Debt Free Blog

Sometimes Debt Makes Sense

noreply@blogger.com (Debt Free LLC Team) — Thu, 22 Feb 2007 03:45:00 +0000

Though we are often taught that debt is bad, even on this website, in some cases, it may actually make sense to retain a debt, especially if the alternative costs more. For example, it does not make sense to drain all of your financial resources paying your mortgage off, if you know that if anything goes wrong, you will incur high interest credit card debt.

In other cases, it simply isn’t feasible to pay cash for large purchases, like a home or college. In fact, in these situations, debt may actually be beneficial to your financial picture.

In the majority of cases, you will not have the cash to purchase your home outright. You have to carefully consider how much money you can afford to put down and also how much home you can comfortably pay for. Obviously, the more money that you put down upfront, the less you will pay in interest and for your home.

But before you rush to drain your cash reserves and put down every available cent to cut the interest payments on your mortgage, you will need to consider other financial issues. Since mortgage rates are typically a lot lower than interest rates on other debt, using all of your available cash towards purchasing your home is not always a wise decision.

Traditionally prospective homeowners put down a 20 percent down payment in order to get the best mortgage deals. However, in a booming housing market, prospective homeowners are wooed by low down payment and no down payment home loans. It is important to remember, though, that the less you put down the higher your monthly mortgage payment will be and he more you will pay in PMI.

So it makes sense to not pour all of your cash into a home, especially if you will end up with credit card or other personal debt, because the interest payments on mortgages tend to be lower than the interest payments on other debts. Plus, you can deduct the interest on your mortgage when you file your yearly taxes.

When it comes to paying for you child’s college education, it makes more financial sense to allow your children to borrow for college rather than to borrow against your retirement. In this case, your children have numerous financial resources available to pay for college, such as student loans and scholarships, often at discounted rates. However, when your retirement funds are gone, they are gone.

Also, your retirement funds are not considered when applying for financial aid for your child’s education. This is why using federal loan programs for your child’s education makes better financial sense than borrowing against your retirement.

Many people consider borrowing against the equity in their homes to pay for college. This is not recommended, because you risk losing your home if you run into financial difficulties.

It is always best, of course, to try to save for your child’s education. Then your child can borrow the portion that you cannot pay. Student loans have guaranteed low interest rates and no payments are due until after graduation, which a big plus when considering financing options for college.

Depending on the situation, sometimes debt makes sense financially. Debt such as mortgages and educational loans often cost less than other financial debt. In these cases, it may be wiser to borrow than to drain all of your financial resources. Becoming debt free is an admirable goal, but not at the cost of all of your resources.

Budgets and Setting Financial Goals

noreply@blogger.com (Debt Free LLC Team) — Wed, 24 Jan 2007 00:18:00 +0000

When you are planning a budget, it is necessary to analyze how you are spending your money, so that you can see where you need to make adjustments in your spending habits. The first thing that you will need to do is take a look at the budget that you have created and figure out where you can cut expenses.

This is especially important if you are spending more than you earn. If you are in this position, you are not alone. As a matter of fact, statistics show that many families who bring in $50,000 or less each year are spending more than they earn. This data seems to back up the assertion that people are in the habit of spending more than they have, thereby creating debt and placing themselves in a precarious situation.

If you are in this situation, then it will definitely benefit you to construct a budget that helps you to minimize your spending immediately.

However, if you are not spending more than you earn, you may still want to evaluate how you are spending. By doing this, you are able to identify areas in which you may be overspending. For example, if your family is dining out every night, you might want to consider cooking at home more often.

When you are planning a budget, you should only include income that you are certain of receiving. This means that you should not include bonuses from your job or tax refunds as income. These things should be considered extras. When you receive this extra cash, it makes sense financially to save or invest this bonus income for the future.

When setting your financial goals using your budget, you should aim to spend only about 90 percent of your income. The remaining 10 percent of your income should be set aside for the financial objectives that you have relegated as the most important.

