Money Management

Debt Consolidation Loans – Proceed With Caution

April 10, 2014 by Kevin Mercadante

If you have more debt than you are comfortable carrying, debt consolidation loans can seem like an oasis in the desert. It’s a way of taking a large number of smaller debts – each with its own annoying monthly payment – and rolling them into a single loan, with one lower monthly payment than the collection of payments you’re making on your various debts.

But as good as the theory of debt consolidation loans seems to be, proceed with caution. Debt consolidation loans don’t always do what you hope they will, and sometimes they can even make your situation a good deal worse.

How Debt Consolidation Loans Can Go Wrong

When people consider taking out a debt consolidation loan, they seldom give serious thought to the potential pitfalls that they have. There are number of ways that debt consolidation loans can go wrong, and here are just a few:

Though they usually lower your overall monthly payments, they don’t reduce the amount of money that you owe
By reducing your overall monthly payment, they often pave the way for you to take on additional debt
If you don’t stop borrowing after you take a debt consolidation loan, the consolidation will have been absolutely pointless
Debt consolidation loans can make debt easier to live with, and that does not create the kind of budget discipline that leads to an improved overall financial situation
Debt consolidation can become a revolving arrangement, in which you do a consolidation loan, that’s followed by an even larger one, a larger ones still, in a process that often has no end

In short, debt consolidation loans can lead you on a one way road to ever higher amounts of debt.

The Cycle of Perpetual Debt

Point #4 above warrants special consideration, since it lies at the root of the cycle of perpetual debt a lot of people find themselves in. Many debtors look for ways to make their loans easier to live with. This may reduce budgetary stress in the household, but it doesn’t actually make your debts go away. In fact, if you become too efficient at debt consolidation, you run the very real risk of turning short-term debt into permanent debt.

How does that happen?

As debt consolidation loans become larger, they tend to carry longer repayment terms at higher monthly payments. At the extreme, debt consolidation eventually morphs into either a home equity line of credit or a cash-out refinance of your primary mortgage. At that point your debt consolidation become something close to a permanent obligation.

Once short-term debt has been converted to permanent debt, secured by your home, you’re debt slate is once again wiped clean. This can be an excellent strategy to get out of debt if you are fully committed to avoiding all forms of debt in the future. But for many people who do the ultimate form of debt consolidation – a mortgage on their homes – the path is simply cleared to accumulate more debt.

This entire arrangement – and it is not an uncommon one – puts you squarely on a path of perpetual debt.

How to Make Debt Consolidation Loans Work For You

Debt consolidation can actually work! By lowering your monthly payments, it does free-up your budget, and give you a host of options that you didn’t have before. But none of that will do any good unless your realize that getting out of debt requires sacrifice.

What kind of sacrifices are we talking about? Here are just a few examples:

1) Recognize that rearranging debt is not the same thing as paying it off –
A huge part of the success or failure of any debt consolidation loan is the way that you view it from the very start. You may need to change your thinking! If your primary purpose is simply to lower your monthly payments, the consolidation loan will probably only lead you deeper into debt. But if you see it as a more efficient way to payoff your debt it could be the very tool you need to help you get out of debt forever.

2) Eliminate the level of spending that got you into debt in the first place –
One of the biggest negatives with debt consolidation loans is that people who take them convince themselves that they don’t have to change their spending habits. That thinking is completely wrong, and a recipe for disaster. The entire reason that you go into debt in the first place is because you spend more money than you earn. That arrangement will have to change – you’ll have to learn to live beneath your means. That’s where the sacrifice come into play, but there is no way that you can be successful with a debt consolidation loan without it.

3) Swear off borrowing at least until the debt consolidation loan is paid off completely –
If you borrow more money shortly after taking a debt consolidation loan, you’re defeating the entire purpose of having the loan in the first place. Adding more debt on top of the debt you already have with a consolidation loan, will simply put you deeper into debt. Once you take a debt consolidation loan, you must avoid taking any new loans, at least until the debt consolidation loan is paid off in full.

