Archive for the ‘Debt’ Category:
Plans for My First Credit Card
My Discover Student credit card came in the mail last Thursday.
I know anyone who’s had to deal with credit card debt, and Dave Ramsey of course probably has a few issues with that sentence. But don’t worry. I have no plans to rack up any kind of balance that I can’t pay off at the end of the month. I’ll even shred it if I find myself spending more than I can afford.
For now, I’m only using the card for things I was planning to buy anyway: Cedar Point tickets, gas, normal eating out, and some stuff for college. The best part, besides being able to hang onto my money for an extra 30 days, is that I’ll be earning 5% cashback. Not a fortune, but who would turn down free money? I also have no interest on all purchases for 6 months, but I don’t plan on taking advantage of that benefit. I don’t want to fall into the “Oh, I don’t have to pay for this for 6 months!” trap.
Once I get used to making a lump-sum payment every month, I’ll consider adding more impulse type purchases to my credit card. For now though, I’ll keep using cash or my debit card.
What was your first credit card? Did you use it responsibly or did you get into trouble?
Review: The Total Money Makeover
Dave Ramsey’s “The Total Money Makeover
Let’s check out what this “proven plan for financial fitness” teaches us.
1 – The Total Money Makeover
This chapter is very much a call to look in the mirror. You won’t find any your-money-worries-are-someone-else’s fault type talk here. Dave even says “you are the problem with your money”. Here we are introduced to the book’s motto: “If you will live like no one else, later you can live like no else”.
2 – Denial: I’m Not that Out of Shape
Open your eyes. Many people live their lives pretending nothing is wrong. They have nice homes, cars, and other Stuff but all of it belongs to the bank and credit card companies. Ramsey presents a few stories of people who “woke up” and realized they needed to make a change: live debt free.
3 – Debt Myths: Debt is (Not) a Tool
Understand that debt is not just “the ways things are”. Americans’ love affair with debt isn’t some natural instinct we’re all born with. Companies and banks have changed the status quo and made us think that debt is necessary to live a good life. That wasn’t an accident.
My favorite part of this chapter was Dave taking on this myth: “Car payments are a way of life; you’ll always have one.” I’ve heard a few adults in my own life say this and I always shake my head. The only reason why you’ll always have a car payment is if you’re suffering from the disease known as caring what other people think and you don’t have the self-control to em save em money.
4 – Money Myths: The (Non) Secrets of the Rich
This chapter has a bunch of myths that people often believe will make them rich or clear their debt. Get-rich-quick-schemes don’t work. There is no secret way to building wealth – that takes work and time.
5 – Two More Hurdles: Ignorance and Keeping Up with the Joneses
Ignorance – no one is born knowing how to manage their finances. But that’s no excuse not to start your Total Money Makeover. If you value money, then you need to take steps to learn about it: read a book or attend a seminar Dave suggests.
Keeping Up with the Joneses – stop trying to impress people with things you can’t afford. “When you buy a big pile of stuff with no money and lots of debt, you are a financial fake.” You must make the radical change of simply not wanting approval from others. The Joneses are probably broke.
Baby Steps
People familiar with Dave Ramsey know he provides a 7 step plan that gets you debt free and financially secure. The next few chapters detail these steps.
6 – Save $1,000 Fast: Walk Before You Run
“It is going to rain. You need a rainy-day fund.” This step is simple: save up $1,000 for when shit hits the fan. Your car’s radiator bites the dust. Your job is terminated. Life happens. Be ready for it. $1,000 isn’t going to cover every major expense obviously, but it’ll help you avoid turning to Visa when a crisis hits.
7 – The Debt Snowball: Lose Weight Fast, Really
This step is where you actually get out of debt. Dave tells us to list all of ours debts from smallest balance to largest balance without worrying about interest rates (besides the house). Then, you pay the minimum amount required on all debts except the smallest. On the smallest, you throw everything you have at it. Find $20 in the parking lot? It goes to your smallest debt. Once you’ve paid off that debt, you send the money you were paying on Debt 1 to Debt 2 in addition to it’s minimum payment. Every time you pay off a debt, the “snowball” grows and soon you’re sending in huge payments.
8 – Finish the Emergency Fund: Kick Murphy Out
While having $1,000 in the bank is nice, it’s not going to cover a really big emergency like an extended job loss. Dave recommends that you keep enough money in a liquid account (like savings) to cover 3-6 months of living expenses. This prevents you from ever going into debt for when life happens.
9 – Maximize Retirement Investing: Be Financially Healthy for Life
“Invest 15% of your income in retirement.” This is a general rule-of-thumb that will allow you to have a secure and nice retirement, but not so much that you can’t get the house paid off quickly. For young people, there is some important advice here: do not expect Social Security. If it still exists, we can consider it a bonus and hire a maid or something.
