Debt Free

So, how do you create a budget? The first thing you should do is to create categories for all your current and projected expenses. Make sure you include a category for emergencies. They always seem to crop up and you should budget accordingly. Start with your fixed expenses first. This should include rent or mortgage, any other fixed housing expenses such as taxes and insurance. If you have car payments, include these in the appropriate category. The same is true for any automotive related fixed expenses, such as insurance or monthly parking. If you have health insurance that you contribute to, or any other fixed expanses, create categories and include the appropriate expenses.

After you have created budget categories for all your fixed expenses, start creating budget entries for your variable expenses. These are expenses that are different every month, such as food, utilities, credit card accounts, and fuel. If you have copies of your recent utility bills, credit card statements and how much you’ve spent on gas, oil and maintenance for your vehicle, you can use these figures to help create a picture of what you can expect for your budget in the future.

Now comes the scary part. In order to create an accurate picture of your spending, you have to actually document every penny you spend. You may feel like a geek, but the only real way to accomplish this is to keep a journal. That’s right; you actually have to write down what you spend. This should include everything; gum, candy bars, cigarettes, lattes, drinks, trips to the Bahamas, whatever.

After you’ve documented every penny you spend, and categorized it appropriately for at least a month, you should have a representative picture of your spending habits. Certain things will not make into a 1 month spending journal. Recurring, but semi-regular expenses such as oil changes and tires can contribute substantially to your spending, but will often fall out of a 1 month spending journal due to their relative infrequency.

Look at your income for the month as well. For the majority of people this will consist of weekly or bi weekly paychecks. People that get tips, commissions or bonuses will have to do a bit more work to track their income, but tracking income is usually much easier than tracking spending.

After you have a fairly complete picture of how you come by your cash every month and where your money goes, the next step is to prioritize your spending. You should have your spending accurately categorized. Look at every budget category. Some of them will include money you really have to spend without much chance of reduction. Things such as a mortgage simply must be paid. Assign every category a priority from 1 to 5, with 1 being the most important. For example, your mortgage would be a 1. Go through all the spending categories you tracked throughout the month and assign the appropriate priority value. That will let you know where you can cut spending the easiest. If you’ve never actually tracked your spending before, you’ll probably be shocked at how much you spend on things such as gum, lattes, magazines, or any other seemingly insignificant expenses. These really add up in a hurry, but the bright side is that you may actually have way more money than you realize.

Now that you have prioritized all your money going out, you can create a budget. Assign an appropriate dollar amount to each category. Some of this will be effectively done for you, due to the type of spending. In other categories, you’ll have to come up with a figure that works in your particular situation.

Once you’ve created your budget, you’ll be able to find room for things such as investing and retirement savings that you weren’t able to afford before. That is the reason that a budget is so important for your lifelong financial success. It allows you to find the money that is slipping through your fingers and reallocate those funds toward making you financially secure.

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It wouldn't be a bad way to go for the consumer, but many consumers are not ready for the dozens of phone calls they'll get after signing up with such a service. Does it work for the lenders? In some cases, yes, and very well. The more information the lead generation site gets, the better, in theory, they can match the lender with the applicant. Different lenders are looking for different types of borrowers, and given enough information, they can do a pretty decent job of creating a match between the two. The problem is that many people on-line have the attention span of a gnat with ADD. The amount of information required to give a good match necessitates a fairly long form. That will, in many cases drive people away from the site, even though it would be beneficial for the lender to have more information.

The other problem with sites that require more information is that many people feel some trepidation about having all their personal information floating about on the Internet. The greater the amount of information, they larger their goosebumps. That concern can have some validity, especially when it seems like every other day there is a news story about a stolen computer or compromised database.

If you do use one of these sites to get a mortgage or refinance, make sure you are getting all the information. Remember, in addition to the interest rate, you need to include the fees and points that may be included in the offer when you are making your calculations. Before you can determine weather or not you're getting a good deal, you need to include all the pertinent information. Make sure you get all the necessary information, especially regarding an ARM, including the rate index, caps, maximum interest rate, and adjustment date. These sites will not offer this information in most cases. You'll have to get it from the actual lender yourself. Don't forget to do so.

So, remember that these mortgage lead generation services are a business. As such they have to get paid. Their employees, vendors, and investors would like to be paid, you know. They way they get paid is by selling your information to those who value it, in this case mortgage and refinance lenders. It's worth big money, too. They'll get from $100 - $500 per lead, per lender, depending upon the quality of the information, your demographics, and their contract with the individual lender. That means your information could be worth $2,500 to them, depending how many lenders they sell it to. Not to say that's a bad thing, but you should be aware of it.

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IRS Tax Deduction You Can’t Take #1 –
Mileage or vehicle related expenses incurred while driving to and from work. If you use the vehicle in the course of doing business, you can deduct expenses or mileage resulting from this, but it’s a no-no to deduct mileage accrued while getting to and from your office.

If you run a home based business you can deduct the portion of use that your family car is used for the business, but not for your vacation to Aunt Nellie’s. If, however, you happen to vacation in Las Vegas or Tampa and swing by a trade show or convention at the same time, that’s a whole different story. You can deduct travel expenses for expenses incurred, weather you own a business or not, if you must travel to a location that is not your usual place of work, but not for trips to and from the office or job site. Employees should use IRS form 2016 to claim these deductions. You should be aware that you must itemize to take advantage of these, and they cannot exceed 2% of your adjusted gross income.

IRS Tax Deduction You Can’t Take #2 –
Un-reimbursed medical expenses lower than 7.5% of your adjusted gross income. This has worked for me in the past. A few years ago I had a year that my post insurance medical and prescription drug expenses were around 10% of my AGI . The deduction  really helped out, but very detailed record keeping is essential to make this (or any other) tax deduction really work for you.

You’ll have numerous small receipts for things such as co-pays that may be only $10 or $20. At the beginning of the year, you may neglect to save these in your tax file. If something should crop up, heaven forbid, that pushes your medical expenditures beyond the 7.5% threshold, you’ll need every single one of those receipts to document that fact. So, make sure you save them all, beginning January 1^st.

