A lot of people that are truly successful with money live a debt-free lifestyle.  If they do borrow money, they pay off the debt early to lower risk and avoid paying interest.  In order to become more financially successful, let’s set a goal to become debt-free.

This may seem like a very audacious goal, but it is achievable and in probably less time than you think.  I know because my wife and I paid off all our debt except our mortgage earlier this year.  So, I can personally testify that this is possible for the average person to become debt-free.

The advantages of debt-free living.

There are numerous advantages to living a debt-free lifestyle.  Before you commit yourself to any goal, it is important that you understand why it is necessary.  Therefore, I want to highlight a few reasons that you should firmly decide right now to pay off all your debt.

1.  Being debt-free lowers financial stress.

Do you feel nervous about your financial position?  Do you start sweating profusely or have to down antacids by the handful every month when the bills arrive?  If so, then you are a prime candidate for considering a debt-free lifestyle.  Is it all really worth it?  Wouldn’t it be better to hunker down, pay off your debt, and eliminate the source of your stress?  Why live this way?

I can tell you that living without debt is a lot better way to live.  It ends the emotional roller coaster which alone significantly increases one’s quality of life.

2.  Being debt-free lowers your financial risk.

Debt is risky because you commit to paying it back on time or agree to suffer some prearranged consequences.  The consequences may include things like paying penalties, incurring higher interest rates, and/or forfeiting your collateral.  If you pay cash up front for purchases, you totally eliminate this financial risk.

With debt you have a greater potential downside if you lose your job, suffer a personal disaster, or encounter a serious health issue.  Why take the risk?

3.  Being debt-free opens up your options.

Debt is a trap that limits your choices.  You are tied to paying it off one way or another.  It becomes a ball and chain that robs you of your freedom.  Once you have a pile of debt, then you have to keep your nose to the grind stone because you lack financial margin.  One little trip up and your whole house of cards is going to come tumbling down.  It doesn’t have to be this way.

Becoming debt-free gives you back control of your life.  It gets the creditors off your back and allows you to make the decisions again.

Debt myths revealed and lies exposed.

There are numerous falsehoods that exist and are perpetrated by institutions that make a profit by charging consumers interest on loans.  It is important that we first recognize and debunk these myths before we can embrace a debt-free lifestyle.

1.  Debt is not the path to a better life.

Banks and financial institutions have done a fantastic job of selling us on the idea that credit cards, home equity lines of credit and car loans give us financial power.  This is simply not true.  What this debt does is line their pockets with profits.  We’ve all enjoyed the “priceless” MasterCard commercials, but it is time to realize that true financial freedom comes from being debt-free not charging items we cannot afford!

Do you want to continue taking financial advice from people that need the government to bailout their businesses because they’re broke?  Not me!

2.  Debt is not a tool.

Okay, debt is a tool.  It is a tool to make bankers rich, but it is not a tool to make you rich (unless you are a banker)!  I think the financial industry has recently proven that you cannot borrow money from one place, invest it in another and make it work for the long-term.  It is just too risky.  This will get you in a bind and fast. 

Just take a look at all the people that took out adjustable-rate or balloon mortgages.  They borrowed money, invested it in a house they couldn’t afford and bet that they could refinance it before the day of reckoning.  It was a gamble and they lost.  This is not the way to win with money.

3.  Debt is not inevitable.

Many of us were raised to believe that the way to get what you want was by using debt.  We saw our parents buy things on credit cards and other consumer loans.  We grew up thinking that a car payment was just a way of life.  We were trained for instant gratification.  When you want something, just whip out the plastic and get it.  Of course, this has caught up with many of us over the years. 

It is time to realize that debt is not inevitable.  It is possible to live without it.  We can do what our grandparents or great grandparents did.  We can wait until we have the money before we buy things.  I know it is a radical idea, but one whose time has come.

4.  Debt-free does not mean fun-free.

I think that some people believe that the only way to enjoy life is by living beyond their means.  Have you ever listened to Dave Ramsey’s radio show?  Do the people that call in seeking his advice because they are drowning in debt sound like they are having fun?  No!  It is just the opposite.  I never get enough of hearing the calls where people are calling in to celebrate their freedom from debt!  You can hear the joy and relief in their voices. 

Becoming debt-free opens up your life to happiness and prosperity like you’ve never experienced!  When was the last time that you were debt-free?  Were you happier then?

