Debt-Free Forever Read online

  GAIL’S TIPS

  In January, start setting aside the money you’ll need for the next holiday season. It’s much easier to save $100 a month than to come up with the $1,200 all at once. A little bit at a time means the money is there at the ready when it’s time to shop for seasonal gifts.

  Working Together on the Budget

  One of the big benefits of a budget is the fact that it becomes the reason why you do or don’t do things. Yes, you can make the budget the bad guy. The budget becomes the control point. If you’re trying to cut your expenses, it’s easy to get upset with a partner who seems to be spending too much. But do a budget together, and if either of you can’t buy that thing you want it’s because “It’s Not in the Budget.” You’re not monitoring each other anymore. The budget becomes the monitor. And since you both agreed on the budget, getting upset with each other doesn’t make much sense.

  This works. It’s one of the reasons the people I work with see so much change by the time I’m ready to say buh-bye. As an outside force, they now have someone else to blame for why they can’t spend: me. By the time I’m done, they’re in the habit of checking with the budget before making a spending decision, so they’ve created their own inside force.

  I’ve watched people’s lives change significantly because they’ve implemented a budget and have control over where their money is going. I’ve watched their relationships change as they move from being a “parent and child”—as in, “you can’t buy that” or “you’re spending too much money”—to two adults sharing responsibility for their family’s financial health. It works if you do it right. So take the time and see for yourself.

  Remember, your budget will require some fine tuning, like a musical instrument, to get it just right. Let it evolve to meet your changing needs.

  It’s a good idea to review your budget at least twice a year. Look at where your money went and what you didn’t notice while it was happening to you (like bank charges that snuck up, up, up). Make conscious decisions about what you’re going to do differently, how you’re going to live differently, and what you want from your life.

  So often we sleepwalk through our lives, completing tasks by routine, keeping on keeping on. We slip, drift, slide into bad habits, but because we’re just doing same old, same old, we don’t even notice. Expenses creep up, and we fall out of touch with our own financial realities.

  Keep your eye on your budget, make adjustments that make sense to you, and keep an eraser handy. And get a calculator!

  Budget Worksheet

  5

  LOSE THE DEBT!

  People are always claiming to be serious about becoming debt-free, and then out they go and drop $3 on a coffee, $30 on a book, $110 on a new pair of shoes. The little things we spend money on may improve our lives for the time it takes to consume them, but they do nothing for our long-term goals. If you’re serious about becoming debt-free, you can do it. But as I’ve said earlier, you have to have a plan.

  REDUCE YOUR INTEREST COSTS

  Before we go any further, it is vitally important that you reduce the interest you’re paying on your debt to as low a rate as you can get. The more money you must spend on interest, the less you have to pay off what you owe.

  In Chapter 3 you made a list of all the debt you have, including the interest rates you are paying on each of those debts. Now it’s time to tackle those rates to reduce your interest costs.

  On your Debt List, circle all the interest rates above 10%. You are going to attempt to get your costs way, way down. There are four strategies for how to do this:

  1. Call and negotiate with each creditor individually to reduce the rate you are paying. This works best when you have just a couple of very high-interest debts.

  2. Do a balance transfer to a cheaper form of credit. Whether you use a credit card with a lower rate or a line of credit to pay off your more expensive debt, a balance transfer can be a great way to reduce your costs.

  3. Get a consolidation loan, where you lump all the debt together at a lower rate. If you’re walking around with umpteen different sources of credit, then a consolidation loan may be your best bet as long as you can get a loan at a reasonable rate.

  4. Ifyou have equity in your home, use that equity to pay off your consumer debt so that you reduce your interest costs. I’m all for using the equity in your home to pay off high-cost debt IF you get rid of all forms of credit and swear on the soul of your cat that you will never, ever, ever spend money you don’t have again. Refinancing debt should not be seen as a way to hide that debt. Nor should it be a way to free up money in your cash flow so you can keep shopping. Refinancing makes sense when you are determined to cut costs and can use the leverage of home equity to achieve your goal.

  GAIL’S TIPS

  Getting a consolidation loan just for the sake of “consolidation” won’t get you to debt-free any faster. The loan has to reduce your interest costs to make sense. I’ve seen more than a few consolidation loans with whopping interest rates … sometimes higher than on the original credit card or loan. People often assume that “consolidation” means “better.” It only means better if it’s also cheaper!

  Strategy 1: Call and Negotiate

  If you choose to call and negotiate with your existing creditors for a reduction on your interest rates, you must be very persistent. Very, very persistent. Your call may go something like this: “Hi, my name is Molly McGoo and I want to find a way to lower the interest rate on my credit card.”

  Some lenders will give you a lower rate simply because you asked. Some will agree to lower your rate only if they also freeze your account so you cannot continue to use it. Others will say there’s nothing they can do.