4) Become a committed saver –
Probably the best way to avoid debt in the future is by becoming a saver. If you have money in the bank, you’ll be less likely to borrow money, particularly using credit cards. If you can start saving money while you are paying your debt consolidation loan, you’ll be able to really accelerate the process once the loan is paid in full. You can then direct what used to be the monthly debt consolidation payment into your savings.

In order for a debt consolidation loan to be completely effective, you have to view it as the first step in a very long-term process. The whole purpose of the debt consolidation loan is to clear the decks of your old debt, so that you will be able to go forward with a clean slate, and to develop an entirely new and more effective financial strategy.

Run On China Bank Gives Consumers Food For Thought

March 29, 2014 by Twila Van Leer

When The Rumors Aren’t True

Keeping close tabs on our money is an American fact of life. In general, we like to be able to deposit what we have in what we believe to be a secure holding institution and then relax.

three-day-run-china-bank — Customers getting money out of the Jiangsu Sheyang Rural Commercial Bank

But what happens when an alarm is sounded and there is the possibility that we relaxed too soon? How do we react when there is even a hint that our particular financial institution could be in trouble and that our share of the money being held could be in jeopardy?

Fortunately, the United States has built safeguards into its banking systems, including federal deposit insurance, and the likelihood of a “run” today is miniscule. But a recent story out of China shows what can happen when rumors run rampant and cool heads do not prevail.

How The China Bank Run Started

A customer in Yancheng, China, went to his bank and requested a withdrawal of 200,000 yuan, the equivalent of $32,200 in American dollars. The story goes (and the details have not been clearly defined) that when the customer’s request couldn’t be immediately honored, he assumed that the bank had run out of money and panic ensued.

Panic Rampant

Soon, depositors arrived in droves, by any and all means of transportation. Though regulators and spokespersons for the central bank assured the bank’s clientele that their money was safe, the flood of customers demanding their full amount kept arriving. The beleaguered bank stacked piles of yuan on its counters to create the appearance of plenty, but even that ploy and the sight of armored cars bringing cash to aid the besieged institution didn’t immediately quell the tide of anxious customers. The run continued for three days.

Customers’ concerns were probably magnified by China’s failure to meet a domestic bond recently. The default was a first in the mega-country’s current financial history, but it lent itself to ongoing itchiness about all aspects of the country’s financial security.

Lessons From The Bank Run

There are many versions of what happened in Yancheng, but the lessons for Americans are the same.

The news of this story spread quickly. All it took was one customer who used a twitter like service to notify his circle of friends. From that point hundreds of people heard about the customer’s experience and soon it gained world wide attention. The Chinese people have a heritage of fearing for the safety of their money. Older generations of people experienced government confiscation of property and wealth. It is no wonder that panic resulted.

So what is the lesson American people can gain from this? When rumors start, don’t panic. Check other sources for the truth to the rumor. Give yourself some time to make the best decision for you and your family. Though time would be of the essence in a real bank failure, it is foolish to over-react.

The bottom line is to look before you leap. Trust in the safeguards that have been built around the country’s financial practices. Certainly you are justified in making immediate inquiries if there is a suggestion that something is wrong, but don’t just assume that the rumors are true. Often, they are not.

To Own Or Rent? Proceed Wisely

March 28, 2014 by Twila Van Leer

Home ownership is the American ideal. But there are good and valid instances in which renting is a better alternative. Look at them carefully before taking the leap into a mortgage.

If You Make Frequent Moves

If you know that your job is going to require that you relocate every few years, or if a bit of “wanderlust” is part of your makeup, you’d be foolish to be burdened with home ownership everywhere you went. Home purchases and sales involve costs, with fees on both sides. Even in a positive market where property values intend to increase, you aren’t likely to break even.

When A House Payment Would Break You

It isn’t just the monthly payment. There tends to be more out-of-pocket expenses with home ownership. Maintenance and repairs, for instance. When debating the factors, add about a thousand dollars a year to the mortgage money for such costs. Best to leave those to another owner while you pay a set rent if things are looking tight.