IRS Tax Deduction You Can’t Take #3 –
Expenses incurred as a result of fines or criminal penalties, even those incurred through your regular course of business. It makes sense, but every year people try to deduct things such as the speeding ticket they received while driving the company van. Some think it is allowed under Section 162 of the Internal Revenue Code, but some would be mistaken. The IRS doesn’t like such claims, so it’s better not to make them in the first place. For that matter, deducting any expenses incurred during the commission or as a result of, an illegal act are forbidden.

IRS Tax Deduction You Can’t Take #4 –
Meals that you eat while at work are not deductible. If you take a client to a meal, you can deduct a portion of the meal related expense, but you can’t deduct that $4.00 for the burrito you had at Chico’s lunch wagon yesterday.

IRS Tax Deduction You Can’t Take #5 –
Home repair expenses can’t be deducted in most cases. Too bad for me, because I just spent $1,300 to get a new water heater installed. That would have been nice to include in the deduction total for 2007. The IRS does not allow deductions for the repair of a home that you use as your primary residence. Repairs are defined as something that “…keeps your property in good operating condition. It does not materially add to the value of your property, or substantially prolong its life.” Certain disasters have been granted exclusions by the IRS. For example, certain losses experienced because of Hurricane Katrina are covered under Internal Revenue Bulletin 2006-28.

If you have rental properties, you can deduct repair expenses as a business expense that you could not deduct were you to them for your primary residence. As a landlord, you can claim such deductions such as interest, repair expenses, insurance, and even travel to visit or inspect your properties, weather it is local or long distance.

IRS Tax Deduction You Can’t Take #6 –
Work clothes. You may not take a tax deduction for clothing you purchase for work, unless it is not an article of clothing that you could usually wear while outside of your job. Just because you got a new job and had to by new, nicer clothed than you would usually wear does not mean you can deduct the cost of the new clothes. The only way you can deduct the cost of work clothes is if they would not be worn in the course of everyday activities. Things such as hard hats, uniforms, logo shirts, and the like can be deducted if you are required to purchase them specifically for your job. Sorry, that new Armani you bought to impress the boss doesn’t qualify.

IRS Tax Deduction You Can’t Take #7 –
Some deductions that you could claim were they to be spent on a rental property cannot be claimed when they apply to your personal residence. These include the cost of home owners insurance, closing costs, contractors and domestic help, utility expenses and depreciation.

Although it would be great if the IRS would allow these deductions, they would likely raise our taxes to compensate. Have a great, Debt Free weekend.

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In this country it is relatively simple to retire rich. It is not however, as some (usually those that are trying to sell you something) would have you believe, an overnight process. That leads into one of the primary reasons why few attain wealth; lack of persistence. Too many folks simply don't stick with things long enough for them to be effective. I'll get back to the reasons people fail to generate or retain wealth later, now it's time for how to get there in the first place.

How to Get Rich #1
Generate multiple streams of income. Not only will this increase your income, but it will also protect it. Just as diversifying your investments mitigates risk, diversifying your income will guard against losing all of it. In this day and age of corporate downsizing and fiscal cutbacks, this is more important than ever. You can diversify your income in a number of ways, but some of the most popular and effective are starting your own side business and getting a part time job.

I'm much more partial to the business avenue. Another benefit is that you may find something you actually enjoy more than your current job, and eventually become quite successful at it. The problem is that too few people ever pursue income diversification, and of those that do, few have enough persistence to taste much success.

How to Get Rich #2
Invest regularly. This is common sense and really a no brainer. It's standard teaching from financial advisers the world over. While this advice is followed by far more people than the number that choose to augment their incomes by adding other income streams, it is nonetheless ignored by a significant percentage as well. If you ignore the principle of compounding interest, it will be tough to get rich or retire that way.

How to Get Rich #3
Avoid excessive consumer debt. People carry excessive debt and are not leveraging the debt they have to produce any income or asset appreciation. In addition, much consumer debt tends to bring with it very high interest rates. These interest payments will conspire to drain your financial resources. It is relatively easy for your consumer debt payments to reach a point where they negate any ability to contribute to your investments.

How to Get Rich #4
Educate yourself financially and take control of your finances. Far too many people are simply along for the ride when it comes to their finances, and many that take an active role in their personal monetary policy have insufficient grasp of how things work. This makes them not as effective as they could be at best, or at worst, they can be extremely decremental to their financial position. Few people have any formal financial training, and although some people take steps to learn on their own, statistics point to a frightening level of financial ignorance. Here are some of the statistics to which I'm referring:

A) A poll of mortgage holders by Bankrate.com found that 34% were unaware of what type of mortgage they have. Although recent publicity of the mortgage and credit industry problems may have lowered this number somewhat, it's mind boggling that it was ever so high.

B) A recent survey in the UK found that 79% of people did not know what the term APR meant, and 25% were unsure how much money they spent every week. I doubt the numbers in the U.S. are much different.

How to Get Rich #5
Reprioritize. People choose “living now” now over financial security. This thinking is especially prevalent with younger people, many of whom have a hard time imagining life when they are older. Take it from someone who had that same mentality; you'll most likely get there, and you won't be so happy with what you see in your retirement accounts. While partying, buying toys such as motorcycles, boats and Jetskiis, taking flying lessons, skiing 4 days a week, and traveling to fun and interesting places is definitely enjoyable, you need to balance the amount of resources you commit to such things against those that you target toward freedom later in life.

Having a good time, bonding with friends, and seeing the world should definitely be done, but balance that with your ability to enjoy life later. Retiring secure at 55 is a worthy goal, while working insecure at 70 is not. Sadly, most people aim for the former, but only do what it takes to achieve the latter

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PMI has been required on homes with an equity level of below 20%. This protects the lender from default by the borrower. PMI reduction of risk for the lender has been instrumental in allowing first time homebuyers and others without the ability to scrape together a 20% down payment, the ability to finance a new home. Now however, as the result of the high level of defaulted mortgages, PMI providers are rethinking their level of exposure.

