May
1
April Debt Reduction Progress
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We’re now a third of the way through my debt reduction plan. If you’re just joining the blog, one of my 2008 financial resolutions is to pay off $40,000 in debt. March was a good month for debt reduction. We managed to pay off one credit card entirely. April wasn’t quite as good, but we still made solid progress. Thanks to snowballing, we may be able to pay off the full $40,000 by November.
Debt Reduction Successes in April
This month we paid another $1700 towards our debt, in addition to our regular monthly payments. We were hoping to pay off another credit card, but car repairs got in the way.
Debt Goals for May
Thanks to our economic stimulus check, we should be able to pay off the second credit card this month. If we’re lucky, we’ll also pay off the last of a small medical loan.
Changes in the Debt Plan
Thanks to falling interest rates, one of our small student loans has seen its interest rate plummet 5% in the last four months. That gives us some extra breathing room, and has also made us change our plans slightly. Even though it’s the smaller of the two loans included in our debt goal, we’re going to pay off the larger one first. Its interest rate has only dropped 1%, so it’s still up around 11.5%.
We’re also going to fall a little short of our debt plan in June because we’re pre-paying our December vacation in order to save 40% and use our airline miles to get free flights.
It looks like we won’t be getting one of the two windfalls we were expecting this year, but we will hopefully have the other one by the end of the summer. If it arrives, that will eliminate a student loan entirely, and then we’ll start saving for the taxes on the two windfalls.
After we establish an emergency fund, we’ve decided to tackle a third small student loan in early 2009. It’s not a major dent in our finances, but it’s around $80 a month. With those three loans, the medical loan, and the credit cards paid off, our debt-to-income ratio will be nearly 40% lower than it was in January of this year.
After that debt is paid off, we’ll focus heavily on savings and retirement. The rest of the loans are so large that accelerated payments won’t put much of a dent in them, and won’t have any effect on our DITI when it comes time to apply for a mortgage.
Progress on Other Goals
Except for small increases in my retirement contributions due to fluctuating paychecks, we haven’t boosted our retirement savings yet. I’m also reconsidering where we should put the money when we do contribute. Neither of us gets a match, so we may opt to open Roth IRAs and only contribute a small sum to our 401K plans.
We haven’t yet opened the emergency fund, but we’re currently making more than we spend. We’re able to cover most emergencies by delaying our debt payoff plan by a couple weeks.
Our goal of buying a house is also looking further off. Prices are still falling in Los Angeles, and it looks like they may fall another 20% in the next year. On the other hand, our income is reaching a point where the lack of a mortgage interest deduction could bring us into AMT territory. It’s a tough call. The home purchase delay is another reason we’re vacationing this year. It will also allow us to really build up our emergency fund and save for taxes.
How was your debt progress this month?
Apr
28
How to Fight Zombie Debt
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Just like the living debt, sometimes old debts can come back to haunt you. This is called zombie debt. The good news is that you can fight this illegal debt collection without having to pay them a penny. I tell you how in the last of my five-part series on credit.
What is Zombie Debt?
Zombie debt is charged-off or expired debt that collection agencies have purchased for as little as one cent on the dollar. Sometimes they purchase them from creditors, other times they purchase them from other collection agencies. Even though you’re not legally required to pay the debt, they will review the credit scores and histories of potential victims. They then target those who have the most to lose.
Typically, you’ll receive an excessive bill for a debt with one of three characteristics:
- The statute of limitations has expired
- It was a result of identity fraud
- It was discharged via bankruptcy or some other settlement
The collection agency will send you a letter demanding payment and threatening to sue you or add the collection to your credit report if you don’t pay up. Any attempts to deal with them will only encourage them to push harder. They’re banking on your fear of having your credit ruined, and your lack of awareness of your rights.
How to Fight Zombie Debt
First, don’t try to deal with the collection agency directly. Do not speak to them on the phone; do not offer them money to go away. If you pay them, they might decide you can pay more. If you speak to them, you may inadvertently agree that you do owe the debt.
Instead of dealing with them, take the following actions:
Verify the debt. Don’t speak to the collection agency, but do check your own records for some history of the debt. If it was charged off, you should have a record of that. If it’s an old debt, verify the statute of limitations in your state and the state where you created the debt. If both statutes of limitations have expired, you can’t be required to pay anything. The statute of limitations for most debts is six years, but it can be up to fifteen years in some states.
