A financial cleanse: dealing with debt

Much like physical health, if you want to achieve financial wellness, you need to remove the toxins from your life. When it comes to your finances, that means dealing with debt.

Owing money for past purchases hamstrings your future. Accumulating interest eats away at your income.

An analysis of household debt at NerdWallet.com shows Americans owe the most on mortgages, and an increasing amount on student loans. Credit cards are the third-largest source of household debt.

But in most cases, that’s the debt you should tackle first, as it’s more likely to fall into that “toxic” category. Interest rates are typically higher. There are no tax deductions, as is the case for mortgages or student loan interest.

Also, the smaller balances mean you can get rid of that debt faster – allowing you to then snowball your payments toward that student loan debt, and lastly, your mortgage.

NerdWallet’s analysis shows 46.7 percent of U.S. households have a credit card balance. The average U.S. household credit card debt is $15,252 among households that owe money. Spread across all households, that number drops to $7,115. And the median debt (the amount in the middle) for indebted households is $3,300 in consumer debt, a very manageable figure.

If you’re ready to deal with your debt, here are some tips for tackling credit card debt:

  • Balance your budget. It’s Adulthood 101. You’ve got to live within your means. You’ll never stop the debt cycle unless the money going out is more than or equal to the money coming in. You’ve got two choices: reduce your expenses or increase your income.
  • Stop using your cards. You can’t pay down debt while also racking it up. Plus, if you carry a balance on your cards, your grace period – the time from you make the purchase and that purchase starts accruing interest – goes away. That means you’re charged interest on new purchases right away, increasing the cost of everything you buy.You don’t necessarily need to close the account (unless that’s the only way you’ll keep your fingers out of the credit cookie jar). Just cut up the card, lock it up or freeze it in a block of ice, whatever it takes to stop using it.
  • Pay more than the minimum. That minimum payment you owe your credit card is just that: a minimum. Depending on your interest rate, that amount may not even cover the interest you’re accruing, meaning you’d never actually pay off the card.If you’ve got debt on several cards, focus extra payments on one balance until it’s paid off. Most financial experts would tell you to pay more on the card with the highest interest rate first. An alternate tactic is to pay off the smallest balance first.
  • Call your credit card companies. If you’re in over your head, credit card companies may be willing to work with you, for example, by reducing your interest rate. They’d rather get something than nothing. You need to ask, though.Another option to reduce your interest rates is to transfer your balance to a lower-rate card. Read all the fine print, though. Balance transfer fees could eat away all your savings. That low interest rate could expire quickly, leaving you with an even higher rate.
  • Seek debt management – not debt consolidation. Financial guru Suze Orman does a great job distinguishing between the two options.Debt consolidation companies will tell you to stop paying your credit cards and will ask for payment upfront, as well as a percentage of the discount they negotiate for you. It ruins your FICO score. Don’t go this route.Rather, talk to someone with a debt management organization. These agencies can help you look at your financial situation and get you on a plan to pay off your creditors in three to five years. Their services cost you very little. One example locally is The Village Family Service Center. You can find other reputable services at www.aiccca.org or www.nfcc.org.

    Sherri Richards is a thrifty mom of two and Business Editor of The Forum. She can be reached at srichards@forumcomm.com

Money-Savin’ Mama: Ready to swipe again after all-cash diet

For Christmas, my 4-year-old daughter picked out a new wallet for my gift. It’s exactly the kind of wallet a 4-year-old girl would choose: bright pink and covered in swirly hearts. A silver heart pendant hangs from the front clasp.