A few have decided to make changes that will make it more difficult to obtain PMI, and that, in turn, will make getting a mortgage more difficult. On Feb 11^th the PMI group announced they would no longer be offering PMI to borrowers with less than 97% loan to value.

On March 3^rd Mortgage Guaranty Insurance Corporation (MGIC) sent out a letter indicating they’d no longer provide PMI for borrowers with credit scores below 620 and if buyers had loan to value ratios of over 95%, they would now require a FICO score of 680. They had already announced they would no longer be approving insurance for borrowers having a LTV, no matter their credit score, who are living in certain real estate markets where prices have recently been declining. This includes the entire states of Florida, California, Nevada, and Arizona, in addition to 25 other real estate markets throughout the country.

What can you do as a consumer to mitigate the risk that these changing rules among PMI providers could affect your chances of getting a mortgage? There a few things;

1)                  How to Avoid Paying PMI  - Make sure your credit score is as high as possible. That will not only give you the widest range of options by ensuring that you’ll be above prospective insurer’s cut offs, it will give you lower interest rates on your mortgage and a wider array of lenders to choose from.

2)                  How to Avoid Paying PMI  - Some lenders will let you avoid PMI, but will charge you a higher interest rate to compensate for their increased risk. You can work with one of these lenders, and then refinance your mortgage when your home appreciates such that your LTV falls below 80%.

You’ll definitely pay for the privilege and in some areas of the country there’s no telling how long until real estate appreciates to the point where you’d have enough equity to refinance. This would mean you could be paying the higher mortgage payments for quite some time, rendering this a very expensive option.

3)                  How to Avoid Paying PMI - Increase your down payment to exceed the 20%. This isn’t an option many people will be able to take advantage of, but look at all your alternatives here. You may be able to borrow enough from other sources that you can make this work.

4)                  How to Avoid Paying PMI - Look at a cheaper property. If it’s possible, set your sights a bit lower so that you have the required 20% down payment. This may not work for your particular situation, but evaluate where you sit to find out if you can get an acceptable home for a lower price. It may be worth revising your expectations for your new home downward a bit so you can not pay PMI.

5)                  One popular way to avoid paying PMI has been what’s known as an 80/20 mortgage, where you actually get 2 mortgages, one for 80 % of the home and another for 20%. With the recent problems in the credit and mortgage industries, these are very hard to find now, as lenders have dropped many of their more creative financing options.

Bottom line: You can avoid paying PMI, but some of the options of doing so can end up costing you more money than just paying it until you no longer have to. Look at your individual situation to determine what works best for you.

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In these areas, the single largest component in the increased cost of housing is the cost of government regulation. You read that right. The more “progressive” an area, such as Seattle, or San Francisco, the more expensive these government regulations seem to be for the average citizen looking for a home. Does your friendly state and local government respond to their constituency’s concern by reducing the level of government regulation, restriction and red tape?

Hardly, they’d get little credit for that. They wouldn’t want to reduce the cost of regulation and compliance for the guy just trying to get the house built. There would be nothing concrete local pols could point their finger at and say “See how I reduced the cost of housing for the little guy/gal”. Obviously most politicians are concerned with things they can point to during their next campaign. Now, if they can come up with some money to help Joe/sephine homebuyer in their quest for affordable housing, that’s something that can help them get elected next time around.

Are you having trouble believing me about all this? Well, I can understand that. After all houses are so very expensive, it’s hard to imagine that the cost of government is higher than the cost of wood, labor, or windows. Well, sad to say, it is. It’s not only me saying this either, although decades of involvement in the building industry has provided me with ample anecdotal evidence that it’s true. No, greater minds than mine have actually done real research on the problem of expensive housing, and gotten concrete data to back these theories up.

Government regulations, from land use regulations and environmental laws, to extremely complex and expensive building permit processes have piled on a huge amount of additional costs. They reduce the supply of buildable land, and economic law dictates that when you reduce the supply of something that is demanded, its price will increase. They have also increased the cost of compliance through such regulations as restricting the times of the year when work can be done on building projects. In addition some areas are notorious for the cost of building permits and the lengthy and complicated process one must go through to obtain them and keep them open.

I said that greater minds than mine have concluded that all this is true, and one such mind is University of Washington professor Theo Eicher, founding director of the University’s Economic Policy Research Center. He has released the results of a study, itself derived in part from the Wharton Residential Land Use Index, a detailed analysis of the cost of regulation and its contribution to the cost of housing in MSIs (Mean Statistical Areas) throughout the country. Professor Eicher’s study has concluded that in Seattle, fully $200,000 is of the average home price is attributable directly to the effects of government regulation. When you stop and consider that the average home price in Seattle is $447,800, and that $200,000 of that is due to government regulation, it’s amazing that the citizens of Seattle and King County (Seattle’s county) haven’t risen in revolt. The ironic thing is that it is these very same citizens lamenting the increased housing costs that voted in the politicians that enacted the laws, and in a few notable cases, the laws themselves.

For more on the Professor Eicher’s study, go here.

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For example, the 90 point range from a FICO score of 760 – 850 currently nets you an average loan rate of 5.457%. Stepping down a bit into the next range, which falls from 700 – 759 will put you at an average interest rate of 5.679%. As your credit falls, credit ranges shrink, and their effect on your credit score becomes much greater. That’s why, when your score is relatively low, small moves can pay off for you big time. At the bottom end of the FICO score range it’s actually fairly shocking how much lower your interest rate becomes by raising your score 20 points or so.

The lowest range is between 500 -549. If you have the misfortune to find, or have put yourself, in this range score range you’ll currently be looking at an average interest rate of 10.479%. The next range up is only 29 points wide and gives you an average interest rate of 9.910% a reduction of .569 percentage points. Moving up, the next score range is also smaller, only 19 FICO points this time, from 580 - 599. The interest rate reduction is a drop of .404 percentage points, to 9.506%.

