Reflections on Debt Management

Good resource for finding a mortgage broker

2006-06-21T17:18:00.000-06:00

Another good resource for finding a mortgage broker is at this Mortgage B2B Directory.

Good luck!

Mortgage Brokers are a good resource

2006-06-21T17:13:00.000-06:00

Debt is nobody's friend. It never goes away unless you force it out (i.e. pay it off). With all the housing price increases of late, homeowners can take advantage of newfound home equity by contacting their favorite mortgage broker, who can help consolidate high interest credit card debt into a low interest mortgage loan.

Monthly savings are often several hundred dollars. However, it would be wise to reconsider your approach to spending if you consolidate your debt, because if you don't you'll most likely end up deep in debt again.

Good luck!

Personal Debt Levels to Rise to 160% of Income in Ireland?

2005-10-26T22:28:00.000-06:00

Wow. Is it just me or is personal debt the 21st century version of a plague? The Irish Times is reporting expectations of an average personal debt level in Ireland to rise from 120% of income to 160% over the next three years. Here's the link:

Irish Times

Can you truly invest if you are in debt?

2005-10-10T22:37:00.000-06:00

First off, let's not call a mortgage an investment, let's call it what it is: debt. Therefore, if a mortgage is not an investment that rules out a good portion of middle-class America as true investors who believe they are "investing" by paying on their home.

Ok - let's look at a scenario or two that don't involve mortgages. Suppose you want to "invest" some money, but you have at least one of the following:

Credit Card Debt
Auto Loan
Department Store Debt
Home Depot Debt

And so on and so forth. If you have ANY debt, other than your mortgage, do you truly believe you are "investing" if you put money in the stock market or anywhere else (other than your IRA or 401(k) - more on this later)?

I submit to you that you are merely mismanaging your money if you have any revolving debt and you put money into traditional "investments". Why? Because those investments you have are financed by credit. Therefore, any investments you have, you do not truly own.

Now what about automatic payroll deductions to a 401(k) with or without company matching? I personally don't classify retirement accounts as "investing" - I call it "saving". You should always contribute to your 401(k) in my opinion, even if you don't get company matching, because you lower your taxable income and you prepare yourself for a time when you won't be earning as much as you do now.

In conclusion, it's my opinion that it is wiser to pay off any revolving debts as well as auto loans prior to investing in stocks, bonds, t-bills or any other traditional investment.

Rip Van Winkle

2005-09-29T12:58:00.000-06:00

The title of this entry is appropriate, since I have neglected to post anything new here in quite some time. But, unlike Rip, I have not been sleeping - I have simply been toiling at my day job.

At any rate, how about that Hurricane Katrina mess? So much has been said and written on the subject already that I simply want to point out that people who were living wisely by spending less than they earned probably came out of that whole thing in better shape than those who were not.

Now I know that a lot of people down there were living in "poverty", but that's not the point of my statement. America is the best place in the world to rise out of poverty and there are ample opportunities for that. My point is that those who "earn" money have the choice to spend more or less than their earnings, and those choosing to spend less probably are in better shape today than those choosing to spend more.

Credit can be a powerful tool for us to advance our quality of life, but it can also completely destroy us. Be careful in your use of credit. That's all for now.

Options for Selling Your Home to Lighten Debt

2005-04-14T14:26:00.000-06:00

Those of us that currently find ourselves with a lot of debt probably have the largest portion in a home. Typically, the home is the largest investment one will make during a lifetime (the term "investment" is used loosely here).

One possible solution for reducing debt is moving into a smaller, less expensive home. I know, I know, nobody wants to do that. But seriously folks, if you are having oodles of money problems which are causing conflicts with the people in your life or you can't meet your financial obligations, common sense says examine every option.

If you are brave enough to live more modestly, and pay no attention to what the gossipers would say about you, you will end up happier and more financially secure.

There are really two ways to sell a home:

For Sale By Owner (i.e. fsbo)
Real Estate Agent

Agents typically charge 4-6% of the final sales price of your home for their services, which would equate to $12,000 on a $200,000 home. This is why a lot of people try to sell on their own first.

If you feel like selling your home and buying something less expensive would help your existing debt problems, try doing some research on fsbo and agent assisted selling on the web first.

Good luck!

