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Plan for How to Get Out of Debt Fast

If you are like millions of other Americans, chances are that you are carrying around some debt on your credit cards. As of March 2010, U.S. revolving debt equaled $852.6 billion, 98% of which was from credit cards, and the average household carried $16,007 in credit card debt. That’s a lot of debt to have hanging over one’s head! With the economy the way it is, jobs being lost, and houses being foreclosed on, it’s a difficult time to try to get ahead and out of debt. But it’s vital that anyone who is in debt works to get out from underneath it, so I wanted to put together a list of things that could maybe help people get out of debt faster than if they were doing it without a plan. A long time ago I wrote a series called “The Start Digging Out Of Credit Card Debt Challenge” which you may want to check out in addition to what is to follow.

In order to get out of debt you need a plan. Just paying the minimum on your credit cards each month for years on end isn’t going to push you toward solvency very quickly and will just leave you frustrated and angst-ridden. So that’s a good place to start — put a plan in place.

  • Jot down all your credit card debts
  • Find out their respective interest rates
  • Note the minimum payments for each

Now at least you know what you are battling — you can see how much you owe, who you owe it to, and just how much it is costing you in interest. Scary, right? That’s why you need to get out of debt! While there are several different schools of thought on how to go about attacking your debt, my personal belief is to try to pay off the card with the lowest balance first, as it may give you a mental boost to continue attacking the other cards once you see progress being made. Put as much money as possible toward this card with the lowest balance; make it hurt. Have a savings account? Take most of it and pay off debt. You don’t really have any savings if you have debt, it only feels that way. Leave a little for an emergency fund and use the rest to pay down debt. It’s vital that you shove money at this debt to start making a debt.

Once that first card is paid off, move on to the card with the next lowest balance. Continue sending as much cash to that card as you sent to the first one, but now you can also add in the minimum payments you were making while paying off the first card. I don’t really need to keep going with this theory as it just repeats itself, but that’s how I paid off debt and what I feel is the best way to do so as quickly as possible. While you are working this system, I want you to keep in mind a bunch of tips that kept me going until I was out from under my debt.

  • Spend less than you make. Always. Even when not in debt. Sell your car and get something cheaper if you can’t afford it. Move. Cut back. Above all, spend less than you earn.
  • Keep one credit card in your wallet for emergencies only. But make sure it’s not one you are currently paying off.
  • Budget. I hate budgeting, but it’s a necessary evil in order to keep track of where your money is going.
  • Don’t worry about other debt like mortgages, cars, or student loans. Concentrate on credit cards only.
  • Be patient. This could take a while, but the important thing is to keep moving forward.
  • Always pay all your bills on time. Not only can late payments ding your credit score, but they can also jack up interest rates even higher.
  • Call your credit card company and ask for a lower interest rate. The worst they can do is say no.
  • Keep going. You may cry, you may get pissed, you may think it’s hopeless. It’s not. Be determined to get that monkey off your back!
  • Don’t try to keep up with your friends. They may be going to dinner or bars every night, but that doesn’t mean you have to. They will still like you and understand if they are true friends.

The single most important thing to remember when you want to get out of debt fast is that it’s never going to be “fast”, but it can be “faster” if you have a plan in place. You have to stay focused on your end goal, being free of credit card debt! It’s the best feeling ever, and once you are there you will never go back.

Do you have any tips for readers on getting out of debt? Something that worked for you? Please let us know in the comments!

(photo credit: SqueakyMarmot)

debt
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What Is a Money Market Account?

There are many different places to put away your monetary savings; under the mattress, in a shoebox, in a home safe, buried in the backyard… or a bank. Most people put their money in a regular old savings account at their bank, either because they don’t know there are better options or because they feel safer having it down the street in that little brick building. If that’s you, you may be missing out on a (now only slightly, but in the past much better) interest rate on your savings, as there is an alternative that acts pretty much just like a regular savings account but gives you a higher return on any money you just have sitting around waiting for use.

A money market account (MMA for short) is a type of savings account that one deposits money into and allows the holding bank/institution to lend and invest the cash in government and corporate securities, giving you (the account owner) back part of the returns. The money you keep in the account is used by the bank to make money, and they pay you a little bit for the privilege to do so. Interest rates on MMA accounts are generally higher than typical savings accounts, and this is for several reasons:

  1. These accounts are not considered “transaction” accounts and thus have different rules than checking and/or regular savings accounts
  2. There are oftentimes minimum balance requirements on the accounts
  3. Account holders are only allowed six withdrawal transactions per month
  4. Banks can charge fees for exceeding the six transactions

