What happens after you have reduced all your credit card debt? Well, my old friend Mary just did that and so I asked her what were her financial plans going forward? I congratulated her as she had taken a few years to totally eliminate her debt. She shared her plans with me.

1. Work on paying off her mortgage debt faster

To Mary, debt is debt and though one can argue that your home is an ‘asset’, Mary just simply looks forward to the day when she is totally debt free. Your mortgage interest may be ‘tax deductible’, but it is still debt. So aside from her monthly mortgage payment, she is now paying additional principal so she can reduce the term of her mortgage. She now anticipates paying off her mortgage in 15 years.

I have not exactly gone through the calulations with her regarding the benefits of having mortgage interest as a tax deductible item. But to Mary, that is irrelevant.

2. Have 12 months of emergency funds

Yes, while Mary is paying off her mortgage faster, she wants to increase her emergency fund to be able to support her for 12 months. 12 months of emergency funds is more than the 3 months or 6 months that is typically being recommended. But Mary’s husband had lost his job before and took close to 10 months before finding another job. In fact, this was one of the reasons that put off her debt reduction schedule.

3. Have adequate disability insurance

While Mary’s husband has disability with his present employer, Mary does not have any with hers. She is already shopping for a disability policy and will be buying one soon. She does not want to take any risk. This is a very smart move in my opinion. In a previous post, I talked about a church mate of mine who had a stroke in between employment and had no disability insurance. You definitely want to make sure you have adequate disability insurance coverage.

4. Start the journey to retirement planning and savings

Yes, since the credit card debt is now eliminated, she will start serious contributions to her retirement plan. She also plans to hire a financial advisor and begin saving seriously. She is in her mid thirties and that is a very good thing - start early and stick to a plan.

5. Start a regular program to donate to charity

Donating to charity is very important to Mary. However, she does not think she can donate as much as she wants to right away. Instead, she will start small and hopefully increase her charity donations over time as her financial situations get better.

Wel, I am very happy for Mary and I think these are very logical steps she is taking. I definitely agree with her on the part of paying off her mortgage early. I think too many of us do not think of our mortgage the same as our credit card debt. That is because we are paying off for an asset that historically has appreciated as much as the inflation rate. But I’m sure having no monthly mortgage payment will be a huge relief to anyone. I agree with her on the emergency fund as well and I think 12 months of emergency money is the right amount. Some of you may disagree with me and think that is too much and that perhaps three months emergency money is enough. Let me know what yoy think by commenting below.

Mary also made me realize that I have to check my disability insurance coverage with my company. Charity - well, it is always something we have all said we would do but never got about to do it. We’ll see how this pans out in my situation.

Right now, I am in Atlanta attending a seminar. During one of the presentations, a couple of guys were on stage to present a franchise opportunity.

The opportunity was to buy into a franchise that developed websites and a strategy for the small business owners. I was extremely sceptical of this concept, but hey, some people were convinced. The franchise cost about $10k (thereabouts).

While I was having late night drinks with some new friends that I have made in the seminar, we were talking about the ‘franchise opportunity’ presentation. Most of us laughed at the whole concept. However, we had a friend that just had dinner with a couple of other attendies. He said that his ‘new friends’ were extremely excited about the opportunity and cannot wait to get started. He did not understand the merits of the concept as well.

But what was most disconcerting about his ‘new friends’ getting excited about the ‘franchise opportunity’ was the fact that one of them had $150,000 in debt (mostly credit card debt).

I was shocked to hear that. How could someone who had $150k in debt pay to attend this seminar? How could this person even think about shelling out $10k for this franchise when his priority should be to have a debt reduction? I think the answer is simple and based on two facts. Greed and slick salesmanship.

When you hear ‘how easy it is to make money’, I think your defences will go down. Coupled this with some slick salesmanship, and I think you have the recipe for a gullible person who desperately need his or her finances to be sorted out, to fall for something like that. Even if the concept was great, investing $10,000 when you have a six figure debt is simply financially irrespossible.

Lesson : When you are in debt, don’t attend any ‘wealth seminars’ and fall for ‘opportunities’. Perhaps a better idea is to start a blog about reducing your debt much like Tricia has done with her Blogging Away Debt.

One way to increase the pace of your debt reduction plan is to increase your monthly cash flow. Short of getting a promotion or cutting your expenses (which we assume you are doing), there are a couple of other ways to put more money in your pocket. Below are a few things to consider.

1. Mortgage Refinance

If you are still paying a higher than market rate on your mortgage, then this is really a no brainer. Refinance your mortgage and you could potentially save a few hundred dollars a month. Do not just consider a regular fixed rate conventional mortgage, but also look at fixed to adjustable mortgages. The media will have you believe never to look beyond the conventional fixed rate mortgages, but saving on interest in the early years of a fixed-adjustable mortgage can make the difference between paying off your debt sooner or much later. You can always refinance again later on.

