photo credit: Photos8.com

Being Good With Money Can be Boring!

We all know that we need to budget, watch what we spend, and not put things on credit.  Sometimes this can just seem a little bit dull and depressing!  You start the month feeling sure that there will be some money left at the end for a nice meal out/some new clothes etc. but gradually the money goes on other things.  The car needs to be repaired, the children need new shoes etc. etc.

Temptation is Always There….

This is when the temptation to put things on credit can be very great.  The card that you haven’t used since you got it has 2000 available to spend with zero interest.  The feeling of being freed from your monthly budget is brilliant.  Yes you can afford that meal in an expensive restaurant, the latest techno gadget, or a trip to the theater.

But the Punishment For Taking on Debt is Swift

Take this path and the feeling of freedom won’t last for long.  You will hit the limit on your card, the introductory interest rate will end landing you with a hefty monthly bill.  Suddenly you are back to funding your spending out of your monthly budget, only now you have even less money to spend each month.

Is There Ever a Right Time to Take on Debt?

So when should you be funding purchases from debt?  I think that you should only use your card if you know you can pay the balance off in full when the bill comes.  On very rare occasions it might be worth making a big purchase (e.g. a vacation) on a card if you know that you can clear the balance over a couple of months.  To use your card in any other way is to make yourself permanently poorer.

photo credit: Nexeus Fatale

What is a debt spiral?

This is when the interest/repayments on loans reduce your available income so that you have to borrow more and more each month to keep up.  It is a downward path that leads to serious financial problems and even bankruptcy.

Example

A family has a monthly income of 2000.  Their monthly essential outgoings total 1500 so they have 500 each month to spend on non-essentials or to save.

They decide that they just must have a new car, the monthly cost is 300.  They now have 200 each month to spend/save.

As they are working really hard, they feel that they deserve a holiday and put the 4,000 cost on a credit card.  Monthly repayments are 200.  They now have nothing left to spend each month.

But people can’t live without their little luxuries so they eat out and go to theme parks with their children and increase their credit card debt to 8,000 over the next year.  New credit card repayment is 400 and they are now running a monthly deficit of 200.

If nothing is done about this situation the debt will grow more and more quickly as it compounds up/is added to.  This process will only stop if the family realize that they need to take action or they are refused further credit.  In the latter case the door to bankruptcy is open!

Be on Your Guard

The point of this post is to realize that the start of the debt spiral won’t seem like a problem at all.  In fact it could seem like a really great day.  You’ve rewarded yourself for all your hard work with a new car.  That foreign holiday you’ve always dreamt of is now a reality.

If you are tempted to put luxuries/treats on credit then consider this thought:

“If you can’t afford the lifestyle you want now then how are you going to be able to afford it when you have extra credit bills to pay”?

Taking on credit when you don’t need to is stealing from your future.  Consider the following rule:

“The only way to become wealthy is to spend less than you earn and invest the difference”

You should be able to clearly see that doing the opposite (spending more than you earn and borrowing the difference) is a certain way to being poorer in the future.  Always ask yourself if you really need something before you buy it.  Never buy large purchases on an impulse especially if they are going to be bought on credit.

Without a budget you are not in control of your finances and have no way of measuring your success or failure

But all of the information and tools about preparing budgets are missing the point.  Do people get into debt because they don’t understand that they are spending more than they earn?  I don’t think so.

Preparing a budget is the easy part.  It is sticking to it that is difficult.

I can relate a story from my own slide into debt problems that illustrates the point.  A long time ago I made the effort to total up all my expenses and income.  I worked out how much my wife and I had to spend on “fun” things and decided to keep track of this by the extremely high tech method of keeping this money in an envelope each month.  One day nearing the end of the month we were shopping and my wife wanted to buy lunch in a restaurant.  I said we didn’t have the money (trusty envelope in hand!) and we had an argument about it.  In the end I gave in and we bought lunch on our credit card.  Our collective weakness was a sign of things to come.

