How To Pay Off Credit Card Debt

Debt is a horrible master. Nothing saps wealth like being in debt. Just take your monthly payments, add them together, then times it by twelve.

How much do you spend on debt?

Once you get the number go to this compound interest calculator. Set as the interest rate a reasonable rate (try 6%). Then set the years to the average length of a car loan (5 years), then take your monthly amount you spend on debt and add it to the calculator. Select the compound interval to yearly. What is the number you get? Image what you could buy or save if you paid off debt!

How do you pay off debt? Follow these simple steps:

1. Get the current balances for your debt accounts.
2. Throw the amounts and list in excel or Google spreadsheets.
3. Sort the list from smallest to greatest.
4. Add due dates, minimum monthly payments
5. Pay off the smallest amount ASAP
6. Take the minimum payment you were paying for the smallest balance and add it to the next smallest balance. Ex: Visa minimum is $50 per month, Master Card is $100. After VISA is paid off, apply th $50 to the Master Card monthly payment making it $150
7. Keep doing this until you reach your mortgage.
8. At this point I would apply half of what you were spending on consumer debt to pay off your mortgage faster!
9. Celebrate!!

How to Control Spending

One of the key areas of controlling your finances is to control expenses. To many, this might be a very obvious point, but in reality it is much harder to do. We all know that the less you spend the more you can save, but do we really apply that advice? How many of us can put off instant gratification so we can save?

The problem boils down to psychology. Our present selves view our future selves as complete strangers. Because of this, we tend not to take our futures too seriously. We do things and expect our future selves to fix the problem. Sound familiar  Take diets and exercise. We choose to eat poorly and not exercise, we gain weight. We know we should exercise and reduce the amount we eat, we know that if we don't we will develop health problems, but we can do it later. We wholeheartedly expect that our future selves will fix the problems. The failure of this method, this thought, is that we are the future selves, and eventually (as will all people) we won't have a future self that will fix the problem. 

To go back to my point, how do we control spending? The easiest way to do it is to track spending. Record every time you spend money. This sounds very tedious, but it is illuminating. Do this for one week, and you will be amazed on what you spend. Many times, we swipe our cards and not thinking about it. These purchases, the ones we do without thinking, cost us the most. The goal of this exercise is to make us conscious of our spending. 

After doing this for a few weeks one will become more aware of the flow of money. This is a key point of taking control of your money. YNAB helps, because unlike other software (Quicken and Mint) you have to manually enter each transaction. Quicken and Mint automatically categorizes your transactions. This means your daily routine of analysing your finances becomes nothing more than viewing graphs and making sure your software categorized everything correctly. 

One final method of controlling expenses is to use cash. Cash is finite. How hard is it for you to break a hundred dollar bill? You are more frugal when your wallet is filled with hundred dollar bills than with singles. You can visibly see your money deplete, and once it is gone you cannot spend more. If you combine this method with tracking your expenses (either using a spreadsheet, Quicken, Mint or YNAB) you will see an increase of funds within a month. My wife and I noticed an increase of $200.

How to use YNAB to Recover from Financial Set Backs

My emergency fund went from $1,200 to nothing within two weeks.

An unexpected bill for a doctor visit a month ago. The car is overheated, my other car needed two new tires. A class was cancelled and financial aid now says we owe money. My son's medicine was more expensive than normal. 

Things for April were going well, but it is amazing how bad things happen quickly, silently, and without warning. In two weeks our funds dropped to zero. The financial peace we've been building now has taken a step back, and for the first time in awhile, I am feeling the strain of more month than cash.

What happens now? Use debt to bail myself out? Isn't that the mantra, have a credit card for emergencies. My plan of attack (my budget) is now thrown out the window. We are starting May with only $1,050 to budget for May. This only covers my mortgage, one week of food, and to keep the water and lights on. Not a happy place to be at for the average person, but I'm not too concerned.

I get paid next Friday (start of May basically) so does my wife. This adds a cool grand to our account, which will cover our basic needs and mandatory obligations for the month. My next paycheck then covers our comfort obligations and some fun money. Since May is a month that my wife gets an extra paycheck (I get two since I'm paid weekly), the rest goes back into the account. By the end of May our fund will be replaced, and next month paid for with May's income.

How did I do this? 

Using the income you've set aside for next month and any funds not budgeted. Fill the budget categories and go as far down your budget until you are left with zero or close to zero. Then, as you get paid, continue filling your budget until zero. For us, we will have May completely paid by my second paycheck for the month. If you overspend, just move funds between categories to make up for the shortfall. We are expecting the other 2 paychecks from my wife, and 3 of mine to cover June's expenses and refund our emergency cash reserves by the end of May. 

