This is the end of Part 1 on Taking Control Of Your Finances - Please submit yourr comments at the end of this post - Thank you
Part 6: Get out of debt. There are many methods to eliminate your debt obligations, but whatever you do, just pay it off. Debt leaves you beholden to other individuals, and everyone has the right to be free.
Debt is like indentured servitude. You work and earn income, but you hand over that income to someone else. With debt, your finances are controlled by someone else, not you.
For example, credit card companies have the right to change your interest rate at almost any time with advance notice. In fact,
CitiGroup recently raised its interest rates on a wide swath of customers to help bring in more money to this failing company. High interest rates cause customers to take longer to get out of debt because a smaller percentage of their payments goes towards the principal balance.
In this case, CitiGroup is controlling a portion of your finances. If a Citi customer is accruing more debt on the credit card at the same time, CitiGroup’s control outweighs the customer’s.
Read More Link On Right
Credit cards aren’t the only forms of debt. Mortgages and student loans prevent people from saving as much money as possible, so even before you make decisions about life goals, it’s a good idea to start eliminating these debt as well.
Good debt versus bad debt
One comment you may hear is that mortgages and student loans are “good debt” while credit cards and car loans are “bad debt.” The philosophy here is that houses appreciate in value, so mortgages provide leverage, allowing you to risk less of your own money for a greater return.
Similarly, a college education allows you to earn more money in the future. In reality, houses do not always appreciate in value, especially if you consider how house-related expenses contribute to the true cost of owning a home.
Also, not everyone earns more with a college degree than they would without one, but on average, those who do earn more over their lifetime. It is possible, however, to earn a college degree without going into debt.
On an individual level, you can’t use generic labels like “good debt” and “bad debt.” If you are accumulating more debt, all debt is bad. If your debt is not increasing, you have the option of weighing your debt to determine which to pay off quicker.
For example, at one point, it was common to have student loans with interest rates under 3%. At the same time, high-yield savings accounts paid over 4%.
Even after taxes, it was worthwhile — if the student loan was the only debt — to put extra money in savings while making only the minimum payment towards the student loan.
That is not always the case, particularly now that savings interest rates are lower and student loan rates are higher.
Now just get out of debt
Getting out of debt is a six-step process, with one extra preliminary step.
0. Put $1,000 aside. You should be spending less than you earn by now, so you have excess income at the end of every month. Start putting aside some money for emergencies even before you start paying off debt. $1,000 is a good target, but you shouldn’t wait until you reach that point before moving on to the next step.
The purpose of this money, which will eventually become your “Emergency Fund,” is to allow you to dip into the savings if a problem comes up. Rather than paying for the surprise expense with a credit card, you have a little accumulation set aside. If you already have a savings account set aside for this type of expense, move right to Step 1.
1. Commit to avoiding new debt. You’ve already committed to taking action to take control of your finances, but in order to do that, you must eliminate your debt. While you have debt, you don’t get to use a portion of the income you earned. You already used income you didn’t have, allowed someone else (a lender or a credit card company) to cover the expense for you, and now they own you (or part of your income). Until this relationship is eliminated, do not accumulate more debt.
Do not spend more than you earn by using credit cards. Don’t buy a new car if you don’t have the savings. Once you’re out of debt, you can carefully ease these restrictions, but the object is not not get into debt while you’re going through a process of elimination.
2. Call your creditors. There is no harm in calling the credit card companies to ask for lower rates.
The customer service phone number is always printed on the back of credit cards, and this is your first point of contact. Historically, people have had success calling customer service and asking for a lower rate.
With the economy deteriorating and many banks and credit card companies struggling, it might be tougher to get them to budge on your interest rates. If at first you don’t succeed, ask for a supervisor.
Call back, if you have to. In some cases, the banks will offer to lower your rate if you close your card. That means you will pay less to get out of debt and you’ll be restricted from using that card for more purchases. Take the deal! You won’t be using your credit card again until you’re out of debt, anyway.
3. Choose how to pay back your debts. If you want to spend the least amount of money and least amount of time to pay back all your debts, there is only one option: the Debt Avalanche.