There is a reason why lots of people give advice on making budgets but not so much on sticking to them.  That’s because one is simple and the other is very hard and complicated.

No money management tool will solve your money problems for you

Sorting out an addiction to spending is like dealing with losing weight or a chemical dependency.  The motivation for it needs to come from within.  You need to spend time thinking about why you want to spend money – is it to make up for low self-esteem or is it the result of problems in your past or even the way your parents managed money?  Understanding the reasons behind your desire to spend and addressing them is the real key to solving your debt problems.  Once you have done this then you can use any method for calculating you budget – a spreadsheet, a web-based tool, the back of an envelope!  It really doesn’t matter once you have discovered the motivation to sort out your money problems.

A lot of advice also ignores the uncomfortable fact that many people are not in debt because they spend on luxuries.  They have problems because they cannot earn enough for essentials or because of medical emergencies.

Have you had money problems and overcome them?  What was your motivation to do so?

For the short period of time that I’ve got to know Neil, I have realized that he is against credit cards. Here is the US, there are also many advocates against credit cards. The most famous one being Dave Ramsey. I cannot blame anyone for having this view because many of the practices by credit card companies over the last few years have been disgraceful. In fact, it took a credit card bill of rights to potentially put right to many these shady practices. Here are a few examples.

Yet, despite all this, for some people, credit cards can be of help in building a credit history because of the following reasons:

Credit Scoring System – In the US, an individual’s ability of get loans or a mortgage depends a large part on one’s credit history. But to have a credit history, you need to have some credit. Without any credit, you can never have a “good” credit score or FICO score as they call it here. To get a very good credit score in the US, you’ll need to have a variety of credit under your belt. For example, having a mortgage, a car loan and a credit card would help. And if you payed your bills on time every month and you do not utilize all the available credit lines you have, you will achieve a good credit score very quickly.

A good credit score means you will get lower interest rate on your mortgage or loans.

Importance also extends to businesses – Most of the job growth in the US is in the so called “small business” area where an entrepreneur starts a business. To get a credit card for a business, a credit card company looks at the owners personal credit history (and not the business history). So if you are in the US and you have a business, and you need a credit card for yourself and your employees, you need a decent “personal credit score” to get a credit card. And if you business is not well established, your personal credit score can get you business loans you would never have access to if your score was no good.

Important to rebuild credit after bankruptcy – In the US, many people file for bankruptcy because of massive debt burden that can be due to medical bills, lost of jobs and too much debt etc. Prior to and once they emerge from bankruptcy, their credit score will be very low. If the person got out of bankruptcy still current on his mortgage, then he or she can rebuild their credit faster as long they make timely payment on their bills.

For those who do not own a home or a car, but intend to in the future (which is basically most people), then rebuilding one’s credit with a secured credit card may be a very wise financial decision.

Hotels require credit cards for advance booking – Many hotels require credit cards for advanced booking. They need your credit card so that they can charge you with a cancellation fee if you withdraw at the very last minute. Car rentals also require credit cards for advance bookings.

Sometimes Credit Cards Are Just Plain Dumb – Yes, sometimes credit cards offer deals that are too good to be true. Here are a few example of how credit cards have fallen over us consumers just to get us to sign up.

Usually sites based on WordPress add a “nofollow” tag to all comment links. This prevents search engines from counting the link for the purposes of ranking/relevance. I do not think that this is fair! If you have taken the time to write valid comments then I think that you deserve a live link!

Please remember that all comments have to be approved by me, and that comments unsympathetic to people with debt problems will never be approved.

3 years on and I have resolved my debt crisis.  I am looking forward to the future and am remarkably still married.  The process of working through my debt crisis  wasn’t easy, but the tough decisions I took then are starting to pay off now.

What is your debt story?  Write a reply here, you might find that just writing it down helps you to come to terms with it/see what needs to be done to fix it.

Good luck!