10 – College Funding: Make Sure the Kids Are Fit Too
Dave starts this chapter out with a thought I wish more people would subscribe to: “College degrees do not ensure wealth”. This is important because too many students and parents are taking on enormous student loans, expecting a kick-ass job to come along five minutes after the diploma’s are handed out.
But he still values a college education, just not enough to go into debt for. He recommends parents use an Educational Savings Account (ESA) to fund their children’s college expenses. There’s no specific percentage to save, but he does include a chart so you can figure out how much you’ll need based on how old your child is and how much you want them to have.
11 – Pay Off the Home Mortgage: Be Ultrafit
Now that you’re debt free (besides the house), secure with an emergency fund, and saving for retirement and college, it’s time to eliminate the mortgage. Dave is a fan of 15 year mortgages and likens 30 year mortgages as “for people who enjoy slavery”. If you already have 30 year with a good interest rate, he suggests paying like you have a 15 and includes a worksheet to figure out what your monthly payment should be.
12 – Build Wealth Like Crazy: Arnold Schwarzedollar, Mr. Universe of Money
At this point in the plan, we are completely debt free. This chapter reminds us to actually do something with our money. Now is the time to have fun, invest to build crazy wealth, and give.
13 – Live Like No One Else
The last chapter is simply a wrap up with a warning against materialism. Remember that wealth isn’t about buying expensive toys all of the time. It’s about knowing what enough is. Finally, Dave tells us that he wants us to have hope that we can change our lives for the better by becoming financially secure and wealthy.
Buy or Don’t Buy The Total Money Makeover?
The Total Money Makeover
But the reason why Dave Ramsey and The Total Money Makeover
But this book isn’t for everyone. If you aren’t in debt, then you’ll probably have a hard time buying into Dave’s strategy. As a high school senior, the stories from regular people who’ve had their The Total Money Makeover
Finally, there are few Christian messages sprinkled throughout the book. This might bother you. I’m not a very religious person and I didn’t have any problems with it. There’s really no preaching or commanding.
A Few Student Loan Changes…
President Barack Obama appears to be on a roll lately. First there was the passage of the Patient Protection and Affordable Care Act, which has some important changes that should help out college students and young adults. But 6 days ago, he also signed into law the Health Care and Education Reconciliation Act of 2010. The main purpose of this bill was to change some of the original provisions in the first bill, but it also some important changes regarding student loans:
- 1. The federal government will no longer give subsidies to private banks to handle federally insured loans. Instead, the government will directly handle the loans.
- 2. Pell grant awards will be higher
- 3. For loans that are taken out after 2014, the maximum amount you must spend on loan repayment is capped at 10% of your discretionary income. (You must qualify for this perk.)
- 4. Loans that are taken out after 2014 will be forgiven after 20 years of timely payments. (If you qualify.)
- 5. Parents will have an easier time taking out federal PLUS loans.
Overall, these changes seem to be for the best. If the government can save money by handling loans directly, then I’m all for it. I’m not a big fan of the huge, private banks, that rake in profits, getting a discount from Uncle Sam. The 20 year loan forgiveness is nice I suppose for those who enter low-income professions, but I have no interest in paying my loans for 20 years. Hell, I’m not even comfortable taking more than 10 years to pay off any student loan debt I accrue. Finally, I’m not sure what “easier” means for PLUS loans. Are parents with lower credit scores going to qualify that wouldn’t have before? I’m not sure that’s necessarily a good idea.
Do Not Buy Stuff You Cannot Afford
The following is a clip from Saturday Night Live that explains how to spend less than you earn.
This video is simply awesome. If I was in the business of comedy, this is the type of stuff I’d do. Common sense, yet surprisingly uncommon.
Hilarious and true.
Just remember that you save up money before you buy something. You do not buy something because you think you can pay for it later. You pay for it now, if you can. If you cannot, you don’t buy it.
I just prevented you (and myself!) from ever incurring credit card debt.
You’re welcome.
A Simple Guide to Student Loans
courtesy of Omar Omar on Flickr!
As I receive college acceptance (no denials yet!) letters and plan my future studies, I can feel student loans creeping towards me. While I am applying for scholarships and already have the FASFA filled out, there’s a very good chance I’ll be taking out at least some loans. To learn more about them (yeah, there’s more than one type!), I thought I would write up this post detailing the typical student loans available.
Federal Stafford Loan
- These loans are administered or backed by the US government and you don’t have to pay anything on them while you’re still in school. The main benefit is a much lower interest rate than what you would pay on a private loan. There are 2 variations of Stafford loans.
- Federal Family Education Loan Program (FFELP)- is handled by typical lenders like Sallie Mae or Chase bank. The US government basically says “Hey there Sallie, we’ll guarantee this loan, so go ahead and give the kid a low interest rate.”
