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Ideas for how to get out of debt

Planning and motivation are required to get out of debt.

Planning and motivation are required to get out of debt.

I have to admit it bums me out when the numbers don’t tell the whole story of how to get out of debt. If one interest rate is lower than another, I want it to be natural that borrowers will trend in that direction. Likewise, if one price is higher than another I want to know that consumers will lean the other way. But I’ve learned I must accept that’s not always the way it works when it comes to figuring out how to pay off debt.

So, what is the best way to get out from under debt? First, assess your situation. When you know what your situation is, particularly when you have a bunch of debts on a bunch of credit cards with various interest rates, I’ve always advocated debt stacking. This is the approach by which you tackle your debts in order of highest interest rate first. That makes economic sense. The highest interest rates cost borrowers the most. So by eliminating them first, you get out of debt faster and more cheaply. The other popular pay down method is called the debt snowball. If you use the debt snowball, you tackle your smallest debts first wiping them from your plate and enjoying the benefit of wins that come at a quicker pace. I get it psychologically, but always thought that the benefit of saving more money ruled.

As anyone who’s had to do it knows, paying down the years of accumulated debt can take years. As far as debt stacking goes, a new study shows I’m not always right when it comes to the best way to pay off debt. As the New York Times Bucks Blog reported: “Researchers at the Kellogg School of Management at Northwestern University have crunched data from a big debt-settlement firm and found people with large amounts of debt are more likely to succeed in paying down their entire debt if they first attack the accounts with the smallest balances — even though that approach might end up costing them extra money in interest over the long haul. That’s because, they say, ‘maintaining motivation to eliminate debts over a long time horizon might necessitate small wins along the way.’

In other words getting out of debt seems to be the operative word. As anyone who’s gone through credit counseling knows, you need a get out of debt plan. Many people quit before they finish. Which of course, can scratch the whole faster/cheaper benefit. “That’s the downside,” said Blake McShane, an assistant professor of marketing at Kellogg and a co-author of the report. “One of the implications of our findings is that there’s no universally optimal solution.”

In light of this, what do the researchers suggest when paying off debt?

“The one thing I would want to note about the so-called rational strategy is that if you’re someone who knows you’re going be able to get out of debt, I don’t think you can argue with [debt stacking]. It’s unassailable,” McShane told me. “If you lack motivation, building up quick wins can be more effective at keeping you motivated and sustaining the process.”

David Gal, who is McShane’s co-author and is also an assistant professor of marketing at Kellogg, also noted that your payment plan can depend on the variety of interest rates you’re looking at. “In many cases [with credit card debt], the interest rates are all pretty similar. In that case, you can focus on paying the smaller accounts first.”

These seem like two good rules of thumb: one, consider your motivation. Two, consider the variation in interest rates. If you need a psychological boost and the rates of your three accounts only vary by a point or two, maybe (just maybe!) starting with the smallest balance is right for you.

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Checking your credit report and score

Check your credit reports and scores for free three times a year.

Check your credit reports and scores for free three times a year.

How long has it been since you checked your credit report and score? If the answer is more than a few months, it’s time to do it again. That’s because your credit scores are more important than ever as a financial barometer in your life. Lenders look at credit reports and scores naturally, but so do insurance companies (which use it to determine, along with a cocktail of other factors, how much to charge you), employers (which tend to see it as a measure of whether you’ll be a responsible employee) and landlords (which use it to decide if you’ll be a decent tenant.)

In all the years I’ve been reporting on money, there’s been a lot of confusion over whether you can get your credit report and score free of charge. It’s a question I am asked fairly frequently, and the answer is: It’s easier now than ever to get free credit reports.

Here’s the deal: Because of the Fair and Accurate Credit Transactions Act, consumers are entitled to a free credit report once each year from each of the three credit agencies (TransUnion, Equifax, and Experian). If you’re doing the math, that means you can actually access your free credit reports and scores three times a year – once from each of the credit bureaus. You do that through the website annualcreditreport.com . And note: This website was put together by the bureaus for the specific purpose of giving you your credit report and score for free*.