2. Make sure you maximize your tax benefits on your retirement contribution

Many of you have both a company sponsored qualified retirement plan and a perhaps your own IRA. Before you contribute into your IRA, make you max out your contributions to your existing company plan. I know many people who do not max out their qualified plans but contribute to their individual IRAs instead. By not maxing out your contributions to qualified plans, you could be potentially leaving money on the table to the IRS.

For example, if you have a SEP plan and an IRA, you should be maxing out your SEP plan before even thinking about contributing to your IRA. The IRA has certain phase out rules that stops your contribution from tax deductibility. The rules involve both gross income, whether your spouse is an active participant in an employee plan. Know these rules and maximize your contributions to your qualified plan.

3. Putting your kids savings in a 529 Plan

In some states, contributions to 529 plans are tax-deductible for state taxes (not federal taxes). You will have to find out what the rules of your state are. But if you are a resident in one of those states, you could potentially reduce your tax bill quite a bit. In that case, you should get started immediately on a 529 plan. Even if you do not have 529 plans, you can actually start one for yourself! The portfolio in any 529 plans grow tax free. Furthermore, you have full control of the account even if it is for your kids.

4. Invest in Muni Bonds if you are in the top tax bracket

If you are in the top tax bracket, then you have no business being invested in a taxable bond fund. Get rid them and invest in Muni Fund that invest in your states municipal bonds. This is another potential way to save on your taxes and put more money in your pocket.

5. Incorporate Your Home Business

If you have a home business (like running a profitable blog!), then incorporate it rather than just being a ’sole proprietor’. By doing so (in the form of an LLC), you can not only limit your personal liability, but also deduct business expenses, depreciate things like your computer etc.

That’s it for now!

OK, that’s it for now. Please share any other ideas you have for getting more cash in your pocket.

While many people get into trouble with debt due to unforseen circumstances like a huge medical bill, others simply get into trouble because of spending discipline (or lack of). Credit cards have become such an essential thing in our lifes now that we (at least I do) use it for every thing we buy. However, the convenience we get from using a credit card also traps people into a spending binge and eventually a credit card debt spiral.

I recently got to know two friends who used to have problems with their credit card debt and this was what they suggest you do if you have problems with your spending habits (you obviously need to formulate a debt reduction plan - but you also need to change some habits)

1. Stop Using Your Credit Cards - Do not cancel your card as this will hurt your score (you also cannot cancel cards with a balance!). But rather, just cut them up and stop using them. Both told me that having to pay with cash really makes you think twice about parting with it. I personally don’t think I can stop using my credit cards. But if I did have a problem, then I’ll probably just use one!

2. Eat at Home - Yes, it not only saves money, but you will probably eat more health food as well. But eating at home will save at least half of your food expenses. This tends to be a problem for two busy working couples who are simply exhausted when they come back from work. One solution is to cook the food over the weekend and pack it in the freezer. Simply microwave it when you get back from home during the weekdays.

3. Stop going to the mall - For shopoholics, this might amount to cold turkey. But it is probably necessary cold turkey if you are constantly doing impluse shopping and piling up your credit card debt. Go to the park and run instead!

4. Use the library - Your local library probably has all the magazines that you want to read. Mine has DVDs too! I just recently borrowed the latest James Bond Casino Royale from the library and did not have to pay any fees.

5. Use quicken and check your bank balance every day - Let’s face it, the reason why most people have financial problems is because they do not treat their finances as a business. Businesses look at business reports every day. Train yourself to look at finances every day. Use a software like Quicken or Microsoft Money. Once you get into the habit to looking at your finances every day or once a week, you will treat your expenses in a different light.

Well, these were the main things I got out of my two new friends. I thought they made sense and these were things they actually did (not some theory on how you should you do it). You may realize that if you implement these steps and take their advice, it essentially involves a change in lifestyle. But that is what you probably need if your spending is out of control.

Share you thoughts and other ideas below.

In my last post, I talked about how the emergence of for-profit credit counselling firm has altered the landscape in this industry. We are now going to talk about a few steps you should take before choosing the right firm to work with.

1. Check if it is accredited

It is best to work with a credit counselling firm which is affiliated with either the National Foundation for Credit Counselling or the Association of Independent Consumer Credit Counseling Agencies. You should check their websites to see if the firm you are considering is affiliated with them.

http://www.nfcc.org

http://www.aiccca.org

2. Check with your local regulators

Call your local Better Business Bureau (BBB) and the state attorney general’s office. Check if there are any complaints against them and if there are any actions taken against them by any regulators.

3. Fees

I have not really taken a survey on the fees. But you should shop around with a few firms.

4. How much is the credit counselling firm paying your creditors?

The reason why credit counselling firms have got such a bad reputation is that the unscrupulous ones do not pay your creditors the check you send them. Some want to negotiate even harder for a lower payment. Missing your payment is going to hurt your credit score. This will prevent you from doing any refinancing or taking out any new loans. It is best to have this in writing.

5. Unbelievable Promises

If the firms you are speaking to are making unbelievable promises, it is best to walk away. What are ridiculous promises? Like telling you credit counselling will have no negative impact on your credit. Or that they can settle you debt or reduce your payment without affecting your scores. These claims are a telltale sign to stay away.

