Interest Rates too high

Do what will make you feel good, not what makes you look good. Good feelings, even if they come later in the game will last forever. Looks don’t.

Most folks use credit the wrong way. For example, I’m sure you have a credit card (or two, or three..) in your wallet or purse. You use it to pay for things you don’t have the cash for “right now”, with the intent of paying for it in full on payday. You’re doing this to build a credit history of course, so you can buy your first car, or first home down the road. Of course, that’s not gonna happen. The first time an unexpected emergency occurs, the first thing you’ll be going for is that credit card, knowing full well that you will not be paying it off in full when the bill comes. That’s how it starts. Seems like it will never end too.

Paying money to a creditor really isn’t going to help you get that big $100,000 loan down the road to buy your first house with. You may think it will help, but not as much as you may be expecting. Just because you can pay a $1000 credit card bill in full every month, does not mean you can pay a $1000 house payment on time every month. Face it; you’re not going to convince a mortgage lender that you’ll stop charging $1000 on your credit card every month so you can instead use that money to make your mortgage payment with. So what will convince a lender you can make those big house payments every month?

If instead of paying a creditor every month, you need to pay yourself every month. What you pay yourself needs to be the equivalent of a house payment too. So if you can pump $1000 a month into a savings account (you’ll need that money in two years anyway, for a down payment on that house), then a lender is more likely to believe you’ll have no problem  making that mortgage payment every month. They know that instead of paying yourself 1000 a month, you’ll be able to make that $800 a month house payment, and still be able to pay yourself around $200 a month once you get through the expense of settling in to your new house after the purchase.

But we’re focusing on the future here. At this point, we really need to focus on the “right now”. More than likely if you’re reading this, you are so deep in debt that your dream of buying a house is just that, a dream. But you’ve decided now that you want to go for it. Where to start? Well, you have to start with what I refer to as “the basics”. The basics consist of two rules that I like to refer to as “The Primeval Rules of Finance.” These rules need to be executed in the order listed.

Rule #1 – Reduce your spending. Rule #2 – Increase your income.

Let’s discuss each rule in detail. But first, before I say more that I’m sure is going to piss you off, let me lay some things on the line here.

- I am not your friend. You did not come to this forum looking for friends. You can here looking for advice and help. There is no requirement for you to like me, or to even like what I say. But understand that I’m not shooting from the hip here. I’m talking to you eyeball to eyeball. You asked me to. - What I say here is not personal, and definitely not intended to be interpreted that way. However, if you take it personally and it pisses you off, understand this **I** **DON’T*** ***CARE***  I’m responding in an effort to help you. If you want friends, post on FaceBook.

- In our discussion in this thread I may be asking for information that you may consider somewhat personal. Well, it is personal… but personal to you. Understand that nobody in this public forum knows who you are, where you live, or anything. So posting how much you make, or the details about your debt is nothing to be overly concerned about, so long as you never post any personally identifiable information in this forum. For example, the fact you make $250,000 a year and own two BMWs and a credit score of 325 will not enable anyone to identify who you are so they can come steal your cars. Posting that you filed bankruptcy 4 times already in your life will not identify who you are. But providing these types of details may be necessary, as in an effort to help you here, I (we) can only work with the data you provide. So now, lets get to it.

The first order of spending is to stop spending more than you make. Period. If you make $2000 a month then you can’t afford a brand new car. You can’t afford to pay the rent to live in the Hamptons. If that car is costing you more than 25% of your take home pay each month (not gross pay, but take home pay in your pocket) then you flat out cannot afford that car. You need to sell it ASAP and go buy a used beater car for the short term, that you can pay cash for if possible, so you can lower that payment and decrease your monthly spending. If that means you have to sell that car for less than you owe on it, then that’s what you do.

As an example, if you are in a situation where you owe $25,000 on your car, but the KBB price on it is say, $18,000 and you can sell it for $17,000, that means you will be $8,000 short for paying off the car loan, and you would “think” the bank will not go for that. Technically, you’re right; the bank won’t go for that. However, if you will sit down with your lender and explain your financial situation in detail, *AND* (this is important) show them your *written* plan for fixing your financial problems, the lender has two choices. A) You default on your car payments meaning the bank will repossess it, and there’s no way on this green earth that they will get more than what you owe on it, when the sell that car to someone else – meaning the bank will lose money. B) Allow you to sell the car for less than you owe on it. You give the check from the buyer directly to the lender to pay down the loan, and they convert the remaining balance on the loan to a signature loan. (Yes, I know a signature loan will have a higher interest rate. The bank knows that too.)

Now, if you have a *written* financial plan that shows the lender your plan for getting out of debt, and if that plan includes in it you paying off the signature loan, the bank will buy into it and allow your sale to occur. They may require some type of collateral for this, and you can use your IRA or 401(k) as collateral. (Or use your spouse’s if they have a retirement account and you don’t.) You know what else you can use as collateral that hardly anyone ever considers? Life insurance. So if you have a life insurance policy, be it one that you purchased outright, or one you have through your employer, you just agree in writing to make the lender the sole and primary beneficiary of that policy until your signature loan is paid in full.

