ConquerYourDebt.com

If you watched 20/20, America in Debt, the author featured in the first segment was Robert Pagliarini and his book, The Six Day Financial Makeover, available on Amazon.com.

From the show, Robert’s equations for a quick glance into your financial health are:
1. If your outgoing monthly debt payments are more than 1/3 of your monthly pre-tax income, you have a debt problem.
2. As a percentage, you should be saving 1/2 of your age. For example, a 36 year old should be saving 18% of his/her income.

Also featured was Dave Ramsey, author of The Total Money Makeover, which I’ve featured previously in Becoming Debt Free.

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On Friday, January 19, 2007, 20/20 on ABC will have a segment on Debt in America. Dave Ramsey, among others, are part of the interview group. Broadcast time, 10 Eastern, 9 Central.

I’m supposed to receive an advance transcript, but I’d recommend watching or setting your DVR to record.

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I have become convinced that while credit cards have become a significant burden on the general public, they aren’t the biggest obstacle holding people back financially.

I used to think that outside of the personal behavior, the credit card industry was the biggest culprit to those stuck in a financial rut. The average college student has $2700 in credit card debt the day they graduate (in addition to an average of $17,000 in student loans). But over the course of the last couple of months, I’ve changed my mind and would now put the automobile ahead of the credit card.

I’ve been volunteering my time to help others with budgets and financial planning and recently, over lunch with the dean of my alma mater’s business school, pitched him on the idea of a one-day seminar to give the soon-to-be graduates some real-world financial advice.

Considering this was held on a Saturday, was voluntary, and only mentioned in a business school ‘happenings’ newsletter, I would have been happy to get 10 people to show up. Much to my surprise, there were 29 students who showed up, with one brought her parents along.

While I was jived at the attendance, my informal (and obviously non-scientific) survey results are what surprised me the most.

Of the 29 students:
first, the credit card debt and student loans were in line with the national average - no surprise there.
- 17 had full-time jobs currently or lined up post-graduation.
- 14 mentioned the first thing they plan on doing is buying a new car when they start working post-graduation.
- 19 owed more on their car than they had in credit card debt. Only 4 did not have a car payment.
- 11 had a car 2 years old or newer.
- Of the 17 who had post-graduate jobs already in the bag, 3 owed more (via debt or total due on the balance of a lease) on their car than their pending annual salary.
- 6 had a higher monthly car payment than their monthly rent.
- Of those with student loans, less than 20% were thinking far enough ahead to budget for their repayment plans.
- Only 2 had a monthly budget
- 4 did not have any credit card card debt, 1 as the result of a bankruptcy in September of 2005 (at 22 years old)
- The combined monthly car payment of the 29 students in the room: nearly $6700 - an average of $230 per person ($267 when you drop the 4 who didn’t have a car payment).

Now here is the lesson for you:
If those 29 students each took that $230/month and invested only that much from now (at an average age of 23) until they are 60; at a very conservative annual return of 8% that would result in a nest egg of $600,000 at age 60. At 10%, a cool Million and change, and at a historical market average of 12%, nearly $1.7 million.

Think about that next time you even consider heading in to the car dealership.

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The LA Times reports on a growing, but highly risky, trend of using rising home values as an income source. As home values rise, homeowners are refinancing and pulling cash out of their homes.

As they happily watch their houses swell in value, Americans are changing their attitudes toward mortgage debt. Increasingly, a home is no longer a nest egg whose equity should never be touched, but a seemingly magical ATM enabling the owner to live it up or just live.

Homeowners took $59 billion in cash out of their houses in the second quarter, double the amount in the 2004 quarter and 16 times the average rate of the mid-1990s, according to data released this month by mortgage giant Freddie Mac.

People are cashing out so quickly that the term “homeowner” may soon be inaccurate. Fifty years ago, Americans owned, on average, three-quarters of their house and the lender owned the rest. These days, it’s approaching an even split.

My favorite part of the article though would have to be:

Such thriftiness has gone out of fashion. What was once considered undesirable — taking on large debt — is now seen as smart. And what used to be smart — becoming debt-free — is described as imprudent.

“If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years,” said David Lereah, chief economist of the National Association of Realtors and author of “Are You Missing the Real Estate Boom?” “It’s as if you had 500,000 dollar bills stuffed in your mattress.”

