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PSA: Your Money Matters!

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CharmedForce	PSA: Your Money Matters!	Lead	[-]
Posts: 44590 (04/08/09 7:01 PM) Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	I've noticed some really stupid information in the media lately and decided to do a public service for everyone. You know how people are talking about all the money they lost when the economy tanked? How they are going to lose their homes and everything? buzzer sounds WRONG! You cannot lose money you don't have. Really! Can you believe it? It's true. Let me explain. Say I've been working for XYZ Manufacturing for 15 years and have set aside $10,000 in a 401K. My employer matches, and the fund grows. My balance is somewhere around $75,000. Then the economy tanks and my 401k bombs and suddenly the value is $35,000. WTF?! I just lost $40,000!! Except, um, NO, I didn't. I never had that $75,000 in my hand. The only money I have is the $10,000 that came out of my paycheck and into that account. If you want to be picky, you can also say the employer's matching contributions came out too. Otherwise, no money was lost. Different scenario now. Let's say I have a nice apartment that I pay $1200 rent on. I realize that I could take that $1200 and spend it on a mortgage instead of rent, and actually own a home. I go out and buy a 2 bedroom, one bath, 1000 sq ft house for $200,000 with an adjustable rate mortgage. A year later my adjustable rate mortgage shoots my payments from $1200 to $1800 a month. I can't afford that $1800 a month (god forbid I downgrade my cell phone, car or -GASP- stop going to Starbucks!) so I refinance my mortgage to a fixed rate and now I just pay $1400 and still get a grande skim chai every morning. (For the sake of "honesty", please let it be known that I've been to Starbucks less than 5 times in my entire life. I have no idea what a grande skim chai is.) A year after that, the housing market bursts (or rather, goes back to normal). My home is now valued at $120,000. Crap! I just lost $80,000! Except, um, NO, I didn't. The decreased dollar amount is only the estimated amount of a sale. That means that in order to "lose" $80,000, I would have to sell my house. What's the best way to respond to a housing crunch? DON'T SELL. Stay where you are! In 10 years, the value will be considerably higher again. These are examples of REAL income versus VIRTUAL income. Virtual income is money that you have "made" but don't have in cash, like investments or other capital gains. Virtual money is also credit that is extended to you, or money that technically you are "good for" but don't physically have, like your credit card limits. If your credit card has a $5000 limit, that is virtual money. When you use that credit and fill that with purchases, you've got real debt. When you purchase a home for $200k, that home is valued at $200k. Period. That's it. That is the value of the home until you choose to vacate the home. THEN the value decreases, at which point you can report it as capital loss to the IRS and get a major tax break, effectively eliminating the amount of taxes you pay that fiscal year. If you are in a position where you can't make your monthly mortgage, then you have a legitimate housing problem, typically brought on by multiple refinances of mortgages, adjustable rate mortgages, or living above your means. It happens. It SUCKS. But think about this: if you can't make your mortgage payment and you walk away from the home, getting foreclosed on, the mortgage holder will auction the house off for PENNIES on the dollar. My $200,000 house in the example above was just sold at auction for $50,000. Why would the mortgage holder force you into foreclosure? It isn't a viable option for them. It is in their best interest to work with you in adjusting your mortgage so that you can stay in the house and they can still get their money. Again, virtual vs real money. The real money, the mortgage, is considerably better than the virtual money, or potential auction value. They don't know what that house will get in auction. It could be $40,000 or it could be $70,000, but it is not going to be good. The mortgage is calculated and proven and is a responsible plan. Evenesco-ed by: CharmedForce 04/08/09 7:04 PM. Edited 1 time.
