Today is the last day to submit your entry for the Credit Card Cutup Contest. On friday I will post the winners, as well as the video of myself cutting up my card, AND I will post what the surprise is, which I will give out TEN of….so get those entries in!
401k Recession. Those two words are currently the most searched personal finance words and we can all understand why. There is the threat of recession looming and everyone wants to know, above all, “how is this going to affect me long term” which is most manifested in the ultimate long term investment – retirement accounts. I have also had a lot of reader emails asking about what they should do if they are this age or that age so Ive gone ahead and broken things down into age groups with specific advice for each age group.
Age group 0-35
At this age you should not be worried about how the recession will affect your 401k, but about how you can dump as much money as possible into it. Now is not the time to think about the short term economic problems because eventually the economy will come out of it – long before you are even thinking about retiring. What we are looking for in this age range is capital growth. In fact, if there IS a recession you will most likely benefit from it in the long run because in effect it will be a big giant retirement sale.
Asset mix: 80% to 100% of assets into an index fund or a mix of low load mutual funds and 0 to 20% in bonds
Age group 35-50
Ok so you’ve been in the party that is the business world for a while now and you should have a pretty good amount setup in your 401k. Its enough to if and when a recession hit it would be a little painful to see the money drop. There is a huge urge to pull out and put your money in something much more conservative. Don’t do it. You still have quite a few years left until retirement and any setbacks that happen right now will balance out in the long term. Your number one goal is still long term capital growth. However, you DO want to be a little less aggressive than your 25 year old counterpart so your mix will be slightly more conservative.
Asset mix: 60% to 80% of assets into an index fund or a mix of low load mutual funds and 20% to 40% in bonds
Age group 50-Almost retired
You should be at the top of your earning potential at this point so its time to really buckle down and save as much as possible, including doing catchup contributions to your various retirement accounts. You are also the one who is most concerned about this recession talk. Now would be a very bad time to lose a lot of your money, but you also still need capital growth because you’re investing to keep yourself with money all the way through retirement. So you need capital growth but you also need to protect your assets that you’ve accumulated so far. Rough balancing act.
I know what your knee jerk reaction is: pull out of your current investments and put it all in bonds. Well, don’t. While bonds most certainly should be part of your portfolio at this point you still want to give yourself a good chance at long term growth as well.
Asset mix: 50% to 70% of assets into an index fund or a mix of low load mutual funds and 30% to 50% in bonds.
Age group-Retired
If you are in this group, there needs to be a large swing in planning. Since you are pulling money out for living on if there is a large market slump you could end up losing money at an alarming rate. You now want to completely balance your portfolio so that you still have enough capital growth to support you for years to come, but enough locked down in bonds to get through any very tough times.
Asset mix: 40% to 50% of assets into an index fund or a mix of low load mutual funds and 50% to 60% in bonds increasing the amount in bonds as you age.
401k Recession. Do not let those two little words scare you. The main thing to avoid is trying to time the market, that is a surefire way to risk losing a lot of your hard earned savings. Next Recession proof your life…
So finally we get to the payoff (literally). How do we ditch this debt that has grown after days, months, years of using the credit cards. There are a lot of theories out there on the best way to go about it, some of them great, some of them ok, and some of them terrible. Most of the terrible ones involve you paying someone to tell you how to do what I am going to tell you how to do…except I don’t charge anything for it. The credit card contest has really energized me to share as much as I possibly can for everyone. I want you all to crush your debt, I mean that, just absolutely kill it, and become rich. If any of you keep up on this blog and are getting out of debt, and you use these concepts to get out of debt, for the love of God, email me and let me know, I want to hear your story. Ill post it on here, and if you are ever in northern colorado Ill take you out for a beer and we can talk about what a relief it is.
I think its important to include that I am in the same boat as all of you, I have the same temptations, debts (hello 6 months of being laid off), and problems as the rest of you. In fact, chances are you have a leg up on me: I have to force myself to organize things. In the world of personal finance, organization is everything, and its my weakness. The trick is that this is a “long haul” game. Its not a short term solution, it has to be a life change. There will be times of falling off the bandwagon, but as long as you keep at it, and persevere, you WILL get everything paid off. So now exactly do we go about getting rid of this debt? Well there are several methods and I am going to go over each of them because I don’t believe there is a one size fits all catch all thing here but I am going to focus on the snowball method because I believe that is the easiest one to follow for most people.
