If you’re struggling with credit card debt, you may grab hold of the Debt Snowball Method to help find your way out of it. What you need is the patience, determination, and planning to follow the steps in the Snowball Method and make it work in your favor.

Steps to snowball your debt

1. List your debts – List your debts from the smallest balance to the largest balance without taking into account the interest rate on them. If you find two debts have similar balances, consider the one with the highest interest rate first.  (I know there will be people that scream that the highest interest rate should always be paid down first…but money is emotional, so trust me – you’ll have a better chance doing it this way!)

2. List the monthly payment on your debt – Note down the minimum monthly payments on each of your debts you need to pay.

3. Pay off your smallest debt – Try to make extra payments toward your smallest debt so to pay it off as quickly as possible.

4. Make minimum payments on all the others - Make a budget so that you are able to pay the minimum payments on each of your debts except the smallest debt as described above (pay as much as you can on it).

5. Direct funds to the next smallest debt – After you have completely paid off the smallest debt, use the money that USED TO be used to pay this debt, and direct all of it to the next smallest outstanding debt.  THIS IS KEY!  All of this extra money (from the smallest debt that you no longer have to pay) goes straight to principal, which is the key to the system.

6. Continue this process – Repeat this process until you have gradually paid off all your debts.

Advantages of The Debt Snowball Method

Here are some advantages you may find when you use the Debt Snowball Method to get out of debt.

1. Quick wins – It helps you to get psychological satisfaction when you find out that you are able to eliminate certain debts. This also helps you gain a positive attitude when you see fewer bills coming every month.

2. Provides motivation – The Debt Snowball Method motivates you to think about your financial situation seriously. It also helps you to stick to the plan until you eliminate all your debts.

3. Systematic way – The Debt Snowball Method helps you to pay off your debts in a systematic way so that you don’t stray from the system and think emotionally – you just work the system.

The Debt Snowball Method isn’t the best choice for somebody who is struggling to pay their debts each month.  Consider credit counseling or debt settlement (or even bankruptcy) in that case.

The bottom line is that the Debt Snowball Method is recommended by many finance experts to get you out of debt as soon as possible, and give as little interest to the banks and credit card companies as possible!

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites. His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations. Some of his works include e-books like ‘Credit Score The Quintessential Therapy for a Happy Pocket’, Take Creditors and Collection Agencies to Small Claims Court’ and, My Story- From Depression To a Smile’.

Let’s face it.  A bunch of us are just trying to keep our heads above water in this economy.  Savings and retirement planning aren’t exactly the top news stories right now.

So where does that leave you when your bank fails or your safe money market fund “breaks the buck”?

Scared.  Very, very scared.

It is one thing when your current job seems shaky and you are worried about the economy and the future is uncertain.  But, it is a nightmare to think of your hard-earned, rainy-day savings not being there when you need it…like if your shaky job does go away all of a sudden.  Or, your retirement nest-egg disappears overnight.

These are important things, and each one could easily have pages written about them.  But, I hope that in my goal to summarize them, you’ll take the time to read and think about them.  If you want more detail, let me know and I’ll send you a ton of info.

What if my bank fails and I lose all my money?

This is a very real concern right now, and for good reason with the meltdown in the banking/credit world.  The good news is that almost every savings, checking, and money market account held at a bank is insured by the FDIC to $250,000 (although this reverts back down to $100,000 on January 1st, 2010).

Most of the time, accounts at credit unions are insured to the same amounts through a similar insurance fund, but I would check yours out today to be sure.  Finally, keep copies of all of your paperwork on these accounts – if something does happen, you want to get every last penny that is coming to you.

Where should I put my money now?

Under your mattress.  Actually, I’m only half joking, as I really feel like doing just that with all of the turmoil these days.  Stocks have always performed well over the long haul, and there are probably some big bargains out there right now…but it is still just a little too crazy for me right now.  I don’t think I’m smart enough to perfectly time the markets, and I don’t want to miss the next bull market trying to pick the very bottom, but I don’t think we are anywhere near that yet.

We think you should just go for a single right now instead of a home run.  I’m aggressive in terms of investing, so it pains me a little to say it, but I don’t think an ultra-secure CD from one of the big banks like Capital One or ING or HSBC is a bad option right now at the 3-3.5% they are paying.  Look around, but don’t search out the very highest interest rate, since that might be at a riskier bank.

