Beating Broke

Personal Finance from the Broke Perspective

Beating Broke Rules: Payday Loans

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This one is simple.  Or should be in any case.  And yet, the industry keeps getting stronger and more prolific.  But let me be clear on this one.  Do not touch Payday Loans!

Payday loans are something that I and other financial folks like to call Parasitic Lending.  They tout their convenience and ease all the while (like a parasite) putting you further and further behind with their high fees.  That money that you thought you needed so badly becomes about 25% lighter before you even leave the office and if by some chance the check you wrote them is bad?  You could easily rack up enough fees for that to exceed over 50% of the “loan”.

I cannot say this enough.  Debt is BAD!  And Payday loans are the worst of the bunch.  The only thing that I can think of that is worse would be bookies that take broken fingers and knees as fees rather than money.  Yes, they are that bad.

Do yourself the favor.  If you’re even thinking about using a payday loan service, don’t.  Things will be tight for a while, but if you truly work at it, you can get by without them and you will be much more financially sound without them.

Beating Broke Rule: Don’t touch PayDay Loans

There are plenty of alternatives around.  You can get a pretty good rate on a shorter term loan through a peer-to-peer lender like Lending Club.  You can sell off some of the junk you don’t need for some quick cash.  You can ask your bank or credit union.  You might be surprised by what they say.  Especially if you’ve got a relationship with them.

Beating Broke Rules: Emergency Fund

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If I could use only one word to describe my thoughts on this it would be the word yes.  I went the first 26 years of my life without an emergency fund and I’ll never go another day without one.

The purpose of an emergency fund is to give you available funds in case of an emergency.  Your car breaks down and needs repair.  You fall and break an arm and have to take some unpaid leave.  Whatever the emergency is, your fund is there to see you through it.  It’s a great thing, and can take an immense weight off of your mind that you didn’t even know was there.

So where do you put your emergency fund?  A fluid account that you have nearly immediate access to.  I prefer to have it in a secondary account that is separate from my everyday account because that makes it that much harder to spend on silly non-emergencies, but where it’s still available if I need it for an emergency.  At the moment, I keep my e-fund(my pet name for it) in an Ally Bank interest checking account.  The interest rate is consistently in the top 10 or so and the service has been superb.

How much do you put in it?  Ideally, you’ll keep 3-6 months of expenses in your emergency savings.  If you’re just starting out with your debt plan, try for something between $1000 and 1 month of expenses.

Make your emergency savings a priority.  Until your reach your $1000 balance goal, you should be paying as much as you can into it.  The peace of mind that you’ll get by having the account is well worth the extra interest you’ll pay on your debt while your building it.

Creating a Debt Plan: My Dollar Plan Reader

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One of the readers over at My Dollar Plan want’s to eliminate his debt and My Dollar Plan has opened it up to all of us to give it a go at creating a debt plan for the reader before he announces what he has/will suggest.

Here’s the basics:

The reader has approximately $14,000 in debt.

  • Personal Line: $3,500 balance @ 15% – $7,000 limit
  • Credit Card #1: $2,300 balance @ 9.6% – $5,000 limit
  • Credit Card #2: $6,600 balance @ 8.5% – $8,000 limit
  • Credit Card #3: $1,900 balance @ 18% – $2,000 limit

According to the post, he’d like to keep using the 3rd card as it gives him cash back on certain purchases. If you’ve been following the Beating Broke Rules, you’ll know how I feel about Credit Cards.

The other factors we are given are that the persons income is in the high 5 figures, so for this exercise, we’ll assume  about 75k.  He’s currently paying $210 on the personal line, $0 on the first card, $1200 on the second card, and $100 on the third card.  We don’t get anything about living expenses which makes it a little hard to nail down a very good debt plan, but we can give it a try.

We’ll use what he’s currently paying as his total income that is usable for this purpose.  He’s also got some company stock, but we won’t be using that as selling stock can sometimes carry a pretty hefty tax bill.  Sidenote: Company stock plans are great, but some thought should be given to diversifying.  That’s another article though.

Let’s get the reader started on creating a debt plan.

Current payments: $1510

As you can probably tell by the byline of this blog (The borrower is Slave to the Lender), I don’t like debt.  I especially don’t like credit card debt.  And Personal lines are not much better, but have the added benefit of not normally being as easily accessible as credit cards.  I also think that cash back cards are a waste of time.  If you miss even one payment, you’ll pay more in interest to the card company than they paid back on your purchases for the whole year.

Here’s how I would go about creating a debt plan.

Pay the minimum payment on everything but the 3rd card.  That should pay it off in just over 1 month.  Now, if you insist on using that card for the cash back, you must also insist on paying it off every month.  I suggest taking your receipts home each night and making a bill pay payment for the amount.  If you can live without the cash back on the credit card, you might look into finding a bank account that would give you a cash back on debit card purchases.

After the third card is paid off, start on the personal line.  Pay minimum payments to everything but the personal line.  With a balance of about $3400 at this point, it should take just under 3 months to pay it off.  That gets us to October.  I really don’t think, unless you can find some more disposable income, that you’ll make the November cutoff.  One way would be to sell your stock, but you should be very sure of the tax ramifications of doing so before selling it.  If you do, start with the first item here and work your way down until the money is gone.

Once we have the third card and the personal line paid off, we are left with just card 1 and card 2.  Both have similar interest rates, but the balances are different.  Card 1 has about $2300 in balance and could be paid off rather quickly, so I think that would be a good place to start.  It would take just under 2 months to pay that one off.

That leaves you with only the ~$6000 on Card 2 at the end of the year.  If you are diligent and continue paying the $1500 a month, you can have that card paid off in 4 months.

It will take longer than November unless you sell your stock, but when you are done your financial picture will be so much better for it.  The more you squeeze out of your budget (you do have one right?) now, the faster the debt gets paid off and the sooner you can start planning for your future instead of paying for your now.

Good Luck!