Examine Your Financial Habits For Money Sinkholes

Are you ready to pay off your debt but have no clue where to start? 

Read the first post in my series about paying off your debt, then read through this series until you get to this post, our fourth in the series.

You don’t have to experience a life changing debt event to end up in debt.

Simple consumerism or spending more than you earn for a long period of time can put you in an equally horrible debt position.

Many people don’t realize how their small decisions can add up into a big problem until they experience hitting rock bottom or get that dreaded wake up call alerting them to the now bigger issues.

What Is A Money Sinkhole?

I personally think these types of money issues are very much like a sinkhole. A sink hole forms when an underground water source slowly eats away at what supports the ground above.

At first, you’ll never notice a problem because there are no visible signs of problems. As the support continues to be eaten away, the ground starts slowly sagging.

At this point, you’ll start to see small problems like cracks on concrete and tiles in your home. Then one day, without notice, the surface collapses into the hole below, causing massive damage. When the sinkhole shows itself is the moment that most people realize they have a problem.

Hopefully you haven’t actually gotten to the point of a money sinkhole swallowing your financial home, but there is a good chance your money habits are slowly eating away at the ground supporting your financial home if you’re in debt.

Instead of continuing these bad money habits that will eventually lead to your home being swallowed by a sinkhole, you can make a change after recognizing what financial problems lead to money sinkholes.

So How Do You Find A Money Sinkhole?

It’s hard to find a money sinkhole when you personally can’t see any visible signs of your spending problems. Luckily, you can you can find these problems before you get too far into debt. So where do you start?

The first step to discovering is to track your income and expenses. You’ll want to have at least two months of data in order to weed out any anomalies in the data.

The more data you have the more accurate your snapshot of your situation will be. Here’s a couple of quick ways to figure out what your prior income and expenses were in case you haven’t been tracking your finances.

One way to track income and expenses quickly is to use an aggregation tool like Mint.com. Simply set up a Mint account and link all of your financial accounts (banks, credit cards, loans, etc) to the Mint interface. Once you’ve done that, categorize any uncategorized transactions and take a look at the data in front of you.

If you’d prefer not to use an aggregation tool, you can do the same thing with a bit of time. Take statements from your financial accounts for the last few months and a piece of paper or an excel spreadsheet. Then, simply classify all of the line items on your statements into income and expense categories.

Once you have your income and categorized expense data you can start looking at the numbers to see what type of story they tell. The first thing you should check is whether you’re spending more than you earn.

The next exercise is to order your expenses from the largest expense category to the smallest expense category. If you spend your money based on your values, you should see the things you value highest at the top of your expense list and the things you value the least at the bottom of the list.

If that isn’t the case, you have some work to do.

The next step is starting to take action by making small changes, which we’ll cover next week. You’ll be surprised how quickly they add up.

Chances are you can make some changes immediately that you won’t even notice, so we’ll be able to get an easy win up front!

Looking back, have you ever experience any money sinkholes with your finances? I’d be interested to hear what you find either in your past or present finances.

How To Discover Why You Ended Up With A Terrible Mess Of Debt

Are you ready to pay off your debt but have no clue where to start?

Read the first post in my series about paying off your debt, then read through this series until you get to this post, our third in the series.

I bet you’re psyched to figure out which debt you should pay off first, but you’d be jumping ahead of yourself.

In order to completely vanquish consumer debt for good, as your new mindset states, you must first figure out how you got into consumer debt in the first place.

Without this knowledge, you can’t prevent yourself from falling into the same consumer debt trap twice.

You must examine your past and learn from the mistakes so that you don’t make them again in the future.

There are two major ways most people get into debt. The first is a major life changing debt event and the second is through simple money sinkholes, which I’ll explain in the next installment of our series.

For now, let’s take a look at some major life changing debt events that could have caused your debt.

Look In The Past For Life Changing Debt Events

Not all debt is due to overspending and consumerism, but that doesn’t change the fact that you want to get rid of it. There are a few times you can have life changing events that put you in serious debt that you never expected to incur.

