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Credit Card Catastrophes: 12 Debt Traps Smart People Fall Into Without Realizing

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Credit card problems are shockingly common, and once you start to accumulate credit card debt, finding a way out of the hole isn’t easy. That’s why it’s critical to avoid credit card debt traps as much as possible. By doing so, you can maintain your financial health. If you aren’t sure where the issues lie, here’s a look at 12 credit card debt traps that smart people fall into without realizing it.

1. Introductory APRs

Introductory APRs are low interest rates advertised as a form of incentive, essentially encouraging people to open up new credit cards. While those rates are usually incredibly enticing, the issue is that they don’t last. If you carry a balance beyond the introductory APR period, a higher interest rate will start applying. That can cause a debt (and the related payments) that once felt manageable to become incredibly cumbersome.

2. Balance Transfer Promotions

Like introductory APRs, balance transfer promotions usually allow cardholders to get a lower-than-typical interest rate on balances transferred from another card for a specific amount of time, such as 12 or 24 months. While they’re often enticing – particularly if the debt originally had a high APR – they aren’t always the best deal.

Balance transfers typically come with a balance transfer fee, which is often between 3 and 5 percent. Plus, once the promotional period ends, the regular APR applies to that balance.

Generally, a balance transfer is only a good deal if the associated fee is less than the interest that would have accumulated during the promotional period. Additionally, if the new card’s regular APR is higher than the previous card’s interest rate, the balance transfer may only provide real value if that amount is paid off before the new card’s APR comes into play. Ultimately, doing the math can help cardholders determine if the deal is solid or if it only seems good if you don’t look at the details.

3. Late Payments

Late payments on any debt can come with consequences. At a minimum, you may owe a late fee, and that may be sizeable. In some cases, late credit card payments also trigger a penalty interest rate, causing interest to accumulate far quicker than it did previously.

Usually, the penalty interest rate is the biggest issue, as the difference between the previous APR and the penalty APR is often sizeable. Plus, most credit card issuers leave the penalty interest rate on your account for at least six months, and failing to make those upcoming payments on time can extend the duration.

4. Special Financing Options

Some credit cards have special financing options for specific types of purchases. For example, one of the more common versions involves a “same as cash” repayment period. During the time window, the interest rate for that specific purchase is usually a very low rate, such as 0 percent. However, if you don’t pay off that balance by the time that time period ends, your total owed may skyrocket.

The reason the total owed can climb dramatically is due to what happens after the promotional repayment period ends. At that point, it’s not just that the card’s usual interest rate applies. In some cases, you’ll also owe the interest that would have accumulated (based on the card’s regular APR) since the purchase occurred. That can cause a sizeable balance increase to happen all at once, and it can easily leave you with far more debt than you expected.

5. Overspending

One of the biggest credit card problems is that credit cards can increase your chances of overspending. A splurge might not seem like an issue since you can pay the balance off over time. However, the problem is that it’s easy to fall prey to that kind of thinking. Then, a single splurge turns into two, then three, then four. The next thing you know, you have a sizeable credit card balance to contend with, and it can put a severe strain on your budget.

6. Getting Lured in by Perks

Many credit cards offer a variety of perks, such as cashback or rewards points you can spend. The issue is, if you’re carrying a balance and paying interest, what you’re getting in perks is usually significantly offset by what you’re paying in interest. Plus, the presence of perks may encourage you to use your credit card more often, increasing your chances of charging more than you can pay off in full at the end of the billing cycle.

Generally, perks only provide real value if you don’t carry a balance. That’s particularly true if it’s a credit card with a high interest rate.

7. Skipping Payments

Some – but not all – credit cards allow cardholders to skip the occasional payment without any penalty. While this may be helpful if you experience an unexpected financial hardship and need some breathing room, it’s critical to remember what happens. Any interest associated with the skipped payment ends up added to your balance, and it will start accumulating interest, too. That can have a surprising impact on the amount of debt you’ll have to tackle, particularly if you skip a payment whenever the opportunity arises.

8. Interest Rate Adjustments

The vast majority of credit cards come with variable APRs. That means the interest rate is impacted by changes to the prime rate, which is set by the Federal Reserve. So, if the Federal Reserve raises rates, your credit card’s APR can climb to match that increase. Along with increasing how much interest you generate, it also leads to a higher minimum payment.

9. Withdrawing Cash from an ATM

Many credit card companies allow cardholders to withdraw cash from ATMs. Essentially, credit card users can tap into their credit limit but gain the convenience of spending physical money.

Now, most cardholders understand that any cash withdrawn can accumulate interest, just as charges do when using a credit card at a register. However, some people don’t realize that credit card companies often charge additional cash-advance fees when they use the card to withdraw cash from an ATM. While the cash-advance fees may seem small, some are as high as 5 percent. Plus, there may be ATM surcharges, too.

Ultimately, using an ATM for a cash advance can lead to a lot of fees, pushing your balance up quickly. If you don’t pay everything off when the bill cycles, then you’ll owe interest on the withdrawn amount and any charged fees, too, causing a simple transaction to cost a lot more than most people expect.

