managing debt

5 Things Keeping You From a Life of Financial Independence

Toni Husbands — Sat, 10 Oct 2020 17:32:44 +0000

Financial independence can mean different things to everyone. A 2013 survey from Capital One 360 found that 44 percent of American adults feel that financial independence means not having any debt, 26 percent said it means having an emergency savings fund, and 10 percent link financial independence with being able to retire early.

I define financial independence as the time in life when my assets produce enough income to cover a comfortable lifestyle. At that point, working a day job will be optional.

But what about the rest of America? How would you define financial independence? If freedom from debt is what you're seeking, here are five areas that could be holding you back.

1. Not having clear, financial goals

If you're not planning for financial independence, chances are you won't reach it. The future is full of unknowns, but having an idea of when you'd like to achieve financial freedom should be your first step.

Do you want to retire before you turn 65? Do you want to travel the world with your spouse once you reach early retirement? Both goals will require a significant amount of cash stashed away, so it's important to start saving ASAP to make those dreams come true. (See also: 15 Secrets of People Who Retire Early)

2. Not saving enough

It's important to identify how much you're currently saving, and how much you need to save in order to retire when you want to, or reach another major financial goal. Using a calculator like Networthify can help you play with various money-saving scenarios and make realistic projections about retirement.

Another way to make saving money easier is to automate it. Setting up an automatic weekly or monthly transfer from your checking account into your savings account will take the extra task off your already full plate. Even if it's as little as $5 a week, it's enough to start building that nest egg. (See also: 5 MicroSaving Tools to Help You Start Saving Now)

3. Not paying off consumer debt

If you're carrying a credit card balance each month, financing cars, or just paying the minimum on your student loans, compound interest is working against you. Creating an aggressive plan to pay off debt quickly should be a number one priority for anyone who is serious about achieving financial independence. Otherwise, your money is working for your creditors, not you.

If you prefer to tackle credit card debt first, there are several debt management methods you can try, including the Debt Snowball Method and the Debt Avalanche Method. The Debt Snowball Method has you paying off the card with the smallest balance first, working your way up to the card with the largest balance. The Debt Avalanche Method is similar, but here you would pay more than the monthly minimum on the card with the highest interest rate first, working towards paying off the card with the lowest interest rate. Both are highly effective methods, and choosing one really just depends on your preference.

4. Giving into lifestyle creep

A high income does not automatically make you wealthy. As you move up in your career, the temptation to upgrade your lifestyle to match your income will be ever-present. After all, you work hard, so why not reward yourself with the latest gadgets and toys?

However, if you continue to spend and live modestly, you can put more money away for travel or retirement with every pay raise you earn. Financial freedom will be just around the corner if you resist that temptation to upgrade your home, car, and electronics to match your income bracket. (See also: 9 Ways to Reverse Lifestyle Creep)

5. Being driven by FOMO

Fear Of Missing Out, aka FOMO, is the modern version of keeping up with the Joneses. Except now you have access to the Joneses' social media platforms, and they go on all kinds of fun adventures. Social media is a great tool for keeping in touch, but it can also make you want to spend all your money on lavish vacations, clothes, spa treatments, and other extravagent things. Resist that urge. And block the Joneses on social media if needed. (See also: Are You Letting FOMO Ruin Your Finances?)

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This article is from Toni Husbands of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Get Rid of Your Credit Card's Annual Fee

Dan Rafter — Mon, 19 Nov 2018 08:00:13 +0000

You look down at the credit card in your hand. It's one of your older cards, and you've bought plenty with it. The problem is, it charges an annual fee, and you're sick of paying it. You're tempted to cancel the card to eliminate the fee altogether. But you know doing so will hurt your credit score.

Should you cancel your card? Or should you continue paying that annual fee when you could easily find another credit card that provides a generous rewards program without any annual charges? (See also: 8 Fees You Need to Stop Paying Right Now)

Why you shouldn't cancel your card

It can be tempting to cancel any credit card that charges an annual fee, especially if that fee is a big one. But canceling a credit card can hurt your credit utilization ratio. This ratio measures how much of your available credit you are using at any one time. The more credit you use, the more your credit score will drop.

When you close a credit card, your credit utilization ratio will automatically increase, even if you don't make any new purchases. Say you have three credit cards with a total of $15,000 of available credit. You are using $5,000 of that $15,000 in available credit. If you close one of those three cards — the card with a credit limit of $3,000 — you're left with a total credit line of $12,000 rather than $15,000, ultimately increasing your credit utilization ratio. This is why financial experts recommend keeping credit card accounts open even if you aren't using them.

The age of your credit matters, too. The older your credit, the better it is for your score. So if you close an older card, even if it does charge an annual fee you'd rather not pay, you will also hurt your credit score.

How to get rid of that annual fee

How, then, can you get rid of that annual fee without damaging your credit score? You'll have to call your bank and negotiate.

Some banks will agree to downgrade your credit card's annual fee and move it to another card that doesn't charge any fees, or at the very least, offers a lower annual fee. Doing so won't hurt your credit score because you'll maintain your existing credit limit and you won't be closing an older credit card.

Why would a bank approve such a downgrade? Mainly because it doesn't want to lose you as a customer. If you tell customer service that you are considering canceling the card if the annual fee doesn't go away, many credit card providers will agree to a downgrade. They'll earn more money from your continued business than they would have from that annual fee.

