Monday, December 27, 2010

Holiday Hangover

No, I don't mean overindulging in your favorite beverage.  The hangover I want to discuss is the mountain of bills hanging over your head after you've overindulged in gift-giving.  If you don't have that problem, good for you!  But many of us used that plastic a little too much leading up to the holidays.
Now it's time to take a serious look at budgeting - get rid of the holiday debt and try to better plan for next year. 

First Comes The Budget

You need to sit down and figure out how much money you have coming in, and how much needs to go out each month.  Sounds simple, but it can be a painful process….and there’s no getting around it.  The good news is, you only have to do it once and then tweak the numbers as needed.

Collect all of your bills, account statements and receipts for the past month.  A good budget starts by tracking where your money has gone.  Going forward, using software or the internet may help keep better track of your money, but for now we’ll assume you’re starting from scratch.   Start listing your expenses in columns for “needs” and “wants.”  Group the items by categories such as food, housing, utilities, clothing, medical expenses, and so on.  You can do this with pencil and paper, use a spreadsheet program, or find an online budgeting tool.  Destinations offers a simple tool called BudgetSmart and is getting ready to offer a very robust program called MoneyDesktop for free from within our online banking.

What do you actually need?   

Needs are generally expenses that have to do with food, shelter, basic clothing, transportation and previous debt commitments that must be repaid.  As you make your list, be aware of those expenses that may vary from month to month, such as your electricity bill.  When you list those expenses, write down a range for the expense (Electric Bill $100 - $200 per month, for example).

EVERYTHING ELSE is a want.  Wants can only be fulfilled when you have paid for all your needs and have money left over.  Make sure you're honest with yourself about needs versus wants.  You may be a fashionista and think you need that great pair of shoes, but the fact is, you already have lots of other shoes and that great new pair is just something that you want.

If there is no money left over, you may need to reevaluate your “needs” and look for ways to cut expenses in those areas:  move back in with your parents for a while; take in a roommate; cut down on groceries by eating less expensive food and using more coupons; or drive less and walk more.

The bottom line:  live within your means!

The Next Step>>

Holiday Hangover: Part II

The Next Step

Now that you know how much is coming in and how much is going out, come up with a plan to pay down your debt as quickly as possible and prepare yourself for the future.

Make saving a priority

First, pay yourself! Put money into a savings account out of each pay. Most employers will allow you to deduct an amount from your paycheck to one or more financial institutions. If you are a member of the credit union, we can split your payroll in whatever way you choose once it gets here. To avoid the holiday hangover next year, you might want to set up a Holiday Club account now and put a few bucks in that as well.

Eat out less often, buy fewer cups of Starbucks, pack your lunch, or whatever it takes to at least start on your savings

Many financial planners recommend that you have 3 to 6 months of your income in savings to weather a crisis involving medical leave or loss of a job. For many people, especially younger ones, that’s simply not realistic….but you have to start somewhere. Put money aside in a savings account and forget about it. If you can save 10% of your pay, you’ll find that nest egg growing quickly. Once you establish your emergency fund, begin saving toward longer term goals, such as buying a home or retirement savings.

Look for new ways to pay down debt

Now it's time to wrap your head around that ugly debt. The way that works best for me is to start with the highest interest debt and put as much extra as I can toward that debt, while making the minimum payments on the other bills. When the highest rate bill is paid off, I take the amount of the payment I was making on that bill and pay it all on my next highest rate debt. Some people call this "snowballing" your debt.

You may want to pay on your loans more frequently than once a month. If you get paid weekly, you might want to take the monthly payment, divide it by 4 and pay that amount every week. It's easy to set up an automatic transfer from your checking account or just transfer the money online every week. Why, you ask? Because by paying more frequently, you are reducing the principal amount faster, and will pay less interest in the long run. 

For example: suppose you owe $5,000 on an 11.99% APR credit card. If you make monthly payments to pay it off in two years, the payment will be $235.36 per month and you will have paid $848.59 in interest over that time.

