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Which Debt to Pay First: Lowest Amount or Highest Interest?

February 22, 2016 by illinois

If you are in debt, you are not alone. On average, households in the United States have over $15,000 in debt. Almost half of this comes just from credit cards. Clearly, debt can be difficult for people to manage. However, for many people debt is also a difficult topic to discuss. Creditcards.com conducted a poll asking Americans what topics they would be uncomfortable discussing with a stranger. Debt was one of the least comfortable topics to discuss, coming in behind salary, weight, politics, and religion. Not talking about debt could be why people sometimes use the wrong strategy when choosing which debt to pay first.

There are two main strategies, working on the lowest amount debt first, or the debt with the highest interest first. Even experts disagree on which strategy is the best, and it can vary from person to person. Check out this article for a bit of the debate between debt experts. What works for you may not work for your friend. Keep reading to help decide what the best strategy is for you.

[Read: Is It Possible To Save While Paying Off Debts?]

Pay Off High-Interest Debt First

Focus on most expensive debt in long-run

Mathematically, this is the best strategy for deciding which debt to pay first. It helps you avoid making more interest in the long run. For this strategy, you continue to pay the minimum payments on all your debt, except for the one with the highest interest rate. You should pay any amount you can afford to pay off this debt first. The logic behind this strategy is that you will save the most money overall. The downside to this strategy is that it may take a while to pay off the first debt. The slow progress may make you less motivated to continue tackling your debt. If you choose this strategy for which debt to pay first, it is important to be determined, and self-motivated.

Once you have paid off the first debt, you can “snowball” the next payment. Choose the account with the next highest interest rate and focus on this one. Now that you have paid off the first debt, you can take the money you were putting toward the first debt, and work on your second debt. This is the snowball effect, because each time you pay off an account, you have more money to put towards the next account you decide to focus on.

Prioritize Lowest Amount First

Lowest amount debt paid first

With this strategy, as with the first one, you should still continue paying the minimum balance on all your accounts. However, instead of choosing the highest interest debt to pay first, you should focus on the lowest amount of debt first. As with the previous strategy, there are pros and cons to this method of deciding which debt to pay first. The main con of this strategy is that it will often cost you more in the long-run. Your lowest amount of debt is most likely not your highest interest debt. This means, as you focus on paying down the lower amounts, your higher interest accounts will still be accumulating interest. Based solely, on mathematics, there is a clear advantage to choosing the highest interest debt to pay first. So why do experts say there are two methods? Paying down debt is a daunting task, which requires financial self-discipline and lots of motivation. This is what the lowest amount method provides – motivation. Paying the lowest debt first lets you cross off an account quicker than if you paid off larger, high interest accounts first. Being able to cross that account off the list of debts provides many people with an instant boost of confidence and motivation. It helps seeing that you have accomplished something, and are on your way to achieving your goal. One study from Texas A&M University has begun to investigate how this effect works. Their findings suggest that paying the lowest balances first helps people build their motivation, but the subject still needs to be studied further to be conclusive.

[Read: Do I Repay Debt Or Invest?]

Which Strategy?

Strategy depends on personality
Either method leads to no debt

With all this information, how should you go about choosing the best strategy for you and your debt? One important thing to remember is that everyone’s situation is different. People have unique personalities and debt situations, which should be considered when choosing a strategy. Do you need the confidence boost of paying off your low debts first? Or is knowing you are saving hundreds or thousands of dollars in interest enough motivation? Whichever strategy you choose, the key thing is to stick with your goals and keep paying down your debts. Both strategies will lead to the same end result of zero debt. Check out this video which discusses one method to pay off your debt.

The Worst Financial Mistakes You Can Make When You Get a Divorce

February 3, 2016 by illinois

Getting a divorce a divorce is never an easy decision and going through it not only comes with emotional side effects but also financial ones too.

This might not be the first thing to cross your mind, however, preparing to avoid the worst financial mistakes you can easily make during a divorce may save you from becoming a financial victim in the future. Here’s a list of the most common financial mistakes you can make.

[Read: Money Tips for Married Couples]

1. Lack of planning and knowledge of your household finances

First, you need to be clear about how assets need to be divided between you and your spouse. Normally, problems start to occur during negotiations, when one spouse or the other doesn’t have a clear idea of the household assets such as properties, accounts or pension plans, which often makes negotiating a difficult scenario considering that everybody wants what is best for them and if there are kids, chances are that negotiating will be even more problematic.