Get on the right path to financial freedom!

Nugget of financial wisdom: True financial freedom begins when you become debt-free and start living within your means.

You really need to grasp the truth above if you want to win with money.  Over the next several days, I will lead you through the steps to achieving financial freedom from debt.  However, unless you embrace the ideas I have written about here as the absolute truth, then it is very unlikely that you will succeed with money.  Ninety percent of what determines your financial success lies in your attitude toward money.  Once you acknowledge this basic financial principle, then you are well on your way to financial freedom!

What are your thoughts about debt and becoming debt-free?  I’d love to hear from you.  Please leave a comment below with your opinion.

Photo by danesparza

You would have to live under a rock to believe that things aren’t going to get worse before they get better.  I’m not one to go around telling everyone the sky is falling and that’s not what I’m doing now, but we all might have to cinch up our belts a notch before this financial crisis is over. 

We are going to pay for these mistakes

Back in April, I wrote Subprime Mortgage Crisis Is Going To Cost Us Money.  Well, here we are in September and one way or another, many of us are going to end up paying for this mess.  Of course, I have not been the only one writing about this, in fact, as Ron points out, The Mortgage Meltdown Signs Were There All Along.

As a result, there are several articles about ways to be more frugal.  For strictly financial concerns, I’d suggest taking a look at these:

We Don’t Need No Stinking Bailout Plan @Frugal Dad

Nine Things to Do When the Going Gets Tough @The Simple Dollar

Of course, there are concerns beyond just the economy on many people’s minds.  This crisis is likely to have long and far-reaching effects beyond just its financial impact.

Success is mostly about attitude

It is true that the economy is struggling right now.  However, winning financially or at anything else in life is not about external circumstances.  Some people make money and lots of it in tough economic times.  Regardless of your circumstances, you can come out smelling like a rose if you approach the situation with the right attitude. 

Our attitude about something defines our behavior toward it.  If you are experiencing repeated difficulty in any area of your life, it is likely because you have the wrong attitude toward it.  This is true in finances, marriage, your career, raising a family, and every other area of life.  Get the right attitude and you’ll be amazed how quickly you can turn things around.

The attitudes that will help you survive and thrive

So, what are the right attitudes to successfully navigate the hard times ahead?  Well, I believe there are a number of them that will help you.  Here the ones that I’m adopting to ensure I survive and thrive:

1.  Let the mistakes of the past go.

Hanging on to the sins of the past keeps you from moving forward in life.  It takes your eye off the ball which prevents you from hitting the next pitch out of the park.  Forget about what happened yesterday.  Concentrate instead on what needs to be done today to get things headed the direction you desire.

In the current financial crisis, it is easy to get bogged down in whose to blame.  However, for those of us removed from the situation, this does little good.  Getting steamed at the bankers, politicians, or at the people that took out loans they couldn’t afford will only distract you from what you need to be doing.  I suggest forgetting about all that.  Let someone else worry about it.  Delegate that job to your Congressman.  There are other things closer to home for us to think about right now.

Keep your thoughts in the present and look to the future if you want to survive tough times in life.

2.  Stay calm and control your fear.

Fear makes people do some really stupid stuff.  Fear will cause panic and panic seldom leads to productive action.  Do not let yourself get caught up in the hype and sensationalism of the circumstances that arise in life.  Keep yourself calm and thinking straight.  Be the voice of reason and you will prevail.

There is a lot of fear brewing right now about the economy.  People seem pretty nervous.  Of course, the media is doing their best to stir everyone into a frenzy.  This really will not help.  In fact, it is highly counterproductive.  If there is anything that will make this financial crisis worse, it is fear. 

Do not let yourself be sucked into the hype so that you do something really dumb.  I don’t know how bad the economy is going to get.  The situation may stabilize or it may get a lot worse.  Either way, don’t rush to judgement, seek multiple opinions, and make rational choices weighing all possible outcomes.  This will help you to come out on top.

3.  Be willing to go the extra mile.

Difficult situations are not the time to hunker down.  On the contrary, it is time to come out and pitch in to achieve positive results.  Tough times call for hard work.  Do not be afraid to roll up your sleeves and dig in.  Everyone values the person that makes a positive contribution when the chips are down.

