How to Pay Off Your Debts to Improve Your Finances and Retirement

-->

How to Pay Off Your Debts to Improve Your 

Finances and Retirement

Financial and Retirement Planning Information - 

for Beginners

Before I start telling you how to pay off your debts, I want to tell you a little about myself.

I read a lot of financial articles and so many of them don't apply to the average Joe. I read one recently that said, start saving money by passing up a Starbucks coffee every day. Well, I have never had a Starbucks coffee in my life.

When you clip coupons, eat hamburger and spaghetti, and only buy clothes for the kids, it is hard to cut back. You have to be spending money, before you can quit spending it.

Many of us do spend money on things we could cut out, but an awful lot of us don't! What is a luxury to some is a necessity to others. A newspaper may seem like a luxury, but if you are looking for a job, it is cheaper to have it delivered than to buy it on the stands, especially if you have to drive to get it. That newspaper is a necessity to the job seeker. What about the internet? Same deal. Where I live, local newspapers do not post classifieds online, unless you subscribe to that newspaper. Even if you have home delivery, you have to pay extra to access that same newspaper's website, so if I want to look for local jobs, I need to take or subscribe to that newspaper. The internet is necessary if I need to expand my job search, so I can't say, save money by dropping your internet service or your newspaper subscription. More and more, companies require you to apply online, so again, the internet is a necessary expense. I will say, look for ways to save money and if you find it, take advantage of it.

“Oh, there is he, some rich SOB telling me how to save money. He probably never had to worry,” you are thinking to yourself. Wrong! This is a case of do as I say, not as I have done. I have learned a lot from making mistakes, and I am passing my experience on to you. I have been in debt up to my ears, I have gone hungry. I was never homeless, but I came close. I was never out of work, but I didn't always make enough to make ends meet.

By using the principals outlined below, I paid off $150,000.00, in debt, including interest, in six years, earning less than $20,000.00 a year. I know, it looks like if I spent my entire income on those debts, I still could not have paid them off. Read on to find out how I did it by paying my debts off early and saving a bundle on interest.

The first thing you need to do to pay off you debts is not acquire more debt than you can afford.

The second thing is to get the right type of loan. If, possible, don't get a loan with a pre-payment penalty. If you have a pre-payment penalty, it will cost you a considerable amount to pay that loan off early; however, you may save more in interest, than your pre-payment penalty would cost you, so figure it out both ways.

On the other hand, if you have a loan that lets you pay it off early, it is fairly easy (assuming you can afford the loan in the first place), to pay that loan off early. By paying your loan earlier than the initial terms dictate, you: 1) save interest (money in your pocket), 2) help your credit and FICO scores, and 3) feel good about yourself.

So, how do you pay it off early? There are two main ways. Pay extra each time you make a payment, and to make payments more often.

For example: if you have a loan that is $91.78 a month for five years, and you make your regular payments, you will pay $1,101.36 a year, for a total loan payoff of $5,506.80.

If you round that payment up to $100.00 a month, you will be paying $8.22 extra each month, which adds up to $98.64 a year, making your total payment for that year come to $1,200.00. By rounding your payment up, you just made one extra payment that year. In 5 years, that comes to slightly more than 5 payments. But if you add on the interest you saved by making these payment early, it may come to another 2 payments (depending on your interest rate). Now you have paid off your loan 7 months early, and you didn't even feel the pain!

Another great, and to some, much easier way to pay off a loan earlier is to make a payment more often. Many people get paid bi-weekly, so this method fits right in with their take-home pay schedule. If you have the above $91.78 a month loan, instead of paying $91.78 a month, pay ½ twice a month. If you pay $45.89 every other week, you will be making an extra payment a year without doing anything else. At the end of the year, you will have made $1,193.14 in payments, exactly one extra payment.

That is because if you make monthly payments, you will be paying 12 times a year, but if you pay every other week, you will be making – not 24 payments a year – but 26. Right there you have gained 1 extra payment, without paying 1cent extra. Depending on your interest rate, you may gain another payment due to the interest you saved.

Now, what would happen if you combined the two methods? What if you pay every two weeks and round up? Lets see: You would pay $50.00 twice a month (26 payments), which would come to $1,300.00 a year. That is $198.64 a year more than your loan contract, which is more than 2 payments. Remember that this amount is not counting the interest you saved. In four years, you would have gained at least 8 payments, just on principal and at least 2 more on interest, so you just paid your loan off a full year, if not more, early.

You did all of that by paying an extra $4.11 a week and two extra payments a year! Now that didn't hurt at all, did it? If you make a ¼ payment every week, you would save even more in interest.

To make these methods work, be sure you tell your financial institution to apply the extra payment to the principal amount, not the interest.  Loan payments always go to the interest amount first, unless you designate otherwise.  This means that your loan amount stays the same. 

If you owe $5000, and the interest on your payment is $10, and you make a $100 payment, $10 will go to the interest, and $90 will go to the principal.  If you make a $110 payment, without designating the extra $10 goes to the principal, $20 will be applied to the interest, and you will still owe (and be charged interest) on $90.  However, if you tell them to apply the extra $10 to the principal, your $110 payment will reduce your principal to  $80.00.