Therefore, to avoid making the worst financial mistakes, you must have a personal plan prior to discussing anything with your spouse with accordance to what it is that you would like from your assets and what is available to you. This allows for you to get a heads-up and prepare for anything unexpected prior to discussing anything with your spouse. Understanding the basis of assets and what each of them involves like tax entanglements or liquidity. Arguably, it’s even more important to understand the financial security that each asset will give you in the future.

Additionally, it often occurs that one spouse or the other makes a not thought out financial decision because he/she does not have a thorough involvement with their bank accounts or credit status. Truthfully, to avoid bad decisions both spouses should have a deeper insight of the family finances, which can simply be achieved by talking to your spouse to get a grasp of the financial flow in your accounts.

However, if this does can’t happen for some reason, you might find it useful to consult with a forensic accountant who is able to have a look at basically everything from tax history, individual retirement accounts and financial history of both spouses, and then make assumptions about the overall information gathered.

2. You don’t consult with a financial advisor

It’s always good to have an advisor or team of people who can objectively answer and help you with financial questions in terms of the divorce. When you have to consider your common assets, it’s a good idea to collaborate with professionals.

Financial advisers make sure that work is carried out properly by giving thorough advice on asset related information and they can consult with both spouses legally until they can come to mutual terms.

They can also create a new financial plan for both spouses and find the relevant assets according to their newly formed situation. However, the advisers don’t take place in any further processes related to the divorce.

Above all, merging with a team of people who you can trust throughout and even after the divorce is going to strongly influence the type of decision you will make regarding your financial status.

3. You neglect the divorce ordinance and agree to unwritten things

After getting a divorce, it’s common for spouses to get in clashes with each other because the unwritten promises are not kept, therefore, misunderstandings and failures to do something that was promised but never been agreed on a legal document can occur.

This often results in one person getting stuck with a stack of tasks that was agreed to be split up between one another but has never actually happened and was not put into writing. This must happen in order to avoid future conflicts and emotional arguments, which can get in the way and lead to making the worst financial mistakes later on.

As family and personal circumstances will change after the divorce ends, there is a high chance that you will not know for sure how the other person will change his/her mind about financial decisions later on, and they may not stick to the promises that the two of you verbally agreed to but did not put in written form.

That is why writing down the mutually agreed terms is a must, as you can’t expect the other person to always make rational decisions in the future. Due to the possible conflict, it is usual that people don’t put down things in writing because they want to avoid the negative side to it, however, this is what generally results in unnecessary arguments and unfair burdens shifted to one of the spouses.

Things to consider that can save you from making the wrong decisions

Make financial plans prior to making your decisions
Consult with a financial advisor
Prepare and make copies of important documents
Make sure you’re aware of your assets
Try to come to a fair settlement with your spouse
Have a stable financial plan for the time after the divorce has been closed
Try to remain neutral and refrain from involving emotions when making important decisions

Whether you’re in the middle of a divorce or getting one, you will surely want to avoid making the worst financial mistakes because it may cause a disadvantaged situation in your future life. Being a more financially stable spouse than the other one can occur as factors outside the divorce may influence that, however, whilst negotiating the terms you should tidy up any emotional attachments towards each other and try to work together as a team or focus on coming to mutual terms that work best for the both of you as such decisions will make you satisfied in the future.

[Read: 7 Money Mistakes That Can Mess Up Your Marriage]

You don’t want to become the person who didn’t put enough time and energy into your decisions and you might regret them later, especially if you also have children to be responsible for after the divorce, not just for yourself. It is a trip that you have to take together even if you don’t want to belong to each other anymore.

Overlooked Home Ownership Costs: The Facts!

October 22, 2014 by illinois

If you’re looking for somewhere to live, you have two main choices, you can decide to rent or you can decide to make a purchase and own your own home. Choosing the latter is not without its problems, though it seems like the most sensible option for many. Here are the four most overlooked home ownership costs that might make you consider your options more carefully before you take the plunge and buy.

Time Constraints

When you own your own home, one of the main overlooked home ownership costs are the maintenance and upkeep of the property and the fact that this will have a considerable effect on your time, too. If you rent, any problems fall to your landlord to fix – in your own home it’s up to you and it might not always be affordable or easy to find the time to do it. How often do you talk to friends and family and find that they’re busy doing DIY or other tasks? It’s food for thought if you want more free time.

Major Maintenance

If you own a property for a good number of years the chances are during that time one of the biggest overlooked home ownership costs will be keeping on top of the exterior of the building – you might have to replace all the windows, or even the roof, if you’ve chosen to live in a particularly old property or one that needed a lot of renovation. Chances are, if you’re renovating the inside you’ll choose “only the best” and might end up with more outlay than you intended – if you go for expensive decorations, furnishings and appliances.