As this economic scenario plays out, you are likely to have financial challenges at work and at home.  Do not shy away from these.  Determine what your role should be and then double your efforts in that direction.  Face the challenge head on.  The progress might be slow, but it will make a difference.  This could save you your job and your marriage.

4.  Accept the need to make sacrifices.

Getting through a tough time usually requires making some sacrifices.  The quicker you open up your mind and consider all the possibilities, the better the outcomes you will experience.  Do not hold onto a situation that is not working for you.  I know that it is often difficult to make sacrifices, but these are usually small prices to pay to avert total disaster.

In this financial downturn, you might need to sell that pretty new car you just bought to help make ends meet.  You might need to get a second job for awhile to generate some more income.  You might need to get on a written budget and stop spending more than you earn!  Do not wait too long to make these adjustments.  I know they will hurt a little, but if you want to succeed, you will do what it takes to win.

5.  Do not give up even when it gets hard.

Whatever hardships you face in life, never give up!  I know that it can be overwhelming.  I know that there may be days that you simply do not want to get out of bed.  However, I also know that every positive step you take gets you a little closer to being back to normal.  Every day that you do the right thing is one day closer to the results you want.  Many people give up when the prize they desire is just around the corner.

This financial crisis, whatever it turns out to be, will not last forever.  We will turn things around.  America has enjoyed some of the greatest prosperity known to history since the Great Depression.  If we adopt the right attitudes, conduct ourselves appropriately, and persevere, we will come out of this in great shape!

Hard times reveal your true character

Do you have what it takes to survive and thrive in tough times?  It is when we are tested that our true mettle shines through.  I believe the attitudes above exist in all successful people.  Sometimes they lie dormant, but when the situation calls for it, they surface again.  Be strong!  Prepare yourself and your family to face whatever challenges life throws your way.  Don’t wait for the storm to hit full force before you get your thinking straight.  Those that have the right attitude will come out on top!

Photo by epicharmus

Why does any of this matter?  Well, your credit score is being used for a wide variety of things besides just lending decisions.  Is this fair? 

Is your credit score holding you back from living life to the fullest?

How your FICO score is determined.

There are a number of factors used to determine your FICO score (the chart below came from CML).  The exact formula used to compute it is a closely guarded Fair Isaac Corporation secret.  However, many have said that it is roughly comprised of the factors shown in the chart below:

It is wise to understand as much as possible about your FICO score.  One of the absolute best resources I have found on this subject can be found at the Wisdom Journal.  I highly recommend reading Ron’s article The Truth About Your Credit Score (from an expert) for detailed information.

How your FICO score is used (you might be surprised).

There are a number of ways that your credit score is being used to judge you.  In fact, you might even be surprised by some of them.  If you have a low credit score, this can have a far-reaching impact on your life.  However, a low FICO score can result from simply not borrowing money.  Therefore, is it truly the best indicator of the kind of person you are?  Companies are certainly using it to determine a lot about you.

Your FICO score might be effecting your ability to get a job, a home, certain types of insurance, or even a cell phone! 

Here are just some of the ways that your FICO score is used to discriminate against you:

1.  Mortgage lending and other types of loans.

Okay, this one might seem obvious, but did you know that certain lenders make lending decisions based almost entirely on your FICO score?  It is true!  This means that in certain situations, even though you have plenty of financial means, you may not be able to borrow money to buy your dream house because your FICO score fails to measure up.  For instance, you may have trouble if one or more of the following is true for you:

• Your credit report contains inaccurate or misleading information
• You made some financial mistakes in the past, but have since cleaned up your act
• You have stopped borrowing money

All these things will make your FICO score lower.  What is also concerning is that another person may have a higher FICO score and therefore be preferred over you for the loan when they are out of a job, broke, and without any assets!  The FICO score does not include any of these factors in it’s formula!  With your lower FICO score, even if you do qualify for the mortgage, you will likely pay a higher interest rate.

Dave Ramsey recently went on a rant on his radio show about this very issue.  You should give it a listen.

2.  Getting a job.

That’s right!  Hiring managers often look at your FICO score when considering you for a job.  You could get disqualified or at least edged out simply because your credit score was lower than someone else’s.  Your FICO score is an indicator that organizations use to assess your integrity and whether or not you live up to your obligations. 

Is a person that doesn’t pay their bills a good hire?  Probably not, but is your FICO score the best indicator of your financial success and therefore your worthiness for employment?  Should it be used to disqualify you for a job you really want simply because it is lower than a pre-determined standard?

