Sunday, August 26, 2007

Surviving Hard Times

via Chris Roush/UNC

I promised Monkeyfister I'd do a post about surviving hard times this past week. Sorry but this may be a very long post as I wish to share with you some financial tips that I've picked up over the years. I hope they help somebody out there.

1. Put 10% of your take home pay in savings before you pay any bills. I know that sounds hard, but the bills will always be there. Once you get in the habit it gets easier and you'll see a change in your attitude as time goes by. Once that savings gets to $2000 or $3000 move it to an investment like a mutual fund. If you aren't sure or don't like the idea of keeping track of a fund at least move it to a higher paying CD.
2. Make a list of all the money you spend in a month. You only need to do this once to show you where you're bleeding money. Once you see where the money is going it's time to change habits. If you go for the morning latte at $2 to $4 (that's $40 to $80 per month that's $480 to $960 per year) consider buying an espresso machine and making them yourself.
3. Never buy a new car. Once you drive that new car off the dealer lot it's worth 10 to 20% less than what you just paid for it. Shop for car financing first. See what you qualify for before going car shopping. If you don't have the income for a newer used car loan (most banks won't finance anything older than 4 years) you can get a personal loan. Yes the rates will be higher than a car loan, but if you can make that loan for 24 or (no more than) 36 months you'll come out ahead. If you follow #1. above like I did you can get a secured loan against the CD and if you pay that loan off in 10 months like I did just recently you'll basically be making money on the loan. Yes there are those that say you are borrowing your own money, but as I see it you're making the money you have work for you. And as an added bonus you will be increasing your credit score as well.
4. Credit cards are for emergencies. I only use a card if they don't take checks and I don't have enough cash. Then when I get home I send a check to cover it to the credit card company. Check card companies for rates but don't apply for more than one. Inquiries can lower your credit score so check the web for rates and terms. The best ones I've found are at credit unions, but even there the rates vary. Get a fixed rate card and check the grace period. Some cards now have no grace period even though they say they do. What? you say. On some cards by the time you get the bill and send in the payment (even on the same day) the grace period has expired. Pretty rotten business practices if you ask me.
I never sign up for a card from offers in the mail. If you look at the bottom or back of the application for "terms" you'll see interest rates of 20, 25 and even nearly 30%. Watch out for teaser rate cards. You know the ones that start out at 1.5% for 6 months. After 6 months what is the real APR (anual percentage rate). You can save these applications and keep them by the fireplace to start next winters fire.
5. Make a list of your loans (minus any mortgage) from the highest amount to the lowest and from the highest interest rate to the lowest. Start with the highest interest rate and the smallest amount. Pay an additional amount on that bill first. Even $25 or $50 paid more per month can help lower your debt. Once that bill is paid move to the next bill and add what you had been paying to that bill. When you get through the list add those amounts as extra principle payments to your mortgage.
Mortgage $1000 (not counted yet)
Loan - used car $5000 $198 per month 15%
Loan - personnel $4000 $ 150 per month 14%
Credit card A $3000 $ 32 per month (mainly interest) 12%
Credit card B $2500 $ 22 per month (mainly interest) 10%

By adding a payment of just $25 to Credit card B's payment each month you will pay that card off in less than half the time. When card B is paid for add that $47 payment to card A's payment and it will be paid off in 1/3 the time. If as you go through this process and you find a personal loan at a lower rate than card B and can add card A then go for it, but watch our for things like teaser rates, hidden fees, and variable rates on such loans (read the fine print). I go for a fixed rate even if the % is a bit higher because you never know which way the rates are headed and if they go down you can always find another loan at a lower rate. A word of caution here. Don't go chasing after the lowest rate and switching your credit cards or loans on a frequent basis. By doing so you'll destroy your credit score. Credit agencies take note of how many times in a year you have applied for a loan or card and this adversely affects your score.

Update: If this post turns out to be sucessful I'll make it a it a regular feature called Surviving Bushville. What do you think? Feel free to add any of your own tips for surviving bad economic times.


Snave said...

I'm a financial Doofus (with a capital D) and am in credit debt, car payment debt and home mortgage debt way up past my eyeballs...

So while I have nothing to add to your post, and while I have no suggestions for surviving Bushtimes, I have to say THANK YOU for posting articles such as this one! There is good advice here.

pygalgia said...

I forgot to have any debt. Damn. I live paycheck-to-paycheck, but I have NO DEBT.
Great post,D.

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