Write to the collection agency. Send them a certified letter demanding that they cease contact with you. Federal law requires that they comply. State that you do not acknowledge the debt in the letter.
Monitor your credit report. Often, they will illegally re-age the debt to make it appear current and restart the seven year clock. If the debt appears, dispute it with the credit bureau. If the collection agency persists, demand that they produce documentation of the original debt. In most cases, they don’t have documentation. Continuing to report a debt they can’t document is a violation of the Fair Debt Collection Practices Act. If they do have documentation, then it will most likely prove that you no longer owe the debt.
Hire an Attorney. If the statute of limitations isn’t expired, hire an attorney to negotiate a settlement with them. Contact the National Association of Consumer Advocates for a referral. If the debt isn’t valid, they can’t document it, and they continue to harass you, hire an attorney to fight for you.
Fortunately, the FTC is actively pursuing illegal collections, and has shut down some collection agencies engaged in aggressive practices, including pursuing zombie debt. If you’re the victim of an illegal debt collection, follow the above steps and then report them to the FTC.
Apr
1
March Debt Reduction Progress
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One of my 2008 financial resolutions is to pay off $40,000 in debt. February was a great month for debt reduction. We didn’t have a windfall this month, so our progress wasn’t quite as spectacular, but we’re still on track to pay off the full $40,000 by the end of December. I’ve also made more progress on other goals.
Debt Reduction Successes in March
This month we paid another $3400 towards our debt, in addition to our regular monthly payments. One credit card is now completely paid off and the other one is down to 1/3 of its original balance.
Debt Goals for April
For April, we will cut the remaining credit card debt in half again. The interest will resume in mid-April, but the balance will be low enough that transferring it wouldn’t be worthwhile. Thanks to our economic stimulus check, we should be able to eliminate the credit card debt and a medical debt completely in May.
Progress on Other Goals
We haven’t yet boosted our retirement funds or started an emergency fund, but I can feel it getting closer.
We’re also reconsidering our goal of buying a house by the end of the year. On the one hand, our windfalls may mean that we’ll get hit by the AMT if we don’t find more deductions. On the other hand, prices in LA are expected to continue plummeting at least into early 2009. Although we plan to buy a place we can live in for five years, we still don’t want to overpay. If we opt not to buy until early 2009, we’ll focus our finances on saving for retirement, planning for taxes, building an emergency fund, and paying down higher-rate student loan debt. We may even squeeze and affordable vacation in at the end of the year, without creating new debt to do it.
If you have financial resolutions or debt reduction goals, how’s your progress? Tell me in the comments.
Mar
5
My husband isn’t a profligate spender, but he hasn’t been fully on-board with my plan to pay off $40,000 in debt this year. Don’t get me wrong, he was thrilled with our February debt reduction progress. He’s equally determined to get rid of the credit cards and at least one student loan, but he wasn’t convinced we could pay off two of them and the medical debt so quickly.
Then last night he prepared our March cash flow budget and also took a look at our annual expenses versus our current income. That was the breakthrough. After looking at the numbers, he discovered that we only have $1,000 more a month than we earn. That’s not enough to afford a mortgage, insurance, property taxes, and HOA fees, at least not and have anything left to put into savings, start an emergency fund, and maybe have a little fun.
I pointed out three things:
- The amount of mortgage interest we would pay in the early years will reduce our taxable income (it will be about double the standard deduction), so we can reduce our withholding after we buy
- We will hopefully both receive raises before we’re ready to buy
- If we succeed in my debt plan, we’ll free up nearly $550 a month.
That got him. The prospect of having an extra $550 a month by the end of the year, even without factoring in withholding or raises is a big deal.
I think I finally have a true partner in this plan to reduce our debt. Maybe now he’ll listen when I brainstorm ways to reduce our expenses. He might even agree to some of them. He’s not a big spender, but I’m borderline cheap and that’s caused some tension. I’m hoping he’s seen the frugal light and will join me under it’s lovely glow.
Mar
4
February Debt Reduction Process
Filed Under Debt, Personal Finance | 4 Comments
One of my financial resolutions is to pay off $40,000 in debt. January was a good month for debt reduction, but February was a great month. Not only did I make good debt progress, but I also made progress in other goals.