3.  Renting a house or an apartment.

Sometimes it is advantageous to rent a place to live.  For instance, when you are new to an area and want to learn a little more before jumping into buying a home.  However, if your FICO score isn’t up to snuff, then you may find this a difficult process.

Landlords regularly pull credit scores on applicants.  They want to know if they can count on you to pay your rent.  Your credit history is certainly an apt indicator of future financial behavior, but the FICO score alone does not tell the whole story. 

4.  Purchasing various types of insurance.

Insurers want insight into your personality and behavior.  They want to know if you are the type of person that is likely to file a claim.  They know that people who are financially strapped are more likely to make a claim to try to get their insurance company to pay, even in an iffy situation.  The time it takes to evaluate and fight such claims cost the insurance company money.

Insurance companies regularly use your FICO score to help make this determination.  This means that if you have a low credit score, you may be denied coverage or at the very least, you will pay a higher premium for your coverage.

5.  Signing up for a cell phone.

Again, this is another example of how corporations are using your FICO score to size you up and determine whether or not you qualify for certain products they offer.  If you have a credit score that is lower than an arbitrary figure, the cell phone companies may decide you are too big a financial risk and therefore deny you a contract.

Again, what kicks me in the teeth about this is that the FICO score doesn’t even take into account whether or not you are currently employed!  However, many companies are misusing it by making it one of the only discriminating factors they consider when evaluating your financial history.

What can you do to protect yourself?

Obviously, your FICO score is used in a wide-range of ways.  Again, I pose the question, "Is this fair?"  Is this the right way for you and I to be evaluated?  I don’t think so, but it is going to take time for change to occur.  In the meantime, what do we do?

1.  Don’t use credit to bolster your FICO score.

First, I want to make it clear that I don’t advocate borrowing money simply to maintain a good FICO score.  That doesn’t make sense.  If you have a lower FICO score because you do not borrow money, which is different than having a low score because of bad credit, then you need to seek out companies that will take the time to investigate your situation more closely.  Do you really want to do business with a company that is judging people this way?

2.  Educate others.

I think it is our responsibility to use every opportunity we have to make as many people as possible aware of how their FICO score is being used and abused.  We need to decide as a society if this is really a fair way to judge people and their financial prowess.  Awareness is always the first step in being able to defend yourself.

3.  Monitor your credit history.

Even if you do not borrow money or use credit, you should still occasionally check your credit report to verify it is accurate.  Your credit history is the source for the information used to compute your FICO score.  You may want to check out this legitimate way to get Free FICO Scores & Credit Reports.  If you find errors, then work to get those resolved.

What do you think about the ways companies are using your FICO score?

You and I are very fortunate right now.  We are blessed beyond belief.  However, it is easy to lose sight of this in our day-to-day lives.  We get busy and focused on the nuisances and anxieties of work, raising families, and traffic.  We lose focus on what is really important and stop being grateful.  Instead, we start feeling sorry for ourselves and get mildly depressed about the boring routine of life.  We get up, go to work, come home, eat dinner and go to bed.  It is comfortable, but boring.  Oh, how we take it all for granted!  We really need to remind ourselves of all we have to be grateful for.

The trap of ungratefulness with everyday living.

I’m guilty of this way of thinking.  It happens to me all the time.  It is one of the perils of living in a country where we enjoy so much peace, security, and abundance.  However, there are others out there in our world, even in our own country, that aren’t enjoying all that we are right now.  They are dealing with disaster, hunger, war, drought, and famine.  They are struggling just to get by.  I’ve been there in a small way when I lost my home to a tornado so I can relate, but I have so much to be grateful for now.

Let’s take the time to review why we should be grateful.

I don’t want to bring you down.  In fact, I hope to do just the opposite.  I want to help you realize just how fortunate we are.  I want to highlight some of the plight going on in the world so you can stop and realize just how great your life is right now.

Be grateful that we have food to feed our children.

Last Friday, ABCNews reported that there are 10 million Afghan people that are hungry.  The report showed the fresh grave of a three-year old girl that died from starvation.  I have two young daughters and the thought of not being able to feed them is very disturbing to say the least.  I cannot imagine the horror of watching my child wither away.  I am so grateful that I live in a place where access to food is not an issue.

Be grateful that we live in a peaceful place.

