Dave Ramsey’s Debt Snowball

Some financial experts recommend that the best and most practical way to tackle debt is to pay those with the highest interest rates first. This way, you don’t have to pay as much on interest. But for Dave Ramsey, author of Total Money Makeover, the secret towards becoming debt-free is to have “quick wins” by paying off the smallest balances first. He called his method as the Debt Snowball.

In the Debt Snowball method of getting rid of debt, you are asked to list all your debts (excluding the house) in order with the smallest balance first. Then once you already have this list, Ramsey says that you “pay the minimum payment to stay current on all debts except the smallest.” As for the latter, you are supposed to pour forth all your efforts in paying it completely until you have no remaining balance left.

Then, once that debt is fully paid, you move on to tackle the next debt on your list. Using the payment from the first debt and other extra monies you can find, you pay off the second debt. The same strategy is given for the third debt on the list, except that you now use the money you used to pay for the first and second debts and use that and other monies you may be able to raise to pay for the next debt. The same strategy is applied to all debts in the list until you have paid all your creditors completely.

What makes the Debt Snowball effective is that it boosts your morale when you see that you are actually making progress. No matter how small a debt you have just completely paid off, the sense of fulfillment encourages you to continue with your repayment scheme. Because you see that it actually works, the Debt Snowball gives you motivation to keep on going.

For this strategy to work, Ramsey reminds readers that they must stop borrowing. It makes sense. If you just continue to use your credit cards while working on the Debt Snowball, chances are that you’ll be snowballing perpetually. If you keep on paying off your debts, you’ll never get around to building your nest egg. It’s very important to stop using plastic while you are snowballing to ensure the greatest chance of success.

But what if you still can’t find the cash to start your snowball rolling? Ramsey says it’s time for so some drastic action. “You have to dynamite it. You have to get radical to get the money flowing again.” What are these radical steps you need to do to get the cash for your Debt Snowball?

The most obvious one is to start selling stuff you don’t need and yes, even the stuff you feel you need but can’t afford to have. Go through all the things you have and you’re bound to find something you can sell. Books, clothes, shoes, a piece of furniture, jewelry collection—whatever—all these can be converted to cash by holding a garage sale or auctioning them over on the Internet. But no one would want all my stuff—they’re worthless! We'll, always keep this inspiring quote in mind: One man’s junk is another man’s treasure. Remember, eBay started when founder Pierre Omidyar sold a broken (yes, broken) laser pointer for $14.83 on his site previously known as AuctionWeb.

Should you sell your home or your car? Ramsey only recommends selling the home if you “have payments above 45 percent of your take home pay.” For most families, the home is not the root of all money problems and does not have to be sold. As for the car or other vehicles you may have, the Total Money Makeover recommends: “If you can’t debt-free on it (not counting the home) in eighteen to twenty months, sell it.”

If you don’t have anything to sell or what you sold just wasn’t enough to get your Debt Snowball rolling, you can also take another radical step: Find ways to increase your income. This can mean working overtime or finding a second or even a third part-time job. It doesn’t matter Working long hours and feeling sleep-deprived for what seems like an eternity can be done temporarily—just for the time-being when you are paying off your debts. You can ease back into a more relaxed lifestyle (and feel truly stress-free) once you have taken the burden of monthly payments from your shoulders.

Those who have resolved to get themselves out of debt and be on the road towards financial stability by doing what it takes to legally augment their income in various ways find that despite the pain of parting with a beloved possession and/or the tiredness of mind and body felt after doing ten straight hours of work, they are energized. The inspiration comes from knowing that they are doing this for a reason. They know that they are going to face a better and brighter future not only for them but for their children as well when they have unshackled themselves from the chain of debt.

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Tackling Debt One at a Time

Debt: The Real Foe

When it comes to building wealth, you have one real foe: Debt. Yes, your obligations to your creditors hinder you from becoming rich. Think about it: If you had no car payments to make, no credit card bills to pay, or no student loans to take care of, just how much of your income could go to your savings and retirement funds? A huge chunk, right? Without debt, you can even finish paying for the house years earlier!