The key is to keep to your budget and spend less than normal, and not to give up.

How about you? How you been in this situation before?

How to Increase Your Net Worth

Want to increase your net worth quickly? Pay off your high interest debt (credit cards, payday loans, etc...). Take that money and split it between paying off other debt and savings. Below are quotes that should help motivate you and show current state of American finances.

Wired magazine, "In a 2006 survey, 30 percent of people without a high school degree said that playing the lottery was a wealth-building strategy. ... On average, households that make less than $12,400 a year spend 5 percent of their income on lotteries."

While some may argue that this does not apply to them, the concept is still the same. Any investment, whether in stocks, forex, gambling, binary options, that promise high returns with low risk and with little investment are most likely scams. Due diligence is required when it comes to investing. Get rid of the thoughts that high rewards can come to you via "risk-free" investments with "little or no money down". Also, gambling never succeeds in the long run, only the house wins. Prudent investing equals good returns with moderate risk.

According to David Wessel of The Wall Street Journal, Americans "spend about half of their food budgets at restaurants now, compared to a third in the 1970s."

I like going out to eat. I love the idea of not having dishes to clean up afterwards. It allows me to talk with my wife and enjoy the night out, but not long ago we use to spend around $500 per month going out to eat! Imagine what I could have done with 500 dollars a month? Pay off high interest debt, invest in mutual funds, donate to charity, but I decided that eating at Cracker Barrel was better investment. I don't suggest to become an ascetic and never go out to eat, or buy lattes again, but I just suggest to cut back. We reduced our restaurant budget to 100 dollars, and with the extra $400 dollars we paid off our two credit cards.

In the 1960s, wages and salary income made up more than 50% of GDP. By 2011, it was less than 44%, as dividends, interest, and capital gains made up a growing share of the nation's income.

Who are the wealthiest individuals in the nation? I can tell you they are not wage earners, so what does that say to you? Pursuing a higher wage works out in the short term, but in an increasingly global environment wages will continue to drop. Why pay $20 per hour for an American worker while I can pay someone $5 for the same labor. Look on freelance job boards. People in other nations charge rates below the USA minimum wage for skills that would land an American a decent job, like programming. This all leads that the only way to retire wealthy is to invest, and do so constantly.

According to ConvergEx Group, "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away. ... A full 30% have less than $1,000.

This is self explanatory. The sooner you invest, the more rich you'll be later.

On a final note, don't rely on some government pension. Only you know what is best for you and your family.

The Pareto Principle of Personal Finance

The Pareto Principle or also known as the The 80/20 Rule is simple:

"Roughly 80% of the effects come from 20% of the causes"

A quick glance at the wiki article above sums up that the 80/20 rule is applied to different areas from economics to nature. I suggest we apply the same rule to personal finances. 20% of your income should generate 80% of your wealth.

How is this possible? Live off of 80% of your income and save the other 20%. That 20% should then be divided according to your family needs. Do you have an emergency fund? If you don't, you should take that 20% and build a 3 month one first. Have debt? After you have an emergency fund, take that 20% and pay off debt. Once you finish those steps then save 10% of that 20 for retirement (especially if your young). If your older save 15% for retirement out of that 20%.

The rest of that twenty should go into saving for items that you may want like a new car, furniture, vacations, college, and so on. This method will allow you to pay in cash for items, and gives you negotiation room when haggling. It will free you from using "90 days same as cash" or other financing scams that will put you in the hole. 

The very act of paying off debt is equal to getting a raise. The money you spend every month on credit card minimum payments could go to savings. Once the debt is go, you can pay using cash for the things you want.

I suggest using YNAB to start you off on the road of financial management. Once you have a buffer, then move to Quicken to maximize the money you earn and keep.

YNAB vs Quicken 2014

While on the surface YNAB and Quicken do the same thing, help manage your money, but that is where the similarities end.

YNAB is a purely devoted budgeting system. It does have some report abilities, but its primary goal (which it does flawlessly) is to manage cash flow. Remember, like businesses, cash flow is the life blood of a family's finances. To sum up the importance of cash flow, I like to quote Frank Hebert' Dune: "The Cash Must Flow"

YNAB cost 60 dollars to purchase (you can buy Quicken Deluxe for the same price). What you get is a program that does not have a sunset policy (Quicken expires after 3 years), and a program that comes with a unique money philosophy.

The philosophy tries to move the family from the paycheck to paycheck lifestyle to a living on last months income for the current months expenses. This is done using a buffer, as the YNABers call it. This buffer tends to be the most confusing part of the philosophy; however, once you move past the initial confusion, you are left with a wonderful budgeting tool.