These examples are based on a $5,506.80. Now think about doing that to a $50.000.00 loan. How about a $500,000.00 loan?!

These methods only work if your financial institution allows you to make payments using these methods, or if you would save more that a pre-payment penalty. Be sure to check it out before you take out your loan. If you applied for a loan at two places and one allows you to make extra payments and the other doesn't – all other things being equal – take the one that allows you to make extra payments.

One other thing you should know about making extra payments, is how your financial institution applies it to your loan. I have found that on the whole, credit unions are better at allowing you to make an extra payment, and they way they apply it can be beneficial to you if you get in a pinch on down the road.

Here's why. For this example, let's use different numbers. If your payment is $100.00 and you pay an extra $25.00 a month, in four months, you would have made an extra payment. Some places will credit you with the extra payment amount against your principal, but no matter how many extra payments you make, you still owe your next payment, in full, the next month, just as though you had not paid any extra. Some places, however, will credit you not only with the extra payment amount, but with an extra payment, as well. See what I mean: You owe $100.00 a month. In January, February, March, and April, you pay $125.00, so you have made an extra payment. Your next payment would not be due in May, but in June, because you made May's payment with the extra amount in the first four months.

Now don't be tempted to skip May. Just keep on making those extra payments every month, and you will see that it easy to pay that loan off early. If you happen to get in a real pinch, say you lost your job, or had to have an operation and missed work without pay for two months, THEN would be the time to take advantage of the months your payment isn't due, but don't waste them on something trivial, such as, “I'll just skip that May payment and buy me a new (insert something you don't really need here).

Just make sure your bank or credit union allows you to make payments in these ways before you take out that loan. You will find that most loan companies will not allow either of these methods.

If you follow these simple steps, not only will you pay off your loans early, you will greatly improve your FICO and credit scores, feel really good about yourself, learn a little bit about financial planning, and taken a step to getting out and staying out of debt, and maybe even get a jump on your retirement.

By applying these methods, if possible, to existing loans, you may be able to avoid bankruptcy, or debt consolidation.

If you have several loans, or credit card debt, start with the one with the highest interest and pay as much extra, as often as possible to that loan or credit card. When you get it paid off, take the money that you're paying on that loan, and pay that much extra to the loan with the next highest interest. It will be hard and it may take several years, but you can pay off your debts, assuming you have an income.

Once you have paid off all of your loans, take the money you were paying on them and put that in an IRA, 401k, or saving account. Don't start spending it just because you have it available.

If you do as I say, not as I did (I should never have gotten $150,000.00 in debt in the first place), you too can improve your financial and retirement situation.

How to Find and Use Retirement Planning Tools

How to Find and Use Retirement Planning Tools

Financial and Retirement Planning Information - 

for Beginners 

There are thousands of retirement planning calculators and retirement planning software programs on the internet.

My first suggestion is: Never buy what you can get for free. I also live by the rule, you get what you pay for, but this seems to apply more to physical things, such as air guns, dishwashers, and furniture. Why do I say that? Because there are some excellent software programs to be found that are absolutely free. They cost you zilch, nada, nothing.

If you are like me, you are leery to download stuff because you don't know what you will be getting. Well, I found that some sites like Cnet (download.cnet.com) and PC World (pcworld.com) are excellent sites. They review and test a lot of the downloads so you know it is safe. A word of caution, they have freeware, shareware, and trialware, so be careful when choosing something.

Different retirement calculators allow you to calculate for your retirement in different ways. With some you enter how much you want to save per week or month, and for how many years, and the retirement calculator will tell you how much you will end up with. With others, you do it the opposite way. You put in how much you want when you retire, and how many years you have until then, and the calculator will tell you how much you need to save per week or month. By doing a little retirement income planning now, assuming you are starting early enough, and stick with it, you should be set all right when it comes time to quit working.

An excellent place to calculate what you will get from social security is the "Benefits Calculators: About the Social Security Retirement Estimator" on the Social Security Administration website at http://www.socialsecurity.gov/planners/  By entering your earnings the calculator:

• provides an estimate of your retirement benefits comparable to the estimate you receive on your Social Security Statement each year, and
• lets you create additional "what if" retirement scenarios based on current law.

You could hire a retirement planner, and if you will have a large amount of money, you should. However, most of us can get by using an income calculator and then sticking to the plan

Your retirement savings should be in a separate account or better yet, an Individual Retirement Account (IRA), or a 401k if available. There are also SEP IRA's for the self-employed. No matter what you have, you should plan on making the largest contribution possible.

Some things you should think about when you are planning for retirement. How do you want to live, and where do you want to live? Will you be satisfied living in your present home and reading books all day, or are you thinking more about retirement communities, and a yacht? Do you want enough retirement income to allow you to buy a motor home and travel? You will want to have the financial freedom to live as you would like.