It helps, of course, if you always make your payments on time. Your provider will be more interested in retaining your business, too, if you actually use your card on a regular basis. If you haven't made a purchase on your card in months, your provider might be less likely to approve your request for a downgrade.

When you downgrade to a card with no annual fee, you will lose out on perks the original card offered. Your new rewards program won't be as strong. Your new card might not have a rewards program at all. If that's worth dumping the annual fee, though, downgrading your credit card might still be the smart financial move. (See also: How to Decide if an Annual Fee Credit Card Is Worth It for You)

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This article is from Dan Rafter of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Tackle Your Summer Vacation Credit Card Debt

Lindsay VanSomeren — Thu, 09 Aug 2018 08:00:10 +0000

It's easy to rack up credit card debt while on summer vacation. After all, finances are probably the last thing on your mind, and you have a handy credit card in your wallet whenever you need something. You can sit back with a margarita in hand without having to look at that credit card statement until next month.

When summer comes to a close, however, it can be quite a shock to see how high your credit card balance has grown. It's not a fun situation, but with a plan in place, you can get out of credit card debt before the snow starts to fall. Here's how to do it.

1. Assess your new debt

As tempting as it might be, now's not the time to hide your head in the sand. In order to create a plan to get out of credit card debt, you first need to know how big of a monster you're fighting.

Log into your credit card accounts — all of them — and record two things for each of your credit cards:

How much you owe.
What the interest rate is.

It's also a good idea to go back over your credit card statements to make sure everything's kosher. Look for any double-charged expenses (maybe that waiter at the bar was a little loose with his fingers while keying in your purchase), or any charges you don't recognize, as this could be a sign that your credit card information has been stolen. (See also: 7 Ways to Avoid Credit Card Fraud While Traveling)

2. Check in with your budget

It's a good idea to check in with your budget again if it's been a while. In this case, it also serves another purpose: Finding out how much extra you can afford to pay toward your debt each month.

Go through each line item and ask yourself if there's any way you can reduce it without sacrificing too much. For example, do you really need to pay for cable if you're mostly watching Netflix, or can you start bringing leftovers for lunch instead of going out to pricey restaurants? Cut those corners now and it could make a huge impact in your debt repayment plan.

3. Commit to a monthly payment amount

After you've gone through your budget and found extra money, it's time to commit to a monthly payment amount. If at all possible, strive to pay more than the minimum monthly payment amount for your credit card debt. The more you can afford to pay each month, the sooner you'll be out of debt.

Once you decide on a number, the final step is to set it up on autopay. That way, it's even harder to self-sabotage your debt-payoff plan. (See also: How to Manage Money When You Hate Thinking About It)

4. Decide which credit cards to pay off first

If all of your credit card debt is on one credit card, this'll be easy: pay off that credit card and you'll be done.

But what if your debt is scattered across two or more credit cards? In that case, you'll need to make the minimum payment on each. If you have money leftover after making the minimum payments, you'll need to decide where to send it.

Two popular debt-payoff methods are the debt snowball and debt avalanche methods. The debt snowball method has you paying off the credit card with the smallest balance first, then moving onto the next smallest balance. The avalanche method is similar in execution, but instead of starting with the card with the smallest balance, you start with the card with the lowest interest rate until your debt is gone.

5. Throw extra money at your debt

So, you've committed to a monthly debt payment that is hopefully higher than the minimum required. This will get you out of debt on schedule, but wouldn't it be better to get out of debt even sooner?

That's why it's a good idea to throw any extra money you have coming in toward your debt. If you earn any money from a side hustle, selling unwanted items, unexpected gifts, or a raise at work, throwing it at your debt rather than buying a new big-screen TV can go a long way toward getting out of debt sooner.

6. Make a savings plan for next year's summer vacation

In order to avoid a repeat event next year, why not take the time now to plan a savings strategy so you don't go into debt again? Figure out a target savings goal, either based on how much you spent this year, or the cost of a trip you want to take next year. Then determine how many months you have between now and your vacation. Finally, divide your target savings goal by how many months you have to save, and strive to set that amount aside each month.

For example, if you have six months until you want to go on a $1,800 cruise vacation, you'll need to set aside $300 per month until it's time to go. (See also: How to Build Your Best Travel Budget)

After all, won't sipping cocktails on the beach be that much sweeter if you're not worrying about facing a debt hangover once you return?

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This article is from Lindsay VanSomeren of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

2-Minute Read: What You Need to Know About FICO Scores

Holly Johnson — Fri, 25 May 2018 08:30:30 +0000

FICO scores are the most widely used credit scores in the U.S. According to myFICO.com, 90% of the top U.S. lenders access these scores to make important credit decisions.

FICO scores range from 300 to 850, with higher scores representing better credit.

Why your FICO score is important

A FICO score considered "very good" or "exceptional" (in the 740+ range) makes it more likely you'll qualify for credit approval with the best terms. If your score is below that, you may still qualify, but with a higher interest rate.

Besides, lenders, landlords, car insurance companies, and even some employers check your credit score because it's considered an indication of risk and responsibility.

Why FICO scores aren't always the same

There are many places to get your credit score, and those scores may differ. All three credit reporting agencies — Experian, Equifax, and TransUnion — assign you a FICO score, and they may not be the same since each reporting agency may have different information on file. On top of that, FICO itself offers different versions of your score — some are tailored for car lenders, others for mortgages, etc. Your FICO scores will also fluctuate over time as your credit use is reported.