When someone is in dire financial straits and asking their bank/lender to work with them, so long as you can show a plan to fix your financial issues, and so long as it’s a realistically achievable plan, you’ll find creditor’s would rather work with you, if it appears to them that not working with you means they will lose money on the other end of that stick. If you have to file bankruptcy, that’s the last thing a creditor wants you see, because they know they are going to lose something in such proceedings.

If where you live, your rent and utilities combined is more than 25-30% of your gross pay (not take home pay on this one, but gross pay) each month, then it’s time to move. Yes, I know it cost money to move. But you can either move voluntarily, or risk getting evicted and thrown to the curb after you get more than 3 weeks behind on the rent payments. Don’t think that just because you have kids, that won’t happen. It can happen, it does happen, it has happened, and it *will* happen to you if you get too far behind in your rent.

If you’re making $3000 a month and your rent is more than $1200 a month, you don’t need to move to a place with lower rent – you *have* to move to a place with lower rent. You can either move of your own accord, or “get moved” when the eviction notice comes. But you’re moving.

On that subject, there is nothing wrong with a person or even a married couple moving in with the parents for a short term, so as to cut that spending and get out of debt. But understand that doing so must be understood to be “SHORT TERM”. That term needs to be clearly defined too. There’s also nothing wrong with moving in with a friend and paying half their rent, so long as what you pay is substantially lower than the rent you’re paying now. Heck, even renting a room or two from mom and dad in their house is okay. But again, I stress “SHORT TERM”. It needs to be understood that you have no intention of permanent residency with friends or parents.

Next, you look at your day to day, week to week, and month to month spending in that order to find areas ou can cut. For example, do you go out to eat once a week or so? Eating out cost you 4 times more for that meal, than it does for you to buy the food and ingredients and make it at home. So starting now, until you are out of debt, the only way you see the inside of a commercial eating establishment, is if you work there. Understand this does not mean you will never eat out for the rest of your life. You most certainly can after all your debt is paid off.

Next, call your credit card issuers and tell them to close your account permanently. Understand that having an outstanding balance on your credit card does not mean you cannot close the account. It also does not mean the balance due is payable in full immediately. It just means you can’t use that credit card anymore. It won’t work once the account is closed. But you will still receive your monthly bills and still be expected to make at least the monthly minimum payments. That’s what you do. If you don’t close  your credit card accounts and other revolving charge accounts, you’ll never get out of debt.

That’s all I’m going to cover for now in reducing spending. How you reduce your spending depends on what you’re spending money on. Of course, I can’t possibly cover every single possible scenario here. The intent is to get *you* thinking about *your* specific spending habits, and to change them where possible.

Now in the process of reducing spending, more than likely you (and your spouse if married) have sat down and written things down on paper so you can better “see” where the money has been going. Guess what? That’s the first step in establishing a budget. Yep, you need a budget. That budget needs to be “in writing” on physical paper. Also make it realistic. You can do that by looking at your bills for the last month or two, or three to get an idea not of what you spent in those months, but what you “needed” to spend in those months.

For the initial start of a written budget, there are four items that must be the absolute first four things in your written budget. What order you put those four things in doesn’t matter, because all four of them “MUST” be dealt with every month. Those first four items are:

1. Shelter/utilities – without it, you will die or at least get sick from exposure to adverse weather 2. Food – without it, you will starve to death. 3. Clothing – Without it, you go to jail for indecent exposure and you will not be able to get or keep a job. 4. Transportation – Without it, you have no way to get a job, or get to work if you already have a job. Transportation is not necessarily a car either. If a bicycle fits the need, then a bicycle it is. Get a raincoat for rainy days.

Those are the four things that you “MUST” have. You have no choice; it’s not negotiable or debatable either. Those are the first four things that you must pay for FIRST, out of each and every paycheck received. If you can’t pay the credit card or other bills, so be it. Now your budget needs to be finely detailed so that you can account for every penny coming in each month, and every penny going out each month. Yes, we’re talking pennies here, not dollars.

One thing that really helps when first starting out, especially if you’re married, is at the start of this you and the spouse establish a weekly “finance meeting” one day a week. Generally a good time for this is in the evening after supper, the dishes are done and the kids are in bed. You go over the budget and compare it with your actual spending for the last week, so you can actually see how you’re doing, as well as where you may need to make adjustments in either your spending, or the budget. But the important thing for a married couple working to get out of debt is communication. You make *ALL* financial decisions together.

Now lets talk about increasing the income. Yes, it’s possible and realistic. Is your spouse a stay at home parent? Maybe they can’t work because they have to take care of the newborn? There’s still quite a number of ways that stay at home parent can contribute to the bank account. When my daughter was born in 1988, we started piling up the debt and “caught ourselves” in 1990. We realized that if we didn’t fix our financial situation now, then the legal system would definitely fix it for us later. Now you would think that I, the breadwinner of the family could just go out and get a 2nd job right? Not so fast. I worked a job of rotating shifts. I worked 4 days shifts, followed by 4 swing shits, then 4 graveyard shifts, then 3 days off. Makes it rather difficult to get even a descent part time job.

