Steps To Becoming Debt Free

Posted on by Ryan

Is Becoming Debt Free Possible For Me?

YES!! There comes a time when most sane people have had enough….Enough stress and embarrassment….Enough collection calls and harassment…. Enough being in debt! Living the lifestyle that you think you have to live simply because others expect you to is foolish. It is time to grow up and to finally start acting like an adult.

No matter what you may hear from the popular newspapers, your debt problems
cannot be traced to anyone but you. The economy did not cause your problems. George Bush did not cause your problems. You did. You signed that stupid car loan at 12% interest. You signed up, and subsequently maxed out, those credit cards. No one else did it for you.

If you are finally tired of the mess that you created, there is a way out. Becoming debt free will allow you to start living the life you have always wanted. All it takes is a plan.

Enter Dave Ramsey!

Dave Ramsey is a well respected, nationally syndicated radio talk show host and TV personality, who is quite simply ‘the’ expert with respect to personal money management. Over the past few years, Dave has helped thousands, if not tens of thousands, of people get their debt under control and changed their lives forever. Additionally, Dave has helped people understand the true power of passive income. I am one of these people.

What I like most about Dave Ramsey is his straight talking, in your face, attitude who will blast apart any objections that you may have. Over the course of dispensing financial advice, he has developed what he calls ‘The Baby Steps’.

What Are The Baby Steps?

Often people get frustrated by all of the possibilities available to them. Information is great, yet information overload can be tragic. In order to help people process what is important, and what is just noise, Dave developed the following plan.

1. Build a Small Emergency Fund of $1,000

The first thing you should do is save $1,000 as fast as you can. Do whatever you have to do to put this money in the bank. Sell some old stuff on eBay or Craigslist. Get a second job bagging groceries at a grocery store. Create your own affiliate marketing empire online. Whatever it takes!

Once you save this money, keep it in the bank for true emergencies. Do not use it for a nice vacation. Do not go out and buy yourself a new set of golf clubs. Becoming debt free requires having this money set aside for true emergencies in the first step. If something does happen, you will not have to use your credit card to pay for it! You can use cash!

2. Start Your Debt Snowball

This is the step where most people begin to understand just how difficult it can be to get rid of debt. It takes a lot of effort, dedication and teamwork to power through this step. For some people, it may take two years to finally complete it. For others, it may only take a few months. Try our debt snowball calculator.

Here is the basic approach:

* Make a list of all our your debts from the smallest amount to the largest. List ALL of your debts, except for you house (this debt actually is accounted for later on).

* After all of your necessities are paid (food, shelter, transportation and clothing), pay the minimum amounts on all of your debts. As a side note, you should be current on all of your debts before you begin this step. In fact, I think you should be current on all of your debts before you complete your initial emergency fund.

* Any additional money that can be squeezed from your budget should be applied to your debt with the highest interest rate. This is extra money, in addition to the minimum payments that you are already paying. Do not consider interest rates when determining which bill to pay extra on. Pay off your highest interest rate debts first and ignore the mathematics involved.

* Repeat this process until you are debt free living, except for your mortgage.

3. Complete Your Emergency Fund

In step one, you saved $1,000 to cover minor emergencies while you begin to eliminate your debt. In baby step three, you will now complete your emergency fund. A fully funded emergency fund should cover between three to six months of expenses. This is your main security blanket.

How great would it feel to know that even if you lost your job, you would be OK while searching for a new one. Guys, a fully funded emergency fund is the best gift you can give to your wife. She will sleep so much more sounded at night when you have one.

4. Invest 15% of Your Income for Retirement

You have now finally reached the step where you start thinking about your retirement. You have no debt, except for maybe your mortgage, have a fully funded emergency fund and are well on your way to changing your family’s future.

Invest 15% of your gross income, not your take home. Do not cheat yourself out of potential growth. Additionally, if your company has some form of retirement match, do not include it in your calculations. Invest the full amount yourself and consider anything else just icing on the cake.

5. Save for College (if applicable)

According to Dave’s book, The Total Money Makeover, 68% of Americans have saved nothing for their child’s college education. This is a tragic oversight, which is putting thousands of students in debt before they even have a chance.

In this step, begin investing such plans ESA and 529s. If you do not know what these terms mean, simply type them into Google, and do a bit of research. New plans are being creating every day, so it may be best to talk to a qualified financial planner.

