15. !"#$"#!%
Take Complete Control of Your Finances….
Avoid Drowning in Debt...
Borrow Wisely!
A Guide to Beating Debt
Income
Paycheck 1 $ 2,000 <>
% % %
Paycheck 2 $ 1,500 <>
% % %
Other %$ 500 <>
% %
% %
% %
Total Income $ 4,000
Expenses
Mortgage %$ 950
% %
Cars %$ 600
% %
Insurance - Auto %$ 150
% %
Insurance - Life % %$ 60
% %
Credit Cards / Loans %$ 125
% %
Phone / Cable % %$ 75
% %
Utilities - Gas/Water/Electric %$ 125
% %
Groceries %$ 250
% %
Entertainment %$ 250
% %
Gasoline for Cars %$ 100
% %
Total Expense $ 2,685
% %
% %
% %
NET INCOME $ 1,315
This is what a sample budget would look like for one month. Notice this budget has a net income (i.e. this family has money l
after it pays all of its expenses.) You might find out as you put in actual numbers into your monthly budget, that you end up w
net loss. That is not a good situation to be in. Just like a business, if it cannot make a profit it will go bankrupt, so will you go
bankrupt unless you can spend less than you take in.
Debt
» Debt is a double-edged sword. It cuts two ways !
» Responsible borrowers can pay for items they
need with borrowed dollars
» Others see large parts of their income consumed
by debt with little to show for it
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16. !"#$"#!%
Reasons for Debt
We Get Into Debt
» To reward ourselves
» To make big purchases
» To meet day-to-day expenses
%
%
» To go on vacation
» To cover emergencies
%
%
» To make others happy
%
%
» Because we can
3
%When It Doesn’t
Make Sense to Borrow
» To go on vacation
%
%
» To lend to others
%
%
» To get married
%
%
» To buy clothes
%
%
» To gamble
» To invest in a hot stock tip
How long does it take for your debt to double?
4
Understanding Debt
» Principal – The amount of money you borrow
» Interest – The fee you’re charged for borrowing
money from others
» Credit – An amount of money made available for
your control by a bank or other lender
» Two categories - Secured and Unsecured debt
5
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17. !"#$"#!%
Determining What You Owe
The first step towards managing and eliminating debt:
CREDITOR BALANCE MONTHLY
PAYMENT
FudgeAppliances $1,100 $49.99
ChokeElectronics $3,200 $167.00
ShylockMotors $6,900 $450.00
RipFurniture $4,200 $275.00
DMXVisa $5,200 $300.00
TotalOwed $20,600 $1,241.99
6
%Evaluate Your Situation
You Have a Problem When
» You fight over money
» You are late paying your bills each month
» You use credit for things you once paid cash for
%
%
» You are making debt payments with rent money
%
%
» Creditors are writing and calling
7
%Evaluate Your Situation
You Have a Problem When
» You transfer balances from one card to another
%
%
» You are using pay day loans to meet living expenses
%
%
» You cannot save any more
» You are threatened with repossession, eviction, legal
action
» You count on a tax refund to pay debt
8
&%
18. !"#$"#!%
Track Causes of Debt
LENDER AMOUNT REASON
$750 TV“ONSALE!”
Smears
DepartmentStore
ChokeElectronics $3200 Largescreenwas
thethingtohave
DMXVisa Cruise
Toimpressmy
EX!
9
Credit Cards
» Can be used to purchase most everything
%
» Allow you to borrow up to a set limit
» Allow you to pay a minimum amount each month
%
» Are easy to overuse, pick one with the right terms
%
» Allow you to inflate your income
Credit and Debt walk hand in hand! Without credit
you would have no debt. Protect your credit!
10
Kick the Credit Card Habit
Moving forward:
» Stick to one or two credit cards
%
%
» Write down what you spend
» Charge only what you can pay off monthly
%
%
» Use for large purchases only in emergency
11
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19. !"#$"#!%
Borrow Wisely!
