I apologize for this blog being so late; but I think the information you find in the next three posts will be well worth the wait, enjoy:
Debt: It’s what
stresses us out, keeps us up at night, and is always in the top three things
that couples argue about, often leading to separation or divorce. All of this leads to overall decreased health
due to stress and depression. In fact,
most people dream of money not so much to have more, but to be free from the
bondage of debt. So why do we get into
debt knowing that it has so many negative effects on our health and relationships? In four words: it is too easy! When I talk to my grandmother, who just
celebrated her 89th birthday, she says she never had a credit card
as a young adult and didn’t even know anyone who had one until decades later. They were forced to buy only what they could
afford. Nowadays, we are offered a
credit card every time we walk into a big box store, as discussed in ‘Profits,
Percentages, and Procrastination’.
The standards for applying for a credit card have gotten lower and
lower; hence, being easier and easier to obtain one. To qualify for most credit, you can have up
to about 40% to 45% of your monthly gross income going towards debt payments. That is insane, not to mention unsustainable!
LOW INTEREST RATES:
the interest limbo, how low can you go?
The most important component of your debt reduction plan is
making sure you are paying the absolute lowest interest rate possible! The problem is most people don’t know how to do
this. But have no fear, Tyler is here! There
are a number of strategies you can use:
1)
You can call your current Credit Cards or Lines
of Credit and demand a lower rate. Tell
them to lower it or you are taking your business elsewhere. This will get you down from about 29% to
maybe 12% if you’re lucky, sometimes they won’t budge though so… in which case
you need to make paying that card off the first priority and then cancel it. And make sure you tell them that (we will
show you how to do that in just a bit).
2)
Another strategy is to transfer that debt to
another form of credit that is the next lowest rate offered. Often unsecured lines of credit can be as low
as 6% to 10%, as opposed to credit cards that are at 18% or 29%. You just need to shop around at the different
banks and apply to see what happens. (The
rate they give you is mostly based on your credit score.)
·
Often people get scared by the system into not applying
multiple times for different credit by telling you that your credit score will
get hit each time you apply. The truth is, you can apply about 5 to 10 times a
year for credit without any change in your credit score.
·
If for some reason it does change: you are
looking at a 5 to 30 point credit score hit, which really isn’t significant,
especially if your credit score is above 710, because anything over 680 is
almost an automatic approval.
3)
The next thing you can do to decrease the amount
of interest you’re paying is to refinance your home.
·
Oftentimes, banks and even mortgage brokers won’t
give you the rock bottom rate because they get paid more the higher interest
you pay. So just make sure you have the
lowest possible rate you can get from the lender you choose (see Part 2 of this
post for more info on this and other mortgage strategies).
·
If there is enough available equity in your
home, you might even be able to consolidate your other high interest debt. Almost always, the secured loan is cheaper
than the unsecured loan. (A lot of
mortgages are right around the 3% marker.) When is the last time the bank called you to
tell you that you could save thousands of dollars a year in interest by
consolidating your debt at a lower rate?
Never. They don’t want you to do
this because that would mean less profit for them! Once again, we remember the rule of 72 and
how the banks get them to work for them, not you. The same bank that gave you your mortgage at
3% is probably also lending you money on another credit card or line of credit
at 6% or even 18%. I know people get
afraid of putting debt on their home – they fear that their home will never get
paid down if they add more debt, but remember that the lowest interest rates
always win!
Let’s say you owe $50,000 in unsecured debt paying an average of 12% a year,
which means you are paying $6000 in interest a year or $500 a month in
interest. Take that same interest
against the home at 3% you are paying $1500 a year or $125 a month. Imagine how fast you could pay down the
mortgage and be debt free if you paid an extra $375 a month against that
mortgage while still spending the same you are now on your current debt.
·
The way companies scare you into keeping you
locked in to your current mortgage/debt situation, is by threatening penalties if
you refinance. A good Financial Advisor
or Mortgage Broker can run the numbers and show you if it’s worth it or not to
take the penalty (some of the best hockey players and games had lots of
penalties).
·
Remember, often we have a philosophical or
emotional problem with our money, not
a money problem. Think like a “1-percenter!”
4)
If you don’t have any equity in your home and
have gotten the lowest possible rates you can everywhere else, there is one
last strategy. This one is mostly used
in the states because the credit card companies are so competitive down there. But here in Canada there are not as many
options. We only have a few to choose
from: the first is the 0% MBNA card ... what 0%? … is that a typo? … nope it
wasn’t; but offers like this only last a short time: 6 to 18 months (depending
on the card or company) and then it shoots back up to 29%. You see the companies take a statistical gamble
that you are either not educated enough or too lazy to switch the money out
once it bounces up to 29%. They are
playing the law of averages just like the big box stores do when you get their
credit cards and go after those extra reward points and then don’t pay it
off. Some of these cards have annual
membership fees so make sure the fees don’t outweigh the interest you are
paying; always run the numbers or get someone to run them for you. The beauty about this strategy is once the
time limit is up and the interest rates revert back to the 29% you can flip it
back onto your low interest line of credit (LOC) and then cancel the credit
card. Often the same company will send
you an offer again in the mail to reapply with the same 0% interest or you can
just reapply again and qualify for the same offer, online. In the meantime, you’ve saved a lot of money. Here are some sites where you can apply for
these cards:
These are great deals and a lot of money
can be saved, BUT there is a catch: if you get new credit cards and max those
out without paying off your old ones, you run a huge risk of doubling your
current debt load and being in debt forever. And in case you didn’t quite catch
that:
YOU RUN THE RISK OF BEING IN DEBT FOREVER!!!