Subscribing to that link of thinking is only pushing the ‘montly payment’ life style. So why is this equity as income such a bad thing? One only needs to look to Friday’s statements by Alan Greenspan:

WALL STREET shuddered yesterday after Alan Greenspan, the United States’ central banker, warned American homebuyers that they risk a crash if they continue to drive property prices higher.

He said that the US house-price spiral had become an economic imbalance, threatening stability like the country’s trade gap or its budget deficit.

He said “history had not dealt kindly” with investors who kept ignoring risks.

Source: Times Online

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Judging from the ways people are finding their way to this site from the search engines, it seems that there are quite a few people who are in the same boat I was and looking for help in paying off their credit cards.

While the plan we used to pay off our debt is not rocket science, it did take a monumental change in our approach to money to even begin to think about our end goal.

The plan we used was based upon the book The Total Money Makeover: A Proven Plan for Financial Fitness.

In a nutshell, the plan is broken down into a series of baby steps.
1. While making minimum payments, put together an emergency fund of $1000 (essentially to break the cycle of using credit cards for emergencies).
2. List your debts from smallest to largest, pay the miniums on the larger debts and throw every dollar you can scrape together at the smallest. As you pay one off, move to the next debt in the list. (a series of small wins will give you a sense of accomplishment and keep you motivated).
3. When all of your debt except your house is gone, fully fund your emergency fund with 3-6 months worth of expenses.

The book then covers remaining steps for investing for the retirement, saving for college, paying off the house, etc.

On a side note, he also has a popular radio show. You can listen online, or download the previous two weeks of shows, or download a 1-hour commercial free podcast from the previous day’s show at: DaveRamsey.com.

There is also a support site for his book: MyTotalMoneyMakeover.com.

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A 302-126 vote by the House sent the legislation to President Bush, who is eager to sign it, the biggest rewrite of the bankruptcy code in a quarter-century. It marks the second major change in law to benefit business since Republicans increased their House and Senate majorities in last fall’s elections.

Debate in the House was acrimonious as Democratic opponents warned that the measure would hurt the economically vulnerable.

After eight years of strenuous efforts by congressional backers, banks and credit card companies, the legislation was catapulted toward enactment starting earlier this year. The legislation, which garnered some Democratic votes, cleared the Senate last month on a 74-25 vote.

The measure would require people with incomes above a certain level to pay credit-card charges, medical bills and other obligations under a court-ordered bankruptcy plan.

Opponents say the change would fall especially hard on low-income working people, single mothers, minorities and the elderly and would remove a safety net for those who have lost their jobs or face crushing medical bills.

While I don’t believe bankruptcy is needed in the vast majority of filings by individuals, I have issues with any bill that seeks to give protection to the credit card industry. The overly-aggresive marketing tactics of the credit card companies go too far with encouraging the practice of indebtedness.

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Fair Debt Collection

If you use credit cards, owe money on a personal loan, or are paying on a home mortgage, you are a “debtor.” If you fall behind in repaying your creditors, or an error is made on your accounts, you may be contacted by a “debt collector.”

You should know that in either situation, the Fair Debt Collection Practices Act requires that debt collectors treat you fairly and prohibits certain methods of debt collection. Of course, the law does not erase any legitimate debt you owe.

What debts are covered?
Personal, family, and household debts are covered under the Act. This includes money owed for the purchase of an automobile, for medical care, or for charge accounts.

Who is a debt collector?
A debt collector is any person who regularly collects debts owed to others. This includes attorneys who collect debts on a regular basis.

How may a debt collector contact you?
A collector may contact you in person, by mail, telephone, telegram, or fax. However, a debt collector may not contact you at inconvenient times or places, such as before 8 a.m. or after 9 p.m., unless you agree. A debt collector also may not contact you at work if the collector knows that your employer disapproves of such contacts.

Can you stop a debt collector from contacting you?
You can stop a debt collector from contacting you by writing a letter to the collector telling them to stop. Once the collector receives your letter, they may not contact you again except to say there will be no further contact or to notify you that the debt collector or the creditor intends to take some specific action. Please note, however, that sending such a letter to a collector does not make the debt go away if you actually owe it. You could still be sued by the debt collector or your original creditor.