TheGood TheBad TheUgly
»CreditUnions »LifeInsurance »PawnShops
»Banks »Retirement »CreditCards
»Savings&Loans Plans »PaydayLoans
»ServiceRelief »Friends& »HomeEquity
Agencies FamilyLoans
12
Comparison Shopping
Amount APR Length Monthly Total Total
ofLoan ofLoan Payment Interest Cost
Loan $12,000 7.5% 3years $373 $1,438 $13,438
A
Loan $12,000 8.5% 3years $376 $1,541 $13,541
B
Loan $12,000 7.5% 4years $290 $1,927 $13,927
C
Loan $12,000 8.5% 4years $296 $2,197 $14,197
D
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Where To Begin to Reduce Debt?
» Get out your checkbook, ATM slips and credit
card statements
» Figure out on what and where you spend, and
how much is left at the end of the month
» Create a spending plan
» Use the spending plan to guide future spending,
debt reduction, and saving
14
'%
20. !"#$"#!%
Spending Plan Tips
» Make budgeting a family affair
%
» Don’t spend more than you earn
%
» Pay yourself first – treat savings
like a bill
» Adjust as your income, expenses
and goals change
» Monitor your spending
15
Debt-to-Income Ratio
How much of today’s purchasing power is going to debt?
Divide total monthly debt by monthly income
$1,500 in monthly debt payments divided by $5,000
%
monthly income = 0.30 or 30%
< 15% - Things are under control
%
%
15 – 20% - Watch it !
21% or higher – Get professional help!
16
%When You Spend
More Than You Make
You must:
» Increase income
%
%
» Spend less
» Adjust your goals
» Negotiate with creditors
%
%
» Change behavior
17
(%
21. !"#$"#!%
Every Bit Counts in Repaying Debt
» Reduce Spending!
– (Cut out expensive habits, pack lunch, carpool, use
coupons, shop end of season, etc.)
» Sell what you don’t need
» Make extra income and apply it to debt
%
» Use tax refunds and bonuses to reduce debt
» Every dollar not paid in interest is money in your
pocket
18
Borrowing Money
to Pay-Off Debt
Consolidating Loans
» Pros:
– Rolls everything into one monthly payment
%
– Makes life easier
» Cons:
– It takes tough self-control
– Creates a false sense of security
%
– Can have high fees
19
Getting Out From Under Debt
1. Stop spending
2. Collect and organize bills
3. List creditors, balances and interest rates
%
%
4. Develop a spending plan
%
%
5. Have a plan for repayment
%
%
6. Use extra cash to pay on debt
20
)%
22. !"#$"#!%
Three Repayment Choices
» Pay the highest interest rate first
%
» Pay the lowest balance first
%
» Pay off the shortest term first
Apply one-time or periodic additional payments
%
(e.g. bonus, tax refund) to debt
Apply extras to principal
21
What to Pay Off First
Knock this one down first!!
Lender Balance APR% Monthly
Payment
USAA $2000 12% $200
Citibank $500 18% $50
MBNA $5000 29% $300
22
Power Pay
» Pay monthly minimum on lower rate debt
%
%
» Apply extra cash to high interest debt until the
balance is paid off
» When a balance is paid off use that money to
attack next highest rate debt
» Apply Power Pay to home and car loans
23
*%
23. !"#$"#!%
Home Loans
» One debt that can make sense
» Take out a thirty year loan – but pay it off early
%
%
» Don’t take out a mortgage just for tax reasons
%
%
» Buy less house than you can afford!
%
%
» Understand rates and terms
» Determine how you will pay the
%
%mortgage if there is less income
24
%
% Mortgage Freedom
%
%
%
%
%
Here’s a way to pay a mortgage off early and save thousands of
%
dollars. For this example we use a 30-year $100,000 mortgage at
%
6% interest
MONTHLY EXTRA PAYMENT*
Payment $ 600 $ 100
Annually $ 7,200 $ 8,400
% % %
Total interest paid $115,830 $76,400
% % %
Years to maturity %30 years 21 years
% %
%Savings $39,430
*Record the additional principal amount on the “memo” line of your check
%
%
%25
Car Loans
» Buy used
%
%
» Negotiate
– Be ready to walk away
%
– Go with cash-in-hand
» Shop around
» Don’t go over a five year loan
%
%
» Keep your car for the long term
– Maintain your car!