This can be risky if you are not monitoring
it with discipline. If you were
wondering about the title of the blog, this could turn into the “Ugly” part. So please make sure your calendar is marked,
you have a clear debt reduction plan, and work with a professional on this. Make sure you have a low interest LOC to
transfer the money back to when the promotion runs out and keep that LOC open
until the debt is zero. This requires
work and discipline.
DEBT REDUCTION: Implementing the most efficient plan, the
Snowball Strategy
Now let’s talk about the most efficient type of debt
reduction plan, the Snowball Strategy.
Ever watch those old Bugs Bunny cartoons when they are in the snow? There’s always a scene were someone falls
down a hill and slowly picks up more and more snow until they are one big
unstoppable snowball rolling down a hill and then disintegrates when it smashes
into something. This is what happens to your
debt when you use the Snowball Strategy.
The debt reduction starts small but grows exponentially, and finally,
smashes your debt out of existence! Doesn’t that sound awesome? Read on to find out how it works.
1.
Once you have gotten the absolute lowest
possible interest rates on all of your debts, you need to determine the
absolute minimum payment you can make on these debts (in other words, the
absolute lowest payment you can make without the creditors coming after you
with all those annoying phone calls). For
example: if you have student loans, call them and see if they can’t lower your
interest rates, then call them again and give them your best sob story to get
them to lower the monthly payments as low as possible. (Student loan interest is often tax deductible
so you may want to pay it down last, but run the numbers. If you don’t know if its tax deductible, ask! Get a trusted accountant to help you with the
tax deductions.)
2.
Next, you need to make a budget to find the
maximum amount of money you can put towards that debt (my next post will
discuss how to do this painlessly). Once you have the maximum amount to put
towards your debt and the minimum payments you need to make, watch this video
and download the spread sheet (I use it for my own household and have referred
all my clients here). The video will show you how to enter in the information
and how to run the Snowball Strategy. It
will show you what to pay each month to which credit card, line of credit, etc.
Basically there are two options
to the Snowball Strategy:
1)
You pay down the smallest debt first, regardless
of interest rate.
·
Why do this, you ask? Well psychologically, it
is the best for us because we see actually progress, and quickly. We get to scratch one debt off the list and
then cut up that credit card or close that loan account and it feels amazing!
2)
You pay down the highest interest debt first.
·
This one makes sure you pay the absolute lowest
cost of interest. It’s the most
effective way to pay down your debt and has the biggest snowball effect. The trade off? You don’t get the emotional
high of quickly knocking off a few debts, it may take a year before the first
emotional high comes; so this one takes more discipline.
Whichever path you choose, you now have a plan for lowering
your high interest, bad debt, quickly and efficiently! Keep working the plan by focusing on one debt
at a time and then “snowballing” the payments into your next debt as you pay
them off one by one.
The final step for successful debt reduction: once you’ve
paid down your debts, don’t rack them up again!
Cancel the credit cards, cancel the lines of credit. When it is all said and done keep one credit
card in your name and one credit card in your spouse’s name and maybe mix them
up so one has a Visa and the other has a MasterCard. Then, get each other matching cards for each
company. That way you are both building
Credit Scores and you have two different cards that are more likely to be
accepted wherever you go to use them. (A
colleague of mine once had a widowed client and she could not apply for a
mortgage because she had no credit history, everything had always been in her husband’s
name, not hers. This can be devastating
for a family. Luckily my colleague was
an amazing mortgage broker and was able to pull some strings, but anywhere else
and this lady may not have had a home for her and her children.) Lower both those cards to $500 maximum
each. That means you can never get into
debt more than $1000; and most people can pay down $1000 reasonably fast. What?
But $500 won’t even buy me a plane ticket, you say. Most people don’t know this, but you can “overpay”
your Credit Cards. Let’s say your plane
ticket cost $2000: just drop $2000 on your card and the new balance will be
$2500 available. You spend the $2000 and
are never in debt again. Got it? If you
have a credit card through your bank and it is connected to your accounts this
can happen almost instantaneously online.
Otherwise, there may be one to five business days hold on the money transferred,
but that gives you the time to make sure that’s what you want to purchase, or
that you truly can afford it; rather than impulsive buying. Remember the system is designed to entice you
into debt so by putting up as many blockers as possible, you’re going to win
this money game!
My next blog will tackle the biggest debt we
will ever take on: our mortgages!If you would like to speak with me more in-depth about building a financial plan, please click here. Please don’t waste your time or mine – only click here once you’re ready to move forward; both of our time is valuable!
If you aren’t quite ready to move forward with a plan,
scroll down and subscribe so you can read the next blog on finances; until you’re ready to move forward on your own.
Disclaimer:
The opinions expressed in this blog are purely the opinions of Tyler Piccini
and do not reflect on the any of the companies or associates, Tyler works for
or represents.
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