Another thing: Since there are other types of credit scores (VantageScore being the main competitor to FICO), your lender may not even look at your FICO scores. But since FICO is the most commonly used scoring model, getting acquainted with your FICO scores is still a smart way to check your credit health.

5 factors used to determine your FICO scores

Payment history (35%): Your ability to make payments on time consistently is the biggest determinant of your FICO scores.
Amounts owed (30%): How much you owe in relation to your credit limits — your credit utilization ratio — is the second most important factor. You want to keep this as low as possible.
Length of credit history (15%): This is the average time that all your credit accounts have been open, with a longer history considered better.
New credit (10%): Too many new credit accounts can imply that you're desperate for credit, and lower your score.
Credit mix (10%): Having more than one type of loan is typically considered a good thing and will boost your score.

Where to get your credit score

There are several ways to get your credit scores, and some of them are free. Not all are FICO scores, but may still be worth checking to get an idea of how you're doing. You can pay about $20 to get your score from myFICO.com. Several credit cards offer free credit scores, as do Credit Karma and Credit Sesame. In addition, some lenders (e.g. Sallie Mae for student loans) offer a free FICO score or estimate of your credit score on your monthly statement.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

8 Questions to Ask Before Hiring a Credit Counselor

Holly Johnson — Thu, 26 Apr 2018 08:30:10 +0000

If you're struggling with debt and don't see a light at the end of the tunnel, working with a credit counselor may be your best move. Credit counselors are trained to help you manage your debt and understand credit, cash flow, and budgeting. They will take a holistic look at your financial situation, then help you craft a plan to get out of debt and handle your money problems once and for all.

While this may sound like exactly what you need, it's important to note that all credit counselors are not created equal. The Federal Trade Commission (FTC) says that most reputable credit counselors work for nonprofit firms. But it warns that "nonprofit" status doesn't guarantee that their services are "free, affordable, or even legitimate."

Some credit counseling organizations are known for charging high fees, which they try to hide with layers of complexity. The FTC also notes that credit counselors sometimes ask for voluntary contributions to their business, even if making those contributions would put you into more debt.

Obviously, you'll want to avoid credit counselors with high fees or shady practices. Before you choose a credit counselor, approach the situation with a list of questions to ask right away.

1. Is this a nonprofit credit counseling agency?

While this may seem like an obvious question, credit counselor Joseph Martin of Take Charge America, a national nonprofit credit counseling agency, says this question is crucial to ask right away. Because there are many different types of debt relief organizations with similar names and very different services, you should make sure you're speaking to a credit counselor instead of a different type of business, he says.

If you think you're speaking with a credit counselor but are instead speaking with a debt settlement company, for example, you could wind up receiving advice that doesn't help you reach your goals. Credit counselors offer budgeting and financial education services. They can also help you create a plan to get out of debt by paying off your debts, often at reduced interest rates, through a long-term debt management plan (DMP). Doing so will eventually help to rebuild your credit.

By contrast, for-profit debt settlement or debt relief companies focus on helping you negotiate a settlement for your debts that is less than what you owe, and this may cause your credit score to plummet. These are totally different services, and what works for one person may not work for another. (See also: 4 Ways to Negotiate Credit Card Debt)

Even though "nonprofit" credit counselors can charge hidden fees, you'll still want to know if you're working with a nonprofit organization, says Martin. Why? "The initial financial assessment, budget, and education are always free with a nonprofit," he says.

Since a nonprofit credit counselor offers free advice that you can use even if you decide not to move forward with their services, seeking out a nonprofit is a solid first step. (See also: 8 Organizations That Really Can Help You With Your Debt)

2. Are you accredited?

A smart way to weed out unethical or substandard credit counselors is to find out if the credit counseling agency belongs to the National Foundation for Credit Counseling (NFCC) or the Financial Counseling Association of America (FCAA). Members of these industry associations must be accredited by the Council on Accreditation and must "abide by specific guidelines, ensuring consumers receive a full, comprehensive guided session to identify individualized debt and budgeting solutions," says Martin. By choosing a credit counselor that is accredited, you'll be choosing the cream of the crop.

3. How much do your services cost?

If you're talking to an accredited nonprofit credit counseling organization, services like budgeting and receiving general financial advice should always be free. Your antenna should go up if a credit counselor wants you to pay anything for those services. "If an organization won't help you because you can't afford to pay, look elsewhere for help," the FTC writes on its website.

Entering a debt management plan will usually cost more. According to CreditCards.com, most counseling agencies collect monthly fees from people who enter DMPs — up to $50 a month. A DMP usually lasts three to five years, so that means you could end up paying as much as $1,800 to the credit counselor.

In addition to asking what recurring fees the agency charges, you should also ask whether there is an initial setup or consulting fee, says licensed insolvency trustee Michael Krieger of Krieger & Company in Toronto, Canada. If your credit counselor glosses over the topic of how they get paid, definitely dig deeper, says Krieger. Or just move on and find someone else to work with.

4. What services do you offer?

Here's another common sense question that should be asked right away. Before you decide to work with a credit counselor, make sure you know what services they offer and if they're services you actually want.

The FTC says you should look for an organization that offers several different services "including budget counseling, and savings and debt management classes." The FTC also says you should avoid organizations that only offer a debt management plan (DMP) or push a DMP without fully analyzing your situation.

