Sunday, September 4, 2011

The "D" word

Now that you've started thinking about your bank and credit card accounts, it's time to start making sure you put them to work.  My next few posts are going to focus on using your accounts to make your life easier.  This will take a little bit of time and some getting used to but, in the end, it'll definitely save you a lot of time and stress.

The road to a stress-free financial life starts with one nasty little word that we all have to deal with at some point: debt.  Americans have developed a belief that it's normal to have debt or to spend more money than they actually have.  In fact, the average American household owes more than $15,500 in credit card debt.  The average student graduates with about $4,000 in credit card debt before even starting a full time job!  Debt, especially on credit cards, only causes stress and leads to you paying much more than you would have if you paid with money you already had available.

Some debt is good.  When it's used to pay for a house or an education, that's understandable.  These things can be very expensive and they typically appreciate, meaning they gain value over time.  Debt can lead to trouble when it's used to buy items that depreciate over time, like clothes, a t.v., or an iPod.  Paying for these things with a credit card will cause you to pay much more for them, especially if you just make the minimum payment!  It's easy to spend on things like this because they're fun, but clothes or an iPod are even more fun when you can pay for them up front and not have to pay interest!

Now, statistically speaking, the odds are that you already have debt.  Don't worry, after reading this you should have everything you need to start attacking that debt and paying it off aggressively.

Start by taking a few minutes to figure out what you owe.  Take a piece of paper or open up a spreadsheet on your laptop and make a debt chart.  List the name of the credit card, the total you owe, interest rate, monthly payment amount, and the due date.  This chart will help you see exactly how much you're in debt and will allow you to make a plan for paying it off.

The next part is tricky and, sadly, there's no quick fix or easy way out of debt.  Don't get discouraged though - there is light at the end of the debt!  There are a few methods you can use to pay off your debt; all of them can be effective, but you have to stick with it.  Getting out of debt is something that requires persistence and will power but will benefit you big time once you accomplish it!

I'll leave you with a short review of a few methods for paying off your debt:

Snowball Method - this is probably the most often used debt payoff method.  You pay only the minimums on all of your debts except for the smallest balance.  You pay off the smallest balance as quickly as you can.  Once the smallest balance is completely paid off, you take the minimum payment from that and apply it toward your next smallest balance and so on.  Every debt that you pay off means you have more money available for the next payoff, until you are completely debt free.  This is a great method because it lets you see the progress you are making and it feels great when you pay off a debt completely!

 Interest Rate - in this method, you'd pay off the debt with the highest interest rate first.  This would mean that you'd have to make just the minimum payments on all your debts and put extra money toward your debt with the highest rate.  It may take a little longer to notice results with this plan, but you would save a significant amount of money by paying off the debt with the highest rate first.

Minimum Payment - this plan is pretty simple.  Once you have all your debts listed you will be able to see the minimum payments.  You should also know how much extra you can afford to pay over the minimums each month.  This method just says that you should apply extra payments to your debts equally.  For example, if you have an extra $200 to use to pay off your debts each month and 2 credit cards, this method would say that you pay an extra $100 toward each card every month.  This is a decent method, but the more debt you have, the longer it will take you to notice results with this method.

In the end, the plan you choose is completely up to you.  Just make sure you stick with it and most importantly, make sure you don't add any debt while you're trying to pay it off! (DUH)  Trust me, those jeans you're wearing will last you long enough to pay off your debt.  Then you can buy new ones with money you have available as a reward!

Remember, the most important thing is to stick to the plan!  If you get discouraged, go back to your goals and remind yourself what you want to save up for.  Being debt free will help you accomplish any financial goal that you have.  Remember that vacation you've always wanted to take or that new laptop you want to buy?  Stick to your debt payoff plan and you'll be that much closer to reaching that goal.

Sunday, August 28, 2011

Accounts that work

Now that you have an understanding of how credit works, you can start to work on your bank accounts and credit card accounts.  This should be fairly simple, so I'll try to keep it as short as possible.

Checking Account

I consider my checking account the foundation for anything I want to accomplish financially.  The key is to make sure that you have a checking account that is working for you.  This means 1) you don't get charged any fees, 2) it's easy to use and manage online, and 3) maybe even earns you interest.  If you're still using a student checking account but you're not a student....why?!?

Finding an account that works for you is easy.  There's this thing called the internet that makes it very simple to search for and compare checking accounts in a matter of minutes.  It also helps to ask friends if they have any bank accounts to recommend!  In fact, I "found" my current checking account through a friend.  It's an account that, understandably, isn't advertised very much because it's through a smaller local bank and offers great benefits if you can meet the requirements.  Here's why I like my account and also what you should look for in any account:
1) there are no annual fees
2) there are no fees if I meet the monthly requirements (simply use the card as a credit card 12 times a month and keep a small minimum balance in it)
3) online bill pay and statements
4) it pays me interest, and lots of it!

I earn a 4% APR on the average monthly balance in my checking account.  I've been experimenting with this one by putting some of my savings into this account and using it as a combined checking/savings.  I'd only recommend this if you have a monthly spending plan and self control!  However, if you would be able to follow a similar plan, it would definitely pay off.  I've earned roughly $20 per month in interest alone for the previous 4 months that I've had this checking account open.  In case you're wondering which account I use, it's MB Financial's Red Checking account.  Comment or email if you have any questions about it.

Bottom line, find an account that works for you.  If you already know you have no restraint and would spend all of your savings if you tried this, then get a free checking account with a good website that lets you see what you're spending.  Online checking accounts are rapidly becoming popular for these reasons.  Check out ING, Capital One, or Schwab.  Each offer online checking accounts with various benefits!

Credit Cards

I have a very simple approach to credit cards.  I stick with two or three that are very easy to use and never charge me any annual fees.  Annual fees are okay for very few people.  For instance, if you spend a lot on travel and find a credit card with travel rewards that would actually help you save money, then an annual fee may be worth your time.  You'd have to do some research and comparisons, though, to find out if it would work for you.

I keep a Capital One credit card in my wallet because I've had it forever and I've got a good credit limit on it.  Both of these help to improve my credit score.  I don't worry much about the interest rate because I pay it off in full every month.

If you're carrying balances on credit cards, you have to do two things.  First, call the customer service number and get them to lower your rate.  Don't take "no" for an answer.  Tell them you've been a customer for a while and need a lower interest rate.  If you get a representative who won't budge, tell him/her that you'd hate for them to lose your business over this and that you could easily transfer to a card with a 0% introductory rate.  That's just for emergencies...I don't actually recommend transferring balances to new cards.  It's a tricky game and messes with your credit because you are opening new accounts.

The second thing you have to do is work toward getting that credit card paid off and keeping it that way!  Once I got my credit card account paid off, I arranged for a couple fixed bills to be paid each month through my card.  For example, my cell phone bill is the same each month (fixed) and it automatically gets paid by my credit card.  That's getting into different topics for another day.

Plain and simply, find a credit card that works for you.  Typically, the credit card offers you get in the mail are for cards that don't work.  Again, search for credit cards online.  If you don't know where to start, type "credit cards" into Google and go from there.  There are multiple sites that let you compare cards and will help you find one that works for you!  Remember: low interest rate, high credit limit, $0.00 annual fee, and a good website that allows you to manage the card online are all things that I would recommend.

You know what to look for in your accounts now.  These are the most basic and important things to look for in checking accounts or credit cards.  Put this information to good use and go find accounts that work for you!  It'll make your financial life easier and you won't regret it.

Comments, questions, suggestions?