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Over
the last year or so, I did a bit of financial reorganization.
Without getting too far into the details, I'd like to recount the
steps, as one or more may be helpful for others.
First, let me stipulate that I had
lots and lots of debt. Suffice it to say that the amount far
exceeded the value of my assets. My debts consisted of student
loans, credit cards, a car loan, personal loans and a house loan.
First, whatever the reasons for
getting into debt, the goal should be to minimize the cost. Over
both the short and long term, that means eliminating fees, lowering
APRs, and eventually eliminating the debts.
Fees are the worst. Late payments on
credit cards cost a lot, and also damage your credit. Bank fees for
bounced checks or payments can take a chunk out of your account.
What I did to address these problems was to first, get a credit
account with my bank and link it for Overdraft Protection to my
checking account. Even now, I frequently go below zero in my
checking account - but there is never a fee. When the next paycheck
comes, I pay the balance on my credit account. This makes managing a
checking account much easier, because you never have to worry about
hitting $0 balance.
The second thing I did to address
fees is to start using Internet banking. My account is through Bank
of America. There, I can schedule all my monthly payments ahead of
time, without waiting for statements. I set up recurring payments
where applicable. For accounts like Best Buy, that charge 0%
interest but require payment by a certain date, say 12 months in the
future, I enter a payment for a few days before the final due date.
That way, I am reminded when it is time to make that final payment
and avoid "back" finance charges for the 0% period. Many
companies can even bill you through the Bill Pay system, eliminating
paper bills altogether. Internet banking will revolutionize your
bill paying, saving lots of time and lots of money in fees. It's
also great because you don't have to worry about making payments
while on vacation or are otherwise unavailable.
After I got my bill-paying in order,
I figured out which credit cards were costing the most. I had
several over 20% APR, which is just way too high. To pay the credit
cards, first I took a loan from my 401K account. Most articles you
read recommend against this, but when weighed against paying high
rates on credit cards, it is a good idea (just don't  use the money
on anything besides paying off bills). Paying off the high interest
cards improved my credit, which allowed me to refinance my house,
which had gone up in value.
Refinancing took quite a while, but
it was worth it. I paid off the remaining big cards, and that
further improved my credit. After my credit score improved (it takes
a month or so), I canceled some cards and applied for new 0%
Discover cards. That allowed me to move the remaining debt to 0% for
the next 6 months or so, and hopefully I can pay them off before
they jump to 7.9% or so. Even so, anything under 10% is a lot better
than cards over 20%!
I did some other small things as
well, such as signing up for electronic payments on my student loans
(saved 1/4 point on the interest rate) and creating a spreadsheet to
track exactly how much each account costs in interest. When you see
the numbers, how much you can spend each month on, essentially,
nothing (interest), you too may be motivated to clean up those
accounts.
Having good credit has benefits. We
were able to get the new car loan at 1.9%, and any furniture we buy
for the baby's room will probably be at 0% for 1 year or more. It's
a simple thing - when you have good credit, you save money. As a
corollary, when you have bad credit, it costs money. I paid my dues
- now I keep the money that was being used for interest.
If you'd like a copy of my personal
"Master Financial" Excel spreadsheet, let me know. PC and
Mac formats supported.
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