The website Iraq Body Count reports that possibly as many as 92,000 civilians have died from the violence in Iraq since the 2003 invasion.  I know that this is gruesome to hear, but it is reality.  To put this in perspective, according to the 2000 Census, this was equivalent to the population of Santa Barbara, California.  I think it is hard for us to imagine this kind of violence in the United States.  We don’t have to worry when we take a trip to Wal-Mart that we might be killed by a suicide bomber.  I am grateful that I live in a peaceful country.

Be grateful that we have the money to pay our mortgages.

Foreclosures were up in May about 48% over last year.  Over 250,000 families received notices that they would be losing their homes.  I know that many of these people couldn’t afford to buy a home in the first place and that they should never have done so.  However, this doesn’t change the fact that they are losing their homes now.  Where will they go?  Their credit is in shambles and they are obviously broke.  As a father and husband, I would hate the feeling that I couldn’t afford to pay for our home.  I am very grateful that I have the money to pay my mortgage!

Be grateful that we aren’t paying over $9.00 per gallon for gas (yet!).

In France, they are paying as much as $9.66 for a gallon of gasoline!  That’s over double the average price here in the United States.  So, while it’s true that gas prices have soared over 144% since May 2003, we are still enjoying lower prices than what many people are paying.  How would you like to pay over $200 for a tank of gas in your mid-sized car?  This is what they are experiencing in Turkey where prices are over $11.00 per gallon!  I am grateful that I filled up my car last night for $3.71 per gallon.

Be grateful that your home is not underwater.

The Cedar River in Iowa has forced over 20,000 people from their homes.  According to the story from MSNBC, at least 438 blocks were underwater in Cedar Rapids.  What a mess!  I think back to the pictures I saw from New Orleans after Hurricane Katrina.  Floods like this leave a massive mess and often homeowners are not insured against water damage like this.  Some of these people have lost everything and their insurance won’t help.  My heart goes out to these people.  I am grateful that my home is not underwater.

Be grateful that you are here to live another day.

Tim Russert, the moderator of Meet The Press, died last week at the age of 58.  He was at work and had just returned from a family vacation when he suffered a heart attack that took his life.  We often take for granted that we will wake up each morning.  Mr. Russert was enjoying fabulous success in his career and was unaware of any life-threatening health issues.  Life is short and we never know when our time is up.  I am very grateful that I have another day to live, be happy, and enjoy my life.

We really do have plenty to be grateful about.

As you can see from the recent news, we have plenty to be thankful for in our lives.  I am grateful that I am not dealing with any of these situations and I know that this is just the tip of the iceberg.  There is so much more tragedy going on in the world.  It all makes my sometimes boring, routine life very desirable.  I am grateful that I have the life that I do.  I hope you are grateful too!

Photo by SuziJane

How we track our finances now.

In Mvelopes, we created an envelope for each of our spending categories.  We also have a spending plan or budget where we forecast our spending in each envelope.  For some of the envelopes, like groceries, eating out, and miscellaneous, my wife withdraws the money from the checking account every two weeks.  We then use this cash to pay for purchases in these categories.  For some of our expenses, like the mortgage and utilities, the money gets withdrawn directly from our account automatically.  We assign each of the transactions from our checking account back to an envelope in Mvelopes.  This helps us to plan and know exactly how we are spending our money.

We use three different types of envelopes.

We have envelopes that work in a few different ways.  Some of our envelopes get zeroed out every month.  An example of this is the mortgage envelope.  We know exactly what our mortgage payment is going to be every month so the exact amount goes in and comes out each month.  We never build up or carry a balance in this envelope.  The expenses like this are easy to track.

However, other envelopes do carry a balance.  For instance, the envelope we use for auto fuel is funded a certain amount every month, but the amount we spend for fuel varies.  Also, we don’t withdraw this money from our checking account because we pay for gas with our debit card.  So, we need to be able to keep track of what we spend and the balance in these types of envelopes from month-to-month.  The balance in these envelopes needs to carry forward to the next month automatically without our intervention.

The final type of envelope is not really used to track expenses at all, but rather to keep track of savings.  An example of this is our emergency fund.  We just became debt-free except for our mortgage a few months ago so, we are now building up our emergency fund.  We set up an envelope for this and each month according to our spending plan, we deposit the appropriate sum of money in this envelope.

Where the problems arise with tracking our envelopes.