Taking that same debt and dividing the monthly payment into 4 weekly payments, you will pay $58.84 per week and the debt will be paid off in 95 weeks (or about 22 months) and you will only have paid $569.63 in interest. You will be out of debt 2 months earlier and have saved almost $300.

Dividing your payment to coincide with your paychecks can make managing what's left a lot easier too. 

By taking control of your finances, you will find it’s easier to stay out of debt, keep your credit rating in good standing, save for the future and your overall sense of well-being will improve. 

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Monday, October 18, 2010

Credit card world is a creepy place Part II

The easiest way to show you the differences are in a side-by-side comparison. There are so many ways for you to "pay" for your card that you really have to read the fine print. Start by comparing the "Fed Box" information required by law. The box on the left is the current information from Destinations Credit Union.

Below is the information from the same day (10/14/2010) from a major bank.

Teaser Rates Can Cost You More in the Long Run
Although this is a real bank, we'll call it "Big Bank USA" to protect the not-so-innocent.  Both the bank and Credit Union offer no annual fee and a 25 day grace period on purchases. Big Bank USA has higher rates than the Credit Union, though they are offering a teaser rate of 0% for the first 6 months.  After that, they revert to the higher rate and you can see that they are much higher for cash advances.  The Credit Union offers the same rate for cash advances and purchases.  These higher rates and fees will add up to more than you'll save on a teaser rate in many instances.

Balance Transfers
Big Bank is going to charge you 4% or a minimum of $10 if you transfer balances on to that card. That means for every $1,000 you transfer from a higher rate card to this one, you'll pay a $40 fee.  At the Credit Union, there is no balance transfer fee.

In reading the fine print on this offer, you'll find that the bank offers rewards - 1 point for each dollar of purchases.  The Credit Union offers the same reward, BUT there is a difference.  Big Bank USA charges you a fee every month for participating in the rewards program....the credit union doesn't

Credit Card Connection lists fair and ethical cards by the state in which they are issued (Destinations Credit Union is proud to be on their "Dean's List").

The credit card world can be pretty creepy, so shoppers beware!

Halloween is coming up and this article is being written to shed light on the scary practices of some credit card issuers.  Before you know it, Thanksgiving will be here and then we'll rush full-blown into the holiday season.  For many of us, that means using our credit cards more.  There are some things to be aware of and beware of before you trot out that plastic on your holiday shopping spree.

Know your limits...

....and not just your credit limit.  Don't spend more than you can comfortably pay for in a reasonable period of time.  Spreading the cost of the holidays over 2 or 3 months may make sense to you, but if you're still paying for this year's gifts by next December, you may have a problem!

Know the score before you use your credit card

Sweeping credit card legislation enacted this year has many credit card issuers looking for new and inventive ways to part fools from their money.  There are all kinds of ways for issuers to make up for the income they've lost through the Credit Card Act. 

Other issuers are closing accounts that are not profitable for them and that can affect your credit score.  While it is difficult to gauge the exact affect this has on your score, closing card that you have had for a long time will negatively impact you.  In addition, closing cards may negatively affect you by lowering the difference between your credit limit and actual credit used (smaller overall credit limit while your balance remain the same).  To offset that change, you could request a higher limit on the credit card(s) you are keeping.

Higher and new fees are other ways credit card issuers are using to make money.  Among the items reported are fees for foreign transactions or higher balance transfer fees. Some have begun charging annual fees even if they offered no annual fee before.  Some are charging fees if you are inactive or pay off your balance every month. At least one large bank is charging monthly fees for participating in the rewards program.  Others are taking away rewards altogether, or removing rewards if you are late on a payment.

You should also pay attention to whether the APR is a "fixed" or "variable" rate.  A variable rate that may look very attractive now (when rates are at their lowest point in recent history), may not be so attractive as market rates start to rise.

Part II