6. Speak to friends or people who have used their services

In situations like these, it is best to get a few referals and ask them about their experiences.

Well, I think if you take these steps, your experience with a credit couselling firm will be better than if you simply fall for the best sales pitch.

The National Foundation for Credit Counselling was one of the first non-profit credit counselling firms . They helped cash strapped consumers negotiate a lower interest rate and payment plan from their creditors, banks etc. The banks and credit card issuers supported them by giving a portion of the check (lower of off course) they receive from the consumers. It was called the ‘fair-share’.

In the 90s when consumer debt spiralled upwards, new for profit credit counsellers entered the market. These companies, being for porfit, went after consumers who were able to pay off their debt but who just wanted to lower their interest cost. They charged higher and often hidden fees. After negotiating a lower rate for their customers, many simply took their check and never paid the credit card company or bank. As a result, many unsuspecting consumers had their credit scores destroyed.

As a result of these tactics being used, soon after, many credit card companies and banks stopped giving back the ‘fair-share’ to credit counselling firms. This hurt the truly non-profit firms that really wanted to help their customers.

This explains why choosing a good and reputable credit counselling firm is such a minefield today. You should not avoid seeking one if you need help, but you just have to do your due diligence and pick the right one. We will explore how to do so in our next post.

I know a couple of people who have got into deep financial crisis. Very often, it is a result of years of overspending and not watching their finances. For example, I knew this person (let’s call him Mr A) who had a wonderful career and he was pulling in six figure salary. Then, his company downsized and he got laid off and was out of work for close to nine months. During the time when he was pulling in the six figure salary, spending was never an issue. Neither was saving! Mr A had very little in his savings account. He also took out a Home Equity Loan to renovate his kitchen.

When he spoke to me about his financial problems, he had $35,000 in credit card debt and he was close to using up his cash account. He had to come up with some cash fast. He had been given advice on what to do. This was what most people have told him.

1. Consolidate your debt with a Home Equity Loan (out of the question because he already has a HEL!).

2. Sell your house and move to a smaller place.

3. Take some money out of your retirement accounts.

4. Sell your junk and hopefully raise some significant cash.

5. Borrow from your relatives and friends.

Well, Mr A ignored most of these advice and this was what he did. Firstly, he did not want to move house. He was happy with the schools and secondly, selling and buying a house takes time. It simply does not happen in a day. He decided to put his two kids in a room and rent out a room instead for a few hundred dollars a month. This brought in some spare cash.

The second thing he did was to sell his car and buy a really old second hand car for about a couple of grand. That is a few more grand in his pocket.

Thirdly, his wife (who had been a full time housewife) found a part time job. He continued to take on consulting and part time projects.

Fortunately for Mr A, these steps brought in sufficient cash flows to pay off monthly bills. Mr A made sure he paid his bills on time and eventually set up a systematic payment plan to reduce his credit card debts. He eventually got a full time job, with lesser pay, but got health insurance. Within the next four years, he expects to be debt free. But this time, he is putting aside some emergency money.

Mr A’s action is a great illustration of steps you have to take when you run out of emergency cash. You have to do some ‘financial engineering’ and get some cash flow out of your household.

Consolidating your student loans may be one way for you to save money on your interest payments and perhaps even pay off your student loans even faster. There are essentially three methods to go doing this. I want to highlight these methods below.

Consolidate with another student loan

The most obvious method is to consolidate your student loan with another student loan. If all your student loans are from one company, you must consolidate with that company. If you have loans from different companies, you can shop around. There are a couple of things to be aware of when you consolidate you student loans with another student loan.

1. Consolidation can affect your ability to get deferment on your student loans. Deferment is one method which you can delay your student loan payments. You can defer loans if you and your spouse are disabled, become unemployed, go back to school (resulting in more loans!), work in law enforcement or joining the peace corp. If you consolidate your loans, you may disqualify yourself from future deferments.

2. Some perkins loans has clause that allows you to cancel your loans under certain circumstances. Once again, consolidating your loans may result in you losing this option.

Consolidate with a HEL or HELOC

Consolidating your student loan with either a home equity loan or home equity line of credit is another viable alternative. The caveat to this method is that if you miss payments, you may risk losing your home to foreclosure. Whether you choose this method depends on the rate you are getting versus your existing student loan or your new consolidated student loan. You also have to decide whether to get a HEL or a HELOC. A HEL has a fixed interest rate whereas the HELOC has an adjustable rate. For the most parts, a HEL is preferred because you lock in a fixed rate.

Consolidate with a 0% APR Credit Card

Another alternative is to do the consolidate your student loan via a zero percent balance transfer credit card. You should look into this alternative if you do not own your home and/or you have a very good credit score. Apply for a 0% APR Credit Card, and you could potentially save a lot on interest for the introductory period. Do the math and see if this will work for you. At the moment, the best card for doing a balance transfer is the Platinum Consumer Card with Cash Back OR Travel Rewards from Advanta, which has a 0% introductory offer for 15 months (the longest offer period in the market today).