You probably already figured this, but per the first item above…make sure it is an insured account.

My 401(k) has dropped like a rock – what do I do now?

If you’ve got at least 5-6 years until you retire…

Most likely your investments will come back.  Due to stiff penalties, don’t yank money out of your 401(k), and don’t stop contributing.  Consistent, regular contributions will actually buy you more shares of stock when things are down (for more on this, search for “dollar-cost averaging”).

Make sure that the balance of investments in your account is still optimal after all of the market ups and downs.  (This is a fairly complex subject, but with all of the market turmoil and craziness, it is possible that your investment allocations have gotten skewed either too aggressively or too conservatively.  Probably best to check the website or call a live person where your funds are for more help on this).  Finally, ensure that your money is invested in the lowest-cost plan options possible – usually index funds are best.

If you are hoping to retire within 5 years…

I’m going to tell you something I hope you’ll respect me for.  I don’t know.  I mean, there are many options and textbook thoughts and ideas, but there isn’t a one-size-fits-all answer for you, and I think it would be criminal for me to act like there is with something so critically important.

So, here is the extent of my advice on this one, which I hope you’ll follow.

Get in touch with your financial advisor immediately.  I’m amazed by how many people we talk to haven’t done this, for one of a few different reasons.  Call today, and if you don’t get very detailed advice that you can immediately take action on, find somebody else.  Right away.  (But also keep in mind that if they can back up their reasons, the right decision for you might really be to wait it out and not do anything).

I was just getting ready to retire – should I still do it?

This is obviously another complex topic, and I can’t give a perfect answer that will fit every situation.  What I can do is bring up a few things that people don’t seem as familiar with to add to your list of options:

1. Confirm that your retirement benefits are what you are expecting.  Some benefits (especially health-related) have been changing the last few years…to say nothing of what could happen based on our current economy.  This is a huge concern in our opinion, so check it ASAP.
2. Check with your employer to see if they have a “stepped” or “phased” retirement.  Sometimes you can work 2 or 3 days a week and make it a win for you and your employer.
3. We’re surprised that some people don’t realize that Social Security benefits will go up if you start taking them as late as you possibly can (currently at age 70).  If you are close, and this could work for you, we think it is a good option to consider.

Social Security Scares Me

If you are pretty close to retiring, you are probably going to get exactly what you are expecting.  But, if you’ve still got 5+ years…you really need to ask yourself some hard questions.  While things will probably be fine for a decade or two like most experts predict, what if the whole system is worse than expected?

I’d run a few different scenarios, showing your social security income at 90%, 75%, and 50% of your currently-expected benefits.  I don’t want to be too pessimistic, but you’ll be much better off if you think about it now rather than later.

I’ve got a traditional pension, should I be worried?

Yes and no.  The government guarantees your payouts (up to a certain percentage cap or $51,750 a year for 2008) if your company’s plan is covered – and most are.  But, pension plan assets have been on a rollercoaster with the rest of us.  Your company might have to make changes to keep up with federal regulations, and that could directly impact you, especially if you are close to retirement.  A good website with information on easily checking the funding of your pension plan is www.pensionrights.org

Although your pension plan obviously isn’t under your control, what you can control is how well you are prepared for surprises like this.  As with the item above, I’d run a few different scenarios with different levels of pension payouts – today.  You might decide to make some changes now just to be prepared for the “what if” factor.

Your Money: Series Wrap-up

You’ve finally reached the end of this series!

Most people have found the information and level of detail helpful, although some people wanted me to condense it substantially.  We live and breathe this stuff, so we want to get information out there as much as possible.  But yes, sometimes that makes it a little rambly.  All in all, I hope it was worth your time.

Comments – as always – are welcomed.  I’ll probably do another series early next year, and want to make it as valuable as possible.

Oh, and let me know if would you like a downloadable PDF file containing the whole series.  I’m planning on doing it, but want to see if there is any interest first.

Thanks for reading, and I’ll be back shortly after the Christmas holiday.

Happy Holidays!