6. Pay Off The Mortgage

Who would have thought when you began this process, that you would actually be debt free (except for the mortgage), have a fully funded emergency fund, be saving for your retirement and be saving for your child’s college education? You have come a long way and you should congratulate yourself.

You are not, however, completely done yet. In baby step six, you will now start paying off your mortgage early. Treat this exactly like you treated your other debt in step two and figure out a way to pay more directly to the principle each month.

7. Build Wealth

This is the step most people only dream about. You are now debt free and can truly live free from any debt or burden, free from the stress of being able to pay your monthly bills and free to know that you will have something saved for your retirement.

In this step, build wealth and then…..give it away. Give some to family. Give some to churches, Support something you believe in. Create a lasting legacy for your family.

Conclusion
Being in debt is not the end. It does not have to be part of your life. Becoming debt free just requires the right plan.

How To Manage Debt Effectively

Posted on by Ryan

In the current it seems that a lot people are still sinking into debt, even though the loan companies have become very strict on who they lend money to. This article was intended to give you tips on how to manage debt effectively.

We know most people who find themselves in debt will struggle initially to get a handle on things and could end up even deeper in debt if they are not careful. However, there are several ways in which to get debt help to tackle your debt problem.

Top 5 – How To Manage Debt

Priorities Your Monthly Expenses

No doubt you may have monthly expenses, which you could certainly get rid of. For example get rid of any club/gym memberships, which are not totally necessary. And talking of luxuries you should also eliminate on your takeaways each week. Over the course of a month the cost can really add up. This is why looking for ways to save money can can really help in reducing your debt.

Get A few Quotes

Next time you go to renew your car insurance, home and content insurance etc then it pays to shop around for the lowest price deal. You can save $100’s by getting quotes online when it comes to renewal time.

Pay more each month

If you already own a number of credit and/or store cards you should always pay more each month. A lot of people tend to pay back just the minimum amount and it could take years to finally wipe the debt. By paying a little extra it could shave off a few years of repayments.

Use 0% Balance Transfer Cards

If your credit rating is good and you also have lots of cards it makes sense to move your debts to cards which give you 0% for extended periods. Lots of companies give out 0% on balance transfers from other cards and they do this for anywhere up to 6-12 months. This can save you lots of interest payments each month and should be a high priority in helping to manage or reduce debts. Check out http://www.creditkarma.com/Zero-Intro-APR/CreditCards to find out cards you will qualify for.

Secured Debt Consolidation loans

Lots of loan companies offer this type of loan. The principle is very easy in that you pool all your debts from credit cards etc into one big loan. This then leaves you with one manageable loan, which you pay back each month. Consolidation loans are very popular but are only useful if you also cut up the credit cards that got you into the debt mess initially. The loans are typically secured on your home so the interest rates are very competitive, and certainly less than a standard credit card. As you can see by consolidating your debts it can save you a lot of money each month.

How To Manage Debt? What’s next?

The above are just 5 ways on how to manage debt. By applying all or even a few of the debt management tips will leave you with a much lower debt exposure month on month. All you need to do now is apply the advice given and start clearing your debts from today. Look at Improve Your Credit In 5 Easy Steps

Companies To Invest In – 3 Principles To Follow

Posted on by Ryan

Investing means giving up some of your money now with the expectation of getting even more money in return in the future. Did you catch that? Money. Investing is about money. The bottom line when it comes to investing in stock (or anything else for that matter) is that you want a company that can profitably convert its goods and/or services into cash, lots and lots of cash. Well, isn’t that incredibly obvious? You would think so, but when it comes to identifying companies to invest in, it can be oh so easy to take your eye off the ball. Following are 3 principles that can help you to avoid getting distracted and maintain an investment-oriented focus for deciding which companies to invest in.

3 Principles For Finding Companies To Invest In

Principle #1 – Don’t Confuse Investing With Donating to a Cause

When considering investing in a company’s stock it’s vitally important to distinguish between evaluating the company vs. considering the companies valuation. To evaluate a company means to consider its overall suitability as an investment and to otherwise determine whether you’re comfortable with it. In other words, I don’t ever recommend investing in a company if you have a problem with the kind of business they’re in, or the goods and services they produce. For example, if you think smoking is bad for society then by all means don’t invest in a cigarette company, no matter how well you might think the stock will perform. Having said that, once you’ve evaluated a company and determined that you don’t have any ethical or moral problems with its business, it’s then time to consider the valuation of the company, or how much it’s stock is actually worth in dollars.