  If you’re denied a rate reduction, don’t give up. Wait a couple of days and try again. You may reach a more cooperative customer service rep. If it doesn’t work on your second try, escalate the call. Ask for a supervisor. Explain your situation again and then ask, “What can you do to help me out?” If he can’t do anything, ask for a manager. If she can’t do anything either, keep escalating the call. You want to find the body that can do something.

  If you have a good credit history, remind the person you’re talking to that other card issuers want your business. Be polite. Stress how much you like your card. But be firm. You’re not going to settle for a crappy rate. You’ll move the business. They may reduce your rate on the spot. Or they may say they need to look into it and will get back to you. If they don’t, call again.

  GAIL’S TIPS

  The biggest reason people end up paying too much to credit card companies is that they don’t shop around. People commit to a card because it offers points, travel miles, or some other incentive and then they stop paying attention to their costs. Credit has become like every other consumable: shop around for a better deal.

  If you have a crappy credit history, remind the person you’re talking to that you are desperate, that he is only one of many creditors you’re speaking with, and that if you can’t find a way out of this mess you’ve made of your financial life, then you’re willing to bite the bullet, declare bankruptcy, and start fresh.

  While that works a lot of the time, sometimes it doesn’t. Or sometimes the rates don’t come down enough. Time to try the second tactic: the balance transfer.

  Strategy 2: Do a Balance Transfer

  Transferring your balance from a card with a 28.8% interest rate to a 2.5% interest rate seems like a no-brainer, right? But there are a few things you should watch for since not all balance transfers are created equal.

  If you’re doing a balance transfer to a card with a promotional offer, check how long the lower rate will last and what the rate will be when the special offer period is over. Offer periods vary from six months to one year, after which the card will revert to the normal (usually much higher) interest rate. If you can’t pay your balance off before the rate skyrockets, you may be stuck paying even more than before. Note on your calendar, in your daybook, or in
Big Fat Red Capital Letters on your wall the date that the promotional interest rate ends and plan either to have the balance paid off in full or to transfer the balance to a cheaper option when the higher rate kicks in. The credit card company isn’t going to remind you, so if you don’t keep track you can’t go whining about what fiendish louts they are.

  Make sure you understand what the low rate applies to. There are generally three types of transactions you can have on your credit card: a cash advance, a balance transfer, and purchases. Each of these transactions may have a different rate, with cash advances usually the highest and the balance transfer rate the lowest. If the offer you receive applies only to a balance transfer, do not make additional purchases on that card.

  Why? Because every payment you make will go against the balance transfer amount, leaving the new purchases to build up interest at the higher interest rate. Really! That’s what happens! Believe it!

  Balance transfer fees are usually buried in the mouse print, so read your credit card agreement thoroughly before you make your transfer. Many people receive offers with no balance transfer fees and that’s usually clearly stated since it is a selling feature that’s attractive to buyers.

  While you’re always supposed to pay your credit card on time, missing your due date by even one day on a balance transfer will result in the lender switching you automatically from the promotional rate to the standard rate, no ifs, ands, or buts.

  If you do a balance transfer, cut up the old card. Don’t cancel the account for six months so you don’t lose the credit history. But don’t fool yourself into thinking that you’ve taken care of the problem and that you now have even more “free money” to spend. This is one of the biggest traps of balance transfers. If you forgive yourself and don’t get a handle on your expenses—if you continue to think of credit as disposable income—then it’s only a matter of time until you’re pulling your hair out and running naked through the streets screaming!

  Remember that credit card companies don’t make low-interest balance transfer offers out of the goodness of their hearts. They know the odds are on their side that you’ll fail to pay off your balance on time, triggering the higher rate, or that you’ll neglect to switch your balance to another credit card when the promotional period is up.

  Make sure you like the features of the card to which you’re transferring. A card with an annual fee is a card that costs more. Call it a fee, call it interest, whatever you call it, it’s costing you money, and since the point of the transfer is to get those costs down, taking on an annual fee makes no sense.

  And please, please, don’t forget about your old card. Until you receive some sort of confirmation that the balance has officially been transferred, you still need to meet the next due date of your old card or you risk getting slapped with a late fee and a black mark on your credit history.

  If you have room on your line of credit, transferring the balance from more expensive debt to your line will make sense. Don’t fall into the trap of thinking you “paid off” your credit card debt. You didn’t! You simply moved the debt around. Take those credit cards and cut all but one up. And make sure you’re actively paying down that line, since the biggest temptation with a line of credit is to make only the interest payments required to keep the line in good standing.

  Strategy 3: Get a consolidation Loan

  If you’re walking around with balances outstanding on dozens of cards, plus car loans, student loans, and other forms of credit, you may need a consolidation loan.

  For people who have been chronic credit abusers, consolidation loans work better because they are not “revolving credit.” They are “instalment credit.” The amount to be repaid is set for a specific number of months, at which point the loan will be repaid in full.

