Stay out of Debt Song

Here's a clip from one of Gilligan's Island best episodes where Shakespeare's Hamlet is set to music. (Couldn't all Shakespeare be improved this way?)  The tune is the Toreador song from the opera Carmen. The theme: stay out of debt.

http://www.youtube.com/watch?v=bXId5jOTxdg&feature=related

Is Layaway a good idea?

“The man who never has money enough to pay his debts has too much of something else.”
-James Lendall Basford

This year Sears, Kmart, Toys “R” Us, Babies “R” Us, TJ Maxx, Marshall’s, and Burlington Coat Factory are offering layaway plans. What exactly is layaway?

If you can not afford the full price for an item but don't want to see it sold out and unavailable closer to Christmas you pay the store part of the price and agree to pay in installments. There is an initial deposit based on a percentage of the purchase price (perhaps 10-20%) and a service fee (say $5-10) to administer the plan and keep the item in storage for you to pickup later. There are no interest payments but you don’t get to take the merchandise home until you’ve paid for it in full.

Most stores offer 30 to 90 days for you to make all payments. Some require payments every week or two to keep the item in storage. If you miss a payment the item might be put back on the shelf; some stores will give a refund of partial payments (minus cancellation fee) but others will only give you a gift card of money paid. Some stores will honor a sale price after an item has been put on layaway - others have limited time windows for honoring sale prices (eg 7-30 days).

Bottom Line

It's important to ask for and read the complete terms and conditions of a store's layaway plan before using layaway. You might be in for a nasty surprise if you change your mind or the item goes to 1/2 off two weeks later.

Unless the item is really expensive you're better off using a credit card than layaway. Consider the Rock n' Roll Elmo doll for $25 at Toys "R" Us. The layaway fee is $5. Say you have 90 days to pay in full. The $5 can be thought of as a loan with 20% interest for 90-days. (5/25 = 20%).  This is equivalent to an annual loan rate of 107% APR. By law credit cards are maxed at 30% APR. If you used a credit card for Elmo and paid it one year later, the interest would be 25 * .3 = $7.50 which is higher than $5 but you also had 4 times as long to pay it.

Better yet, don't buy a toy if you cannot afford it. An estimated 13.5 million Americans are carrying debt leftover from last Christmas. Go simple. Give a gift with love instead of a gift with batteries. Make something or give a gift of time like a free message or painting a room.

What Broke People Say

“The art is not in making money, but in keeping it”
- Proverb

SmartOnMoney.com has assembled a list of Things Broke People Say (that keep them broke). How many of these do you agree with?

1. If I earn interest, I have to pay more taxes.
2. There’s no shame in being poor, just in dressing poorly.
3. At my age, it’s too late anyway.
4. Why save money? You can’t take it with you when you die!
5. We’re only young once!
6. But it’s only zero percent interest!
7. I’ll pay it off next month!
8. Old cars just aren’t safe.
9. Whatever you want, dear.
10. I’ll start my budget next month.
11. It’s for the kids.
12. I work hard so I deserve to have it!
13. I’ll just keep paying the minimum payment.
14. My rich grandparents are going to die soon.
15. I want my kids to have it better than I did.
16. It’s cheaper to eat out than eat at home.
17. Always keep a house payment for tax purposes.
18. I’ll save next year when I’m making more money.
19. We’ll pay it off when the tax return comes in.
20. You have to leverage debt to become rich!
21. I need to invest in a car.
22. Why save? The Lord is coming back soon!
23. If I make more money, I will lose my food stamps!
24. If everybody got out of debt, the economy would collapse!
25. You’ll always have a car note.
26. Just put it on the card and we will worry about it when it comes in..
27. Being debt free isn’t for everyone.
28. It’s only money! We’ll make more.
29. I must be able to afford this (car, house, etc.) since I was approved for the loan.
30. I’ll just use a cash advance from my Mastercard to pay down my VISA.

Bottom Line

Poverty can be just rotten, dumb luck or a combination of misfortunes. But it can also be a lifestyle and self-destructive way of thought. Success eludes those who are not prepared for it.

"Fortune favors the prepared mind" -  Louis Pasteur

"There is a tide in the affairs of men, which, taken at the flood, leads on to fortune; Omitted, all the voyage of their life is bound in shallows and in miseries." - Brutus in William Shakespeare's Julius Cesar

Debt Collectors

“Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” -Ogden Nash
Some debt collectors will do anything to collect from you including harassing your family, friends, coworkers, etc. But you have rights.

The Consumerist features several useful posts.