Accessing your credit scores, however, is a bit more complicated. If a lender pulls your credit score and you’re denied credit or given an interest rate that is not the best available, that lender is required to send you information about how they made that decision – including the score used in the process. This is a new regulation, put into place by the Federal Reserve and the FTC in July of last year. You can also take advantage of a service that offers credit monitoring — there are many of these and they’ll generally give you a free credit score when you sign up. Just be careful: You have to cancel the monitoring within the trial period or you’ll start receiving a monthly bill. Finally, there are a few credit-oriented websites (Google them) that offer free credit scores that are similar to at least one of your FICO scores.

This can be a good place to start also. What are you looking for when you get this information? A few things.

First, your own data — free of errors. It’s not uncommon to find errors on credit reports. If you see any, use the website of the bureau that issued the report to dispute the information. They have 30 days to respond to your request.

Second, the absence of data that you know doesn’t belong to you. If random facts seem to be popping up, you could be a victim of identity theft. Immediately get in touch with the fraud departments of all three credit bureaus and put fraud alerts on your account. Then, again, start disputing the information. You’ll also want to file a police report; some of your financial institutions may ask for it.

Finally, you want to see a score that’s in the range of 720 or above. If you’re not there, work on improving your score — make sure you’re paying your bills on time, using only 10 to 30% of your available credit and not applying for any credit you don’t need.

*Please note that we are not responsible for the information contained on the listed website. The site is provided to you for informational purposes only.

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Millennial survey results: Pick up your savings pace

What was more concerning to me from the Millennial survey results, was that the savings picture looks different for the genders with 61 percent of men and 50 percent of women who report that they are saving.

What was more concerning to me from the Millennial survey results, was that the savings picture looks different for the genders with 61 percent of men and 50 percent of women who report that they are saving.

Today, we released the Wells Fargo Millennial Study on how this generation looks at money and their future. While 80 percent of millennials, ages 22-33, say the Great Recession taught them they have to save “now” to survive economic problems down the road, only about half (55%) are actually saving for retirement.

What was more concerning to me was that the savings picture looks different for the genders with 61 percent of men and 50 percent of women reporting that they are saving. As a result, men (58%) are more satisfied than women (41%) with their savings at this point in their lives. This satisfaction trend continues around debt levels, employment prospects and the overall financial situation of millennial men and women. The difference may hinge on the fact that the median annual household income reported by millennial men is $61,000 versus $45,000 for women.

Regardless of the gender differences, 42% of all millennials say debt is their biggest financial concern currently. Almost half (47%) are using half of their monthly paycheck towards debt. If you’re facing that kind of situation, what should you do about it?

Do the math. Sit down with a calculator and figure out how much debt you can comfortably repay each month after essential expenses. Equally as important, use a retirement savings calculator to figure out what you need to save to reach your financial goal when you retire.

Set it and forget it. Usually contributing to your 401(k) plan is an automatic process through your paycheck, which means you set it up once and then don’t have to think about it again. Once you get into the habit of saving, you won’t miss it and will thank yourself later.

Take their advice. When asked what’s the top piece of advice they would give to someone starting out, millennials said, “Don’t spend more than you earn.” And boomers we surveyed for comparison said, “Start saving for retirement now.” Each generation is taking a lesson form their current situation.

Saving doesn’t have to be an either or choice. The good news for millennials is that time is on their side. They have the benefit of a long-term investment horizon that gives them a good opportunity for growth. It is important now more than ever to pick up the pace and step up your savings to make a big impact to your financial future.

How satisified are you with your savings level? Have you calculated what you need to save now for your future? What piece of advice would you give to your younger self? Let us know!

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When to refinance a mortgage or recast it

How do you know when to refinance a mortgage?

How do you know when to refinance a mortgage?