It’s kind of like Dave Ramsey’s “Debt Snowball” on steroids. The main difference is that the “Debt Snowball” relies on extrinsic motivation while the Debt Avalanche works the best with intrinsic motivation.
If you’ve been following the Take Control of Your Finances series on Consumerism Commentary, and you’re committed to the idea of being in control, you have the intrinsic motivation to use the best option.
The Debt Avalanche specifies that your debts should be listed from top to bottom, sorted by interest rate, with the debt with the highest interest rate on top. The balance is not important.
To all your debts on the list, pay the minimum monthly payment, but to the debt on top, pay more than the minimum payment — as much as you have available.
If your monthly excess income does not meet the minimum payment requirements across all cards, you will have to call your credit card companies to renegotiate. If you aren’t able to make at least the minimum payments, you may be accruing more debt without spending anything. It’s like a cruel magic trick.
This method works best when “all debts are created equal,” for example, when all debts are credit cards. But it doesn’t always work that way. You may have a loan from a family member.
Maintaining good relationships with your family should be a larger goal in life, outside of money. You may want to pay this debt off first, even if the rate is 3% while your credit cards are at 14.9%.
This decision is a personal choice. If you decide to pay the loan off faster than your credit cards, move this loan to the top of the list. Pay your minimums to all other debts, but to the loan at the top of the list, pay as much as possible.
Once the debt at the top of the list is eliminated, do a little dance if you are so inclined, cross out the debt, and start putting your excess money towards the debt that is listed second. Remember, try not to accumulate new debt during this process.
4. Automate your payments. If you can have your credit cards deduct your payments directly from your checking account automatically, this is a great way to eliminate the possibility of human error from the process. Some credit card companies won’t allow you to do this.
It would guarantee that your payments would always be on time, and the credit card companies would lose out on possible late fees and finance charges.
Even if that is the case, visit your credit cards’ websites and link your checking account. This way you can pay your minimum or more with one click rather than writing a check, finding a stamp, and remembering to drop your payment in the mailbox.
5. Get in the groove. People get into debt for different reasons. Some people like shopping to buy new things. Some people have an addiction. Others are faced with an emergency with no other options that credit card. Occasionally, people make bad choices.
Whatever the reason, see what you can do about changing your behavior. Creditors make it easy to stay in debt, and it’s difficult to see the consequences of debt accumulation. If you’re tracking your money, you have a good indication of the effect debt has on your net worth, and you’re able to predict the state of your finances in the future.
The more you’d like to do with your life down the road, the more money you’ll need. Debt, in all forms, works against you. Get in the habit of making good decisions about your money and spending less than you earn.
6. Complete your payoff. Getting out of debt fully calls for a celebration. It may take decades to do so, especially if you have a mortgage. Celebrate however you may like, but don’t fall back into debt.
- See more at: http://www.consumerismcommentary.com/take-control-of-your-finances-part-6-get-out-of-debt/#sthash.TZjScgNc.dpuf
Part 7: Set goals. Do you have a personal mission statement? If not, then what’s the point of growing your net worth? Set long-term goals so your short-term goals make sense.
Last month, I began writing about the process of taking control of one’s own financial condition.
It’s common to outline any process by describing a series of steps, and that is the form I have chosen for writing about this particular process. The steps I’ve described roughly follow my experience as I learned to take responsibility for my money, or lack thereof.
Most recently, I wrote about step 6, getting out of debt. Eliminating the money you owe to other people and companies is a process in itself. Although I’m describing this process of a series of steps, it is not necessarily necessary to wait until one step is completed before beginning the next. This next step is a good example.
If you have debt, you can begin the next part of the process, setting goals, before you finish paying what you owe. You might believe it’s late in the process to start talking about goals, since you may have heard somewhere that it’s “wrong” to attempt to start a process without clearly defined targets. I disagree.
No matter where you are going, everything I’ve written about so far in this series applies in the same way.
At some point, it’s important to ask yourself why. Why bother taking control of your finances? Why focus on saving and investing as much as your income as possible? Why think about ways to earn more income? The obvious answer is to grow your net worth. It can be a challenge to find a deeper answer, but usually there is something.