Debt Management Means Spending Less Than You Earn

2005-04-07T00:01:00.000-06:00

The debt management and relief industry is a multi-billion dollar one. Why? Are we consumers really so financially un-saavy that we need someone to help us balance our checkbooks and tell us that we don't have enough money to buy that new car or that new boat? No. We're just accustomed to thinking in terms of monthly payments instead of actual cost.

Just because I have $800 left over after taxes and regular bills doesn't mean I can go buy a car that has a $800 payment. This is the wrong way to think about money. For a more in depth review of the right way to think about money check out this book available from Amazon:

How to Get Out of Debt, Stay Out of Debt, and Live Prosperously

Bankruptcies to Rise from New Debt Relief Legislation

2005-03-24T00:59:00.000-07:00

Bankruptcy lawyers are encouraging clients to file for bankruptcy now before tougher laws are passed that would make it more difficult to eliminate personal debts.

The U.S. Senate passed a bill last month that would make it harder to clear personal debt by default. The bill goes to the House next, where it should pass, and then would find it's way to the Oval Office. If President Bush signs the bill it would take effect six months later.

More here.

Bankruptcy Reform Legislation Gives Congress the Perfect Opportunity to Regulate Credit Counseling

2005-03-22T20:36:00.000-07:00

From PRWeb.com:

The U.S. House of Representatives will soon consideration bankruptcy reform
legislation (S. 256) on the House floor. In the bill is a requirement that
consumers must seek a budget analysis and financial review by a non-profit
credit counseling agency before they are eligible to file for bankruptcy.
Congress should use this opportunity to regulate all credit counseling agencies
through a federal law.

Read the whole article here.

While I agree that bankruptcy is a huge problem in America today, and indicative of the general "debt ignorance" of American Citizens, I'm not sure this is the optimal way to correct the situation.

The article is very one-sided, and obviously written by the AADMO (AADMO is the credit counseling and debt management industrys largest trade association), and therefore they obviously stand to gain a great deal if this legislation passes. Even if Credit counseling are non-profits they can have marketing arms that make huge profits while the non-profit sides take only a small portion of the proceeds. At any rate, one thing to consider:

Credit counseling is often viewed by lenders as worse than a bankruptcy on a credit report

Perhaps this will change with new legislation but I doubt it. Another problem is that the credit counselors usually try to negotiate lower rates with the lenders, or even get relief from the total principal owed. While that must be nice to those in debt, it causes lenders to recuperate the money elsewhere. In addition, little is taught to those being counseled about actual money management, so that they can avoid a similar fate in the future.

I suppose a combination of required counseling with an approved money management curriculum would definitely be better than what there is currently.

Why eliminate credit card debt?

2005-03-22T02:12:00.000-07:00

This may seem like a silly question to some. But then again, if it were so silly how come so many people carry expensive credit card debt? If you become a regular reader of mine you'll soon catch on that one of my resounding themes is that financial health means spending less than you earn.

Yes, emergencies do arise from time to time and it's not a bad idea to have the convenience of a credit card if your cash reserves won't cover your needs. However, living with credit card debt is about the best way to be a slave to big finance companies your entire life.

Eliminating credit card debt should be the first task of anyone seeking to become debt free. How it is eliminated can make a big difference. Those are topics for other entries. Beyond being disgustingly expensive (usually 10-25% APR), credit cards have this magic power to make some people feel wealthier than they actually are. In other words, they can make you feel like your capacity to spend is greater than what it really is. That's how you get in trouble, fast.

If you are one of those who feels the burning desire to shop anytime you have room on your plastic, but you want to change, make the choice now to spend less than you earn. If you do, you'll be able to eliminate credit card debt and begin to build cash reserves and investments. Then you'll be on the receiving end of interest, which is the best place to be.

Should I Consolidate My Debt?

2005-03-20T03:49:00.000-07:00

Let me start this debt consolidation article off with my disclaimer: my ramblings here aren't intended as advice in any fashion. These are my opinions about debt and debt management and nothing more. I don't want to get in any legal trouble so let's continue now that that is out of the way.

I have heard 'should I consolidate my debt' many times during my career as a mortgage broker. Though my job isn't to be a credit counselor, I think it's a pretty simple process for people to determine whether or not a debt consolidation loan is financially wise or not.

Rule of thumb: don't look at monthly payment difference, look at the difference in Annual Percentage Yield (APR). What I mean is that if you can find out what interest rate your debt consolidation loan will have (usually in the form of a cash-out refinance on your mortgage, or a home equity loan) you will be able to compare that to the interest rate on the debt you would be consolidating.

