It’s January, and that means that all around you, people are trying to improve their lives. More than any other time of the year, January is when everyone attempts to fix past problems and make their lives better. I’m certainly including myself in that group; it’s only six days into 2012, and two of my posts so far have involved my goals for the coming year.

Given that so many people are taking the time to focus on their resolutions and trying to improve their lives, I figured that it would probably make for a good blog entry (or four) to look at some of the more common personal financial resolutions and provide on how to accomplish them. So, for the next four Fridays, I’m going to providing advice on achieving Resolution Success, starting with

Paying Down Debt

This is a perennial favorite resolution: most of us have some debt, and it’s a rare person who doesn’t want to be debt free. Heck, I’ve covered this exact resolution before. (Although, looking back on it, I realize that I wasn’t as clear on how to actually pay down debt as I should have been; ah, the things you can learn by being a blogger.)

It's almost as good as book learnin'

But it’s obviously a tough one to actually achieve, otherwise there wouldn’t be so many people who make the resolution year after year. Since I find myself in the same boat as many people, facing quite a bit of debt and wanting to pay it down, it’s an area I definitely want to focus on this year. With that said, here are some tips to help you (and me) pay down debt this year:

-Figure Out a Plan of Attack, and STICK TO IT: As you might guess, the topic of paying down debt is a popular one, which I am hardly the first person to tackle. There are more than a few gurus with their own personal favorite ways to tackle debt, from Dave Ramsey’s Debt Snowball to Flexo’s Debt Avalanche, and pros and cons of each. Hashing out the best method is not what this article is about (and the best method for YOU is something I can’t tell you, anyway), but the important thing is that once you have a plan you feel will work for you, you need to stick with it. Going from one plan to another to another (or worse, dropping your plan altogether) will be worse than sticking with a single plan, even if that single plan is less than ideal.

-Pay More Than the Minimum: The centerpiece to every debt elimination plan is to pay more than the minimum on one particular debt. (Which one is a major source of debate, of course.) Trying to pay off your debt while paying only the minimum is a surefire method to remain in debt for years, if not decades, longer than you need to be. While some debts, like student loans, are designed to be paid off in a specific number of years (ten for most student loans), others can take decades to pay off at the minimum payments (and may not necessarily ever be paid off at those rates). If you aren’t putting more than the minimum into one of your debts, you’ll need to do so if you hope to ever declare yourself debt-free.

-Negotiate Better Rates, if Possible: It’s a situation of ‘ask, and ye shall receive’, at least sometimes. The simplest way to lower your credit card or other debt interest rates? Ask for lower rates. It really can be that simple. The worst that happens is your creditor says no, and the best is that you find yourself charged hundreds or even thousands less as you work to pay off your debt.  While I can’t say for certain whether your lenders will be willing to cut your rates, asking is the only way to know for certain.  Better yet: find out the rates you could get by transferring your debt to another creditor, and use those rates to negotiate better rates.  Worst case scenario, you know where to get to get lower rates if your current creditors won’t play ball.

-Put as Much Money as Possible Towards Debt Elimination…: Regardless of what particular repayment tact you choose, you’ll be most successful by putting the maximum amount of money possible towards debt repayment. You might say that you don’t have any money available; if you did, why would you be in debt? But there’s usually money to be found, if you put your mind to it. There are probably services you use, from cable TV to subscription websites, that you can cut, at least until your debt is gone. There are likely items in your house you could sell to bring in some extra money. And speaking of extra money, have you heard that some people even make a few bucks online doing something called ‘blogging’? If you put some time and effort to it, you can potentially derive quite a bit of additional to help your debt repayment.

-…But Make Sure to Have a Reserve: It’s tempting to go whole hog when you are paying down debt; after all, every dollar of credit card debt you eliminate is one less dollar you owe, and thus one less dollar accruing interest. But you need to have some money set aside in an emergency fund; otherwise, the moment you run into financial trouble, you’ll find yourself in even deeper debt. How much of an emergency fund to have is another of those issues you’ll hear numerous opinions on, but you should have enough that any foreseeable problems can be handled without having to add further debt.