Because access to your money is a little more limited than in a typical savings account, many people store there emergency funds and/or long term cash in these type of accounts. It is definitely not the type of account you want to use to keep your daily cash needs in, as the fees you will accrue will eat up any higher interest rate you may be getting. I keep my emergency funds, my car repair funds, and my “taxes due” funds in 3 separate accounts over at ING Direct, who I have been with for years. I don’t need access to this money too often, so the restrictions on the account or the wait time (a few days) to transfer money to my checking account is OK with me. A local bank is currently paying a 0.05% APY interest on their savings account while ING pays me 1.10% APY on my MMA with them — a rather large difference. Money Market Accounts are FDIC-insured just like savings accounts, up to $250,000 per depositor, so you don’t have to worry about losing your money in a bank collapse or any other situation. (Unlike when you keep it under your mattress and your house catches on fire)

If you are holding any long-term money in a regular savings account and not an MM account, you may want to look into moving some of it into one. The interest rates are much better, your money is safe, and you can still access it whenever you need it. Why keep earning a tiny amount of interest when you could be doing a lot better just by moving your money? There are a ton of different MMA available at banks and institutions, so be sure to do your homework, but some of the common ones are ING Direct, Ally, and EverBank. Happy MMA hunting!

(photo credit: alancleaver_2000s)

banking
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Cost of Living Comparison and Difference Between Cities

In the last three years I have lived in three different states and one of them twice. I lived in Southern California from 1996 – 2008, then in New Mexico from 2008 – 2009, then Colorado from 2009 – 2010, and then I arrived back in California again late last year to set up shop. The story behind all those moves is long-winded so I will spare you from the details, but that’s not really the point of why I am writing this post– I really wanted to discuss the cost of living in different communities and what effect that can have on your financial well-being and stability.

Of the three states I have lived in, New Mexico was definitely the cheapest in every way. Rent on my 3 bedroom house with acres of land was under $1,000 a month, car insurance and registration was dirt cheap, gasoline was $1.00 less/gallon than California, going to the movies was only $6, and the lack of much to spend money on allowed me to save up some money. While there isn’t much work in the state and the education system is one of the worst in the nation, one cannot beat the dramatic beauty of the place. I hope to one day find myself living there once again, in a small little house surrounded by mountains, horses, and a few goats. That’s my long term dream place to live again, and here are some of the reasons why.

California on the other hand is so incredibly expensive that I am continually amazed that so many people can survive here. Gasoline is currently $3.75/gallon, my car registration cost me $400, car insurance isn’t cheap, groceries are expensive, and the rent? Forget it – I pay a small fortune for my little house I rent with neighbors so close I could hand them sugar through our bathroom windows. While the weather is fantastic and having access to the Pacific Ocean is part of the value per dollar spent to live here, SoCal requires its residents to make quite a bit of money in order to live comfortably. It takes a lot of work to live here, which is why I can see myself moving back to NM to enjoy a quieter, simpler life again.

Colorado came in right in the middle of those two extremes, but it wasn’t a place I could see myself living long term. It had natural beauty, for sure, but I didn’t find the charm of New Mexico or the splendor of California there. But many people love it and price-wise it’s a pretty fair place to live.

Cost of living in different communities is a huge factor in how well-off you are going to be, what kind of money you are going to make, what kind of work you will have to do, and what kind of experiences you will be able to have. You can choose somewhere cheap to live and have the opportunity to make way less money while doing something you love… or you can live somewhere really expensive and possibly have to work extra hard just to try to make ends meet. It’s all about what an individuals’ priorities are, and everyone has their own ideals of place/work/lifestyle. I used to think I needed (AKA wanted) to do something I didn’t like too much just to keep up with the Joneses or live in a community I couldn’t afford, but as I have gotten older my priorities have shifted away from making money to making a life.

If you are interested in comparing the cost of living of that new location you have been thinking about in comparison to where you live now, you may want to check out this handy-dandy cost of living calculator over at Sperling’s Best Places. You enter in current city, your possible destination city, and your annual salary. The calculator then spits out a cost of living comparison based on costs of services, food, and housing, combined with the differences in salary. Give it a try before you jump ship from your current locale!

Lifestyle • real estate
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14 IRS Tax Audit Red Flags – Minimize Your Chances of Being Audited by the IRS

Nobody wants to be audited by the IRS, period. Although only about 1% of taxpayers actually get audited each year, many worry that this year may be the year that they get chosen for an in-person meeting with an IRS agent. Audits are not chosen at random willy-nilly, but rather by a computer-generated score given to each return by the IRS. Scored by their “discriminant function” system, or DIF, the computer takes into account common variables that may show a need for an audit. Once picked for an audit, an actual human agent takes a look at the return to determine if it is truly necessary or not.