Scott

Geez, it is depressing out there right now.  It seems like just about everybody we talk to is really worried about losing their job.  And…I’d say that almost half of the business owners are wondering if they’ll be able to make it until the economy turns around.

Scary for sure.

Remember at the beginning of this series of articles that I said that certain things you should worry about, and certain things you shouldn’t?

Well, this is one of those things.  Actually, it is both of those things.

You shouldn’t worry about whether some really rotten luck will cause your company to go under, or cut their workforces, or whatever.  After all, there isn’t much you can do about that part of it, right?

But, you should worry about doing everything you can to be the most valuable employee you can be.  Most of us get so efficient at our job that we can do it with our eyes closed.  We just kind of go through the motions, get “it” done acceptably, and move to the next thing.

Think back to when you first started at your current job.

Didn’t you do everything you could to be a superstar employee?  You did everything better and faster than you needed to, so that you could make a good impression.  You thought about your job a bunch, and you even suggested things to your boss to make your company or products better or cheaper or whatever.

You went above and beyond on everything you did.  You completed stuff that wasn’t “in your job description.”  All in all, you were a perfect employee.

Do that now.

Really.

Remember, you can’t do anything about your company and what they might or might not decide to do.  But, you can make yourself as “layoff-proof” as possible by simply remembering what you were like when you were new on the job.

That’s all for now.

Talk soon,

Scott

Quick but important one today…

We’ll get the random question about insurance here and there, but for the most part nobody thinks about it very much.

I’ve got to admit, other than briefly checking my coverage amounts on my home each year during renewal time, I don’t think much about it either. (Side note – if you haven’t ever thought about it, ask your insurance agent. He or she will be able to make sure you are okay, discuss “extended or guaranteed replacement cost”, and other important options with you). But I digress.

Anyway, the topic of insurance got really hot overnight…yep, you guessed it – as soon as the American International Group (AIG) story broke in the news.

People were understandably worried that they might be exposed, but luckily this isn’t the case. First of all, regulators can step in really at any time to take over a troubled insurer. (Surprisingly, this is always done at the state level, not the federal level).

Also, insurance companies are required to pay outstanding claims to policyholders like you and me, before other creditors can get anything from insurers.

Insurance companies are almost always backed by guarantee associations or funds at the state level, which protects you up to a certain amount even if your insurer fails. AIG would have been a massive failure, and caused more of the “house of cards” to crumble, which is why the government stepped in.

We know that it turned out “okay” (depending on your view of the government bailout, capitalism, etc. – but that is a topic for a different time). But, that didn’t stop AIG customers from feeling awfully scared for that brief time, and I can’t blame them.

Just a couple other quick things that come to mind on this topic:

• First, if you have a policy with AIG, don’t listen to anybody that uses scare tactics to try to get you to switch. Two different families we’ve talked to have already been approached by agents selling higher-priced policies to replace their “dangerous” AIG policy. Actually, I’d guess that fast-buck agents might even approach people insured by other companies, using AIG as an example. Just hold tight, and talk to your current agent or insurance company before you make any drastic changes.
• Second, while it might have been scary thinking a $5,000 car accident claim wouldn’t be paid…what about when you have a bunch of money in an annuity, or cash value life insurance? That is what really got me thinking when the AIG news came out. As above, just hold tight and don’t panic, knowing that the same regulations discussed above have you protected to a certain limit. The limits vary by state, but if you have over $100,000 with an insurer in an annuity, cash surrender, or even in death benefits then check out The National Conference Of Insurance Guaranty Funds website for the exact limits for your state.

That’s all for today.  Have a different viewpoint or something to add?  Did I miss anything?  Talk to me!

Thanks,

Scott

The first two posts in this series were about home and mortgage problems.  I think you’d agree that the problems there are the biggest nightmare right now.  Even if none of those problems impacted you, I bet you know somebody that has been hit hard – I know quite a few personally.

But, I’d also wager that you know even more people that have been bitten by the credit card companies lately.  You could spend days listening to people rant on this, and there are too many different topics to count.

But, this seems to be the toughest issue for people to find information about, so I’ll take a stab at it…

My Bank Is Dropping Me (My Credit Limit, That Is)

This issue has had national news coverage, so it isn’t hard to guess that it is a problem for many people.  Most, if not all, of the biggest credit card issuers have been dropping people’s credit limits significantly.

