paying off debt

Why It’s So Hard to Pay Off Debt – And What You Can Do About It

January 31, 2014 by illinois

Debt sneaks up on people. It’s easy to find yourself over your head. One purchase was affordable, so was the second. The third, fourth, fifth, and the interest payments on all of it makes money vanish before you know it. There is a whole industry out there to convince us that we need the newest thing, always, at all times. They don’t just sell us “items” like the newest cell phone, iPads or tablets and that giant TV that’s even bigger than the giant bigger TV. They are selling consumerism itself and all of it can be financed with the swipe of a card. Easy – Right?

That easy part is why it’s so hard to pay off debt.

Price, Interest and the Real Cost

When we take out a student loan or a mortgage for a new house, we see the final cost on the last line when we sign. We’re used to that and it becomes part of our financial planning. That’s not true when we take out that credit card and even when we think we’re getting a great deal on that giant TV, that’s not the price we are paying. A few great deals down the road and we’re committed to bills that add up to $500, $600, $800 each month. That’s a lot of money gone from our monthly income. Over the course of time, a few hundred dollars turns into thousands and we’re behind the eight ball.

Credit cards aren’t just there to make things easy for you. They are there for lenders to make money. The interest you pay is why they are interested in you. They are a useful tool and can help you get the things you need or want, but only if you stay in control. Lenders don’t care about your control. They care about the money they will make from you.

We Feel the Pain, But What Can We Do About It?

Whether we weren’t being responsible or we thought we were, debt snuck up on us. We know why it’s so hard to pay off debt, interest is killing us and the longer we pay, the more everything costs. The real question is how to pay off debt and get back to living a solvent life.

Like everyone else, you have a limited, defined amount of income. The first step is to understand how much you’ve got coming in and how much you’ve got going out each month. There’s no doubt about it, you need a plan.

Some people think they don’t need a budget. Forget that. You do. Understand your monthly income, your living needs and make a realistic assessment of what you owe.
Stop making only minimum payments wherever possible. The minimum payment is the creditor’s way of making sure you will pay the highest possible price for whatever you bought. Yes – you will continue to make your bills (unless you are in even deeper trouble), but you will pay off debt over a period of years! No one gets ahead of anything on minimum payments.
If you cannot make higher payments (say on a credit card) at the time payment is due, make that minimum and see if you can’t make an extra payment between due dates. There are a number of benefits to doing this. You will of course pay off debt faster, but what most people don’t understand is that the extra payment will go against the principal and the interest you will pay on the following bill will be figured on a lower amount. Doing this throughout the course of the year will save you a ton of money!
Assess your bills and assign priorities. What are your highest monthly bills? If you can make an extra payment on them, you will save the most since that interest is costing you more. Do you have one or more bills that are lower and might be “retired?” Nothing feels as good as reducing not just the money you’re paying, but reducing the number of bills you have. It’s an accomplishment! It will be a big help in making you feel good as you pay off debt.
You’ve made a budget. You know what money you’ve got. It’s time for some life adjustments. Cutting out the things you want so you can take care of the things you need can be a little painful, but it’s not like losing what you need. There is plenty you can do. Gone are the lunches out and triple-sized lattes. Make a decent shopping list, eat at home and buy the food you need to take your lunch to work. Spending $.15 to bring your own coffee to work is great. Spending $5.00 a day can mean making a credit card payment each month.

Pay Off Your Mortgage Early: the Pros and Cons

December 18, 2013 by illinois

Most bills should be paid as soon as possible to ensure financial wellness, but is this true when you are looking to pay off your mortgage? Maybe. The question is complicated by the government’s plans to increase the size of the entitlement programs. I’ve laid out some of the arguments both for and against an early plan to pay off your mortgage below to help you draw your own conclusion.

The Cons of Paying Off Your Mortgage Early

You have not yet taken advantage of your employer’s workplace retirement matching plan.
Instead of using money to pay off your mortgage early you could be putting that money to work for you. If you have a 401(K) plan that your employer will match dollar for dollar up to a given percent, or even a percentage of that, take advantage. Why not let you employer basically pay you more than they are now?
You have other, higher interest debt

Always pay off your higher interest debts first. Putting off high interest debt will result in overpaying.

