Archive for the ‘Debt’ Category.

A Faster Approach to Paying off your Credit Card debt

When it comes to eliminating your credit card debt, paying the minimum payments will only mean that you are covering what is necessary to ensure a good standing order with your card issuer. But that is about it. You are not getting ahead in terms of paying off the remaining balance on your credit card.

Unless you are fine with this and don’t mind carrying a balance on your card for years and years to come, you need a new fighting strategy to reduce or eliminate your credit card debt all together. Notice the word ‘fight’: you have to be aggressive in your strategy otherwise you won’t get very far.

One of the things you can do is to increase your payments, a little above the minimum required. But even that will only make a small difference.

What you need is to create a turning point. One where the difference before and after is quiet noticeable. Let me explain. This turning point is nothing more than a payment that is at least 5 to 10 times the minimum payment that you are supposed to make. By injecting this one-time lethal shot, you are helping put a stop to the spread of disease (accumulating interest)

Once you have gone through this turning point, both your balance and interest charged will be significantly lower. From here on, and unless you can afford to take some bigger shots at your balance, you may continue to make payments that are slightly above the minimum required. But not much longer after, you need to create another turning point and reduce your balance to an even lower amount. Until your debt is down to zero or a very miniscule number.

Again, the idea is simple: even if you are unable to make consistently big payments to eliminate your balance, you need to create these turning points, which help from a psychological boost. That is, when you make a payment that is much larger than the minimum required, you are convincing your brain that you are finally able to beat your debt and not be controlled by it for years and years. And as you see your debt going down-much faster than before-you will be motivated to finish it off even faster.

This active plan of attack on your debt will require some sacrifices on your part. Most importantly-as you have may have already guessed it-is to attempt to stop using your credit card, unless in extreme emergencies or very small purchases. You don’t need to walk one step forward and then take two steps backward.

 

Your plan: Start your plan by designating a certain payday on the calendar, where you will make a large payment.  After that, continue to make payments that are larger than the minimum required. After your debt has been reduced to a more manageable amount, schedule another date to make another big payment-at least 5 times the minimum.

Example: Let us say your balance is $1800 and your minimum payment is around $60 (usually around 3% of the balance) .  To make a difference and lower your balance dramatically, your ‘turning point’ large payments should be anywhere from $300 to $600 dollars, which could bring your balance well below 1500-1200. After that, continue to make payments that are at least $100. In 3 months, your balance could be down to less than $1000. At which point you should make another large payment that is 5-10 times the minimum payment. Say another $400. Eventually, you will see your balance well below $500, down all the way from $1800!

Tip: to speed up your debt elimination, you can set a date on the calendar as a point of reducing your debt to zero, one that is not too close or too far, but gives your brain enough time to focus on the task.

The Dangers of Consumer Financial Illiteracy and Ignorance

In a CGA-Canada survey, more than half of the people surveyed had no idea how much interest they were paying on their credit card balances, thinking it was 3-4% like prime rate!

How disappointing is that? Sure this may not be something that everyone of us know to the cent, but don’t people look at their statements to see what the percentage is or what they are paying on their balances? Such ignorance lead you to believe that people pay the interest on the balance without much thought.

This lack of basic financial knowledge is very worrying and could easily push Canada towards the same financial disaster that the US got trapped in during the 2008 economic melt-down.

The government of Canada recently introduced new rules for credit card companies that make it mandatory to include information about balance repayment. More specifically, on every credit card statement, you will find specific time details as to how long it will take you to pay the balance, assuming you keep on making minimum payments only.

It is astounding why our education system doesn’t pay more attention to this and offer more courses in basic finance and budgeting for students? I believe that giving high school students the basics of personal finance and budgeting will help them avoid the many costly mistakes that we make later in life.  Education and awareness about financial literacy is one huge step towards correcting our national dependence on debt and the problem of spending beyond our means.

It is best to teach something as important as this, early in life. We need our kids to pick up the right finance habits and attitude, so they are ready for the real world when they become adults and form their own families.

We have a whole new generation-falsely manipulated by banks and credit card companies-that has grown to almost believe that the money they use from credit cards is their own money. In other words “pay it now, and don’t worry about paying  it back later!”

One of the basic lessons that we have to teach every teen and young person, is the basic difference between a debit card and a credit card.  With the first one, the money you spend is your money. With the second one, the money you spend, isn’t your money, and you will have to pay it back with interest!
You knew that already? sure you do, but are you treating them as such? do you find yourself using your credit card more often to get points, only to forget to pay it back, thus accumulating interest?

Living beyond our means, aided by such things as credit cards and refinancing our mortgages, can only last for so long. Eventually, everything has to come down and every penny has to be paid back, with interest. So if having to pay back money that you didn’t have doesn’t bother you, how about adding accrued interest on top of that?

Of course, not everyone falling in the trap of debt is financially illiterate.  In fact, some know full well how the whole system of credit cards and the concept of borrowing works. The issue is with the whole notion of ‘instant gratification’, where we want everything now, regardless of whether we can afford it or not. And that could be even worse than being ‘financially illiterate!’

Enough being a kid when it comes to spending your money. Grow up and take charge of your finances, and while at it, help educate your family and friends too. They will thank you later in life!

How can others Afford big purchases while you can’t?

Your friends and coworkers are buying new cars, taking vacation after vacation, and seem to be able to afford anything they wish to get their hands on. You on the other hand, can’t find money to buy even the affordable items.

Why are your friends and others around you able to afford these items while you can’t? In fact, some of these people are not even employed, so where do they get the money from?

No, I am not feeling any jealousy or envy when I see others buying things that I can’t afford. It is a simple question of curiosity. I would like to know what these people are doing to be able to afford these items, when I am unable to.

Well, I have done a lot of asking around, and the results were a little disappointing. Most of these people couldn’t even afford what they were buying, they simply put it on their credit cards, line of credit, or worse yet, refinanced their home!

You see, it is not worth being jealous of what they are able to afford, which you can’t. They are simply borrowing to buy. But they will have to pay that money back, sooner or later, and with interest. In other words, they can’t really afford what they are buying, but they don’t care even if they have to borrow to buy it. Call it ‘impulse buying on steroids’

In our ‘5 Principles of Finance and Budgeting’, we talk about the need to be ‘patient and disciplined’ and it couldn’t be more applicable than in this situation.

Today’s culture of instant gratification and wanting something right away is not ideal and can’t be sustained forever. The financial meltdown of 2008 can be attributed, to a large extent, to all the careless borrowing and spending on things that people couldn’t otherwise afford.

This is why you need a budget, to allow you to save for things, so you don’t have to borrow and be in debt for a long time.