26
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24. !"#$"#!%
When You Are Overwhelmed
Service Members Credit Relief Act (SCRA)
» 6% cap on interest rates
» Invalidates, sale, foreclosure or seizure of property during military
service and for 90 days after
» Prevents you and dependents from eviction while on active duty
%
» The SCRA allows you to request a delay regarding a legal matter
%
» The SCRA provides protections against default judgments
27
Bankruptcy
Chapter 7
» Your debts may be erased
» Can keep paying on secured debt (mortgage or a car loan) and
keep the secured property
» You could lose other property
Chapter 13
» The court approves a payment plan
» You have to repay portion of your debt (and possibly all)
%
» Are obligated to make payments for up to five years
28
Ways to Avoid Future Debt – Plan!
EXAMPLE: John wants to take his family on a vacation. It’s years since
%
they’ve gone somewhere special. He would like to tie the vacation to his 10
%
year wedding anniversary four years from now. He’s looked into the costs,
%
including: travel, hotel, food and tickets. He expects the total cost to be close
%
to $4,000
GOAL WHEN HOW HOWLONG SaveEach
MUCH Month
Trip 4years $4,000 48months $83
PlasmaTV April‘09 $1,200 6months $200
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25. !"#$"#!%
Emergency Fund
Cash to draw from when you need money fast
%
%
» Ideally three to six months cash to cover expenses
» Use strictly for emergencies
» When you take it out – put it back!
30
Debt and Your Credit Report
A report card of your personal attitude
%
%towards borrowing and repaying debt
» Your credit report contains:
– Personal information
%
– Payment history
– All accounts in your name & types of accounts
%
– Amounts owed and the proportion to credit limits
%
– Length of credit history
%
– Inquiries
– Public records
31
Who Sees Credit Report/Scores
» An “index of responsibility”
– Lenders, Credit Card Issuers
%
– Employers
– Apartment/Utilities/Cell phones
%
– Insurance Companies
%
– Banks
– Security Clearances
– Indebtedness of Military Personnel
– Separation from the military – loss of career
32
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26. !"#$"#!%
Credit Score Bands
» 760 - 850 Excellent
% %
» 700 – 759 Very Good
% %
» 660 – 699 Good
% %
» 620 – 659 Fair
% %
» 580 – 619 Borderline
% %
» 500 – 579 Poor
% %
» 300 – 499 Unlikely to be approved
Note: 58% have a score of 700 or above
%
%
%
%
%33
What a Difference a Few Points Make
Fico Score
%
Rate %
%
% %
720 – 850
% %
% %6.3
% %
700 – 719
% %
% %6.5
% %
675 – 699
% %
% %7.0
% %
620 – 674
% %
% %8.2
% %
560 – 619
% %
%12.0
% %
500 – 559 %13.0
Difference between 720 and 620 can add 2% to your
%
loan cost or $2,000 per year on a mortgage of $100,000
…. 620 - 619? 34
Errors on Your Credit Report
» Certified Letter to the Bureau
%
%
» Clearly Identify Item in Dispute
» Send documents (copies) in Support of the Dispute
%
%
» Request Correction/Deletion
» Contact Lender/Provider re: Dispute
» Request Copy of Correspondence Between
Provider & Bureau
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27. !"#$"#!%
Ways to Improve/Protect Your Credit
» Pay your bills on or before payment due date
%
» Use credit only when absolutely necessary
» Pay down revolving credit. Do not just switch balances to a new
card. Limit the number of accounts you have
» Do NOT make frequent requests for more credit
» Communicate with your creditors if you are in jeopardy of
missing payments
» Check your report annually at www.annualcreditreport.com
%
» Resolve any issues on your credit report
Beat the 30 day deadline!
36
Breaking the Cycle
» Realize how you got there
%
» Borrow for the right reasons
» Do not feed “wants” by financing
%
» Do not create new debt
» Do not compete with the Joneses
» Set goals and save for purchases to stay out of debt
%
» Always look for the Annual Percentage Rate (APR)
%
» Borrow from reputable lenders
Always remember the pain of repayment!
37
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