Another 19 point score increase will reward you with the 2^nd largest drop in the whole scoring ladder, a .571 percentage point reduction to 8.935%. That’s nothing, compared with the reward you’ll receive for raising your credit score into the next 19 point range, from 620 – 639. That must really give the guys in the scoring algorithm and risk department the warm and fuzzies, because that 19 point boost in your FICO score moves you from the aforementioned 8.935% rate all the way down to 7.046%! What that means is that a 21 point increase in your FICO score, from 599 to 620 will lower your average loan interest rate down about 2.5 full percentage points.

To give you’re an idea of the impact that could have on your finances, your payment on a $250,000 30 year fixed rate mortgage at 9.506% will cost you about $2,103 for P&I. Raise your credit score 21 points, from 599 to 620, and your payment will drop to $1,671. 21 points difference on a mortgage this small saves you about $500 a month, for 30 years. It's definitely something to think about.

This all points to the importance of knowing your credit score at all times. In this example, if you were trying to get a mortgage or car loan, some work on your credit score in the months before you applied for the loan would pay huge benefits. If you weren’t aware of what your credit score was, however, that blissful ignorance would be expensive indeed.

Remember, you are eligible to receive a free credit report once a year from each of the three major credit reporting agencies. You should definitely take advantage of this, if nothing else. If you stagger your requests, you’ll get a report every 4 months. You’ll be far more informed than most Americans about your credit worthiness, and that should be the minimum that you do. The information from each agency is a little bit different, but you’ll still have a pretty accurate picture of your overall credit health.

If you would like to be a bit more up to date on your credit, and that’s never a bad idea for one who’s concerned about their financial well being, you can check out the services offered by Experian, among others. They are very affordable and will monitor your credit activity and score daily. To ensure you are as informed as possible about changes in your credit score, they’ll send you email and/or wireless alerts when something changes. This alone could easily save you thousands of dollars when financing vehicles or getting a mortgage, but it will also make sure you get the best deals on credit cards and other financing as well. Remember, a small change in your credit score can have a very large impact on your interest rates, depending upon where you start. That’s why you need to know where you stand at all times.

A further benefit of this sort of monitoring is that it helps protect against unauthorized use of your credit, something else that can be extremely expensive. See how you can help yourself get the best rates on financing by ensuring your credit score is optimized when you apply; go here.

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Here are some of the ways that this act can help you when dealing with creditors. According to the act a creditor may not do the following when attempting to collect a debt:

1- Use or threaten violence. While it may be obvious that using leg breaking tactics to collect a debt would be illegal on many counts, some of the more dubious debt collectors used to threaten or imply this type of fate for difficult creditors. If this happens report them at once to your local police and the FTC.

2 – A debt collector may not use obscene or profane language when communicating with you in any way, including speech, or any written communication. Once again, this is prohibited and if the jerk on the other end of the phone starts cussing at you, no matter how far your debt is past due, they are breaking the law.

3 – Harassing you with repeated phone calls. The act even views “causing the phone to ring” as a phone call, so the collector may not call your house at 3:00am and hang up or engage in any other such shenanigans. A debt collector may not call you“repeatedly or continuously with intent to annoy, abuse, or harass any person at the called number. “ although at times, it may certainly seem that they are doing that. Remember that if you are receiving debt collection calls from debt collectors for different debts, and from different collection agencies, that does not apply.

4 – If a collector is calling someone besides the debtor in order to collect a debt, they are severely restricted in what they can and can't do. They can call a 3rd party in an attempt to get your address or telephone number, but they cannot reveal to a 3rd party that they cannot state that you owe any debt, or use any language on the envelope of written communication that may reveal that they are in the debt collection business. They cannot communicate with a 3rd party more than once, unless that person specifically requests that they do so, or they legitimately think that person is lying to them or withholding information. Also, post cards are a no-no. If anyone gets a post card from a debt collection agency, send one of your own to the FTC.

5- If the debt collection has been informed that you are represented by an attorney in the debt collection matter, they must communicate only through your attorney. They cannot call you again after they have this knowledge. Again, if you get a phone call from the collector after you've informed them they should speak to your lawyer in the matter, drop a line to the FTC. The only way they can speak to you again is if your attorney ignores their attempts at contact. For $200 an hour, you'd hope they can answer the collection agency's communications.

6 – Unlike the police during the interrogation of a suspect, a debt collector cannot lie to you or misrepresent themselves in any material way. They can't say or do any of the following:

a. Say or imply they are with the government or affiliated with any government agency

b. Say or imply that you'll go to jail for nonpayment of any debt. Debtor's prisons don't exist in 21st century America. If, however, you fraudulently obtained a credit card or any other financing, you are in violation of the law, and can be imprisoned for fraud, but not the actual debt itself.

c. Say they are an attorney, when in fact, they are not.

d. Lie about the debt or how much you actually owe.

e. Indicate or imply that you have committed a crime regarding the debt you owe.

f. They cannot threaten any action, such as wage garnishment, unless they actually expect to take such action. Making empty threats in order to collect a debt is a violation of the act.

g. Send fake court documents making any claims regarding the debt. This seems so logical, you wonder why the government even had to include it.

h. Not disclose that they are attempting to collect a debt and any information they receive will be used for that purpose. They have to state this in their first communication with you, weather it is written or oral.

i. Using a business name other that the true name of the collection agency that they work for.

You can download the full text of the Fair Debt Collection Practices Act here. 

If anyone is using any of these tactics in order to collect a debt from you, they are violating the law. This is true weather or not you are the biggest deadbeat this side of the Mississippi. It doesn't matter how large or small the debt is, or how long you have owed the creditor money. There is certain conduct and certain actions that are prohibited under this act. If a collection agency is trying this on you, politely inform them that you know about the Fair Debt Collection Practices Act, and that they are in violation of it's statutes. That will usually make them clam up. Stay Debt Free

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In addition to the above debt statistics, only 51% of those in the study were able to completely pay their credit card bills every month. That means that 49% of Americans, if the study accurately represents the entire country, are going deeper into credit card debt every single month. That stands to reason, as 33% reported that their non-mortgage debts exceeded $10,000. Because the majority of Americans finance their vehicles, that could account for a large portion of the $10,000, but the study isn’t specific about this. It’s frightening nonetheless.

