Beating Broke

Personal Finance from the Broke Perspective

January Financial Reset

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You’ve had your fun.  You spent the holidays with your loved ones, did some frugal gift giving (right?), and probably ate way more than you should have.  But, the new year is upon us, and it’s time to get back to business.  It’s time for a January financial reset.

With tax season right around the corner, there’s no better time to get all your financial books from the last year in order, take a good look at the balance sheet, and decide on the directions you’re going to take your finances in the coming year.  For some of you, that will mean finally getting a handle on your debt.  For others, it will mean finally paying off your debt.  And for more of you, it will mean finding the best ways to make your money work for you as you build your net worth and make strides towards financial independence.

For those in that last group of people, this post isn’t likely to help much, but you might want to take a peek at my Lending Club page for a great way to keep your money working for you.  The rest of you, stick around.

Reformulate your debt

January Financial ResetIf you’ve still got debt hanging around, a new year financial reset is a great time to investigate reformulating it. What the heck does that mean?  It means taking a good look at the debt that you’re carrying, and considering the options you may have to pay it off earlier.

  • Reduce the rates: The worst feature of credit card debt is the interest rate that they like to charge.  12%, 15%, 22%, or more.  The interest payments eat into any payment you make on the debt quickly, and make it that much harder to make any meaningful progress.  If’ you’ve got good credit, consider finding some good 0% balance transfer cards to transfer your existing balances to.  You should be able to find something with a 12 to 15 month 0% rate.  Be aware of the balance transfer fee when you do this, but otherwise it can be a good way to help you make some good progress on your credit card debt repayment.
  • Refinance: In some cases (mostly secured debt) you may want to look into a refinance of the loan.  If you can reduce the rate on a loan and extend the length of it, it can free up some of your debt repayment money to go towards loans with higher rates and speed up your debt snowball.

Recalculate your debt snowball

Now is also a really good time to update all the numbers on your debt snowball plan.  (or debt avalanche if you’re so inclined) Unless you’ve been keeping it updated throughout the year, the numbers are probably pretty out of date, and need to be freshened.  Take the time, while you’re doing this, to determine if you need to move one debt ahead of another, or if you can afford to increase the snowball payment to speed it up.

Seed your budget

Your budget can be the lifeline for your financial life.  It’s a blueprint for how you’re building your financial house.  Even a simple budget can help tremendously, and the beginning of the year is a great time to give your budget a full inspection (or just to start one) and make sure that it’s got all the categories you need, that it’s still balancing, and for planning out where you’re going to focus your efforts in the new year.

Examine your bills

We all get bills throughout the month.  In many cases, we throw them in a pile, then enter them into bill pay, (or, gasp, write checks) and then forget about them until they show up the next month.  While you’re going through your finances from the previous year, pay attention to the bills that you’re paying.  Are there bills that have increased?  How about ones that you meant to cancel the service but didn’t?  Or maybe there are some that you just haven’t called to try and get a better rate for?  Know what time it is?  You guessed it.  It’s time to cancel that service. It’s time to call and see why the rate increased, and if there’s a change you can make to get a better rate.  It’s time to compare your services with their competitors and see if there isn’t a better rate/service available out there.  You may think it’s a waste, but you could end up saving hundreds a month.  And that can quickly make your debt snowball grow!

Keep on your financial path

Here’s the most important thing you have to take away from this post.  You’ve got to keep on that path.  Once you’ve done the things above, you’ve taken some really solid steps on your path to being debt free, but they’ll only work if you keep working with them.  Keep that budget going, keep a close eye on your bills, keep your snowball updated, and know how much debt (and at what rate) you have left.  Whether your debt feels like a mountain, or just a molehill, knowing the what/when/where of it make the climb that much easier.

Will you take the time to do a January Financial Reset?

How Your Confidence Affects Your Finances, Part One

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The other night, my husband and I watched Maxed Out, a documentary about the credit card industry and the effects using credit has on individuals’ lives.

While the movie itself had some dry sections, the heart of the movie, to me at least, was how people responded to heavy debt loads.

Of course, heavy debt loads is a relative term.

The Worst Case Scenario

One college student who was $12,000 in debt chose to take her own life rather than face the endless collection calls about a debt that she obviously felt was insurmountable.

Another woman, Yvonne Pavey, was in debt, but then, with late fees and penalties, the amount of debt she faced spiraled out of control.  Her solution was to simply drive her car into a nearby lake.  Her body was found at the end of the Maxed Out documentary.