Take a look back in your past and see if you can find any of these life changing, debt incurring events.

Higher Education and Student Loans

The first life changing event was the one my wife personally experienced. She ended up with over $80,000 of student loan debt.

Going to college and taking out student loans can leave people in a pretty serious debt situation, much like the one we were in. You can graduate debt free if you really put your mind to it, but the past is the past.

To avoid incurring too much student loan debt in the future, don’t let yourself or any family members go into more debt than they can afford.

You need to calculate this based on their post college career path. Make sure you have a solid plan to pay that debt off once you achieve your educational goals.

Medical Bills – With or Without Health Insurance

Another horrible, life changing debt event happens more often that we’d like to think. A simple medical problem can easily put someone with or without health insurance into thousands or tens of thousands of dollars of medical debt.

Even though you can normally negotiate the bill down or set up interest free payments, this debt can be soul crushing.

The best way to avoid going into a huge amount of medical debt is to protect yourself and your family with health insurance. Add in a decent emergency fund and you should be well covered.

Death Of A Loved One Without Enough Life Insurance

If medical debt wasn’t bad enough, you can get into even worse financial trouble should someone in your family pass away.

In addition to dealing with the final arrangements of your family member, you’ll now have to learn how to live on less. A big chunk of income could have disappeared and you’ll still have the same bills and debt to pay off.

The best way to prevent going further into debt in this situation going forward is to make sure that you have enough life insurance so that your financial life won’t be a struggle if something should happen to your loved ones.

Divorce

Divorce is another nasty debt inducing event many people face. Splitting up from your significant other can get nasty in a hurry and can leave you with more debt than you can handle on just your income alone.

You could have been forced to take out a larger mortgage to pay you ex-spouse their half of the equity in your home. You could have been burdened with half of the credit card debt that you didn’t even know existed.

Regardless of how it happened, it is in the past. Just make smarter decisions going forward and make sure your next marriage, if you remarry, is with someone you are a better fit with in both finances and personality.

Job Loss or Extended Unemployment

Preparation is key for avoiding financial speed bumps. Most people I personally know aren’t prepared for one of the biggest financial speed bumps you can face, the loss of a job.

Unless you get a new job quickly, you’ll be burning through your cash reserves and racking up the debt very quickly after your last paycheck hits your bank account.

Few people have an emergency fund large enough to last through the difficult times of an extended unemployment spell. The best way to prevent going into debt in the event of a job loss is to have a fully stocked emergency fund of at least six months worth of expenses.

Failure Of A Business

The failure of a business is much like a job loss because you’ll no longer have an income to support yourself, but in some ways it can be much worse.

Many people throw every last penny they have trying to save a failing business and that normally includes maxing out the credit cards in a last ditch effort.

To avoid this horrible outcome, try to take a step back and evaluate your business objectively. Hopefully you’ll be able to see the writing on the wall before you incur massive amounts of debt trying to stop a sinking ship.

Accidents or Acts of God (Hurricanes, House Fires, etc)

Accidents or acts of God can be financially disastrous. Whether you’re in a car accident, are victim of a burglary, house fire, flood or hurricane, these types of events can set you back thousands of dollars easily.

If you didn’t have the proper insurance or money in the bank you might have to go into massive debt to get your life back on track.

Make sure you’re properly insured for the property you own and that you have enough cash to cover any deductibles on these policies if you want to avoid going into debt because of these events.

Short or Long Term Disability

A disability, whether caused by an accident or an illness, can either be a short term or a life long problem for your finances.

If you’re unable to work and didn’t have short or long term disability insurance your financial life could be ruined by the fact that you can no longer earn money for your family.

In the short term you could end up in a ton of debt while you’re waiting to heal before going back to your job. If you end up being disabled for a longer period of time you may never be able to recover financially.

Once again, insurance and a well stocked emergency fund can prevent the financial part of the disaster of becoming disabled. We’ve dealt with a couple of short term disability stints and were very glad Tori had short term disability insurance through her employer.