But since my wife was a stay at home mom taking care of a 2 year old, she started doing in-home daycare. We did our research to find out what was necessary for her to be a licensed daycare provider, met those requirements and she started her own home daycare business. Now not all states or locales require licensing, but a majority does and it’s cheap, when compared to the income it can generate. In addition to our own child, my wife provided daycare for 5 other children in our house (maximum allowed by the laws of where we were living at the time) and she profited about $1500 a month after expenses. Now “THAT” was a huge boost to getting us out of debt all that much faster. Keep in mind that she did not do this for years either. It was only to get us out of debt that much faster, and it really, really worked too!

In later years when when things happened and we need more money each month for a short time, I was shocked to learn how much one could make in one night delivering pizzas. About 14 years ago I lost my job. This happened in December right before Christmas. I can tell you right now, that even if employers have openings their trying to fill, nobody is hiring during the holidays. They’re all in the holiday mood, not in a “training the new guy” mood. But if my kids were going to have a Christmas, what I had in the emergency fund wasn’t going to cover my living expense while unemployed, “and” pay for Santa Clause too.

So I went to a local pizza hut one Friday afternoon and was hired on the spot. I started delivering pizzas around 4pm that day, and by midnight I had over $300 of tips in my pocket. I was not paid as an employee. I was paid by the business owner as a self-employed contractor. He paid me 90 cents for each pizza I delivered. Now that just covered my transportation expenses for gas, tolls and such. The “real” money was in the tips. I delivered pizza every Friday and Saturday night until 2am, and Sunday night until 11pm for three months, and I was on average grossing $700 per weekend. After taxes, gas and other work related expenses, I was making around $400-450 each weekend. My kids had a “GREAT” Christmas! Though I must say all that driving did take its toll on me emotionally. But like I said, it was only short term until I found another line of work – which I did come February.

One thing that you absolutely must do, is stop contributing to your retirement plan. No, it’s not forever. It’s only for the short term so you can use that money to pay off debt faster and get it gone sooner. Generally, if you get really focused on getting rid of all your debt, you’ll be done in less than two years, and then you can resume your retirement contributions. Not contributing for 1-2 years is NOT going to have any huge impact on retirement income either, when you reach that age. If you retire at 60 you can live out the rest of your days just fine with two million in the account, instead of two and a quarter million. It’s just not going to matter. So stop the retirement contributions now.

So the bottom line is, do whatever it takes to increase your income for the period of time it takes you to get out of debt. You can do more than delivery pizzas in the evenings too. Wash cars, cut grass, clean houses for money on the weekend, house sit, walk dogs, anything. Remember, you’re doing what will make you feel good later, not what makes you look good now. As a said at the start, feelings last forever. Looks don’t. What others may think of you or say about you behind your back during these tough times isn’t really any of your business anyway. Their thoughts and behind the back comments will be short lived. Your feelings after you’re out of debt, will last forever. Let the back stabbing gossipers eat that once you get rid of your debt and start building “real” wealth.

Now when I say out of debt, I’m meaning you’ve got absolutely everything you own paid for in full, with the exception of the mortgage on your house. (if you have a mortgage). So just “exactly” how to you get out of debt after reducing the spending and/or increasing the income? In addition to your budget, you need a plan. But first, let’s define the difference between expenses and debt.

AN expense is something that you will pay on a recurring basis for the rest of your life until you take your last dying breath. There are only four such expenses. Shelter/utilities, food, clothing and transportation. Sound familiar?

A debt is something that once you pay it in full, it goes away forever and if you so chose, you will never pay it again. That would be things like credit cards, the signature loan you took out at the credit union to pay for that vacation you took the family on to Yellowstone Park last summer, and the $1000 you owe the dentist for that emergency a few months back when your son fell off his bike and knocked is two front teeth out. So what’s the best methodology to get this paid off the quickest and most efficient and effective way possible?

Start by listing your debts from smallest to largest. Understand that the interest you may be paying on that debt does not matter, as it’s not relevant. So you will list that $400 credit card debt you’re paying 14% on, before the $5000 credit card debt you’re only paying 8% on. Interest rate DOES NOT MATTER. Only the outstanding balance that you owe matters. So list all of your debt smallest to largest.

Next, for item number 2 and higher on your list, you make the absolute minimum payments on those items first, then you throw *every* *single* *penny* you have left at item number 1 on yo ur list. You pay that one off first. More than likely, if that first debt is only $400, you’ll have that paid off in less than a month. Deliver pizzas for a weekend, and you can pay it off Monday morning. Guess what happens after you pay off that smallest debt first? Item number two on your list; say that $5000 credit card now becomes your number one. Deliver pizzas every weekend and that bad boy will be gone in about 3 months.  (Continued in next post in this thread)