How do you know when to refinance a mortgage? I’ve refinanced twice over the past three years. Why? Because not refinancing didn’t make a whit of sense. I was planning to be in my house long enough to recoup the closing costs on each of the transactions. That was all I needed to know. The first digit of my mortgage interest rate (and yes, I’m bragging a little) is a 4. Even a few years ago, that would have seemed unbelievable.

Maybe it’s time for you to refinance as well. Some banks even offer a refinance analysis. It’s likely the heftiest line item in your budget, which means lowering that bill just a little can free up some much needed cash. Mortgage rates are incredibly low right now—averaging in the 4 percent range, so my rate isn’t out of reach for you—and for many, that means a refinance is in order. To determine if you’re a good candidate for a mortgage refinance, you need to crunch some numbers. Start by answering three questions: How much is your current monthly payment? How much will your new monthly payment be? And how much are the closing costs?

Once you have those figures in front of you, you can subtract the refinanced monthly payment from your current monthly payment, and divide the closing costs by the result. That will tell you how long you need to stay in the home to recoup the cost of closing—and actually save money on the refinance. If you’ve decided to go ahead, do your research and read the fine print. Talk to an expert on how to refinance. However, if your are planning to move before you can recoup the closing costs then, stick with your current mortgage.

If you find you can’t refinance, you may be able to recast the mortgage instead. Also, if you’ve already done so, and want to knock your payment down even more, recasting a mortgage is a perk offered by some lenders in certain states— you’ll have to make a phone call to see if your state is among them— that allows you to pay down a chunk of your principal and a small fee to the lender. The amounts required will vary by lender, but generally you’ll put at least a few thousand dollars (and sometimes more) toward principal and pay a couple hundred dollars as a service charge to the lender. You don’t have to apply for a new loan or go through the appraisal process.

Finally, whether you employ these strategies or not, consider making an extra payment on your loan each year (or whenever you have some extra cash). It will save on interest and help you pay off your loan faster. Take a $200,000 30-year fixed loan with a 5% interest rate. Over the life of the loan, you’ll pay over $186,000 in interest alone. But make one extra payment each year—that’s about $1,000, or less than $100 a month—and you’ll pay the loan off four years earlier and save over $30,000 in interest.

Is refinancing something your considering or have you refinanced recently?

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Who’s paying down your debt?

Have you seen the CNBC reality TV show Til Debt Do Us Part? It focuses on helping couples who have accumulated significant debt start paying it down and take control of their financial lives. The show’s star, Gail Vaz-Oxlade, says she takes a tough love approach to helping couples get out of debt and on the road to financial recovery.

What I find most interesting about the show is that Gail analyzes each couples’ spending habits at the beginning of each episode and presents them with an analysis of what they’re spending each month. She also provides an eye-opening projection of how much their debt will grow over a five-year period if they maintain their current spending habits. Every couple is astounded at the results and claims to have no idea they were spending and accumulating debt at the rates Gail presents.

Why? Because no one is guarding the hen house.

What all of these couples have in common is a lack of communication about their finances and no household budget or spending plan in place. While they know they’re overspending, they are surprised to learn they are overspending by three or four times what they thought they were on a monthly basis. Some of these couples are spending several thousand more than they make each month, which has a devastating cumulative impact.

One of the first steps Gail Vaz-Oxlade takes is to require each couple to watch proactively over their money and spending. She helps couples establish a monthly household budget and spending plan to achieve three primary goals:

  1. Track expenses to determine how and where your money is really being spent each month. (This can be an illuminating experience, trust me!)
  2. Identify areas where you can cut back on spending.
  3. Redirect budget savings to start paying down debt, bolster emergency savings, and save more for retirement.

This is a great exercise whether you’re part of a couple or single. I encourage you to take a few minutes this week to take a close look at your spending habits and share your findings with us.

Were you spending more than you thought? Less? Did the exercise encourage you to be a better guardian of your own financial hen house and start paying down your debt?