So, what are your options to legally eliminate debt if you find yourself in this distinguished company?

Option to legally eliminate debt #1-
Pay it off. This is the responsible thing to do, and probably what most people would choose if given the choice. If the debt is of your own making, i.e. fueled by excessive trips to the mall, clubs, casino, or eBay, it’s definitely the right thing to do, but it may require a bit of reorganization and reprioritization.

Weather you’re trying to lose weight or get out of debt; you will do well to implement a complete lifestyle change. Actually, losing weight and losing debt require many of the same things. You need to develop and implement a strict budget, weather you’re talking food or finances. Come to think of it, your food budget can really help your financial one. Evaluating your victual choices can really help in paring back the family budget.

Obviously eating out is a no-no, except on the most special of occasions. Look at your diet. In most cases you can make food choices that are less expensive and healthier for you. The health aspect is very important when it comes to keeping yourself out of health related debt in the future. A glance at the debt study numbers reveals that this is a big concern of many Americans, so a change of diet can help put your mind at ease, in addition to stemming the outflow of your hard earned dollars.

You should also look at where you shop. No more high-end markets for you. It’s off to the warehouse food store. Don’t worry, your stuffy friends (who are also deeply leveraged) will never see you there, they’re too busy trying to find a spot to park the Lexus at the Whole Foods Market. You’ll have the last laugh though, because your grocery bill will shrink by about 30%.

To eliminate your debt by repaying it, you’ll need a plan. One method that works very well is the roll up debt repayment plan. It’s pretty simple, yet effective, especially if you have a large amount of credit card debt. Stop using all your credit cards except in the direst of emergencies, and I don’t mean the Labor Day Sale at Macy’s. Once you’ve done that, here’s how the repayment plan works.

Pay only the minimum payment on all your debts except the one with the highest interest rate. Bring all your financial resources to bear on that debt. Pay as much as you can squeeze out of your budget (you did make one, didn’t you??) toward this debt. When it is paid off, switch all the money you were using to pay off this debt toward repaying the one with the next highest interest rate. With each successive debt you repay, you will put more toward repaying the next one, because you not only have the money in your budget for debt repayment, but the minimum payment you were using for all the previous debt you’ve repaid.

Option to legally eliminate debt #2-
Bankruptcy. Ouch! That’s usually the absolute last option and it’s even less attractive since the new bankruptcy statutes went into effect in October of 2005. There are 2 main types of personal bankruptcy; chapter 7 and chapter 13. Chapter 7 is able to be used for both personal and business bankruptcies. It’s the worst kind of bankruptcy with respect to your credit. There’s no going back. Your non-exempt assets are sold, and the proceeds are sued to satisfy your creditors to the extent the proceeds of the sale will allow it. The advantage to the Chapter 7 is that your debts are eliminated, not reorganized.

All your debts are eliminated, except of course, if you happen to owe the IRS anything. They always get their money, so be aware of this if your primary debt is tax related. Tax related debts are given what’s called priority status, meaning they are exceedingly difficult to get out of paying. The IRS will not go away by merely filing bankruptcy, and many state departments of revenue work the same way. It’s best to reach a settlement with the IRS to reduce as much of your back tax bill as possible because eventually, you’ll have to pay it.

In addition to eliminating your debts, a chapter 7 bankruptcy will pretty much eliminate your creditworthiness for the next 10 years. That’s a heck of a long time, but that’s how long a chapter 7 will stay on your credit report. You’ll still be able to get credit of course, especially after a few years have elapsed, but it will cost you much more, and you will have fewer options than before you filed. After all, if you’re making good money, and are fairly debt free after your bankruptcy, there are definitely creditors who’ll want a piece of your pie, so they’ll loan you money, you may just have to pay more for the privilege.

A chapter 13 bankruptcy is also called reorganization. In this type of bankruptcy, debtors pay off a large portion of their debts over time. The chapter 13 stops collection actions and prohibits collections action for a 5 year period. It freezes your debt at current levels. It requires a bankruptcy plan that’s approved by the courts. It will spell out in detail how you plan to repay your debt. You have only 15 days after you file your bankruptcy petition to complete this plan to the court’s satisfaction and have it on file.

The largest reason to file a chapter 13 over a chapter 7 is that you can save yourself from losing your home to foreclosure. After the bankruptcy however, you will have to make all your mortgage payments as per the terms of the bankruptcy plan, or you will risk losing your home anyway. Another advantage is that all creditors are paid by the bankruptcy trustee (the trustee is an impartial individual appointed by the court as the administrator of the bankruptcy), so you make a single payment, similar to what you would do with a debt consolidation loan.

After the Bankruptcy legislation of 2005 a larger percentage of your debt is required to be repaid than before. There is now a means test to help determine the debtor’s ability to pay off their debt. The legislation also required chapter 13 to be used if the means test shows that you are able to repay your debt over time, because your income is greater than your expenses.

Option to legally eliminate debt #3-
Debt settlement or debt elimination. With debt settlement or elimination, your debt is negotiated down by professionals. They basically get the credit card companies to agree to accept a fraction of the original debt and then consider the debt paid in full. The credit companies do this because if you file bankruptcy, they may receive little or nothing that you owe them. I can hear some of you thinking now; “Wow! That sounds great. How can I sign up for that?”  Slow down. Do you really think there’s no catch to that sort of thing?

There are a few catches. First of all you’ve got to be ever vigilant for debt elimination and debt reduction scams. The Internet is rife with such nonsense. In fact these types of scams are so prevalent, the Board of Governors of the Fed has sent out warnings about it. One popular debt elimination scam uses fake financial instruments to claim the debt is invalid. Think about it for a second. If you charged up that Virgin Islands vacation on your Visa card, do you really think you can question its validity? Come on! You still have the tan, you have to pay the credit card bill.