Cost of Bankruptcy - Filing Costs

The filing costs for bankruptcy are actually quite small and are as follows:

Chapter 7 – $299

Chapter 13 – $274

Cost of Bankruptcy – Legal and Counseling Costs

You will probably need to assistance of a attorney to file for bankruptcy.  There are also new regulations that require you to attend credit counseling before declaring bankruptcy.  Typical costs for these are going to be in the region of $700-$2000

Getting Credit and Insurance After Bankruptcy

Your bankruptcy will stay on your records for 10 years (or 7 years for chapter 13).  During this period you will find it much more expensive to get credit, including mortgages (for chapter 7 bankruptcy you will probably be unable to get a mortgage at all for 2 years).  In the current climate you might find it hard to get a mortgage at all.  Insurance companies will use credit records, and consider people that have been bankrupt a higher risk.  This will increase your premiums.

The Emotional Cost

There is much less stigma attached to bankruptcy than there used to be, but it’s still there.  The effect on your family and relationships might be significant, you are certainly going to find out how strong your relationship is.  If you have been hiding debts from your family then the double shock of also declaring bankruptcy will push a lot of marriages to breaking point.

Debt Control – The Basics

You cannot control your debts if you don’t know what they are.  Record all of your debts in one place with amount outstanding, repayment amount, interest rate, and time to repay.  You can use this information to help you to decide which of your debts to pay off first.

You cannot plan to pay off your debt if you don’t understand how much you earn and how much you spend each month.  Use your bank statement to write down a complete list of everything you earn and spend in a month.  This will help you to see if you are able to pay off your debt on your current income.

If you feel that your debt situation is getting out of control then seek the advice of a reputable debt organization, preferably a charity or a company that gives initial consultations free.  One thing that you must not do if you are in this situation is nothing (and another is taking on more debt).  Delay can make things much worse and make the job of resolving your debt situation far worse when you eventually have to face it (which you inevitably will).

Bankruptcy Types – Chapter 7

This is full bankruptcy for the most serious debt situations where the debtor has no or little income. Recent legislation restricted access to this form of bankruptcy as it was felt that too many people were taking advantage of it to avoid their debts.  Some of the new requirements include attending credit counseling and the need for additional legal advice.  This type of bankruptcy stays on your credit file for 10 years and usually you will not be able to get a mortgage for 2 years.

Bankruptcy Types – Chapter 13

This bankruptcy type is for people that have a serious debt problem but have earnings and can afford to pay something towards paying off their debt.  In this case the debtor will pay an agreed amount into their bankruptcy over a period of years.  At the end of this period all of their debts will be written off.  This form of bankruptcy stays on your credit file for 7 years. If you are a UK rather than a US resident, this type of bankruptcy is similar to an individual voluntary arrangement.

Common Features

Mortgages are not included in a bankruptcy and whether the debtor gets to keep their home or not will depend on state-by-state regulations regarding exemption of the family home from the bankruptcy estate,

Debt to Pay – Pay off the Most Expensive First

This method makes logical sense.  You sort your debts into order of the interest rate that they charge and use any additional income that you have to pay off the most expensive debt first.  In this way the money that you pay off your debt saves you the most interest.

Debt to Pay – Pay off the Smallest First

One criticism of the above method is that you might spend a long time paying off an expensive debt and not see very much progress.  This alternative method sorts your debts into order of their size.  You then use as much income as you can to pay off the smallest first.  In this way you will reduce the number of outstanding credit balances that you have at the fastest rate.

Debt to Pay – Calculate it Once and Forget it!

The problem with both of the above methods is that they require a level of self discipline and organization that most people that get into debt just don’t have (I know I didn’t).  My alternative suggestion is to try and work out why you have got into debt and address that issue. Once you have done that, then as long as your debt repayments are reducing your debt and you can afford them – just forget about them and concentrate on enjoying your life and not taking on any more debt!  Your credit balances will be cleared eventually as long as you keep up the payments and don’t take on anything new.