If you are looking at homes, notice that some of them are in serious disrepair, probably from just this circumstance. The owners can afford the payment, but not the upkeep. Assume that this could happen to you too, if the margins are too skimpy. Maybe, like some home purchasers, you believe you can take care of upkeep and repairs yourself, but if the demands get beyond your capacities, you’ll end up paying a contractor. Being house poor is hardly a desirable offset for the perceived blessings of owning.

What Your Area Offers

If in your neighborhood a home typically sells for $300,000, with a monthly payment of $1,800, but rentals can be had for $1,000 a month, the math isn’t hard to do.

Unless you can easily manage the $1,800, the rental seems the better option. What you lose in such a scenario is the tax advantage that a mortgage offers. But the $800-per-month savings in rental payments goes a long way toward offsetting that advantage. And you needn’t look at the additional costs of maintenance and repairs, which amounts to even more savings.

Making Major Life Changes

A personal financial crunch, divorce, being widowed, relocation, starting a new job — these and many other unexpected life events are all good reasons that you may need to rethink ownership vs. renting, at least temporarily. Any situation that creates a new reality for you should demand such a rethink. In any major life upheaval, renting could provide the flexibility you need before things settle into that new reality. Not being tied to a mortgage could help you safely bridge gaps when things don’t go as you had thought they would.

If owning a home is your dream, go for it. But remember that renting is a good option until the dream comes true.

10 Tips To Break Bad Banking Habits

February 17, 2014 by Sherry Tingley

You may be losing money every month because you aren’t aware that some of your basic banking habits can be pricey. Some common mistakes that people keep making come to the attention of banking analysts and are shared with you in this guide to keeping more of your money in your pocket.

Tip #1 – Stay Current With Your Account Fees

You may have opened your bank account 20 years ago when there were no fees charged to you. Take the time to talk to your bank and ask them what fees they can charge your particular type of account. It may be time to change the type of account you currently have.

One woman was getting charged $27 a month and went into the bank to complain. Her account was designed to encourage savings and would charge a $1 per transaction fee each time she made a withdrawal or processed a transaction. Setting up a different type of account would save her $324 a year.

Tip #2 – List Dates Of Your Automatic Withdrawals

Nothing is as frustrating as checking your online balance, thinking you have money to spend and then not realizing that an automatic withdrawal is pending. Forgetting about the pending withdrawals can be draining your bank account.

Go online and download a month’s worth of activity. Filter out all the automatic withdrawal transactions and figure out exactly what dates the amounts are deducted. Keep the information in a spreadsheet or print it out and carry it with you.

Tip #3 – Discover The Location Of Approved ATM’s

When you withdraw money from ATM’s that are not associated with your bank, you can get charged fees in varying amounts. The fees might not be big, but they could easily put you into an overdrawn status. Now those fees can be large and will make you cringe.

Find the ATM’s that are near your work, where you dine out and near where you shop and use them. One customer had $50 worth of ATM fees in a month. When asked why he couldn’t find approved ATM’s his response was that he knew where they were, he just couldn’t be bothered with walking across the street. Walking across the street could potentially save him $600 a year.

Tip #4 – Save Loose Change

It may be annoying to carry loose change, but having a strategy to deal with it can really add up to some decent money. When you get home from work or shopping, just toss the loose change in a large jar. When the jar gets full, bring it into the bank and use their coin machine to count it and return you with paper currency. You’ll be surprised how much is really in that jar. Take care of the cents and the dollars will take care of you.

Tip #5 – Check Online Accounts Daily

Face it. Some people don’t even do this monthly. One customer went into her bank and was very upset. She had no money in her account. Upon investigation, it was discovered that she had a joint account with an ex-partner and she had never had his name removed from the account. For five years the partner had been stealing from her account in small increments. It was only when he decided to take it all that she even noticed.

Tip #6 – Reduce The Number Of Accounts

Some of us get creative with our savings or checking accounts, opening too many to even remember what they are for. Balancing and tracking all that information is very time consuming and for most people too much of a hassle to handle.

