Debt Management

How to Choose the Best Rewards Card

Last issue we talked about zero percent financing. Now, I want to talk about the benefits of ‘rewards cards’. You know, those credit cards that offer cash back bonuses, airline miles or other rewards that accumulate with each purchase.

Get the facts to determine if rewards cards are right for you.

Annual Fee and Interest Rates

First, rewards credit card generally have an annual fee and a higher interest rate than non-reward credit cards. You have to be absolutely certain that you will pay your balance off each and every month in full or the reward won’t be worth it.

Can You Use the Reward?

Nothing is worse than carefully accumulating points for a year, only to find you can’t use the reward. Ugh!

You need to find out what rewards are available, how many points and/or miles are needed, what are the exclusions? I was just reading an application for someone and for 25,000 points, they could get a free coach airline ticket valued at up to $400. That seems great on the surface, but what does that actually mean? Can you book that reward when and where you want to use it? How much do you have to charge to earn those 25,000 points?

If you were a part of my Nearly Free Travel Group, you know that we don’t have an airline miles rewards credit card. We earn our miles in more direct ways. We used to have several different types of rewards cards (airline miles, cruise points, etc.) but not anymore. But with everything in life, this is a choice we made. You may want to choose differently.

The Terms and Conditions

So what should you look for?

How the interest is calculated – single or double cycle billing?
How long is the grace period?
What percentage is the minimum payment (typically 2 to 2 ½ %)?

Take your time and ask questions before applying. Make a pros and cons list – does it work for your future plans and current spending habits? To start your research, go to Nerd Wallet’s Best Credit Cards of 2015 for a comparison chart that will help you determine if a rewards card could benefit you.

Say Bon Voyage to Your Debt Part 6: Make Note of Your Successes

I keep a Gratitude Journal. Every night before bed I write down 5 things I am grateful for. Here are some financial examples from over the years:

I was able to pay more than the minimum on my credit card bill
I sold an item and put the $40 towards an extra payment on my student loan
I worked an extra hour and that money will go toward my car loan
Got a flat tire today. Was able to pay for the repair with my emergency savings and not with my credit card
The store credit card bill was lower than I expected
I paid the bill before the bill arrived

Acknowledging my successes kept me motivated. It was no small effort and I needed all the help I could get.

You are on the path to paying off your debt. This is a long journey and there will be many challenges. You may want to quit before you get there. Don’t.

Congratulate yourself for taking the first steps. Celebrate all the good work you are doing and will do. Remember to celebrate with something that isn’t going to give you more debt. For example, we love to treat ourselves with summer picnics in the park where they show free movies or concerts.

We want to hear from you! Tell us how it’s going. What you share may inspire others to keep going.

Say Bon Voyage to Your Debt Part 5: Make a Custom Plan

With Step 5, we’re going to get into the hard stuff – the actual debt payoff. If you have kept up with the series of newsletters or the Facebook group, you have completed the following:

You have reflected on the actions, inaction, thought process, or events that got you into debt.
You have “faced the truth” by compiling a complete list of your debt.
You have reflected on ways that you can find more money in your budget or bring in more income.
You have started your emergency savings plan.

With these steps in place, it’s time to create your own custom action plan for paying off the debt.

To start, you need to do some brainstorming.

Sit down with paper and pen (or at your computer) and write down your answers to this question: “What can I do today to lower my debt?” Just write the first 20 ideas that come to mind – you can worry about whether they’re even possible later.

Your list might look like this:

“What can I do today to lower my debt?”

Consolidate my credit card debt into one monthly payment
Apply for a home equity line of credit for debt consolidation
Sell home and downsize
Live frugally and only buy essentials so that I can pay off the debt faster
Stop funding my / our retirement until the debt is paid off
Apply for zero percent balance transfer to pay off debt quicker

Now, put the list away and wait a few days. Stepping back from what might be a difficult choice will help you reevaluate your priorities.

After 2 or 3 days, come back to your list and choose one. There is no right or wrong answer. Remember, you are designing a plan that tailor-made for your individual goals and needs. You have to determine what is best for you and your situation.

Now, go through the process of exploring whether that choice will work for you. You may have to contact a third party like a bank, mortgage broker, real estate agent, etc. You may have to look for zero percent balance transfer offers. You may have to get the whole family on board to see if they can live on a smaller budget. If it all works out, then you can start your plan. If not, go back to your list, choose another option, and explore it thoroughly.

Because you didn’t accumulate your debt overnight, it won’t be going away overnight either. You will make your choice (you can try many choices on the list), and you may need to follow through on it for over a year or for several years.

This whole process is definitely worth your while, because you will gain control over your finances. You will stop working just to pay your creditors, and actually save money as you eliminate the finance charges you’ve been paying.