If you are having trouble coming up with the money never fear, I have some methods in here as well to help come up with extra money to put toward the debts. You can use any mix of these methods so read them all.
Method #1: Debt snowball
This has been popularized by David Ramsey on both his radio show and his book Total Money Makeover (which I have read). Its a decent read of a book if you are curious, I would recommend picking it up. The way it works is that first make a list of all the debts you have, with the debt with the lowest balance being #1, the second lowest being #2, and so on down the list. Some of these are painful to look at.
I did this a while back and the one that hurt the worst oddly was my student loan debt. I had to take out the entirety of my student loans in 2 semesters meaning I got TERRIBLE rates. I had to pay my mortgage while going to school and I had 2 weeks notice I was being laid off, thats it. I wasn’t prepared for it at all because I had been given a top rating at Hewlett Packard and I was the sole engineer left on my team….why on earth would they lay me off? Well they did and I had no backup plan and no emergency fund so I got stuck with 15k in student loans at 12% interest. Ouch! In general loans that have something backing them up are not so terrible to look at: mortgage and car loans you have assetts there. The credit card debt is the one that is really really painful to see.
Next step is to allocate as much of your budget as possible (That we made in the previous article) to debt crushing. Now make the minumum payments to all of the debts except for the one with the smallest balance. For that one, pay the absolute most you can until it is gone.
Now with that money that you were paying toward that smaller balance debt, you put all of that money PLUS the minimum payment you were paying toward the second largest balance debt. This is why it is called the “debt snowball” because with every debt that is paid off, there is more and more available funds to pay off each progressive debt and eventually it is all gone.
Example:
Ignoring interest rates, let’s pretend you have the following debt (along with the minimum payments):
-Visa – $2500 balance – $150/month minimum
-Mastercard – $250 balance – $25/month minimum
-Student Loan – $15000 balance – $100/month minimum
-Discover – $1500 balance – $50/month minimum
Thats a total of $325/month. You would order the debts like this:
Mastercard $250
Discover $1500
Visa $2500
Student Loan $15000
Now if you allocate an extra $100 to paying off debt per month you would pay $125 toward the Mastercard, and the rest would get the minumum payments. After two months the Mastercard is paid off and you now allocate the $125 that you were paying for it plus the $50 minimum you have been paying toward the discover card so you are paying $175 toward the Discover until IT is paid off, then that $175 plus the $150 toward the Visa, and so on until all your debt is gone.
Pros: You get to see progress immediately, paying off smaller debts lets you “write off” each one. which is really nice. It is a great way to get in the rythm of paying off debts.
Cons: It does not take into account interest rates so you are not being 100% efficient at getting rid of debt.
Method #2 High interest to low interest
This method is fairly simple. Start with the exact same steps as the snowball method, except order your debts in order of highest interest rate to lowest interest rate. Now begin paying on the highest interest rate and add your extra money toward the highest interest rate until it is paid off, then move to the next highest interest rate putting the money from the first toward the second as well.
Pros: This is the most efficient way to pay off debt because you will end up paying the least amount of interest over all.
Cons: It is difficult to see progress, it may feel overwhelming.
What if you are having trouble coming up with money to help put toward your snowball, are there any options? Yes, yes there are.
Method #3 The Consolidation Loan
This is where you go to a bank or credit help insitution to get a consolidation loan for all of your high interest debt. Usually you will pay more with these types of loans in the long run, but if you are desperate it can reduce your payments. Things you should look for are to make sure there is no pre pay penalty because that is counterproductive to your cause.
Pros: Can help if simply cannot cut out enough to meet your payments, ability to reduce monthy payment
Cons: Will end up paying much more in the long run, generally higher fees for the service
Method #4 Sell stuff around the house
This is best if used in conjunction another methods. This can help get a jump start on knocking down balances. You can sell old clothing to second hand thrift stores. You could also have a garage sale and sell some things on ebay.