10. Making Only the Minimum Payment

With installment debt, making only the minimum payment isn’t always problematic. Those types of debts – often in the form of loans – have a definitive end date. As a result, if you make the minimum payment, you’ll pay off the entire balance within the preset number of months (typically no more than 84, which works out to seven years, not including mortgages) without issue.

Credit cards work differently. The minimum payment is based on a percentage of the total balance and any newly accumulated interest. Suggesting you don’t rack up any new charges, the minimum payment you owe shrinks over time. As a result, even if you make the minimum payment each month like clockwork, it could take several years, if not decades, to pay the balance in full.

Precisely how long it takes does depend on the total balance, with smaller balances taking less time. Still, it’s easy to fall into a trap by not realizing how long you’ll carry credit card debt even if you pay what’s required. Plus, that means you’re paying substantial sums just to cover the interest, which can harm your budget and financial health.

11. Limited Access to New Credit

While having a credit card can be beneficial to your credit score if you limit how much you use it and make your payments on time, there are plenty of situations where credit cards can hurt your ability to secure new credit. Your credit limit size can impact your access to new credit cards or loans, as lenders factor in the total amount you could borrow, not just your existing balance.

Similarly, mishandling of your credit card – such as late payments – can harm your credit score. That may also make securing new credit harder.

12. Fraudulent Charges

Generally, credit cards offer better protection against fraudulent charges than debit cards. However, if an unauthorized purchase occurs, you have to report it to your credit card issuer within 60 days of receiving the statement with the fraudulent charges on it. If you don’t, you can be on the hook for the amount spent, regardless of whether it was unauthorized. While this isn’t usually an issue for anyone who carefully reviews their transactions regularly and will quickly report any suspected fraud, it could be an issue for anyone who doesn’t monitor their bills, leading to additional debt they didn’t expect.

Do you know of any other credit card problems that can get people in over their heads? Do you have any tips that people can use to help manage their credit card debt more effectively? Share your thoughts in the comments below.

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Escape the Debt Trap: 10 Genius Ways to Pay Off Loans Faster

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escaping the debt trap

Are you struggling with debt and feeling overwhelmed by your monthly payments? Do you want to get out of debt faster and save money on interest? If so, you’re not alone. Millions of people are in the same situation, but there is a way out. In this article, we’ll share 10 genius ways to pay off your loans faster and escape the debt trap for good. Whether you have student loans, credit cards, car loans, or any other type of debt, these tips can help you achieve financial freedom sooner than you think.

1. Make a budget and track your spending

The first step to paying off your loans faster is to know where your money is going and how much you can afford to pay each month. A budget is a plan that helps you allocate your income to your expenses, savings, and debt payments. By tracking your spending, you can identify areas where you can cut costs and free up more money for your loans. Many apps and tools can help you create and stick to a budget, such as Mint, YNAB, or EveryDollar.

2. Use the debt avalanche method

The debt avalanche method is a strategy that involves paying off your loans in order of interest rate, from highest to lowest. This way, you can save money on interest and pay off your loans faster. To use this method, you need to make the minimum payments on all your loans, and then put any extra money toward the loan with the highest interest rate. Once that loan is paid off, you move on to the next highest interest rate loan, and so on until you’re debt-free.

3. Use the debt snowball method

snow ball method

The debt snowball method is another strategy that involves paying off your loans in order of balance, from smallest to largest. This way, you can build momentum and motivation as you see your loans disappear one by one. To use this method, you need to make the minimum payments on all your loans, and then put any extra money toward the loan with the smallest balance. Once that loan is paid off, you move on to the next smallest balance loan, and so on until you’re debt-free.

4. Refinance your loans

Refinancing your loans means replacing your existing loans with a new one that has a lower interest rate or a shorter term. This can help you save money on interest and pay off your loans faster. However, refinancing may not be for everyone, as it may come with fees or penalties, or affect your credit score. You also need to have a good credit score and income to qualify for a lower rate. Therefore, before refinancing, you should compare different offers and weigh the pros and cons carefully.

5. Consolidate your loans

Consolidating your loans means combining multiple loans into one with a single monthly payment and interest rate. This can help you simplify your finances and reduce the risk of missing or late payments. However, consolidating may not always save you money or help you pay off your loans faster, as it may extend your repayment term or increase your interest rate. Therefore, before consolidating, you should do the math and make sure it makes sense for your situation.

6. Make biweekly payments instead of monthly payments

Making biweekly payments means paying half of your monthly payment every two weeks instead of once a month. This can help you pay off your loans faster and save money on interest, as you’ll end up making 13 full payments per year instead of 12. However, not all lenders allow biweekly payments or may charge a fee for doing so. Therefore, before switching to biweekly payments, you should check with your lender and make sure it’s beneficial for you.

7. Make extra payments whenever possible

Making extra payments means paying more than the minimum amount due on your loans each month or making additional payments whenever you have extra money. This can help you pay off your loans faster and save money on interest, as you’ll reduce your principal balance and shorten your repayment term. However, some lenders may charge a prepayment penalty or apply your extra payments to future interest instead of principal. Therefore, before making extra payments, you should check with your lender and specify how you want them applied.