  GAIL’S TIPS

  Once upon a time the only kind of credit you could get was called instalment credit. You had to make monthly repayments that were designed to have that debt paid off within a certain period of time. So you might borrow $12,000 to buy a new car, with the plan to have that paid off in 24 months, so your payments would be about $560 a month. You knew exactly when the debt would be gone, how much interest you’d pay, and how much you were making a commitment to repay every month. And you had to have a good reason for borrowing. Lenders were loath to just hand out money willy-nilly. You had to justify your borrowing, which made you think. Those types of loans are still around; a consolidation loan is one.

  Much more popular today is revolving credit. Lines of credit and credit cards are the primary examples. You can borrow money, pay it back, and borrow it again at your whim. You don’t have to explain anything to anybody. You can use it to buy furniture, a car, or a dog. Unfortunately, you don’t have to think too hard or too long before you rack up some debt.

  If the bank you regularly deal with won’t help you consolidate, go and ask another lender. Sometimes our own bank takes us for granted, but another bank that would like the biz will cut us some slack. Offer any other business you may have: your retirement plan, your mortgage, your accounts, whatever you have to show the new lender good faith.

  Remember, a consolidation loan only makes sense if your interest rate is coming down. If it’s not, you need to find out why. You may have a crappy credit history that is affecting your rate, in which case you’re unlikely to do better elsewhere. But it may simply be that you’re speaking to the wrong person. Lenders don’t have as much discretion as you may think. You may have to ask to deal directly with the branch manager to make your case. If you are a good client with a strong credit history and a decent income, you shouldn’t have any trouble getting a consolidation loan with a decent interest rate. Don’t settle! Demand the most you can get in terms of a low rate. And be prepared to do some serious legwork to find a financial institution that is willing to work with you to help you achieve your goals.

  Strategy 4: Refinance Your Rate Down

  Paying off expensive debt by increasing your mortgage is one of the more time-honoured ways of hiding debt. Our homes, once the anchors in our wealth-accumulation plans, have become cash cows used to finance everything from vacations to vehicles, eroding our true wealth and leaving us vulnerable to the inevitable downward fluctuation in the value of our homes. Lots of people consolidate using the equity in their homes and then pretend that everything is okay, cuz now it’s a mortgage payment. Isn’t a mortgage good debt? Hey, tell the truth. It’s still consumer credit; it’s just been shuffled to somewhere you don’t have to look at it. And believe me, it’s costing you.

  Allison and Peter have been in debt forever. They make more than $140,000 a year combined, but they can’t seem to stay out of the hole. It started with Allison’s two maternity leaves, for which they had nothing saved. They kept spending as if she were pulling in her regular income and ended up using their line of credit to fill the gap. Peter’s truck gave up the ghost, and because they’d been late with some payments, their credit score was low. That meant a higher interest rate on the new truck loan. And then there was the trip to Cancun they decided to take last winter because they just had to get away. All in all, they ended up with $67,960 in debt and the payments were killing their cash flow.

  Allison had a great idea. The house they’d been living in for the past 14 years had gone way up in value. They could just fold their debt into their mortgage, which was coming up for renewal, and be done with the worry. They were paying more than 12% on average on their debt, and the mortgage would be at a much better rate: 5.15%. And if they went with a 30-year amortization, their mortgage payments would actually come down. They wouldn’t have those huge payments on the truck or the line of credit anymore, so they wouldn’t run short of money and end up having to use their credit cards to get them to the end of the month. There was no downside.

  When Allison and Peter made the decision to refinance using their home equity, they made a smart choice. When they figured they’d be done with the worry, they didn’t consider the high cost of the �
�peace of mind.” Repaying the refinanced amount over 30 years means the $67,960 they consolidated to their mortgage will end up costing them almost $44,000 in interest!

  It makes sense to consolidate on your mortgage to save on interest, providing you put away all forms of credit, learn to live on your current income, and continue to make extra payments against your mortgage to offset the consumer debt you stuck on there. Slap as much on the mortgage as you were paying for debt and mortgage payments together and you’ll not only save money, you won’t add to the length of your mortgage.

  BACK TO YOUR DEBT LIST

  You’ve been successful at reducing your interest rates, so now it’s time to reshuffle your Debt List so that your most expensive debt is back on top. Remember, your most expensive debt is the one with the highest interest rate.

  The next step will be to figure out how much money you must put toward your debt to get it paid off once and for all. If your interest costs have gone down, so may your minimum payments. Note the changes to your minimum payments and then add up all your new minimum payments to see how much you have to pay to stay on the good side of your credit history.

  MORE THAN THE MINIMUM

  While you make the minimum payments on each of your debts to keep them in good standing, paying only the minimum on your debt will keep you in Debt Hell for a very long time.