Let's begin with a sample letter that one should send immediately after first being contacted by a debt collector: http://consumerist.com/2007/07/sample-letter-for-disputing-a-debt-collection-notice.html

The letter asks for four things:

* (1) the amount of the debt;
* (2) the name of the creditor to whom the debt is owed;
* (3) Provide a verification or copy of any judgment (if applicable);
* (4) Proof that you are licensed to collect debts in (your state)

The letter goes on to mention...

* because I have disputed this debt in writing within 30 days of receipt of your dunning notice, you must obtain verification of the debt or a copy of the judgment against me and mail these items to me at your expense;
* you cannot add interest or fees except those allowed by the original contract or state law.
* you do not have to respond to this dispute but if you do, any attempt to collect this debt without validating it, violates the FDCPA;
...
Should you pursue a judgment without validating this debt, I will inform the judge and request the case be dismissed based on your failure to comply with the FDCPA.

What is debt validation? The collection agency needs to prove that they own the debt. They can claim that the debt was sold to them but you have the right to ask them to prove it. Often the proof is flimsy or wrong. There are many stories now of mortgage factories signing fraudulent papers assigning mortgage debt for illegal foreclosings.  The Consumerist recently featured a story of a of a collection agency forging the signature of a dead woman thousands of times to establish validation of ownership.
http://consumerist.com/2011/01/dead-woman-tried-to-collect-on-thousands-of-debts.html

Another debt right to be aware of is the Statute of Limitations. A company can not appear out of the blue and say you failed to pay a debt from 20 years ago.  Well actually they can (and will) say it, but will very likely lose in court if you challenge them. Each state has its own limit on when debts expire. See http://www.creditinfocenter.com/rebuild/statuteLimitations.shtml for details.

Bottom Line

Search the Internet to know your rights. Read the Fair Debt Collection Practices Act at http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf

But if legal language makes your head spin, the FDCPA is explained here,
http://en.wikipedia.org/wiki/Fair_Debt_Collection_Practices_Act
and here
http://www.expertlaw.com/library/consumer/fair_debt_collection.html
and here
http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre18.shtm

Debt

"Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you"-J. Reuben Clark Jr., 1938

If you have credit card debt and are unable to pay the full amount each month, then I highly recommend visiting the web site, The Real Damage

Enter in a amount of money for something you'd like to buy, click the "What's the Damage button?" and see how much you'll actually be spending by the time the debt is paid off. Not so obvious is that you should customize the parameters behind the calculation by clicking on the "Credit Cards" bar to the right. This allows you to enter your actual interest rates, outstanding balance, and amount you pay off each month. There is also an "Additional Payments" bar so you can see how paying a little extra can go a long way to reducing the total cost of debt.

The site does not ask for email or any personal info.

Bottom Line

Never pay just the minimum amount on a credit card bill. This will keep you in debt for years and cost you big time. With the default settings on Real Damage, a $75 purchase cost a total of $168 after all the interest payments.

Trade Schools

“College is like a fountain of knowledge - and the students are there to drink”

A Washington Post story notes that More college-educated jump tracks to become skilled manual laborers.

"They started out studying aerospace engineering, creative writing and urban planning. But somewhere on the path to accumulating academic credentials, they decided that working with their hands sounded more pleasant -- and lucrative -- than a lot of white-collar work. So bye-bye to term papers and graduate theses, and hello to apprenticeships to become plumbers, electricians, auto mechanics
and carpenters."

The poor economy has been a boon for trade schools. The electricians' union program in Washington D.C. has 2,500 applications for 100 slots. And nearly 4,000 are competing for the 300 slots at a plumbers and pipe fitters school.

Pay for trade jobs is good. Apprentices start out at half salary with raises every six months. After five years licensed journeymen can expect to be paid $65,000 to $85,000 a year, depending on the amount of overtime. That beats four+ years of college, graduating deep in debt, and with no job.

In Europe many students begin an apprenticeship at age 18 right out of high school. But in the US, high school counselors rarely recommend trade school (except for their worst students). So American youth try college first and then switch to blue collar. The average age for beginning apprentices in the US is 25.

Bottom Line

This weekend my wife and I bumped into an old friend who is moving in the opposite direction - from blue collar to white collar. He was a long-time union employee at a TV station. However with better technology and greater automation, the station was able to layoff 38 technicians. Now my friend is completing a BS degree in Labor Relations and then plans to study law so he can go back and sue the pants off big companies.

There is merit in having some real-world experience before graduating from college.

Ten Worst Money Mistakes Anyone Can Make

"Money get back,
I'm alright Jack keep your hands off my stack."
-lyrics to Money by Pink Floyd

FreeMoneyFinance.com says there is just one rule to managing your money:
Spend less than you earn over a long period of time

While this is great advice, you can still lose your shirt by making one these Ten Worst Money Mistakes.

