1.Amount owed to each creditor
2.Interest rate
3.Potential fees for each loan
This should all be found on either your online banking platform or through the budgeting platform you chose. A spreadsheet with the following headings can help you organize your debts:
Step 2: Negotiate
Try negotiating with your credit card company to lower the rate. The worst they can say is no. However, they would prefer that you continue making some payment every month over having to collect in bankruptcy. If you pay your balance off entirely each month, then you do not have to negotiate for a lower rate since you are already paying 0%.
Step 3: Consolidate
The next thing is to find a credit card with lower interest rates on sites like CreditCards.com and CardHub.com and transfer your credit card balance to consolidate your debt. If you are Canadian, look up Greedyrates.ca and RateSuperMarket.ca.
If you have access to a line of credit or home equity line and have credit card debt, then use your lower-interest debt to pay off your higher-interest debt. Your goal is to become debt-free, but in the meantime, this is an effective way of saving money on interest payments. If you use a home equity line, be aware that if you fall behind on payments, you could put your house at risk.
Warning: If you look at a company that specializes in debt management to consolidate your debts, they could either be increasing the time to pay off your debt, to give the illusion you are paying less interest, or have a higher interest rate than your existing debt.
Do not confuse debt consolidation with debt settlements. Debt settlements are done by a debt counselor who negotiates on your behalf to settle your debt. They typically charge high fees and sometimes leave you worse off than when you began.
Step 4: Eliminate Your Debt
Not all debt is created equal. Lines of credit, student loans, credit cards, a home equity line on your house, or payday loans each have different terms and conditions and, most importantly, interest rates. Consider these two recommended debt elimination methods:
The Debt Snowball Method
Dave Ramsey, a popular American money management author, is a big proponent of the “Debt Snowball” method. This method consists of ranking the debts from smallest balance to highest and focusing on the smallest balance first. The idea is that you gain confidence over time by paying off debts in full. It also goes by the “momentum method” moniker. I do not agree with this approach. Why would you pay off a debt with zero percent interest rate before paying off your credit card with the highest interest rate? You should not gain confidence from such a mistake. Focus on your credit cards first, assuming they have the highest interest rates, then work down the list. That leads us to my preferred approach to tackling debt.
The Debt Avalanche Method
This is tackling your debt with the highest interest rate first. I prefer this approach because you get out of debt faster, and it saves you the most money.
For example, you have a credit card with a $10,000 balance with a 10% interest rate and another credit card with $6,000 and a 25% interest rate. You can make $150 monthly payments on each. You might think about paying down the $10,000 debt first since it has the largest total. This will take you 98 months to pay off, and you will incur $4,657 in interest.28 The card with the $6,000 balance will take you 87 months to pay off, and you will incur $7,034 in interest. More interest on a card that has almost half the starting balance! To get ahead of your debt payments, focus on the highest interest rate first or else the interest payments will slowly eat into your disposable income.
Alternatively, nothing is stopping you from adopting both methods. You could list your debts from smallest balance with the highest interest rate down to your largest balance with the lowest interest rate and go from there. I still feel this is leaving interest savings on the table, but adopt whichever approach will be more successful for you.
KEEP YOURSELF ACCOUNTABLE
Is there a good way to keep yourself accountable for paying down debts? One method is to make a promise to someone that says if you do not pay off a predetermined debt amount per month, then you will donate “insert amount” to a cause you hate. This is known as the commitment contract. Do this with a friend, use a website/app like Stickk,29 something like PBwiki,30 or even Facebook. Whichever method you use, set a predetermined goal with either money or your reputation, choose a timeline to accomplish it, and if you do not honor your commitment, follow through with the punishment.
Behavioral science tells us that we are loss-averse social animals who make decisions in a time-inconsistent manner. We hate losing things and often give in to immediate gratification, e.g., splurging, at the expense of our long-term goals, e.g., saving money. The good news is that research has discovered two factors that effectively help people achieve the behavior change they desire: Incentives and accountability.
Create a Habit
In Charles Duhigg’s book The Power of Habit, he explains that people can change their habits if they learn how habits operate. The “habit loop” has three stages: A cue propels a person into a routine to reach the goal of a reward. Now, apply this to our spending habits.
In the first stage, the brain seeks a cue that will put it into automatic pilot and indicate what it should tell the body to do. The second stage is the routine, or the ensuing habit. The last stage is the reward, which teaches the brain whether the loop in question is “worth remembering for the future.” When the cue and reward connect, the brain develops a strong feeling of expectation, leading to a craving and the birth of a habit. Unfortunately, the brain has difficulty determining whether the habit is a good habit or a bad habit. So, all habits are hard to break. The good news is that once you understand your cues and rewards, you can change the routine.
