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Financial Peace University Lesson 5 – Credit Sharks in Suits

October 30, 2009 · Filed Under Financial Peace University · 1 Comment 

Understanding Credit Bureaus & Collection Practices

Dave starts out this lesson by exposing one more myth, similar to what he did during the previous lesson:

Myth: You need to take out a credit card or car loan to “build up your credit score.”

Truth: the FICO score is an “I love debt” score and is NOT a measure of winning financially.  I admit that in the past I’ve taken pride in having a “high” FICO score.  It is interesting to really look at how it is calculated, though.  According to Ramsey, if you want a higher FICO score, you should go into debt and stay in debt for a long time.  The more credit cards you have (assuming you don’t have big balances on all of them) and the longer you have had them will generally translate into a higher FICO score.  He also explained that you could inherit a bunch of money tomorrow or get a huge raise and if you don’t change any of your debt, then your score will not change at all.  So, I agree, this is not a measure of how well you are doing financially…it is basically worthless for that purpose.  (He also mentioned that he currently does not have a FICO score at all…and I’m pretty sure that he is doing ok financially!)

Understanding Credit Bureaus

The first portion of this lesson revolves around your credit report.  Some interesting notes from Ramsey:

  • Information remains on your credit report for seven years after the last activity, except for a Chapter 7 bankruptcy, which remains on there for 10 years.
  • Beware of credit clean-up scams – it is not legal to remove accurate information from your report.
  • In a survey done by the National Association of State Public Interest Research Groups, 79% of credit reports of the people surveyed contained mistakes.

It is recommended that you check your credit report annually to make sure there are no issues.  Of course, this can now be done free using annualcreditreport.com.  Through that website, you can get a copy of your credit report from each of the three credit bureaus once a year (FREE – you don’t even have to sign up for credit monitoring or any of the other junk – if you do, you’re most likely at a similarly-named site).  So, you can check your credit report every four months if you cycle through the different credit bureaus.

Correcting Credit Report Inaccuracies

According to the 1977 Federal Fair Credit Reporting Act, a credit bureau is required to remove all inaccuracies within 30 days of you notifying them of the mistake.  To do this, send a letter for each inaccuracy via certified mail to the bureaus with your credit report attached and the account number circled.  The bureau will then request clarification from the company that reported the information in question.  Often, that company will not respond and the credit bureau will remove the offending information.  If the company responds to the bureau and claims that the information is accurate, then you will have to work with that company to clear up the discrepancy.  Most times, the letter to the credit bureau will be sufficient.  If they do not remove the inaccuracy within 30 days, however, you can then request that they remove the entire account from your report.  Finally, if you are having problems with them, then you might need to complain to the Federal Trade Commission and your state’s Consumer Affairs Division.

Dealing with Collectors

During the remainder of this lesson, Dave discussed collection practices and how to interact with debt collectors.  Here are some of the highlights of his teaching:

  • The collector’s job is to get your money – not to be your buddy or to help your overall situation
  • Typically, they attempt to induce strong emotional reactions from you
  • It is illegal for a collector to harass you and they can only call you between 8 AM and 9 PM (unless they have your permission to do so).
  • You are able to demand that they stop calling you at work
  • It is even possible for you to demand that they stop all contact with you (except notification that they are suing you).  Dave does not recommend this, however, as all negotiations then stop and there is no hope of a positive resolution.  In fact, this makes it more likely that you will end up being sued by them.
  • Except for student loan debt or the IRS, it is not possible for a creditor to garnish your wages or take money from your bank account unless they sue you and win the court case; a threat to do so is just a bluff.
  • Of course, it is possible for them to sue you.  If they do, they will win (remember you do owe them money) and then they have the right to garnish your wages after a 30 day waiting period.

The purpose of all of this is ensure your life is bearable while you are trying to deal with your creditors.  It is not to try to avoid paying back your debts. If you borrow money or owe someone money, the honorable thing to do is to pay what you owe.

Luckily, so far I have not had to deal with debt collectors and I have not found any significant errors on my credit reports (though when I had student loans, so many of them show up on the report that it is hard to keep track of whether they are all accurate or not) so this lesson was not as interesting as some of the others.  If you are dealing with collectors, however, Ramsey’s advice is to stay in contact with them once every two weeks and send them more information than they send you.  Send them your budget, send them the plan that you are using to work your way out of debt, show them how much money you have to pay debts after your necessities and try to work something out.  As long as you keep communicating with them and paying them, even if it is less than they want, they will probably work with you instead of suing you.  A lawsuit is expensive and getting some of your money, even if it is slowly, is better than getting none (or spending more on court costs that you actually owe!).

Resources

Request a copy of your credit report:

To reduce direct mail advertising and telemarketing calls:

(So I recently visited both the opt out site and the do not call site.  The do not call site is pretty straightforward but for the opt out site it is so obvious that someone forced them to put that site together.  They are not happy about you coming there to opt out of the marketing.)

Check out my previous FPU posts:

Weekly Bible Verse – Laziness leads to Poverty

October 26, 2009 · Filed Under Weekly Bible Verse · 1 Comment 

Lazy hands make a man poor, but diligent hands bring wealth. Proverbs 10:4 (NIV)

A great reminder this week of the importance of working hard to provide for yourself and your family.  You can’t just sit around all day saying, “I’m not worried, God will provide for me.”  He has already provided for you – He’s given you a mind and skills (like nunchuku skills, bow-hunting skills, computer hacking skills) and innumerable other resources.  Now it’s your turn to get up off the couch and use what He has provided.  If you want to better your current financial situation, then employ your diligent hands and get to work.

God bless and have a great week…

Financial Peace University Lesson 4 – Dumping Debt

October 23, 2009 · Filed Under Financial Peace University · 5 Comments 

Beaking the Chains of Debt

I mentioned in the previous FPU post that Dave Ramsey is very big on creating and using a cash flow plan each month.  I now have to say this week that he stresses even more the importance of getting out of and staying out of debt.  I would probably say that this is the most important facet of his financial peace plan.

If you tell a lie often enough, loud enough, and long enough, it becomes accepted as truth

Ramsey spends the majority of this session presenting and debunking various myths about money and debt – some that I found very interesting.  I’m not going to go through every myth in this post – I’ll just hit some I found more intriguing (I have to leave something for you when you actually take the course, right?).

Myth: Playing the lottery and other forms of gambling will make me rich.

Truth: Playing the lottery is a tax on the poor and on people who can’t do math.  Ramsey asked this question, “Why is the lottery line not filled with rich people?” and also presented this telling statistic: People with no high-school diploma spend on average $173/month on the lottery while people with a college degree spend an average of $49/month.  Do you know how much money $173 will grow to over time if you invested that money each month instead of wasting it on lottery tickets?

Myth: Car payments are a way of life and you’ll always have one

Truth: Staying away from car payments by driving reliable used cars is what the typical millionaire does.  I admit that I totally bought into this myth; I simply did not see a way that you could drive a decent car without having payments every month.  We used to pay $800/month on our two cars.  You know, you can do a lot with $800 if you don’t have to give it away each month.  We’re saving a lot more money these days since we accelerated and paid off our car loans.  In fact, Ramsey states that the average car payment is $464/month and if you invested this amount at a 12% interest rate starting when you are 30, when you reach age 70 you will have $5.5 Million.  Wow, I hope getting a nice, new car every few years is worth $5 M to you!

Myth: Leasing your car is what sophisticated financial people do.  You should always lease things that go down in value.

Truth: The car lease is the most expensive way to finance and operate a vehicle.  I remember reading reading an article in Consumer Reports about this exact topic.  In fact, I found these statistics that Ramsey offered very enlightening: If you buy a new car with cash, the dealership makes an average profit of $82.  If you finance that new car through them, the dealership makes an average profit of $775.  If you lease that new car, the dealership makes an average profit of $1300!

Myth: I’ll take out a 30-year mortgage and pay extra.  I promise!

Truth: Life happens!  Something else will always seem more important, so almost no one pays extra every month.  Never take more than a 15-year fixed-rate mortgage and your payment should be less that 25% of your take home pay.  It is true that using a 15-year mortgage will save you tons of interest!  In fact, on a $225,000 mortgage at 6% interest, you will save more than $143,000 in interest with a 15-year mortgage compared to a 30-year mortgage.

This is a hard one to do though.  When we bought our current house, we didn’t buy one anywhere near what we were qualified for, but we are barely below the 25% of our take home pay and that is on a 30-year mortgage!  Interestingly, this advice is the opposite of what Crown Financial Ministries will tell you to do.  They suggest paying extra on a fixed 30-year mortgage to make sure you can still afford the payments even if something changes in your financial situation (of course, that’s probably why Ramsey tells you to keep the payment below 25% of your take-home pay).

Myth: It is wise to take out an adjustable-rate or balloon mortgage if “I know I’ll be moving.”

Truth: You will be moving when they foreclose!  Remember, an adjustable rate mortgage transfers the interest rate risk from the bank to you.  They are good for the bank, not for you.  (Disclosure: we currently have a seven-year adjustable rate mortgage).

Myth: You need a credit card to rent a car or to make purchases online or by phone.

Truth: A debit card will do all of that, except for a few major rental companies (check in advance).  Remember that you get the same level of protection as a credit card when you swipe your debit card like you would for a credit card (not when you enter your PIN number).

Myth: “I pay my credit card off every month with no annual fee.  I get brownie points, air miles, and a free hat.”

Truth: A Dun and Bradstreet study found that when you use plastic instead of cash you spend 12-18% more because spending cash hurts.  So what if you get 1% back!  I am currently struggling with this actually.  We typically use credit cards for most of our purchases but I am really re-evaluating this strategy as we go through this class.  I hope to start moving to cash or debit card for some purchases next month as a trial to see if we spend less and if we can do a better job tracking it as we move through the month.

Myth: I’ll make sure my teenager gets a credit card so he/she can learn to be responsible with money.

Truth: Teens a huge target of credit card companies today.  This is chilling: more young adults filed bankruptcy last year than graduated from college.

Myth: Debt is a tool and should be used to create prosperity.

Truth: The borrower is slave to the lender.  In a survey, the Forbes 400 were asked, “What is the most important key to building wealth?”  75% responded that becoming and staying debt free was the number one key.  Think of it this way, your largest wealth building tool is your income so don’t waste it on interest payments each month.  Now think about this: How much money could you save, invest, blow, and give away if you had no debt payments each month?

Steps Out of Debt

Getting out of debt is hard and you have to be focused and serious about it to get it done.  “You can wander into debt but you can’t just wander out.”

Dave presents the following five steps to getting out of debt:

  1. Stop borrowing!
  2. You must save money
  3. Prayer really works
  4. Sell something.  (His famous line: “Sell so much that the kids think they’re next!”
  5. Take a part-time job or overtime (temporarily)

The Debt Snowball

A key component of Dave Ramsey’s FPU plan is the debt snowball.  You’ve probably heard about it and seen countless debates over whether paying off your debt this way make sense or not.  I’ll admit that in most cases, this is not the most “interest-efficient” way to pay off your debts but as Ramsey himself states, this is about behavior modification not about math (“besides, if you could do math you wouldn’t be in debt to begin with.”).  The debt snowball relies on seeing that you are actually making progress and that tangible progress motivating you to stick with it and make more and more progress.

Here is the debt snowball process:

  1. List all of your debts from smallest remaining balance to largest.
  2. Pay the minimum amount on each debt except for the first one.  Put all the extra money you can scrape together towards paying off the first one as quickly as possible.
  3. When the first one is paid off, put all the money that you were paying on the first one towards the second one.  So, the money from the first debt will be added to the minimum amount you were already paying on the second debt thus increasing the payment.
  4. Repeat this process for each subsequent debt.  As you can see, the amount of money being paid on each debt gets larger and larger as you pay off the smaller ones – hence the “snowball” concept.

This debt stuff is important!

I feel that this is one of the most important lessons in FPU.  Most people just assume that car payments, mortgages, home equity loans, credit cards, and so on, are just a way of life but it doesn’t have to be that way!  We strove for a few years to pay off our cars early and get rid of my wife’s student loans.  At one point, we were paying $800 on our cars and $2000 on student loans – that adds up to a lot of money each month!  Now, we’re saving that money.  Instead of giving away $2800 each month, we’re giving it ourselves.  That’s a great feeling.

My parents never made a ton of money through their working careers.  They rarely use credit cards, paid off their mortgage years ago, and live fairly simply though.  As a result, they can basically do whatever they want in retirement without even touching the principle of their savings.  They’re not just sitting around listening to the radio all day either.  Their indulgences are going out to eat a lot, getting a new car every couple years (and they lease!), and taking a three-week vacation to Florida each year.

Get out of debt – keep the money for yourself! If you want to give it away, it’s a lot more fun to choose whom to give your money to instead of being forced to give it to your bank.  And I’m sure your church or some missionaries or some people who are struggling need that money a lot more than your bank does!

Check out the previous FPU posts:

http://www.borrowfromnone.com/2009/10/financial-peace-university-lesson-3-%E2%80%93-cash-flow-planning/

Weekly Bible Verse – The Sluggard

October 19, 2009 · Filed Under Weekly Bible Verse · 2 Comments 

How long will you lie there, O sluggard? When will you arise from your sleep? A little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a robber, and want like an armed man.  Proverbs 6:9-11 (ESV)

This week’s verse is probably not a terribly profound one, but still a valuable one.  It’s a reminder of the importance of working hard and avoiding sloth.  Basically the questions being asked, in modern vernacular, are “Are you going to lie there on that couch forever?  When are you actually going to get up do something?”  Ahhhh, not exactly pleasant questions to hear!

Certainly there is a time to rest – even God rested on the seventh day during creation and set aside the Sabbath for man to take a day of rest as well.  So, I do not believe that the main point of these verses is that you can never take a break.  Rather, I feel that this verse underscores the importance of not extending that rest to ridiculous proportions.

The result of all this resting and sleeping and taking it easy is that poverty will be upon you.  In other words, lazy people don’t make much money to support themselves and their family.  I do find it interesting the similes that are used to describe how this happens.  “Like a robber” poverty will come upon you.  You’re lounging around (again) and you don’t even notice that poverty has seized you.  And “want” for necessities and niceties follows this lack of resources and that is described as an “armed man.”  In other words, at this point, you’re stuck with this poverty and want, you’re forced to accept it.  You’re in a hole now and the only way to climb out of it is to get off your lazy….bottom…and get to work!

Enjoy your rest but keep it within reason and work hard in all you do to bring glory to God.

God bless and have a great week…

Financial Peace University Lesson 3 – Cash Flow Planning

October 15, 2009 · Filed Under Financial Peace University · 2 Comments 

The Nuts and Bolts of Budgeting

You have to be proactive

Just in case you didn’t already know, Dave Ramsey is big on budgets (very, very big on them).  He earnestly preaches the need for a budget.  Why?  Because money is active – so you need to tell your money what to do instead of sitting around at the end of the month wondering what your money did.  You might remember that I just reviewed a book, The Automatic Millionaire by David Bach, in which the author gives the opposite advice – don’t do a budget as they never work and are not necessary.  I found it interesting that Ramsey actually said on the DVD that those people who tell you never to do a budget are just trying to sell books.

So Dave wants each of us to do a budget and not only that, but he wants us to do a new budget every month.  Why, you ask? (What are you, my two-year old?)  Well, because every month is different so don’t build a single “One-size-fits-none” budget that does not reflect reality.  You will have different expenses each month, so you need to do a slightly different budget each month.

Why do most people hate the word “budget?”

Ramsey offers some reasons why people hate budgets starting with a budget having a “straight-jacket” feel to it.  Couple that with the fact that most people have never had a realistic budget that actually worked and this explains a lot of the angst surrounding budgets.

In fact, budgets (or “cash-flow plans” if you want to remove the B-word from your lexicon), do not work when you leave things out or over-complicate them.  That’s where I struggle actually.  I do not want a budget with 413 individual categories where I have to spend 45 minutes after each trip to Wal-Mart divvying up the purchases into the appropriate categories. There must be a middle ground where we can find a workable plan that does take most of the month to actually work!

Finding that plan is worth the effort

During the lesson, Dave listed a number of reasons why we all should do a cash-flow plan.  Some of the highlights are that a written cash flow plans (if agreed and actually lived on):

  • Removes money fights from your marriage
  • Removes guilt, shame, and fear that may be a part of purchases (“do I have enough money in my checking account to buy these groceries?”)
  • Will show areas of overspending
  • Will cause your money to go farther (“managed money goes farther”)

Create a zero-based plan and use the envelope system

So what exactly is this zero-based cash-flow plan that Ramsey recommends?  It is simply a plan where you spend every single dollar that you earn on paper before the month begins.  In other words, you sit down before the month begins (or stand up, I don’t think that matters, I’d probably “lounge” if I had the choice) and write down where all your money will go that month taking into account bills, payments, and all the things on which you need to spend money for that particular month.  It is a zero-based budget because when you add up all the planned expenditures you just wrote down and subtract your income, you get zero (get it?).

To implement this, Ramsey recommends using the envelope system where you put the cash you are going to spend that month in an envelope and then…wait for it…spend it.  But, here’s the rub, when there is no more money in the envelope, you have to stop buying stuff.  Seems simple enough.  Personally, I have not completely committed to this system yet.  I’ve toyed with it a bit and I want to roll it out in a more formalized approach next month (with our first actual zero-based cash flow plan!) to a few categories and see how it works for us.  Keep in mind that Dave is not recommending this for everything – he doesn’t suggest you walk into the bank with your wad of cash to pay your mortgage each month (“hold on, lemme find my pennies…”) but there are some spending categories that work well with this system (for instance, the ones you are prone to overspend).

Ramsey also cautions that you are not going to be very good at budgeting the first few months – he claims it takes about 3 months to get most of the kinks worked out.  So, create the first monthly cash flow plan and when things come up, have an emergency budget meeting with your spouse or mentor or whatever, and change the plan.  Repeat as needed while striving to reduce the number of emergency budget meetings in future months.

This is where the rubber meets the road

You should have heard the sighs (I’m pretty sure I heard a gasp or two) as Ramsey introduced all the forms that needed to be filled out for homework this week.  I do admit that there were quite a bit to do (and I also must admit I didn’t do them all).  The most important form, obviously, is the actual Monthly Cash Flow Plan.  You can download this form from Dave’s website here or just use a spreadsheet or whatever.  Two other important forms were the Lump Sum Payment Planning form where you keep track of all the large, non-monthly expenses (think insurance, taxes, pool membership, etc) and the Irregular Income Planning form for those who do not get the same check every 2 weeks or whatever.

All in the all, Ramsey wants us to fill out the following forms:

  • Consumer Equity Sheet (Net worth)
  • Income Sources
  • Lump Sum Payment Planning
  • Monthly Cash Flow Plan (3 pages)
  • Allocated Spending Plan (basically the cash flow plan broken out week by week)
  • Irregular Income Planning
  • Breakdown of Savings
  • Financial Snapshot

If that sounds like a lot…that’s because it is.

So, we’re working on our budget and I’m kinda excited to do it for a few reasons.  Certainly I want to get a better handle on where our money is going on a monthly basis.  I also think that having a budget will reduce my stress surrounding purchases.  I tend to not want to spend money on, well, pretty much anything.  So I like the idea that I can look at the budget and it says $X in category Y, so it’s ok for me to spend that money…so less stress.

This was quite a session with a lot of forms and homework – I’m telling myself that not all lessons will be like this so no need to worry about it (I don’t know if that’s true or not but it seems to work for me).

Check out the previous FPU posts:

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