SMART goals are not so smart
If you’re involved with business management, you’ve probably heard about “SMART” goals. I’ve written about the “SMART” concept on Consumerism Commentary, most recently when I formed my financial goals for 2008. To be “SMART,” a goal should be specific, measurable, attainable, relevant (or realistic), and time-based. For example, earning $10,000 in sales commissions during December could be a “SMART” goal for someone.
Forget about “SMART.” It focuses on nothing that will help you yet. Rather than trying to determine how much money you want to have, start thinking about what you’d like to accomplish within your lifetime. Don’t be specific and don’t concern yourself with whether the goal is attainable.
A good life goal will set you on a journey, and the journey is more important than the goal itself. On this journey, it’s common to discover new aspects of yourself, and these aspects will sometimes encourage you to change your goals. That’s nothing to worry about.
Your goal should be less like one a business might have and more like a mission or a vision, though it doesn’t have to be lofty. Here are a few examples.
Help alleviate global hunger and poverty
Encourage arts education
Bring peace to the Middle East
Provide every opportunity for my family
Long-term goals vs. short-term goals
Look at the big picture. Decide what your place in the world might be. Once you set a major life goal, you have a direction for your first few steps. Your goal might change, so be flexible.
But until then, make every decision with this long-term goal in mind. Your life goal may manifest itself in different ways. For example, if your goal is to encourage arts education, there are many paths you can take. You could earn a degree in education and become a teacher.
You could start a foundation that offers grants to programs that promote arts education. You could be a financial planner who donates some amount of money to an arts organization every year.
Any two people could choose drastically different paths with the same goal in mind, and the path will have more of a bearing on your short-term financial goals than the destination.
The teacher will need to find the money to enroll in a college to earn a teaching degree. The person who wants to start a foundation might have to start with $1 million or more.
If visualization is motivational, consider writing goals down. To follow a standard form, write your long-term life goal at the top of a piece of paper. In order to achieve that goal, understanding that you might never fully achieve it, what are some of the smaller milestones you must achieve?
For example, the teacher must earn a qualifying degree. He must also earn a teaching certificate. The individual who wants to help bring peace to the Middle East may want to earn a degree in international relations and be elected or appointed to a political position. Each of these accomplishments consist of another level of goals.
If this structure is beginning to sound like an outline, that may be the form your goals should take on paper. Each larger goal requires a number of smaller goals.
We don’t need to think about finances until we get to the lowest level. I’ve heard people say, “My goal is to earn $1 million by the time I’m 30 years old,” and I want to get away from that type of thinking as much as possible.
Money is not the goal; money is only a tool that can be used to help you reach real goals. For example, one of the sub-goals involved in becoming a teacher is partaking in an accredited college program that offers an education degree, either a bachelor’s degree or master’s degree depending on your needs, at completion.
In order to receive this education, there are additional sub-goals, including the ability to afford the education. The money might come from loans, scholarships, fellowships, grants, or your own income, but this is where finances finally come to play in process of setting goals.
Everyone has a life goal. It may be a calling, like helping to cure AIDS in Africa, or it may be a personal goal to be the best mother you can be. You can consider this your mission.
Without defining one (or more), financial goals have no context. Money is nothing by itself. Getting out of debt is a goal, but only so far as it gives you the flexibility to use your money for a better purpose. What’s yours?
- See more at: http://www.consumerismcommentary.com/take-control-of-your-finances-part-7-set-goals/#sthash.vNBV9v09.dpuf
Part 8: Set savings targets. The point of accumulating money isn’t the accumulation of money, its what you want to do with it. With real goals in mind, you can make relevant and accurate short-term targets.
Last week, I wrote about the importance of setting real life goals in order to take and maintain control of one’s own financial condition. It’s important to break past the idea that a life goal is based on money.
For example, entering retirement with $4,000,000 is a good target, but it’s not a major goal. Your goal is the purpose for earning that $4,000,000. What do you want to do with that money?