Even though I’ve only been using the wallet since late December, I realized soon into a month-long plastic fast how my spending habits had conditioned the way I use it.
Each time I went to make a purchase, I automatically unsnapped and flipped open the wallet to the now-empty credit card slots. It took a few weeks before I’d trained myself to unzip the wallet’s cash compartment first.
I joked I was having swipe withdrawals.
Last month, I wrote about how credit cards, when used responsibly, are useful financial tools. But they do have downfalls. Mainly, people tend to spend more when using credit versus cash.
I wanted to see if I could operate without my cards, a social experiment as well as test of financial willpower.
Now at the end of my self-imposed challenge, I’m ready to unsnap and swipe again.
That said, there were benefits to my plastic furlough.
First, I found I could operate fairly well on cash. Clerk s didn’t bat an eye as I counted out my bills. I saved 3 cents a gallon on gas by paying cash. I was also far more aware of my purchases, and forced to make some either/or choices. This, I think, is the true benefit of cutting out the cards.
I did cheat once on Giving Hearts Day, an online fundraising effort. I gave my husband one of my twenties and had him make donations with his credit card on my behalf.
While my month-long challenge wasn’t meant to be an exercise of self-deprivation, my low-balled weekly allowance of $140 made it feel like one. I bought groceries and gas, paid babysitters and dined out twice with that money, and that’s about it. I didn’t bother going to department or big-box stores. Good thing I was stocked up on diapers.
Still, I only spent about $482 for the four weeks, staying under budget three of the four. In Week Two, I went off-list at the grocery store and needed to write a check, too embarrassed and stubborn to put any items back. I deducted my overage of $28 from the next week’s budget.
Without a card, I had to pass on several online daily deals that could have saved me 50 percent at those vendors. Of course, not buying them in the first place saved me 100 percent.
During the four weeks, the only activity on my credit card was one automatic payment to our Internet provider, a rewards credit and two payments, paying off the January bill and smaller February statement.
It is liberating to know I don’t owe Visa any money. And this past month I did spend less because I couldn’t spend more.
But cash also cost me. To pay bills, I needed to mail a check instead of paying them online, adding the cost of a stamp and check blank. I also sacrificed the 2 percent cash back rewards my card offers.
For purchases in which the dollar amount wouldn’t change based on my choices, it doesn’t make sense to use cash, only because I do pay off my balance in full each month.
Even on that discounted tank of gas, my rewards credit card would earn 7 cents per $3.50 gallon.
I also learned how important it is to write every expense down when working with cash. An envelope system would have helped me a lot.
So would have tucking all my receipts into my pretty pink wallet.

Sherri Richards is a thrifty mom of two and reporter for The Forum. Read weekly updates from her plastic fast at http://topmom.areavoices.com

 

Plastic Fast, Week 4: Ready to swipe

My four-week plastic fast has come to an end, though I still haven’t actually used my credit card yet.

I’m a bit relieved to be through it, while still processing what I learned from my swipe hiatus.

In week 4, I spent about $115, including $38 plus change on gas, a smaller-than-average grocery store bill of $20.08, $20 to charity, $4 on Girl Scout cookies (Huzzah Thin Mints!), and $15.58 on lunch with a friend.

For the month, I spent about $482 of my allotted $560 cash for groceries, gas, household supplies and entertainment. This doesn’t include checks I wrote for daycare, a clinic bill and dentist appointment.

I’ll wrap up my month-long experiment in Friday’s Money-Savin’ Mama column. Look for it in the SheSays section of The Forum.

Plastic Fast, Week 3: Choices

In Week 3 of giving up my credit cards, I faced a choice: Put gas in my car or buy a case of Mike’s Hard Lemonade.

I chose Mike.

That probably doesn’t speak well of my priorities, but with a blizzard coming, I figured my husband and I would consume more of one than the other.

That snowstorm and a sick little girl kept me home-bound and under budget in Week 3 of my plastic fast, a feat I’m pretty proud of considering I’d cut my weekly allowance.

I gave myself only $112 to work with instead of $140, a penalty for going over budget in Week 2. I spent $103.28. That included two trips to the grocery store, a drop-in daycare appointment and my husband’s Valentine’s Day present (also purchased at a grocery store …), plus the Mike’s.

My hubby had to pick up some of the slack. His workplace had planned a potluck, and he asked if I’d make my scrumptious fruit pizza. I told him I’d gladly make it, but I couldn’t afford to buy the ingredients.

I also lucked out. Owen had a doctor appointment that comes with a $25 co-pay, but the receptionist didn’t request I pay it then.

