Saturday, August 29, 2015

The Vacation You Want Vs. The Vacation You Need...

This past year has presented some challenges for me that has left me feeling exhausted.  It was the kind of exhaustion that gets under your skin and into your bones.  Most of the exhaustion has come from a great number of changes, many of which are good:  a new position teaching high school English, a move across the country, turning our house into a rental (and unexpected repairs that came along with it), and a number of other things.  Sometimes even the most wonderful changes can leave a person feeling extreme fatigue.  When this happens, we have to do something to rejuvenate ourselves because let's face it, we can't be of any use to others when we are running on empty...  When we get to this point, many of us find ourselves uttering the words "I need a vacation!"

...And we're probably right...

Now be careful of the "vacation trap."  Just the though of planning a vacation drums up images of exotic locations, palm trees, dinners out, drinks with little umbrellas in them....  Then we find ourselves searching the internet for discount tickets to the French Riviera or a resort in the Bahamas.

You are to stop and go no further.

I know, I get caught up too.

This is when we all need to have a very frank conversation with ourselves about the vacation we want versus the vacation we need.  These two things are not always the same.

Step 1.  Review your financial goals and your honest progress toward them.
In my case, this is easy.  I wanted to be out of credit card debt by the time school started again in the fall.  When I considered my progress toward this goal I realized that it was attainable, but it would take most of my extra cash to do it.  I could not divert these funds to another cause and still meet my goal.  Besides, if I have credit card debt, I can't afford the vacation.  Tough pill to swallow, but true.

Step 2.  Think through the vacation that you want, and compare it to the money that you actually have available (only after completing step 1)...
I really want to take a trip to Europe (Italy to be specific) with my partner.  I have done my research, and know how much money that I realistically need for this vacation.   I cannot plan this vacation this summer and still meet my goal in step one.

Step 3.  Be honest about the best thing for you...
The best thing for me is to put  Europe on hold, and create a savings plan to work toward that goal.  I also know that I need a vacation.  I gauged my own exhaustion, and know that this is more than a want.  The absolute best thing for me to do in this case is to get creative and plan a vacation that I can pay for without getting in the way of my financial goal.

How did this turn out for me?

I wanted Europe, but I did not do that.  What I did do, is take a couple of camping trips where I could relax in a different environment.  I also paid off all of my credit card debt this summer.  I feel like I made the best choice for my family because now this Europe trip can happen without being a setback.  Of course we have other financial goals, but this is a huge one that was checked off the list.  Now, I can start planning that vacation of my dreams and save for it in the process...

How successful are you at balancing want versus need when it comes to vacation planning?

Saturday, August 22, 2015

"Smallest Balance First" Method: Eliminating Credit Card Debt

There is one chore that I cannot stand doing...Laundry...  Thankfully, I live in NY, and I use the drop-off service (I did the math, it turned out that doing it myself wasn't really creating much savings).  The thing that I hate the most about doing laundry is the fact that it never looks like any progress has been made.  On the other hand, I love doing the dishes because I immediately see something change.  I find that very motivating.  Why am I telling you about my housekeeping likes and dislikes in a personal finance article?  Simple.  We can learn a lot about ourselves financially, but looking at ourselves in non-financial situations.

Last week, we took a look at the "debt snowball" method of paying off credit card debt.  There is really no way to go wrong with that method, unless of course you run into motivation issues.  On one hand, paying off your credit card debt, and becoming debt free should be pretty motivating on its own, however; there are situations where the debt snowball can make you feel like you are attacking a never ending pile of laundry!

For example, perhaps you have created your list of credit cards, the balances, interest rates, and minimum payments, and you are looking and something like this.

  1. Retail Store Credit Card----$4500 (bal.)----19.99%---$75 (min. pmt)
  2. Airline Credit Card----------$3000 (bal.)----14.90%---$65 (min. pmt)
  3. Credit Union Card-----------$1200 (bal.)-----7.90%----$25 (min. pmt)
Notice, these bills were ordered from highest interest rate to lowest.  This the way you would look at it if you were planning to use the snowball method.  The idea is that the Retail Store Card listed above is costing you the most in interest every month.  It is the most expensive of the three debts.  So, you then take a look at your other bills, and find that after making all minimum payments, and all bills paid, you can put an extra $400 per month to eliminating the balances.  Next you identify that if you use the snowball method, you will put that $400 to the Retail Card, you start punching numbers into the calculator on your cell phone, and learn that it will take you almost a year to get rid of ONE credit card.  You feel immediately defeated, right?

Well, first off, you need to realize that it will take TIME to get out of debt. It is sort of like losing weight.  It is easy to put weight (debt) on, but takes a while to get rid of it.  That being said, you might consider trying a different method.

Try a Smallest Balance First method.  Put your extra $400 toward the Credit Union Card, while paying minimums on all of the others.  In roughly 3 months, you will have eliminated the balance on that card.  Then, you will start to apply the $425 you were applying the Credit Union Card to the card with the next smallest balance (the Airline Card).  You will continue on in this way, until you have eliminated all credit card debt.  