Pros: Gain some extra money, get rid of things you dont need and reduce clutter
Cons: May not net too much money from it
The main thing to keep in mind, this is a long race, not a 2 second fix, but you CAN see results right away. Get to it!
If there was an adult version of sesame street it would have a feature: A is for auto which costs 600 a month, B is for budget something you probably don’t have.
So I heard on the radio the other day that of Americans with credit card debt 90% of them do not have a set budget for the month. Is that really surprising though? Alright so now that we cut up our cards, and got rid of temptation, lets set up a budget.
The steps to setting up a budget are actually easier than you might think.
1) Sit down an make a list of all the things you spend money on each month that are set in stone. All of your bills, housing costs, etc…basically anything that has a set monthly cost.
2) Make a list of expenses that are NOT set in stone. What you think you will need for food, gas, unexpected expenses. Now is the time to be honest with yourself. How much do you REALLY spend on food and going out? How about on random purchases?
3) List all of your income. For most people this will be one source, married couples 2 sources. But some people have multiple jobs, whatever, just write it all down. Now add them together.
Now we are going to do a little math, everyone brace yourself.
Take the total from #1 and add it to the total from #2. Now subtract that from #3. There are two possible outcomes here:
1) The result is positive
If you are not lying to yourself about how much you spend on a monthly basis, then great, stick to this and use that extra money to pay down debt. If you seem to still be accumulating debt its time to go back and revise your values about what you are ACTUALLY spending.
2) The result is negative
Uh oh. This is where that lovely credit card debt came from. Its a pretty simple equation, if you spend more than you make you will go into debt. Now is the time to go back through and see what can be cut out. Chances are you will find that you can cut out a decent amount of food and entertainment expenses. If not, then its time to restructure your finances to do what it takes to make ends meet. This might mean canceling cable or some other sacrifice, but in the long term if you do not take care of it now, then you will have to make that many MORE sacrifices later on.
The overriding budget golden rule is this: decide how much you are going to spend so that it is within your budget and then stick to it. Keep track of it. Check up on it daily.
Ok so you now know where your money is going, tomorrow: how to get rid of that credit card debt that is there already…
This is a guest post from Debt Free Revolution, special thanks to her for taking the time to do this. I was going to wait until after the end of the credit card cut up contest but I have the flu so here it is:
Jesse asked me to do up a guest post since I just became consumer debt free on February 26th, and I am happy to oblige! He thinks y’all will be particularly interested in the “big picture” since my journey to eliminating debt (except for the mortgage now … and that will get its day) spanned just three days shy of fourteen months. It felt tough at times, but this was something I knew in my bones had to be done if I was ever going to turn the financial ship around in my life.
I accomplished this debt free feat using the Dave Ramsey “baby steps” and recommend them personally.
Once I made the decision to get out of debt, I had to learn a few productive money habits. The first was getting caught up on my bills, and paying them on time (cringe; yes I was that disorganized). The second was learning how to make a budget that works. Yes, I just used that nasty “B” word. Except it’s no longer a bad word for me. The best quote about budgeting I think I have ever heard was: “A budget is telling your money where to go instead of wondering where it went.” Some folks rename their budget, calling it a “cash flow plan” or maybe even “allocated spending plan” since that sounds fancy, or you can just call it “Fred” if you want. (“Fred” says we can’t buy that right now.)
Doing a realistic working budget was a huge eye-opening experience for me. Before I wrote it down in dry erase and white, I thought we didn’t make enough to make ends meet. After writing it down, I discovered that somehow at least $600 per month was just disappearing! Over a year later, I still can’t say for sure where that money went to … although I suspect it vanished in the local restaurants.
OK, so I was current on my bills and I now had a working realistic budget in hand … time to kill some debt, right? Not so fast, Hoss …. and this is where I am so grateful I was following the Dave Ramsey plan! The next step is to build up a baby emergency fund of approximately $1,000. No problem, I said. I had a non-retirement mutual fund I could cash out, and I did. I squirreled away the $1k and used the rest to finish off the last two months of my car note and start in on the next debt on my list.