Prepare For These Situations To Avoid Debt

As you can see, there are many times when an unexpected life event can throw you tens of thousands of dollars into debt if you aren’t well prepared with proper insurance and a well stocked emergency fund.

Do your best to prepare for the worst case scenarios. By doing so, you will have eliminated many of the threats to your debt pay off journey.

The next step, which we’ll cover next Monday, is taking a look at money sinkholes and how they can put you in the same horrible debt that these life changing debt events can.

Once you understand all of the ways how you’ve gotten yourself into debt you can protect yourself against it happening again. You’ll be well along your way to paying off your consumer debt once and for all!

Have you experienced any of these awful life changing debt events? If so, did you end up in debt or were you well covered by insurance and an emergency fund?

Setting Yourself Up For Success To Pay Off Your Debt

Are you ready to pay off your debt but have no clue where to start?

Read the first post in my series about paying off your debt, then come back and read this, our second post in the series.

Now that you know everything about your debt, including how much you owe in total, it is time to take the next step in your debt pay off journey.

Hopefully you’ve let the magnitude of the debt that you owe sink in.

You Need A New Mindset

You know that you’re in consumer debt. You can no longer deny it. You’ve added up the numbers yourself.

There is only one way that people get into consumer debt. You spent more money than you earned. Plain and simple.

So how do you get out of debt?

The answer is just as easy on the surface. You have to spend less than you’re earning. That isn’t all though. You need to spend a significant amount less so that you can both make the minimum payments on your debt AND still pay extra to knock out your debt quickly.

Why is it important that you pay your consumer debt off quickly? Consumer debt is an emergency!

You’ve set your financial life on fire by going into consumer debt. The only way out is to slowly put the fire out by suffocating it completely through paying off your consumer debt permanently.

Once you realize this, you’re on the right path but you’re just at the beginning of the road. Don’t get frustrated and whatever you do, don’t give up already.

My wife and I know exactly how you feel. When we were staring at minimum payments over over $700 per month for over $80,000 of student loan debt we thought it’d take decades to get out of her debt.

Luckily, we saw the light and followed the exact path I’m explaining now. We ended up paying off all $80,000+ of my wife’s student loan debt within just three short years.

You can get out of debt, too. So how do you get started along the path?

Quit Using Consumer Debt Forever Starting Now

The first step is breaking the cycle of going deeper into consumer debt. You MUST give up consumer debt all together.

You can no longer use the tools that enabled you to get yourself into the situation you’re in now. Are you ready to make that commitment? When you are, continue reading.

Now that you’ve decided to give up consumer debt for good it’s time act on that promise to yourself.

You can no longer use credit cards. You can’t take out payday loans anymore. No more borrowing money from friends, family or co-workers. No borrowing money from anyone. No more going into debt for consumer purchases.

This is serious and you should treat it that way.

Remove The Temptation

The best way to give up consumer debt for good is removing any temptation from your daily life.

Go cut up your credit cards or freeze them in a block of ice so thick that you can’t get to it for an impulsive consumer purchase.

Go out of your way to avoid the payday loan shop that you normally stop at to get some quick cash.

Tell your friends and family straight up to never, ever loan you money again. Heck, your friends and family will probably be quite happy about that!

Are you addicted to shopping online at Amazon.com with your Amazon Prime membership? Cancel it and remove your credit cards from their system. Turn off one click ordering and remove your Amazon bookmark from your browser.

You must make sure to remove anything that tempts you to spend money that will put your further into debt.

Trust me. After a couple of months you won’t miss spending money as much as you think you will.

Making the conscious decision to change your mindset is no easy task but it is absolutely essential if you want to change your relationship with your money and destroy your consumer debt forever.

Once you’re committed to the new mindset and have let it sink in for a bit you’ll be ready to begin tackling the next steps of the debt pay off process.

The next step is figuring out how you got into debt in the first place, which we’ll cover next Monday.