As I said earlier, everything seemed to flow smoothly for us initially.  Mvelopes would automatically download our transactions from our checking account at the credit union.  When we logged in, it would notify us that we had new transactions and request that we assign them to the appropriate envelopes.  However, after our credit union did an upgrade to their system, Mvelopes was no longer able to automatically download new transactions for us.  This means that we now have to manually enter the transactions which causes us to get behind.

The other problem with Mvelopes that we can’t figure out is that sometimes an envelope gets out of whack and there doesn’t seem to be a way to make a simple adjustment.  We have had a few situations where we just wanted to zero out an envelope or we wanted to enter an adjustment because we knew the balance in the envelope was wrong.  Well, the software doesn’t seem to let you do that.  If a balance exists in an envelope, it forces you to transfer that balance somewhere.  You can’t just enter an adjustment that changes the balance in an envelope without it affecting something else.  I understand the reasoning behind this, but it doesn’t really work with real life and it annoys me.

What I like about our present system.

One of the things that I like about Mvelopes is the way it allows me to create my spending plan and then use that to fund my envelopes on a regular basis.  I also like that it is an online system which means that I don’t have to worry about backups.  Mvelopes is also fairly easy to use.  You don’t have to be a computer genius to figure it out.  They have online help and tutorials that answer most of the questions that have arisen. 

What I want in a finance tracking system.

Since I’m asking for ideas, it only makes sense that I tell you what I want the system to do.  Here are some of my thoughts:

1.  It should support the envelope system of budgeting.

Overall, I like using the envelope system of budgeting so, whatever I move to has to support this approach.  This is why we chose Mvelopes in the first place.  It is built solely around this methodology.  I’d like a system that either recognizes the concept of envelopes or at least can be configured to emulate the behavior.  If the system isn’t designed around the use of envelopes, then I’d like to see or be told how someone else set it up.  I don’t want to have to recreate the wheel to get it to do what I want.

2.  I want a software-based system.

I suddenly realized that I might be assuming that everyone thinks like I do and likes software.  This is probably not the case.  I’m sure there are some out there that still like to do things by hand.  I am not one of those.  The system I choose will have to be software-based.

3.  It needs to have a way to automate the loading of transactions.

I think that if Mvelopes still automatically downloaded our transactions or supported a methodology where we could easily upload our transactions instead of having to manually key them, then I probably wouldn’t be looking for an alternative system.  I’m not picky about how the system handles this as long as it is easy and eliminates the manual entry.

4.  I need to be in control.

I want to be able to enter an adjustment in one envelope without it affecting any other envelope or account.  I want more flexibility than I have now within Mvelopes so that my financial management system can adapt to real life.  Unfortunately, things in the real-world get kind of messy and complicated at times.  The system needs to give me the control I need to handle the unusual circumstance.

5.  It needs to be easy.

A system that requires a doctorate in computer science to operate will not work.  I believe that one of the keys to financial success is consistency.  It is impossible to consistently manage your money with a system that is difficult to use.  By nature, we humans avoid things that are painful or difficult.  I don’t want to dread using the system.

6.  Some decent reports would be nice.

I don’t use a lot of reports, but a few decent ones would be nice.  It is great to be able to print out a copy of the budget or the balance in each or our envelopes.  Occasionally, we like to print a register of transactions by envelope for a specific date range to analyze a situation.  Other than that, we don’t typically get too fancy with reporting.

Please let me know ideas on a new system.

I hope this is enough information to give you an idea of what I’m looking for in an alternative to Mvelopes.  I am very interested in how others are doing this.  I sincerely hope to find something that is easier for my wife and I to use and that takes less of our time.  Once I come up with a new system, I will post an article letting everyone know how it works for us.  Hopefully, there are others out there that can benefit from what I learn.

Please feel free to let me know your suggestions by leaving a comment below or you can email me at jeff(at)mysuperchargedlife.com.  Thanks!

Photos by Gunnar Wrobel and David Boyle

Why be concerned about the subprime mortgage situation?

Okay, so I don’t have a subprime mortgage and neither do you, so why should we care about this impending "crisis"?  Well, in another article from CNN Money, we find that Congress is getting ready to spend our tax dollars to bail people out of their impending foreclosures.  Of course, in their usual style, the politicians may be spending our money on a hopeless cause.  They are proposing legislation to federally guarantee the refinancing of a lot of these loans that are in default.  I can’t believe this!  The subprime borrowers made bad decisions that ruined their credit to the point that they couldn’t get a regular mortgage and then they made another stupendously bright financial move in taking out a subprime loan and now we, the taxpayers, are going to guarantee they’ll pay in the future.  Does something seem wrong with this picture to you?