It is an unfortunate part of life right now that more and more people are digging into their credit cards to help pay the bills every month.  So, it seems almost like the credit card companies are doing their best to hurt people and take away that (hopefully temporary) lifeline on purpose.

Of course, no human is sitting around at those companies looking at your situation and messing with you on purpose, but their financial and statistical computer models sure are.  They simply decide that their company has too much risk, and they try to reduce that risk by lowering the amount of money they are lending.

Although it sucks, that is all pretty obvious stuff.  But, there are a couple other things that come out of this indirectly, which makes it a bigger punch in the gut.

Special Credit Offers

Even up until this summer, many banks were still extending 0.99% or 1.99% interest rates for their short-term “special” offers, and 3.99% to 5.99% even for their permanent offers.  With the credit crunch right now, do you think those companies like having a bunch of money out there at that low rate of return (to them)?  Nope, not at all.

Sure, they bank on you taking a long time to pay it off, collecting a bunch of interest and fees the whole time.  But, if there was a way that they could easily break their special offer so they could charge you more, do you think they would do that?  Absolutely.

You know how credit card offers only stay in effect for their customers in good standing?  Well, they can’t really make you send them a late payment (which kills all your special offers)…but they can “help you” to exceed your credit limit (which also cancels all your special offers).  Starting to see the way they think?  Don’t ever forget it – they’ll do whatever is in their best interest every single time.

Finally, just for future reference on this topic – credit card issuers can change almost anything regarding your rate and terms with only 15 days notice to you.  This might be changing, but so far it hasn’t – so be careful and try to always think “worst case” on any credit card balance you carry.

Balance To Available Credit Ratio

So let’s say you’ve been carrying a $3,600 balance against a $10,000 credit limit on a credit card.  You’ve made all your payments perfectly, and your balance is only 36% of your credit limit.  You’ve got plenty of room left, and obviously aren’t struggling or having any problems.  Your credit score is still above 700, and all is well.

Then, your bank’s computer decides that $5,000 is a better credit limit for you.  You are annoyed, but you don’t need to charge any more on your card anyway, so you just curse them a few times and forget about it.

But, behind the scenes, they did just hurt you.  Your $3,600 balance is now 72% of your new, lower credit limit.  Once they send their monthly update to the credit scoring bureaus, your new, lower credit limit is picked up.  The computers at the credit scoring bureaus think “uh-oh, John Smith went from a 36% ratio to 72% ratio – he must be having problems…”

In fact, high ratios are one of the things that hurt your credit score the most.  So, now your score takes a 50 point dive – when you still have a perfect payment record and have done everything right!

Yeah, and if you are thinking ahead a bit on this one, you’re right – when you want to buy a new car in a few months, you are going to pay a little higher interest rate because of your lower score.

By the way…the same bank that started this in the first place might look at your updated credit score down the road – which again, they caused – and do something else negative because of it, and that cycle goes on and on.

So, yes – this is something to worry about.  If it hasn’t already happened to you, it might very soon.

What To Do Now

Pay close attention to your statements every month.  If anything has changed, call your credit card company right away.  You can’t strong-arm them like you could in the past, but if you have decent credit and pay your bills on time, take it up the chain.  Much of the time the first-level customer service people don’t have the authority to increase your credit limit back to where it was, so escalate it to a manager if necessary.

Be nice.  State your case clearly, and illustrate all the positives about your account for them.  Tell them why you are not a risk and that you just want a real person to review your situation instead of a computer program.  They might still think you are making the same salary that you were making when you applied for that credit card 10 years ago after all.

Most of the time that is enough to get it done.  If not, push a little harder, but still…be nice, and don’t threaten them or talk down to them.  Your position isn’t as strong as it was in the past, and they know that.

If they won’t do it, don’t tell them to cancel your account like you probably want to (I would too).  Just say thanks, hang up, pay your next monthly bill even earlier than you normally do, and repeat the above process.  It usually works.

Any thoughts or experiences on this one?  As always, we love your comments – so drop in a quick one now!

Until next time…

Scott

We’ve been receiving lots of calls and emails from people in a panic about their finances.