I’m excited to get my full allowance to fill up the car and get some groceries, but am facing a bit of a dilemma. This Thursday is Giving Hearts Day, a 24-hour fundraising effort for 177 local nonprofits during which donations of $10 or more are matched. But it’s online, which equals plastic.

It’s a worthy enough cause to break my fast, but I’m looking to see if I have another choice.

Plastic Fast, Week Two: In over my head

It was not a good week in the land of cash.

A convergence of expenses — mainly an empty gas tank and dog dish and an impulsive grocery store outing  — left me holding the bag with not enough bills. So I wrote a check to cover my assets.

In the second week of giving up all my plastic, I spent $28 over my self-imposed $140 cash allowance.

While I didn’t use my plastic (technically a success that way), I discovered operating on cash doesn’t work well without some sort of structure, like an envelope system. I also slacked on writing down my outlays, so had to spend more time figuring out my weekly totals.

I filled up my car’s gas tank on Tuesday, earning a 3-cent-per-gallon discount by using cash. I only had one squirmy kid with me and there was no line in the convenience store, so it wasn’t as big of a headache as I’d feared.

On Wednesday, I needed to get more prescription food for our pooch. That cost $27.08. Also, I paid $13.50 in cash to the drop-in daycare, where Owen played while I visited the dentist (a check-up paid for by check).

I planned to spend about $45 when I went to the grocery store Thursday. I knew I was limited in cash, but shopped like I wasn’t. I was lured by excellent prices on produce, pop and Pop-tarts, and went off-list not considering the consequences. As I watched the total climb at the register, I quickly realized I was in over my head. My total was $60.86, more than I had in my wallet. I was too embarrassed and stubborn to put anything back, so I wrote a check.

A neighbor girl helped me out with the kids after school, so I needed to pay her. I’d promised Eve lunch at McDonald’s on Friday. And my favorite thrift store had a 49-cent sale Saturday, where I spent $3.14. That put my week’s total at $168.19 (not to mention my husband’s supermarket trip for Super Bowl snacks).

I suppose I could justify that I was $44 under budget in Week One, but my goal was to spend less than the $140 target each week. So this week, I’m penalizing myself for my extravagence. I’ll have only $112 to work with. I already spent $10.49 at the store this morning, a desperate run for toilet paper and coffee creamer.

Time to pinch my pennies.

Plastic Fast: Week One

In Friday’s Money-Savin’ Mama column, I wrote about my newest personal money challenge: to live without my credit card for a month. I officially started my challenge last Monday, right after I finished writing the column. Mainly because it was 4 p.m. and I hadn’t used my credit card that day. Score! One day down, 29 to go.

Now one week into my fast, I’ve already asked myself many, many times, “Why am I doing this?”

At times, it’s been a frustrated question, like on Wednesday when I had to turn back halfway to the grocery store after remembering I still hadn’t withdrawn my weekly cash allowance. I had to retrieve my debit card from its secure hiding spot, go to the bank, get the cash, then go to the grocery store and spend said cash. “Why didn’t I just swipe my debit card at the store?” I asked myself amid all the driving around.

It’s also been a question of worry, like on Saturday, as I drove to Grand Forks, N.D., without the safety net of a credit card. What if something happened? Would the $54 and few check blanks in my wallet be enough to cover me?

And at other times the “why” question has been more philosophical, a question of refinement and focus, to really pinpoint what I can learn from this experiment.

Giving up my plastic is not an indictment of modern banking. It’s not necessarily an exercise of self-deprivation. My goal is to become more aware of my spending habits. To become closer to my cash. To see if I spend less.

It’s also a bit of a social experiment. Can we operate on cash in today’s paperless world?

And finally, it touches on something I read once, about how kids today aren’t learning the concept of personal finance, of exchanging money for goods, because they never see us make such exchanges. Instead, they see us swipe a card and put that card right back in our wallet. Hopefully my daughter can learn alongside me this month.

So, one week in, here’s my tally: I started with $45 plus change, withdrew $100 from the bank, and spent a total of $95.65. That included a trip to the grocery store to restock my cabinets and buy some infant medicine for a feverish Baby Owen.