Yes, I know (and have been there) that these are hard choices to make. But if I can do it so can you.

Say Bon Voyage to Your Debt Part 4: Prepare for Surprises

Step four might surprise you.

I want you to start an emergency savings account and your goal is to save an initial $1,000. Yes, you read that right.

Why would I tell you to put money into savings when you’re trying to pay down debt? It’s not like the interest you earn is going to be more than the interest you’re paying, right?

Because, if you don’t have a savings account to fall back on, you’ll be back in debt the next time you’re blindsided by an unexpected repair or medical bill. Life happens. If you don’t have money in the bank, how will you pay for the surprises it brings? With a credit card or a loan? It’s a bad habit, and it’s better to start breaking it now rather than later.

Just like your debt didn’t happen overnight, your emergency savings isn’t going to happen overnight, either.

1. Make a plan to save money from each paycheck.

2. Start small with $5 per week and increase over time.

3. Remember to pay savings first (and automatically) before you pay the bills.

You can put money in savings automatically through your payroll department. If you don’t have a direct deposit service through work, you can set it up with automatic transfers at the bank.

As I said, start small and work your way up. The ideal goal is to put 10% of your income into savings. But first, start with the emergency fund so the little emergencies don’t discourage you from your quest of paying down your debt

Next issue: We will actually start paying off your debt – bet you thought we wouldn’t get to this.

Say Bon Voyage Part 3: Finding the Money

In step 3 of Say Bon Voyage to Your Debt, we are going to look at ways to find more money.

One way to “find” money is by plugging the leaks in your spending. You’ll take back that wasted cash and put it where it can do some good. To do this, you need to know where your money is going, and that means tracking your spending. For more information on how to do this, see Step 2. We personally do this several times a year, and we are doing this for July along with the group.

You are going to have to make some tough choices by reducing and eliminating expenses. Here are a few common budget leaks to get you thinking:

Bring food and beverages from home versus buying out.

Rent a movie from the library and make homemade popcorn instead spending $20 each at the theater.

Have a potluck dinner with family and friends instead of splitting the cost of a restaurant bill.

Institute a “don’t buy” month (you can buy needs but not “wants”).

Do free activities – in summer there are lots of options. We attend festivals, and concerts and movies in the park.

Reduce your bills by eliminating unneeded services (lawn, cable TV, premium channels, etc.)

Do things yourself versus hiring someone. Some home projects can be tackled with the help of the internet and your hardware store’s advice.

Buy used versus new. About 20 years ago we bought our patio set used for $100 (table for six, including cushioned chairs, chaise lounge, and end table). We are still using this set and have only replaced the cushions. It would have cost ten times the price if we bought it new.

These are just suggestions. Think about your own lifestyle to find reductions that will work for you.

Another way to find money is to make money. You don’t have to get a second job, necessarily. Here are some creative ways to increase your income.

Sell unwanted items for cash. Think tag sale, online sales, free classified ads in a local paper, etc. People love a good deal! We’ve have sold everything from new toothbrush heads to a car online.

Earn some extra cash. There are websites that will help you connect with people who need your skills. Do your research before you commit.

Use your hobbies to earn extra money. Don’t start a business that requires lots of money. Instead, rent out your skills or sell your handiwork. If you’re a gardener, rent yourself as someone who does spring planting or puts the fall plantings to bed. If you’re a scrapbooker, organize other people’s photos. Do you have extra handiwork laying around? Sell it on Etsy.

Rent out extra space. Do you have extra space in your garage or a spare bedroom? Rent them out. Again, do your research and get references.

Now think about what you can do to earn money. You might be surprised at finding an enjoyable second income that works well for you and your family.

For more information and support, join my free private Facebook group “Say Bon Voyage to Your Debt”. We officially started on July 3, but you can still join to get the individual support and worksheets. Sign up here: www.facebook.com/groups/PayOffYourDebt/. To receive a bonus budget tracker, sign up through my newsletter

In our next issue, we will tackle something unexpected.

Say Bon Voyage Part 2: Face the Truth

The next step to getting out of debt is to face the truth. Yes it’s scary, but it’s time.

First, gather up your most recent credit card and loan bills. You are going to compile a list of how much debt you have. The statements will give you several key pieces of information that I want you to write down:

Balance Owed

Interest Rate

Minimum Payment

Number of months and/or
years to pay off

Now total the columns.

I know this is a big step, and I want you to congratulate yourself for doing it. Once you know the truth, you can take proactive steps to deal with it.

Now, explore options to pay off your debt as fast as possible. You could…

Pay a higher amount towards the highest interest rate debt while making minimum payments on the other debts. When that’s paid off, move on to the next highest interest rate until you are done.

or…

Pay a higher amount towards the smallest balance first, so it’s paid off quickly. That will give you a sense of accomplishment and keep the momentum going until all debts are paid off.

