Posts Tagged ‘budgeting’

Quick Guide to Paying Down $10K in Debt

Monday, August 10th, 2009

An entry on BusinessWeek’s new interactive forum, BX, highlights the level of credit card debt that the average consumer struggles with: roughly $10,000. But with that level of credit card debt, what are some useful ideas on how to pay it off?

Budgeting

  • Set up a budget. This can be as simple as our rough, quick budget, or as complex as you desire. The value of even a rough budget can be enormous, but make sure that if you choose to use a highly complex system, that you will have the willpower to maintain it over the course of months. If not, opt for a simpler budget that you know you can execute.
  • Track and evaluate. Measuring the viablility and impact of your budget on debt paydown is key. Use our tracking form for simplicity.

Debt vs. Investments

  • Stop making 401(k) and Roth IRA contributions and roll that money into your debt reduction payments.

Non-discretionary expenses

  • Set up a monthly non-discretionary amount that is aggressively trimmed down from your current expenditure level. Easy places to cut include the eating out budget, the alcohol budget, and the shopping budget.

Recurring expenses

  • Expenses in your budget that recur from month to month are some of the best items to cut out. These typically include: cable TV, subscriptions of all kinds, gym memberships, home Internet connections, and food and wine clubs. Roll all of the savings in these categories directly into debt reduction payments.
  • For those living in high-cost rental markets, consider moving to a new, cheaper place. If the potential savings is significant, you will wipe out your debt in no time.

Big-ticket purchases

  • Don’t make them until the debt is completely gone. Enough said.

Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Quit Spending On Credit Cards

Sunday, February 22nd, 2009

At DebtGoal.com we are constantly surprised by the number of people who set goals for reducing debt but keep spending on their cards.  There are a lot of reasons to keep using the plastic:  convenience, rewards, cash flow, etc.  There are endless reasons for using plastic, but only one not to:  it’s nearly impossible to get out of debt if you’re spending on your cards.

We have a friend who decided a year ago that her debt load had reached a critical point and that she was going to finally buckle down and pay off debt.   She called me back a few weeks ago to check in for advice.  In the space of a year, she and her husband had taken out 5 more cards and racked up another $20,000 in debt.  She may be an extreme case, but it’s hard to increase your credit card debt if you don’t spend on them

The truth is that people tend to spend more when they spend with plastic.  Various studies have tried to quantify this impact, but they all come to the same conclusion:

  1. A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash.
  2. McDonald’s found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash.
  3. Professors at the Sloan School of Management at MIT found that study subjects were willing to pay up to 100% more for identical purchases when they pay with plastic rather than cash.
  4. USA Technologies (2008) found that customers purchased items costing 33% more when they purchased with credit vs. cash.

Why is this?  They reduce the pain of payment by deferring the costs of spending:

  1. Paying for the product or service is put off when you use plastic. Therefore we don’t do the same mental accounting as we do when we pay with cash.
  2. When we buy several things on a credit card at one time and pay in a single transaction, there is no clear signal that we may have overspent on any one of the items.
  3. Paying with cash is a visual clue that money is being spent. And while checks don’t have the same effect, writing down the amount physically still imprints on your brain that you are letting go of some cash.

There’s another incredibly practical reason for not spending on your cards: if you don’t spend on your cards on only use your debit card, you’ll find that it’s much easier to balance your spending to your income.  If you consolidate down to only one checking account, you and your spouse just need to monitor spending on this account and make sure you don’t go over.  With many accounts you can get daily balance alerts, making it easy to keep your spending in check.

So quit spending on your credit cards.  Do whatever it takes to get them out of your wallet and make them hard to use.  If you can put distance between the plastic and the urge to spend, you have a better chance.

  •         Cut them up
  •         Burn them
  •         Freeze them in a block of ice
  •         Wrap them in duct tape
  •         Bury them in the back yard
  •         Feed them to your dog

Be creative and have fun with this task.  Challenge a friend of family member to see who can come up with the best way to destroy cards.  If you have a great story or idea, post it here.

Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Vacations and Debt

Monday, January 19th, 2009

This week we present a series of articles entitled “How to Have a Rich Life While Paying off Debt”.

There’s seemingly nothing to celebrate when you’re due for a vacation yet are buried under a substantial amount of debt. But not only are there numerous options for the budget-conscious, innovative ways to maximize one’s opportunities to relax abound. The following guide should not only provide the important steps, but help to get the creative juices flowing regarding any number of possibilities.