8. Use windfalls and side hustles to pay off your loans faster

Windfalls are unexpected or irregular sources of income, such as tax refunds, bonuses, inheritance, or gifts. Side hustles are ways to earn extra money outside of your regular job, such as freelancing, tutoring, babysitting, or selling stuff online. You can use windfalls and side hustles to pay off your loans faster by putting them toward your debt instead of spending them on other things. This can help you accelerate your debt payoff and achieve financial freedom sooner.

9. Negotiate with your lenders for lower interest rates or better terms

Negotiating with your lenders means asking them to lower your interest rates or modify your repayment terms to make them more favorable for you. This can help you save money on interest and pay off your loans faster. However, negotiating may not be easy or successful, as it depends on your lender’s policies and your financial situation. Therefore, before negotiating, you should prepare a convincing case and have a backup plan in case they say no.

10. Seek professional help if you’re overwhelmed by debt

Seeking professional help means getting advice or assistance from a reputable debt relief company or a certified credit counselor. They can help you evaluate your options and find the best solution for your debt problem, such as debt management, debt settlement, or bankruptcy. However, seeking professional help may not be cheap or risk-free, as it may come with fees or consequences for your credit score. Therefore, before seeking professional help, you should do your research and compare different providers and programs.

Paying off your loans faster can help you escape the debt trap and achieve financial freedom sooner. By following these 10 genius ways, you can reduce your debt burden and save money on interest. However, remember that there is no one-size-fits-all solution for debt payoff, and what works for someone else may not work for you. Therefore, you should choose the methods that suit your goals, budget, and personality, and stick to them until you’re debt-free.

Read More:

California’s Debt Relief Programs and their Impact on Individuals

What Steps Should I Take to Avoid Indebtedness?

What Happens When You Fall Behind On Your Mortgage?

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what-to-do-when-youre-behind-on-your-mortgage
What does the bank do if you’re barely hanging onto your mortgage? What if you’re still a little behind, or a lot behind, on your mortgage?

First, it depends on your definition of behind.  It may not be the same as the bank’s definition (not shocking). Let’s examine:

1 – 15 Days Late

Most companies allow a 15-day grace period before tacking on any additional fees.  I know that being self-employed, my mortgage company calls me on the second of the month if I didn’t pay on the first, but there’s nothing to worry about if you’re “behind” less than 15 days.  No big deal.  That’s why they call it a “grace” period.

15 – 30 Days Late

If you’re in that 15 to 30-day time frame, prepare for a ton of telephone calls from your mortgage service provider (probably between two and four a day).  You’ll also begin receiving letters reminding you that if you forgot to pay your bill, now would be the perfect time to make that payment.

Back when my income was very unsteady, a sneaky trick my mortgage company would pull was to send out another bill insinuating that I was two months behind and that if I disagreed with them I should call ASAP.  Sneaky snake oil salesmen they were.

During this fifteen to thirty day period, if you can’t pay, don’t worry about the phone calls.  You’ll have to pay a small late fee of some kind, but there still won’t be any damage to your credit report.

30 – 59 Days Late

It’s important to note here:  If you’re running up against that 30-day late period, it’s best to drop everything and pay your mortgage.  Even if you’re habitually late 29 days; it’s better than being 30 days late from a credit reporting standpoint.

Now the letters and phone calls increase dramatically until you’re 60 days late.  Your credit report will note your current late status. Your credit score will fall.

60 – 90 Days Late

Here the phone calls and letters will cease.  Does the mortgage company give up?  Ah…that would be nice, but alas, no.  They change tactics.

Once you’re over 60 days late, they’re going to send someone out to your house, just to make sure it and you are still there.  You can see these people coming a mile away.

They circle your block two or three times, usually, they don’t look like they belong in your neighborhood, then they run up to your front door, peer in a window or two and leave a note on your door saying “Sorry we missed you.  Please call us at once.”

It’s at this point you should start preparing for your next steps.  If you’re 60 or 90 days past due, it’s probably a lingering problem, but all hope isn’t lost.

The best thing you can do when you’re behind is to communicate with your lender.  Home lenders have instituted a number of programs to help you work through your late status.

The second biggest thing to remember is that the people you talk to don’t know you and you don’t know them.  They don’t care about your problems.  It makes no difference to them whether you stay in your house.  They’re a thousand miles away in a cubicle.  Stay calm while talking to your lender.

When you’re behind more than 30 days, you need to start talking – but don’t wait until it’s too late.  Call your mortgage company, explain your personal circumstances, and begin laying the groundwork to solve the problem.

Can you pay the late payment over a couple of months?  How about rolling that payment to the back of the mortgage?  Can they waive a fee or two?  Sometimes they will, sometimes not, but you’ll never know if you don’t ask.

Next week I’ll talk about the different options you have when you’re really behind on your mortgage and what they all mean.  Stay tuned!

For more on paying off your Mortgage and ways to help you do it check out these articles.

