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5 Steps to Help Your Parents Get Out of Debt

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Senior Couple Talking To Financial Advisor At Home

Does it hurt to watch your parents make one bad financial decision after another? Do you often find yourself wishing that you could do something to open their eyes to the situation they’re in?

If so, you’re not alone. I’ve been there several times. My parents have been struggling with consumer debt my entire life.

While I’m grateful that I was able to learn from the mistakes they made early on, that doesn’t mean I want to stand by and watch them repeat those mistakes!

After a few years of talking with them about financial matters, they’ve finally asked me to help them get their finances in order so that they can pay off their debt once and for all.

I want to tell the story of how it happened, because I’m happy to help my parents dig themselves out of the hole they’ve been in for years, and I know there are others out there who would like to do the same.

While these methods might not work for everyone (personal finance is personal), I think many can benefit from the same steps.

If you want to give your parents a hand when it comes to dealing with debt, here are 5 steps you can take.

First, a Word of Warning

While you may want to help your parents (or even friends and loved ones) with their financial situation, you might have to accept that it’s not possible.

Why? You can only help those that are ready and willing to be helped.

I’ve learned this the hard way as the years have gone on and I’ve become more enthusiastic about personal finance. It’s the old saying – you can lead a horse to water, but you can’t make it drink.

I don’t agree that money should be taboo, but you can’t force someone to budget, to track their spending, or to consider the ramifications their purchases will have months down the road.

Your eyes may be open to what’s going on, but your parents may be burying their heads in the sand because they can’t face the reality of the situation.

Those who have already had their “aha!” moment when it comes to their finances are typically more willing to accept help.

I know it might hurt to step away and keep your mouth closed, but you have to pick your battles. Some aren’t worth trying to fight, especially when the other side isn’t aware there’s a problem.

Step 1: Lead by Example

That’s why my first suggestion is to simply lead by example. I love talking about personal finance, but sometimes talking isn’t effective.

I’ve been tracking my spending for years, and I created a budget when I first moved out on my own. I’ve always been open with my parents about my finances, and I spoke with them regarding any financial decisions I made, as well as asked for their input.

As a result, they’ve always known me to be on top of my finances. They saw first-hand how powerful tracking spending was because I did it.

I admit, I nudged them along a few times, mentioning that since budgeting had been working out well for me, they might want to try it.

Eventually, it worked – my parents got so sick of their debt, they wanted to take action, and the first person they turned to was me.

While my parents did pay extra toward their debt when they could, they didn’t do it in a consistent or effective way, so the first step was getting their statements together to create a debt payoff plan.

Step 2: Gather Financial Information Necessary to Create a Plan

My parents have about 5 creditors they owe, so this step was crucial in being able to create a debt payoff plan. If you or your parents don’t know the particulars of their debt, then you can’t help them.

I recommend getting all their recent statements together and listing all the debt they have. I’m a huge fan of spreadsheets, so I took their information and listed it out accordingly:

Creditor, Balance Owed, Minimum Payment, Interest Rate, Due Date

By doing this, you can easily sort debts by any category you choose, which can be helpful when deciding how to prioritize them.

Also, while going through these statements, my mom noticed she had rewards points on one of their cards. She was able to redeem the points as a statement credit, and knocked out $400 of that particular debt!

It goes to show you it’s worth going through statements to make sure you’re not missing anything like that. My mom was excited they started their “real” debt payoff journey with a bang, and as most of us know, emotions are a huge factor when paying down debt.

However, having all of this information in front of you can be overwhelming, and people don’t always know what to do afterward. Help your parents prioritize their debt and create a plan by telling them what choices they have, without being judgmental.

I explained that the avalanche method (paying off debt according to highest interest) is the mathematical approach which will save them more, but I also understood my parents had been carrying their debt around for years. If going with the snowball method (paying the smallest debts off first and using the psychological momentum to drive you forward) helped them, I was all for it.

promo-balancetransfer-halfIn the end, we decided on a mix, but the important thing was they had a list of their debt that they could easily reference and update at any time. Their total wasn’t a mystery anymore, and I think that was empowering.

Additional steps to take during this stage: if the interest rates on your parents’ debt is unbearable, have them call their creditors to see if they can work with them. If they’ve paid on time and have been customers for a while, their creditors may be willing to help.

You can also look into 0% balance transfer offers for them – just make sure they’ll be able to pay back their debt in full before the 0% rate period expires or teach them how to roll it over to another offer.

Step 3: Get Spending Under Control

If your parents are in consumer debt like mine are, they might have some spending problems that need to be addressed.

