What College Football Can Teach Us About Getting Out of Debt

Here we are in the midst of my favorite time of year. College football season has begun, which means my Saturdays are booked until early December. I love so many things about college football, but none more than cheering on my alma mater, West Virginia University. Watching the Old Gold and Blue rack up 40+ points regardless of the competition is just awesome.

College football is great in and of itself. But since this is a personal finance blog I have to ask: Could it also teach us a thing or two about reducing our debt loads?

I say yes. Here are 5 cool things college football can teach us about getting out of debt:

1. To complete a pass you have to know where your receivers are and where they’re headed

If receivers ran all over the field willy nilly, how would the quarterback be able to predict where to throw the ball? A quarterback has to know not only where his receivers are but where they are headed. This is where plays come in. Offensive coordinators design plays with a goal of advancing the ball down the field. Their ultimate goal is to score a touchdown.

You are the quarterback of your life. Your receivers are your debts. Get out a piece of paper and write down every one of your individual debts including the balances, interest rates and minimum payments. Your credit report will help greatly. When you have them all written down, rearrange them in order from smallest to largest. You will make nothing but minimum payments on all debts except your smallest one, at which you’ll throw every extra dollar you have. When that debt is gone you’ll throw everything at the next smallest and so on. This is called a debt snowball.

Until you have a clear view of the field, you’re not going to complete any passes. Your debts will languish in oblivion, steadily increasing thanks to interest.

Takeaway: Know your debts and snowball your way to success. 

2. To make big hits you have to bulk up

Athletes spend hours each week in the weight room. Why? They realize the more time they spend conditioning themselves before the game, the harder their hits will be during the game. A 250 pound running back is a lot more intimidating and harder to stop at full speed than one weighing 220. Building muscle is so important that most teams have a strength trainer on staff.

In a previous post I talked about an important muscle you have in your frugal toolbox known as the DG muscle. That’s Delayed Gratification for any newbies out there. The gist is that if you deny yourself pleasures now you’ll be better off down the road. In that post I talked about our decision to put off a furniture purchase until we had the money saved up. Avoiding the extra debt was well worth the upfront unpleasantness of hanging on to our old furniture a few months longer.

Just like the athletes, the more you flex this muscle the stronger it gets. When your DG muscle is primed and ready for action, you’ll start saving money everywhere. Take all the money you would have spent on “things” and chunk it towards your debt snowball. Now that’s a big hit.

Takeaway: Practice delayed gratification by flexing your DG muscle often, and put the savings toward your debt snowball. 

3. To handle game day pressure you have to focus

I’ve never played in front of 60,000 screaming fans, but I imagine it’s pretty intimidating. And some of the bigger games are shown on national television, so the pressure is even more intense. How does an 18-year-old handle these situations? In a word, focus. On the ball, on the game, on their coaches; anything but the pressure. A healthy dose of humility helps, but it’s increasingly rare these days.

Your game is your budget. You have a budget, right? Good, because it’s your road map to which you’ll refer back often. In case you haven’t noticed, a lot of products and services out there are clamoring for our dollars. There’s never a shortage of people ready and willing to take money off your hands. These are the screaming fans you’ll have to fight through on your journey to debt freedom.

You have to realize that we’re always one clever marketer’s pitch away from busting our budgets. One vulnerable moment is all it takes for them to swoop in. That’s why you see all those ads everywhere – it’s a numbers game. Advertisers know their ads aren’t going to work on everyone, or even most people. But they work on just enough people to make it worth their time.

Takeaway: Filter out the noise and stick to your budget

4. To graduate in 4 years you must excel in the classroom

You didn’t think every one of these would also apply to the NFL, did you?

College athletes have the double responsibility of preparing and performing in games and doing well in their classes. Many tremendous athletes have unraveled their careers in the classroom.

How do you spend your time outside of school or work? Mindlessly sitting in front of the TV isn’t going to get it done. You need to educate yourself in the basics: what affects your credit score, which types of insurance you need or don’t need, how investing works and so on. You need to be aware of exactly where every dollar is going each month. And you need to learn about creative ways to save outside of couponing and frequenting thrift stores.