Pay a Little Extra on Your Mortgage – What a Difference it Makes
6 Tips for Paying off Your Mortgage Quickly (Without Going Broke)
Don’t Be Afraid to Refinance: 6 Options to Meet Your Financial Needs

Photo: Hanging On: Jess2284

 

*Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see website for full disclosures: www.crgfinancialservices.com

Financial Planning Basics: The Financial Pyramid

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The first time I heard about the financial pyramid, I was instantly intrigued. I had never thought about it in this concept before, but I unintentionally had been practicing this in my own life.

In finances you have to build the base before you can reach the top or it will all fall apart, hence the allegory of a pyramid.

financial-pyramid

The Base

The base of your financial pyramid should be a solid financial plan. This includes your written budget, short-term and long term goals, and how you will make your income as well as an investment plan to be implemented in the future.

You should have a positive cash flow, meaning, no longer using debt to fund your lifestyle.

RELATED: The Importance of a Personal Investing Statement

Once you have implemented the base, you can move onto the first building block: protection.

Protection

You must protect yourself from the unimaginable, so I recommend everyone have a will and power of attorney, insurances such as life, health, auto, homeowner’s/renter’s, and disability, and a basic emergency fund of at least $1,000-$2,500.

I was thankful to have my mini-emergency fund when I had some car issues because I was able to pay cash to repair them instead of having to go into debt. The overall pyramid looks something like this:
the-financial-planning-pyramid

The second building block is low-risk wealth accumulation. This would include saving for a home, retirement, and children’s college education, in addition to reducing consumer debt.

Debt Reduction

Financial guru Dave Ramsey teaches that you should get completely rid of any debt before beginning savings, although, in my opinion, you should still invest in retirement while reducing debt only if your employer offers a match.

I, myself, am in the debt reduction stage but still contribute to my retirement account since my employer offers up to a 4% match into my 401(k).

Additionally in this step, you should create your emergency savings fund. Many people believe an emergency fund of 3-6 months’ worth of expenses is adequate.

Investing

The third building block is high-risk wealth accumulation.  This includes investing. Expanding on the second block, in this stage, you will max out your retirement accounts and then build a non-registered investment portfolio.

Once you have built your net worth to an amount sufficient to fund your lifestyle and retirement, you can move to the next stage of investing– speculation (also known as speculative investing.) In this stage, you invest money into investments such as start-up companies.

This is very risky, so you don’t want any debt by this stage. Also, you should only invest a small portion of your total investments into speculation. Also in this stage, you’ll want to begin tax planning, especially as your retirement investments increase.

Estate and Charity

The final building block is wealth distribution. You’ll gift and spend the money you have earned. As well as plan your estate for future generations or charity upon your death. Since your net worth increased quite a bit since you first started the financial planning pyramid, you should update your will and/or trust.

Finally, once you’ve got these basics nailed down, it’s time to hire some help. One approach a lot of millennials use is robo-advisors. A robo-advisor is a machine that uses various theories about portfolio allocation to make investing decisions. If you’re interested in a critical review of this, consider checking out Roboadvisorpros.com, they have a good article on the topic.

For help getting your financial pyramid in order, check out these great articles.

Yes, Financial Planning Matters – Here is Why
Best Free Financial Advice
Become a Financial Expert Step-by-Step

Analyzing California’s Debt Relief Programs and their Impact on Individuals and the State Economy

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Rising inflation and fears of a possible recession have put a strain on household and company budgets alike. As a means of navigating some of the uncertainty, California launched programs designed to boost the economy and provide people with some financial breathing room. Primarily, these took the form of stimulus packages, giving qualifying individuals influxes of cash that could potentially allow them to make ends meet with greater ease. However, these programs did cause some people concern, as many worried about the impact on the economy. Here’s a look at the California stimulus and how this CA debt relief impacted the economy.

How Did the California Stimulus Program Work?

In the aftermath of the pandemic, many Californians received several rounds of stimulus checks to help them make ends meet. Initially, they were designed to boost income after the pandemic caused many to experience significant losses. Subsequent rounds often targeted other financial strains, such as offsetting the impact of inflation.

Recipients of the stimulus were able to receive the funds in several ways. Direct deposit or checks were often available, and some could even have the money onto a prepaid debit card for ease of use.

There was also additional aid available for some households. Those types of relief were often a bit more targeted, such as providing rent or utility bill assistance. Additionally, the state temporarily suspended diesel fuel sales taxes.

While the influx of cash was well-received by those who qualified for relief, it also spurred fears about the potential impact on inflation. Typically, reducing inflation requires a decrease in overall spending. Essentially, supply and demand have to hit an equilibrium to prevent prices from continuing to rise. If more money is available to spend, that could stimulate an economy that’s already struggling to bear the weight of demand, and the outcome is usually higher prices.

However, there’s some debate about whether the stimulus had an inflation-boosting effect. Some experts felt that it could push prices higher, while others stated any impact would be minimal. Ultimately, since the release of the last round of stimulus checks, it appears that the latter is true. The inflation rate in California has largely been on the decline, with only small, short increases showing.

Ultimately, inflation peaked in June 2022, and Southern California even saw a 26-month low based on May 2023 data. As a result, it appears that the stimulus didn’t negatively impact inflation.