This can be a sensitive topic to discuss, but if your parents are aware that their debt is an issue, then hopefully they realize some changes are in order when it comes to how they use credit.

I’m thankful my parents realized long ago they couldn’t continue to use credit like they had. They cut up most of their cards, kept a few in case of emergencies and online purchases, and that was it. They were already fairly dedicated to lessening their expenses and getting their spending under control.

However, when I asked my mom how much they were spending on certain things (she primarily handles the finances), she couldn’t give me any numbers. Mental accounting doesn’t work for most people, so I challenged her to track their spending in hopes that it would give them a little reality check.

I set them up with a simple spreadsheet similar to the one I use to budget and track spending (but if your parents are good with technology, try using Mint!). Since they use cash 99% of the time, I told my mom to keep all of their receipts and to record transactions the day they happened so she wouldn’t get behind.

The basic premise for the budget I use looks like this:

Category, Actual Spending, Budgeted Spending, Leftover

I’m happy to report it’s been a few months since they started, and my mom has diligently updated the spreadsheet. She’s very happy she started tracking their spending!

Just a few days ago she commented that she was close to being over-budget on food. Before having a budget, that thought wouldn’t have entered her mind, but because she was updating it, she was conscious of what they had spent.

Additionally, my parents live on a fixed-income as they’re retired (aside from the fact my mom has a part-time retail job). Sticking to a budget ensures they’re not spending more than what they have coming in, which is crucial.

Step 4: Putting It All Together

Okay, now that your parents have created a plan to tackle their debt, and hopefully have their spending under control (or are aware of any issues), you need to put all of these steps together.

I understand that not everyone is going to be able to do this, but I told my parents whenever they have money leftover at the end of the month, they need to put it toward the debt they’re focusing on. This also motivates them to spend less, because they want there to be a positive number in the “leftover” box.

If your parents are open to it, go through their spending line-by-line to see if there are any leaks that can be plugged. Just try to do it in the nicest way possible, and don’t cast judgment.

One method that may work better than simply telling them to cut spending is showing them exactly what their habits are costing them. If your parents are spending $133 a month on their cellphone bill, that adds up to almost $1,600 a year! That’s a decent chunk of change that could be going toward debt.

You can also suggest they try giving things up temporarily, such as dining out, going to the movies, or any other costly activities they partake in on a regular basis.

Lastly, help them figure out what their values are so they can start spending on things that really matter and cut the excess out.

Step 5: Saving and Earning More

Depending on your parents’ situation, it’s worth mentioning the possibility of earning more. My mom likes to keep busy, so she took a job in retirement for that purpose.

However, the added bonus is that her entire paycheck can go straight to their debt, because they’re already living within their means, and their regular living expenses are covered by their fixed income.

The last thing most people want to do in retirement is work, but that’s the reality a surprising amount of baby boomers are facing these days.

If your parents aren’t thrilled at the idea of working retail, see if they can make money from hobbies or their past professions.

My parents live in a 55+ community and know a handful of people that make money on the side from things like woodworking, haircutting, knitting, and teaching classes.

Lastly, I do need to mention the importance of having savings, especially if your parents are close to or in retirement.

The primary reason my parents still have debt today is because they lacked the savings to cover expensive home repairs in the past. Any time something went wrong, they would charge it, and so the cycle continued.

They were finally able to create a savings cushion by selling their house and moving to a lower-cost-of-living area. I know that’s a bit extreme, but the area they wanted to retire to happened to be much cheaper – so much so, they were able to buy a house outright and still have money left in the bank from the sale of their old home.

If your parents are still stuck living paycheck-to-paycheck, though, then make sure you emphasize the importance of saving. Having an emergency fund will give them peace of mind, which is worth it, especially if they’re living on a fixed income.

It Isn’t Simple, But It’s Worth It

Helping your parents get out of debt isn’t easy, especially if they’re not willing to hear you out. Be patient, understanding, and lead by example. Don’t try to force your financial beliefs on others – they’ll come around when they want to.

Once they do, then you can start helping them get on the right track by setting them up with a spending plan and a debt payoff plan that works for them. They’ll be thanking you soon enough, and you’ll feel better knowing their financial situation is improving.

Download our Debt Free Forever Guide! It’s FREE and will help get you back on track.

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Erin Millard
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Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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Freedom Debt Relief Review: How This Debt Settlement Company Works

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Struggling to repay debt isn’t something you have to do alone. Consumers can turn to solutions such as credit counseling or even bankruptcy (if the debt is too much to handle).

Another option that can offer you some savings is working with a debt settlement company. Debt settlement companies negotiate with creditors to settle your debt for less than what you owe.