Takeaway: Use your noggin to find creative ways to save on things you regularly buy

5. To create a winning strategy, the entire team must be on board

Coaches create plays and make game plans with the assumption that all players will contribute to the success of the team. We’ve all seen what can happen when one player becomes selfish and tries to take the game into his hands. The reality is it takes a team effort. Even great running backs need blocks from teammates to find the end zone.

On your team will be your family members. Your spouse, girlfriend, boyfriend, fiance, whatever. Everyone needs to agree to the plan and follow through with their individual parts. Two people pushing in opposite directions will get nowhere.

Getting out of debt is hard work. A team effort gives support, motivation and accountability to the process.

Takeaway: Gather a team of loved ones, agree to a plan, and support each other through the journey

What’s your favorite team? Can they teach you anything about getting out of debt?

How to Negotiate Credit Card Debt with Collection Agencies

Negotiating with collection agencies can be a challenging task.

When your credit card company realizes you aren’t going to pay up, they sell your debt to a collector at pennies on the dollar. The collector’s goal is to recover the owed amount in full. They know this won’t happen every time, but they’re confident they can at least make their money back in most cases.

Even if you have no legal requirement to pay the debt, you may decide to for moral reasons. If that’s the case you want your payments going towards principal and not to interest. What many people don’t realize is that you can negotiate with the collection agency to lower the interest rate on your balance, helping you pay it off faster.

To negotiate successfully, follow these steps:

1. Prepare a negotiation plan: You don’t need a law degree to negotiate successfully. However, you do need a plan. Educate yourself and know your rights under the Fair Debt Collection Practices Act. Find out whether your account has passed the SOL or Statute of Limitations for your state. Knowing what the law says about debt collection practices puts you on a level playing field with the collector.

2. Calculate the amount you can pay: You need to calculate the amount you can afford to pay to the collection agency before you negotiate a settlement. The total balance and age of the account may determine the amount a collection agency will agree to accept. The debt collector may want you to make a lump sum payment, so you need to offer what you can afford to pay. You can also negotiate with the collector to set up a monthly payment.

3. Provide a settlement offer: Call the collection agency and tell them you want to settle your debt. Include in your offer the amount you can pay and any evidence of hardship that is stopping you from making full payments on the debt. Be polite but firm throughout the process. As a last resort, inform them you may be compelled to file bankruptcy. That might make their ears perk up.

If they don’t cooperate, send a certified letter detailing the terms of your offer.

4. Require the account be reported as “Paid in Full”: What you want to see on your credit report is “Paid as Agreed” or “Paid in Full” instead of “Settled.” If the collection agency reports the account as “Settled” it will adversely affect your credit report.

5. Get the terms of the agreement in writing: When the collection agency approves your offer make sure you get the terms of the agreement in writing before you submit any payment. Before signing the agreement make sure you read it completely. If the terms meet your requirements, send payment via money order. Never give a collection agency your checking account or credit card numbers.

Follow these tips to lower your interest rate, settle your balance and pay off your debt faster.

Author bio:
My name is Marie Nelson. I am a finance writer from California. I write on debt related issues as well and to post on debt relief to personal finance blogs. Click here for more information.

How Retailers Get You to Keep Spending

It’s summer – a time when many of us spend our money on cookouts, swimwear and gas for road trips. But this isn’t all we’re buying. Retailers in more industries are coming up with new ways to get you in the door and keep you coming back.

Take Amazon. Their Subscribe and Save program offers lower prices on a wide variety of goods, which show up at your door at scheduled intervals. They hope these low prices will entice you to sign up to receive products regularly. Then there’s Amazon Prime. For $79 a year you get unlimited free 2-day shipping on most items on their site. Studies have shown that people buy more if free shipping is offered. But for that $79 up front, you start to feel obligated to shop at Amazon more often than you normally would. Finally, their Kindle Fire tablet, which came out in late 2011, hooks you in by encouraging you to download e-books and songs from their online catalog.

Offering the original product at a discount or even free is another way retailers get you into their ecosystem. Printers and razors are two examples.