“Find Companies To Invest In That You Don’t Have Any Ethical or Moral Problems With It’s Business”

This is an important concept, because people sometimes confuse investing with donating to a worthwhile cause. For example, if a company is pursuing green initiatives such as clean energy, there are certain people who will almost blindly pour money into it. Is that a wise or unwise use of money? It depends. If your intention is to “invest” in a clean energy company without a thorough analysis of its business prospects then you’re acting unwisely because remember, when investing, the question you’re asking is not whether a company can save the world, but whether they can bring their products to market and generate a pile of cash in the process. On the other hand, funding a clean energy company can be a good use of your money even though it may be years away from producing a commercially viable prototype if your primary intention is to help the environment and profit is an afterthought (or not a consideration at all).

In summary, when looking for companies to invest in I think we would all like to invest in companies that both benefit society and would make us a lot of money in the process, but the reality is that such investment opportunities are few and far between. In other words, most companies aren’t out there saving the world, but they’re not destroying it either. Instead, they’re usually somewhere in between, trying to make as much money as they reasonably can by selling their products and services within the confines of the law and their business practices. For that reason, my recommendation is that if you intend to use your money to donate to a cause that will help society then by all means do so, but temper your expectations of getting anything (or even nothing) in return. On the other hand, if your intention is to invest in a company’s stock with the expectation of a solid financial return, make sure to keep your focus on the profit generating aspects of the company.

Principle #2 – Investing is About More Than Products, Services and Technology

Again, investing is about making money; it’s not about products, services, or technological advances in and of themselves, no matter how groundbreaking, novel, beneficial or noteworthy they may be.[1] To illustrate, I was once doing onsite professional work at a company. During one visit I noticed that an employee had a yellow sticky affixed to their computer on which they had written the most popular, trendy dot.com companies of the day – companies whose stock had skyrocketed even though they had no proven profit-making business models. We talked for a minute and I said, “I noticed you’re a big fan of dot.com companies.” The person said yes, and that they were an enthusiastic investor in them, to which I said, “Aren’t you concerned about the high valuations of these companies, even though they’re not making money?” To that the person said, “It’s not about valuation, it’s about revolution.” Upon hearing that my immediate thought was, “SELL! Everybody sell your dot.com stocks now!”

Why my reaction? Because it became clear to me that the whole dot.com-induced investment mentality had become so enamored with the life-changing technologies bringing on the Information Age that it had become unhinged from financial reality. But like any other law, financial reality cannot be defied forever, and not that long afterwards the vast majority of the dot.com’s burned through the remainder of their cash and crashed in spectacular fashion, leaving only those companies that had focused on realistic, workable, and sustainable profit-generating activities (Amazon and eBay, for example). The lesson? Remember that investing is not-about the products, technology, or services of a company, but whether a company can covert its products, services, or technology into more money (profit) than it costs to generate those products, services or technology!

Principle #3 – Don’t Buy into the Hype (or sell due to a lack of it)

When deciding which companies to invest in you may begin to notice that companies can be hip one day with a high-flying stock price and fall out of favor the next leaving their stock in the tank. Does that make sense? Does the financial outlook of companies really rise and fall so quickly? While it is possible, in the short-term a company’s stock (and the market itself) can frequently be driven by a herd mentality. Warren Buffet has a great quote that summarizes this concept: “In the short run, the market’s a voting machine, and sometimes people vote very non-intelligently. In the long run, it’s a weighing machine, and the weight of business and how it does is what affects values over time.”

In other words, over the long haul investing isn’t a popularity contest. No, in the end investing is about substance (or “weight”), or how much profit a company can churn out over time. So don’t get caught up in the hype and buy into a company just because it’s the latest market darling (you’ll likely buy too high), and don’t abandon ship just because a company is getting beat up in the media for making an understandable mistake (you’ll likely sell too low). Instead, step back, get some perspective, consider the big picture, and base your investment decisions on a company’s medium and long-term profit potential.

Summary of Companies to Invest In

When you boil it all down, all well-run companies have at least one thing in common: they’re trying convert their goods, services, and/or technology into as much cash profit as they can in accordance with the law and their overall business principles. In other words, at their core, companies (or any other kind of investment) are capitalistic, profit-centered money-making machines. If you don’t remember that then I don’t think you can ever properly judge the actual monetary value of a company’s stock. So, to maintain that investor-oriented focus, keep the following 3 things in mind:

While reviewing companies to invest in don’t invest in companies that you have moral or ethical problems with, but don’t confuse investing (making money) with donating to a cause (benefiting society).
Investing is about more than products, services or technology; it’s about efficiently converting products, services and technology into cash.
Investing isn’t a popularity contest; it’s about substance in the form of profits.