So let's look at an example. Suppose you have three debts you want to consolidate by taking out a home equity loan (also known as a HELOC). Home equity loans are second mortgages, or in the second lien position on a property title, and as such pose a higher risk of default to lenders than a first mortgage loan (in this case a cash-out refinance). Your three debts are a car and two credit cards. Let's suppose you have pretty good credit, not bad credit, but not perfect credit either. Your car loan has an interest rate of 6.5%. Your credit cards have rates of 14.5% and 17%. Your mortgage broker gives you a quote of 9.5% fixed rate for a home equity loan. Well, that's kind of in the middle. How do you figure out if this debt consolidation plan is financially sound?

Let's look at the numbers. Now that we know the interest rates on each debt, we need to know the outstanding balances on each of them in order to determine what to do next. The car loan has a balance of $13,500. The credit cards have balances of $2,500 and $1,300 respectively.

Car loan: $13,500 @ 6.5%
Credit Card 1: $2,500 @ 14.5%
Credit Card 2: $1,300 @ 17%

To consolidate this debt, a home equity loan of about $18,000 is needed (calculating room for any closing fees). By the way, you'd probably want to get your home equity loan from your credit union if it's a "stand-alone" because you'll get a better deal than your mortgage broker can give you. We need to determine if your current cost of debt (interest paid) is greater than it would be as a home equity loan.

13,500 * .065 = 877.50
2,500 * .145 = 362.50
1,300 * .17 = 221

The above figures sum to a total simplified annual interest (this year only) of $1,461.

18,000 * .095 = 1,710

A home equity loan as a means to consolidate this debt would be more expensive in terms of interest paid, as the simplified annual interest would be $1,710. Granted, this isn't taking into account any tax benefits. We'll assume no tax benefits for the purposes of this example. So at what interest rate would a home equity loan make sense? The break-even point can be solved using the following equation:

18,000 * x = 1461
x = 1461/18000
x = .08117

So an interest rate of 8% or less would save you money in this situation. The thing about debt and interest is that there are many vantage points. Half the battle is simply figuring out which viewpoint makes the most sense. To illustrate what I mean, imagine simply consolidating your credit card debt and leaving your car loan intact. Lowering your two credit card debts from 14.5% and 17% to 9.5% as a home equity loan obviously would save you money in interest. You really have to take a look at the big picture to determine from which viewpoint it is best to attack debt.

We'll go more into those subjects later. Remember, debt free living is a lifestyle. It all starts with your decision to spend less than you earn.

Debt Management = Common Sense

2005-03-17T03:01:00.000-07:00

This will be my first post to what I hope will be a beneficial blog to someone, anyone, out there. I look forward to joining the blogspot community and welcome all visitors.

All around me I see individuals and families struggling with all kinds of debt... credit card debt, student loan debt, retail credit debt, etc and so forth and so on. Those who find themselves with a heavy debt burden are usually consumed by the anxiety and frustration that comes with being financially trapped. So the question is how does an individual or family get debt relief?

In my opinion, it all boils down to common sense. Problem is, there are aspects to common sense that don't come naturally to us, but that we have to learn. Debt management usually requires a little learning.

The bottom line is don't spend more money than you make. Debtors who get rich off consumers using credit cards to purchase the latest thing would have you think this means you can spend as much as you make, translated into monthly payments. Don't fall for this trap. The right way to think about debt and purchasing items is whether you can pay for that thing you want in cash. If you can't pay cash, don't buy it. The debt headaches aren't worth it.

Of course, buying a house or a car are the general exceptions. Although be careful about buying a car because they can be huge money pits as well. But for anything else... only pay cash. If you can get yourself to think this way you will discover that you won't purchase a lot of things you thought you wanted because handing over a lumpsum of cash is a lot harder than charging it to the credit card.

I think that will do as a good intro for this debt management blog. In the future, I'll go into more detail about the true cost of debt (especially credit card debt), ways to get debt help, good habits for reducing debt, and of course good principles that help people live debt free.

I've never been in debt, other than a mortgage and a car payment, and I never will have any other debt. Eventually, living the smart money principles I have adopted, I will be completely debt free. I'm not rich. I don't make a lot of money at work. But I choose to view money and debt in a way that modern society is only barely coming around to. That makes all the difference.