Taxes

You’ll of course be liable for many financial aspects of the house such as the mortgage and all the bills, but you’ll also need to factor in property taxes as another one of those overlooked home ownership costs. These are state by the state you live in and can, in some cases work out at up to $1000 a month extra. All worth thinking about before you commit to buy.

Risks to Others

If you’re in a rented apartment block and someone has an accident in your property or near it, it isn’t your fault and the responsibility falls to the company who own the property to pay out any compensation or answer any queries about the safety and maintenance of the building. If you own your own home and the same thing happens, the onus falls to you. This can sometimes make your home insurance premiums rocket and become unmanageable. Again, another factor worth considering if you’re wanting to own your own place and wondering if you can afford it.

Are there ways to minimise overlooked home ownership costs if you still want to own your own place?

Yes, there are ways you can avoid some of the many overlooked home ownership costs if you’re still adamant it is the right thing to do, to invest in your future and put down roots somewhere.

1.) Think about what you’ll like now and in the future, but something that suits you now and you know will not date, or that can be easily decorated or renovated if you change your mind. Looking to buy somewhere that is already renovated to your taste and style or as close to it as possible is another way forward, this can keep your own costs lower as you can just move straight in without worrying too much.

2.) Do as much of the DIY as you can, yourself. Obviously within reason – but there aren’t many people who can’t put a lick of paint on a wall to brighten a room up. Real heavy chores and anything to do with plumbing or electric should be left to a professional, but minor changes can be done by you to save a fortune on other unnecessary expenses.

3.) Look for areas that charge low taxes – whilst you never know what will happen down the road it pays to look for somewhere to live that at that moment in time had relatively low taxes compared to other areas, you can save quite a lot of money that way and even if there are hikes, you may still end up saving more compared to if you were living in another area with higher prices still.

4.) Think about investing in a condominium. It might not be the most attractive option, but in terms of running costs and maintenance you’re onto a winner as they need relatively little doing to them. You’ll also have to spend less time on maintenance too as there are laws forbidding any structural changes being made to them.

Think twice about all the overlooked home ownership costs there are before you invest – it’s everyone’s dream to own their own home, but in the long run it can be much easier and hassle free to simply rent.

Is Peer To Peer Lending Effective Against Debt?

May 2, 2013 by illinois

Debt consolidation loans are effective in getting you out of debt but you have to realize that there are qualifications to be met. These are important so that you can maximize the benefits and potential of getting a loan to help pay off your other debts.

The thing about this type of debt solution is you have to get a low interest loan. This is one of the ways that you can get a lower monthly payment – at least, it should be lower than your current. Failing to do so will defeat the purpose of using debt consolidation as your solution.

There are two ways for you to get a low interest rate on your loan. You need to have a good credit score or a collateral. But what will you do if you do not have both?

You may want to try out peer-to-peer lending. Instead of borrowing from financial institutions, you are actually borrowing money from private individuals and investors. It is like borrowing from a community of investors. This is continually gaining popularity because it is simple, effective and fast.

This type of debt consolidation loan is preferred because it can offer a low interest rate even for those with a bad credit history. It is not as low as the interest rate of secured loans or good credit score holders borrowing from banks and lending companies. However, it is definitely not as high as payday loans. In terms of the credit card – they are usually at par. The interest rate of P2P (peer-to-peer) ranges between 35% to 7%.

Your credit score will still be taken into consideration of course. P2P lending is managed by a third party website. They run the whole program, having lenders on one side and borrowers on the other. When you apply as a borrower, you need to fill up a form and submit it online. The company behind the website will conduct a credit check and will assess the risk you will pose – much like how banks and other lending companies would. They will rank your risk factor and individual lenders will check this before they decide to lend you their money.

There is a possibility that your money will be funded by more than one lender. It will be third party company’s responsibility to gather your borrowed money and to collect from you. They will also take charge of sending payments to the respective lenders who funded your loan.

The thing that makes P2P lending ideal is the fact that the lenders involved will not be too strict about their money because they will be investing their disposable income (at least most of the time this is the case). It will not be like the banks wherein they treat it as a primary business so collecting from you will be done aggressively.

If you are wondering if it is effective against your debt – well that depends on whether you have the financial capabilities to pay it off and if you are disciplined to see it through. So before you really push through with this type of loan, make sure that you have scrutinized your own finances. There are other debt relief options and you should consider them carefully to find the perfect solution for your troubles.