[1] Also, don’t automatically dismiss as an investment opportunity what may on the surface appear to be mundane or “boring” company. Fortunes have been made in the garbage collection business, and Gillette has made billions by cranking out massive quantities of sharp little strips of steel called razor blades!

Actively Managed Funds vs. Index

Posted on by Ryan

Index Funds Consistently Outperform Actively Managed Funds

A recent survey once again shows what has long been the case, that index mutual funds consistently outperform actively managed mutual funds (see below). So if that’s the case then why do so many people invest in actively managed funds?

5 Common Reasons People Fall For Actively Managed Funds

Reason #1 – Ignorance

Some people simply do not understand the long-term performance of index mutual funds handily beats that of actively managed mutual funds.

Reason #2 – Sales Efforts

Firms make much more money off of actively managed mutual funds, often 1%-2% of principle per year vs. 0.18%-0.25% for many index funds. As a result firms put relentless efforts behind selling actively managed funds (with great success!)

Reason #3 – Greed/Temptation

By definition you can’t beat the market if you’re in an index fund designed to mirror the market. What are you, some kind of wimp? And so people pour billions into actively managed funds only to see their returns lag year after year.

Investor Pride – This is a close cousin of “greed/temptation.” Here’s how the story goes. Yes, there are lots of lousy actively managed mutual funds out there, but by virtue of your penetrating insight you are smart enough to pick a fund that will beat the market…and that’s how the train wreck begins.

Reason #4 – Fund Manager Pride

So despite the sub-par performance of actively managed funds, show me one that doesn’t have a fund manager that thinks they can be the market every year. If you can find one then I would love to see what the marketing material looks like, “Invest with us – we guarantee we’ll charge you more and underperform relative to the market in the process!”

Reason #5 – Performance Chasing

Maybe you’ve had a reality check and realize if you’re like most regular you can’t consistently beat the market (but don’t worry, the pros can’t either). But wait, you don’t have to be smart enough to beat the market, right? You’ll just find some mutual fund rankings and pick the ones that performed the best last 1-3-5 years, right? That’s called performance chasing, which is another name for buying high and often selling low (instead of the other way around!).

Low Cost Index Funds are the Best Long-Term Investment Strategy

So what’s the solution? What’s a good investment strategy for regular people? Unless you’re able buy stock or another investment at an amount that’s comfortably below the market price (such as pre-IPO stock) then you’re best bet for the long-term is to invest in low-cost index funds (view Best Vanguard Funds for specific recommendations). It may not get you riches anytime soon but hey, slow and steady worked out pretty well for the tortoise!

How Do Credit Cards Work?

Posted on by Ryan

A Credit Card is a Means to Borrow Money

How do credit cards work? When you boil it all down a credit card is simply a convenient means to borrow money. In other words, when you use a credit card to pay for something it’s not really you that’s paying for it; the credit card issuer (the bank or financial institution that issued you the credit card) is paying for it. That means when you use a credit card to make a make a purchase the seller is happy, because they get their money. However, the transaction isn’t over as far as you’re concerned because now you owe the credit card issuer. In summary, when you use a credit card you’re borrowing money from the credit card issuer pay for things, and then you’re obligated to pay off your credit card balance.

Payment Options

When answering “How do credit cards work?” keep in mind your credit card issuer obsesses over how much money you owe them. Without fail every month they’ll send you a credit card statement listing each of your charges as well as any unpaid balance that carried over from the previous month, and then they’ll then offer you payment options. On the high end you can opt to settle all of your outstanding charges by paying your credit card balance in full. On the low end you can make the “minimum payment,” the lowest amount the credit card issuer will accept without penalizing you according to the terms of your credit agreement. Finally, if you can’t pay off your credit card in full but you can make more than the minimum payment then you are free to do so.

Some credit cards will charge you interest starting from the time you make a purchase (I’m not a big fan of these credit cards). Fortunately, however, most credit cards won’t charge you interest (or “finance charges”) on your purchases as long as you pay your monthly balance in full and on time and you don’t have any carryover charges from the previous month. Said another way, credit card charges are generally interest free as long as you pay your balance in full and on time. Related Article: Improve Your Credit In 5 Easy Steps.