Why are so many subprime borrowers delinquent?

The terms of most subprime mortgages are crazy!  They generally have an adjustable-rate which means that after a short introductory period of 2 to 3 years, the rate gets adjusted upward every 6 to 12 months.  Some of these loans even give the borrower the "opportunity" to make interest-only payments during the introductory period.  After that, the balance of the loan is recalculated at a new higher interest rate.  Once the adjustment occurs, the payments usually go up substantially often by as much as 50%.  This is where subprime borrowers get in trouble.

What kills me is that the borrower was a poor candidate for a mortgage in the first place because they couldn’t qualify for a traditional mortgage.  Then the bank hooks them up with one of these really nice adjustable rate mortgages.  Let’s face it, these people already had a poor track record for managing their money and now the bank thinks that they are going to plan, prepare, and be ready when their mortgage adjusts after a couple of years!  I have no sympathy for the borrower or the lender in these circumstances.  It seems just plain stupid to me.

But wait, there’s more.  As if the adjustable-rate mortgage (ARM) wasn’t enough, subprime lenders came up with another jewel that is killing them now.  They set some of these loans up with a balloon payment at the end of the introductory period.  This makes the entire balance of the loan due in one lump sum at the end of the first two or three years!  Of course, the idea is that the loan would be refinanced, but again subprime borrowers are not good money managers so, this often doesn’t work out. 

Should we bail out subprime borrowers and lenders?

I’m really trying to get this straight in my head.  What were these people thinking?!?  It is often said that it takes two to tango.  Well, to me, this is the case with this so-called subprime mortgage crisis.  The borrowers and the lenders were stupid.  They both knew the situation was risky going in.  How is it that neither side saw the writing on the wall?  I guess the borrower was blinded by their desire to own their dream home and the lender was blinded by the potential profits.

Of course, there is another side to this argument.  If we don’t bailout these knuckleheads, then it is likely that the price of homes will continue to fall.  Our homes will depreciate because the market will be saturated with thousands of homes at bargain prices.  In addition, all of the foreclosures could cause some lenders to collapse.  These things will create all kinds of ripples through the economy.  So, the problem is complicated.  The damage is done.  Either way it is likely going to cost us some money.

Still, I am against the idea of using my tax money to bailout people that made stupid choices.  I believe in personal accountability.  I think that both the subprime borrowers and lenders should have to bear the burden for their mistakes.  I am prepared to ride out the results.  I do not want Congress to throw billions of dollars of my hard earned money toward fixing something that should have been avoided in the first place.  Hopefully, this will teach both sides of this debacle to make wise choices with their finances in the future.  I urge you to contact your elected officials and discourage them from pursuing this bailout.  Make your voice heard!

What can we do to avoid the pinch of the mortgage crisis?

Of course, whether Congress moves forward with their plan or not, this is probably going to cost us all some money.  So, what can we do?  We can use some of the same techniques to ride out this storm as what we might use to prepare for any financial downturn.  We should:

1. Lower spending and increase savings.  (live below your means)
2. Payoff debt
3. Save 3 to 6 months of living expenses in an emergency fund.
4. Plan to hold onto your present real estate until the prices rebound.

If you are doing the right things financially, then this will only be a mild speed bump in your financial future.  However, for those caught up in the crisis, it could be quite a nightmare.

What are your thoughts on the subprime lending crisis?  Leave me a comment and let me know.

Photos by joelogon and Storm Crypt

Snowflaking is a powerful technique used in personal finance for becoming debt-free.  From what I could find, this was first written about by Jaimie at I’ve Paid for This Twice Already.  In her primer on the topic, Jaimie explains that snowflaking is taking little bits of money that is collected over a month and applying it to pay off your debt.  Of course, in order to get any traction, this technique has to be used in conjunction with an overall plan for becoming debt-free. 

