It was a class action lawsuit settlement that Dish was making with customers because of the February 2011 price increase. Apparently they were now agreeing to give customers account credits, free months of Blockbuster streaming or free pay per view credits to settle the lawsuit. Why were they settling? The alleged illegal price increase in February 2011 – when I saw my rates go up:

In March 2011, Girard Gibbs LLP and co-counsel Cohen Milstein Sellers & Toll PLLC and The Wentz Law Firm filed a national class action lawsuit alleging that DISH unlawfully raised its prices for satellite television services in February 2011. The suit alleges that DISH breached its contracts and violated the Colorado Consumer Protection Act when it raised prices on customers who were bound by a two-year contract with discounted pricing for the first 12-months. The Court preliminarily approved a settlement on November 23, 2011.

It appears that my account is eligible to receive the settlement offered in Parker V. Dish Network LLC, so I’ll be digging into that shortly so I can send it in before the March due date. So apparently I was right about the price being protected.

So for now we’ll look into a settlement, and ride out the contract until it expires. At that time we’ll be cancelling satellite and most likely cutting the cord to get our TV watching options in a more affordable way.

UPDATE: After publishing the post this morning Dish Network support on Twitter, @dish_answers , contacted me again to ask for another chance to rectify the situation. They went on to fully credit my account with my $5 credit for the rest of my contract, as was promised. Thanks to their support rep for doing that, but it’s sad it took 3 chats and a blog post to get it done!

Are you a Dish customer who saw illegal price increases as well? Check out the linked class action lawsuit page to see if you qualify for account credits or other options as well.

How To Do A 401(k) Loan: Pros And Cons Of Borrowing From A Retirement Plan

Peter Anderson — Thu, 09 Feb 2012 17:38:02 +0000

We’re in the midst of tough economic times and a lot of people are finding themselves in situations where they need to come up with money quickly in order to pay for one debt or another. Whether it’s IRS tax debt or needing to replace a broken water heater, there are times when people find themselves with a large bill with no emergency fund to pay it. So what do you do in a situation like that? For many people the answer is to take out a 401(k) loan. Up to 3/4 of company 401(k) plans have a provision available to do a 401(k) loan, and up to 30% of people with one of those plans have taken advantage of that and taken out a 401(k) loan.

Taking out a 401(k) loan can be a legitimate road to take if you’re dealing with a serious financial situation like IRS debt or a foreclosure. You should also be aware, however, that there are risks to taking out a 401(k) loan.

How 401(k) Loans Work

Before we get too far into talking about the pros and cons of the 401(k) loan, let’s look at how they typically work. Different plans may have different rules and regulations surrounding 401(k) loans, but typically they’re pretty similar.

Minimum withdrawals: Most plans will have a minimum amount that you can take out when doing a 401(k) loan, typically anywhere from $500-1000. They do that in part to try and discourage people from taking out small amounts from time to time to pay for smaller bills, to discourage people from short-circuiting their investment gains.
Maximum loan amounts: Typically you’re allowed to borrow up to 50% of your vested balance in your 401(k) account, but no more than $50,000. Also keep in mind that quite often you won’t be able to borrow from your vested company matching funds, but only personally deposited and vested funds.
Payment terms: Usually 401(k) loans have a 5 year payment term, and the interest rates are usually set at prime rate plus 1%. If you’re taking out the loan to buy a home, longer terms may be available.
Fees to process your loan: Many plans will charge a fee just to process your loan – a fee anywhere from $50-100.

When taking out a 401(k) loan be sure to know what the provisions and stipulations of doing one are with your company’s 401(k). Depending on what the fees are, maximum or minimums may be, you may not want to go down that road.

Pros Of Doing A 401(k) Loan

I’m not a huge proponent of doing a 401(k) loan just because I think it short-circuits the gains you could see in your retirement account, and it carries some significant risks. That being said, there are some situations where I might consider doing one.

For example, if you’re in a situation where you’ve got a large IRS debt that you need to pay, I think a 401(k) loan might be preferable to getting in trouble with the IRS. You don’t want to go to prison. Or if you’re in danger of going into foreclosure, or losing a vehicle to repossession, you may want to consider it. Just know the risks.

Here are some reasons why a 401(k) loan can be a good thing.

Very little paperwork needed: Typically a 401(k) loan requires very little paperwork and can be done regardless of if you have an actual need. In many cases it’s as easy as making a phone call or clicking a few links in your online account. The only time you may need additional paperwork is if you’re using it for a home loan.
Paying yourself interest: When you get a loan from your bank or a credit card you’re going to be paying interest to them on the loan proceeds. With a 401(k) loan you’re paying yourself interest. Sounds like a good deal right?
Easy repayment: Quite often a 401k loan repayment comes directly out of your paycheck. That makes paying your loan back easy – it comes directly out of your paycheck so you never see the money and feel the pinch of losing it.