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Retirement Savings Options for Small Business Owners

Regarding retirement savings, small business owners are often a little like new parents. They pour so much of their time, energy and love into caring for their progeny, they don’t take care of themselves. You see this in new moms and dads in the bags under their eyes and the new spare tires around their middles. You see it in small business owners in the anemic balances in their (sometimes non-existent) retirement accounts.

And that’s a shame. Because in reality, folks who work for themselves have some great (not to mention, tax-advantaged) opportunities to stash away cash for the future. We’ll take a look at the options in a moment, but two of the big questions you’ll face off the bat are do you have employees (other than yourself and your spouse) and do you want to contribute for them. It’s a requirement in some cases, but not others. And though offering to contribute can be a powerful incentive to keep your employees loyal and happy, it’s not something all small businesses can afford, particularly in the start-up phase.

First of all, if you’re eligible for a Roth IRA (your modified adjusted gross income must be less than $129,000 for single or married filing separately, or $191,000 for married filing jointly), you should start there. But that only accounts for the contribution limit of $5,500 a year ($6,500 if you’re 50 or older).

For the rest of your retirement savings contributions, look to the Solo 401(k). This option allows you to contribute up to $17,500 in 2014 as an employee (i.e. your own employee). That’s the same contribution limit as a 401(k). Then, as the business owner, you can also contribute 20% of your self-employment income, up to a combined maximum of $52,000 (in 2014; these limits adjust each year for inflation). And if you’re over age 50, you can make catch-up contributions of an extra $5,500 each year. Contributions to a Solo 401(k) are tax-deferred. You’ll be taxed when you withdraw the money after age 59 ½ (like a traditional 401(k), you’ll incur a 10% penalty if you withdraw the money earlier).

A solo 401(k) can be a great option, but if you have any employees (other than your spouse), you’re not eligible. In that case, you should consider something called a SEP IRA. This account allows you to contribute 20% of your business income, up to $52,000 in 2014, but doesn’t allow you to also make an employee contribution for yourself. Your contributions will be tax-deductible, and you can open plans for your employees and contribute on their behalf. You’ll incur the same penalties as you would with a 401(k) if you make an early withdrawal.

Other retirement savings options you may have heard of are Keoghs, which tend to make sense only for high-income business owners with low-income employees (for instance, a doctor might open a Keogh because while his income is likely good, he may pay his receptionist very little). A Simple IRA is the opposite — quite complicated — and only a better option than a SEP if you have a good number of employees. That’s because with a SEP IRA, you’re contributing your own money to your employee’s accounts. With a SIMPLE, the contribution is a salary deferral, which means they are contributing their own. To be eligible for a SIMPLE, you must have fewer than 100 employees.

One thing to keep in mind with all of these: You want to think about the big picture. Maybe you don’t have any employees now, but do you envision a time when you might? If so, you should probably talk with a tax professional to find the retirement savings solution that is best for your situation.

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Gay Marriage Rights: In Sickness and in Health

“Looking back, I’m amazed what a difference just a few years made for gay marriage rights! In 2012, North Carolina passed a constitutional amendment banning same sex marriage, in addition to the current law that bans marriage for my family. The next day, our President announced support for gay marriage, followed by the NAACP. Since then, there has been a steady stream of legislative and judicial advancements: Gay marriage is now legal in 17 states. These events have sparked dialogue and conversations never enjoyed before now. Even within my own family, new discussions have emerged. This is healthy discourse for an evolving society.

The laws about gay marriage rights and benefits are constantly changing.

The laws about gay marriage rights and benefits are constantly changing.