In order for your budget to be successful and to meet your financial goals, you need to track your expenses on an ongoing basis so that you can eliminate cash leaks. One of the simplest methods to track your expenses is to use some sort of personal financial software. Many computers these days include versions of basic financial software, such as Microsoft Money. By tracking your spending on an ongoing basis, you are able to maintain the spending levels that you have set as goals.

By tracking your expenses, you may also realize that some of the goals that you have set in accordance with your budget are not very realistic. If this is the case you will need to adjust your budget. It does not make sense to set financial goals that unattainable. You also should not set goals that are not very challenging.

Most likely you will make several revisions to your budget before you actually achieve one that is reasonable for your financial situation. Once you become used to using your budget to help you achieve your financial goals, you will find that managing your money is not as difficult as it may have first seemed.

10 Rules to Building Wealth

noreply@blogger.com (Debt Free LLC Team) — Thu, 14 Dec 2006 01:52:00 +0000

Fortune.com posted an interesting article recently called "10 Rules to Building Wealth." We enjoyed the article and thought it made sense, so we're presenting a summary of the article here:

Start early - The power of compounding interest is amazing. The earlier you start paying debt down and saving money, the better off you'll be.
Use your 401(k) - If your employer offers a 401(k) matching program, you're crazy not to take them up on it. Not only are the funds compounding tax-free, the matching program brings your returns higher than any reasonable investment out there.
Keep it Simple - If you have a full-time job outside of picking stocks, leave it to the experts and pick a proven mutual fund, or even better, simply pick a market index. .
Don't Try to Beat the Market - It's almost impossible for you to beat the market, and even most professionals have yet to do it over any significant period of time, so stick to basic mutual funds or market indexes.
Don't Chase Trends - Your goal is to grow assets over the long-term, there is no sense in trying to time the market or chase trends.
Make Saving Automatic - Once you've found the debt solution for yourself and successfully paid off your high-interest debt, make saving automatic by setting up a plan or direct debit.
Go Heavy on Stocks - If you're in it for the long-term (which is how you build wealth), go heavy on stocks, they're above-average performers.
Hold Down Fees - Avoid mutual funds or asset management programs that charge high fees.
Ditch Credit Card Debt - Ideally, credit cards are to be used only for convenience. The high interest rates these cards charge can quickly eat into your returns or savings plans. Find your own debt solution and get out of credit card debt as soon as possible.
Defer Taxes - Buy and hold, avoid selling assets if you don't need to, as this creates tax liability, when you could be deferring this liability and earning interest or returns.

Capital One's Multiple Card Strategy

noreply@blogger.com (Debt Free LLC Team) — Sun, 12 Nov 2006 23:54:00 +0000

The current issue of BusinessWeek has an interesting article on Capital One's credit card strategy, which seems to, at least in part, involve granting multiple credit cards to the same borrowers. Traditionally, a credit card company would evaluate the creditworthiness of a potential borrower, and assign a credit limit based on this creditworthiness. If, over time, the borrower paid his or her bills on time, the creditworthiness may increase and the limit would be raised.

Increasingly, however, certain credit card companies such as Capital One are choosing to instead grant the borrower additional cards rather than raise the limit on the existing card. It may seem counterintuitive, as this would increase the processing and administrative expenses for the credit card company, but on the other hand, there is much more opportunity for greater fee income from the borrower.

For example, compare the following two scenarios: i) you have one credit card with a limit of $1,500, and ii) you have five credit cards each with a $300 limit. You have the same borrowing capacity, but keeping track of each card could quickly become difficult. Every time you go over the limit on one card, or get confused on the payments and make a late one, the credit card company can charge you fees.

Although it is clear that the overwhelming majority of credit card borrowers have only one credit card from the same company, this practice does occur, and it is a practice that you should be aware of. It seems to be yet another method by which the credit card companies generate profits.

The moral of the story is this: since the ultimate solution of living a debt free life is usually not achievable in the short term, while you owe credit card companies, always try to minimize the number of cards you have outstanding, so that you decrease the chance of incurring expensive over-limit and other miscellaneous fees.

