Tuesday, February 27, 2007

Personal Finance 101 posts of the day 2/27/07

Be careful with those balance transfers

Young and Broke did a great post about Balance Transfer Boo Boos.

Balance transfers can be great but there are definitely some things you want to look out for and Y&B covers the main 5. Those who are playing the balance transfer game (whether it's to pay of debt or earn money) should definitely check it out.

Saturday, February 24, 2007

Borrowing money to pay off debt

War On Credit Cards posted a discussion about whether you should borrow money to pay off debt. They are in support of it if you can get reduced rates on your debt and I agree with some of their points. The biggest concerns I have are when people do the following:

  1. Trade unsecured debt for secured debt by using money from a HELOC to pay off credit cards. There are advantages and disadvantages to this, the main being: you get a lower rate but you potentially put your house on the line. My biggest concern with this method is, if you haven't learned your lesson, you can put the debt on your HELOC and then you run up your credit cards again compounding your problem. There's also the problem of, if you hit a financial rough spot and can't pay your HELOC payment, with credit cards they just trash your credit but with a HELOC they can take your house. It can be dangerous so keep that in mind.
  2. Borrow money from a 401(k) or 403(b). It sounds like a great idea because you're paying interest (at a low rate) to yourself. However there are some dangers. First, if you lose your job, most likely your loan is due within 60 days and if you can't pay it, it's considered a taxable distribution and you have to pay taxes and penalties. Second, many times if you have an active loan you can't make additional contributions. This may mean that you miss out on employer match. It definitely means that you miss out on the ability to contribute (you can't replace missed contributions) which can drastically reduce the money you have in retirement since you also lose all of those earnings. Third, as in the second example, when the money is out of your account for the loan it isn't earning for you and you can never replace the benefits of those compounded earnings which could have a much larger impact on your financial future than carrying credit card debt.
So, basically, if you're borrowing money from credit cards or prosper or something similar in order to get a lower rate then go for it. However, if you're borrowing from your house or retirement, please, think long and hard because if something happens you can really do serious damage to your financial future.

Personal Finance 101 Posts of the Day 2/24/07

Friday, February 23, 2007

Thursday, February 22, 2007

Wednesday, February 21, 2007

Sunday, February 18, 2007

Tuesday, February 13, 2007

Monday, February 12, 2007

Monday, February 5, 2007

Credit cards are not evil!

I say it over and over again in my Personal Credit 101 class: Credit cards are not evil if used correctly. In fact, they can come in handy and make you and extra few hundred dollars/year in rewards or interest.

Stop Buying Crap agrees in his post Why I Still Love Credit Cards.

He makes a pretty convincing argument.

Sunday, February 4, 2007

Small Balance or High Rate?

Inspired by War on Credit Cards: Pay Off Smaller Debt or Larger Interest Rate

There's always a big debate on what order you should pay off your debt. The two schools of thought are:

  1. Pay off the cards with the smallest balances for the psychological benefit
  2. Pay off the cards with the highest interest rates for the financial benefit
In my Debt Management 101 class I outline both methods with the pros and cons and then suggest a combo. While I think that you should do the most financially prudent thing, most people need some sort of psychological boost to help them stick to a plan. For this reason, I suggest that if you have 1-2 small debts that can be paid off in 1-2 months then you should do that first. This will give you a great feeling of accomplishment while not costing you much financially. Once you've taken care of the small balance(s) then switch to the financially responsible method which is below.
  1. Make a list of all of your debts and include balance, minimum payment and effective interest rate (this means that for debt which allows interest to be deducted from your taxes you should list the after-deduction rate).
  2. Sort your list by interest rate in order of highest to lowest.
  3. Pay the minimums on all of your debts except for the one with the highest rate.
  4. Pay every extra penny you have towards the highest rate debt.
  5. When that debt is paid off, add the ENTIRE payment to the minimum payment for your next lowest rate debt.
  6. Lather, Rinse, Repeat until debt free.