The plan that I and many others have used to become debt-free is covered in detail in Dave Ramsey’s book, “The Total Money Makeover”.  I won’t go into the details of Dave’s plan here, but if you are not familiar with it, I would highly recommend learning more.  Here’s where you can find a good review of the book and Dave’s baby steps for getting control of your money and building wealth.  Another great resource that provides additional details is at Gather Little By Little called 6 Ways to kick off your personal finance new year the right way.  Trust me, it doesn’t have to be January 1st to start making improvements in your financial life.  The best time to start is now.

How to get started snowflaking to reduce your debt.

One of the real beauties of any truly effective technique is its simplicity.  Snowflaking is very simple, but also very productive.  You just take any extra money that you can save or earn over the course of a month and then add it to what you are already paying towards your debt.  As Jaimie explains in her Five Golden Rules For Snowflaking, no amount is too small to be consider a useful snowflake.  When you do this, it is truly amazing at how much you can accumulate and the impact it has toward your debt reduction effort.

Still confused about where you’re going to find any extra money to use as snowflakes?  Let me share my story to help open your mind to the possibilities.  When my wife and I started trying to pay off our debt, I honestly didn’t think we had anything beyond spare change to throw at it.  However, by working diligently and refining our budget over the course of several months, we came up with over $500 per month.  We did this by snowflaking together several small sums of money.  We did it by going to level-pay or averaging on our utility bills, reducing our cable TV services, using a prepaid mobile phone, shopping for cheaper car and home owner’s insurance, and cutting back on eating out just to name a few things.  These things really add up.  We also had a garage sale and used things like bonuses, rebate checks, and tax refunds as snowflakes.

There are literally hundreds of ways to find and gather these small sums of money.  In fact, at Finance Gets Personal there is an excellent article titled Snowflaking- 100 Ways to Come Up With More Money for Your Debt Snowball.  Here you will find a ton of very creative ideas that will have you paying off debt faster than a snowball melts in…you get the idea!  If you are still hungry for more ideas to get out of debt faster, then check out Lynnae’s article titled Finding Snowflakes to Add to Your Snowball at beingfrugal.net.  She combines her frugality with snowflaking to speed up the process even further.

Of course, snowflakes don’t have to be small.  At MommyGetsPaid, there is a great story about how they are using a huge tax refund of over $12,000 to pay down their mortgage.  The approach they have chosen to take is very interesting.  Rather than put the whole $12,000 toward the mortgage at once, they have invested it in a high interest money market account.  They are then paying an extra $1000 per month from that account to their mortgage while the principal earns interest.

The impact of snowflaking revealed.

Personally, by using snowflaking to build my debt snowball, my wife and I were able to pay off $28,000 of debt in about 20 months!  ~Jeff

You should find this encouraging.  Snowflaking by its very nature has a cumulative effect.  It starts small and builds to big results.  We didn’t really do or sell anything big.  We were just focused and used whatever we could save or earn to pay down the debt no matter how large or small a sum it was.  It really is an effective technique.  Consistency is one of the most important things to make this really work.

So, what have others done?  FrugalDad explains how he set up a second checking account for collecting his snowflakes which resulted in an extra $66.02 in debt reduction the first month.  This sum may not seem large and it’s not really, but when you do this consistently you will be amazed at the impact it has.  In another example, Shanti at Antishay Ventenne collected $247 in a month by selling some stuff on eBay, half.com, Amazon.com, and craigslist.  She expects that her snowflaking efforts will allow her to pay off the remaining $3,000 she owes in one and a half to two months!

Finally, let’s look at the results achieved by Jaimie that first wrote about using snowflaking to pay off debt.  What has she accomplished?  According to her current numbers, she has paid off a whopping $11,388.48 since last June!  That is an average of over $1200 per month that she has reduced her debt.  Obviously, this technique works!

Examples of using snowflaking effectively in other ways.

Even if you are debt-free, you can use snowflaking to your advantage.  Madison at My Dollar Plan recently wrote an article on MSN Money about how she now uses snowflaking to build her investments.  The concept works the same, but instead of eliminating debt you are building assets.  At Sense to Save, Kacie is using coins as snowflakes to help build a $10,000 emergency fund.  At DebtBeater, the author suggests that the concept behind snowflaking can even be applied to losing weight!  There seems to be no end to how one can use snowflaking to eliminate debt, build wealth, and improve their lives.

There are obvious benefits to using this fantastic technique.  The key is to get started and the sooner, the better.  If you want to learn even more, you should check out The Snowflake Revolution for the latest articles on snowflaking.

Photos by makelessnoise and ortizmj12