Change the Routine
The “golden rule of habit change” is changing the routine but keeping the cue and reward the same. In the context of debt repayment and saving money, determine what your cues and rewards are for spending money. For example, if you find yourself shopping to relieve stress or to feel good about yourself, determine the cause of those feelings. Are you an emotional buyer? Is it retail therapy? Does your sense of identity come from the way you dress? Is it coming from thoughts of inadequacy? Knowing what you spend your money on and why will help you understand the rewards you give yourself.
You must also know your cues. Do you shop when you had a bad day or order in when your fridge is empty? The key is to recognize these cues and create positive actions in response that replace the old routine. For example, taking a friend out for coffee when you have a bad day might replace the routine of shopping with companionship. Do not expect these habits to change overnight. Conventional wisdom says that it takes 21 days to form a new habit. Be patient and persistent when trying to create a new habit.
Start Small
Some people can go cold turkey, but for most of us, it is better to start small with changing our spending habits. Rather than saying you will only dine out once a month, try once a week. Debt repayment is the same concept. If you already have a time once a week to pay bills, that should be your cue to look over your budget and make payments on your debt. It is easiest to incorporate new routines into existing cue and reward systems. Your reward could be to enjoy a nice glass of wine and wind down for the evening. If you do not already have a set time for debt management, then you can always set a reminder to serve as your cue.
STUDENT LOAN RELIEF
Millions are struggling with student loan debt, and I was one of them. Fortunately, there are ways to get student loan relief from the government, your school, and state/province whether you live in the U.S. or Canada, if you meet certain conditions.
The Public Service Loan Forgiveness Program (U.S.)
In 2007, President George W. Bush31 created the Public Service Loan Forgiveness (PSLF) Program that allowed student loan borrowers, who pursue government or non-profit public service jobs, to wipe out the
ir remaining debt32 after 10 years of on-time payments. Its purpose is to incentivize people to work in the public sector, where employees normally make less than those working in the private sector. The public sector is classified as working for the government or a not-for-profit organization. If you currently work in the public sector or are looking to move to the public sector and have student loans, follow these steps to qualify for the program:
1. Have the Correct Loans33
To qualify, you need to have a loan from the Direct program, have made all your payments in full and on time, and have worked 10 years in a public-sector service job with a qualifying employer. They are strict with the rules of qualifying for the program. First, make sure your loan is a “direct loan,” which includes direct subsidized and unsubsidized loans, direct PLUS loans, and direct consolidation loans. If you have other non-qualifying loans, see if you can bundle them into a Direct Consolidation Loan. Only once your loans are under this title will your student debt payments move you along the Public Student Loan Forgiveness 10-year timeline. If you are unsure what kind of loan you have, login to your account at the Federal Student Aid site to find out.
You also need to make sure you are enrolled in the right type of repayment plan – one of the income-based programs. Double check to ensure you have a repayment plan that counts toward forgiveness. Extended repayment plans do not count.
2. Have the Correct Employer
Qualifying employers under the PSLF program include government organizations – federal, state, local, or tribal – and tax-exempt, not-for-profit organizations. You also must work full-time or more than 30 hours a week if you work for two organizations part-time. Your time with an employer does not need to be consecutive. You can work for two years in the public sector, then work in the private sector putting your 10-year timeline on pause, and then return to the public sector, continuing on the same clock.
3. Confirm You Are on Track
Each year, fill out the Employment Certification form. You will receive confirmation on the number of successful payments you have completed. However, it is important to keep records of your employment – pay stubs, taxes, anything that proves you worked at your job, just in case something goes wrong.
4. Watch for Changes in the Program
At any time, the qualifications for the program can change, so follow the latest developments at the Federal Student Loan site.
Student Loan Relief from Your State or Province
Some states or Canadian provinces provide niche forgiveness programs. Do your research early. You may even be eligible for a program that helps offset future education costs, such as for graduate, law, or medical school.
Student Loan Relief from Your School
Your university or college may also offer a forgiveness program. These programs, like grants, are not publicly advertised most of the time, so check with the financial aid office.
The Repayment Assistance Plan (Canada)
If you live in Canada and at least six months have passed since you graduated or left school and your loans are up to date, you may qualify for the Repayment Assistance Plan (RAP). The RAP either reduces your monthly student loan payments or removes them entirely, depending on your financial situation. If you have a permanent disability, it may also depend on your permanent disability-related expenses, which include allowable uninsured medical expenses, special care, and other expenses directly related to your disability. Enrolment is not automatic, and you must re-apply for this plan every six months.
To qualify for nullified payment requirements on your student loan, your financial situation must follow the annual gross family income thresholds by family size.
Annual Gross Family Income Thresholds for Zero Payments under RAP by Family Size
Family Size Income Threshold
1 $25,000
2 $39,052
3 $50,457
4 $59,512
5+ $67,823
*as of 2018
If you make above these amounts, you may be eligible for a reduced monthly payment.