Then my furnace broke at the end of January when it was only 21F outside. The repairs ended up being $1140, and it wasn’t the only time I tapped the baby emergency fund! The other time was a few months later in May when I had to replace the brakes on all four wheels on my car. So … I play my radio a little to loud to have heard the brakes squealing BEFORE it became a serious problem. I had about $300 of the $538 it cost to fix that, so I only pulled about $250 to cover it. I distinctly remember my son whispering to me after I paid the bill: “Mom, can we afford this?” I whispered back: “Yes, we have an emergency fund.”
Which brings me to another thing I did: get a weekend job delivering pizzas. It doesn’t have to be pizza delivery, but picking up a part-time job on the weekends is a great way to bring up your income. Just don’t work somewhere you might be tempted to spend!
Oh, and one thing I didn’t do that I wish I did: convince hubby to sell his truck. Somewhere on hubby’s Y-chromosome is the “I Love Trucks” gene, and there was just nothing I could say or do to convince him to sell it, even though its sale price was MORE than one year worth of salary for him. Hubby dug his heels in deep on this one, so it was a matter of knuckling down and simply paying it off. He did promise to drive the wheels off of said truck, so hopefully it will last until at least 2015 (it’s a 2005, but also a Chevy). But if you can sell high-dollar items without causing a major rift in your relationship … DO IT!
And right there are the keys I used: better habits about paying bills, getting on a working realistic budget, and getting a part-time job. Just be sure to put that baby emergency fund in place LOL Add in a natural stubborn streak and the burning desire and determination to get out the chains of debt, and you see me DEBT FREE but the house, BABY!!!! LOL It’s been a week now and I am still celebrating.
Oh, there’s a whole lot of other parts to this story 
but Jesse asked for a “big picture” post which was in danger of being the size of an ebook before revision. Although Jesse has left the door open to the possibility of further guest posts that deal with y’all’s questions 
If you have been reading, then you know the number one step in eliminating your credit card debt…Cut up your credit cards.
Now step two:
Everyone is tempted sometimes, its just a fact of life. From Adam and Eve checking out the tasty looking apples hangin out on the tree in garden to me buying (and later taking back after I came to my senses) a gigantic TV. Credit cards are one of the most insidious forms of temptation because they allow for immediate gratification EVERY DAY. Giving in isn’t selling your soul to the Devil, but it is like selling your wallet to him. Of course the devil in this case is the credit card company and your eternal damnation is an eternity of debt. Sick of the personification? Ok, lets down to business.
Temptation #1: The Mail
Most people don’t know this but you can actually stop the credit bureaus from seeling your name and address. To get the forms dial 1-888-5-OUTPUT. Thats right, no more “0% limited time offer is here now, you must do this now or else you will never get another good deal again and your firstborn is cursed and you will regret it for the rest of your natural life. Really you will, you fool, get our card now or risk eternal damnation and burn in hellfire with the other that did not take this offer” mail. Not to mention the “this is official and dated information, VERY important. You MUST fill out this form.” Next, write to the Direct Marketing Association, Mail Preference Service, P.O. Box 9008, Farmingdale, NY 11735-9008.
Bonus step: Call your credit card companies that you have accounts open with that you want your account marked to indicate that you do not wish to have any of your personal information shared with telemarketing firms. Remember, just because we cut up our cards doesn’t mean we are closing our credit lines (Dont!) so credit card companies will still treat you like a customer which includes sending you crap.
Temptation number #2: Free Stuff
“Five free oil changes if you fill our this credit card application.” “Sign up today and get a free PONY!” “You are entered to win a life of ease drinking margaritas on the beach, all you have to do is fill out this application.” Do any of those things sound familiar? Oh yeah, of course they do. Walk on a college campus or through a mall on a busy day, and you WILL see people peddling credit card apps for random free crap. Don’t give in. You will be able to buy 100 ponies with the money you will save not paying 20% interest on a maxed out credit card.