Have you ever changed your mindset on your money and how you spend it?

Have you committed to never go into consumer debt again?

Let me know about your debt story in the comments below! Help inspire others if you’ve already conquered your debt or let me know what you’re struggling with if you’re trying to pay your debt off. I want to help you!

How To Pay Off Your Debt When You Don’t Know Where To Start

Most people have struggled with debt at some point in their lives, including my wife and I.

Believe it or not, my wife graduated from college with over $80,000 of student loan debt!

She had no clue where to start in her journey to pay off her debt and I know she wasn’t alone.

In fact, a friend recently asked the same question.

Our friend is in debt and wants to get out of debt but has no clue where to start. Many people around the world are in the same exact situation so I wanted to share some easy ways to get started on your adventure of destroying your debt.

Just remember, it is likely your debt won’t disappear overnight. Paying off debt can be a long journey, but it’ll be more than worth it in the end.

Let’s get started with the first step.

Step One – Get Together A List Of Every Debt You Have

The first step to pay off your is to know every debt you owe. This can be a bit overwhelming, but it is a necessary first step.

I personally start by pulling my free credit report from AnnualCreditReport.com, the only place where you get 100% free credit reports as authorized by federal law.

You can pull your credit report from all three bureaus if you wish or you can simply pull one report from each bureau every 4 months if you want to monitor your credit for fraud. Either way, you’re entitled to one report from each bureau (Experian, Transunion and Equifax) per year.

This report will show you a list of all of the debts that you owe other than loans from friends and family. The balances owed may be a month off if your creditor hasn’t reported your most recent payment, but it will give you the big picture of who you owe money to.

Once you have this list of who you owe money to, it’s time to dig deeper to get the rest of the information you’ll need.

Step Two – Find Out Everything About The Debts You Owe

Now that you have a list of who you owe money to, it’s time to figure out everything else about your debt. Here’s a list of what you’ll need to know about every debt you owe:

  • Exact amount you owe
  • Payment amount
  • Frequency of payment (monthly, quarterly, etc)
  • How many payments left (if fixed term debt such as a mortgage, student loan or car loan)
  • Interest rate and whether it is fixed or variable
    • If variable, what the rate is based on (prime rate, LIBOR, etc)
  • Due dates
  • Grace period (if applicable)

Where do you get this information? To find out how much you owe, check your most recent statements.

For everything else, you’ll need to do a little bit of digging. For loans, check the loan documents you signed. If you can’t find the loan documents, try calling the creditor or log in to their website and check your account details.

For credit cards, check the terms you agreed to when you signed up for the card. You may also be able to find this information online after you log in to your account on the credit card’s website.

If you’re having trouble understanding the terms, call the number on the back of your credit card. A representative will be more than happy to help you.

Step Three – Assess Your Debt Situation

It’s time to look at the big picture now that you’ve figured out all the details on every debt you owe. It probably won’t be fun and it could be just plain ugly, but you have to do it to move forward.

First, add up the total amount of debt you owe. The number may be scary but we’re going to work on knocking it down, so don’t worry too much yet.

Next, take the amount of all of your monthly payments and add them up. This the minimum amount of money that you owe on your debt every month. Again, this can be overwhelming, but you’ll be able to knock this down as you pay off your debts one at a time.

Congrats! You’ve Started The Debt Pay Off Process!

The steps you’ve completed so far have gotten you well along the process of paying your debt off. Even though you may feel like you haven’t made any progress yet, that couldn’t be further from the truth.

You now know everyone you owe money to, how much money you owe in total and how much your total monthly payments are. You now know the basic information you’ll need to make intelligent decisions on how you’ll pay your debt off.

The next step in paying off your debt is setting yourself up for success in your debt pay off journey, which we’ll cover next week.

Do you have any questions or concerns about how to perform the steps in today’s article? If so, leave a comment or contact me directly and I’ll do my best to help!

Want to Buy a House? First Do This One Year in Advance

Many people get excited when they get to the point in their life where they decide they want to buy a house.