Do not pay off your mortgage early if you do not already have an emergency fund in savings that equal three months of expenses.
Be prepared for unforeseen emergencies before you pay off any debt early. You need to think about what would happen if you had a medical emergency, lost your employment or incurred a major financial debt like a car or home repair. Plan for these things first, then if you have expendable income you can pay debt early.
If you like to stay liquid don’t tie up your available funds.
Some people prefer to have more flexibility with their money in order to react to business or other opportunities. If you fit this description you may not want to pay your mortgage off early.
If your house is worth less than you owe
If you are upside down on your mortgage you are more likely to be foreclosed on if you have some hardship that makes it impossible to pay your monthly payments.
If you do not have enough insurance to keep your family safe.
When you have a family it is more important, particularly if you are the sole provider, to have health, life and disability insurance in place. If something should happen to you insurance will take care of your family.
If you have a fixed rate mortgage and it looks like high inflation rates are on the horizon now is not the time to pay off your mortgage.
Inflation makes money less valuable, so when inflation goes up the value of your mortgage debt goes down, if you have a fixed rate mortgage the higher it goes the faster the value of your debt declines. In other words, if the dollar is worth a dollar today and next week it will be worth 60 cents, why use the one dollar now to pay the same debt you can use to pay with the 60 cent dollar down the road.

If you can get a bigger return on your money somewhere else.
If you have a rate of interest at 5% but you are paying 25% of you total income to taxes then your effective interest rate is 25% minus the 5%, so really only 3.75%. Take the time to figure out whether your effective interest rate is low enough that you might get a bigger return by using your money elsewhere.

The Pros to Paying Your Mortgage off Early

If paying off your mortgage is going to help you feel better.
Peace of mind can be the most important thing to some people and having the mortgage paid off can ease a lot of pressure.
If you are getting ready to retire and want to have the mortgage settled to plan your living expenses.
It might be a good idea to pay off your mortgage early to have more money for day to day life once you retire.
You prefer certain return to possible risk even if that risk could mean more money down the road.
If you listen to money expert Suze Orman she will tell you to pay off your mortgage before making any other type of investment because you will need a place to live regardless of how much money it is possible to make.
Interest is money you just don’t need to spend.
Most people who are very good with their money hate paying interest because it is always an overpayment for what you get. Why pay more if you can pay just the principle?

Those are the best arguments for and against paying off your mortgage before it is due. As you can see there is not real correct answer, it depends on you and how you feel. Only you, and your family can decide what financial plan best suits your needs and comfort level.

Take Control of Your Student Loans

December 1, 2013 by illinois

One of the biggest stresses that people have in the United States is their debt. One debt that almost every person can accrue is student loan debt. Taking control of your student loans can bring a person a strong sense of financial freedom.

There have been many problems in the world of student loans. Many of the problems are being addressed by the Consumer Financial Protection Bureau (CFPB). They are hoping to help reduce the confusion over the payments, how they are applied, as well as looking out for the best interests for the individual consumers.

The Troubles of Some

One of the major troubles that you are having, when taking control of your student loans, is that they have no idea to whom they owe money. A lot of this is not the borrowers’ fault. Many times lenders are not clear, as to whom you are getting the loan through.

Another issue that many students experience is the confusion of prepaying on a student loan. Many students have sent in payments ahead of schedule and the payments do not always go through. Sometimes the payments can also be delayed. Many times this is frustrating for the borrower.

It can be a problem when post graduation, is attempting to take control of your student loans and you learn that the loans have been bought and sold several times changing whom your lender is with little to no communication to the borrower. This can be complicated for many borrowers because every time the loan changes hands a new set of payment arrangements needs to be made. Since you are not always informed of this change, you could be sending your payments to the wrong company entirely. Many times it is the past due notices that cause borrowers to learn of their loan status.

Paying on Principal

Many times when trying to take control of your student loans a borrower will send in money that is above and beyond their minimum payment, or make an extra payment. This has caused problems for many individuals. Many lenders do not apply the extra money to the principal balance as the borrowers are expecting. It is a common practice that the extra will only pay the account forward, not reducing the principal or the interest that is earned.