Statistics from the Federal Reserve reveal just how much of an enemy debt is on the average American household’s quest to become financially rich: The average household credit card debt is pegged at $7,093 but when only the indebted household is considered, the average debt more than doubles at $15,204. The average student loan debt is $33,005 while the average mortgage debt is almost $150,000. These debts are only the tip of the iceberg. You also have to factor in the common things that American breadwinners normally continue to pay for month after month—a second car and personal loans taken from other sources, among others.

All in all, the monthly payments for these debts can eat up a third or more of one’s take home pay. Debts can make you lose opportunities to build wealth. For instance, if you were paying $1,500 per month for all your financial obligations, imagine just how much that same amount would grow in ten or twenty years if you were to invest it in mutual funds that offered a rate of return of 10 percent per year? As you can see, you can fatten your nest egg faster if you didn’t have to make all these monthly payments.

The reality, however, is that many American households have to make these monthly payments. They are saddled with seemingly insurmountable debt. The figures are so large that getting out of its deadly claws is seen as an impossible feat. However, if you really want to, it is still possible to get out debt without declaring bankruptcy. Make no mistake, the process is not going to be easy. It will take a lot of sacrifice from your end. But once you can finally call yourself debt-free, the benefits are going to be well-worth it.

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Shady Home Equity Loan Practices to Watch Out For

There are various practices that some unscrupulous lenders could pull on you when you take out a home equity loan or a HELOC. If you’re not careful, you might end up paying more or worse, losing your home. Those who fall prey to these practices are usually the elderly who might not like to read the fine print and those who have credit problems and need money badly. You should always be wary of these shady practices as these violate federal laws on credit, debt collection, and discrimination based on age, gender, marital status, race, and national origin. If you see or smell something similar to the ones below, run!

One of the most common practices is the bait and switch. The lender gives you a set of loan terms that seems very reasonable when you’re still shopping for a loan. But when the time comes to sign the contract, you are given another contract that stipulates higher charges. Don’t make the mistake of confusing and just signing the contract. Be firm that you want to sign on what you had earlier agreed on.

Be sure to read the contract very carefully and note if there are additional charges for credit insurance and other insurance products to your loan. This is called insurance packing, where the lender puts in additional insurance that you don’t need into your home equity loan which can increase the amount you have to pay. Together with these unnecessary products, you might also want to check out for other fees that are not legal that are inserted into your loan. These are mortgage servicing abuses where you ultimately lose out.

We’ve discussed this briefly above but always be wary when you’re offered nontraditional loan products such as allowing you to pay the minimum payments that do not even cover the principal and interest due for a certain honeymoon period. Then when the time is up, you are faced with a balloon payment that you can’t anymore afford. Remember, failure to pay your home equity loan also means losing your home so you should not be slack when reviewing your repayment terms.

Finally, never sign blank papers or documents no matter who gives it to you. There have been cases where a contractor offers to improve a certain part of a home at a very affordable price. He says he can also arrange financing thru a lender if the homeowner can’t afford it. Sometime during the remodeling, the contractor hands a bunch of papers for the homeowners to sign, often threatening them that the work will not be finished without it. The end result is that the homeowners signed blank documents or documents which they were unable to read properly and to their dismay only later realized that they were being saddled with a very hefty home equity loan with outrageous terms.

A home equity loan or HELOC can help you get through rough times. But before you get it, you should strive to get the best deal and avoid scams that can make you lose your home.

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Home Equity Line of Credit (HELOC)

A home equity line of credit or HELOC is likened to a credit card—and some lenders actually give borrowers one. It’s a revolving credit line that allows you to borrow as much as you need whenever you need it by writing a check or using the credit card linked to your loan. Just like a credit card, you are given a maximum credit limit (the amount of your loan) so you only pay the amount you actually used. Thus, if you have a credit line of $100,000 but you only used up $20,000 you only need to pay the $20,000 together with the interest.

