MollysBrother.com

My Favorite: Dave Ramsey’s ‘Debt Snowball’

I know that there are dissenters out there. And I know that there are critics of his, too. (I am one, too. Dave gets a little to religious and preachy for me at times, so I can see how we can turn some non-Christians off.) But the reality is that, out of all of the debt elimination strategies, Dave Ramsey’s “Debt Snowball” is my favorite and, I think, the most effective.

What is the Debt Snowball?

For those of your new to the personal finance blogosphere, the Debt Snowball is a debt elimination technique that was created by Dave Ramsey. (In addition to having authored books and hosting a daily radio show, Dave has a TV show on the Fox business channel. Or at least, he did. I don’t get the channel, so I don’t know.) If you are not familiar with Dave, run and buy his book. (Or click over to buy his book.)

How does it work?

The debt snowball suggests that you list out all of your debts. Then, while paying the minimum payments on all your outstanding bills, you attack the smallest debts first. In addition to that minimum payment, you throw all your extra money at that debt. So, instead of (let’s say) paying $200/month on a credit card debt. You find a way to make an extra $100 or $200 a month. You now put that extra money towards that credit card. So, now you are paying $400/month towards the debt. Once you’ve paid off that debt, you then take THAT $400 and add it to the minimum payments of the next one. So now, you are putting $400 + minimum payment towards that debt. Once you pay that off, you then take that new amount and pay off the next debt. Ideally, once you get to the larger debt amounts, you should conceivably be able to pay them off in a fraction of the time.

One Important Note

It is important to note that Dave has developed an entire system to debt reduction and financial freedom. This is merely one small–but important–aspect of it. In order for this to work successfully, I believe that all other aspects of his plan must be followed as well. If you are unfamiliar with Dave or are interested in re-committing to his Total Money Makeover, head on over to Amazon and get his book.

Posted in Debt | 2 Comments »

Establishing Financial Goals, part 3

Any time we look at setting and achieving goals, there is a three-step action plan that helps aid us in the endeavor. It is a simple motivating plan of attack that keeps us focused on the task(s) at hand. Below, I’ve outlined the three things you can do now to help you achieve your financial goals for the New Year.

1. Write it down. The very act of writing our goals down and committing them to paper increases the likeliness of you taking  action on the goal. Write your goals, objectives, and tasks in a place where you can view them and review them often. Some places that have worked for me: my desk at work, a post-it near my computer, in my day-runner. I look at each of these daily, thus my goals are front and center.

2. Track your progress. Articulating goals are excellent. However, we are more likely to follow-through on our goals if we have created a positive, supportive way to follow our progress throughout this process. Some suggest creating the old “thermometer” to follow you through the journey. You may have your own tools that work for you.

3. Work through the setbacks. Understand that there will be minor setbacks. I heard long ago that “life is not a success-only journey.” Often times, we learn more from our mistakes, missteps, and failures than from our successes. Take each setback in stride. There may be a month when you are not able to significantly decrease your overall debt. Don’t worry about it. Just make sure that you are able to pull together your resources and redouble your efforts. Find ways to stay focused on the larger goals.

Posted in Financial Goals, Monthly Series | No Comments »

What is a FICO Score?

We have all heard the term “FICO score.” In fact, we have all used the term. Few, however, know what a FICO score really is. Seriously. Very few. Here’s what he do know: the FICO score was developed by Fair Isaac & Co (F.I.C.O–get it?) back in the late 1950s. It is a scoring method of determining the likelihood that credit users will, in fact, pay their bills. The FICO score attempts to predict a consumer’s credit worthiness by condensing several aspects of a borrower’s history. Fair Issac & Co. takes into account the following factors when calculating a FICO score:

• Late payments
• The amount of time credit has been established
• The amount of credit used versus the amount of credit available
• Length of time at present residence
• Negative credit information such as bankruptcies, charge-offs, collections, etc.

How are the scores calculated?

If you are concerned with your FICO score, you may be interested to know exactly how the score is calculated. Although not exact percentages, the following provides an excellent blueprint to see what matters.

• Your payment history–about 35% of a FICO score.
• How much you owe–30% of a FICO score
• Length of your credit history–15% of a FICO score
• New Credit–15% of a FICO score
• Other factors–10% of a FICO score

It should be noted that, while the FICO score, has become the industry standard, each of the three credit reporting bureaus has their own credit scoring system, too.

The FICO score range extends from 300 to 800. Most people fall within the 600-700 range. Scores above 720 are excellent.

How can I increase my score?

It is impossible to increase your score over a short period of time. Here are some tips to increase your score in the future.

