Smith Business and Finance

Many people find themselves owning much more money than they can realistically afford to pay back. If you can relate to this situation, then it’s highly likely that you’ve researched your options and have decided that negotiating with your creditors for reduced settlements on your credit card balances may be the best solution to become debt-free.

Now that you’ve made the decision to attempt negotiating with your creditors you’re probably left wondering what steps to take and whether or not you need to have a debt settlement firm to do the negotiating on your behalf. Well, that depends; some people can successfully negotiate reduced settlements with their creditors, while others simply feel too intimidated when they face any type of controversy. My experience has shown that approximately fifty percent of the people with whom I talk are willing and able to negotiate on their own.

If you can remain calm and, at the very least, sound confident, during the stress, badgering, harassment and several phone calls from your various creditors, and you’re patient enough to take the time to become educated about the process of debt settlement, there’s no reason you can’t negotiate on your own.

If you’re going to go it alone, it’s important to understand that the debt settlement process can take several months, and during this time your creditors won’t stop badgering you, and trying to convince you to enter into a re-payment arrangement. But remember, you decided to negotiate with your creditors due to the fact that you simply could no longer afford to make your monthly payments. Even if your creditors are willing to reduce your monthly payments and/or interest, you’ll still be faced with many monthly payments over a period of several years. So, during the course of your discussions with creditors, stand your ground and insist that you simply cannot commit to a long term payment agreement.

If you need convincing to remain on solid ground when talking with your creditors, think very carefully for a moment about the “make-up” of the credit industry. If you’ve made your payments on time every single month for the last several years and suddenly faced a hardship, your creditors simply wouldn’t care. You could call and write to these companies, begging for a break on your interest or payments and they won’t budge. Only once you become delinquent will they finally offer you a reduced interest rate or payments. This fact alone should help you stand your ground and insist that you absolutely will not agree to their new payment terms. They weren’t willing to help you after you reached out, begging for assistance, and this unwillingness by creditors to cooperate has led many people down the path to bankruptcy.

After several months and numerous discussions with your creditors you’ll eventually reach a mutually agreeable negotiated settlement. Prior to releasing funds to your creditor, you’ll want to obtain a settlement letter, which clearly states the settlement arrangements that have been verbally agreed upon. This is very important; remember, if it’s not in writing it doesn’t exist, so until you have a settlement letter with a settlement amount, a deadline and the correct account number, don’t pay a dime.

Successful debt settlement requires knowledge and education. Take your time and take advantage of the many resources that are available. Even if you find that it’s necessary to spend a few hundred dollars to buy materials that will inform and educate you, you’ll end up being several thousand dollars ahead. Your decision to become debt-free is one you will not regret.

Many people do not consider the importance of a budget. They indulge in spending according to their earning and do not leave room for emergencies. This usually ends up in the incurring of debts and sometimes, personal bankruptcy. A budget helps to counter these consequences.

The essential calculations in a budget are income and expenditure. The purpose of a budget is to ensure that the expenses do not exceed the income and also provide for savings for the future.

A budget needs to be documented in the form of a chart or table. This needs to be easily comprehensible and provide a quick summing up of the relevant details. The chart needs to effectively reflect the different heads of expenditure. Suggested heads are housing and utilities, entertainment, health and beauty, transportation, communication and household. These can be further subdivided as follows:

Housing and utilities

- Mortgage payment or rent
- Insurance
- Taxes and electricity
- Natural gas
- Water and garbage pick up

Entertainment
- Cable television or satellite service
- Internet access
- Dining out
- Bars clubs

- Sporting events, parties, lessons and recitals

Health and Beauty
- Hair-cuts, perms etc.
- Make-up
- Medical, dental, vision, weight loss, diet products
- Nutritional supplements

Transportation

- Car payments, insurance
- Gas
- Routine maintenance, repairs
- Air travel
- Rental cars, public transportation

Communication

- Telephone
- Cellular phone
- Voice mail

Household

– Groceries
- Cleaning supplies
- Laundry, dry cleaning
- Home improvement
Projects, towels, linens

Others

- Credit card payments
- Other loan payments
- Child care, items for baby/elderly
- Allowances for children, book clubs, magazines, music, etc., fast food
- Investments, vacation, spending money, donations to church or charity
- Gifts (Christmas, birthdays, anniversary, etc.)
- Emergency fund
- Cigarettes.

If you have any other expenses that are not covered, you could add them to the list.