I wrote earlier about debt consolidation, but when you are doing your financial planning, your goal should be to be debt free when you retire. You should get out of debt and then be able to stay out. You want to cancel your credit card debt and your mortgage. Don't, however, cancel your credit cards. That can hurt your credit.

Debt consolidation for beginners can be overwhelming. You might ask yourself, "Will I really be saving money?" or "How much will my new loan cost?" "Where is the best place to consolidate my loans...a bank, credit union or finance company?"  You need to shop around and get the best rates.  If you can see that you will have to consolidate your loans, do so before you get behind in all of your bills and hurt your credit.  Since interest on loans is based on your FICO (credit) score, the better your credit when you apply for a consolidation loan, the better your interest rate will be.

When considering an IRA, shop around and look for the best IRA rates. As with a loan, all banks and credit unions do not offer the same rates. Do you know that you can have several IRA accounts?

Be sure to consider the consequences of getting a traditional or Roth IRA. Put all of the money you can afford into your retirement, but don't forget to set aside some for that rainy day. If you should lose your job, or get sick, or hurt, and unable to work for while, you want to be able to live without having to make an IRA withdrawal. There are substantial penalties for withdrawing your money early. By the way, if you do lose your job, be sure to ask your HR person about a 401k rollover.

Well, that's it for today. Be sure to subscribe so that you will be notified when new posts are added.

How to Improve Your Financial and Retirement Situation

How to Improve Your Financial and Retirement Situation 

Financial and Retirement Planning Information - 
for Beginners

The method of improving your financial and retirement situation depends somewhat on your age and your current status, but whatever your age, financial and retirement planning is a must.  You can't just hope that things will improve on their own.

If you are young and have time to build up a nest egg, you can afford to be a little less aggressive when it comes to stashing the cash, as you have a longer time to invest. On the other hand, if you are older, you need to be less aggressive in terms of investments, as you want something safer so your money won't be at risk when you are close to retirement.

Regardless of age, anyone who is earning a dime should have an IRA account. You should have this even if you have other types of retirement, but you should have it especially if you do not have any other kind of retirement.

Unless you are a multi-millionaire, you can not have too much in a retirement account. You don't know how long you are going to live, or how much things will cost in the future, or if you will not be healthy and need more than you anticipated for medical expenses and/or a nursing home.

The only exception I can think of to this rule is if you are in your 60's and don't have any retirement and very little money and a small income. Why would I say that is an exception? If you are on the borderline of having “some” money and have almost no money, it can keep you from being eligible for different kinds of assistance, but you can't afford to pay for everything you need. If you are in that situation, you will eventually spend all you have saved, and thus will become eligible. While you are waiting for that to happen you will be living frugally, having barely enough to pay all of your bills and buy food and medicine. Your life will be miserable, as you will live in fear of what the next day will bring. One day you will wake up and that fear will become a reality. Something will happen to push you over the edge, your refrigerator will go bad, or you will fall and break a bone, or the price of medicine will increase to the point that you can no longer afford it. Debt solutions should not consist of waiting until your are bankrupt so you can get out of debt. Debt management, especially younger in life, is better than trying to figure out how to get out of debt.

If you are in need of debt repair, then you probably also have need IRS debt relief. Believe it or not, the IRS has debt settlement programs and is sometimes more likely to negotiate than some creditors, so don't be afraid to try to work out some IRS debt relief.

When you reach the point of being totally broke - or close to it - you may become eligible for Medicaid, extra help on your Part D Medicare, and maybe some state assistance. Many hospitals have financial aid for low income, and will help pay or totally pay all of your hospital bills. Doctor bills usually are not included.

Medical bills ruin the credit of thousands of people every year. It used to be in the state where I live that as long a you made a monthly payment on your medical bill, even if it was only $1.00 a month, you could not be sued, and your debt could not be turned in to a collection agency. That all changed about 20 years ago, and now doctors and hospitals are very quick to bill you, and almost quicker to turn your debt over to a collection agency. They now dictate what you will pay, and there is little, if any, negotiation. They tell you they want $100.00 a month payment and you tell them you can only pay $75.00. They will tell you if you don't pay the $100.00, then they will just turn it over to be collected. They don't want to be bothered with the time and expense of collecting.

Once the collection agency gets their hands on your debt, you are at their mercy. Consumer credit counseling may help some, but your credit report has already been damaged. Credit repair is possible, but it a long and hard road, especially if you owe a large amount.

If you are younger, you need to be aware of what could happen to you when you get older, and watch out for yourself. Many people say they have to put their children through college, or help raise their grandchildren, but they are just hurting themselves. You are not obligated to put your children through college. Unless they are actually starving, you don't have to help your grandchildren. Do they really need a cell phone and an ipod at age 8? It is nice if you can afford to do that, but don't do it a your own expense.

If you are older and need cash, and you own your own home, consider a reverse mortgage. Once again, don't try to hang on to the house so you can pass it on to your children. Look out for yourself first! No one else is going to take care of your financial and retirement situation but you.