There are two stages to how the RAP works for a reduced monthly payment:
Stage 1
The Government of Canada and your provincial government will pay the interest owing that your revised payment does not cover. This could last up to 10 six-month periods or 60 months during the 10-year period after you leave school.
Stage 2
This stage starts once you complete Stage 1 or if you have been in repayment for over 10 years after leaving school.
During Stage 2, if you continue to have trouble meeting your repayment obligations, the government will begin to cover both the principal and interest that exceeds your reduced monthly payments. If you remain eligible for RAP, the balance of your loan is gradually paid off and the repayment obligations will not exceed 15 years, or 10 years for persons with permanent disabilities, after leaving school.
Important: If you have been approved and received a Stage 2 benefit, you cannot apply for additional student loans until your existing student loans are paid in full.
If you want to see if you qualify for the RAP, check out the online Repayment Assistance Estimator.34
AVOID PAYDAY LOANS
Payday loans are short-term, high-interest loans, generally for $500 or less, that are designed to bridge the gap between paychecks. They are also referred to as cash advance loans, check advance loans, deferred deposit loans, or post-dated check loans.35 At first glance, payday loans may seem like a good idea if you are strapped for cash because whether you apply online or in-store, you are approved within minutes, and you have access almost immediately.
If you think credit cards have high interest rates, payday loans are off the charts! Reasons to avoid them:36
High Interest Rates
Loan amounts range between $50 and $1,000 depending on state laws. Fees also depend on state laws but could be structured as $15 per $100 borrowed. On the surface, that looks like a 15% interest rate, but because the loan is over such a short period, the annualized cost of borrowing is much higher. A standard payday loan with a two-week period and a $15 per $100 borrow fee has an annual rate of nearly 400%.
Hidden Fees
For example, you receive $500 today and are required to pay back $550 in two weeks. In two weeks, you pay only the interest ($50) and rollover the loan for another two weeks. Every two weeks, you pay $50 to borrow $500. At the end of one year, you would have paid $1,300 to borrow $500, and you still owe $500. This is the payday loan trap, and it is hard to escape after falling victim to it. I call this the downward debt death spiral.
Moreover, the payday loan lender has direct access to your bank account, so they can withdraw the fees before you can transfer funds elsewhere to pay for rent or other bills.
Payday Loans Are Unaffordable for Most Borrowers
According to Pew Charitable Trusts,37 12 million Americans use payday loans every year and commonly have these characteristics:
•Likely to be renters
•Likely to earn less than $40,000 per year
•Likely to have less than a 4-year college education
•Likely to be separated or divorced
According to that same report, the average borrower takes out 8 loans of $375 for a total of $3,000 and spends $520 on interest alone by the time the initial loan is repaid.
Payday Loan Alternatives
•Use your emergency fund. If you save two months of salary and have springy debt, you will not be in this situation.
•Ask friends or family for a loan.
•Negotiate a payment plan with the creditor.
•Receive an advance from your employer.
•Obtain a line of credit with a much lower interest rate.
•Apply for a traditional small loan.
•Look at charitable assistance. It is not uncommon to use sites like GoFundMe where complete strangers to lend a helping hand. Alternatively, you can look to charitable organizations in your community, like
the Salvation Army or United Way.
SUMMARY
Prioritize paying off your credit cards. The 15% to 25% immediate return is likely higher than any return in the stock market. In addition,
•Make more than the minimum payment per month. Even paying twice the minimum payment will allow you to pay off a credit card years faster.
•Know your credit score. Improving your credit score will allow you to obtain better rates and save you money over time. Aim to have a 700+ score.
•Conquer your debt using the 4 steps:
1.Calculate
2.Negotiate
3.Consolidate
4.Eliminate
•Use the Debt Avalanche method when eliminating your debt. Focus on the highest interest-bearing debt you have first and work down the list. The interest savings are huge.
•If you have student loans, look at the various student loan relief programs like the Public Service Loan Forgiveness Program (PSLF) in the U.S. and the Repayment Assistance Plan (RAP) in Canada. Also, see if your state or province or your university or college has a student debt relief program.
•Credit cards can be useful to build a credit score and for the rewards but only if the balance is paid in full each month. If you spend more with cards or continue to have a balance, switch to paying with cash.
•Use the commitment contract method to keep yourself accountable with a friend or online service.
•Create a habit of debt repayment by replacing the routine but keeping the cue and the reward the same.
•Stay away from store credit cards. They have higher interest rates than regular credit cards.
•Use your credit card programs. Things like warranties, car rental insurance, and trip cancellation insurance can save you a lot of money not to mention the various reward programs.
Kicking Financial Ass Page 8