CharmedForce	Credit Cards	#1	[-]
Posts: 44591 (04/08/09 7:02 PM) Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	Another thing I want to bring up: CREDIT CARDS. Trust me when I tell you that I understand. I have been there, AM there. When I was in college, I had money for the bare necessities. Things like gas and groceries were SPLURGES. I learned to get store credit cards, purchase things there, then use a main Visa card to make my monthly payments. Then every month I just paid the Visa. Except... I only made minimum payments on the visa because I wanted my cash. Soon my visa was spiralling out of control so I got another card, and another. It was ridiculous. In the end I had a car payment totalling $20k, a $8k student loan, and about $18k in credit card debt, and I was 23. It was absurd. So I changed it. I got a cheaper car and took the loss on my trade-in, combining what I still owed on the old car and adding it to the loan on the new car. That dropped it to like $15k, but more importantly my monthly payment went from $425 to $265 and my weekly gas bill went from $50 to $20. My student loans were consolidated and I requested a temporary forebearance, citing financial hardship. I was granted a 6 month reprieve. At teh end of the 6 months, my interest rate went from 4.65% across several different companies to 2.75% with the government consolidation plan. I agreed to automatic payment from my bank account and was granted a .5% interest rate reduction, so now it was 2.25%. Then I asked changed my repayment plan from a default $50 a month to Income-Contigent. Now I was only paying $10 a month. While I was in forebearance, I made a jump on my other credit cards. I had $3500 on a 14% APR card, $4500 on a 17% APR card, $5000 on a 21% APR card, and $5000 on a 28% card. Though I could pay off the 14% card fastest, by the time it was paid off, I would have accrued a TON of interest on the other cards. Then I learned of the snowball method and couldn't figure out why I hadn't thought of it sooner. The snowball method is when you snowball one payment to another as you pay off a card. I made the minimum monthly payment on the 14%, 17% and 21% cards, each about $50.Then I made a $150 monthly payment to the 28% card, and any time I got extra cash, it went toward that card. In two years that card was paid off, and there was a sizable dent on the others. So great, now I have that extra $150 a month right? I mean, I already paid that card off. WRONG... I snowballed that payment onto the next card with the highest APR. Now I was paying $50 to the 14% and the 17% card, and $200 to the 21% card. I got lucky at this point. Since I had quit using that credit card with the 28% APR, the company was desperate to suck me back in and offered me 0% on Transfer balances for 6 months. I took $5000 from my next two highest rated cards and transfered it to the 0%. As far as I was concerned, I could ignore that card for the next six months. I was able to get the 21% paid off and the 17% almost paid off. Then I got offered another 0% balance transfer on a different card. I bounced my money around to those 0% cards while I paid down the rest of the it. Because I wasn't compounding interest, the results were much more immediate. I also took a leap of faith. When I got my credit cards down to about $8000, I went to a local Credit Union (not bank... credit unions are much better) and was able to take out a personal loan to consolidate a few credit cards. Instead of multiple payments, I just had one payment on the loan and one credit card that I had a 0% transfer balance rate on. I let the 0% sit while I worked on the loan, then went back to the transferred balance. In 7 months I will send my last payment to the credit card. At that time, I will be able to make smaller payments to my personal loan and pay it off in about 28 months. If I choose to snowball my credit card payment to my personal loan payment, I can actually pay it off in about 17 months. By finishing off my last credit card payment, I will have an extra $400 a month as discretionary income. Now, my student loan was just sitting there under my income-contigent repayment plan. This plan has low monthly payments but HIGH interest. My payments were going to be spread out across 300 months. Currently I have $4400 left to pay. If I were to stay on the income-contigent plan, I would pay $35 a month for a long time. By the time I paid off the interest and principal, I will have spent $10,500. But if I change my repayment plan to a different one, I will pay $47 a month and be done in less than three years, paying only $5500 total. That is $5k in savings. Direct, real savings. Just by adjusting my payment schedule and interest rate. Moral of my story? It is very possible to get yourself out of debt. It just takes sacrifice. I haven't had a manicure or pedicure in five years (except at home), I go to a cheap salon to get my hair cut simply and color it at home if I need. I use coupons, and rarely pay full price for anything. It sucks, but in two years when I have NO debt and my entire paycheck goes to whatever I want, it will be worth it. Interest rates are KEY. If you cannot make your monthly payments, call your credit card company and tell them. They will work it out, either reducing your monthly payment, changing your interest rate, or giving you a short reprieve to get caught up. These companies aren't bad or evil, they are just trying to make money , same as you. Keep that in mind and you will be fine.