But is there another way? What if you could…

Find a balance transfer to lower or consolidate your debt? You’d ideally want to find 0% interest for the life of the balance. Yes, you will incur a balance transfer fee (typically 3%), but you will be saving the difference in the interest rate you’re currently paying.

Contact your creditors and ask them to lower your interest rate. You want to do your research first, and be prepared to ask for a supervisor if needed. An interest rate reduction of any kind will save you money and keep the overall balance lower while you pay the debt down.

For more information and support, join my free private Facebook group “Say Bon Voyage to Your Debt”. We officially start on July 3. To get individual support and worksheets, sign up here: www.facebook.com/groups/PayOffYourDebt/. To receive a bonus budget tracker, sign up through my newsletter

In Step 3, we will discuss ways to find money and change your spending habits.

Say Bon Voyage Part 1: Reflect on What Went Wrong

We all know that debt (and the costs associated with it) is a national problem. In fact, it may be the biggest problem standing between you and a comfortable financial future. Putting a stop to accumulating debt, and dealing with it once and for all, is the answer.

Over the summer, I will be offering ideas to help you start on the path to paying off your debt and keeping it gone.

In my opinion, there are typically 6 steps to paying down your debt. Here is step 1.

Step 1 Getting Started

I want you to take time to reflect, and to determine why you have debt. I believe that once you know what got you into debt, you can make the changes necessary to improve your finances.

Maybe you simply spent too much. Judging by advertising and television, every waitress should be able to afford a home furnished by a mix of Crate & Barrel and Anthropologie. You wouldn’t be the first to want to live the American Dream… before you made it.

But, not all debt comes from overspending. Sometimes it comes from medical bills that accumulate due to illness or uncovered procedures, it could be a death in the family, divorce, a job loss or reduced hours. There are circumstances that can blindside you and throw the best financial plans off track.

The bottom line is that you are spending more today than you earn. You have been living in a “buy now and let my future self pay the debt” universe. But this isn’t a science fiction movie. That future self is you and you’ll be just as unhappy with debt tomorrow as you are today!

I don’t want you to think I am judging you. We all have reasons (or excuses) for the actions we take. If you want to get out debt once and for all, you have to make changes to your thought process and habits in order to see lasting changes.

Right now, I want you reflect on why you’re in debt. Go ahead and tell the whole story. Start from the beginning.

1. When did you first get behind on your bills?

2. What did the money go towards?

3. Do you have habits that make it easier to accumulate debt (and difficult to pay it off)? These might be shopping, eating, decorating, entertaining, recreation or work habits.

4. What needs to happen for you to pay off your debt? (We’ll revisit this question later – this is your first, knee-jerk response.)

5. Why do you still have debt today? List all the reasons. This is just for yourself to read, so feel free to be honest.

In the next issue we’ll begin the hard work, so get ready.

Is it time to take a break from your credit cards?

My credit cards have been with me for years – my oldest was opened in 1987. They were there for me when I had unexpected car repairs, unfinished holiday shopping lists, uncovered medical expenses, a slow month in business, and the times when our money ran out before the end of the month. They have gotten me through good and bad financial times, just like old friends.

But, about ten years ago, I came to the conclusion that my cards were helping themselves more than they were helping me. When I relied on them for emergencies, it meant paying interest on the entire balance for an unforeseeable amount of time.

Here’s a common example of credit card debt:

Balance Owed	Interest Rate	Minimum Payment	Months to Payoff	Additional Interest Paid	Total Paid
$5,000	12%	$100	70 Months (almost 6 years)	$1,966	$6,966
$20,000	18%	$350	131 Months (almost 11 years)	$25,745	$45,745

I want you to look closely at the last 3 columns. Look at how much you’ll end up paying and how long it will take! That should scare you into taking a break from using your credit cards. I know it did me!

Once you get behind in your bills, it becomes a never-ending cycle of taking out debt to pay debt. You worry yourself into sleepless nights and your whole paycheck goes towards past expenses instead of current wants and needs.

Today is the day to make a resolution to stop your credit card debt and take back your financial independence.

This step is the scariest, make a list of all your credit card debt (you can include other debts as well).

The list should look something like this:

Name	Interest Rate	Minimum Payment	Balance Owed	Payment Due Date	Paid On
Creditor #1	18%	$350	$20,000	5/1/14	4/27/14
Creditor #2	12%	$100	$5,000	4/15/14	4/10/14

You can tackle paying off your credit card debt in one of two ways.

Save money by paying the highest interest rate card first.