The scammers charge large up front fees, claiming to be able to get the debts eliminated by showing they are, in fact, invalid. You’ll be sucked in by a tremendous amount of logical (on the face of it) and official sounding documentation. It’s all total crap. After you pay the scammers their large up front fee, you’ll be left holding the bag, and deeper in debt than ever before.

The other catch to debt elimination and debt reduction programs is that they can hurt your credit score. Lowering your credit score can make it more difficult to secure new credit, especially now, when lenders are skittish about giving out mortgages and refinance loans without spotless credit.

The last catch is rarely talked about, especially by the debt settlement companies. Ever hear of a 1099? If you are an independent contractor, you are well familiar with these IRS forms. These are the IRS forms for non employee income. If you receive any non employee compensation for work performed such as contracting, the contracting firm will document this with a 1099. That way they can deduct what they paid you from their income, and the IRS is notified of yours. Well, guess what, the IRS considers a creditor agreeing to reduce your debt as compensation paid to you. The creditor will send you a 1099 and you will have to pay takes on that income, as sure as if it showed up in your paycheck. The problem is that nothing was withheld from your paycheck to cover the income noted on a 1099, it’s just added to the income reported on your annual W2.

So, be aware of the catches of this method of legally eliminating debt; possible scams, implications to your credit, and more taxes owed by you. If you look at all the options, you may still feel that debt elimination or debt settlement is the right choice for you. Then again you may not.

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After the home has been transferred, it is sold at auction. You've seen those late night ads and websites that promise to show you how to get government homes at auction. Well, in many cases there's no reason to pay for a website or whatever the late night infomercial is selling. You simply go to HUD's website and choose the state where you want to find a HUD home. You'll get a look at HUD homes for sale in each area. Despite all the stories of getting homes at 10 cents on the dollar, discounts typically run 10% - 15% off normal home retail prices.

One other point of interest for those looking into this avenue of home ownership; you must use a real estate professional that's been through the HUD approval process, and is certified to deal with HUD properties. Ask your real estate agent if this applies to them if you are trying to bid on one of these properties at auction.

Now, about this whole HUD homes at 50% off business; HUD's name actually gives a clue into how you can get these homes at such a tremendous discount. It's in the Urban Development part of their name. Many FHA properties are at the lower to middle end of the scale in terms of price because FHA insured mortgages are usually used by a huge number people to buy a home, and are especially popular with first time home buyers. Their popularity stems from the fact that down payment requirements are very low, normally only 3%, and there are no income requirements. If you have an adequate credit score and have the down payment, you will probably qualify for an FHA mortgage.

Because it's not in anyone's best interest to have blighted urban areas, your friendly Federal Government has come up with a program or two to help spruce things up a bit. Someone figured that one great way to help make ugly areas a bit more beautiful would be to have responsible homeowners live in some of these areas. Even better would be to have police officers, fire fighters and teachers, veritable pillars of the community all, take up residence in such centers of urban blight. After all, there's probably going to be a bit less crime in a area when it's populated by a higher than average percentage of the boys in blue.

So, here's how you can qualify for your 50% discount off HUD homes. First, spend a few months at your local police or fire academy. You can also get a teaching degree, if that's more your style. Here's how the program works. Certain areas with strong support from local and county governments have been designated as “revitalization areas” by HUD. These are areas where a bit of community and economic development would transform them from crime ridden neighborhoods that need help into areas of the city where responsible taxpayers call home and business owners set up shop.

To encourage police officers, EMTs, teachers and fire fighters to take up residence in revitalization areas, HUD has what they call their “Good Neighbor Next Door Program”. If you are one of the aforementioned groups, you are eligible to purchase a HUD home at auction for a 50% discount. If you consider that you're probably getting a 10 – 15% discount anyway, this is a really attractive proposition. On revitalization properties, HUD opens up the auction for a period of 5 days exclusively for those persons who meet the eligibility requirements.

What's the catch? Well, there really isn't one, except the requirement that the home be your only residence for at least 3 years. That's a pretty good deal, especially if you consider that your very presence will likely raise local property values. If you can talk a few of your friends at the department to buy homes close by it will help home values appreciate even more. So, not only can you help revitalize your community, but you can really help revitalize your finances by getting so much home equity in such a short period of time. Remember that you have to use only those real estate agents approved to handle such transactions.

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Starbucks experienced a 1% decline in same store traffic, year over year for Q4, 2007 (ending 9/30/2007). They actually had a 5% increase in average transaction value, but that was driven by a price increase on menu items and expanding their lunch program by more than 1,000 locations.

Starbucks has noted a problem, and in their quarter-ending conference call indicated “we recognize that the flat-to-negative trends needs to be addressed” and  ”The pressure we are seeing on the traffic isn’t entirely unexpected considering the challenging operating environment and similar trends reported across both the retail and restaurant industry. It is apparent that our customers are feeling the impact of the economic slowdown.”

One should take note that this was for the period ending in September of 2007, before the bulk of the problems experienced by the credit industry. For Q1, 2008 Starbucks had a 3% decline in the number of same store transactions in U.S. stores. They also raised prices, which helped them raise the average transaction value by 2%. Investors have responded to the consumer’s propensity to avoid inexpensive luxury goods and Starbuck’s flagging sales by shedding their stock, and sending the share price from $26 at the end of November 2007, to its recent close of $18.26.

If you are looking for investment opportunities, this can be a great tool. Take note that when economic conditions dictate that an economic downturn may be in our future, one of the first classes of consumer goods to suffer are inexpensive luxury goods typically consumed by people who shouldn’t so much money on inexpensive luxury goods. As consumer uncertainty regarding their future increases, the trend is for a pullback from spending in certain areas. Spending on luxuries will drop more quickly and farther than spending on necessities. $4.50 coffee drinks while considered a necessity for some consumers have been reevaluated by an increasing number of others, resulting in the sales figures reported by the green giant of coffee shops.