- Federal Direct Student Loan Program (FDSLP)- is handled directly by the federal government. You are in essence saying “Hey Uncle Sam, let me borrow money!” Uncle Sam replies “OK, fantastic!”
Not to make things more confusing, but there are two flavors of Stafford loans:
- Subsidized- while you are in school, the government pays your interest for you.
- Unsubsidized- you’re responsible for all interest, although you don’t have to pay it until you graduate
To receive a subsidized loan, you must show financial need. Most students whose parents make over $100,000 per year won’t receive one, although some do. If your parents make under $50,000, then you have a pretty good shot.
Luckily, all students are eligible for unsubsidized loans, regardless of their parents’ incomes.
Federal Perkins Loan
- administered by each university through funds the government provides. This loan is only provided to those with extreme financial need and each college has their own definition of needy. The main benefits:
- subsidized, so no interest will accumulate until you start repayment
- relatively low interest rate of 5%
- allows ten years for repayment
Parent PLUS Loan
– Like the name implies, this loan is actually in your parent’s name. You can agree to pay it off of course, but if you don’t, your parent will be responsible. Like Stafford loans, these are issued either directly by the government or by banks and credit unions. Other details: (the first one only applies to loans made after July 1st, 2008)
- Repayment begins either 60 days after you get the money or 6 months after you cease to be enrolled at a university on at least a part time basis.
- Not subsidized, so interest is accruing (adding up) throughout your time in school
- If your parent has a bad credit history, they may be denied
- You can borrow whatever amount isn’t covered by other forms of financial aid (limitless basically)
Private Education Loan
- This type of loan is provided by private banks and credit unions. The interest rate is higher than what the federal government charges. Keep in mind:
- interest rates and fees will be determined by your credit score (or your cosigner)
- having a parent with good credit to cosign should lower your rate
- almost absolutely NO WAY to get rid of these loans, even through bankruptcy
- some allow up to 25 years for repayment
Just in case it isn’t clear, you should exhaust all other loan options before taking out a private student loan.
While student loans can provide the means necessary to achieve a degree, they are still a debt that must be repaid. Anytime you’re considering taking one out (even federal ones), always ask “Can I realistically expect to pay this back?” If the answer is no, then do not do it! This is my plan of attack and I’m hoping planning to exit college with minimal loans.
6 Ways to Prevent Financial Diaster
lightning strike by rooymans2000 on Flickr!
After reading dozens of personal finance blogs, I’ve heard many stories of utter desperation. Individuals who were on the verge of bankruptcy. People who were slaves to their jobs. Many of these people just wanted to start over.
Instead of ignoring their misfortunes, I thought it would be helpful to highlight some of the most common mistakes so you and I don’t make them.
1. Be careful with credit cards. Many of the authors I read have a history of enormous credit card debt. Think how you would feel right now if you were told you owe $35,000 at a 12% interest rate. Now imagine you have kids and a mortgage payment. Scary isn’t it? I’m not against credit cards, but you must think before you swipe! If you cannot pay for something in cash right this second, you cannot afford it. Period.
2. Learn the difference between a want and need. Even many adults fail to realize the line that separates the two. This often lends to crippling credit card debt that takes years to be repaid.
3. Start an emergency fund now! If you’re still in high school, you probably won’t be subject to many financial emergencies. Take advantage of this while you can. Then, when you move out of your house at 21 and your car’s radiator bites the dust, you can pay for it without freaking out. Don’t make this harder than it needs to be. Just set a reasonable and realistic goal. My goal is to save up $1000 in my emergency savings account by the end of the year. That’s “only” $2.74 a day.
4. Avoid student loans, especially private ones. You have to repay every cent you borrow, plus interest. You may not get a job when you graduate. These are facts I try to ignore when I’m looking at tuition rates, but they’re too huge to forget about. Loans must still be repaid even if you file for bankruptcy. There is, except under ridiculous circumstances, no way out! Work the sh*t out of scholarships and other financial aid.
5. Avoid flashy cars…unless you can pay for them in cash. Luxury cars and SUVs aren’t just expensive to purchase, they’re expensive to own. Instead, buy a reliable and safe vehicle and drive it for as long as possible. While a car loan might be necessary, use it to buy the vehicle that’s just right for you.
6. Save for retirement. Do you want to be forced to work your whole life? No? Good! Now you need to save up so you don’t have to. Whether you want to retire at 30 or 100, you need to have money stashed and ready to go. A Roth IRA can attain a huge balance with just small and regular deposits.
Even if you obey these “rules”, you’ll make mistakes. I know I do (and will). I’m still paying an iPhone bill every month that I shouldn’t have agreed to until I had a reliable income. But at the end of the day, we all live and learn. Not having the previous 6 things to worry about just makes it much easier.