"Individuals very quickly head down the wrong path from counselors and financial service providers without really looking at the value they are adding," says Krieger. "Those making promises that seem too good to be true usually are, yet people latch onto those promises."

Instead of believing promises such as, "everything will be okay" or "we'll get you out of debt," you need to find out exactly how the counselor plans to help you achieve your goals and what services they plan to use. (See also: Should You Sell Your Home to Pay Down Credit Card Debt?)

5. What is your monthly DMP dropout rate?

If you do decide to enter a DMP, go into it knowing that only about 25 percent of debtors complete their plans with a credit counselor, according to CreditCards.com. Another 25 percent report that they finish paying off their debts on their own. But that's hard to verify. So the question to ask a counselor whose advising a DMP is how many people drop out of the plans every month — 2 percent is low, 5 percent is high.

6. How will we meet?

Before you connect with a credit counselor, it's important to know exactly what you're getting into. Will you talk to them online using technology like Skype or Google Hangouts? Will you talk on the phone? Or will you meet in-person to go over your budget and financial situation?

If you believe meeting someone in-person would be the most helpful, then you should seek out local credit counselors that offer this option. If not, Krieger says you should decide if you're OK working via the internet or phone where your service may feel less personal overall.

7. Can I get my family involved?

Whether you're receiving credit counseling in-person or over the phone, Krieger says it should be a family affair. This means that, ideally, you'll be able to sit down with your credit counselor and your spouse or partner to go over the family's finances and debts and how everyone can be involved in the solution.

"Money problems start at home and both are influenced by and impact the entire family," he says. To solve your money problems or get on the right track regarding budgeting or debt, you have to get all adults in the family involved or it may not work. (See also: How One Couple Paid Off $147k of Debt, Even While Unemployed)

8. How will working with you help me in the long run?

The FTC says that you should ask any credit counselor you're thinking of working with how their advice will help you in the future. After all, you don't just want to get out of debt — you want to stay out of debt.

By asking your counselor about their methods, you may gain some insight into how they can prepare you for a financial future free from the debt and financial strain you're experiencing today.

And really, that should be the whole point. You want to get out of the mess you're in, but you should also strive to avoid more problems in the future. A nonprofit credit counselor should be able to help you with both goals, but you have to ask the right questions first. (See also: 3 Times When Filing for Bankruptcy Is the Right Move)

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How to Ease into Credit Card Rewards After Debt Repayment

Holly Johnson — Fri, 23 Mar 2018 09:30:18 +0000

Imagine you've just paid off a boatload of debt after months, or years, of struggle. Now that you're finally debt-free, you have extra cash to spend each month and your credit score is higher than ever.

With that in mind, you may think you're ready to use credit cards again. Thanks to the array of travel rewards and cash-back offers available, you may even be itching to start earning rewards for each dollar you spend. And why not? You're debt-free and have a much better grasp on your spending now. Plus, paying off debt has helped you develop the discipline to avoid letting your spending get out of hand.

While it's great to feel confident, many financial advisers say you should probably still err on the side of caution to avoid any more credit mishaps. It's true you may be ready for credit cards, but there are still precautions you'll want to take right away, they say.

As you ease back into credit card use, here are some steps you should take.

Review your spending frequently — especially at first

Wealth adviser and certified financial planner Brian Behl of Bronfman Rothschild says one of the best steps you can take as you get started is reviewing your spending often. "Every few days or at least weekly" at a minimum is what Behl suggests, although you can tailor this advice to your lifestyle and needs.

By reviewing your spending at least once a week, you can check to see if using a credit card has brought on any of your old habits. For example, you can make sure you're not using credit as an excuse to splurge, and that everything you've purchased can be paid off immediately when your credit card bill becomes due.

Make frequent payments

Behl also suggests making more than one payment each month. If you have access to your account online, you can usually make payments from your checking account instantly without sending a check. This allows you to keep your balance from accumulating and lets you maintain a low credit utilization ratio.

By making frequent payments, Behl says you can stay on top of your spending, take advantage of credit card rewards, and avoid credit card debt. (See also: 5 Simple Ways to Never Make a Late Credit Card Payment)

Use credit cards as part of a monthly spending plan

Financial adviser Matt Adams of MoneyMethods.com suggests you use credit cards as part of a monthly spending plan if you want to make the most of rewards without falling back into debt. Yes, this means dealing with the dreaded "b-word" (budget), but it doesn't have to be bad news.

Try writing out a budget for the month, then make sure you never charge more on that card than you would if you were paying in cash, says Adams. Also, "make certain it is never an amount that can't be paid off each month. If you don't keep close track of it, that credit card balance can get overwhelming very quickly." (See also: How to Budget When You're No Longer Broke)

Adams says that, even though he is a financial adviser, he still tracks his spending and compares it to his budget at least once a week. This way, he can earn travel rewards points good for airfare or hotels while making sure his spending isn't getting out of hand.

"If you are diligent and pay close attention to it, the rewards may very well be worth the trouble," he says. After all, who doesn't love a free vacation?

Use credit for fixed bills only

Shane Sullivan, a certified financial planner and founder of the blog Wealth Over 50, offers this strategy for people who want to ease into credit use slowly: Try paying only recurring bills with credit and use cash or debit for everything else.