Just like a home equity line of credit, your loan is secured by your home. If you don’t pay it off, you may be forced to sell your house to pay off what you owe. Again, this requires advance planning and a rock solid repayment plan from your end.

While you can borrow up to 85 percent of the appraised value of your home as in a home equity loan minus the amount of your first mortgage, a HELOC is different because you need to consider many things before you sign the contract.

Ask the lender if there will be minimum and maximum withdrawal limits for your HELOC and if there is a so-called draw period. The latter refers to the time when you can get money from your account. When the draw period is up, you won’t be able to borrow any more money from your credit line unless you can renew your loan. Now here’s the catch: When the property values dropped significantly in 2008, banks no longer renewed the HELOC of borrowers, leaving those who were looking to refinance as a way to pay for their loan with a very heavy debt burden. This is one risk that HELOC borrowers have to take.

Before taking out a HELOC, be sure that you get a clear idea of what your interest will be and how it is structured. There are different interest rates for these plans and you need to certain that you know when it will go up and whether you can afford to pay for it when it does. Many HELOCs have variable interest rates wherein you get to pay a very small amount in the first few months—even at a steeply discounted rate—and then goes up to the real market value for the rest of the repayment period. Be sure to on the periodic and lifetime caps of the loan so you can determine if you will still be able to pay it off in case the rate surges. There are also other lenders that are amenable to allowing you to pay very small monthly payments over the life of your loan and then make a balloon payment to pay off the balance afterwards. This kind of arrangement is risky and you’d want to avoid it as much as possible.

Now if you can find a HELOC with a fixed interest rate and has reasonable terms overall then by all means go for it even if the monthly payments are higher. The plus is that you are assured that you will be paying the same amount over the life if your loan.

As in a home equity loan, be sure to negotiate the closing costs and other fees. With HELOCs, you might also have to pay continuing costs such as an annual membership fee and a transaction fee. Be sure to read the contract carefully before affixing your signature so that you are clear on the terms. You are still covered under the three-day cancellation rule if you do decide to rescind the contract for whatever reason.

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Making Wise Decisions on Home Equity Loans

Home Equity Loans and Home Equity Lines of Credit

One of the good things about owning a home or at least paying the mortgage on it is that you build equity which you can borrow from when the need arises. These tools for credit come in two types—home equity loans and home equity lines of credit. Both allow you to fund certain projects like home repairs or improvements or even pay for your child’s college tuition. In exchange, they also put your home on the line so if you can’t pay, you risk losing that roof over your head.

There are fundamental differences between the two kinds of loans and choosing which kind best fits your situation is part of the smart shopper’s guide to getting this kind of loan. This report will give you the lowdown when you borrow against your home’s equity so you can make the most out of it and not have face the scary prospect of foreclosure in your future.

Home Equity Loan

A home equity loan, also called a second mortgage, is secured by your home. You can borrow up to 85 percent of the equity you have put up in your home and receive a fixed amount when your loan is approved. How much the lender is willing to grant you will also depends on other factors. They will take into account your income, credit history, and the market value of your home. Thus, it’s important that you get a copy of your credit report and your credit score at least six months before you plan on obtaining your loan. This way, you will be able to review it and check for errors and enhance your credit rating. The better your credit score, the more competitive interest rates you are most likely to get.

Just like your mortgage, you repay the home equity loan in equal monthly installments at a set interest. If you don’t meet the monthly payments, the lender could foreclose on your home. This is why it’s important that you already have a solid and doable repayment plan in place before you even start looking for a lender.

Whether you need this loan to pay for tuition or a major surgery, consolidate debt, or do home repairs or remodeling, you need to shop for the best deal around. Banks are just one source of home equity loans. You can also get quotes from mortgage companies and credit unions. If you know a trusted mortgage broker, you can ask him for recommendations as well. Do not hesitate to inform lenders that you are looking for the best rates and the most reasonable deal around. This way, you get to haggle and be able to get the best terms.

When negotiating a home equity loan, take note of the interest rates and other fees that might be added to your account. Remember, if you add to your loan amount loan processing fees, origination fees, lending fees, appraisal fees, broker fees, and others to your loan amount, you’ll surely end paying more for them over the life of your loan. So negotiate these as much as possible.