Was the California Stimulus a Type of CA Debt Relief?

While some consider the California stimulus checks a type of debt relief – as many decided to use the funds to address their debt – they were technically something different. The stimulus money – aside from targeted programs – could be used for functionally any purpose.

Recipients weren’t limited to using the funds to pay off debt and could instead use the cash to handle living expenses, boost their savings, or do nearly anything else they’d like. As a result, calling it CA debt relief wouldn’t be an accurate description.

Are There Other CA Debt Relief Options?

As is true in essentially every part of the US, most California residents do have debt relief options that they can explore. In most cases, nonprofit credit counseling services that are properly accredited are a solid choice. They can assist people with creating a workable budget, which may be enough to get back on track financially. However, they may also be able to set up debt repayment plans that are more affordable than the current debt payments a person is making. Plus, most debt repayment plans have a single monthly payment, making them easier to navigate.

Californians may also be able to access other programs, though these don’t necessarily qualify as debt relief. For example, food assistance via SNAP programs or food banks can free up room in monthly budgets, potentially making debt payments easier to manage. Veterans also often have access to various programs through the VA, and they’re worth exploring if you qualify and are experiencing hardship.

What’s critical to remember when exploring CA debt relief programs is scams are widespread. Some fraudsters state they can functionally wipe out your debt in exchange for a fee, which isn’t usually possible outside of formal bankruptcy proceedings.

While reputable credit counseling services may charge modest fees for their services, they’re honest about how the program works and what it can do. Any organization that claims it can erase your debt should give you pause. Similarly, if the fee to get started is high, do additional research before moving forward.

 

How do you think the CA debt relief programs impacted individuals and the state’s economy? Do you think the programs were a good idea or a bad move? Share your thoughts in the comments below.

 

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3 Things You Should Do When Tackling Debt

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You can find yourself in debt for various reasons. It may be that you recently went through a divorce. Perhaps you were in an accident, or it could be that your expenses are more than what you can handle. Whatever the case is, now you’re trying to tackle that debt and get out of the red. Follow these suggestions, and soon you will see your bank account balance returning to something more comfortable for you and your family.

1. Take Your Accident to Court

If you were injured in a situation that was no fault of your own but didn’t do anything about it, now is the time to start thinking about getting what you’re owed. Almost all personal injury cases, 95% to 96%, are settled before they get to the courtroom. So, if you avoided going through the proceedings because you simply didn’t want to deal with it, now is when you should speak to an attorney.

The money you get from a case like this will help pay for lost work hours and alleviate the medical bills that are likely a decent portion of your debt. In addition, some lawyers can win additional compensation for pain and suffering, so you can use that money to pay for any other bills you may have fallen behind on because of your accident.

2. Review Your Alimony

Reviewing your alimony payments is essential when getting out of debt. According to Statista, in 2019, there were approximately 750,000 divorces registered in the United States, so rest assured you’re not alone in this. Alimony payments are a significant financial obligation for many people post-divorce. If your money situation has changed since your divorce, you may be able to renegotiate the terms and lower your monthly payments. This, in turn, will free up money that you can use to pay off your debts.

Additionally, say you have been paying alimony for a while. In that case, it’s a good idea to check if your agreement has a review clause that allows you to revisit the terms after a set period. It’s also important to remember that alimony payments are tax-deductible, so reducing your costs could result in a higher taxable income, further impacting your financial situation. Working with a financial advisor or attorney is critical to help you navigate this complex process.

3. Consider Updating to Solar

Installing solar panels is an intelligent choice for anyone looking to get out of debt. Not only does it help the environment, but it also reduces your monthly energy bill. Unfortunately, the energy cost continues to rise yearly, but by investing in solar panels, you can lock in lower prices for decades. It’s estimated that you will benefit from the savings related to solar for at least 40 years, with solar panels included adequately in your infrastructure.

Reducing your monthly utility bills frees up more cash to pay off debt. Solar panels can also increase the value of your home, so it’s a wise investment that pays off in multiple ways. By installing solar panels, you’ll take control of your finances, reduce your carbon footprint, and make your home more energy efficient. It’s a win in more ways than one!

In conclusion, there are several ways to get out of debt, including taking your accident to court, reviewing your alimony payments, and updating to solar panels. Legal action for a personal injury case will help you get compensation for lost work hours and medical bills while renegotiating alimony payments frees up money for debt repayment. Updating to solar panels reduces monthly energy bills so that you will have less money going out regularly. These suggestions effectively tackle debt and bring your bank account balance back to a more comfortable level. However, working with an advisor is essential when taking control of your finances and making positive steps toward a debt-free future.

Tips You Can Use to Recover From Debt

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When it comes to debt, finding out where to start can be one of your biggest hurdles. Your debt recovery time depends on how much debt you’ve incurred, how long that debt has been building, and the type of debt. There are many different types of debt. Some are easier to manage, while others can drown you. The good news is that recovering from debt doesn’t need to be a scary process. All it takes is some dedicated money management and budgeting.