-Be Careful About Adding New Debt: I’m going to take a different tact here than the average debt elimination adviser. Most sources you’ll read say to not add any more debt as you pay down what you owe; things like cutting up your credit cards and canceling them as soon as you eliminate what you owe. This is not bad advice, particularly if you find yourself spending money you don’t have anytime there is plastic in your wallet. But, I understand that there are times when you find yourself all but unable to avoid adding further debt. Particularly if you are a student and making little, if any, income, you’ll likely have to go into debt simply to keep a roof over your head and food in your belly. The trick is to be careful and only add more debt when it is absolutely necessary. So, food, gasoline (assuming you are going to and from classes or work, not joyriding across the country), and rent: yes; expensive parties, fancy clubs, and high-class booze: no. A good rule of thumb: Try not to add any debt that doesn’t directly help you to earn more in the future.

There are a few tips to help you take that debt off (and keep it off). Does anyone have further suggestions they’d care to share? Or perhaps horror stories of finding themselves in too much debt thanks to doing things wrong? Inquiring minds would like to know!

Well, the holidays are over (or are well underway, at least; I realize that it’s only the fourth day of Christmas, for those of you who celebrate all twelve days, to say nothing of the other holidays that occur during this time of year). Hopefully, you’ve had a good holiday, with plenty of friends, family, and fun times. Now would seem to be the time to kick back, relax, and wait for the New Year to come.

But alas, that’s not always possible. There’s plenty that should be done before the year ends, or near the start of the year next year, at the latest. I’ve covered quite a few items on Monday (because I couldn’t let you go any longer before thinking about what you needed to do), but there’s an elephant in the room we still need to discuss: paying for those holiday presents.

Yup, Christmas Presents just like this

If you are like a great number of people in our modern society, there’s a decent chance that you went into debt (or added more debt to what you already had) buying presents for everyone (I know that I did). It happens, and I’m no position to scold you for it; now, though, is the time to plan how to deal with this added debt. We should start by:

1. Accessing the Damage: You need to know where you stand before you can figure out how to deal with it. Luckily, it’s easier than ever to find out where your finances stand nowadays: every credit card company allows you to check your balance online, as well as making payments. You probably kept track of how much you spent, of course, but it’s a good idea to go back over your statement to ensure that you are only being charged for spending you actually did, as well as making sure you know the total of what you owe.

2. Making a Plan: When you know what you owe, it’s time to figure how to eliminate it. There are a few different issues you will need to consider, from where to get the extra money to pay down the added debt (do you cut down your spending, or perhaps try to earn some money through a side job?) to which debt to tackle first. (There’s quite a bit of disagreement on the best order to handle debts; I tend to support trying to deal with the highest interest debt first, but paying down debt is good, regardless of the exact order you follow.)

3. Stick to that Plan: Once you know how you’re going to pay down your Christmas Present debt (or any debt, for that matter), it’s simply a matter of sticking to your plan. Alright, it’s not really that ‘simple’; if it were, there’d be a lot less trouble with debt in the world today. If you are going to stick with a plan, you need to make sure to reward yourself when you meet landmarks along your road to the ultimate goal of finishing off your debt. Try to find things that will bring you joy, but won’t cost much money; a picnic in the park or a (frugal) night out as you clear out your holiday debt will make it that much easier to remain motivated as you keep paying things down.

4. Plan for Next Year: Let’s be honest, there are some expenses, like car repairs or medical expenses, that we can’t see coming. Holiday expenses are NOT in that category, though; while you might not know exactly how much you will spend next year, you can probably come up with a ball-park figure about what you will need to keep everyone on your gift list happy (as well as providing food, decorations, and all the other holiday accouterments). Rather than charging all those expenses, why not put money aside throughout the year so you can pay for the holidays with your own cash (and enjoy the interest you accrue along the way, rather than pay interest to the credit card company)? By breaking the expected expense up and putting aside a smaller portion monthly or weekly (similar to an emergency fund), you can ensure that there will be plenty of holiday cheer, or at least, fewer holiday credit card bills.

Alright, that should be enough to get started on dealing with your holiday related credit card debt. Hopefully, next year you can have an even better holiday with less holiday debt as a result. Good luck, and enjoy the holiday time!

If there is one financial problem that seems to bother more people in the United States, it’s debt, and the task of getting rid of it. As a nation, we seem to have more trouble handling debt than any other financial task, like investing or drawing down money for retirement. With so many potential customers, there is a pretty sizable market for advice on how to pay down your debt.