Debt Reduction Successes in February
Due to a windfall, we were able to pay $11,500 in addition to normal debt payments this month. We will have to pay taxes on the windfall come April, 2009, but we decided to use all of it for debt now and then save for the taxes once the debt is gone.
That large a payment means our credit cards are more than 50% paid off. One credit card is at 0% until April, so we’re deciding whether to transfer again and take another hit on our credit, or simply pay it down with interest. By April, the balance should be low enough that the interest will be manageable. We are expecting one more windfall sometime in late summer, and hoping for a second within the next several months.
Debt Reduction Goals for March
For March, I would like to have one credit card completely paid off (about $1,000), and make a $1,500 dent in the remaining balance of the other debt.
Progress on Other Goals
I boosted my retirement withholding, but only because of a salary increase, not because I increased the actual percentage. The emergency fund hasn’t been started yet, but it’s getting closer.
Even without the debt, we would probably continue to wait until the end of the year to buy a house. Prices are falling fast in Los Angeles, but one lender is now requiring a 25% down payment. More lenders may follow their lead. By waiting until the fall, we can hopefully have more options in our price range and be dealing with less panicked lenders who understand that a 25% down payment is excessive for a first-time home buyer.
I also have a goal of losing weight that I haven’t mentioned on the blog before. My initial goal was to lose eight pounds. So far I’ve only lost three, but my clothes are fitting much better, so I suspect that I’ve lost fat and gained muscle. My new goal is to drop one dress size. I’m halfway there already.
If you have financial resolutions or debt reduction goals, how’s your progress? Tell me in the comments.
Feb
22
Five Good Ways to Spend a Tax Refund, and Five Bad Ways
Filed Under Debt, Money Management, Personal Finance, Saving Money, Taxes | 2 Comments
Many people treat a tax refund as “found money” or “free money.” What they don’t realize is that it’s their money, and always was. The money was an overpayment of taxes owed, which the government was happy to receive as an interest-free short-term loan.
Once you start thinking of your tax refund as a portion of your income, and not as free money, you’ll rethink the way you spend your tax refund. Rather than wonder, “Why is my refund so low,” you’ll think, “Yay, my refund is low!”
Five Good Ways to Spend a Tax Refund
Here are my top five ways to spend a tax refund:
- Don’t receive one! The best way to spend your refund is to never receive one in the first place. No, I’m not suggesting you donate your refund to the government. I’m suggesting that you adjust your tax withholding http://www.soundmoneymatters.com/tax-withholding/ to ensure that you only withhold what you owe. This year my husband and are receiving less than $200 from our federal and state tax refunds because we managed to pay almost exactly what we owe. (It was an accident this year, but we intend to do it again.)
- Pay down debt. If you owe any debt, use your refund to pay it down. That’s where our tiny tax refund is going.
- Boost your emergency fund. If you don’t have any high-rate debt, then use the money to boost your emergency fund. Even adding a little bit to an interest-bearing savings account can help you out in a pinch.
- Invest it. The average family receives a $2000 refund. If you’re one of them, that’s a pretty sizable investment. If you were to deposit $2,000 in a Roth IRA at age 35 and average an 8% return, you would net $20,125 by age 65 without adding another cent.
- Spend a little and save the rest. If you’ve been frugal all year long, reward yourself with a nice bottle of wine or a nice night out, then save the rest. Don’t overdo it, but spending $50-$100 is a good way to treat yourself every now and then.
Five Bad Ways to Spend a Refund
I have to admit that I’ve been tempted to waste tax refunds in the past. Especially when I didn’t have any debt - I just spent it whenever I felt like it. Now I know better. Here are five bad ways to spend a refund:
- Blow it on a vacation. Many people use their refunds as vacation funds. There’s nothing wrong with taking a vacation if you can afford it, but it shouldn’t depend on whether or not you receive a tax refund. Instead, adjust your withholding to the correct amount and save the additional money you receive in your paycheck. Simply divide the amount of your previous year’s refund by twelve and deposit that amount into a savings account every month. Even if you only earn $20 in interest, that’s $20 more than you could have spent on vacation if you’d simply used your refund.
- Blow it on clothes. We all need clothes. No one needs a $2000 pair of shoes. Buy new clothes if you need them, but don’t go on a shopping spree just because you got a refund.
- Blow it on a big screen TV or another large, unnecessary purchase. If you wouldn’t buy it without the refund, then don’t buy it because of the refund. Instead, save up for it. If you still want it after months of saving, then go ahead and buy it.