May a debt collector contact anyone else about your debt?
If you have an attorney, the debt collector must contact the attorney, rather than you. If you do not have an attorney, a collector may contact other people, but only to find out where you live, what your phone number is, and where you work. Collectors usually are prohibited from contacting such third parties more than once. In most cases, the collector may not tell anyone other than you and your attorney that you owe money.

What must the debt collector tell you about the debt?
Within five days after you are first contacted, the collector must send you a written notice telling you the amount of money you owe; the name of the creditor to whom you owe the money; and what action to take if you believe you do not owe the money.

May a debt collector continue to contact you if you believe you do not owe money?
A collector may not contact you if, within 30 days after you receive the written notice, you send the collection agency a letter stating you do not owe money. However, a collector can renew collection activities if you are sent proof of the debt, such as a copy of a bill for the amount owed.

What types of debt collection practices are prohibited?
Harassment. Debt collectors may not harass, oppress, or abuse you or any third parties they contact.

For example, debt collectors may not:

• use threats of violence or harm
• publish a list of consumers who refuse to pay their debts (except to a credit bureau);
• use obscene or profane language; or
• repeatedly use the telephone to annoy someone.

False statements. Debt collectors may not use any false or misleading statements when collecting a debt. For example, debt collectors may not:

• falsely imply that they are attorneys or government representatives;
• falsely imply that you have committed a crime;
• falsely represent that they operate or work for a credit bureau;
• misrepresent the amount of your debt;
• indicate that papers being sent to you are legal forms when they are not; or
• indicate that papers being sent to you are not legal forms when they are.

Debt collectors also may not state that:

• you will be arrested if you do not pay your debt;
• they will seize, garnish, attach, or sell your property or wages, unless the collection agency or creditor intends to do so, and it is legal to do so; or
• actions, such as a lawsuit, will be taken against you, when such action legally may not be taken, or when they do not intend to take such action.

Debt collectors may not:

• give false credit information about you to anyone, including a credit bureau;
• send you anything that looks like an official document from a court or government agency when it is not; or
• use a false name.

Unfair practices. Debt collectors may not engage in unfair practices when they try to collect a debt. For example, collectors may not:

• collect any amount greater than your debt, unless your state law permits such a charge;
• deposit a post-dated check prematurely;
• use deception to make you accept collect calls or pay for telegrams;
• take or threaten to take your property unless this can be done legally; or
• contact you by postcard.

What control do you have over payment of debts?
If you owe more than one debt, any payment you make must be applied to the debt you indicate. A debt collector may not apply a payment to any debt you believe you do not owe.

What can you do if you believe a debt collector violated the law?
You have the right to sue a collector in a state or federal court within one year from the date the law was violated. If you win, you may recover money for the damages you suffered plus an additional amount up to $1,000. Court costs and attorney’s fees also can be recovered. A group of people also may sue a debt collector and recover money for damages up to $500,000, or one percent of the collector’s net worth, whichever is less.

Where can you report a debt collector for an alleged violation?
Report any problems you have with a debt collector to your state Attorney General’s office and the Federal Trade Commission. Many states have their own debt collection laws, and your Attorney General’s office can help you determine your rights.

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I put a feeler out to friends and family to keep an eye out for advice from their banks, credit cards, financial planners, etc. This tip was brought to you by Providian Financial.

Monthly Credit Tip
High levels of debt have you singing the blues? Work to reduce your balances by creating a budget and starting with the highest or most expensive debts. Lowering your debts can save you in interest and could also help improve your credit score.

While on the surface this appears to be good advice, for the average person this simply won’t work. Human beings require feedback and accomplishments to keep themselves energized and focused on a goal. A better way to do this would be to create the budget and list out debts from lowest to highest. Then start knocking them out in that order. Each time you knock out a smaller debt, you’ve taken a big step towards your goal and you then roll what you were paying on the smallest debt into the payments to the next debt on your list; working you way through until they are gone. This is also commonly known as working the debt snowball.

I realize that there it is a valid point that you will be continuing to accumulate more interest on the bigger debts, but for the average joe, working and working on a large debts without ’seeing’ some immediate results might be enough to push them back into old habits. Additionally, if the goal is to become totally debt free, the amount of interest on the large balances will be negligible when you consider that the average household has the means to become totally debt free within 12-24 months (with exception of home mortgage).

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