The Endless Anxiety and Despair

Stay Confident and Pay Off DebtAnother woman in the documentary began to struggle financially after her husband died and she could no longer keep up with the house payments.  Rather than sell the house, she chose to finance her monthly $4,000 house payments on her credit card.  When she was interviewed for the documentary, she was weeks to days away from foreclosure.  The pain and despair she felt was palpable.  While she hadn’t taken the drastic measure of taking her own life as others had, it was clear that she thought her life was over and that she had failed.

She had mentally checked out of the game of life and felt that she had failed and there was no escape.  This feeling of despair among those who have debts is common.

The Effects on Your Health

In addition, carrying a heavy debt load can take a physical toll.  “Experts say there’s no question that being in debt can be stressful.  And a wide body of research has tied stress to health problems including high blood pressure, cardiovascular disease and stomach disorders such as colitis.  ‘As with any serious stress’ debt does have an ‘impact on one’s physical health,’ said Elizabeth Carll, a New York-based stress and trauma psychologist.  Financial worries may cause a person to be ‘run-down, have more colds, migraines and headaches, [and] their current medical conditions may get worse” (The Washington Post).

As someone who is on a journey to pay off nearly $58,000 in credit card and student loan debts, I can attest both to the sense of hopelessness and the health risks.  For nearly 18 months in our debt payoff journey, the debt was literally all I could think about, and it affected my health.  I didn’t sleep as well as I should, I was quick to anger because of the stress from the debt, and my health failed me.  In fact, it’s taken me 15 months to restore my health and almost begin to feel like myself again.

We have been paying down our debt for two years now, and we have just reached the halfway point.  Our debt now is at $29,000 in student loans only, and we finally feel like we can breathe.  I’m not out of debt yet, but I’m far enough through the process that I can see how much that debt weighed on me like a ton weight around my neck.

Through this journey, I’ve learned that your mindset can make or break you when it comes to both your feelings about your debt and your debt payment.

Stay tuned for part two. . .

VantageScore: A New Way to Figure Credit Scores

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Dave Ramsey doesn’t have one.  I didn’t have one when I first graduated from college.

What am I talking about?  A credit score.

Our reasons are different–Dave Ramsey shuns credit, and as a recent college graduate, I hadn’t yet opened a credit card account nor bought a car with a car loan–but we were still in the same situation.  So, how did a recent college graduate making less than $35,000 a year get lumped in the same high risk category with Dave Ramsey?  Simple.  FICO didn’t have a score for either one of us because we hadn’t used credit in the last 6 months.

Life Without a FICO Score

Of course, if you’re Dave Ramsey earning a gazillion dollars a year (just joking, sort of), you don’t really need a credit score.  You can pretty much buy what you need with cash.

However, if you’re like the majority of Americans, you need a credit score to do the most basic of things like rent an apartment or qualify for a car or home loan.  (Okay, if you follow Ramsey’s advice to stay out of debt, you don’t need to qualify for a car loan, but you still likely need a home loan.  Besides, many landlords routinely ask to check your credit before agreeing to allow you to rent their apartments.)

For many, then, there is a problem.  How can you shun credit cards as Ramsey advocates and yet still have a credit score?  For years, the answer used to be–you can’t.

However, CNN Money reports that hope might be on the way in the form of a VantageScore.

What Is a VantageScore?

A typical FICO credit score simply looks at the last 6 months of your credit history.

VantageScore, which was created by the three credit bureaus (Experian, Equifax and TransUnion) and unveiled in 2006, instead looks at 24 months of payment activity including payments that don’t require credit cards such as rent or house payments and utility payments.

How Many People Could Benefit from VantageScore

According to CNN Money, nearly 64 million Americans don’t have enough credit history or activity to generate a FICO score.  Of that group, 10 million have excellent credit, and another 20 million have good credit.

Currently, many banks and other lending institutions are missing out on those consumers because they essentially have no FICO score.  The VantageScore would show that these consumers are attractive to lenders because they are responsible with their money.

When Will VantageScore Become Mainstream?

For people without credit to benefit, VantageScore must become more mainstream.  Currently, almost all lending institutions rely on the industry standard, the FICO score.

Until VantageScore becomes mainstream, if you are one who shuns credit, you may be faced with a difficult decision–either use credit sparingly every month and pay it off immediately, or save enough money to pay for everything you need in cash.  (This, of course, is Dave Ramsey’s preferred method.)

Do you use credit just to keep a high credit score, or, like Dave Ramsey, do you shun credit?  If you shun credit, have you had problems with not having a FICO score?