CharmedForce	Final Thoughts	#2	[-]
Posts: 44592 (04/08/09 7:03 PM) Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	FINAL THOUGHTS Some final tips before I go back into hiding. 1. Snowball your credit cards. 2. Pay close attention to any other those debt consolidator companies. What they do is tell you to pay them instead of your credit cards. The money you pay them is supposed to go to the credit card company who will then negotiate with the consolidator for a better payment plan. However, all those companies are doing is highjacking your credit, holding your money hostage, and extorting the credit card companies. They notify your credit card company of a change of address and contact information for you, then they don't pay your bills for months, until the credit card companies call to find out why you skip. Then the consolidator tells the credit card company to make these changes or they won't get another dime from you. The credit card company has to agree to get any of the money they are owed. These consolidators will tell you that you are rebuilding you rcredit and blah blah blah, but what they don't say is that your credit is hit SEVERELY when you first start. Those credit card companies simply report to the credit bureaus that you are a failure to pay. That stays on your record for SEVEN years. Do you really want to be rejected for a home purchase in 6 years just because of your failure to pay? That sucks! And that's if you get a legitimate company. There are a lot of companies that just take your first few months payment then leave without ever talking to the credit card company. 3. If you can't make your payments, taking a temporary interest rate increase to get lower monthly payments can be best. But make sure it is temporary! Use that time to get ahead, set some money aside or get a better job. 4. Keep track of all of your purchases for a few weeks. This includes minor things like that stop at the vending machine. Look and see what you are spending your money on, then STOP SPENDING YOUR MONEY. It sounds easy, but it is hard. These are very hard times right now, and with a bit of suffering now, you will keep yourself from dying in a few months. It is better to have cheap Folgers at home for $0.25 than get that $5 Starbucks and end up without a home. 5. Find ways to get around spending money. Best example: Costco samples food during midday hours. Go snack there instead of buying a lunch. Also, we have a furniture store in town that serves soda, popcorn and cookies for free. There is a dealership that gives out free hot dogs. There are plenty of businesses that do this sort of thing, and you can work it out to save a meal a week. 6. Remember, you only take a hit in the housing market if you SELL. Just don't sell right now. Wait a few more years. There are legitimate businesses out there to help you renegotiate your mortgage. 7. I know there are a lot of numbers here, but just substitute it for some of your own credit card bills or mortgage balances and you will understand better. Or let me know and I can go simpler. PS: As my international friends are aware, this is definitely an American thread. Why? Because most Europeans understand the difference between real and virtual money, and don't spend virtual money the way Americans do. Specifically credit. Credit is limited almost exclusively to Americans because Americans abuse credit so much. The best way to solve the economic crunch and prevent it from happening again? Get back on the gold standard! Love Always, The Answer Queen CF
Maria0682		#3	[-]
Posts: 29687 (04/08/09 7:51 PM) What Would McKay Do ? Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	My mom is really in debt on her credit card. I've tried giving her advice, but she won't listen. Got any ideas on how I can get her to understand that she has a problem spending money she doesn't have?
CharmedForce		#4	[-]
Posts: 44593 (04/08/09 8:24 PM) Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	How secure is her job? Scare tactics tend to work. Point out that if she were to lose her job, she would be unable to pay her bills and because she is charging so heavily to her credit cards, she wouldn't be able to use those as a temporary measure. Then tell her that you are done warning her and if things go belly up, you will not be providing her with any money or assistance.
Maria0682		#5	[-]
Posts: 29689 (04/08/09 9:08 PM) What Would McKay Do ? Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	Job security? I have no idea. She already knows I can't assist her with bills. I'm having trouble finding a job around here.
honadawson11		#6	[-]
Posts: 24763 (04/11/09 3:23 PM) Peanut butter, nutty, creamy; staple of children everywhere... never forget Charlie... A dream is a wish your heart makes... Reply Quote More Where I've Been Message Me Connection Blocking Invite Ignore User's Posts Report Post	what a great post CF. i will reply more later... but what a great post

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