Manufacturers sell printers at rock bottom prices, often as low as $30, and force you to buy expensive ink refills that cost as much as the original printer. Since all printer cartridges are different, your only option is to buy that manufacturer’s refills. Thus, you’re forced to pay their inflated prices for years and years anytime you run out of ink.

Then there are razors. Companies like Gillette often give away razors for free on college campuses. Then they turn around and sell four-packs of razor heads for about $18. This works out to $4.50 for 3 weeks of shaving. What a ripoff! But I’ll let you in on a little secret. Razor blades are stainless steel. If you take care of them they’ll last for a year or more. In fact, I’ve been using the same razor for 30 months and counting!

Taking care of a razor blade means rinsing it out well, drying it completely and occasionally sharpening it. The best way to sharpen it is to use the inside of your forearm. After every 5 shaves or so, push the razor from your elbow area to your wrist. Your skin acts like leather, and is great for sharpening razor blades.

Retailers use all sorts of strategies to keep you coming back for more. Be aware of this next time you get that screaming deal!

Can you think of any other companies that use this strategy to keep you coming back?

Pay Now or Pay Later?

Decisions, decisions.

Notice the title of this post isn’t “Buy Now or Buy Later.” That’s because you’ve long ago made the decision to buy. Now, you’re trying to decide how long you should wait to pay for it.

Should we pay now or later?

Recently my wife and I were doing a little furniture shopping. We had been saving for a new couch and recliner for our living room for a while, and we had finally reached our goal.

Strolling through the store, I saw a couple talking to a salesman. He was putting their information into a computer, getting ready to process an application for credit. I realized that these people had no intention of actually paying for their furniture that day – they had decided to buy and charge it to a store account.

Then I saw another such couple. It occurred to me that maybe saving up for a purchase puts me in the minority of customers at this little furniture store.

You mean I have to pay for it?

You see, when buying an item, you have to pay for it. The money has to come from somewhere. I don’t think some people get this simple truth. Your credit card company or the store where you’re shopping will gladly give it to you today, but you’ll pay dearly for this money in the form of interest.

Paying later ensures that you’ll always pay more than the asking price. It also means your obligations will increase every month. Essentially, you’re relying on your future self to consistently make on-time payments until the debt is paid off. The problem is, our future selves aren’t very reliable.

The alternative to paying later is paying now. But this is tough. It requires you to sit out of the game for a while until you’ve saved up enough to make the purchase. Who wants to do that? It’s not the glamorous thing to do, and it certainly won’t win you any awards.

But it does offer you some benefits

First, it allows you to remain debt-free. We all know the benefits of being debt-free.

Next, it allows you to earn interest on your savings instead of paying interest to someone else. Your decision to pay now completely transforms the equation. You go from paying more than the asking price and being a slave to your paycheck, to having control of where your money goes. From the back seat to the driver’s seat.

It allows you time to shop around, compare features and prices, and make sure you’re getting the best deal. Do you really need the $300 blender, or will the $60 one do the job just as well? Could you find a discount code to get it down to $50? What’s the price on Amazon? Take time to think about which features you really need.

Finally, paying now gives you time to practice good old-fashioned delayed gratification (DG). As you approach your savings goal, you’re constantly denying yourself the pleasure of having the item. The more you flex your DG muscle the stronger it gets.

Either way you’ll have your item. Paying now, with your own money, sets you free from debt and ultimately puts you in control of your finances.

Photo by smithfurniturestore.com

Student Loan Debt is Crushing Dreams

For our parents and grandparents, going to college wasn’t necessarily a step in gaining a good job and earning a decent living. Fast forward a few decades and everyone assumes that after high school our formal education continues at least four more years.

It’s understood among Gen Y and the Millennials that anyone who wants a well-paying job needs at least an undergraduate degree. But this isn’t an invitation to spend gobs of money to attend any school that accepts you. Likewise, the party scene and the caliber of the football team should have no bearing on your decision.