Using the above scenario, you will effectively eliminate the balances on two credit cards using the smallest balance first method, in the same amount of time it would have taken you to eliminate the balance on the Retail Store Credit Card using the snowball method.

While you are not eliminating your most expensive debt first,there is something to be said for the motivation that comes from seeing progress happen very quickly.  Take a good look at yourself.  If you are the kind of person that can't stand doing laundry because you feel like you never see any progress, perhaps the smallest balance first method is for you.

Saturday, August 15, 2015

Debt Snowball: Eliminating Credit Card Debt

Sometimes paying off credit cards can make you feel like you are standing at the bottom of Mt. Everest staring upward.  Now, those of you outdoorsy types know that you don't just wake up one morning and say "Gee, I think I will climb Mt. Everest today!"  It takes planning and preparation.  The same goes for paying off credit cards.  There are a couple of different strategies that help greatly in this type of planning.

One of these methods is sometime referred to a "debt snowball."  I've also heard it called a "debt ladder."  Regardless of what you call it, this method is highly effective for paying off debt.  It can be used with regards to all of your debts, but for now, we will just look at your credit cards.

The very first step is to prepare to make a list.  You will access to your most recent credit card statements.  Write down the name of the credit card, the balance, the percentage of interest that you are paying on it, and the minimum payment.  Do this for each card.

Next, reorder your list.  The first card you should list is the one with the highest percentage rate.  The one with the lowest percentage rate should be the last one on your list.  Your list might look something like this:

      1. Department Store Card--$550--19.99%-----payment:  $25
      2. Airline Credit Card-----$4500--14.90%-----payment:  $75
      3. Credit Union Visa------$3300----7.90%-----payment:  $70
Now, the next step also requires a little bit of work on your part.  You need to figure out how much money you have leftover after paying all of your bills.  This includes those minimum credit card payments.  We will do more work on budgeting in the upcoming months, but for now, let's assume that you've calculated this.  For the sake of example, let's say that you find that you have an extra $200 each month.

You are to pay all of your bills, including all of those minimum payments first.  Then, you are to apply the $200 to the first credit card on the list.  That is the one with the highest interest rate.  The reason is because regardless of balance, that is the credit card that is costing you the most money each month.  You will continue to do this each month until you have eliminated credit card number one.

Once the first card has been paid off, move on to number two.  Now that you have paid off number one, you have $225 available.  You are no longer responsible for the $25 minimum payment, and you still have your extra $200 to use.  So, here's what you'll do.  Again, make the minimum payments on all credit cards, then make an extra $225 to the one with the highest interest rate.  Keep doing this until you have eliminated the balance on that card.  Using the above example, that frees up an additional $75 per month (eliminating the balance on credit card two).  Now you have a total of $300 per month to apply to the final credit card after you've paid the initial minimum payment.

Now, there are a couple of other things that you can do in order to maximize your effectiveness in paying off credit card debt.
  • Use all bonuses and tax refunds to pay off credit card debt.  I know this is harsh, but if you have credit card debt, you have somehow lived beyond your means, and you need to wipe the slate clean as quickly as possible.
  • Transfer balances to lower interest rate cards.  Calculate carefully.  Most of the time there is a fee for a balance transfer.  It may not really be worth transferring a balance to a lower rate if the fee is too high.  Also, this is not a green light to go a head and open more credit cards all willy nilly.  More credit cards can get you in trouble if you aren't very calculated and very careful, however; if used carefully, and researched well, doing a balance transfer could greatly speed things up.  I have used this method successfully, and it has saved me time and money.
One important thing to note is that while you are paying off your credit cards, they should not be in your wallet (see last week's post regarding the freezer method).  You should not be spending money on them, or you are sabotaging your own progress.  Also, there is one exception to the above method of ordering your debt.  If you have any credit cards with a low interest rate that is only good for a limited time (perhaps you took advantage of some special offer), you need to place that in the number one position.  If you don't eliminate that balance by the agreed upon date, the credit card company will charge you a higher rate, and most likely backdate that all the way to the time you took advantage of the offer in the first place.  That could be a very expensive error!

This method can be highly effective for paying off credit card debt.  One of it's strongest features is that it aims to eliminate your most expensive debt first.  Simply put, the card with the highest rate costs you more in interest per dollar charged than any other debt.  

The "debt snowball" also helps you to combat lifestyle inflation.   Lifestyle inflation, in its simplest terms, is the idea that when people have more disposable income, they tend to find ways to spend it (dinners out, entertainment, etc).  By reallocating the minimum payment dollar amount to another credit card after you've paid one off, you've prevented yourself from spending that money on something else. 

I just paid off a credit card, and only have one to go!  One more step on the path to financial freedom.  For those of you that are also working to pay off your credit cards, how is your progress going?

Saturday, August 8, 2015

Credit Cards On Ice: The First Step To Controlling your Credit Card Debt

Today's article is in celebration of a personal financial achievement.  I have paid off a credit card!  One down, one to go!

There are a couple of wonderful strategies for paying of credit cards that I'd like to share with you over the next few posts in hopes that you might find one that works for you: the debt snowball and the smallest balance first methods.  Regardless of which method you choose, the first step is the same.