Balancing Repayments With Living Costs

While it’s tempting to repay as much debt as you can monthly, there may be one area that can be forgotten. According to the Office of Efficiency and Renewable Energy, the average household spends $1,945 a year on heating, cooling, appliances, electronics, and lighting. This number can vary depending on home size and area of residence.

These are costs that can not be left out of your budget. When creating a budget for your debt, all potential costs need to be included. This way you can budget out living expenses, including food, along with your debts. This process will let you know if there are any months where you have more funds that can be set aside for savings or that can go towards a higher-than-normal debt payment. Getting out of debt shouldn’t come with the thought process that you can’t spend any money on yourself. Finding some way to treat yourself and saving towards that goal is a good way to reward yourself for knocking down significant amounts of debt.

Don’t Make Minimum Payments

While making minimum payments can seem like an attractive tactic to balance out your living expenses, in the long run, you’re hurting yourself. Making the minimum payment means that by the end of paying off your loan or line of credit, you will have paid significantly more than the initial money that you spent. Interest rates are stacked each month. Depending on your interest rate, these percentages can be excessively high.

If you have multiple sources of debt, create a spreadsheet. This way, you can easily see the full balances, interest rates, and payment dates. This is an easy way for you to look at it and make decisions about how much of your monthly budget will be put toward that particular debt. While you may have to tighten your belts in other areas for a little while, getting rid of high-interest-rate debts is in your best interest.

Pay on Time

This should go without saying, but making your debt payments when they are due is a must. While not all forms of debt come with late payments, many of them do. You also run the risk of being taken to a collection. All of this will damage your credit score and can prevent you from getting a home or a car in the future.

Know Your Options

If you’re struggling with debt, there are ways to help you repay it. For example, if you are left paying large amounts of money for an injury, you can take the other party to court. Typically, these amounts aren’t worth the effort that it takes to go to trial and 95% are settled outside of court. If you’ve wracked up a significant amount of medical bills, many hospitals offer reduced rates and payment plans for those who qualify.

Debt can also be consolidated. When you consolidate your debt, all debts are combined usually at a lower interest rate. This can make it easier to pay down significant amounts of debt with less penalty for yourself.

Overall, you have a few different options when you are facing debt. It’s important to do research to see how you can make savings in your everyday life. For example, a new asphalt shingle roof can give you a 62% ROI. Follow these tips if you’re facing debt.

What Is Indebtedness And How Do I Avoid It?

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What Is Indebtedness And How Do I Avoid It

Many people have heard that indebtedness can lead to financial troubles. But what exactly is indebtedness, and how do you avoid it? Fortunately, the concept of indebtedness is pretty easy to understand. Additionally, it’s possible to prevent indebtedness – or keep it manageable – with some planning. If you’re wondering what indebtedness is and how to avoid excessive debt, here’s everything you need to know.

What Is Indebtedness?

In the simplest sense, indebtedness is the state of owing something to someone else. Traditionally, people use indebtedness to describe financial debts, such as credit cards, loans, or mortgage balances. However, it can also apply to the sense of owing someone for doing you a favor, leading you to feel obligated to return that favor in kind at a future date.

For the purposes of this article, the focus is on traditional financial indebtedness, primarily involving owing a lender based on previously borrowing money. Often, that form of indebtedness creates the biggest challenges for households, so it’s wise to have a plan for avoiding it specifically.

How to Avoid Indebtedness

Have a Dedicated Emergency Fund

When it comes to avoiding monetary debt, your best starting point is to build an emergency fund. This allows you to have some cash set aside to deal with the unexpected, ensuring you don’t have to turn to credit cards or loans to cover a cost that catches you off guard.

If you don’t have anything set aside for emergencies, make $1,000 your first target. Usually, that’s enough to cover a vehicle, renter’s, or homeowner’s insurance deductible, ensuring you aren’t struggling should an accident, fire, or similar incident occur. Plus, it can cover a wide array of other emergencies, such as an unplanned medical bill, car repair, or appliance breakdown.

Once you have $1,000 set aside, work on increasing the balance of that savings account. Build up to one month of household expenses, then shift up to three months. That can help you weather larger emergencies or a short period of unemployment.

When you gather up three months of expenses, you can choose a new target. Some people feel most comfortable with six or 12 months of household costs, as that can cover major emergencies or an extended period of unemployment.

Whenever you tap into your emergency fund, focus on building it back up once the situation resolves. That allows you to restore this critical cushion, making it easier to avoid indebtedness long-term.

Create a Reliable Budget

In some cases, debt is generated because households don’t plan for their spending needs. As a result, they overspend during the month, having little choice but to turn to credit cards or loans to cover any remaining expenses until their next payday.

By having a reliable, formal budget, you have a spending roadmap. You know how much it takes to cover your bills and debt payments, as well as handle costs relating to food, gas, utilities, and more.

Often, the easiest way to start is to review your spending habits over the past several months. That allows you to determine how much you’re spending in various categories. Then, create a simple list – ordering debts and other costs by their due date – and outline how much of your income needs to go to that expense.

If you have money left over, commit some of it to savings. Additionally, it’s wise to include “fun money” in your budget, giving yourself a small amount that you can use as you please for entertainment, items that are wants instead of needs, and similar purchases.