Next, try to reflect all expenses on a monthly calculation. For example, if you pay yearly taxes, calculate the monthly expense by dividing the yearly amount by twelve. Having done this, add up all the figures to arrive at the total monthly expense figure. Then subtract this amount from your take home salary amount. If you find the remainder in negative, you need to look for expenses where you ought to cut down. For example, if your take home salary is $1000 and your expenses total to $1150, you would need to trim down $150 each month, from the expenses.

If you need to cut down on your expenses, you would be the best judge to decide where to make the changes. However, it would be prudent to cut back on the extra subscription channels of the television. If you are smoker, cut down on smoking instead. Take home cooked lunch to office instead of eating fast food. Economize on power consumption by avoiding unnecessary use of the air conditioner and heating and make less use of the phone.

Creating a budget is absolutely necessary to manage your finances and is not dependent on the size of your income. It helps to prevent overspending and personal bankruptcy, allowing you keep track of your income and expenditure.

Money isn’t everything, but people who don’t have any soon find out that the dangers of debt are less about going broke and more about their family, their marriage, their career, and their well-being. Debt affects every aspect of people’s lives. It has ended marriages, caused depressions, separated families and caused deaths. No wonder people call money the root of all evil.

If you think your debt level might be nearing the dangerous point, there are some ways for you to find out if you are controlling your money or if your money is controlling you.

Here are some indicators:

1. You don’t know the balances of your bank accounts.

Chances are if you aren’t aware of how much money you have then you are spending money recklessly, especially if you are charging items to your credit card or have an overdraft. Even if your spending isn’t a problem, not knowing your balances at all times could cause problems in the future.

2. You borrow money from others, even small change, and forget to repay them.

If you can’t even remember to pay a co-worker back for coffee the day before, it is likely you are having difficulty keeping track of the larger financial picture in your life, too.

3. You haven’t set any money aside for taxes or retirement.

If you aren’t planning for your financial future, then you should be.

4. You can’t pass up a bargain when you are shopping.

Not being able to refrain from buying items you don’t need only fills up your home needlessly and empties your pocket books. This is one small sign that you are not in control of your finances.

5. You have difficulty meeting simple personal or financial obligations.

Difficulty with this can mean many things and none of them are good. You are likely disorganized, forgetful, apathetic and irresponsible. Taking charge and being accountable for your spending and actions is a good thing.

6. You get a different feeling buying things on credit than you do on cash.

It doesn’t matter how you buy something, you have to pay for it, be prepared for that.

7. You feel like money causes chaos in your life.

You should feel like your finances are orderly and precise. If this is not the case, you should seek a financial planner or credit counselor to remedy the situation.

8. You live pay check to pay check and feel like your are always on the edge of bankruptcy.

Everyone should have savings and a financial plan for the future. What’s yours?

9. Talking about money embarrasses you.

If you can’t even talk about it, how can you handle being responsible with it. The first step to having a solid financial plan when you are on the wrong track is talking to others to determine how to proceed.

10. You are over-working or under-earning.

You need to make healthy decisions in your life that contribute to a solid financial foundation. Perhaps you should ask for a raise or consider looking for a new job.

If you felt uncomfortable thinking about these indicators or if you’re feeling uncomfortable with your finances, chances are you need to look at creating more structure in your life and making a plan for your financial future.

Anyone you talk to about investments will probably tell you the same thing: “Don’t put all your eggs into one basket!” This cliché simply means that when you are investing, you should not put all of your money into a single company; or a single industry. This technique of investing is called diversification, but there is more to diversification than just following the cliché.

Understanding Diversification

Diversification means that you create an investment portfolio that attempts to reduce risk by using multiple types of investments and investing in more than one company, and within more than one industry.

With a diversified portfolio, when one industry or company fails or takes a large hit; the rest of your investments should be strong enough to weather the storm and help minimize the effects of the loss. Diversification reduces your overall risk. On the other hand, if all of your money was invested into the stock of a single company and the company doesn’t succeed, your investment portfolio and net worth is going to take a huge hit and decrease alongside the value of the stock. Additionally, if you invest in multiple companies that are all within the same new technology sector and that particular technology doesn’t take off- your pocket will feel the pain of a failed technology and you may lose your investments!

An improved method of diversifying an investment portfolio involves investing in more than just company stocks. If your investments are varied, and include stocks and bonds, company sponsored retirement plans, high interest savings accounts and cash for example, you will have a strong balance between high risk and medium risk investments.