  1. Begin researching and planning well in advance. By looking up fares, packages, and other options for travel and stay in advance, you will not only increase the chances of getting the best possible rates, but also enjoy some of the widest selection and flexibility in planning. Also, make sure to set a total budget for the vacation and plan to meet it, providing room for a discretionary cushion.
  2. Stay with friends or family, in a cheap hostel or dorm room for rent, and pack very lightly. Lodging is one of the main expenses of a getaway. Minimize the cost of this and your total spending objectives should be met. You will maximize your sense of relaxation when not struggling with a mountain of luggage.
  3. Keep it short. Vacations in the range of four days to one week are enough for most people to fully recharge. Of course, the longer your vacation is, the more it is going to cost in most cases.
  4. Grocery shop. We’ve advised those in debt to avoid eating out. This applies to vacations as well. If fine dining is one of the cornerstones of your vacation ideal, then eat in for the entire trip and make the last lunch or dinner of the getaway the night out on the town.
  5. Cruises. Many cruise lines offer some of the best vacation deals on the market from a per-day cost standpoint. Choose one with inclusive meals and embark/disembarcation locations that are inexpensive to get to, and you’re set.
  6. Travel as part of a large group. Economies of scale may mean you can get a vacation deal laden wtih value.
  7.  Fit your vacation into your broader game plan. Those who make a clear financial plan are significantly more likely to reduce debt and stay out of it. Make sure the excursion is budgeted. If you splurge on a vacation, make sure that it fits within your career strategy. Keeping a job, and the cash flow that comes with it, is a key source of funds to pay down debt over time. Do not jeopardize this, so try and plan your getaway during slow periods in the office.
  8. Last minute specials. While planning everything well in advance has its merits, booking last minute might save you a lot of money. There are numerous vacations deals for travelers that can make the commitment at a moment’s notice. If you’re flexible enough for whatever reason to vacation this way, then snatch up one of the offers you can find online.
  9. Think outside the box. For most, the overarching goal of a vacation is to simply relax and recharge. To this end, there are many options that do not require a journey to the other side of the world nor even a trip across your time zone. You know yourself best – many can recharge in a quiet, rural environment with a decent view.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Your Issuer Can Impact Your Credit Score by Closing Your Unused Cards

Wednesday, December 3rd, 2008

With the credit crisis worsening, card issuers, worried about exposure to the risk of credit card defaults, have begun to ramp down lending by issuing fewer cards, lowering credit limits, and closing dormant accounts.  This begs the obvious question: should you as a card holder be concerned?  The answer (as always) is that it depends on your situation and your goals.

If you view your financial situation as secure and are concerned with paying off debt, then this may not be a concern as having your credit limit reduced or your card closed simply represents fewer opportunities to charge up balances.

However, if you are concerned with preserving financial flexibility in a tough economic environment and feel that you might have to rely on credit cards should you suffer an economic setback, then you may wish to keep all of your cards open.  Similarly, if you are concerned with your credit score in the short term, you may also be concerned about having your limits reduced or your cards closed.  Why?  Simply put, even if it’s your bank who lowers your limits or closes your accounts, this can reduce your score.  To understand why, you need to know about the following factors that determine your score:

  1. Payment history (35% of your score). This includes information on missed payments, late payments, bankruptcy filings, and any referrals to collection agencies.
  2. Outstanding debt (30% of your score). This represents a snapshot of one’s credit line utilization, the amount of outstanding debt versus one’s total credit limit. The higher the utilization, the lower the score will be.
  3. Credit history (15% of your score). Having a long credit history, including keeping cards open, improves the score.

Since a closed account or a lowered credit limit will increase your credit line utilization (you will have the same balance as before, but a lower total combined credit limit), this can reduce your score.  Similarly, closed accounts will reduce the length of your credit history if you have had these cards for a significant amount of time.

So how can you keep these dormant accounts from being closed?  The answer is fairly simple–just use your card.   If your issuer has lowered your credit line, you can often have it reinstated by simply calling your issuer to ask that it be restored.

However, all of this raises the obvious question of whether keeping access to credit is ultimately a good idea.  Again, the answer depends on your ability to manage your credit.  For many, open credit cards are a temptation to swipe. This If you have had trouble managing spending or do not have a process in place to track your debt, open cards can lead to mysteriously blooming credit balances.  In this light, make sure that if you do put a charge on your card, make sure that it’s minimal (e.g. a pack of gum per month) or make sure that your spending is part of your regular budget.

If you feel that you have the self control to manage your credit and a system in place that gives you visibility to your total debt balances each month, keeping your cards open can protect your credit score and give you added flexibility.   However, if you feel that your economic position is secure or that you can’t manage to keep spending under control, you are better off letting your issuer reduce your limits or close your accounts.


Scott Crawford is CEO of DebtGoal.com, a do-it-yourself system for lowering your interest costs and getting out of debt.  DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.

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Posted in Credit Card, Debt Management, Lending Industy, Paying Down Debt | View Comments