Make Saving Automatic

Since having money in savings can help you deal with emergencies or plan for larger upcoming expenses – such as home repairs, vehicle down payments, future appliance replacements, and more – making your savings routine automatically works in your favor. By automating your savings, you ensure that you don’t accidentally forget to move that money into the proper account.

Designate a specific amount from each paycheck that needs to go to savings. Then, set up a recurring, automatic transfer for the day your pay arrives (or the following business day if payment delays may occur). That ensures your money is moved in accordance with your plan without you having to physically manage the transfer every single payday.

In most cases, you can set up several transfers to different accounts every month. As a result, you can move cash into several accounts, allowing you to divide up the money based on individual savings goals.

Adopt a Cash-First Mindset

In some cases, using credit cards or loans to pay for various items feels like a quick, convenient option. However, the more debts you acquire, the harder they typically are to manage. Even if the monthly payments are reasonable, you’ll have more due dates to juggle. Plus, if you experience financial hardship or underestimate what you’re currently paying, you could quickly find yourself in over your head.

Additionally, debts typically come with interest payments. As a result, you’re spending far more by financing a purchase than if you used cash. If you rely on cash instead, you’ll have more money to direct to other goals or needs, including saving for retirement, a college education, a home, and more.

Instead of relying on debt, adopt a cash-first mindset. Make it a goal to use as little borrowed money as possible. For example, instead of financing an entire vehicle purchase, at least prepare a sizeable down payment in advance. That ensures you can keep the loan as small as possible.

Similarly, resist the urge to use a credit card to cover the cost of want if you can’t pay off the balance in full right away. While it could mean delaying a purchase, it saves you a significant sum in the long run.

Use the 72-Hour Rule

With the 72-hour rule, you don’t purchase any spur-of-the-moment wants right away. Instead, you wait for 72 hours after learning about the item before deciding if you’ll ultimately buy it.

The delay allows any immediate emotional reaction that can come from initially seeing a product to dissipate, allowing you to look at the purchase more realistically. In many cases, you’ll determine that moving forward with buying the item isn’t actually a smart move, allowing you to walk away. However, if you still want it, it can make you more confident about your decision.

This strategy isn’t just helpful when it comes to items you’re thinking about financing; it can apply to cash purchases, too. By using it at all times, you avoid spending money in a way you might regret later, allowing you to focus your spending on items that are more likely to be beneficial.

Pay More Than the Minimum

If you can’t pay the debt off in full right away, it’s wise to put forth an extra effort to knock down the balance quickly. Unless there is a stiff penalty for paying off a debt early, work to pay more than the minimum payment on at least one debt. Ideally, you want to focus on the debt that has the highest interest rate. By doing so, you can reduce the amount of interest you’ll need to pay over the life of that debt dramatically, resulting in financial gain.

Once you tackle the highest interest debt, you can move on to the one that now has the highest interest rate. Continue working through your obligations in this manner, and you can tackle what you owe in less time.

Increase Your Credit Score

Having an excellent credit score can actually help you avoid certain trappings that can come with borrowing money. Generally speaking, the higher your credit score, the better the borrowing terms. You’ll have an easier time securing low-interest rates on credit cards and loans when you do need them, which can make managing – and paying them off – easier.

Usually, the foundation of an excellent credit score is sound borrowing habits. Make your monthly payments on time, keep your credit utilization ratio low, and avoid opening unnecessary accounts. Maintaining a good credit mix – featuring a small selection of loans and credit cards in your history – can work in your favor, too, as it shows that you can handle different types of debt effectively.

Ultimately, while using credit cards and loans result in debt, when used responsibly, you won’t be overwhelmed by it. As a result, indebtedness won’t necessarily become an issue, allowing you to maintain a favorable financial picture while keeping your credit score up.

Do you have any other tips that can help someone avoid indebtedness? Have you used any of the strategies above and want to tell others about your results? Have you found your way back from indebtedness and want to share your experience? Share your thoughts in the comments below.

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Retirement Bill in Congress

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Congress has a new retirement bill in the works. They’re calling it Secure 2.0 and it has a few transformational pieces to it that will change retirement saving and retirement income planning. Before we get too far into what this new bill looks like, let’s take a look at what the original Secure Act did.

Secure Act 1.0

The Secure Act was enacted on January 1, 2020, and was the largest retirement reform bill since the Pension Protection Act of 2006. The full title is Setting Every Community Up For Retirement Enhancement (SECURE). And it passed through Congress with a 417-3 vote.

The beginning age to which to start taking required minimum distributions (RMD) from retirement accounts (excluding Roth accounts) was moved from 70 ½ to 72.

People can make retirement contributions no matter what age, as long as they have earned income. The previous limit was 70 ½ when RMDs would begin.

Inherited IRAs (non-spouse beneficiaries) have to have the entire account withdrawn within 10 years of receiving it. This means that if someone passes away and their beneficiary is someone other than their spouse, that beneficiary needs to have the entire account withdrawn and closed within 10 years of receiving the inherited IRA. However, there are exceptions, including a surviving spouse, a minor child (the 10-year rule starts when a child reaches the age of majority), a disabled individual, a chronically ill individual, an individual who is not more than 10 years younger than the IRA owner.