We were the exact same way on all three houses we have bought!

However, we weren’t smart enough to plan a year out in advance for our first two homes. In retrospect, that could have really bitten us in the butt if two specific things weren’t in the optimal ranges.

What were those things and how can you make sure you have them in order?

How to Save Thousands of Dollars on Your House

There is an easy way to save thousands of dollars on your house and it doesn’t even involve negotiating with anyone. What is the simple trick? This first trick will help you lower your interest rate to the best possible rate.

Did you know that as little as 0.5% difference in interest rate, for example 4.0% vs 4.5%, on a $200,000 mortgage can result in $21,000 difference in payments over the life of the loan.

Checking and Managing Your Credit

Having a credit score of above 720 will normally qualify you for the best interest rates available on mortgages. If your score is currently below 720 or is close to 720 then you have some major work to do over the next year.

Even if you have a great credit score there are a few things you should make sure to manage to ensure you keep your score in the 720+ range to save thousands.

The first key is pulling your free annual credit report. If you don’t know how, visit AnnualCreditReport.com. This report will not have your credit score but it will contain all of the information that your credit score is calculated from.

Make sure everything is correct. If there is anything that isn’t accurate you should dispute it, especially if it is a negative item. After that you’re ready to start looking at your credit score.

If you don’t understand the components of your credit score, make sure to read my post to learn more. You can’t change the past, but you can change the future to have the best rate possible when you apply for your mortgage.

Make sure you don’t make a single late payment from now on to keep the largest portion of your credit score high. If you have incurred late payments in the past, make sure you set up a system so that they don’t occur any more. Be proactive as you can.

Next, try to lower credit utilization ratio (the amount of debt compared to your credit limit) to 30% or less if at all possible. Lower is better and 0% is best.

In order to get the lowest possible balance on your credit cards make sure to pay down to a zero balance before your statement date, as that is when most credit card companies report your balance to the credit bureaus.

Between these first 2 categories you’ve already accounted for 2/3rds of your credit score.

Don’t close any old accounts to keep your credit history length and average account age as long as possible. The only exception is if there is a card with a large annual fee that is prohibitively expensive.

Finally, don’t apply for any new credit or apply for anything that will result in a credit inquiry. This last tip is the easiest 10% of your credit score to keep high. No inquiries = more points.

Unfortunately, at this point you really can’t do much about your credit mix, the last category of your credit score. You don’t want to apply for any new loans to balance out the mix but you could potentially close some newer credit cards if you have too many.

Remember, you don’t want to affect the length of your credit history or make the average age of credit shorter.

To get an idea on how you perform in these categories, and to get an approximation of your credit score (not your actual FICO score) make sure to check out my Credit Sesame review.

Credit Sesame will give you a grade for each credit score category and give you ways to improve each category.

Credit Sesame will also give you an approximate credit score, but make sure you realize that the score they provide isn’t your FICO score which your lender may use to determine your mortgage interest rate.

The credit scores do tend to use the same factors to determine scores, but they can come up with different results.

Now that you know some tips and tricks to get or keep your credit score above the magic 720 number you’re on your way to savings thousands on your next house purchase. Putting a little bit of effort into managing your credit can make a huge difference.

It is amazing how much a 0.5% difference in your interest rate makes in your total payments on your mortgage.

Not checking our credit scores a year in advance of  applying for our mortgage almost messed us up.

We did check them as soon as we figured out we were serious at looking into buying a house, but at that point my fiancee’s score was in the borderline 720 range and we only had 30 days to apply for a mortgage.

Unfortunately, credit scores don’t update immediately so we were sweating bullets to see if her score would be above 720. We made a couple of quick adjustments, such as paying off her credit card before her statement date, and luckily we squeaked her into 720+ just in time.

However, there is another key factor your should be planning at least a year in advance of your house purchaseFind out what it is here.

Did you manage your credit score before you applied for your mortgage and bought a house or were you flying blind? Did it affect your interest rate? Let me know in the comments.