Finally, don’t forget to look over your contract carefully. Read it and if there are terms you don’t particularly like or was not reflected when you talked it over with the lender, point it out and renegotiate. If the lender won’t agree to your changes, don’t sign anything. There are always other lenders around who would be willing to come to terms with you. Finally, if you do get to sign the papers and decide that you want to cancel, you also have the right to do that under the three-day cancellation rule. This states that you can cancel the deal for any reason without incurring any penalty within three days from signing the loan contract.

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Smart Car Loan Shopping

The Smart Shopper’s Guide to Getting an Auto Loan

The following ways will help you get the best deals on your car loan so be sure to keep them in mind before and during your trip to the dealership.

• Choose your car based on how much you can afford for an auto loan.

Before you even go to the dealership, you have to have an idea of the car you want and how much you are willing to pay for it. This is more complicated than you might initially think. After all, how difficult could choosing a car be? But the price, make, and model are just the tip of the iceberg. You have to compute if the price range is within your capacity to pay so that means taking a close look at your savings and your budget and whether a car loan has a place there. If the car you like is not affordable, it might be necessary to find another kind or you might be willing to cut expenses somewhere else so that you can get the vehicle of your dreams.

Doing this is easier now, what with the Internet allowing you to visit websites that give you price ranges of various cars by brand and other criteria. Be savvy and do online searches so that you have a general idea of the type of car to buy that will be within your spending plan.

• Be sure to shop in different places for an auto loan.

There are many sources of car financing so don’t immediately assume that the car dealership is the only place to get your loan. In fact, you can get more competitive rates in banks or credit unions (if you are a member) than at a dealership so be sure to include them when you go comparison shopping. Use the Internet to your advantage so you save time and energy when getting quotes. Be sure to compare apples to apples so that you know where the best deals can be found.

Other sources of financing include online financial institutions, getting a home equity loan, or borrowing from a rich friend or relative. However, you do have to watch out for some pitfalls. Some online lenders can scam you so you need to check that you’re dealing with a legitimate business. Getting a home equity loan to buy your car is very risky and not recommended because you are essentially guaranteeing your home for your car which means that you lose your home if you don’t make your car payments. Borrowing from rich friends and relatives can be ruin relationships if you don’t keep your promise to pay.

• Get preapproved for a loan first before going to a dealership.

Just like getting a home mortgage, preapproval is the process whereby your financial information is reviewed and the lender gives you the range of loan that you can afford based on your debts, income, and other factors. Choosing a car becomes easier when you know how much you can actually spend. It also takes a lot of the stress out when you are already car shopping. Be sure to ask for a very competitive rate when you are getting pre approval from the lender. Some lenders literally give preapproved creditors blank checks so they can fill it out themselves and give to the dealer when they have decided on a car to buy.

• Don’t discuss financing with the dealer before you’ve settled on the exact price.

Dealers are shrewd businessmen. Some of the more unscrupulous ones will give you a very tempting financing offer—a low-interest loan. But if you agree to it before you even know the price of the car you want to purchase, the dealer could simply jack up the price of the car so he still makes a substantial profit. You can haggle with the dealer by researching the prices of the cars you intend to get in consumer sites like Kelley Blue Book (www.kbb.com). Normally, the sticker price of the car is 5 to 10 percent of what he paid for it so if you do your research beforehand, you will know what this price is and can bargain more readily. As much as possible pay no more than 5 percent above the price the dealer got the car for.

• Don’t reveal how much you can afford to pay per month until you can settle on the price.

In the same way that you don’t discuss financing until and unless you have already agreed on the price of a car, you should not reveal how much you are willing to pay each month for a car. They can do all sorts of mathematical calculations to match the monthly payment you are willing to fork out. For example, they can increase the interest rate or even the car price just so that they can match what you are willing to pay for each month. The figures may not even reflect the actual value of the car. So if you are pressed on how much you can pay each month, firmly but politely say that you want to see the cars first and get the final price first before discussing loans and terms.