Employees who work part-time, at least 500 hours per year, are now eligible to contribute to their employer-sponsored retirement plan.

Secure 2.0

What’s different with this new law?

For one, the vote passed 414-5. Not as lopsided as the previous one, but still an incredibly convincing tally. “Secure 2.0 is fundamentally designed to make it easier for people to save” – Susan Neely, American Council of Life Insurers President and CEO.

The catch-up contribution provision got a facelift. 401k account owners that are 50 and over are eligible to contribute up to $10,000 more than the maximum for those under 50.

The beginning age for required minimum distributions (RMD) also went up, from 72 to 75. The Yahoo Finance article noted that some reps took it a step further. “ My goal is to get rid of it completely.” – Representative Kevin Brady (R-TX).

The bill would also push employers to automatically enroll new employees into the company-sponsored retirement plan.

Small businesses that stare down the, sometimes, daunting expense of establishing and maintaining a company-sponsored retirement plan can receive assistance. They can receive credits for matching contributions.

One very progressive part of the bill that is sure to garner a lot of attention is the ability of people paying down student loans to save for retirement. The bill would allow employers to “match” a students’ loan payment as a retirement contribution. For example, if the student made a $100 student loan payment, the employer would contribute $100 to their retirement account on their behalf.

The bill introduces a SAVERS credit, which would give lower-income individuals a tax break if they save for retirement.

This is another transformative retirement bill. I’m very pleased society is taking steps to encourage individuals to plan and save for the future.

Related reading:

Ensuring Financial Security Throughout Retirement

5 Solutions for Managing Your Money After Retirement

401k Withdrawal Taxes and Penalties

Disclaimer:

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com

Finance Lessons Learned from the Pandemic

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The Covid-19 pandemic changed life for two years and there are definitely still elements of what life was in the world today. No doubt there were some terrible things that happened. People lost their lives and their jobs. But there were also positives that came out of it. We’re going to highlight the lesson we can learn from this pandemic, particularly some personal finance lessons we can learn.

Working from home

This new type of work does not apply to everyone and I don’t like leaving people out, but this needs to be talked about. Working from home and articles about it took over during the pandemic and continue to be discussed.

Working from home, at least from some of those articles and studies, appears to be a net positive for employees and employers. Let time commuting, less overhead costs, more productivity thanks to no commute, increased job satisfaction, and improved work-life balance.

Thanks to the work-from-home setup, people who were able to do that moved out of the city or rented an Airbnb for an extended amount of time. In either case, those people were, likely, able to reduce their housing costs by moving to the suburbs or giving themself a little vacation/change of scenery.

Savings rate

A lot of people saved money during the pandemic thanks to stimulus payments. In April of 2020, the personal savings rate for Americans was 33%. In March of 2021, the personal savings rate for Americans was 26.6%.

The savings rate has fallen since then but is still above 12% which is higher than it was before the pandemic (less than 10%).

Stimulus payments

According to the National Bureau of Economic Research (NBER), most Americans either saved or paid down debt with the majority of their stimulus payments. 40% of the stimulus payment was spent, 30% was saved and another 30% was used to pay down debt.

Personal finance lessons

I think there were a lot of personal finance lessons that can be learned from the pandemic. Here’s a list of them below:

People saved more money

The future was very uncertain so people were more conservative with their spending and less conservative with their savings. That mindset shouldn’t change. The future, in principle, is uncertain. We do not know what tomorrow holds, so saving for a rainy day/goals/retirement is very important.

You don’t need to spend money to have fun

At the very beginning of the pandemic, you couldn’t go anywhere. Quarantine and lockdown orders came in right away. Instead of getting together in person, people utilized Facetime, phone calls, and Zoom. I, personally, had group Zooms with family members where we played and had conversations like we would if we were in person.

Diversification is important

Early in the pandemic, the market tanked. We lost over 30% in six weeks. Granted, it came right back up not long after, but that might not always be the case. If you don’t have time to ride out the ebbs and flows of the market, it’s important you get your asset allocation right. Talk with your adviser to make sure your investment matches your time horizon and risk tolerance.

Get rid of debt

You never know when your job and your ability to earn can be taken from you. Some people lost their jobs, some people were furloughed, and some people just weren’t able to go to work. If you don’t have an income, the only other part of the balance sheet you can affect is your expenses. Get rid of your debt. That’ll help you reduce your expenses in case that happens (you can also save more).

Protect your loved ones

Get life insurance. A lot of people passed away during the pandemic. If you contribute income to your household, you need to make sure you financially protect the people that rely on your income.

Related reading:

5 Personal Finance Tips from the Pandemic

How to Regain Control of Your Finances Amid the Pandemic

How to Save Money on Your Post Pandemic Vacation

Disclaimer:

**Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. Securities America and its representatives do not provide tax or legal advice; therefore, it is important to coordinate with your tax or legal advisor regarding your specific situation. Please see the website for full disclosures: www.crgfinancialservices.com