- Fritter it away. Even if you don’t set out to waste it, not having a plan for the money could be just as bad. If you think, “It’s only $10. I got that refund, so it’s fine,” those purchases will add up quickly. You could wind up spending more than the refund.
- Stick it under your mattress. My friend’s father didn’t trust banks (he was from WWII Germany). When he died, his family found over $30,000 in cash tucked away in boxes and stuffed under the mattress. Imagine how much more money he would have had it if he’d put it in safe investments or a savings account.
Now that I’ve shared my tax refund strategies, how do you plan to spend a refund? Have you ever wasted it? Do you have any good ideas for spending it? Tell me in the comments.
Feb
15
Pay Off Debt or Save for a House
Filed Under Debt, Money Management, Personal Finance | 1 Comment
One of the search terms used to reach this blog was “pay off debt or save for house,” which got me to thinking. If you don’t have someone to help you with the down payment, is it better to pay off debt or save for a house?I think it depends on the type of debt, the amount of debt you have, your income, and your target home price.
Type of Debt: If you have credit card debt or other high rate debts, you must pay those off before you can do anything else. Lenders frown highly on those debts when considering how large of a loan to give you. Not to mention that you’re just throwing away money by continuing to pay that interest. The most you can expect to earn on a savings account - which is where short-term house savings should be - is around 4%. That number could continue to drop if the Fed rate is cut further. If you save your money instead of paying off a credit card at 15%, you’re losing more than 10%.
On the other hand, if you have low-rate student loans (below 6%), then you should save for a house instead of pushing to pay them off. Student loans are considered good debt, so lenders look upon them more favorably. In addition, much of the time you can earn a better return on investments. And finally, those loans can be deferred or put into forbearance if times get tough. I plan to pay off our credit cards and two student loans before we attempt to get a loan, but we won’t wait to pay off our entire student loan balance because we have two graduate degrees between us and a lot of student debt.
Debt Total: Of course there is an exception to this policy. If you have a large amount of debt, say more than 30% of your income goes to debt repayment of any kind, then you need to start paying down debt. These days, most lenders will not issue a loan that will bring you above the 43% debt-to-income ratio unless you have a very high income potential (e.g. you’re a surgeon with medical school loans). So, even if your loans are low-rate, pay down the principal until your debt payments and expected housing payments are less than 43% of your income. With the new underwriting standards, more lenders are pushing for DTIRs of 36% or lower if you want the best rate. The higher your DTIR, the larger the down payment you’ll be asked to put down.
Income: Another exception occurs when your income is higher than the amount you need to pay down debt and save for a house. In this case, you can either spend a few months shoveling all the money you can into your debt, or you can split your goals and pay towards each. I would choose the former, but the latter would also provide you with a nice emergency fund while you save for a house.
Target House Price: Again, this goes to your debt-to-income ratio. In Los Angeles, home prices have now fallen to December 2004 levels, but that was near our peak, so they still have further to fall. If you live in a state like California where home prices are outrageous, then you need to work harder to pay down your debt so your debt-to-income ratio is manageable. It’s ideal to be below 33% DTIR total, with 28% max going towards housing. That may be nearly impossible for first-time buyers in California and other high-value states, but it’s a goal to work towards.
There’s no one right answer to the question, but once you consider your situation in light of the following factors, I think the best answer will be pretty clear.
Feb
11
There are two kinds of personal loans - the loans you receive from banks and the loans you receive from individuals. For most people, personal loans from individuals take the form of family loans, but they can also be fraught with tension. Now, you can also give or receive personal loans to people you don’t know. Prosper and the Lending Club are two of the top sources for personal loans. Virgin Money is the leader in the field of family loans.
Prosper Personal Loans
Prosper is a loan servicer that facilitates personal and small business loans between strangers. Borrowers receive a lower interest rate than you would from a bank or credit card company. You can borrow up to $25,000 for debt consolidation, a car, a business, or almost any other purpose. You create a loan proposal and then individuals bid to fund it. You make the payments to Prosper, which then distributes the proceeds. According to Prosper, they have an average annual rate of return of 6.18% to 8.52% and a default rate of 1.44%. They have been in operation since February 2006 and have issued 5,427 loans.
Borrowers undergo thorough credit checks and must adhere to lending standards. Prosper then rates the loans from AA to HR. The lower the rating, the higher the interest rate and rate of return.