I did like that I actually had cash on hand to pay the sitter and send a couple bucks to Eve’s preschool for the upcoming Valentine’s Day party. I did feel the pinch at the grocery store. I lined up purchases up on the conveyer belt in order of importance, so if the total got too high I could put the final items back.

But I’ve also noticed how operating on cash is costing me. I got a bill from the clinic, which I’ll need to write a check for and mail (adding the ever-increasing cost of a stamp). I had to pass on a couple daily deal promotions for half-price gift certificates (though I can argue equally well that this saved me money.)  I desperately need to fill my tank with gas, which may save me money (if the station gives a discount for paying in cash) but adds the risk of impulse purchases inside the convenience store (“Mommy, pleeeeeeease can I have it?!?!?!”)

I’m starting Week Two with a bit more focus and intention, a fresh stack of bills, and an empty gas tank.

Money-Savin’ Mama: Going on a plastic fast

I applied for my first credit card, a MasterCard, shortly before starting my freshman year of college. My limit was $200. The first time I used it was that spring break, to buy a shirt. I still have the card in my wallet, nearly 15 years later.

My parents drilled solid financial advice into me when it came to credit cards. Save it for emergencies. Pay it off in full every month. Don’t buy something with it unless you have the cash in the bank to pay for it right then and there. Only get a card if it has a long grace period to avoid interest and fees.

I didn’t fall prey to the “sign up for a card and get a T-shirt” tables in the student union. I stayed in control of my spending.

Confession: I did pay interest and fees, once. I needed cash, so used my credit card at an ATM. My bank didn’t offer debit cards yet. I had no clue how expensive cash advances were. I never did it again.

Follow-up confession: I needed the cash because I was at a bar and wasn’t yet 21, so obviously couldn’t write a check. I don’t think I did that again, either.

But through the years, I did start to use my card more and more. My credit limit increased. I got a Visa card that offered rewards. Businesses stopped taking checks. Banking became paperless. Today I use my card for everything, still paying it off in full every month.

In general, I’m a fan of credit cards. They help build your credit score when used responsibly. They’re convenient, letting us pay some bills automatically. They offer rewards, basically a discount on everything you buy. A piece in the Dec. 24 issue of Forbes magazine suggests cash-back credit cards, when paid off in full every month, are one way to capitalize on others’ financial stupidity.

But, as I wrote in an article about credit card traps in Thursday’s SheSays section, many people don’t use them wisely. They use them to live beyond their means.

Gail Vaz Oxlade puts people she counsels on her TV shows on a cash-only diet, confiscating their plastic. Financial guru Dave Ramsey draws a firm line against credit cards.

While I don’t fully agree with Ramsey’s take on cards, one of his points hits home: It’s easier to spend more when you use a card than when you use cash.

Ramsey’s website cites a study of credit card use at McDonald’s that found people spent 47 percent more when using credit instead of cash.

You can “feel” cash leaving you, Ramsey says. You’re more aware of your spending when you use real money.

I realized this last year when I took on a grocery spending challenge, limiting myself to the federal thrifty meal plan food budget for three. I used cash envelopes to keep on target. But one day, absentmindedly, I used my card.

While I could tell you to the penny what I spent on the grocery trips where I paid cash, I had to consult my receipt to remember how much I spent when I swiped.

Plus, my 2 percent rewards card isn’t doing me much good if I’m spending more than I otherwise would.

So I decided to take on another personal challenge: to live one month without my cards.

I’ll spend cash for all the things I typically use my credit cards for, like groceries, household supplies and gas. I’m dreading having to take both my squirmy kids inside the station to pay.

My plan is to take $140 from the ATM each week, aiming to spend less. If a major expense comes up, I hope I can write a check.

Because my challenge is for only a month, I won’t cancel the one auto payment on my card (our Internet provider). But I won’t pay other bills online or over the phone. I won’t shop online. I’ll try not to cheat by having my husband pay instead. I’ll have to hold extra tight onto my usually cash-void wallet.

Goodbye, Visa and MasterCard.

Hello, George, Abe, Andrew and Ben.

Sherri Richards is a thrifty mom of two and employee of The Forum.