Pay It Down! by Jean Chatzky, as you might guess from the title, is one source of such advice.  It’s strictly a book on paying down debt; nothing in here about investing, planning for retirement, or other methods of making your money grow, this book is all about cutting down your debt.  So, is it good advice, or does the book leave something to be desired?  As always, let’s read on to find out!

Summary

Pay It Down opens with a promise, the promise that $10 a day is enough to pay down your debts (regardless of size) and get your financial ship in order. The introduction proper to the book then looks closer at credit card debt, the major type of debt discussed in the book.

The first chapter (or first step, as noted in the book) is about assessing the problem, determining where you stand with your debts, allowing you to break them into secured (backed by a tangible asset that can be seized if you don’t pay up; think car loans or mortgages) and unsecured (nothing tangible backing them up that can be easily seized; your credit cards are the prime example). Once you have a handle on the size of your debt, the short second step covers how to break your challenge into manageable steps, dividing the debt into the amount you have to pay each day to eliminate it completely in three to five years.

Step three is about your credit score, that three digit number that determines how much banks and other lenders will charge you to use their money. There is, as you might imagine, quite a bit of advice on how to improve it, cutting the amount of interest you have to pay and (hopefully) making it easier for you to get out of debt. The fourth step in this process is about tracking your spending, both the fixed categories (rent/mortgage, phone bills, insurance, etc.) and the variable ones (groceries, gasoline, dry cleaning, etc.). For the latter, Chatzky recommends keeping a small notepad with you and writing down all your out of pocket expenses, transferring them to a legal pad at the end of the day.

Once you know where you are spending money, the next four chapters look at how you can cut that spending. The fifth step starts the process, looking at how you can refinance your loans (with a good enough credit score) to cut down your monthly costs or transfer your credit debt to lower interest cards. The sixth chapter continues the process, looking at ways to consolidate your loans, mainly through home equity loans, lines of credit, or cash out refinancing of your home (all of which are likely to be harder to get in our current financial environment).

Step seven is a rather massive one, looking at all the spending categories from step four and seeing where it is possible to cut back while not hurting your life. Each spending category is listed according to priority, from High to Low, so you can get some help in deciding whether gasoline (high priority) is more important than, say, housekeeping (low priority). The eighth step looks at situation where even all that isn’t enough, looking at some of the hard choices, like moving to a lower cost area or putting your children in a public school. There’s also advice on selling some of your things to raise some more money or earning more through a second job.

Once you’re earning more money, the next step in the process (and the book) is how to pay down your debts intelligently, starting with the highest interest rate debt. There’s also advice on how to handle situations where you don’t have enough money to pay all your creditors. Speaking of which, step ten looks at how to handle things going wrong, from handling a shopping problem to dealing with creditors and avoiding foreclosure.

Step eleven is about staying ahead of the game, looking at ways of building an emergency fund (by putting an ‘eleventh’ dollar every time you save into savings). There’s also discussions of insurance and Health Savings Accounts, allowing you to make it through difficult times in your life. The book concludes with the Debt Diet, a guide to how to spend your money and how to pay off your debts, covering ways to stick to the advice given throughout the book as well as how to find further help if needed.

Pros

The Debt Diet is simple, easy to follow, and has lots of helpful advice. There is quite a bit of hand-holding, if you are at a complete loss at where to start. Overall, the advice is useful and a good approach to paying down your debt, particularly your credit card debt.

Cons

There is some dated advice within the book (at least the 2004 edition I’ve been reading), mainly regarding using your home equity to refinance your debts; which is not so easy to do nowadays (to put it mildly). The book is also pretty well limited to only paying down debt; if you are looking for help beyond that, you’ll need to look elsewhere.

Overall

Pay It Down! is a very solid guide to handling debt and hopefully eliminating it.  It helps to break down a seemingly impossible task into quite a few easily manageable tasks.  As long as you only need help with debt pay-off (at least, until the debt is gone), this is a solid book for you.

Nobody wants to be in debt.  Having people or corporations to whom you owe money is never a good thing; it forces you to use your (always limited) resources to enrich someone other than yourself, and decreases your ability to meet your own goals.  It’s not the sort of thing that anyone wants to face.