Taking Action

What can you do to take control of your student loans? How are borrowers to take action? The first thing that borrowers did was write letters and logged their complaints in. This has proven to be the right course of action because the CFPB (Consumer Financial Protection Bureau) has decided to take action. The CFPD already has the ability to oversee the loans within bank servicers. However, not they are also taking over the authority of those student loans that are being services by a non-bank lender. This will mean that for at least 49 million borrower accounts someone is holding the lenders accountable. The CFPB will have the authority to monitor seven of the biggest lenders in both the federal and private student loan sector.

This new oversight is beneficial because the CFPB will not be checking to make sure that the individual lenders are adhering to the federal consumer protection laws as well as their standards. The CFPB will also be watching to ensure that there are no unfair or even deceptive practices going on with the lenders or to the borrowers of student loans.

What Can You Do

This problem is not something that will go away when the CFPB becomes in charge. There are still things that you as the borrower should do.

Continue to notify the CFPB if you feel that your payments are not being applied fairly or if the lender is being deceptive. It is the complaints that have been made by the borrowers that have led to the CFPB taking action now.

Submitting a claim is as simple as plugging in a website. Go to the CFPB website and fill out the form. From here, you can also monitor the status of a complaint that you have made. By making the lenders accountable, you are able to help contribute to the continuation of the forward thrust of the program. Being willing to take control of your student loans and working with the CFPB. They are able to take the unfair actions by lenders that can allow you to obtain freedom from your student loans.

Whenever you are able to take control of your student loans, you will become financial free. With the help of the CFPB many of the problems that you can have with lenders will be able to be eliminated. Be sure that you look into the problems that you are having. Note the changes that are going to be through the new abilities of the Consumer Financial Protection Bureau and how they can help you take control of your student loans.

Is It Possible To Save While Paying Off Debts?

May 25, 2013 by illinois

Some people think that they should choose between saving and paying off debt. Well here’s the thing – you need to do them both. No matter how small your extra money is, these two are equally important and choosing to not act on one of them could lead to financial disaster.

In all honesty, your question should not revolve around what needs to be prioritized. The more important question is, how can you save while paying off your debts? This is where debt consolidation comes into play.

Let us look at the facts here.

If you choose to save and ignore your debts, you will suffer from the high interest rates, penalty charges and even the possibility of a lawsuit. This is mostly true if you have a lot of credit card debt – which is the third biggest debt amount that consumers owe in this country. It will keep on piling up the longer you refuse to send payments to your creditors. By defaulting on your payments, you will be endangering your personal possessions from being taken away from you. For instance, secure loans like mortgage and car loans gives your lender the right to take your vehicle or foreclose your home. Ignoring your debts, not paying them off and pretending they will just go away is the worst thing that you can do.

On the other hand, if you choose to just send everything to your creditors and lenders without leaving anything for savings, you are also in trouble. Let’s say your disposable income can cover your debt payments without a problem. What if, something happens to your job to compromise your main source of income? What happens to your debt payments now? Also, how will your family survive? Or another scenario is a health condition. What if you found out that you need an expensive medical treatment? Will you put yourself further in debt just so you have the money to pay for medicines and medical care?

Both are equally important but another case in point is, what if your limited income cannot cover both your savings and your debt payments? That is how debt consolidation becomes a perfect option.

This type of debt relief option works to provide debt ridden consumers with a low monthly payment plan. You are not really reducing your debts so you don’t have to worry about the creditor not agreeing to the new payment scheme. You are merely distributing your current balance over a longer payment plan. In some cases, you end up paying more interest amount but given your limited resources, you really have no choice. If you are lucky to be granted a low interest rate on your new payments, then it will bring your monthly requirement even lower.

This lower monthly contribution will allow you to make room for your savings. The thing is, you don’t have to spend forever splitting your disposable income towards the two. As soon as you have grown your savings into an amount that can be an adequate safety net for you and your family, you can use all your extra money on your debt payments. That way, you make more significant contributions towards your debt to expedite your debt freedom. This time, if anything happens to your income or an emergency expense crops up, you don’t have to worry about defaulting on your debt anymore.