• Give a substantial down payment—20 percent or more—to your car purchase.

Yes, it is tempting to go with low down payment auto loans. But you’ll certainly bleed with the interest while you are paying it off. As much as possible, save at least 20 percent for the downpayment so that the monthly payments are manageable and the interest rates competitive. If you don’t have this kind of money for the downpayment, you can always downgrade to a less expensive model or get a used car instead.

• Opt for short-term loans.

A car immediately loses value the moment you drive it away from the dealership. This is a fact. So why should you go for long-term car loans of five years or even more? Some defend longer term financing because it makes the monthly payments lower. The problem is, you are also paying a lot more in interest overall. In some cases, by the time you sell your car, you already have excessively paid a lot more for it. So don’t be tempted for long-term financing. Strive to pay off your car loan in four years or even less so you can free up your money earlier and use it for something more productive.

Here’s one more thing: You don’t have to change cars every now and then. A lot of Americans seem to be of the mindset that a car loan is a normal and perpetual part of the budget. You are not obligated to sell your car and get a new one every five years. For as long as you maintain it and take good care of your wheels, it should serve you faithfully for a long time.

Finally, if you originally opted for a longer loan term but later decide that paying it off earlier is better, be sure to read your contract again. You want to be certain that you’re not going to be paying penalties for paying off your loan early.

• Beware of the add-ons.

Car dealers make a lot of money by putting addons into your car purchase so that you end up paying more. The FDIC Car Loan Shopping Guide states:” Service contracts, credit insurance, extended warranties, and other options are not required and can be costly over the term of the loan.” So be sure to read your contract before signing and don’t let the dealer coerce you into getting these things which are not really necessary. You’ll surely save a bundle.

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Personal Finance Lessons You Ought to Know

Since personal finance is an entire course in college, you might think that you won’t be able to learn it without going back to school. This isn’t necessary. There are a plethora of resources—both online and offline—that you can use to enhance your financial literacy. You only need to comprehend the basic things to be able to manage your money well. We give a preliminary list below—you can always expand to other concepts as your knowledge becomes more sophisticated.

1. Budgeting. Knowing how to allocate your money, how to use a budgeting tool, and how to keep track of your budget are important first lessons in money management.

2. Credit and how it works. Credit is a regular part of our lives that we take it for granted. However, those car loans, mortgages, and credit cards come at a cost and it’s vital that you understand what these are. Related topics are credit reports, and credit scores.

3. Savings. Having an emergency fund for life’s most mind-numbing and pocket-emptying blows helps you ride out these threatening financial storms. Knowing the various types of savings accounts, their interest rates and fees, and the best banks to put your money are just some of the things you need to learn.

4. Investments. Savings are not enough. You also need to get acquainted with the various investment tools like stocks, bonds, and mutual funds and how they affect your financial situation. These investments are also crucial to helping you form a nest egg that will also secure your retirement.

5. Insurance. We buy insurance coverage to transfer the risk we would otherwise take for ourselves to the insurance company. Insurance firms give coverage for health, life, cars, and homes, just to name a few. There are many things to consider before you buy a policy and knowing what to look for is crucial if you want to get the most of the premiums you are paying.

6. Managing debt. This is one of the most crucial lessons that you need to know, especially if you are saddled with heavy financial obligations. Freeing yourself from debt is a must if you want to achieve true financial stability.

7. Filing taxes. You can’t escape taxes but you don’t necessarily have to pay more than what you really need to. Besides, you can lower your tax obligations by claiming exemptions and deductions. Whether you file your income tax yourself or depend on a professional to do it for you, learning about the intricate and complicated rules related to taxes forms a very integral part of your journey towards financial literacy.

8. Estate planning. It is your responsibility to ensure that your assets and wealth will go to the special people in your life you intend them to go to. You might not think that you have enough to warrant the preparation of a will but if you die intestate (that is, without a will) state laws will determine how your estate will be divided. The earlier you know about the basics, the more prepared you and your family will be in case you pass away.

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