But let me say it again, YNAB is a budgeting tool that only works as long as you follow the system the developer created. How YNAB tracks your money is similar to any financial software. Just don't expect fancy reports outside of a few basic ones they provide, but in all honesty, how many reports do you really need for your personal finances?.

Quicken is for people who want to manage there money on a level that businesses do. Other than spending reports, net worth, and spending analysis that YNAB offers. Quicken tracks taxes, investments, business expenses, run financial scenarios  analyze loans, track mortgage interest, and the list goes on.

While it might be easy to say that one may never need these abilities, I would disagree. Personal finance is all about knowing what your money does. YNAB gives every dollar a job, but lacks the ability to track and analyze how those dollars work. Quicken takes the past to create reports to see where you've been, but lacks the ease, flexibility, and forward thinking that YNAB offers.

The end decision is simple. When it comes to YNAB vs Quicken the choice is clear. Get both ideally. If you cannot afford both. Buy YNAB ($60) then save up to get Quicken (buy at least the Deluxe version). Use YNAB to manage your budget, and use Quicken to run reports and track taxes, investments, and analyze future financial scenarios that may impact your life.

Why Use Quicken

The minimum recommended version of Quicken I would suggest to anyone who is seeking to control their financial situation is Quicken Deluxe. The problem most people would have with that advice is that Quicken Deluxe cost 60 dollars to purchase.

You can find it cheaper on Amazon but the problem is the same. Quicken is expensive. Why spend 60 when you can get the same thing using Mint.com?

I've used Mint before. It is a great program that helps anyone,  regardless of financial ability,  to start tracking their personal finances. Mint is a program that helps track money. Quicken manages your cash.  Quicken is the big leagues.  The reports you can generate,  the different types of accounts you can track,  even the unique way to track gold and airline miles in Quicken.

I like Mint.  I think every 16 year old should sign up for a free account to start forming the habit of budgets and spending patterns. But after one gets a full time job,  or has multiple accounts from loans to investments,  Quicken should be used.  The ability for Quicken to track important tax info has paid for the program this tax season.

Quicken,  when used regularly and when you read how to use its features, is a powerful tool for the management of money. Quicken gives you the greatest tool in personal finance. Knowledge.

How To Track Cash in Quicken

How to track cash in Quicken

To track cash click on "add an account"-->Click cash-->Name the account (I use our envelopes to name the accounts)-->Select the beginning of year--> Enter the starting balance (we started tracking cash after we started the envelope system, so I entered what we had in the envelope as the starting balance)-->Your done

Over time we are able to see if we need to increase cash in one envelope or if we can get rid of one we don't use too much. It helps us communicate, and it saves us money.

Why Use Cash

There is a big difference between logging into your bank and seeing $100 in your account, and physically holding a $100 bill. In our current age, money is an abstract object. Yes we see numbers that represent money when we view our balances online. We see positive numbers increase the balance and negative numbers subtract from it, we don't think about the very act of paying for items. We just swipe our bank card or credit card to pay for an item.

Want to reduce spending? Open Quicken( this should be done after you import your checking accounts transactions and categorize them) click on the spending tab, then change the graph to represent only your checking account, and the time range for last month only.

From that monthly total, subtract bills that you pay using your checking account (car payments, mortgage/rent, utilities, etc...) so all that you are left with is spending on everything else that you swipe the card for. Now take that amount and divide it by four weeks in a month.

Once you find your weekly number, round down to the nearest twenty. The reason to round down to the nearest twenty is because most ATMs dispense cash in increments of twenty. An example is if your weekly spending is 256.55, you would withdraw 240 every week.

Take the cash you withdrew and sort them into envelopes with each category you spend on. My family has an envelope for groceries, housing goods, kid supplies, going out to eat money. When the cash in a specific envelope runs dry, no more spending. The system works if you don't raid another envelope to increase the cash amount in another. My wife and I had a problem with this. We would "borrow" from the grocery envelope to pay for a trip to go out to eat.

This system works if you keep on top of it. Right now my wife and I withdraw only 160 per week to pay for our food, supplies, and misc. items. We use to spend 372.50 per week swiping the card (not to mention the credit card also). To put that in perspective:

372.50 x 4 weeks=  $1,490.00 per month

160 x 4 weeks= $640.00 per month

Savings of $850 dollars a month!

We haven't been perfect, but on average we spent at least 500 dollars less on average every month. That amount of savings is like getting a raise!

I track our envelopes in Quicken which helps my wife and I stay on track. She does the shopping so handles the cash and withdraw of money. I track the spending and adjust our budget based on her suggestions. Over time we are able to see if we need to increase cash in one envelope or if we can get rid of one we don't use too much. It helps us communicate, and it saves us money.

What type of system do you use to control spending?