While I don’t typically suggest a 401(k) loan, it can be an option if you’re in a pinch and you have to pay off a pressing debt right away. There are some positives of doing one, but you also have to be aware of the significant risks – which we’ll look at next.

Cons Of Doing A 401(k) Loan

There are some considerable risks to be aware of when doing a 401(k) loan. If you’re not careful they could come back to haunt you.

Fees, fees, fees: If you’re not careful you could be losing quite a bit of money to fees. There can be loan origination fees, and in some cases annual maintenance fee. So for example, if you take out a $1000 loan, and then have a $75 origination fee and $25 maintenance fee on a 5 year loan, you would end up paying $200in fees – or 20%. That’s a steep price to pay. Be careful to know what fees your plan charges.
Defaults, penalties and taxes: If you go into default on your loan for one reason or another it will mean that the money will be taxed at your normal rate, and you’ll be charged a 10% early withdrawal penalty. That could mean a huge tax payment when it comes to tax time, something most folks may not be prepared for, especially if the money is already spent.
Money taxed twice: When you repay your 401(k) loan, you’re using post-tax money to repay it. But since the money is then going back into a pre-tax account, it will then be taxed again when a distribution is taken in retirement. Double taxation!
Moving jobs or being fired means loan comes due: If you end up deciding to move to a new job, or if you get let go from your current job, the 401(k) loan will automatically come due in full – although usually there is a grace period of 60-90 days. If you can’t pay in that time you’ll be subject to a 10% penalty and your normal tax rate just like a normal default. That can mean upwards of 35-40% in taxes and penalties. So when tax time comes, you may have a big tax bill at a time when you can least afford it!
Lost retirement gains: When you take money out of your 401(k) you’re taking away from any gains that your retirement funds may have made during the interim. The cost can be especially great if you take the money out at the bottom of the market and it isn’t returned to the account until later when the market is higher. You lose out on any gains your money may have made.

So as you can see there are a ton of cons associated with taking out a 401(k) loan. There are risks associated with the fees charged, penalties if you default or lose your job and can’t pay in full, and the lost opportunity cost of not realizing investment gains. Those are some pretty serious things to consider.

Try Considering Other Options First

My suggestion when it comes to taking out a 401(k) loan is to avoid it if you can and try other options first. What are some other options?

Try saving up an emergency fund in advance so that when you have a need for a large chunk of cash you’ve already got it saved and ready to go. That’s what I’ve done with our 12 month emergency fund – so that when big bills come due, like my recent $5000 tax bill, it wasn’t a problem because we’d planned ahead.

Another option is to open and use a Roth IRA account for your retirement savings instead. When you use a Roth, you can withdraw your Roth IRA contributions at any time without any tax penalties, so you can avoid those risks of the 401(k) loan. You’ll still be having the risk of losing out on investment gains, but at least you won’t be paying taxes or penalties.

If and when you decide to go down the road of a 401(k) loan, however, make sure that you’re doing your homework. Go run the numbers using a 401(k) loan calculator and see just what interest rates you’re actually paying. That may help you to decide if it’s actually a good deal.

Have you ever taken out a 401(k) loan? If so, how did it turn out, did you pay it all back, or did you face paying taxes and penalties? Tell us your 401k loan experience in the comments.

Will A Short Sale Hurt Your Credit, And Will You Even Qualify For One?

Peter Anderson — Tue, 24 Jan 2012 17:49:24 +0000

One thing we’ve heard a lot about the last couple of years is the rash of foreclosures and short sales, and how the real estate market is experiencing a huge downturn. A lot of people are finding themselves underwater in their homes, owing more on the homes than they’re currently worth. People have seen their home values drop by tens of thousands of dollars, if not hundreds of thousands.

In the area that we live in the story hasn’t been much different. There have been a lot of foreclosures and home values have dropped significantly. We bought our house near the height of the housing bubble, and over the past 5-6 years we’ve watched as our home value has dropped by more than $70-80,000 dollars. I don’t have to tell you that it hurts to watch your equity disappear into thin air like that.

Over the past year or so we’ve been thinking about upgrading our house a bit, in part because we’re hoping to have more children some day, and want to have more space, and a backyard for them to play in. We also figured now would be a pretty decent time to buy with the home values being so low. We’ve been able to find some properties that we’d like, and we’ve strongly been considering building our own home since my in-laws are builders.