Recurring bills include any bills you pay monthly — for example, utility bills, cable subscriptions, day care, and your gym membership. Very often, you can even set these bills up to be charged to your card automatically. From there, you can set up automatic payments so your credit card bills are paid once a month from your checking account.

Sullivan says he uses this strategy to maximize rewards while avoiding debt problems in his home. "For example, our day care is $1,000 per month and it is automatically charged to our credit card where we earn points used to take a family vacation," he says. "However, I also set up a monthly bill pay to automatically send $1,000 per month to pay off the card."

For this strategy to work, Sullivan says you need to make sure you don't carry your credit card around in your wallet. If you want to benefit from your recurring expenses without worrying about getting into trouble, then you have to make sure you're not using your card for regular spending.

"Stick it in a drawer, give it to your spouse, or cut it up," he says. "If you carry the card, you'll use the card — so don't carry it."

Hold off on rewards if you're not certain

Finally, if all of this sounds overwhelming or the mere thought of using credit has you nervous, don't forget that you don't have to jump in.

Jon Luskin, a certified financial planner based in San Diego, says that, for many people, the risk of getting back into debt is simply too great. Sure, you may be able to earn 2% back on your purchases, but what happens if you wind up paying 24% APR on those purchases for years?

Sign-up bonuses can make the initial rewards sweeter, but Luskin says it's still a terrible deal when you're stuck paying credit card interest for an unknown period of time.

So pursue credit card rewards if you're determined to do it responsibly, but don't forget there's nothing wrong with skipping credit altogether. The rewards may be tempting, but the risks are downright scary.

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This article is from Holly Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Is Student Loan Debt as Bad as It Seems?

Rod Griffin — Mon, 23 Oct 2017 09:00:06 +0000

College students are back on campuses across the country. For many, it's the first time they’ll be on their own.

Every year the first class begins with the professor asking something like, "Is everyone here for Business Essentials?"

After a brief, awkward silence, one student inevitably raises his or her hand and says, "Um, no, I gotta go. Where, exactly, is Crime and Justice in America located?"

This year the hand was attached to my grandson’s arm. Ironically, he'd visited each classroom the day before just to be sure he knew where he was going. For a young man who grew up in the country hunting and fishing, it’s remarkable he could be so directionally challenged.

But there’s a lot on a college freshman's mind. What line do I stand in first? Where do I sign next? Who cares about reading the document I'm signing? How do I meet that cute girl or handsome boy in the next line?

For many, like my grandson, the biggest concern is just getting to their first class on time. How they’re going to pay for that class, and the rest of their education, usually isn't at the top of their list of things to think about — or even on it. That's what parents and grandparents worry about.

Student loan debt has topped $1.4 trillion

And we worry a lot for good reason. Student loan debt has reached $1.4 trillion. According to the College Board, the average published cost of a four-year degree is $129,640 for a private college.

But have hope. It may not be as bad as it sounds. There are students and parents with overwhelming student loan debt facing tremendous financial crises. But when you look at the big picture across the population, it isn't necessarily as bleak.

An Experian study found that the average total student loan balance is currently $34,144. That’s pretty close to the College Board survey results that found the average cost for an in-state education for a four-year university is about $37,600.

Student loans versus car loans

Compare the student loan numbers with those for car loans. Auto loan debt reached $1.1 trillion in 2017, according to Experian’s Q2 2017 State of the Automotive Finance Market report. The average loan amount for a new car is $30,234. The length of auto loan terms also is creeping up, with a third of new vehicles being repaid in six to eight years. The repayment period for student loans is typically 10 years.

Another important statistic is that there’s been a 10.1 percent decrease in late student loan payments since 2009. Late payments for car loans, on the other hand, have been creeping up.

One last number. The average monthly payment for a new car is $504, according to Experian. Using a payment calculator from StudentLoanHero.com, the payment for that $34,144 average student loan debt would be only $373. So the average education is cheaper each month than the average car.

When you look at the big picture, student loan debt doesn't seem so bad compared with what we spend in this country for new cars.

Student loans are the best investment

However, there's one metric I don't think should be used to compare student loans with car loans, and that's in the context of return on investment (ROI). I've talked with people for whom I have great respect who believe a student loan should have an ROI of five or six years and be treated like a car loan in terms of repayment time frames. I disagree.

The reason? A car is a depreciating asset. It starts to lose value as soon as you drive it off the lot and at some point becomes worthless. An education, on the other hand, is a lifetime investment. Its ROI should be measured over the course of a career or a lifetime — 20 to 30 years or more.

While a car loses value, research continues to show that a person with a college degree will earn as much as $1 million or more on average over the course of his or her career. When you consider that, you can’t afford not to get an education, even if it takes student loans.

There are ways to save significantly on the cost of college:

Go to an in-state public school.
Complete the first two years at a local community college.
Attend a local school and live at home.
Apply for scholarships and grants.

If you're struggling to repay debts, there are options — especially for government-guaranteed student loans — including forbearance, deferment, and consolidation. I know each of them well because I used all three when I was repaying my student loans, which were about today’s average — but that was almost 30 years ago. My education will always be the best investment I ever made.

My grandson, I'm very proud to say, earned a full tuition scholarship at a small but very good college in Kansas. So he shouldn't face the student loan challenges I did — if he can just find his way to class.