The first way is to pay the credit card with the highest interest rate off first. Pay every penny you can above the minimum to get it paid off as soon as possible. There is a box on your credit card bill that tells you how much you have to pay each month to pay the balance off in 3 years – aim for that or sooner.

Once that card is off your list, pay off the next highest interest rate credit card until all cards are paid off in full.

Get satisfaction quickly by paying off the lowest balance first.

Sometimes we need to see physical evidence that our efforts are working to stay motivated. If you need encouragement, then pay off the lowest balance first, then work your way to the highest balance. You’ll get satisfaction as the low balance cards drop off your list.

Either way, you need to stop using your credit cards for emergencies and monthly expenses, and make a plan to pay off your debt once and for all.

Finances: An Honest Look

My finances weren’t always in great shape – too much debt, weak savings, with some self-indulgent spending for good measure. To stay on top of my finances, I have had to take the occasional “honest look”. I think of it as a 3-way mirror view of my situation. By that, I mean that enlightening view you get in the department store changing room where you find out how people see you from the back on a bright, sunny day.

First, I encourage you to step in front of that mirror and take an honest look at your spending and debt. You may want to stick your head in the sand. Please don’t. I can assure you that no matter where you are with your money, with action you can firm up your finances.

You need to ask yourself these questions:

Are you using credit cards for your basic expenses?
Are you making multiple transfers from savings to cover your checking account?
Are your wages running out before the end of the month?
Are you avoiding your bills by not opening your mail or emails?
Are you only making partial payments on utilities and credit cards?
Are your credit card balances going up versus down?

Answer these questions honestly – either alone or with the person you share your finances. Again, Be Honest. You may be thinking, “It’s the economy” or “I wouldn’t be in this situation if not for…” You have to face the reality that is, not what should have been. You cannot change the past. All you can do is to pull your head out of the sand and address the issue now by taking action.

The first thing to do is to track your spending. Keep a list of all that is coming in (income) and going out (expenses). That is the only way you can determine how much of a shortfall you have.

Once you know, you can begin to make changes. You will see where your money is going and can cutback and eliminate unnecessary spending. If you need help, I offer coaching packages that can get you through this.

You want to take action on the overspending now, Trust me, in my 20s I had maxed out many credit cards and had to pay off all that debt. At times, I worked three jobs and it seemed like it would never be paid off, but I did and you can too. The sooner you start the better off you will be.

Start today before it’s too late, and it snowballs into something so big that you cannot manage it, and the only answer is bankruptcy.

Financial Housework: Deciding What to Clean First

Have I ever had credit card debt? Yes! There have been times in my life when I haven’t been able pay my balance in full when the bill arrives.

Credit card debt is the enemy of a good budget, but life happens. Even the best budgeter can have unplanned expenses.

According to a recent study by Trans Union, the average US adult carries $4,878 in credit card debt. That doesn’t include zero percent balances. That means the average US adult owes almost $5,000 plus the additional interest.

If this is you, I want you to take a deep breath. Debt repayment is just financial housework. There’s nothing to be afraid of here.

Do you know what’s really scary? Having company due in 5 minutes when the bathrooms aren’t clean. When that happens, do you lock the front door and pretend you’re not home? No! You walk into the bathroom and decide which part needs to be cleaned first (just in case you run out of time before the doorbell rings).

That’s right. I just compared paying off credit card debt to scrubbing the toilet. That’s because you want to use the same thought process with your credit cards. Some cards will need more attention than others, so you need to make a list of your debts which includes the interest rate and minimum payment amounts.

There are two methods to setting priorities on your credit cards.

Option 1: Pay the highest interest rate first. Your list will look something like this:

Priority	Interest Rate	Minimum Payment	Current Balance
Card #1	19%	$100	$5,025
Card #2	15%	$47	$2,141
Card #3	11%	$177	$9,056

This is the best option if you want to save money. Using the example above, you pay as much as your budget will allow on card #1, and only the minimum on cards #2 and #3. When #1 is paid off, you make card #2 the highest priority. Rinse and repeat until all cards are paid in full. When you pay the highest interest rate first, you pay less overall.

Option 2. Pay the smallest debt first. Your list will look something like this.

Priority	Interest Rate	Minimum Payment	Current Balance
Card #1	15%	$47	$2,141
Card #2	19%	$100	$5,025
Card #3	11%	$177	$9,056

This option is good if you need to see results to stay motivated. Receiving a bill with $0 due is really satisfying. A positive emotional boost can really keep the momentum going. You can compare it to housework, dieting, or exercise. We like to see improvements.

Bottom line: You have chosen to get out of debt (your goal) and the actions that will get you there (your plan). You’ll know the best option for you and your family, and you can change tactics whenever you want as long as you’re moving forward.

Let us know which option you choose and how you are doing.