As taxpayers, we can reduce the chances of being audited by avoiding the red flags which can trigger one, and with tax time rapidly approaching I figured now would be a good time to discuss some of them. Let’s take a look…

  1. Don’t ever lie about your income. Ever. The IRS receives copies of your W-2 or 1099 forms just like you do, so they can verify your income claims (or missing amounts) on your return.
  2. If you still write out your return by hand, write legibly. Bad handwriting could trigger a nice letter from the IRS asking you decipher your own words/figures.
  3. Do not exaggerate deductions or write-offs. This is almost a guarantee that you will be audited, if your deductions or expenses you are trying to write off are excessive.
  4. If you have an actual home office, go ahead and claim it as such. But if your “home office” is actually your dining room table, do not even try to claim it. Make sure that’s the room you do work from and it isn’t used for any other purpose.
  5. When doing your own taxes, have someone else check the math for you before you submit it. No, you don’t have to give a complete stranger access to your info, but asking your brother or a close friend to take a look can’t hurt any.
  6. File on time. Nothing calls attention to a return like a return filed late. Can’t get it in on time? File an extension. Basically, file something…anything.
  7. Use a well-known tax software to do your return. “Joe’s Big-Money Tax-Avoidance Software” from your local PC store isn’t viewed the same as a Tax-Cut or TurboTax.
  8. If in doubt, find out. When you aren’t sure about a deduction, expense, a claim, or whatever, find out before just putting it in your return.
  9. Have something potentially confusing on your return? Attach a note from yourself to the IRS explaining it. My mom did this one year with no problem at all.
  10. Make sure your State and Federal returns match up. Your income, etc. should be exactly the same on both returns, and if it isn’t you could be audited.
  11. Report only legitimate losses. Never overestimate losses and be sure to have paperwork to back up your claims.
  12. Claiming too much in charitable donations can trigger a red flag. Remember when I said my mom sent in a note with her return? It was because of a large amount of donations stemming from cleaning out some rooms in the house. The note explained why there were so many donations.
  13. Save everything. OK maybe not everything, but keep backup documents for three years and tax returns for seven.
  14. Keep in mind that large changes in income from year to year can send an agent your way. Make $100,000 last year but only $19,500 this year? Better have some documented reason why, lest the IRS think you are hiding income.

Well, there you have it — some reasons why your tax return may trigger an IRS audit. Have you ever been audited? Have any other advice for the readers? Please share in the comments!

(photo credit: Robert S. Donovan)

taxes
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How to Spend Money – What Would You Buy or Do with $10,000?

What would you do with $10,000? That was the subject of a recent article over on CNNMoney.com, where the editors decided that because of this wishy-washy economy, you probably have cash sitting unused in an account somewhere — and that you should be doing something with it.

At first I thought the article must be a joke, as who in this economy looks at their bank statement and thinks “Man, I just have too much money sitting in there going to waste. I should really go out and spend it right away!”, right? I especially thought this way about the article because the first thing on the list was to buy art with your $10,000. Listen, I am a fan and supporter of the arts, but it felt irresponsible to me to see this magazine tell readers to take that “just sitting there” $10,000 and buy art with it, like there was something wrong with just keeping the money in the bank. But then I continued reading the article thankfully, and saw that it wasn’t necessarily about just spending the money, but rather a list of things that you may want to do with the money because investing it may not be the best choice right now. Their list included buying Treasury bond ladders, invest in energy-efficiency upgrades for your home, moving your retirement-date fund around, doing some good in the community, and even bribing your now adult child to move out of your home. However, the concept of having $10,000 to do something with got me thinking — if you had that much money that you just HAD to spend this week, what would you guys do with it?

You can’t invest it and you can’t save it, but anything else is fair game. What would you do?

Personally, I would give 25% of it right off the top to a charity or organization that I believe in. It’s “found” money for me, so I might as well do some good with it for others. Whether it would be to help feed the needy, fight cancer, or protect the environment, I could feel good about giving some of the money away. After that, I imagine I would finally get started on one of my dream projects — restoring an original Mini Cooper or a 1950’s-era pickup truck. I would take the rest of the money I still had and spend it on the vehicle in the best shape for the dollar. Sure, I wouldn’t have anything left over to buy parts with, but at least I would have the skeleton vehicle to at least get me started on a project I have wanted to do ever since I was a teenager. I’m not getting any younger, for sure!

I know a lot of people would pay off debt with it, which is of course always an incredibly worthwhile way of using found money. I would too if I hadn’t already paid off my debt, but I would also keep a few hundred of it to do something fun with. That’s what I would recommend to others to do as well, as keeping a few hundred bucks can go a long way to helping one be OK with watching the rest of the thousands go towards debt.

Which leads me to you guys — what would you do with $10,000 that you just had to spend in some way? The CNN article wasn’t about this, but it inspired me to think about it for a while and to wonder what you would do. What would be your dream to use that money for?

(photo credit: Lana_aka_BADGRL)

saving • shopping
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