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This article is from Rod Griffin of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Find Extra Cash by Rotating Your Credit Cards

Keith Whelan — Fri, 25 Mar 2016 09:30:23 +0000

I once took an accounting course taught by the owner of a retail toy store. It was a challenging course, but I have to say, it did impart some pearls of financial wisdom that I still remember and try to apply when managing my own finances. One was, "A dollar in your pocket today is worth more than a dollar a year from now." This was his favorite — and for good reason. A toy store lives or dies based on how effectively its cash flow is managed because over 50% of annual sales often occur during a two-month holiday shopping season. So it has to survive the other 10 months of the year on a cash flow diet.

The idea seems obvious. After all, a dollar in hand today could be deposited into a savings account or invested. The main point, though, is that having the dollar now gives you greater control.

Maximizing Cash Flow

The concept applies to receiving payments from others (accounts receivable, in accounting speak) as soon as possible and also to postponing payments to others (accounts payable) as long as possible. Basically, you're trying to hang onto your cash for as long as you can, and then use that cash to improve your financial situation.

Time Your Credit Card Billing Periods to Find More Cash

Here's an example of how to stretch your credit card accounts payable by at least a month and as much as a month and a half, without incurring a late payment penalty. This will require having and using two credit cards.

Most credit card companies allow you to pick the end date of the billing cycle, so be sure your card company gives you that choice for each card. Now simply pick an end date of the 15th of the month for credit card #1 and the 30th of the month for card #2.

Card #1

Use card #1 only for purchases between the 16th and 30th of every month. The credit card company will close off the billing cycle for card #1 on the 15th of the following month, at which time they will issue you a bill, but give you another two weeks or so to pay it. Voila! You have 30–45 days of "float," or extra time to pay.

Card #2

For card #2, pick the 30th of the month as the end date of its billing cycle. Then after the 30th and before the 15th of the next month, use only card #2. By doing so, you will stretch out the float period for all of your credit card purchases to at least one month, and as much as a month and a half.

I admit, this can be a lot to remember, so to make it easier I just write "Use 16th-30th" on the back of card #1, and "Use 30th-15th" on card #2.

It should go without saying that you benefit from this system only if you pay your card balances in full when they are due — otherwise interest will set you back much more than anything gained.

Here's What You Gain

Alright, so you now have 30–45 days of float at your disposal. That's enough time to receive an extra paycheck or two. How will you put this freed up cash flow to good use? You could keep the money in your checking account. But would that help you get ahead? Unlikely.

Alternatively, you could use it in a way that provides some return. That's probably what a good toy store owner would do. For example, it might allow you to make an extra principal-only payment on a loan, such as a car loan or your mortgage. Or maybe make an additional retirement account contribution (a good example of the "pay yourself first" principle).

Granted, this is a one-time cash flow bonus, and the benefit might seem small. Don't be fooled. Eliminating even a single monthly mortgage payment or trimming your balance on a car loan is meaningful progress toward your financial goals. But what’s really important is that this system reinforces a mindset — a mindset in which you’re always thinking of ways to stretch out or delay expenditures to free up cash. That cash can be put to use in positive ways that get you ahead. Over time, with each success you will gain a little more control. That's what it's all about — taking greater control of your finances, until you reach financial independence. Then you'll have complete control.

What tips do you have to stretch out your cash? How do you use that freed-up cash?

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This article is from Keith Whelan of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Life After Bankruptcy: What's Next?

Silicon Valley Blogger — Tue, 23 Feb 2010 14:00:39 +0000

Having to file for bankruptcy is something we all hope we never have to do in our lifetimes. Whether you file for Chapter 13 or Chapter 7, there are repercussions to going through this process. However, like with other setbacks in life, you can recover. There may be different paths to recovery for each form of bankruptcy, but there is always hope!

You may have done everything you can to avoid bankruptcy but those sweet 0% interest credit cards may have gotten the better of you. Or your health or unemployment issues may have taken center stage in recent years, and you were left with no recourse but to declare bankruptcy. When considering your financial future following such an event, you can expect that trying to secure credit for the next 3 to 5 years is going to be tough. Also, you can expect this negative mark to appear on your credit report for the official length of time of 10 years; although sometimes you may get lucky and the time can be reduced to 7-8 years. For those who need to weigh their options further, check out How You Know When It's Time For Bankruptcy.

Bankruptcy And Your Credit History

It’s legal for creditors to keep financial events on your report for 10 years, but that’s not a hard and fast rule. So how does bankruptcy actually affect your credit? It does so by lowering your credit score by 200 +/- points — usually because of late payments on accounts and not just because you filed for bankruptcy. If you find yourself becoming overwhelmed by payments, then this is an ominous sign. This is one symptom that can eventually lead to serious financial consequences for you if you fail to make any changes about your situation.

Now the good news: if during the bankruptcy proceedings, you decide to reaffirm or keep some of your debt and you continue to take responsibility for these loans (e.g. your car loans or house mortgage), then you may have a shot here (to some degree) to preserve your credit score and future credit worth in the eyes of lenders.

Additionally, there will be credit card companies (yes, they are out there) that will solicit you after the bankruptcy. You'll be debt free after all, right? You should certainly be cautious and wary, although you may think of this as a second opportunity to do things the right way. While taking on new credit and applying for a secured credit card can be a way to rebuild your credit history, you'll have to evaluate just how responsible you can be with handling debt all over again. You'll need to tread down this road very carefully because if caution is not heeded, your actions could lead you back down the same path towards bankruptcy. Here's more on how to build good credit (and clean up your bad history).