1. No Emergency Fund
Things happen; the washing machine breaks, car needs repairs, kids need braces, and so on. Borrowing money to pay for life’s emergencies will just put you deeper in debt. Protect yourself by keeping six months of living expenses in a SAFE place. Safe means not in stocks or any investment that can lose value suddenly. CDs are nice but the money is locked up for months or years. I keep six months in a savings account. It earns peanuts but it’s always there if I need it.
Corollary: if you use your emergency fund, pay it back ASAP.

2. No Will
57% of Americans have no will, including 69% of parents with kids under 18. If the parents die the State will decide how the money is allocated.

3. Not Enough Insurance
Insurance is the ultimate emergency fund for really big events like the total loss of your house or car. Consider also an umbrella policy on your house that covers lawsuits and liability like someone slipping on your icy sidewalk. Our umbrella policy paid off when a small leak was found in our underground oil tank.

4. Marrying the Wrong Person
Marry someone who agrees with your money style. A miser and a spendthrift are incompatible and divorce is expensive.

5. Not Saving
Put away at least 10% of each paycheck for future expenses like a new car, college tuition, vacation, etc. Don’t borrow for these big ticket items. The only item that is just TOO big to save for is a new house.

6. Too much house
Speaking of houses, don’t buy more house than you can afford. Don’t count on overtime or a future raise to pay the mortgage. Put as much money down as you can, say 20%, and aim to pay off the loan within ten years. The interest on a 20-30 year loan is a monster. My parents bought a $70,000 home but the total mortgage payments over 20 years would total $240,000.

7. Waiting to Invest
Don’t wait for a “good time” to invest. I’ve had stocks plunge to half their value and thought they would never recover. But they did. The NY Lottery (which I don’t recommend) says you have to Play to Win. Likewise you have to invest to make any gains.

8. Being in Debt
Debt eats your money. The goal is to earn interest and make money, not pour it down a hole to make someone else wealthy.

9. Not maximizing your Career
Your job is where you’ll earn most of your money. Even a small raise in pay will accumulate over the years to a nice amount. Work hard and get paid what you’re worth.

10. Over Spending
This violates the prime directive (spend less than you earn) and is a sure way to go into debt. Everyone says, “I don’t earn enough”, but in reality it’s how you spend, not what you earn that makes a difference. Boxer Mike Tyson earned $300 million in his career, but it wasn’t enough for his lavish lifestyle. He filed for bankruptcy in 2003, owing $27 million.

Bottom Line

Check out the full article at Ten Worst Money Mistakes Anyone Can Make. It contains dozens of useful links for Estate Planning, emergency fund planning, Insurance planning, etc, contained within the story.

Short Selling a House

"Our house is a very, very, very fine house
With two cats in the yard"
- Crosby, Stills, Nash & Young

A family I know fell behind in their mortgage payments and wanted to work with the bank to catch up but the bank refused to cooperate. After a year with no settlement, the bank has agreed to "short sell" the house and our friend will move elsewhere. What does "short selling" mean?

A short sale is a sale of real estate in which the sale price falls short of the balance owed on the property's loan. ... Both parties consent to the short sale, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan. - Wikipedia

In a short sale the house is sold at or near market prices in a depressed market (much higher than a foreclosure sale but less than the purchase price). The seller saves their credit rating but may still have to make good on the entire loan (ouch!)

The buyer of a short sale may get a great price but the money saved might not be worth the extra hassle and additional months to closing. Read "What It's Like To Buy A Short Sale House" from Consumerist.com. The story ends happily but oh, the stress and follow-ups and loops to jump through along the way. And there was always the chance that the house would be auctioned off before the short sale was closed (and even afterwards).

Bottom Line

Read the comments on the Consumerist Short Sale story for more examples of short sales gone bad (or very slowwwwly). As one buyer put it, "I certainly would not recommend the short sale process to anybody, ever."

Financial Mistakes

'Neither a borrower nor lender be' – Shakespeare’s Hamlet

Check out the USAToday article Eight Money Missteps that can really hurt you financially.

1. Don’t Raid your 401(k) – most states protect retirement accounts from bankruptcy claims. "Some people use their IRAs, and then they wind up in bankruptcy, anyway. So now, they're bankrupt and they don't have any retirement."

2. Don’t walk out on a mortgage – sell the house.

3. Don’t ignore your credit card balance

4. Avoid debt-consolidation firms – most are scams

5. Don’t co-sign a loan for a friend or relative – you’ll regret it later when they default. You’ll lose a friend and your money.

6. Don’t use Payday loans – the interest rate is an outrageous, 391% to 521% annualized.

7. Use a Reverse Mortgage only as a last resort – the fees are high

8. Don’t stiff Uncle Sam by not paying your taxes. He will catch you and the penalties are stiff.

Bottom Line

In short – avoid loans, pay your debts, don’t sacrifice your retirement.