Instead, take a good look at tuition, fees, room and board, and what level of scholarships and grants are available.  In fact, total cost should be a primary consideration for students in their college selection process.

chart of the day, tuition, home prices, cpi, 1978-2010

This graph shows college tuition compared with home prices and the overall CPI from 1978 to 2010. (The CPI, or Consumer Price Index, is an overall measure of the cost of a set of goods and services paid by consumers over time.) Since 1978, college tuition has increased by a factor of more than 10x from its base of 100, compared with housing at 4x and the overall CPI at about 3.5x. It’s clear as day that college tuition is quickly becoming our next bubble.

This is the reason grads are in a heap of trouble today. Students simply enrolled in colleges regardless of the cost. They filled out some forms, took a quiz and the money just showed up. Now that they’re graduating and faced with dim job prospects, they’re wondering whether that private school tuition was such a good investment.

What many prospective college students fail to do today is think about the total, long-term cost of going to college. When taking out a car loan or mortgage, there are certain terms laid out by the lender that force us to look at the long-term costs, how long we’ll be in debt, and whether we can afford to make the payments each month going forward. Student loans are much more open-ended because of the various repayment and deferment options, which makes it much harder to assess the total costs beforehand. Plus, high school seniors often have no idea what their salaries will be after graduation, so repayment is far from their minds.

My youngest sister is going to college in the fall, which got me thinking about all of this. She’s going into psychology, but isn’t sure what she wants to do with it. Over the past year we’ve talked about student loans occasionally. I remind her of the financial newspapers and blogs, which go to great lengths to document the effects of crushing debt levels on the lives of grads and their young families.

Some couples are putting off marriage, buying a home or having a baby because of their student loan debt. As an example, my wife and I are putting off saving for a house down payment until we pay off more of our debt.

If you have a child or other family member in high school, talk to them about these issues. Help them understand that they’ll eventually have to pay back all those loans. Let them know about other options like scholarships, grants and even going to community college for a year or two.

A college education is an investment, just like stocks or starting your own business. Therefore, students need to think about whether the benefits outweigh the costs for their chosen school and what their likely salary will be based on their major. This will give them motivation to limit their borrowing and think ahead to the repayment process after graduation.

Photo by businessinsider.com

How the Crisis in Europe Affects Your Wallet

Europe is in crisis mode, and nobody seems to care.

Several countries have borrowed and spent much more than they’re able to pay back. Central among them in Greece, which is in danger of pulling out of Europe’s common currency, the Euro.

Greece badly needs a bailout, but European leaders sharply disagree about the best path forward. On one side is Germany, Europe’s bankroller, who swears by the austerity measures they’ve implemented in their own country since the recession began 5 years ago. On the other side is a growing number of leaders from other countries, who believe it’s time for a different solution to the region’s troubles.

But why does this matter to us here in North America? Aren’t they across the big pond, thousands of miles away?

Here’s something you may not have considered. Europe accounts for 21% of all US exports, according to the Office of the US Trade Representative. That means over one fifth of all goods and services produced in this country are purchased by someone in Europe. If European countries and citizens are faced with austerity, do you think they’ll continue to purchase at the same pace as they always have?

A slowdown in Europe directly affects our economic situation here. With Europe buying less, companies have less need for labor, so they don’t require as many employees. Up goes our unemployment rate. Investors lose confidence that Europe will be able to cover their obligations, so stocks move lower. Down goes your 401(k) balance.

All of this causes us to consume less here, which slows down economic activity, prolongs the recession and gives companies even less incentive to hire new employees.

Another interesting trend is that policymakers have become the primary market influencers. Investors are now reacting to their perceptions of policy changes rather than economic data like retail sales and corporate profits. Because governments around the world have intervened to such an extent in the financial markets, the economy is now more dependent than ever on elected officials.

If you weren’t aware of how intertwined the global economy is, you should be now. As nice as it might be, you can’t control what goes on in other countries. Heck, we can’t even control what happens in our own country. But there are some things you can do in your own life to help you ride out these difficult and uncertain times.