As a financial professional, I wanted to remind our blog readers that the issues most important to my family are issues of legal protections, tax rights, and financial implications. There are many legal benefits with marriage, but here is a simple list of some categories that embody the nontraditional family’s financial burden. Here are benefits not afforded when gay marriage is illegal:

Social security benefits for partner

Social Security benefits for children

Immigration rights/protections

Tax free health benefits for domestic partners

Estate tax benefits

Family leave benefits

Nursing home protections

Home and real estate protections

Pension transfers

As you begin having dialogue on same sex marriage laws, be sure you know the factual differences related to financial protections of federally recognized marriages (unrelated to social or religious differences). We need to remain super-prepared to battle in the courts for our rights. In my third grade classroom, I said the Pledge of Allegiance each morning, and my daughter does today; now my hope is that the entirety of that allegiance reaches its full truth for her children.”

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Recovering from financial problems

“Financial problems can arise at any time. Hurricane Sandy. The housing bubble (and bust). Divorce. Cancer. Enron. What do all of those things have in common? They – and plenty of other triggers like them – have been the causes of financial setbacks and problems in the lives of many. Financial setbacks, by their very nature, are unpredictable. Even if you had a protection plan in place – homeowners and flood insurance before Sandy, health insurance before a cancer diagnosis – you may, as Carolyn found, have ground to make up in order to regain your financial fitness. But how do you do it?

Figure out where you are. Not where you were. Or where you were headed. But where you are right now. What are you earning, how much do you owe, what do you own? Then look at how long the situation you’re in is likely to linger. Is this an on-going financial problem that will result in a reduced income for months if not years into the future? Or is this a one-time event from which you’ll be able to steadily rebuild?

Cut spending. Take a good look at your living expenses with an eye toward figuring out what’s necessary and what can go. If you have assets of value (jewelry, art, an extra car) that have been sitting around unused, now may be a good time to try to convert them to extra cash. And, if you don’t have the ability to pay all of your bills, strategize so that those most important obligations (typically secured debts like the mortgage and car loan that can be taken from you) get met first.Don’t hide from your creditors. Pick up the phone, tell them what’s going on in your life, and ask how they can help.

Protect your health. There is nothing that sends more people into bankruptcy – a true financial setback – than a situation involving your health. What that says to me is that if you lose your healthcare coverage because you lose your job, or if it becomes unaffordable from your current provider, you need to do whatever it takes to replace that coverage. Using COBRA provisions to extend your workplace coverage is likely an option – but may be pricey. If the cost is too great, look into buying a high deductible policy through ehealthinsurance.com.

Keep moving forward. A financial setback is just that – a setback. Although it can carry a large amount of both shame and guilt, it’s important to remember it is not a life sentence. Think about what got you into the precarious position in the first place (if indeed, it was something under your control). Make changes in your life so that it doesn’t happen again. And then start putting one foot in front of the other. One thing that can help you feel better: Saving money, even if it’s a small amount. Seeing your savings start to grow will, over time, help you regain your feelings of power, independence and self-worth. “

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Financial Advisors: A Big Step

“I did it, I really did it! I found a financial advisor, and that’s a huge deal. I have been avoiding this step for a while now. I had the mindset that this was the most painful of the items on my post-marriage to do list. But instead it ended up being a good and somewhat pleasurable experience.

Let me start at the beginning. I have an advisor that my ex-husband and I share and although she was approachable and good at what she did, she belonged to us. I thought choosing a financial advisor of my own made sense. So I did what I said I would do in my prior posts: I asked my friends and colleagues which financial advisors they use or could recommend. One name came up twice so I decided to call him to just meet to see what would come of the face-to-face meeting.

To prepare for the meeting, I decided to take the advice that we have on this blog to create a quick budget and spreadsheet of my assets and liabilities so he could get a picture of where I was financially. I also decided to take advantage of a great interactive priority tool which is available to everyone on the Wells Fargo Advisors website. The tool is just a glimpse into the Envision® process* my Financial Advisor and I will go through together.

The priority tool helped me get my head around what was important to me in my future. Needless to say, my top two financial goals were: estate and legacy planning, as well as having enough money to fulfill my retirement goals, my dreams, and make major purchases. What was a potential obstacle to these goals? Increasing medical costs. The women in my family live well into their 90s and thinking about the potential pharmacy costs for the next 50 years (yikes) is enough to make you want to stay in bed.