“How do I manage my huge credit card debt?”
“The house next door sold for $200K less than I paid for mine!”
“Should I even bother saving?  My bank will probably go under anyway!”
“What about my pension/Social Security?”

Sure, you’d have to be living under a rock not to be at least a little scared about our world right now.  But as usual in life, there are things you should worry about (those you can do something about), and things you should ignore – why bother if you can’t change them?

So let’s cut through all the noise and doom-and-gloom to talk about what you should be worried about – or not – TODAY.

Worry #1 – Your Home Value

If your home has dropped in value, you’re not alone.  There are very few places in the country that have not been impacted.  We’ve watched our home’s value fall 35% since early 2006, so I’m there too.  (If you are and have been renting the last couple years…congrats, you’ve got great timing.   Maybe you should be writing this post instead!).

But stay with me a second.  As much as that, well…sucks… if you don’t have to sell your house now, just put it out of your mind.  Seriously.

If a job change or personal circumstances or whatever are not forcing you to sell, don’t worry about it!  After all, who cares what your neighbor’s house just sold for?

I used to play “shoulda-woulda-coulda” all the time – if we sold when we were thinking about it at the top of the market, we could have put a big chunk of cash in the bank.  Now we don’t have that option.  Yep, pretty frustrating.

Don’t Walk Away

Oh, and you aren’t thinking about “walking away” from your house and mortgage because your house isn’t worth what you paid for it, are you?

As you probably know, the real estate market runs in cycles.  Even if you are underwater now, when the market starts going up again, the “bottom” will be higher than it was before.  So, your house will be worth more six or eight years from now than it was in 2006.

Also, this might tweak some people, but your house is not an asset.

You shouldn’t plan on it doubling in value in a couple years like during the crazy boom we just went through.  It is a place to live, and it is an expense – again, not an asset.  Sure, you might have equity you can borrow from someday, or make money when you sell it one day.   The value will go back up eventually – always has, always will.  But it isn’t an asset.

We’ll talk a bunch more about this some day, but I’ll get off my asset soapbox now.  Until then, if you want to know more about assets and expenses/liabilities, pick up Robert Kiyosaki’s “Rich Dad, Poor Dad.”  Great book that has made a difference for lots of people.

So, if you can afford the payments and still feed your family, don’t walk away and let the lender foreclose on your house.  Ride it out, and do the right thing if there is any way.

Home Shopping A Few Years From Now . . . You’ll Thank Me

Keep in mind that a foreclosure is the single most damaging thing that can hit your credit report.  The next time you want to buy a house, you can have all kinds of problems with your credit and the lender probably won’t care too much.

$39 collection from a doctor?  $17 charge-off from a department store?  Except for the very top tier programs, lenders don’t care as much about that stuff – everybody makes a mistake here and there.  You know what they do care about when they are ready to lend hundreds of thousands of dollars on a home?  Yep.  “How did this borrower handle it the last time somebody lent them hundreds of thousands of dollars on a home?”

If you even had a late payment or two, you are already at a big disadvantage.  If the lender foreclosed on your property, you’ll have a very difficult time getting another mortgage with any kind of decent rate, down payment, etc.

Anybody that can avoid adding to the mass of bank-owned homes out there will help this whole mess get cleaned up quicker.  Hint, hint – which means if you do want to sell your house eventually, you’ll be able to do it sooner and more profitably.

Values/Schmalues – Who Cares?  But I Actually DO Have To Sell My House Now!

Okay, let’s talk more about the dark side of this subject.  If you do need to sell your home now for any one of a handful of reasons, it isn’t going to be fun – but you knew that already.

If you’ve been in your home since 2003 or 2004 and haven’t sucked all the equity out of it, then you are probably okay.  You won’t make nearly what you could have during the boom days, and it will take much longer to sell, but most likely you aren’t upside-down.

If you bought in 2005-2006 or later, you could be in trouble.

Either way, if you have to sell…then really SELL!  Don’t screw around pricing it high because it makes you feel better about what it used to be worth.  The only people buying right now are bargain-hunters, and they aren’t in a rush (plus, do you think they might have just a few options to choose from?)