Small Claims Courts: David vs. Goliath

noreply@blogger.com (Debt Free LLC Team) — Sat, 09 Sep 2006 03:26:00 +0000

Small claims courts, once created as a balanced way for citizens to mediate issues, today have effectively become extensions of the corporate debt collection world. Anywhere from 60 to 85 percent of all small claims filed in Massachusetts are initiated by professional debt collection companies. Most of these suits have attorneys leading the way for the plaintiff, while the uninformed defendant is left fighting without weapons and thoughts of David vs. Goliath come to memory.

Claims, fueled by debt collection, have risen approx. 11 percent in the last decade, while court budgets have been slashed by 14 percent. It seems there’s barely enough time to get through the docket, never mind investigate the unique considerations behind each claim. It is a shame, as stories of single mothers fighting to keep ends meet and Iraq veterans unable to work, remind us of the harsh reality of a cold system.

The system is unfortunately stacked against the debtor, and its not getting any easier or more balanced. Court fees pile up with interest and late charges, and the debt grows larger and larger. The cost of getting behind with debt payments goes beyond monetary; it is indignity that accompanies the phone harassment and court appearances. There is no question - living with debt is a risk – the risk can be managed but not eliminated. Only by becoming debt free is the risk truly removed.

Debt Collection Powers Up Against the Consumer

noreply@blogger.com (Debt Free LLC Team) — Sat, 02 Sep 2006 02:14:00 +0000

As Americans become more and more reliant on debt, it is only natural that delinquincies on this debt would rise. The issue for consumers in debt is not only that the chance of delinquincy is rising, it is that the army of collectors chasing them is increasing with it. In the last decade, the number of debt collectors in the U.S. has doubled, to over 160,000.

Debt collection has become big business and is one of the fastest growing sectors of the financial services industry. Markets for once uncollectable debt are maturing, with opportunistic companies purchasing old credit card and auto debt at cents on the dollar. The majority of these debt collectors are fair and reasonable; however, there are some who consistently cross the line of fairness.

In certain areas of the country, the small claims courts have become veritable extensions of collection companies. The sheer volume of lawsuits over credit card debt grants latitude to collection companies for such documentation as proof that the debt is actually owed. Granted, in most situations, the consumer actually owed the original balance of funds. However, beyond the standard issue of compounding fees and interest, is today an increasingly fierce collection process.

Lawsuits are filed and notification is given to the debtor, but what if the consumer address has changed? Most collection companies use prudence and care in their diligence to ensure the consumer is properly notified, however, many move forward regardless. This finds many consumers waking up to early A.M. sounds of a tow truck seizing their vehicles. The court date had came and went, without the consumer ever knowing about it. By the time they realize it, it is too late.

The moral of my thoughts today is that with the rising delinquincy rate comes a consumer debt collection industry that is becoming more and more aggressive, and consumers should be prepared for it. Large credit card companies no longer simply "write-off" bad debts; these days this bad debt is sold to companies who make it their business to collect it. Unfortunately, in many cases this translates into tougher and tougher tactics against the consumer.

Your Debt Free Team

noreply@blogger.com (Debt Free LLC Team) — Wed, 16 Aug 2006 17:05:00 +0000

Whether your a frequent visitor of DebtFreeLLC.com, or this is your first visit, let us take this opportunity to welcome you to the new Debt Free Blog. Apart from the services offered on this web site, we work hard to deliver information that is both useful and importent to consumers. In the past, we've answered many questions presented to us form onsite visitors, and we've done this by putting together articles that detail topics ranging all over the debt industry, everything from consumer credit scoring to simple consolidation loans.

However, this method of correspondence takes time, as we are always striving to put together as professional and concise an article as possible. In many instances, we were in need of a medium that allowed immediate feedback, a brief response, and the ability to relate on a more personal basis. In hindsight, we were in need of the Debt Free Blog.

The Debt Free Blog will be our tool to quickly touch on some of the concerns many consumers face in the worlds of credit and debt. We will receive your feedback, explore your issues, and use the blog as a way of publishing our answers and solutions. Of course, helping consumers discover the debt free life is our number one objective, and we'll be satified with each new post that caters to that goal.