Credit Limits

Your credit limit is the maximum amount of debt that you can charge to your credit card. For example, if you have a credit limit of $5,000 then you can either make a one-time purchase of $5,000 or you can make a combination of smaller purchases equal to the same amount. You’re said to have “maxed out” a credit card when you reach your credit limit, meaning that you can no longer make any purchases with it until you’ve paid down your balance. In other words, if you charge $5,000 one month and then pay your balance down to $4,000 then you charge another $1,000 until you reached your $5,000 credit limit.

Sometimes your credit limit is automatically set by the credit card issuer. For example, they might say, “Here’s a credit card and, based on your salary, credit history, etc., you can charge up to $5,000.” Alternatively, you can ask for a certain credit limit when you apply for your credit card (or you can ask for the credit limit to be increased for a card you already have). Either way, you should not make purchases that would exceed your credit limit.

What happens if you do exceed your credit limit? First of all, you may not be allowed to in the first place. Remember, whenever you buy something with a credit card it’s run through a payment processor (or it will be verified online if you’re making an Internet purchase). Thus if you attempt to exceed your credit limit your purchase may be denied. However, if you do happen to make charges that exceed your credit limit then your credit card issuer will likely charge you penalties for doing so.

Cash Advances

In a typical credit card transaction you’re paying for things, but you never actually take possession of any cash. For example, if you use a credit card to buy a computer for $1,000 you never take physical possession of the $1,000; that money is paid directly by the credit card issuer to the computer vendor. However, in addition to using a credit card to charge purchases, you can use it to get a cash advance. This can be accomplished in one of three ways.

You can use your credit card to get cash from an ATM (contact your credit card company if you don’t know your card’s PIN).
If your credit card was issued by a nearby bank you then you can go to one of their branches in person and get cash directly from a bank teller who will charge it to your credit card.
Finally, you can get a cash advance from your bank in the form of a cashier’s check (but again, it has to be the bank that issued the credit card).

Benefits – How Do Credit Cards Work With Cash Advances?

The benefits of the first two options are obvious; you can use your credit card to actually get cash. But why would you want to use your credit card to get a cashier’s check? To illustrate, my wife and I once had a car suddenly die on us. After some searching I found a used car that we had enough money set aside to pay for. The problem was that I couldn’t access the money immediately because it was in an investment account, and if I didn’t move quickly I was afraid we might lose the opportunity to buy the car. To solve the problem I went to the bank and got a cashier’s check and charged it against our credit card. I then used the cashier’s check to pay for the car. Finally, after the money from our investments became available a few days later I used it to immediately pay off our credit card. Thus, by using a credit card to obtain a cashier’s check we were able to move quickly on purchasing the car we wanted (which ironically turned out to be a terrible car…but that’s another story).

Try Our Free Budget Calculator

Annual Fees

How do credit cards work with annual fees? Well, some credit cards charge an annual fee and some don’t. If that’s the case then why would you ever get a credit card that has an annual fee? Generally you wouldn’t. However, some credit cards provide special benefits and incentives, and if the value of those benefits and incentives exceed the cost of the annual fee then it’s worth considering.

What’s In It For The Credit Card Issuer?

How do credit cards work for the credit card issuer? To have a balanced understanding of credit cards it’s important to know what’s in all of this for the credit card issuer. Well, if you carry a balance on your credit card then it’s pretty obvious: they’re going to make a financial return of 18%-22% on the money they loaned to you. Ouch! But what if you pay your balance in full and on time every month and you never owe any interest? Does that seem too good to be true? Are you ripping off your credit card issuer, or is it just that they’re lulling you to sleep, waiting to hit you with some hidden fee or penalty?

Well rest easy, because your credit card issuer is making money when you use your credit card whether you carry a balance or not. How? For every purchase you make the merchant has to pay about 1%-3% in credit card fees (and sometimes even more on top of that). As a result, as long as you use your credit card responsibly and pay your balance in full and on time then both you and your credit card issuer are getting something out of the deal: you get a safe, convenient means to borrow money in the short term and they get steady fees from merchants when you make purchases. It’s when you carry a balance that things get out of whack, because then you’ll pay exceptionally high interest rates, and if you fall behind then a whole train of penalties and interest will follow as well.