Then there are those people who are flattered when they get a sales pitch to open a new credit card. They think it is cool that someone else says they have great credit so they open another account. Having too many credit cards provides you with too many temptations.

Limit the number of accounts you have. Trim down the number of your credit cards to make them easier to manage. Trim down the number of checking and savings accounts if tracking and managing them becomes too easy to make costly mistakes.

Tip # 7 – Distinguish Between Wants and Needs

The difference between what we think we need and what we actually need, can be enormous. Overspending can lead us to overdrawn account fees, excessive credit card use and a feeling of being out of control.

Advertisers are relentless when they pitch us so we really have to be aware of our own needs. Designer clothes, handbags, eating out, multiple Ipads and cell phones may have their appeal, but they can’t be classified as needs. Spend money on your needs first.

Tip # 8 – Maintain Minimum Balances

If your bank requires you to have at least $300 in your account, find out what fees they can charge if you drop below that amount. If you have believe you are entitled to spend money if you see it in your account, take a new approach. Deposit the minimum balance and in your record keeping system don’t add that amount into your perceived balance. That way the money will always be there. Just leave it alone.

Tip #9 – Check Your Excess Withdrawal Fees

Some accounts will penalize you for withdrawing money. They are designed to encourage you to save and can charge per transaction. Ignoring the terms of the account incurs more expense than you will ever earn on the interest.

Tip – #10 – Set Up Mobile Alerts

Some banks will let you set up text alerts that go directly to your mobile phone. You can text in requests to see your account balances, account activity, make transfers and find ATM locations near you.

Alerts can also be set up to send you a text under specific conditions that you choose. Remind yourself when your balance falls below a threshold or learn when a deposit has been made.

Use technology to make your life simpler, avoid bank fees and live a happier life.

What bad habits do you want to break?

Fighting Credit Card Debt

July 16, 2013 by Sherry Tingley

Since the beginning of the 2008 recession in the United States the economic reality of many middle to low income families has not been a pretty sight. More and more families have struggled to meet their monthly mortgages, rents, utilities, groceries and essential living expenses. You may be struggling as well.

Unemployment and rising medical expenses have driven many people to use credit cards as a “plastic” safety net. With high interest rates on credit cards, debt can keep growing until you are experiencing a debt snowball.

The US Census projects that Americans will carry $870 billion in credit card debt in 2013.

Some may think that their lucky charm is a debt protection product which will cover expenses in times of disability. In 2009, consumers spent about $2.4 billion dollars for this type of protection.

Self Assessment

There really is no lucky charm when it comes to managing your credit card debt, but you can easily figure out if you are having difficulty managing your personal finances.

Personal Questions To Ask Yourself

Are you living paycheck to paycheck?
Do you have little or no money put aside in a savings account?
Are you unable to pay your creditors on time and are starting to receive collection calls?
Can you only afford to make the minimum monthly payment on your credit cards?
Have you taken out new loans to pay off existing debts?
Do you hide credit card bills from family members?

All of these factors can lead you to even worse problems, which will eventually, if not corrected control your life in ways you had never dreamed possible. Low credit scores can affect employment, the ability to borrow money at a reasonable rate and increased interest rates on your current credit card balances.

Solutions

The easiest solution to credit card debt problems is to get serious about saving money and paying off your debt. Going to a website like Utah Saves will let you take a pledge to save money, reduce debt, and build wealth over time as well as encourage others to do the same. So far, 310,000 people have signed up and taken “The America Saves Pledge.”

Benefits of signing up are that you will receive text messages to encourage you to save money. You have access to money management workshops. You will have access to personal financial counselors. You can also share your own money saving tips and qualify to win $25 if your story is selected.

While there, you can set up your own personal savings goal, choose the amount of money you want to save and how long you have to achieve the goal.

Getting Help

For consumers that are feeling overwhelmed by debt, you can call the National Financial Counseling Center at 1-800-351-4195 for a free confidential consultation with a Certified Financial Counselor. Plan to get out of debt today, not tomorrow!