• Pay your bills on time, pay your bills on time, pay your bills on time! Late payments will have a serious impact on your score.
• Do not apply for credit frequently. Having multiple inquiries on your credit report can worsen your score.
• Reduce your credit-card balances. If you are “maxed” out on your credit cards, this will affect your credit score negatively. As a rule of thumb, Suze Orman said that you should try to use no more than 30% of your credit limit.
• If you have limited credit, obtain additional credit. Not having a sufficient credit history can negatively impact your score. (source: http://www.mtg-net.com/)

A FICO score can impact your financial future. In the wake of the current housing crisis, banks are now only going to loan to individuals who have strong FICO scores. Additionally, if you do have a less-than-stellar score, you will pay for it in the long run. With higher interest rates, you could pay up to $100,000 more for a home loan over the course of a 30-year mortgage.

Posted in Debt | No Comments »

Save Money at Checkout

Every time we use our debit cards, we have to make a simple financial choice at the checkout: credit or debit? There are benefits to making either choice and only you can decide which one works for you.

Choosing the credit option:

• usually provides the added layer of consumer protection that comes with credit cards (even though your debit card is not a credit card).
• makes your purchase available for any promotions that your bank may be running. For example, I know that INGDirect makes all credit purchases available for a sweepstakes. Other banks run other promotional rewards.
• saves you money. Many stores charge you a minimal fee for processing “debit” purchases. Over the course of the year this 35-cent fee can add up to hundreds of dollars.

Choosing the debit option:

• pulls money out of your account more quickly. If don’t religiously balance your checkbook, this may be a better choice for you!

So, now you know. There are differences between the “credit” and “debit” options at the checkout stand.

Posted in Credit Cards | No Comments »

Spending Log

Fascinating information. I was studying the different ways that people land on this little piece of real estate in the world wide web. The number one search term that delivers viewers to my site is “spending log.” It is interesting that “spending log” or spending logs are on peoples’ minds. Do not get me wrong! I think it is absolutely FABULOUS that people are thinking of ways to track their spending. The only way to do so is by using a spending log.

It warms my heart know that people are searching the term — spending log — because it tells me that people are thinking about creative ways to get control of their budget.

I walk people through the most basic personal finance issues in my year-long ecourse. Sign up for my eCourse and find out how to plan a budget with my immediate eBook “You and Your Money.”

Posted in Personal Finance | No Comments »

Establishing Financial Goals, part 2

Last week, we explored the importance of setting life-changing goals, rather than setting yet another New Year Resolution. Of all the different aspects that lead to achieving your goals, the single most important step is to establish clear tasks that relate to each objective. An important component of this is to create tasks and objectives that are small and attainable.

Small, Attainable Objectives

Goals are achieved in much the same way that houses are built: brick by brick by brick. You will reach your goals by following a step-by-step plan. If you are overweight and out of shape, and your 2008 goal is to run a marathon, you are not going to go out and enter a race next week. This could be detrimental to your health or at least incredibly hard on your body! Instead, you will develop a workout plan with weekly endurance goals that you need to attain.

The same applies to the financial goals that you have established. If you want to eliminate all $10,000 of your credit card debt, you will not be able to do so overnight. However, by setting small, attainable goals you will be able to see that debt disappear over time.

Using last week’s example, you might realize that you can only eliminate $4,000 of the debt this year (which is still fantastic!). In exploring what that means, you realize that you only have to find a way to make an extra $40/week! That’s one dinner out with your loved one or one night of debauchery with friends. By boiling down such insurmountable goals to small, action oriented tasks, you will be amazed at how quickly you can achieve your goals.

Posted in Financial Goals, Monthly Series | No Comments »

Debt: It Takes its Toll

Many people view a moderate amount of debt as something that is a necessary–and at times even helpful–aspect of modern American living. The upside of debt exists. Credit cards do aid in getting us out of financial fixes or short-term emergencies. For some, it even allows them to live a life that is slightly out of reach. However, there is an ugly downside to debt. Debt damages your psychological health and can have negative long-term effects on your relationship, your self, and your future.

Debt Damages Your Relationship with Your Spouse Money is probably an issue in 100% of romantic relationships, although to varying degrees. According to Consumer Credit Counseling Services, of married couples who responded to their national survey, 60% of couples said they had fought about money issues with their spouse. It would be interesting to see how far in debt each couple was. Debt adds an incredible amount of stress to a relationship. Because of debt, credit scores can be affected; it can get in the way of plans to purchase a home; it can get in the way of planning for a secure retirement. Many couples do not talk about debt before they get married. Additionally, out of control spending can, in many ways, have the same effect as sexual infidelity. Spouses feel that their hopes and plans for the future are not being honored by the spouse who keeps the couple in debt.

Debt Damages Your Relationship with Yourself Debt can also negatively impact your own sense of self. It can get in the way of your sleep schedule. It can weigh you down with negative thoughts. In fact, if not acted upon, long-term debt can lead to depression.

Debt Damages Your Future Uncontrolled credit card debt will get in the way of planning for your future. You may be unable to provide for your young children. You may not be able to effectively plan for their college education. Or worse. You may not be able to plan for your own retirement. Credit card debt will take its toll. It will get in the way of your life and your financial future.

Posted in Debt | No Comments »