Temptation number #3: Store discount
I have covered this before, and if you are one of the 15% of people that pay off store purchases right away then you probably aren’t reading this article. So, simply, don’t do it. Check my girlfriends testimony on the credit card cutup contest.
Now that we’ve slain the temptation dragon, tomorrow we taken on the next step….
One week into the Credit Card Cut Up Contest there are a decent amount of entries, though only a handful of pictured entries. However Id like to share a few clips Ive gotten because it really makes me feel good to know that people are taking this to heart. There are entries that range from touching to bitter to funny. Here are a few of my favorites from different people:
The Grateful:
“Dear Jesse,
This is a wonderful thing that you are doing! You are really changing lives, mine included. Attached is my last credit card, now all are in peices. I am an enteprenuer and I have racked up over $20,000 in credit card debt over the past four years! My fiance and I started a decorative painting business in 2004. There have been many time where the money that we make does not cover things like food, the phone bill, etc.. So me, who started out with zero credit card debt, applied for 0% interest cards not seeing the inherent danger. Well, over the course of four years, now I am at my limits on all seven cards and a mountain of debt to pay back!
The best thing that I can do is to remain positive and be joyous to reducing my debt. My fiance has two teenagers and I can only hope that they do not make the same mistakes that I have. I will be sure to show them my statements and educate them on the stranglehold that credit card companies can apply to people if they allow it. ”
The Angry:
“Hello, I would like to enter your contest. I <edit>ing hate the <edit>ing credit card companies. I really do. I was young and did not realize how many problems they would cause me. Thats really all I have to say, except that I hope the surprise is that we get to strangle someone from visa.”
The Happy:
“I have just cut up my gas card and my Kohls card. I guess it you offering an incentive for me to finally do it. It feels good and I’ll have them paid off by September.
Thanks so much for the incentive and the prizes. I hope I win. I need all the info
I can get!”
The Funny:
“The only thing I discovered with my Discover card is how easy it is to get in over my head in debt. I like this contest and it gives me a great opportunity to share my victory photo!!”
So far there are 10 entries with pictures, that means 20 more people need to enter for the iPods to go, so get those entries in, theres one week left!
I have already talked in the past about how easy it is to save yourself a ton of money by calling your credit card company, but the truth is it goes way further than that. Today I was in hollywood video store because it is closing and there is a bunch of stuff on sale. All of the new releases were on sale for 15.99, the TV DVDs and previously viewed movies for $5. I grabbed the first two disks of season one of Lost because Ive heard its good and they were only $5 each. Well, I grabbed a movie as well and took them all to the counter. I was chatting with the assistant store manager as he was ringing things up. He told me things were pretty slow and they weren’t selling out very fast. As he rang up the movie it turns out it was a new release so I told him nevermind because it definitely wasn’t worth $15 to me. So he set it aside….except then I told him
“Hey, if you want to sell it to me for five bucks, Ill take it.” …And he did.
If you walk into king soopers and demand they give you 50% off on peanut butter, they are going to look at you funny. But under the right situations, you really can save money, just by asking. What have you got to lose?
As fun as it is talking all the time about things Im interested in, and whatever topic happens to float through my head on any given day, I would like to hear what you, the readers would like to read about. The only real catch is obviously try and keep it pseudo on topic at least. Though I think I could probably research and write a decent article about the effect of the jet stream on the migration of killer bees, thats probably not a good topic for this site. Here are some things I have lined up coming up, but I would like some comments on what YOU want to know about:
-More on the roth 401k
-P2P lending both on both the lending and the borrowing end
-Where there really ARE monster in your closet
-The price of milk
-Smart Investing
-Guide to debt
-Inflation
-Mutual Funds that beat the market
-The ins and outs of the business I am starting
-More frugality tips
-My networth-o-meter
-Dealing with credit card companies
-How to quickly overcome bad credit, or quickly move from good to great credit
-A Joe graduate update, the 1 year mark
-Save tons of cash around the house
-More google questions
-A bunch of other stuff
But really, you name the topic, and I write about it. Lets hear it people!