Jill Russo Foster

Tips for Successful Personal Finances

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Step One to Having it All

One of my clients told me that a 6-figure income would give her everything she wanted. She could pay the bills, have a home, save for the future, travel, and indulge in all the little things.

I gently pointed out that there are a lot of 6-figure earners who wished they made more money. A bigger income means a bigger mortgage and a more expensive lifestyle. High earners often find themselves pushed to their budget limits, balancing debt against what feels like a meager paycheck.

That’s human nature for you. We pick up more than we can carry, then blame nature for not gifting us with extra arms. We grab for everything, instead of just those things that make us feel fulfilled.

You can have it all (maybe not at once), as long as you know what having it all means to you. The key is in knowing what will really make you happy, having a plan, and working towards your goals.

When my client dreamed of making 6-figures, I believe she was really fantasizing about the freedom of living debt-free, with money in the bank for travel, retirement and a comfortable home life. But, without a plan and goals, she would have fallen into the big-earner/big-spender debt trap.

You may already know what you want, but, if you are living your life day to day with no goals, how do you expect to get to where you want to go?  You may not even know if you are headed in the right direction without action steps to judge your progress.

The first step is to set a goal. What is it? Do you want to eliminate your debt, save for a vacation, save for a down payment on a home, start an emergency fund, save for retirement, your children’s education, or something else? Remember the goal must be reasonable and measurable.

Examples of wishy-washy goals:

  • I want to get out of debt by the end of the year (may not be reasonable).
  • I want to have an emergency fund (not measurable).

Examples of reasonable and measurable goals:

  • I want to pay an extra $100 per month, and stop creating new debt, to eliminate my debt in two years.
  • I will save $20 per week to build an emergency savings of $1,000.

This is Step One: determine your goal(s). Write them down and put them where you will see them every day.

In our next Quick Tips, we’ll discuss Step Two and the action steps you’ll take to have it all.

3 Important Tips for Paying off Credit Card Debt

Last Thursday, I talked about balancing debt repayment with building an emergency savings fund. This is the second part of that post.

For the actual pay debt repayment, there are two ways to do this.

If you  are the type of person that needs to see forward movement to keep you motivated, then pay off the smallest credit card balance first, then work your way to the next smallest until you’re done.  This will give you a feeling of reward and the financial momentum to keep this going.

If paying interest rates and fees bothers you, you will want to pay off the highest interest rate credit card first and then work your way down to the lowest interest rate.  You will have the satisfaction of paying less and less in interest charges each month.

Either way excessive credit card debt is the enemy of your budget.

Live within your means.

Because your credit is so important to your finances, you will have to find a way to live within your means. That means only using your credit cards when you know that you can pay them off in full each and every month.

So many people struggle with credit card debt.  Just as they get their debt paid off, something happens and they are in debt again.  You can use your cards for the consumer protections and to keep a healthy credit score, but learn to use your credit cards the way you would a check or debit card – keep your purchases within your monthly cash flow.

Should you pay off your credit card debt with a mortgage refinance?

In our last Quick Tips, we talked about refinancing your mortgage. I hope you did your homework. If you decided that refinancing is right for you, you may be tempted to pay off your other debts by financing them into your mortgage.

Should you do it? Follow these steps to find out.

List all your debts

If debt is a problem for you, take a closer look. Make 5 columns:

Column 1: Write down the name of each creditor (credit card companies, auto dealership, bank, hospital, etc.)

Column 2: Write down why you took a loan or used a credit card. This will help you see how you came to be in debt. Were these essential expenses like a car or a hospital emergency? Or, were these items you could have saved for, like a vacation, clothes, or furniture.

Column 3. Write down the interest rate.

Column 4. Write down the current payment amount.

Column 5. Write down when it will be paid off at the current payment rate.

I know that this can be scary, but you need to know. Congratulate yourself for doing this. This is a huge step forward.

Why is it important to really look at your debt? If your debts just disappear into your mortgage, you could forget where they came from. Most people who consolidate their debt this way have credit card debt again in just a few years. My assistant told me that it happened to her, and she regrets it. Not only was her mortgage increased, but it delayed the real cure: fixing the leaks in her budget.

Refinancing may not be the answer, but knowing how and why you spend will help you stay out of debt in the long run.

Consider the downside of consolidating credit card debt into your mortgage

Credit card debt is unsecured, so you would be taking unsecured debt and betting your house on it (securitizing it).