Owing More Than Your Home Is Worth

Our only problem? Despite the fact that we’ve paid off almost $80,000 of our mortgage, we’re not sure we can sell our house for more than what we owe on the property. The values have just dropped too much. We’ve also looked at sales of similar homes, and they’re selling for an additional $30-40,000 less than we thought our home was worth.

My wife’s mom, while discussing the topic, suggested that the solution was to do a short sale, and then start over and buy a new house. I don’t think my mother-in-law or wife are aware of just how a short sale works, or that there are significant downsides to doing one.

How Does A Short Sale Work?

Just saying you’re going to do a short sale isn’t enough as not all lenders will accept a short sale or discounted payoff. In many cases for the lender it makes more financial sense to foreclose – and they’re under no obligation to agree to a short sale. Also, not all properties or sellers are eligible for a short sale.

To get the process started you would need to first call your lender and talk to the person responsible for handling short sales, and capable of making a decision. Next you’ll need to submit a variety of paperwork. The things often asked for include a preliminary look at the numbers (how much you’ll sell for, and how much the shortfall will be), a hardship letter explaining why you need to do a short sale, proof of income and assets, copies of bank statements, a comparative market analysis showing prices of similar homes in the market and when you finally find a buyer – a purchase agreement.

In other words you have to contact them and show them that there is a good reason for doing a short sale. You also have to show them that you are truly having a financial hardship. Then they will make a decision as to whether they’ll allow a short sale.

Luckily, if you’re considering doing a short sale, some banks are now even offering short sale incentives to some people to go through with a short sale instead of a foreclosure.

Should You Do A Short Sale?

So the question is, do you really want to do a short sale? Will your situation even qualify for a short sale?

Some reasons that may NOT qualify for a short sale:

Wanting to buy another home: The lender won’t care if you want to move to a different location or bigger home.
Pregnancy: Having the size of your family increase or expenses increase are not qualifying hardships.
Spending all your money on electronics: Having irresponsible spending habits will not qualify you.
Bad neighbors: You may have found that all your neighbors are drug dealers, but this won’t qualify you to do a short sale.

Some reasons that might qualify for a short sale:

Unemployment: If you lose a job and your source of income, that may be a qualifying hardship.
Bankruptcy: Having a bankruptcy could be a qualifying hardship since you probably don’t have the money to pay your mortgage.
Death: Having one of the spouses die could qualify you.
Divorce: Having a divorce and a resulting loss of dual incomes or other expenses could qualify you.
Health problems: Having health problems that lead to financial hardship, that could qualify.

The point here is that you have to be able to show some legitimate source of financial hardship that precludes you from making full payment on your loan. So if you just want to get a bigger house with a nice fenced in yard, that is not a good reason to be doing a short sale.

Consequences Of Doing A Short Sale

So even if you qualify for a short sale, what are some of the consequences of going through with one? Will it put a blemish on your credit report? Is it better than walking away and going through foreclosure?

Here are some of the things to consider:

Your credit will be dinged: If you decide to do a short sale your credit will be hurt. It will usually show on your report as a pre-foreclosure that has been redeemed, and reported as paid in full for less than agreed. While you might think that a short sale would be better than a foreclosure on your credit, many lenders will not make distinction and just see the fact that in both cases the bank probably suffered a loss. Both a foreclosure and short sale are reported and will affect your credit score about the same. From what I’ve read the ding to your credit score could be anywhere from 2-300 points. It could be slightly less on a short sale if you weren’t behind on payments.
Tax or debt consequences: You may be liable for taxes on the forgiven mortgage debt. In some situations the bank will issue you a 1099 for the forgiven amount and you’ll be liable for taxes on that amount (which could be a huge tax bill). Also, in some states the bank may come after you for the amount you are short. Some states are no recourse states and you won’t have this issue, but others do not. Check the laws in your state.
You may not be able to get another home loan: If you’ve had a foreclosure or short sale you may not be able to get another Fannie Mae or Freddie Mac backed loan. You’ll have to wait at least 2 years to get another loan with a short sale, and 5 years with a foreclosure.

So if you thought that there were advantages to a short sale over a foreclosure when it comes to preserving your credit, most sources that I’ve read say that really isn’t the case. They both affect your credit about equally. About the only advantage would be if you wanted to get a new home loan sooner, you may be able to get one within 2 years after doing a short sale. Beyond that, you may be liable for taxes on the forgiven debt, or in some cases liable for the difference itself. Make sure to do your homework before going down that road.

For us, we’re definitely not going to be going down the road of a short sale as we can afford to make the payments, we don’t have any hardship and I don’t want the ding to our credit. That plus we’d need to get another home loan right away if we sold. So I guess we’ll just have to wait until we can sell it for what we need, or save up the difference.

Have you considered doing a short sale, or going into foreclosure? After knowing the consequences, would you still attempt to do one?