Debt annoyance theory

This theory of paying off debt has you look at what debts are bothering you the most. Do you hate that you are indebted to a family member? Do you worry that a friendship is in jeopardy because you owe someone money? Are you angry that a credit card issuer is changing terms, so you want to be shot of that creditor?

There are many reasons that a debt may be weighing on your mind. If you have a debt that is affecting your peace of mind beyond what other debts are doing to your well-being, perhaps that is the debt to pay off, before you tackle a different obligation with a higher interest rate or lower balance.

In the end, you have to do what is best for your situation, and your emotional state. If that means taking an approach that might be logical for reasons other than the numbers, so be it. That’s why it’s called personal finance.

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Before you sign up for something free, make sure you check the fine print. You should also be wary when you are asked for payment information. If you have to provide a credit card number or some other payment information before you can get your free product or service, that is a dead give away that you are agreeing to sign up for a recurring service. If you don’t remember to cancel, your “free” product or service will probably turn out to be nothing of the sort.

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While one might argue that this was a fairly obvious consequence, the fact remains that Congress gave credit card issuers plenty of time to take advantage of consumers before the rules take effect. But now, as consumers protest interest rate hikes, Congress is considering moving up the time table for implementation. And Senator Christopher Dodd is proposing an interest rate freeze.

While an interest rate freeze would be nice, the fact of the matter is that most of the damage has already been done for most people. The freeze would bridge the gap between now, and when the Credit CARD Act goes into effect, whether that ends up being December or February, forcing credit card issuers to justify interest rate increases.

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In my family, we do have some cash around, just in case. When natural disasters strike, you might need cash, but you might be unable to get it from the bank or through the ATM. In such cases, it is a good idea to have enough cash to get you by for a few days. We don’t keep ours in a money jar, though. It’s in a metal, locked box with our important documents. If I ever feel like raiding that cash, I have to get the key from its secret place, unlock the box, and then get the cash. While I’m doing this, I’ll have plenty of time to think about what I’m doing. And probably stop. With an accessible money jar, it’s just too easy to raid it for every little thing.

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This lack of savings is a real issue for the future. It should be noted that Social Security was never meant to replace income — merely supplement it. And it may not even be available to do that for younger workers. On top of that, employers are doing less and less for employees in terms of pensions and matching retirement plan contributions. This means that you are responsible for your own retirement. The earlier you start saving for retirement, the better. There will be more time for compound interest to work in your favor, and you will have a better chance of saving up.

If you are approaching retirement, it is a good idea to take stock of your situation. There are things you can do to stretch your retirement funds, even in a recession, including down-sizing and finding alternative sources of income.

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1. Change your withholding at work: This is a short-term way to get a little extra cash in your paycheck. Here is what Kay points out: “According to the IRS, the average refund last year was $2,800, which means too many people are over-withholding to their own detriment. If you change your exemption status for the holiday months of November and December, you will have extra money in each paycheck for the next two months.” You won’t have as large a refund come April, but you’ll have more now — that you can put to work for you.
2. Defer student loan payments: You can actually defer your loan payments if you are experiencing some sort of hardship. Here is what Kay says about what you can do if deferring payments is not an option: “If your situation is not suited to a loan deferment, contact your lender as soon as possible. With your account manager, evaluate available loan repayment options that may be a better fit such as loan forbearance or loan consolidation. No matter what, you can certainly reassess your payment situation right now and get the money you need to help you with your holiday wish list.” Just remember that interest will still be accruing.
3. Consider cash back incentives: If you are making a large purchase this month or next month, and you have room on a cash back rewards credit card, use that. They pay it off before interest starts being charged. You will get your reward bonus by December, and it can be a nice boost.
4. Cash in rewards: If you have rewards on your card, now might be a good time to cash them in, for actual cash, or even for merchandise or gift cards that you can give as gifts.
5. Defer the mortgage payment: You can also defer your mortgage payment. Some lenders let you take a “vacation” from one mortgage payment during the holidays. However, you may have to pay a fee, and the interest is always there and always accruing.

I don’t agree with deferring loans, but I do think that it is a good idea to check your tax withholding, and if you pay off your credit cards each month those strategies could work.

How are you getting extra cash for the holidays?

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After two years, I decided to be a Resident Adviser in the dorms. That meant a free room, so my parents paid for my meal plan. I had a small stipend that covered other expenses, and I signed up as a substitute to fill at the cafeteria for a few extra bucks when someone couldn’t work. It was a pretty good gig, and one that helped me limit the debt I got into. (If I hadn’t been such an idiot about finances in college, it would have helped me remain entirely debt-free.)

Getting a part-time job is a good idea in college. You still have time to study, and you can make a little extra money. College Spot has a list of 10 part-time jobs (some of them off-campus) that are ideal for college students:

1. Computer Lab Assistant
2. Food Server
3. Babysitter
4. Hotel Desk Clerk
5. Library Assistant
6. Telemarketer
7. Mail Center Attendant
8. Customer Service Rep
9. Bank Teller
10. Fitness Trainer/Aerobic Instructor

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Bottom line: There can be health care reform all over the place, but without a viable public option health insurance companies will have no incentive to work efficiently, or reconsider the practices that somehow lead to CEOs being paid hundreds of millions of dollars a year while premiums constantly rise. (Maybe the premium increases are “cost of living” bonuses for these CEOs.)

At any rate, as open enrollment approaches, make sure you review your options. The same plan you had last year may not be the best deal for you this year. Many employers are offering a variety of options that can allow you to customize the plan a little more, or receive discounts if you agree to answer a health questionnaire, have a blood test, go through preventative programs or show that you are living a healthy lifestyle. All of these items are ways some employers hope to keep costs down on health insurance by preventing sickness in the first place. (Really? What a novel idea. If only our health care system actually operated in such a way as to encourage prevention.)

While you can’t do much about increasing health insurance premiums, you can do your due diligence. Review your coverage and see if you have something extra that you don’t need, or if there are some programs that can reduce your premiums. Don’t just re-enroll. Do your homework and see if you can find a better deal.

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Clearly, this is not something I was comfortable with. In fact, you are better off if you go through your own budget and decide what you can afford for a mortgage payment, before you meet with brokers and lenders. And then stick to your guns. Right now, my mortgage payment is about 20% of my monthly income. This is something I am comfortable with. Affordability is about more than just what you can pay at one point in time. It’s about what you are comfortable with if something should happen in the future.

If I take a hit to my monthly earnings, or if my husband loses his paid assistantship, we will still be able to afford the mortgage payment without cutting too much into the other items in our spending plan. Affordability is about peace of mind, and preparing for the future. If you are uncomfortable with a mortgage payment, look for a lower payment. Don’t be talked into buying a home that you might not be able to afford in the future.

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“We’re finding more and more families right now willing to give up one or two of their cars even if it means they have to share the only remaining vehicle for the entire family,” said Sergio Stiberman, CEO and founder of LeaseTrader.com. “Despite many headlines that say the recession is over, the reality is that people are still hurting financially and they’re finding additional ways to slash their own bills.”

It really does make a difference in the family budget to cut out one car. While we are saving money in gas overall (we bought a Prius), we still have the cost of insurance, as well as the fact that we financed part of the purchase price of the car (after putting down a decent down payment). And, of course, there is one more car to do maintenance on. We are able to absorb the $500 extra a month that we spend now that we have a second car — most of it coming from making payments on the loan — because we had planned ahead. Since most families either finance or lease a car, it is no surprise that many of them are now looking into downsizing to one car.

Are you considering downsizing to one car?

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