Bankruptcy And Your Living Situation

For those who have gone through bankruptcy, you may wonder just how your living situation may become affected. If you're a prospective tenant, you may be surprised to know that in many cases, landlords who own individual homes will be open to considering your application: after all, you've got no debt after you've filed for bankruptcy, and you're eager to build up your finances. Your living expenses and rent are surely a high priority for you. On the other hand, you may find it more difficult to deal with some large apartment complexes and management companies that frown upon those with a record. At any rate, you're likely to still find housing, and things may not be as bad as you thought it would be.

Now if you’re a homeowner, reaffirming your mortgage is the sole way to keep your home. Let’s consider the advantages of this move. The most obvious benefit is that you get to keep your home! This helps your credit and puts a roof over your head while keeping your bank or lender happy. But if you do decide to include your mortgage in the bankruptcy, you’ll be handing your home back to the bank and walking away. If you aren’t a homeowner yet, keep in mind that you can get approved for an FHA (HUD insured government loan) mortgage after two years from the date you are discharged from bankruptcy.

Bankruptcy And Your Financial Future

Do keep in mind that you'll need to continue making payments if you have other credit lines, and that you'll need to keep an eagle eye on your credit score. What most people may not realize is that this is precisely what credit monitoring services are intended for. You can best keep track of your FICO credit score by using myFICO products, which offer visibility to the most widely used score that lenders use.

It may take 3 years before you can qualify for a conventional loan once more, and when you do, the credit score requirements will no doubt be pretty stringent. or such loans, you'll typically need a credit score of at least 620 or higher, while you'll need a score of at least 680 to snag the best mortgage rates. For the lowest unsecured personal loan interest rates, you'll need your score to be in this general vicinity. Approval for these various loan scenarios will be up to the underwriter’s discretion. If you’re considering a mortgage after bankruptcy, I would consider talking with a financial advisor or mortgage banker about specific bank guidelines and your specific scenario so you can get a better understanding of your situation.

Given everything that we've discussed, anyone facing bankruptcy can hopefully see that there's light at the end of the tunnel. Recovery from bankruptcy can happen, and will happen if you're diligent, committed, and positive.

This article is from Silicon Valley Blogger of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Dealing With Debt: Credit Counselors

Stacy Johnson — Thu, 21 Jan 2010 15:00:02 +0000

If you're in debt trouble, get help.

I just published my third book about living debt-free. It's called Life or Debt 2010. To go with it, I'm doing TV news stories and writing blog entries that I hope will help you find extra money in your budget to pay off debt.

But this story is for people who can't think about embarking on a debt-destroying mission yet because their debt is currently destroying them. If you've got creditors calling, are behind on your payments, and basically just not making it, you need to find help, and the sooner the better. But what kind? There are three heavily-advertised options these days: credit counseling, debt settlement, and bankruptcy. (In fact, notice the Google ads all around this article right now!)

Over the next few days we'll take a closer look at each, starting with credit counseling.

Have a look at the 90-second news story below, then I'll go into more detail on the other side.

Credit Counseling

One of the first news stories I ever did 20 years ago was about credit counseling. Over the years I've done plenty more and have gotten involved with them in other ways as well: I'm on the advisory board of one local counseling agency, I've produced video and sold books to others, and several sponsor my news stories in various cities nationwide. Suffice to say this is a business I know quite well.

And they're a great way to get help with debts. There's no shortage of them out there, and many will help you for free. But look before you leap.

Open your yellow pages or look online for "credit and debt counseling" and you'll see lots of companies that seem to be falling all over themselves to bring you back from the brink of debt destruction. They're all over the TV and radio these days. Many wave the nonprofit banner like a flag and promise to reduce your interest rates, or even get the amount you owe cut in half. Some claim their services are free, or nearly free. So how do these things work?

Credit counselors typically help by putting you on a Debt Management Program, also known as a DMP. When you participate in a DMP, the agency is essentially getting between you and the people you owe, most often credit card companies. They contact your creditors and attempt to negotiate lower interest rates, get penalty fees waived and arrive at a monthly payment you can actually afford. Once your plan is approved, you send one check to the counseling agency every month and they divide the money among your creditors. It's not a quick fix — a typical DMP lasts three to five years.

Most counseling agencies give free advice, but if you end up in a DMP, you'll typically pay a small monthly fee to get it set up (0-$50) and monthly fees (5-10% of your debt payment, but normally capped at $25-$50).

But here's something important to know: the monthly fees these agencies collect aren't what keeps them alive. They're also getting paid by the banks whose accounts they're collecting. In years past the percentage they got was 10 to 12 percent of the debt. In recent years, that percentage has declined considerably, and some major banks have started handing out grants instead. Still, it's banks that supply the primary support for this industry, and historically that's largely been through debt management programs.

Why do you care? Well, since credit counselors make a large part of their income from putting you on a DMP, they obviously have a powerful incentive to do so. It could be a problem, since sometimes that might not be in your best interests. Other options, like repaying your debt without a DMP, or declaring bankruptcy might be better in some instances, but credit counselors don't get paid by recommending either.