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’07 F430F1 Spider, Russo Corsa, Beige Lthr, 721 mi, $339,995
’07 F430F1 Spider, Russo Corsa, Beige Lthr, 1,321mi, $324,995
’06 F430F1 Spider, Nero, Cuoioe Lthr, 4,545mi, $314,995
’05 F430F1 Spider, Grigio Silverstone, Girgio Lthr, 3,444mi, $289,995

These Ferrari ads are straight from yesterday’s business section. What can be gleaned from this, vis-à-vis the U.S. economy? Well, when you consider the base price of a 2007 Ferrari F430F1 Spider is $211,000 before any (extremely high priced) options are added, it means that there is tremendous demand for a car that costs upwards of a quarter of a million dollars. Now the price of admission to enjoy the wonderful shriek of a Ferrari power plant at full boil has never been cheap, but this makes that $1,995 2nd sticker your local Mitsubishi dealer has on a new Evo X look positively tame.

This indicates that certain segments of the U.S. economy are humming along nicely indeed. I call this the “Ferrari effect”. When there is such pent-up demand for extremely expensive goods, it indicates that there is an extreme amount of wealth floating around, and those that hold it aren’t afraid to spend it. That propensity for the wealthy to continue their unabashed spending on luxury goods is a great thing for the rest of the economy.

Ferrari must agree that those that have money will continue to spend it, as they just announced that carbon ceramic brakes, formerly a (are you firmly seated) $16,800 option on the F430, will be made standard equipment for 2008. Rest assured, they will not just give those beautiful discs of carbon away, a large portion of the $16,800 will be rolled into the base price of this year’s cars.

It is really quite astounding the level of demand of such an expensive vehicle. A client of mine recently took a journey to the local Ferrari dealer to buy Ferrari’s latest masterpiece, the 12 cylinder 599. The 599 lists for over $250,000, but that hasn’t discouraged a lengthy queue of buyers from forming. My client actually returned from the dealership with a 2005 F430F1 that he paid who knows how much for, after putting down the requisite deposit to secure his place in line for the 599. Sometime in the next 24 – 30 months, he’ll actually take deliver of it.

Something else that indicates the propensity of those that have money to spend it when they really want something

(As an aside, many of the very wealthy people I’ve known, and I've known quite a few (never been one of them, though), are extremely cheap. They won’t spend one extra penny if they don’t see the value in it. It’s an extremely common trait in those that have generated their own wealth. From that you can draw your own conclusions. Consider this, however; the major cause of the massive level of credit card debt exhibited by Americans today is a pattern of consistently spending beyond one’s means. Anecdotal evidence from those people I’ve seen that have accumulated a large amount of wealth do not have that trait.)

is the price structure of luxury vehicles, such as Porsches and Ferraris. Many would expect cars in this price stratum to have a very high level of standard equipment. Actually quite the opposite is true. Many things you’d expect to be standard are actually options, and very expensive options at that. For example, consider  the Bose sound system (including 3-way component front door speakers with 10-inch subwoofers) on a new Infiniti G35, by all accounts a very nice car, is a $2,500. For good measure, Infiniti has also thrown in a power sliding tinted glass moonroof, heated front seats, a power tilt and telescoping steering column, automatic anti-glare rearview mirror with HomeLink® Universal Transceiver and compass, heated mirrors and a Bluetooth phone interface.

On the Ferrari F430, the Bose sound system option, all by itself, never mind such niceties as a Bluetooth interface, is a robust $7,250. Ouch! So, maybe you really don’t care all that much about a better sound system. You’d rather listen to the engine anyway. Well, you’d think a car that retails for as much as a house in Cleveland would at least include power seats, but no. In the Ferrari they will set you back an additional $2,653. The ones in my Jeep were only ¼ that much.

The point is that the Ferrari effect is still alive and well in many areas, although the economy looks like it’s poised for a slowdown. When the Ferrari effect goes away, we’re in for some rough sailing ahead. So, take a look at the business section. When the ads for overpriced Ferrari’s disappear, you’ll know we’re really in a lot of trouble.

Have a great, Debt Free weekend.

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The elimination of the NYSE’s fixed commission structure in May of 1975 opened the door for the discount brokerage. Prior to that day, stock brokers charged investors a fixed commission for every trade, and it was expensive. There was no freedom to negotiate either, as minimum trade commission prices were set by the SEC. It was a real old boys club, and most would-be investors were excluded. After the process was deregulated, discount brokers began to appear, one of the earliest and most famous being Charles Schwab.

Today there are many discount stock brokers, much to the benefit of all investors, weather they are hard core traders who make their living from investing, or the casual investor who may only make a few trades a year. With the ability to trade from home, and free from the requirement of having a broker involved in every trade, there are no longer barriers to those who would like to dip their toes into the stock trading waters before they take the plunge all the way. Those who like to trade consistently have things much easier as well.

The evolution of discount brokers effectively removed the last barrier to that group of investors. Now, with the price of trades ranging from as low as free to $20 a trade the cost of trading has been reduced to the point where it’s been effectively eliminated for most people.

The other huge advantage of the Internet and online brokerage for most people is that it’s now very easy to find information (not always true) on various investment choices. Weather an investor is looking for general information a particular market, company or even legislation, it’s all there for the browsing. Most online discount brokerages make available a complete set of tools for their customers. The array of tools available now to the amateur investor would actually be the envy of most professionals only a few years ago. Most even offer real time, streaming quotes. In the not too distant past, that would have been the province of the hard core professional investor or institution.

There a still full service brokers, and most of those have online and even discount style accounts. Many investors today don’t feel they need the level of service (and are unwilling to pay for it) offered by a full service brokerage houses. Who are the big players in the discount brokerage game, and what do they offer you? Well, here is a comparison of some of the most popular online discount brokers and what they offer you:

TD Ameritrade – No commission trades for the first 30 days, but you may want to keep trading for a bit beyond 30 days. After the initial 30 day period, you’ll pay $9.99 per trade with no maintenance fees. They offer 24/7 online and phone support. There is a $2,000 minimum required to open a non-IRA account and a $1,000 minimum for IRA accounts. Many investing tools are free, however real time news from Dow Jones will cost you about $30 a month.