There’s quite a bit written about how to pay off debt and get your finances in order; it’s one of the most popular financial topics, second perhaps only to investing.  I can’t hope to cover all the varieties of debt elimination in a single post, but hopefully this can help you get on the right path (and since I could use some help in that area myself, perhaps help me organize my thoughts on what to do myself).

Q: What’s the Best Way to Pay Off Debt?

A: Ah, starting off with a tough one.  There are a number of different approaches to paying off debt, with numerous proponents of each.  Strictly mathematically, the best way to pay off debt is to pay off the highest interest debt first (while paying the minimum on all the other debts, of course).  That’s far from the only approach; another popular method is to pay off the lowest-sized debt first (a la Dave Ramsey), which has its own advantages and disadvantages.  My first choice would be the highest interest rate first (although, there are other considerations).

Q: How Should the Type of Debt Influence Payment Order?

A: In general, minimally; the type of debt should be a secondary consideration.  That said, different debts are treated differently under the law, and depending on your situation, you might need to modify your payment order.  For example, credit card debts are wiped out by bankruptcy, while student loans aren’t.  So, if you are approaching bankruptcy, prioritizing student loan payments over credit card payments, regardless of interest rates, might be in your best interest (although, if you are approaching bankruptcy, you should talk to your lawyer and find out your best option).

Q: What Priority Should Debt Repayment Take in My Financial Plans?

A: It should be near the top of your money goals; there are not too many things that should take higher priority.  I can only think of a few off hand; building up an emergency fund (at least a few months of expenses), keeping at least some money flowing into retirement investments (no sense getting out of debt if you don’t have any longer term goals to meet), and continuing to donate to charity being the top of the list.  But a sizable amount of your income should go to paying down debt, until you have gotten rid of the debt.

Q: Should I consider Debt Consolidation?

A: I would be very leery about debt consolidation in most situations.  Particularly when it involves debt consolidation companies, there is the potential for them to make things worse, not better (by withholding payments from your creditors to force a better deal, wrecking your credit in the process).  You can consider DIY debt consolidation, by getting a loan from somewhere like Lending Club and using it to pay down your other debt.  (Just make sure you don’t use it as an excuse to run up more debt and get hit by a double whammy of debt repayment).

Q: How Do I Find the Money for Debt Repayment?

A: It can be tough to find extra money to cut down your debts (if it wasn’t, nobody would have debt troubles in the first place).  There are numerous areas where you can cut down  spending to put more money toward debt repayment; basically any area of your life you haven’t already cut to the bone (which for most of us means all the areas of our lives) can be cut.  Also try building up your income, either by getting a raise or building a side income.  Remember, though,  to cut down debt before you start further spending.

Alright, that’s it for our short introduction to debt repayment; here’s to good luck for all of us in our debt repayment goals!

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One of the major disagreements you’ll come across in financial literature is the issue of student debt and whether it’s worthwhile. Let’s look at my remaining student loans (my only long-term debt) under three different paradigms:

1) Good Debt is Cheap Debt. A fairly simple, purely mathematical distinction; you simply have a cut off point for interest rates. All the debt above that level is bad, any below that is good. Simple, hunh?

Well, not that simple; you still have to settle on a cut off point. There are different views on what constitutes the division; Suze Orman, for one, recommends 8%, but there’s nothing magic about that particular number. My student loan, at 2.87%, certainly meets that level for cheap debt, as well as more grueling requirements of 3-5%. So far, so good debt!

2) Good debt buys value. In other words, if you are able to buy an appreciating asset with the debt, it’s good debt. By this logic, real estate mortgages, small business loans, and yes, student loans all qualify as good debt. The result is an increase in earning power in all three cases. That’s two for two, with student debt qualifying as good debt.

3) No debt is good debt. This is the philosophy of Dave Ramsey, among others. By this standard, any kind of debt you acquire is bad debt. Exceptions are made for mortgages, but even those should be paid back as soon as possible. By this point, even the $12,000 I owe is bad debt, and I should make it a top priority to eliminate the debt.

My View: I tend to lean toward the first definition. I don’t feel that I can go through life without any debt, nor should I put investing and other goals aside until I’ve paid them back. In addition, while the purpose for taking on the debt is relevant (particularly to the IRS)

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