That doesn't mean you shouldn't approach these folks. There are plenty of agencies that dispense honest, objective advice, including advice that ultimately doesn't pay them. But if you're not careful, you could get hooked up with a "DMP mill." These are companies that typically do a lot of advertising and put virtually everybody on a debt management program simply to make money. If your problem includes bills that don't qualify for a DMP (like a mortgage or car loan, for example) they won't help you with them. They also won't offer any type of budget counseling. And if your situation is so tenuous that bankruptcy should be a consideration? You'll never hear that suggestion from them.

For the DMP mill, it only takes a few minutes to sign you up for a program, and if you ultimately have to file bankruptcy anyway, who cares? You'll have wasted your time and tons of money, but they'll have collected their money for as long as you were able to stick with the program. And like most other credit counselors, they too are non-profit, lulling many into a false sense of security.

The way a credit counseling agency should work is that they should counsel you regarding all your debts and present you with all your options before you do anything that you can't undo. In other words, they should counsel you, not slam you into the only fix that makes money for them.

A quality credit counseling organization will also help with simple, free advice and other non-debt, credit-related issues. Here's an interesting story I did where a credit counselor helped untangle a credit card billing mess.

Specific Recommendations

I'd look for a credit counseling agency that belongs to one of two trade associations: the National Foundation of Credit Counselors (NFCC), or the Association of Independent Credit Counseling Agencies (AICCCA). I personally know many members of both of these organizations and in my experience, they're normally credible and well-intentioned. You can find NFCC members near you at their Find a Counselor Now page. You can find AICCCA members near you by using their state by state lists.

Full disclosure: as I mentioned above, my company has done work for members of both of these organizations. But rest assured, my recommendation is never for sale.

Are there other quality agencies that don't belong to either of these organizations? Most definitely. Dues for NFCC and AICCCA aren't cheap, and I also personally know agencies that don't feel like paying them, yet still maintain high standards. So you shouldn't necessarily assume non-members are bad. But wherever you go, ask questions before you agree to anything. Questions like:

What is the percentage of clients they have on debt management programs? If the answer is nearly all, that's bad. If the answer is about half, that's good, because it shows they're trying to help their clients with other methods.
What fees will you have to pay?
What amount of budget counseling you're going to get. If you're not going to get any tools to help change the way you deal with debt, you could end up in the same place farther down the road.
Do their counselors have any training and certification?
Is the agency accredited by an independent organization?
What will their help mean to your credit history? The correct answer here is, "There's no way to tell for sure. Could even be negative. But consider the alternative." The wrong answer is, "No problem, buddy! Sign here!"

Check the BBB or other online sources for complaints. And talk to more than one agency. When you talk to several, it's easy to distinguish between the ones that come across like used-car salesmen vs. ones that sound like what you're really looking for: an objective counselor.

Bottom line? If you can't see your way out of a debt disaster, definitely get help. And don't be ashamed or embarrassed to do so. More than a million people every year file personal bankruptcy. Millions more do nothing to try to help themselves and end up with ruined credit and lots of sleepless nights. Going to a pro for help may not be your proudest moment, but there are definitely a lot worse things that could happen.

Next time we'll be covering another heavily-advertised debt solution: debt settlement.

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This article is from Stacy Johnson of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

How Debt Fools People

Philip Brewer — Mon, 11 Jan 2010 14:00:05 +0000

People who have a natural aversion to debt often wonder how some people get themselves into such terrible problems with debt. Don't they know how much it costs? Don't they understand they can't just go on boosting their standard of living through ever-increasing levels of debt? But that's not really how it happens. As a public service, here's a worked example of how debt spirals get started.

Suppose: Two neighbors are debt-free. Both want a new TV that will cost $500. Money is a little tight — each one only has about $50 a month available in the budget.

One saves for a TV. He puts $49.76 into a high-yield savings account paying 1.3% interest. After 10 months he has $500 and buys a new TV.

The other borrows to buy the TV. He takes out a $500 loan at 11% interest, makes payments of $52.56 and pays off the loan in 10 months.

At the end of ten months both people have a TV. The guy who borrowed the money paid a total of $28 more than the guy who saved, but he got his TV 10 months earlier. You could look at it as if he paid $28 to rent a TV for 10 months. That's a nice boost in standard of living that someone could reasonably view as being well worth the money.

The debt-averse people suppose that a classic debt spiral starts when you extend this logic beyond a single time-limited purchase: A couple months after buying the TV you decide to buy a recliner — after all, now that you're spending so much time in front of your TV you want a nicer chair to sit in. In this scenario the foolish borrower encumbers every available dollar in the budget with payments on more and more stuff until he or she can no longer make the monthly payments.

I'm sure that happens to some people, but I don't think it's the most common scenario that gets people into trouble with debt.

The reality of debt spirals is more insidious. It results from the loss of flexibility when a household incurs a perfectly reasonable amount of debt — or even no debt at all, but some amount of fixed monthly expenses — and then suffers a negative economic event such as a large unplanned expense or a drop in income.

Because that's the way that debt really works its harm. It's not that it costs so much money (although it can), nor is it people obligating themselves beyond their means (although some do). It's that it makes the household finances so much less flexible. It's not the extra $28, it's the inability to adapt.

To the saver, a spike in fuel costs means cutting back on saving in order to put enough gas in tank to get to work every day. To the borrower it means either not being able to get to work or borrowing money he can't pay back.

The reason debt fools people is that even when the cost of the debt is perfectly reasonable, the lost flexibility means any little problem can kick off a debt spiral.

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This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: