Chaplain

VA Benefits

Personal Finance

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Take Complete Control of Your Finances….

Avoid Drowning in Debt...

Borrow Wisely!

A Guide to Beating Debt

Income

<> %<> %<>

Paycheck 1 %Paycheck 2 %Other %%%Total Income

$ 2,000 %$ 1,500 %%$ 500 %%%

$ 4,000

Expenses

Mortgage %Cars %Insurance - Auto %Insurance - Life %Credit Cards / Loans %Phone / Cable %Utilities - Gas/Water/Electric %Groceries %Entertainment %Gasoline for Cars %Total Expense %%%NET INCOME

%$ 950 %%$ 600 %%$ 150 %% %$ 60 %%$ 125 %% %$ 75 %%$ 125 %%$ 250 %%$ 250 %%$ 100 %

$ 2,685 %%%$ 1,315

This is what a sample budget would look like for one month. Notice this budget has a net income (i.e. this family has money l after it pays all of its expenses.) You might find out as you put in actual numbers into your monthly budget, that you end up w net loss. That is not a good situation to be in. Just like a business, if it cannot make a profit it will go bankrupt, so will you go bankrupt unless you can spend less than you take in.

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Debt

» Debt is a double-edged sword. It cuts two ways !

» Responsible borrowers can pay for items they need with borrowed dollars

» Others see large parts of their income consumed by debt with little to show for it

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Reasons for Debt

We Get Into Debt

» To reward ourselves

» To make big purchases

» To meet day-to-day expenses %%» To go on vacation

» To cover emergencies %%» To make others happy %%» Because we can

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%When It Doesn’t Make Sense to Borrow

» To go on vacation %%» To lend to others %%» To get married %%» To buy clothes %%» To gamble » To invest in a hot stock tip

How long does it take for your debt to double?

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Understanding Debt

» Principal – The amount of money you borrow

» Interest – The fee you’re charged for borrowing money from others

» Credit – An amount of money made available for your control by a bank or other lender

» Two categories - Secured and Unsecured debt

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CREDITOR BALANCE MONTHLY PAYMENT

FudgeAppliances $1,100 $49.99

ChokeElectronics $3,200 $167.00

ShylockMotors $6,900 $450.00

RipFurniture $4,200 $275.00

DMXVisa $5,200 $300.00

TotalOwed $20,600 $1,241.99

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Determining What You Owe

The first step towards managing and eliminating debt:

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%Evaluate Your Situation You Have a Problem When

» You fight over money

» You are late paying your bills each month

» You use credit for things you once paid cash for %%» You are making debt payments with rent money %%» Creditors are writing and calling

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%Evaluate Your Situation You Have a Problem When

» You transfer balances from one card to another %%» You are using pay day loans to meet living expenses %%» You cannot save any more » You are threatened with repossession, eviction, legal

action

» You count on a tax refund to pay debt

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LENDER AMOUNT REASON

Smears DepartmentStore

$750 TV“ONSALE!”

ChokeElectronics $3200 Largescreenwas thethingtohave

DMXVisa Cruise Toimpressmy EX!

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Track Causes of Debt

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Credit Cards

» Can be used to purchase most everything %» Allow you to borrow up to a set limit

» Allow you to pay a minimum amount each month %» Are easy to overuse, pick one with the right terms %» Allow you to inflate your income

Credit and Debt walk hand in hand! Without credit

you would have no debt. Protect your credit!

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Kick the Credit Card Habit

Moving forward:

» Stick to one or two credit cards %%» Write down what you spend

» Charge only what you can pay off monthly %%» Use for large purchases only in emergency

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TheGood TheBad TheUgly

»CreditUnions »Banks »Savings&Loans »ServiceRelief Agencies

»LifeInsurance »Retirement Plans »Friends& FamilyLoans

»PawnShops »CreditCards »PaydayLoans »HomeEquity

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Borrow Wisely!

Amount ofLoan

APR Length ofLoan

Monthly Payment

Total Interest

Total Cost

Loan A

$12,000 7.5% 3years $373 $1,438 $13,438

Loan B

$12,000 8.5% 3years $376 $1,541 $13,541

Loan C

$12,000 7.5% 4years $290 $1,927 $13,927

Loan D

$12,000 8.5% 4years $296 $2,197 $14,197

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Comparison Shopping

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Where To Begin to Reduce Debt?

» Get out your checkbook, ATM slips and credit card statements

» Figure out on what and where you spend, and how much is left at the end of the month

» Create a spending plan

» Use the spending plan to guide future spending, debt reduction, and saving

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Spending Plan Tips

» Make budgeting a family affair %» Don’t spend more than you earn %» Pay yourself first – treat savings

like a bill

» Adjust as your income, expenses and goals change

» Monitor your spending

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Debt-to-Income Ratio How much of today’s purchasing power is going to debt?

Divide total monthly debt by monthly income

$1,500 in monthly debt payments divided by $5,000 %monthly income = 0.30 or 30%

< 15% - Things are under control %%15 – 20% - Watch it ! 21% or higher – Get professional help!

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%When You Spend More Than You Make

You must:

» Increase income %%» Spend less » Adjust your goals

» Negotiate with creditors %%» Change behavior

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Every Bit Counts in Repaying Debt

» Reduce Spending!

– (Cut out expensive habits, pack lunch, carpool, use coupons, shop end of season, etc.)

» Sell what you don’t need

» Make extra income and apply it to debt %» Use tax refunds and bonuses to reduce debt

» Every dollar not paid in interest is money in your pocket

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Borrowing Money to Pay-Off Debt

Consolidating Loans

» Pros: – Rolls everything into one monthly payment %– Makes life easier

» Cons: – It takes tough self-control

– Creates a false sense of security %– Can have high fees

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Getting Out From Under Debt

1. Stop spending

2. Collect and organize bills

3. List creditors, balances and interest rates %%4. Develop a spending plan %%5. Have a plan for repayment %%6. Use extra cash to pay on debt

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Three Repayment Choices

» Pay the highest interest rate first %» Pay the lowest balance first %» Pay off the shortest term first

Apply one-time or periodic additional payments %(e.g. bonus, tax refund) to debt

Apply extras to principal

Lender Balance APR% Monthly Payment

USAA $2000 12% $200

Citibank $500 18% $50

MBNA $5000 29% $300

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What to Pay Off First

Knock this one down first!!

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Power Pay

» Pay monthly minimum on lower rate debt %%» Apply extra cash to high interest debt until the

balance is paid off

» When a balance is paid off use that money to attack next highest rate debt

» Apply Power Pay to home and car loans

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Home Loans

» One debt that can make sense

» Take out a thirty year loan – but pay it off early %%» Don’t take out a mortgage just for tax reasons %%» Buy less house than you can afford! %%» Understand rates and terms » Determine how you will pay the %

%mortgage if there is less income

%Mortgage Freedom %%%%%%Here’s a way to pay a mortgage off early and save thousands of %dollars. For this example we use a 30-year $100,000 mortgage at %6% interest

MONTHLY EXTRA PAYMENT*

Payment $ 600 $ 100

$ 7,200 %$115,830 %%30 years

Annually %Total interest paid %Years to maturity %%Savings

$ 8,400 %$76,400 %21 years %$39,430

*Record the additional principal amount on the “memo” line of your check %%%25

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Car Loans

» Buy used %%» Negotiate

– Be ready to walk away %– Go with cash-in-hand

» Shop around

» Don’t go over a five year loan %%» Keep your car for the long term

– Maintain your car!

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When You Are Overwhelmed

Service Members Credit Relief Act (SCRA) » 6% cap on interest rates

» Invalidates, sale, foreclosure or seizure of property during military service and for 90 days after

» Prevents you and dependents from eviction while on active duty %» The SCRA allows you to request a delay regarding a legal matter %» The SCRA provides protections against default judgments

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Bankruptcy

Chapter 7 » Your debts may be erased

» Can keep paying on secured debt (mortgage or a car loan) and keep the secured property

» You could lose other property

Chapter 13 » The court approves a payment plan

» You have to repay portion of your debt (and possibly all) %» Are obligated to make payments for up to five years

GOAL WHEN HOW MUCH

HOWLONG SaveEach Month

Trip 4years $4,000 48months $83

PlasmaTV April‘09 $1,200 6months $200

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Ways to Avoid Future Debt – Plan!

EXAMPLE: John wants to take his family on a vacation. It’s years since %they’ve gone somewhere special. He would like to tie the vacation to his 10 %year wedding anniversary four years from now. He’s looked into the costs, %including: travel, hotel, food and tickets. He expects the total cost to be close %to $4,000

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Emergency Fund

Cash to draw from when you need money fast %%» Ideally three to six months cash to cover expenses

» Use strictly for emergencies

» When you take it out – put it back!

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Debt and Your Credit Report

A report card of your personal attitude %%towards borrowing and repaying debt

» Your credit report contains: – Personal information %– Payment history

– All accounts in your name & types of accounts %– Amounts owed and the proportion to credit limits %– Length of credit history %– Inquiries

– Public records

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Who Sees Credit Report/Scores

» An “index of responsibility” – Lenders, Credit Card Issuers %– Employers

– Apartment/Utilities/Cell phones %– Insurance Companies %– Banks

– Security Clearances

– Indebtedness of Military Personnel

– Separation from the military – loss of career

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Credit Score Bands

» 760 - 850 %» 700 – 759 %» 660 – 699 %» 620 – 659 %» 580 – 619 %» 500 – 579 %» 300 – 499

Excellent %Very Good %Good %Fair %Borderline %Poor %Unlikely to be approved

Note: 58% have a score of 700 or above %%%%

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What a Difference a Few Points Make

Fico Score %%720 – 850 %%700 – 719 %%675 – 699 %%620 – 674 %%560 – 619 %%500 – 559

Rate % %%% %6.3

%%% %6.5

%%% %7.0

%%% %8.2

%%%12.0

%%%13.0

Difference between 720 and 620 can add 2% to your %loan cost or $2,000 per year on a mortgage of $100,000 …. 620 - 619?

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Errors on Your Credit Report

» Certified Letter to the Bureau %%» Clearly Identify Item in Dispute

» Send documents (copies) in Support of the Dispute %%» Request Correction/Deletion » Contact Lender/Provider re: Dispute

» Request Copy of Correspondence Between Provider & Bureau

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Ways to Improve/Protect Your Credit

» Pay your bills on or before payment due date %» Use credit only when absolutely necessary

» Pay down revolving credit. Do not just switch balances to a new

card. Limit the number of accounts you have

» Do NOT make frequent requests for more credit

» Communicate with your creditors if you are in jeopardy of missing payments

» Check your report annually at www.annualcreditreport.com %» Resolve any issues on your credit report

Beat the 30 day deadline!

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Breaking the Cycle

» Realize how you got there %» Borrow for the right reasons

» Do not feed “wants” by financing %» Do not create new debt

» Do not compete with the Joneses

» Set goals and save for purchases to stay out of debt %» Always look for the Annual Percentage Rate (APR) %» Borrow from reputable lenders

Always remember the pain of repayment!

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