When you have credit card debt and can’t make payments, that’s a problem – but, your creditors cannot take your home. On the other hand, if you can’t make your mortgage payments, then you could lose your home in foreclosure. If you increased your mortgage loan in order to cover credit card debt, you could end up with a larger house payment – one that you can’t afford! That’s why I don’t recommend refinancing your unsecured debt into a mortgage.

Consider the long term outcome when refinancing secured debts into your mortgage

Secured debt has a physical object that can be repossessed if you don’t pay: it could be a car, or even a home equity loan or line of credit. Here are three questions you should ask before making your decision:

1.   If you combine your mortgage with your home equity will this mean you need to pay mortgage insurance? Mortgage insurance is added when the total amount of your mortgage is equal to, or over, 80% of your home’s appraised value. That will increase your monthly mortgage payment.

2.   Will you need the home equity line in the future? It will be difficult to get a new line in these economic times.

3. Is it better to pay off your debts yourself, and have a tight budget for the short term? Or combine them with your refinance and have a bigger mortgage in the long term?

Think long and hard about what you put into your new mortgage. Consult with your tax preparer for an objective opinion.

Lending to a Friend

A friend of mine recently asked about lending money to a friend. I have always said that if you can afford to lend money to a friend, then give the money as a gift. If the gift is repaid, that’s an unexpected bonus.

But, you should never lend money to friend, especially money that you need to pay your own expenses. I say this because when people lend money to a friend, they often never get the money back, That’s not because your friend isn’t trustworthy, or sincere. It’s a matter of need. Think about it: If your friend can’t afford to pay a bank loan or rent, then how will he be able to pay you? Especially before you need the money yourself? Unfortunately, lending to a friend often means the friendship is lost along with the money.

It’s difficult to watch a friend drowning in debt or suffering without a car or apartment, but two drowning people are not better than one. There may be better ways to help out than putting yourself at risk.

Back to my friend.  Unfortunately, she had already lent a substantial amount of money. She had also done everything possible to set up the loan legally with a contract, lien against the borrower’s home, and a formal payment plan. It sounded OK, so, I asked what the problem was. She said that her friend had filed for bankruptcy. That’s a problem.

My friend did everything right and took all the steps to protect herself, and now she will be out a large amount of money that she needs to cover her own expenses. She could never have afforded to give this amount as a gift, but that’s what it became. Will she get her money back? Probably not. In this economy, her friend’s home may not sell and when it does, it probably won’t sell for enough money to cover the loan.

My friend learned a very hard lesson in life. Their friendship will probably never be the same because of the damage that was done. Before you lend money to someone, think about all the possible outcomes and then make your choice.

Beware of Debt Settlement

Are you working less hours or maybe even unemployed?  Are you having trouble paying your bills?  You’ve probably heard the TV and radio ads that tell you they can settle your debt for cents on the dollar.  These ads are promoting debt settlement companies, and they are in business to make money for themselves.

Well, I am here to tell you that you need to be cautious.  Let me say it again be cautious.

Paying Fees When You Could Be Paying Off Debt

Debt settlement companies do try to settle your debt for cents on the dollar They may even be successful at it.  But at what cost to you?  Many will require that you pay them a fee up front in addition to a monthly fee to administer your account.  That means you’ve added an additional monthly payment to your budget.

Debt Settlement Damages Your Credit Rating

Choosing debt settlement will damage your credit rating.  If you truly can’t afford your bills, then consider calling each of your creditors to work out an agreement and save your fee money.

It Could Affect Your Tax Return

Lastly, if you are able to reduce the debt you owe, you may have tax consequences come April 15.  The amount you save may be treated as income to you So you may owe income tax.

As your parents told you, if it seems too good to be true, then it probably is If you need this type of service, use a consumer credit counseling service, not debt settlement.  There is a huge difference between the services.  Research your options ahead of time if you are having trouble paying your bills.

You Won’t Get Far With Those Rates

Reader Question: My credit balance is $3,000.00. What will happen if I only make minimum payments each month?

A credit card minimum payment is usually about 1.5% to 2.5% of your balance. That’s a very small amount. Since I don’t know your interest rate, I’ll do calculations based on a 12% interest rate. In your case, that would be about $45 per month.

If you are paying the minimum payment it will take you a really long time to pay off your credit card in full – at $45 per month it will take you 411 months or 36 years. This is assuming that you will not be making any additional charges.

Credit card lenders make their money from the interest they charge you. Your objective is to pay as little interest as possible. When you pay your credit card balance in full each month you save yourself a considerable amount of money.