Reduce the amount of debt you carry. Debt is a chainsaw to your finances. It cripples your financial health, giving your little margin for error. It requires a portion of your resources every month and gives you nothing in return. It adds pressure to meet obligations and stress and heartache when you come up short. Do everything you can to eliminate the amount of debt in your life.

Build an emergency fund. I’ve written about this several times on this blog. You need a pile of cash (preferably not stashed in the freezer) that you can rely on in a pinch. Start with $1,000 in an online savings account. Then build it to one month of living expenses, then two months and so on. This is your insulation against the bumps in life.

Watch your spending. You can make a budget, track every penny that you spend, or even put your credit cards in a block of ice. Whatever works for you. The point is to think about each purchase and how it makes your life better.

Save for your future. If your employer offers a 401(k) with a match, you have no excuses about why you’re not participating. Contribute up to the match and put the rest into a Roth IRA. Even with the markets on a roller coaster, your best chance of beating inflation is a diversified, low-cost portfolio of stocks and bonds. My favorite are the target-date funds. If you’re not sure how much you should be saving, see this post.

Who knows what will happen in Europe. But one thing is certain – it’s time to get back to basics. Following these tips helps you insulate your finances from the drama that’s playing out in Europe.

Are you worried about the crisis in Europe? What are you doing to protect your finances?

Photo by pbs.org

Paying Off Credit Card Debt Using Winter Weather Analogies

For those struggling with credit card debt, coming up with a repayment plan can be a challenge. Should you focus on the highest-interest card or the one with the lowest balance? What if you have student loans or car loans mixed in? Dealing with so many different monthly payments at once can be overwhelming.

The Motivational Perspective

Which credit card you deal with first depends on two factors. First, there’s the psychological aspect. Many people tend to pay off the lowest-balance card first because of something known as “debt account aversion.” That is, we aim to limit the number of open accounts we have.

Paying off the smallest card first means one less account we have to deal with. Getting rid of one balance is a small victory, which gives us motivation to move forward with our plan. Experts have come up with a cute name for this strategy: Debt snowballing. The idea is that you build momentum by paying off smaller accounts first, then putting those payments towards larger accounts.

This path certainly makes sense from a motivational standpoint, but is it best for you wallet? You also have to consider the financial aspect of debt repayment.

The Financial Perspective

From a purely financial perspective, paying off the highest-interest card first makes the most sense. Using this method you’ll pay less in total interest to the credit card company and reduce the time it takes to repay the debt.

Let’s say you have two credit cards. One card has a balance of $8,000 at 19% and the other is $5,000 at 15%. Both have minimum payments of $40. Psychologically, you’d be tempted to pay off the $5,000 balance first to eliminate one of the accounts. But I’ll show you why this is bad for your wallet.

Making the minimum payment, it will take you over 10 years to pay off both balances. But since you’re on top of things, you have an extra $300 to put towards the cards each month beyond the minimum. Where should you put this extra money?

By paying $340 to the $5,000 card and the minimum to the $8,000 card it would take you 49 months and cost $5,575 in total interest.

On the other hand, by paying off the larger card first it’ll take you 47 months and cost $4,754 in interest. Focusing on the higher interest rate first saves you $821 and will take you 2 months less to pay off both balances.

You’re probably thinking that $821 is a lot of money, and you’d be right. But let’s say you cut back on eating out, giving you an extra $100 a month to put towards the cards. It will now only take you 35 months to pay off both balances, a full year less. Not only that, it will save you another $1,343!

Applying every bit of extra money you have each month to debt repayment is known as “snowflaking.” Snowflakes can come from anywhere – income from a side job or savings from decreased expenses.

Which Strategy is Right for You?

Your repayment plan should depend on your personality. If you’re very disciplined with money, focusing on the highest-interest card first is probably your best strategy. On the other hand, if you think you’ll need small victories as motivation to stay in the game, paying off low balances first (the snowball method) might be your best bet.

No matter which strategy you choose, your goal is the same: to pay off the debt. Having the numbers in front of you will only increase your focus. Use a debt repayment calculator like this one to help you build and track your strategy.

Which repayment strategy makes the most sense to you?

Photo by blog.austinkids.org