Go to an experienced real estate professional that you can trust, and listen to what they say!  The listing price will hurt the first time you hear it, but more than likely, it is the right price at which to list your home.  (If you really don’t believe it, pay the extra $300 for an appraisal by a second company – it is worth it in piece of mind).

Again, if you need to sell, you need to SELL!  If you price too high and make a few more mortgage payments during the time when nobody is coming to look at your home, then you are out even more money.  Price it right and get it sold.

Oh, and in this market, you don’t want to sell your home yourself.  Trust me – it really is something you’ll regret.  Pay the commission and figure that it is covered by the higher price that they got you and the time and mortgage payments they saved you.

Make sure that your real estate professional  is taking advantage of technology to get you maximum exposure.  Make sure they know the little secrets about the different websites – to allow you to price it right to have it seen by two price-group searchers instead of just one.  They should know what that means and some other tricks.  Every bit helps, right?

One other thing to keep in mind…nobody cares as much about selling your house as you do.  So, be involved, and pay attention.  Do a little extra work and sometimes that can make all the difference.

For example, there is a real estate expert named Bruce Norris who says you should price your house so you are the “next logical sale in your neighborhood” (or something close to that).  You need to monitor the sales in your neighborhood weekly (yes – sales, not listings), and drop your price if you need to so that your home remains the best-priced one in the neighborhood…and the next logical sale.

If you are able to sell high enough to pay off your mortgage, great.  Take it and run, and be thankful – next time you’ll probably time it right, get a great deal and build lots of equity.

What Exactly Is A Short Sale?

If you can’t pay off your mortgage with what your home is worth, you are not alone.  It is a terrible situation which can make you feel pretty helpless.  My advice to you is to communicate openly and honestly with your lender.  If you can get them to agree to a short sale (where they’ll accept less than you owe on your mortgage), that is often the best solution.  There are some ramifications (tax and otherwise), but all in all they would rather lose some money on the transaction than take your home back.

Your lender does not want to take your home back – trust me, I’ve seen it many times during my years in the mortgage industry.  Lenders make money by loaning money on homes, not foreclosing and owning and selling them.

They don’t have time to deal with properties in foreclosure – they just want to get rid of them ASAP.  When they do that, they almost always get less money than the home is truly worth.  They also spend a bunch of time and expenses during the legal process to take the home back from you, in addition to substantial fees in getting it ready to sell.

Let me say it again – they do not want to take your home back.  So, call them early and call them often.  Tell them exactly what is going on.  Swallow your pride and do it.

You’ll shoot yourself in the foot if you try to take advantage of them, however.  I’ll say it again – they don’t want your house back.  But, they want every last cent they can possibly get from you to minimize their losses.  C’mon, you’d be the same way if you were them – if you were already losing on the transaction, you’d want as much as you could collect.  This is to save your house – give as much as you can in the negotiation, and plead with them to meet you there.

Remember that there are many other people out there in the same situation, many of them further along this unfortunate path than you are.  So be patient and understanding, but be persistent.

You’ll want to present your position as somebody that truly wants to take care of the problem.  After all, you are taking care of this early, rather than after they’ve spent lots of time and thousands of dollars in fees going through their legal foreclosure process.

But BE NICE!  Don’t confuse the positioning I mentioned above as being aggressive, or they’ll squash you.  Or at least not return your calls and cause you to lose valuable time.  Think about the fact that they are on the phone all day, every day dealing with a pretty depressing subject, one after another.

If you aren’t getting anywhere, think outside the box if you need to and do something to make an impression.  Sure, spending any money when you are in that position is tough, but what about a cheap bouquet of flowers or having the local pizza shop deliver them a $10 pizza?  You might melt enough of the ice to really get them on your side and fight for you.

What Are The Other 6 Things to Worry About?

I intended to make this a fairly detailed post, but to discuss all of the 7 items that have come up most often recently.  But once I started digging in to my call logs and emails, there were lots of things to be covered about people’s homes…a pretty complex subject.

In my next post, I’ll discuss some options if you can’t afford to keep making your mortgage payment but selling your home isn’t possible.  After that, I’ll make the rest of the posts shorter, since they aren’t so complicated.

I look forward to your feedback, whether on the post, or just to tell me that yes…I babbled way too much!

Stay Tuned.

Scott