E*Trade – E*Trade was the first online brokerage, dating to 1983, but at that time, they weren’t something anyone could just log on and use. Now they offer stock trades according to a graduated pricing plan. Those who make up to 29 trades a quarter and have less than $50,000 in their E*Trade account will pay $12.99 per trade. If you have a larger nest egg and/or make between 30 – 149 trades a quarter, you’ll pay $9.99 per trade. Options traders can tack on an additional .75 fee per trade. Broker assisted trades cost an additional $45. E*Trade has no required minimum for IRA accounts. Pink sheet stocks will require a $54.99 fee to trade. E*Trade has an annual $160 maintenance fee.

Zecco – Zecco offers free stock trades for those who make fewer than 10 trades a month and have more than $2,500 in their account. That makes them my choice for the occasional or semi-active investor. Those making more than 10 trades a month will pay only $4.50 per trade. If you prefer options, you’ll spend $4.50 + 50 cents per contract. They have recently added a very complete set of online tools and analysis screens. You can even have stocks rated by how many other Zecco clients have bought and sold them recently. That can be very powerful. Something else favoring beginning investors is that there are no minimums required to open a Zecco account. Find out more here.

Scottrade – Scottrade offers low, $7.00 online trades for stocks trading at over $1.00 per share. Pink sheet stocks will require a $27 fee to trade. If you need help from a real, live person to make a trade, broker assisted trades run $27 as well.(the same $27).If you’d like to walk in and talk to someone face to face on occasion, they have over 330 branch offices scattered throughout the country. Scottrade offers free, streaming, real time Dow Jones information.

Charles Schwab – Thanks to a persistent ad campaign in the ‘80’s and ‘90’s, Chuck is who many people think of when they hear the term “discount stock broker”. They’ve been around since way before discount brokers went online. They charge $12.95 to trade for orders of less than 1,000 shares. If you exceed the 1,000 share limit, they’ll tack on a penny and a half per share fee, but no account maintenance fee. Charles Schwab also has real time Dow Jones info for free if you’re an account holder.

Note:
I currently am involved with Fidelity, Zecco, Scottrade, and E*Trade. In addition, I have used TD Ameritrade in the past, back in the days before the TD was added. I should have kept the Cisco I had in that brokerage account back during the Internet boom. I sold it at a loss and closed the account, before I jumped (semi)actively back into the market a few years later. Oh, well

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Just how do you calculate debt to income ratios anyway? For that matter, after you calculated it, what is an acceptable debt to income ratio? Calculating your debt to income ratio is fairly simple, You merely divide your monthly gross income by your outstanding debt. To calculate the ratio, you have to take your annual gross income and divide by twelve. I know, you were told there would be no math, but it's pretty darn simple, really. This calculation gives you your average monthly gross income. Here's where you wish you'd claimed all those tips and side jobs you've been gloating about. If you haven't reported them, you'll have a harder time getting your lender to believe you really have that level of income.

After you figure out your average monthly income, you'll need to look at two different percentages. If you are going to get a conventional mortgage, you'll use 28% and 36%. If you are getting an FHA or VA mortgage, you'll use slightly higher percentages; 29% and 41%. What do those percentages mean? The first is the percentage of your gross income you can use for housing expenses. That will include your house payment, all your housing associated insurance, and interest. These expenses are abbreviated PITI, for Principle, Interest, Taxes, and Insurance.

If, for example, your W-2 income was $55,291 last year, you'd divide that by 12. The result of that calculation is your average monthly income: $4,607.58. Depending upon the type of mortgage you'll be getting, that will give you the amount of house payment you can be approved for, all else being equal. In this example, you'd be able to afford a house payment of $4,607.58 x .28 for a conforming mortgage. $4,607.58 x .28 = $1,290.12. As you can see, that's not too much house in many metro areas. For example that house payment will allow you to technically afford, at this week's average 30 year fixed mortgage rate of 5.52%, a mortgage with a balance after your down payment of $227,000. You might want to avoid the mistake made by too many people leading up to our recent credit problems, and finance less than that.

Wait a minute, what about that second percentage? What does it mean? That 36% or 41% is the amount of house you can afford according to the standard debt to income calculation, after you include all your other recurring debt. This is where you include your credit card bills, car payments and store charge card payments. This is why your loan officer is telling you to pay down some of this type of debt. You can qualify for a larger mortgage if your recurring debt is lower.

Let's look at the above example, but assume you have only one car, a 2005 Honda Accord LX. That's a nice, sensible, family sedan with a price when it was new of about $22,000, depending upon the option level. Say out the door, with taxes an license, you're into it for $24,000. If you financed this car when it was new, and got 4.9% financing, your monthly payments would be about $450 per month. Let's also assume that you have the national average credit card debt of about $8,500, depending on whose statistics you look at. If you are also paying the national average gold card interest rate of 11.73%, your monthly minimum credit card payment amounts to somewhere around $260. (You can take heart in knowing that if you make only the minimum monthly payment on your cards that it will take only about 15 years to pay off the $8,500 and you'll pay about $4,000 in interest on the $8,500 principle amount!).

If you include your car payment of $450, and your credit card payment of $260, your recurring monthly expenses are $710. $710 added to $1,290.12 gives you a nice, round $2,000. Your mortgage lender will let you have 36% of your monthly gross income be consumed by PITI and recurring monthly expenses. Your current gross monthly income in this example is $4,607.58. 36% of your monthly gross is only $1,658. In this example, you're way too high after adding in your monthly expenses, to qualify for your house. Now you see why you see so many used car ads that read “Must sell, buying house”. With this level of monthly recurring expenses, you can only qualify for a house that's $948/ month. You'll be staying above the garage.

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