For investors, the upside is the chance to help someone while also receiving a high return on their money. You can spread your risk by loaning small amounts to a variety of people rather than a large amount to one person. The downside is that there is no guarantee the loan will be repaid. The same could be said of a stock market investment, though.
For borrowers, the upside is the lower interest rate you pay. You also receive the loan anonymously, so your friends and relatives don’t have to know about your debt. The downside is that you only have up to three years to pay it back. With credit cards, you could probably spend forever paying it off and your creditor would be happy to let you do just that.
Lending Club Personal Loans
The Lending Club is very similar to Prosper. The risks are the same. They claim an average rate of return of 12.38%. Their default rate is 0.0%. However, they have only been making loans since May 2007 and have only issued 928 loans.
Lending Club requires borrowers to have a minimum credit score of 640. Based on the borrower’s credit history, the loan is rated A through G, with A loans receiving lower interest rates and having less risk.
The upsides and downsides are the same as they are for Prosper.
Virgin Money Family Loans
Virgin Money is owned by Virgin, but was formally an independent company known as CircleLending. Rather than manage loans between strangers, they facilitate loans between friends and family members. In addition to personal loans, they also manage mortgage loans and student loans. These are true family loans, which means everyone knows everyone.
The old adage says that you shouldn’t lend money to friends and family members, yet thousands of people do every year. Parents loan to children, uncles loan to nieces and nephews, friends loan to friends. Many of those loans lead to strife because the lender sees the borrower spending money and wonders why their loan wasn’t repaid instead.
Virgin Money’s goal is to take the stress out of family loans. You choose the interest rate and the payment schedule, and they complete the paperwork and tax documents. They can also service the loan for an additional fee. They do recommend adhering to the Applicable Federal Rate (currently 3.18%) for loans over $10,000 in order to avoid having the funds classified as a gift by the IRS, but you can choose a rate of 0%.
The downside is that you’re introducing a third party into a family or friendship. For business investments between friends and family members, this is probably a great idea because it confirms the business relationship. I don’t know if my parents would have wanted to use a service like this to loan me college funds (which they later forgave.) They’ve also said they’ll help my husband and me with our down payment, but we don’t want to have strict repayment terms governing those funds. We expect to pay it back, but we don’t know when and we don’t know how quickly.
The other downside is the loan fee. Virgin Money charges fees ranging from $99 to $2499 depending on the type of loan and level of servicing. Depending on the size of the loan, that could be a substantial cost.
Personally, I might consider Prosper or Lending Club for investment purposes, but my relationship with my parents is good enough that I wouldn’t want to involve Virgin Money in the family loan process.
Feb
5
January Debt Reduction Progress
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One of my financial resolutions is to pay off $40,000 in debt. Obviously, I haven’t completed that goal in month one. I haven’t even gotten close. That doesn’t mean we haven’t made some progress yet.
Debt Reduction Successes in January
In addition to our standard monthly debt payments, we paid an additional $1500 toward debt in January. We were able to keep our holiday spending low, which definitely helped. We also received some unexpected money and reductions in expenses, both of which allowed us to pay more.
Debt Reduction Goals for February
Going forward, I plan to set a monthly debt reduction goal in addition to the big goal. The big goal is so big that it seems overwhelming. My goal for February is to cover the unexpected $2600 in auto expenses we incurred this weekend (most of it was routine, but we didn’t expect to have it all at once). I would also like to pay $2500 in debt on top of that.
My other goal is convince my husband to track his spending for a month, but I’m not convinced I’ll accomplish that.
The other goals: boosting the emergency fund and boosting my retirement withholding will have to wait until I make more progress on my debt. I need that to come first so that we can buy afford a better mortgage.
Jan
22
Let’s All Go to the Carnival!
Filed Under Blog Carnivals, Debt, Personal Finance | 1 Comment
Green Panda Treehouse featured me in this week’s Carnival of Personal Finance. Among the rides she offers are investing advice, saving advice, credit card advice, and debt advice. Don’t forget your E-tickets.
The BagLady is hosting the Carnival of Debt Reduction this week. Her links are organized into tips for avoiding debt. Be careful before you enter her hall of mirrors.
If festivals are more your style, check out On Financial Success for this week’s Festival of Frugality. On Financial Success offers a bevy of links about finding that very thing, including a post from me!