Freeze your spending...  Literally!  Take your credit card out  of your wallet, place it in a freezer bag, fill it with water, and put it in the freezer.  Strange sounding advice right?  I heard of someone doing this once, and I though it was brilliant.  Besides, this strategy is very intentional.  There is absolutely no way that you can impulsively buy things on credit if your credit card is in the middle of a block of ice.  You will have to sit and wait for it to thaw out.  In the mean time, you will have enough time to really consider if you really need that item you are thinking of buying.

Note, I said need rather than want.  If you are working on paying off your credit card debt, one of the most important things to work on is want vs. need.  If you need it,  you should have it built into your monthly budget, and should not use a credit card for it.  If it is a want, you should wait.  I have several wants that I am waiting for, but right now, indulging in those wants will keep me from my goal of being free from consumer debt.  Eventually, I will get some of those things, but right now, I am evaluating my wants.  For example, I want to be free from the burden of my credit cards.  I also want to go on a vacation, and have a couple of destinations in mind.  Right now, I know that if I choose the vacation, I will be saddled with my credit card debt for another year.  My desire to be free of my credit card payment overrides my desire to go on vacation.  Now that I have made this choice, I will be free of credit card debt by roughly the end of the summer.  This choice also means that next summer, I will not be in the same position.  At that point, I will have moved beyond the credit card debt issue, and be working on something else, which can include at the very least, a modest vacation.

Now, this may all sound great to you, but you are still unsure of whether or not to freeze your credit card.  Perhaps that sounds too extreme for you...  Okay, I get it.  At the very least, take the credit card(s) out of your wallet.  Lock them up somewhere.  If you don't carry them around with you, you cannot make an impulse purchase.  However, this will not save you from yourself when you are at home.  We live in a highly digital age, and you can buy almost anything from the comfort of your couch.  If you are not going to freeze your credit card, (or cut it up) you must be prepared to exercise a lot of willpower when it comes to online shopping.  If you have that kind of willpower, you have my blessing.  If you don't, the answer may be in your freezer.

Sunday, August 2, 2015

Retirement Basics: Social Security Retirement Basics

Many of you work in certain industries where individuals are left to  their own devices regarding taxes and the reporting of income.  It is tempting to leave much income "off the books" for a number of reasons (one being to avoid "paying in" come tax time).  This is a dangerous choice.  Not only is illegal, but it can cost you dearly in the future.

At some point in life, you may want to retire.  I know for many of you, this is pretty far into the future, but claiming your income correctly is one simple step in retirement planning.  The income that you earn and report now, will impact your social security benefit at retirement.

Social security offers a retirement benefit that can seem confusing to navigate.  Here are some of the Social Security Retirement basics.

  1. You must work for 10 years.  Social Security Retirement Benefits operate on "credits."  You must have a minimum of 40 credits in order to be eligible for retirement benefits.  If you do not earn 40 credits in your working years, you will not be eligible for a social security check.  You can earn up to 4 credits per year that you work.  You must have earned $1220 (in 2015) to have earned 1 credit. 
  2. If you die, your dependents may collect your social security.  Again, you must have collected enough credits, but assuming that you have, you qualified dependents can collect your benefit.  See special rules about who might be a qualified dependent for purposes of social security retirement benefits.
  3. The minimum age that you can collect your retirement benefit is 62.  This being said, you can file for this benefit at age 61 and 9 months.  Age 62 is considered "early retirement" and results in  a retirement benefit that is approximately 25% less than it would be at full retirement age.
  4. Your spouse can claim your benefit even if he/she has never worked.  This assumes that you are either collecting your retirement benefit, or are eligible for it.  Your spouse must be at least 62 years of age in order to collect.  You can collect your own benefit at the same time.  So, both individuals can be collecting a retirement check based on one person's benefit.
  5. "Full Retirement Age" is 67 years old for those who were born in 1960 or later.
  6. If you suspend your social security payment at full retirement age, you will receive a higher benefit by 8% each year plus it will be recalculated based on any earnings that you had in that time frame (until you reach age 70)
  7. Automatic payments begin at age 70.  If you haven't begun to collect your benefit by this time, they will kick in automatically.
  8. A special "trick" for married couples...  If you and your spouse are both full retirement age, one of you can apply for their retirement benefit and suspend the payment.  Then the other can apply for only the spousal benefit.  This allows both individuals to delay collecting their own benefit, which will also result in a higher payment once collected.
I know that was a lot of information, but understanding the basics of how your retirement benefit works is really important.  There is also a Medicare benefit to consider, but we will leave that to a future post.  Right now, there are a few things that you can do.
  1. Report all earned income on your taxes.  You must pay in to social security in order to collect in the future.
  2. Read your annual statement.  Social security provides you with an annual statement.  This provides you with important information.  It tells you if you have enough credits to qualify, how much you can expect your payments to be at various ages, and much more.
  3. Research exceptions, special rules, and payout calculators on the government's social security website.  This will give you the most accurate information that pertains to your specific situation.  This website is  It is a terrific website, and has a lot of information that has been used in this article, and more.

 A few simple steps will ensure that you qualify for a retirement benefit, maximize your payout, and get the most out of your social security retirement benefit.