Living within Your Means

“Unemployment is capitalism's way of getting you to plant a garden.”- Orson Scott Card

Last year I was laid off and unemployed for the first time in my life. My job hunt for a new job lasted six months. During that time my family was naturally concerned but not panicked. We did OK and suffered no long-term harm.

Looking back I ask myself – what did we do right? (The wrongs are easier: not keeping job skills up-to-date, not job hunting at the first sign of trouble, trusting managers to care about my welfare)

So what did we do Right? Minimizing expenses and avoiding debt. My wife and I are both debt adverse. In order to graduate college without a loan I had to work at the university and every summer (night shift for extra pay). My wife worked two jobs and rented out the basement to a boarder to pay the bills before we met & married. After we married, some of the money from my job went towards extra payments on the mortgage so that it was paid off a few years later. We drive our cars until they fall apart and then buy a used car paid in cash or financed as little as possible. Our credit cards are paid in full every month. We do not tolerate debt.

The formula for debt avoidance is quite simple – spend less than you make. In order to make this work you need to have a budget. The evening I was laid off, we sat down at our computer and looked at our budget for anything and everything that was nonessential and could be cut out. No magazine subscriptions, no online-computer game fees, no eating meals out, no movie rentals, no new clothes, and so on. It helped a lot that we had no debt to pay off.

A debt-avoiding budget has two parts- Earnings and Expenditures.

For Earnings look at how much money you take home after taxes and payroll deductions. Don’t forget to subtract out town & school taxes, water bills, and other local government expenses. What remains is your spendable earnings.

For Fixed Expenses add up your monthly bills for electricity, oil or gas, telephone, cell phone, cable TV, Internet, tithing, mortgage or rental payments, car lease payments, credit card minimum payments, etc. If your bills exceed your spendable earnings you’re in real trouble and need serious financial help.

Discretionary cash. If you subtract your fixed expenses from your spendable earnings, what’s left is discretionary cash. This needs to cover food, gifts, clothes, school supplies, and everything else you will buy at a store or online or at a restaurant. This is where modest living and a budget really helps. If you know you have just $100 available to spend this week, will you buy new shoes or food?

When I was unemployed, we tried to lower our discretionary cash spending to as close to zero as we could. We used our Food Storage and bought very little at the grocery store. We fixed old clothes. We did not vacation or travel. By doing this we could almost (but not quite) get by with the amount of the weekly unemployment checks.

Often times discretionary spending, either with cash or credit cards gets out of control. Each year my wife and I fill out a spreadsheet with the money we spent. We look at checks and the credit card bills and assign expenses to categories to determine how much we spent on food, clothes, meals, etc. The hardest thing to categorize is cash spending, for this we try to keep receipts. When we did this for 2008 we found that I was spending way too much cash for breakfast and lunch in New York City. So we agreed on a new plan for my new job – I would eat out once a week and bring lunch to work the other days.

While I was unemployed, my wife used our budget in a clever way. She calculated the minimum we could expect to pay on bills and food with some money set aside for emergencies like car repair, vet bills, etc. We then doubled that amount to calculate the minimum salary I would have to earn to continue living in New York State. We doubled the amount because we assumed half the money would be spent on taxes, church tithing, and a tithing paid to our retirement account. We were quite surprised at how much I had to earn to pay for a modest lifestyle in this area.

Bottom Line

Spend less than you make. Tally up your expenses to discover your spending habits. Create a budget and adjust your expenses to fit within your spendable earnings.

Ideas for spending less

"Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well." - Warren Buffett

As the stock market plummets, banks fail, and prices rise due to high fuel costs, you might be looking for ways to save money. The consumerist.com has a great article 5 Expenses To Cut Right Now If You're In Debt. In fact the story is better than the title - the story has five links to five other stories each with a list of ways to reduce expenses. Suggestions include:

1. Get your life organized and stop paying late fees on bills, overdraft fees on your checking account, fines on overdue books or parking tickets, ...
2. Cut out the extras - the deluxe cable TV package with premium movie channels, meals at restaurants, gym membership, an expensive car, ...
3. Use Coupons at the grocery store, don't pay extra for pre-chopped food, try generic products, compare prices at different stores, ...
4. Watch out for the cost of the information age: Cell phones, Internet service, etc.
5. Create a budget and follow it.

Bottom Line

I heard a story recently about a friend of a friend, let's call her Betty. Betty would go through mood swings and spend wildly when up but then become depressed when the money was gone and she was unable to pay for rent and other essentials. My friend has tried to convince Betty (unsuccessfully) to pay her bills and groceries FIRST thing when she gets a paycheck. Then she can party with what is left over. NOT the other way around. It amazes me and my friend that not everyone understands this.