Is your goal for life to retire comfortably in a location with a low cost of living? Is you goal to provide financially for your family? Or is your goal to have an effect on some issue that you care about?
The life goals define your savings and investing targets. How much money will you need to achieve your goal in the manner you wish to achieve it? This will vary from person to person, even when the goals are shared. Three people might have the same goal, for example, to promote financial education for teenagers. One person may wish to achieve this goal by creating and managing a charitable foundation, another would prefer to become a public school teacher, while a third individual might choose to write a personal finance column. Each path, inspired by the same mission, requires significantly different financial obligations.
Long-term savings and investing targets
Ideally, determine your goals while you’re still young. The earlier you start to work on a goal, the more time you’ll have to meet your financial targets. (Also, if you decide to change your goal while on your path, you’ll have more flexibility to change course.) In reality, there is rarely enough time.
With time on your side, you can afford to be more conservative with your investments in order to reach your goal, but the urgency of a short time horizon requires you accept more risk or work harder to raise the money you might need.
While in an earlier article, I warned against using the “SMART” model for defining your life goals.
But now that you have your mission out of the way and are focusing on the financial requirements for achieving your goal, it helps to keep your targets in perspective.
Your financial targets should be specific, measurable, attainable, relevant, and time-based.
For example, if your ultimate mission is to support arts education in your town and your path for achieving this goal involves establishing a scholarship for college-bound students attending your local high school, your SMART target may be to set aside $1,000,000 within five years.
The interest earned on that money can then be used by the school to fund each year’s scholarship. This sets a specific, measurable, relevant, time-based target for reaching your goal.
If your income level allows you to save $200,000 above your other expense and savings needs each year, or if you currently have investments that might appreciate to this level, this target is attainable.
Short-term savings and investing targets
If you haven’t already achieved a comfortable level for your emergency fund, that should your primary short-term financial targets. This is a key component of a financially stable lifestyle, regardless of your long-term goals. Here are some resources about emergency funds.
The Right Size for Your Emergency Fund
What Qualifies as an Emergency?
50 Tips to Help Establish Your Emergency Fund
Other short-term financial targets depend on personal needs, outside of your larger mission. You may want to dedicate your life to saving feral cats, but you’d also like to own a house.
To purchase a house responsibly, you may need to provide 20% of the purchase price at the time of the sale as a down payment. If your mission is to help search for forms of life in other galaxies, you will need to earn a college degree or two. Enrolling in college requires some financial consideration, and the requirement is much more immediate.
If you’ve determined that you have ten years to raise $1,000,000 to start a foundation, you can set short-term targets to maintain your focus. The targets might not be achievable if evenly spaced, such as earning $100,000 per year.
The achievement of a goal such as this might require a slow start and using compounding interest to your advantage. You need to consider the specific financial tasks you need to accomplish in order to start a foundation with $1,000,000 within ten years, such as fundraising among friends and family.
High-yield savings accounts should be part of your short-term targets. This is one of the reasons I still enjoy ING Direct despite the bank’s slightly lower interest rates than those offered by other online banks. It’s easy to split your ING Direct savings account into sub-accounts, each designated for a specific target.
Using short-term and long-term financial targets will help you stay on task as you reach to achieve your missions, but don’t be afraid to change your plans. The experiences you encounter while on your path might point you to an idea you hadn’t considered originally, reshaping your mission or changing it entirely. If that happens, you may need to revise your expectations and targets.
The mission sets a guideline for living your life, but it’s this living that is the important part, not reaching a specific goal.
Here is what we’ve explored on Consumerism Commentary in terms of taking control of your finances so far:
Part 1-A: Become Aware
Part 1-B: Take an Inventory
Part 1-C: Make Accurate Predictions
Part 1-D: Decide to Take Action
Part 2: Track Your Money
Part 3: Spend Less Than You Earn
Part 4: Use High-Yield Savings Accounts
Part 5: Build a Better Budget
Part 6: Get Out of Debt
Part 7: Set Goals
- See more at: http://www.consumerismcommentary.com/take-control-of-your-finances-part-8-set-savings-targets/#sthash.BmmzVve3.dpuf