So, armed with my budget and spreadsheet and a good idea of what I wanted my future to look like, we met at a coffee shop and spoke for about an hour. I was nervous that I might come off sounding unintelligent, especially being a person “in the business,” but he made me feel very at ease and he asked the right questions. What really made me feel good was that he came to the same conclusions on his own as I did from the priority tool about what was important for me now and in the future.

We’re off to a good start. Our first meeting was to get to know each other and see if I felt comfortable building a long-term relationship with this person. Because, if you think about it, a good financial advisor will know about your life, your hopes and fears, your family issues and most of all will help you pursue your financial goals “to and through retirement.”

I’ll keep you posted on how things go, but right now I’m very optimistic.”

*Envision® is a registered service mark of Wells Fargo & Company and used under license.

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Mixing money and marriage

“Mixing money and marriage can be messy. Over the past few years I’ve gotten married – so has my mother. We, like Carolyn, have set up household systems that seem to be working. And, like Carolyn, they both involve money that is yours, mine and ours.

Here’s why I like the three-pot system: It allows for both autonomy and romance in the marriage. Merge all the money and in many households, one person (traditionally, but not always, the man) assumes much of the control. That can lead to the giving of allowances to the person not in charge or the feeling that you have to ask permission if you want to make a purchase. Both feel a little more like they belong in a parent-child relationship rather than one between spouses. Moreover, when you’re the person with not enough control, you’re in a precarious position. Even if the other person has your best interests at heart, pays the bills on time and manages your marital finances in a responsible way, should something happen to him (or her) you’re up the proverbial creek without a paddle. You likely won’t know what to do to captain the boat yourself. And being forced to learn these foreign skills and procedures during what is likely a difficult emotional time? Well, it stinks.

The three-pot system isn’t perfect either. It means maintaining minimum balances in three separate bank accounts, not just one (or linking them to get around the requirement, which you may not want to do if you don’t want your spouse to be able to see the balances and payments in your own personal account online and vice versa). It means keeping tabs on what’s happening in more than one location and which bills are paid from each. It means not only having multiple checkbooks, but balancing multiple checkbooks if you happen to be a balancer. (My mother is. I’m not.)

But it also has a lot going for it. First, autonomy. At whatever age you enter into marriage you are also adult enough to be making your own decisions about how to use your money – and by the way, under this system it’s yours whether you earn it in the workforce or whether you’re a stay at home parent (more on this momentarily). Making decisions also makes you the de-facto manager of your money. That’s a good thing if you are ever in the position where managing it yourself is something you have to do as opposed to want to do. (And it’s why I advocate having a retirement or other investment account that you’re in charge of as well.) Second, romance. Perhaps you’ve come to the stage where it doesn’t bother you to look at your online bank account and see – to the penny – how much your spouse spent for your last birthday or anniversary. If so, you’ve got one up on me. I don’t want him to see how much I spent either.

But the third thing it has going in its favor is that third pot, the joint account. The best thing about managing money together is that it gives you the ability to decide what you want together and then save for that goal together. That third account is not just your pay-the-mortgage-babysitter-and-utilities-fund, it’s your save-for-a-house-get-another-dog-go-to-Paris fund. This is where you attach numbers to your dreams and watch them begin to take shape.

I remember standing in my favorite seafood shop – it must have been almost a decade ago. The woman in front of me was conversing with the fishmonger and describing the particular piece of tuna she wanted to bring home for dinner. “We like it not too thick,” she said, emphasis on the we. “We like to grill it quickly for just a minute or so on each side. That way it stays pink in the middle.” I wasn’t eavesdropping as much as envying. At the time I didn’t have a lot of we in my life – whether the we was working toward shared life goals or splitting an entrée that would satisfy both. Fortunately, I got it back. The ours account helped me keep it going.”

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