For young investors, it is usually a better strategy to invest in more high-risk stocks, and be somewhat of an “aggressive investor”. This is because you have more time before you need your investments for retirement, and theoretically, the money invested has more time to recover if it should take a few hits. A young investor might have an investment portfolio that contains 80% stocks and 20% bonds, while someone closer to retirement would be more conservative and perhaps have the opposite investment mix. Regardless of your age and whether or not you decide to be aggressive or conservative with investments, a diversified portfolio will reduce risk and a combination of investment types will create a well-balanced investment portfolio.

Easy Method for Diversifying Your Portfolio

For both individuals with small amounts of money to invest and those who want the most uncomplicated path to a diversified portfolio, “a single balanced mutual fund” might be a good solution.

Single balanced mutual funds contain a mixture of stocks and bonds already, so the investor simply makes investments within the single fund to create a diversified portfolio.

If you are an individual who enjoys selecting your own stocks and bonds from various companies and industries- you are not going to be satisfied with the single balanced mutual funds as the actual investments within the fund are chosen for you. But for individuals who want to invest but don’t know what to invest in, these funds are the perfect solution!

For individuals with large sums of money available for investing, a single balanced mutual fund is likely not the best option, either. Large investors should minimize capital gains taxes by selecting investments that can assist you in developing reliable streams of income.

Further Diversification

One way to further diversify your investment portfolio is to extend your investments beyond stocks, bonds, retirement funds and cash. For example, you can have investments in real estate trusts, or hedge funds.

During my sophomore year in college every day as I walked to class I passed tables where vendors urged students to fill out a credit card application, bribing us with a free t-shirt, water bottle or key chain, so I signed up for one. I received preapproved offers in the mail, and within three years I owned 13 credit cards and owed $10,000.

Things really went downhill when I moved out on my own. After six months I lost my job and my credit got even worse: I owed $11,000. I bought a car in my name for my boyfriend who agreed to pay the car note. He stopped making payments and the car was repossessed. I ended up owing $8,000 dollars on top of the $11,000 that I already owed. During this time I was working full-time, making $21,000 a year.

I put myself on a budget and set up payment plans with each creditor. I found a part–time job to help pay down my debt. I worked both jobs for one year. By the end of the year, I saw results and had paid down some of my debt. However, the entire process to become completely debt-free took four years. Here are 10 techniques I used to pay my debt:

1. Reduce expenses. Reduce your expenses to find extra money to pay down your debts such as: pack your lunch for work every day; buy items on sale or shop at a wholesale store such as Costco; carpool or take public transportation to work; cancel your cable, cell phone or Internet service or get the cheapest plan possible; buy energy efficient appliances, programmable thermostats or hot water insulator jackets.

2. Sell some items. Sell some assets such as jewelry, a second car and clothing, or hold a yard sale to sell unused items.

3. Set up a debt payoff plan. Setup a debt payoff plan to prioritize your bills. By using the debt snowball method you will be able to quickly pay off some of your debts. Start by paying off the smallest bills first, then use the money paid towards a previous bill and apply it to the next bill, and continue this process until all your debts are paid.

4. Set up a payment plan. Set up a payment plan with each of your creditors to pay off your debts. Be honest, humble and sincere. Identify any terms and negotiations you would like to make and stick to the terms.

5. Reduce your interest rate. If you have a decent credit score and have not made any late payments in the past year, you can negotiate with your creditors to lower your interest rate.

6. Pay more than the minimum monthly payment. If you pay only the minimum monthly payment, you will end up paying 2 to 3 times what you actually charged due to the interest and finance charges that accrues on your balance. Try to send extra towards your balance each month.

7. Don’t transfer balances. Transferring balances to another credit card may lower your credit score and there may be fees associated with transferring the balance. It is important to pay off the full balance before the introductory rate special ends, because after the introductory rate ends the interest rate may drastically increase.

8. Collection Accounts. An account is usually reported to a collection agency if the account is 90 to 120 days late. Contact the original creditor to see if you can set up a payment plan. If you are unsuccessful, contact the collection agency to set up a payment plan.

9. Settlement. Some creditors will negotiate with you by asking for a reduced amount “settlement” to settle the account in exchange for paying the debt quickly; however, it is best to pay the full amount because a settlement reported on your credit report may lower your credit score.

10. Pay with cash. Pay for purchases with cash until your credit card balances are paid in full. If you pay for an item with a credit card you end up paying 112% the original cost of the item.

While you are in the process of paying off debts, if a creditor continues to call you and is harassing you, inform them of your particular situation, get the person’s name, date and time they called and tell them when you will be able to make a payment.  Don’t apply for new credit, get a payday loan or cash advance. Following these 10 tips will help you get out of debt and be on your way to a debt-free life.