Freedom Debt Relief is one company that’s in the business of helping consumers get rid of debt. In this post, we’ll review what Freedom Debt Relief has to offer, including how much it costs, whether it’s safe and what to expect when you sign up.

What is Freedom Debt Relief?

Freedom Debt Relief was started in 2002 by Andrew Housser and Brad Stroh to offer debt resolution services and financial education to consumers. The mission of Freedom Debt Relief is to operate with integrity and support clients in their journey to paying off debt. With offices in San Mateo, Calif., and Phoenix, Freedom Debt Relief employs over 2,000 people.

Freedom Debt Relief is a leader within the debt settlement industry. The company is a member of the American Fair Credit Council (AFCC). According to Freedom Debt Relief, the company resolves an average of 43,891 accounts per month and has settled over $9 billion in debt.

Breakdown of Freedom Debt Relief

Here’s a look at what you need to know about Freedom Debt Relief and its services.

Services offered

Debt settlements: The Freedom Debt Relief service is a settlement program for people who are struggling to repay debt. You make monthly deposits into a Federal Deposit Insurance Corp.-insured account set up by Freedom Debt Relief. As the account grows, debt consultants negotiate settlements with your creditors. The money to pay off the settlement is taken from your account. Most settlements are structured settlements where you pay off the debt in installments.

Minimum debt required

You must have $7,500 or more in unsecured debt.

Soft or hard credit pull required

A soft pull is required.

Time frame

It can take 4 to 6 months to get your first settlement agreement. Clients typically pay off 70% to 75% of their debt over 24 to 60 months.

Consultation fees

Fees are only charged when a settlement agreement is reached. Fees typically range from 15.00% - 25.00% of the original debt amount, but they can vary by state. The average fee is 21.5%. Each settlement agreement will show the fees to be charged. You have to approve the offer before it goes into effect.

Cancellation fees

N/A

Service fees

N/A

Types of debt accepted

Debts accepted include credit cards, medical bills, department store cards, personal loans and other unsecured debt. This program cannot help you with federal student loans, auto loans, mortgages and other debt that has collateral backing it. Freedom Debt Relief may be able to help with certain private student loans.

Accreditations

Freedom Debt Relief is a member of the AFCC. Consultants are certified by the International Association of Professional Debt Arbitrators.

Ratings

4-plus stars on Better Business Bureau (BBB); no complaints about the company in CFPB consumer complaint database

Service limitations

N/A

Free resources and tools

Freedom Debt Relief has an education area on its site that breaks down different debt repayment strategies (such as debt consolidation or debt management) and how they compare to debt settlements.

Customer service

Customer service is available seven days a week, including evening hours. Freedom Debt Relief is available by phone and email.

Who’s eligible?

  • You need to have at least $7,500 in eligible debt. Eligible debts include unsecured debt such as credit card debt, medical bills and personal loans. According to Freedom Debt Relief, higher debt balances are required for settlements because creditors are less willing to make deals on small amounts that you can pay relatively quickly.
  • You also need to have enough disposable income each month to put away cash into an account set up by Freedom Debt Relief. This savings account is what’s used to pay off your debt and fees when a debt settlement is reached.

What are the benefits and risks of Freedom Debt Relief?

Benefits

Risks

You get to work with expert negotiators. The edge that these negotiators have is experience. If you’re unable to reach an agreement with creditors on your own, they may be able to reach one for you.

The forgiven amount may be taxed. The amount you save through a debt settlement can be considered income and taxed as such. Speak with a tax professional about how forgiven debt will impact you.

Settlements reduce how much you owe. The purpose of a debt settlement company is to settle your debt for less than the balance. Freedom Debt Relief may be able to settle your debt for as low as 50% of what you owe.

The fees. All this isn’t free. Freedom Debt Relief charges you a percentage of your original debt amount when a settlement is reached. The average fee is 21.5%. You could negotiate settlements on your own or with the help of a credit counselor, possibly at a lower price.

No fee is charged until a settlement is reached. You don’t owe any money until you agree to the settlement. You’ll see how much the fees are in the settlement agreement that you have to approve.

You risk racking up fees and getting sued. You may not get a settlement for several months. During this time, the settlement company won’t be making minimum payments on your debt. Interest and other fees still apply to your balances. If you don’t make payments, you can continue getting calls from collectors or sued for nonpayment. Your debt can grow exponentially during this period, putting you in a jam if they aren’t able to reach a settlement. Not paying your bills can do some major damage to your credit report.

A loan isn’t required. The program through Freedom Debt Relief does not require a loan, so you’re not taking out more debt. Instead, most clients save incrementally to pay off each settlement.

There’s no guarantee. There’s a chance the company won’t be able to reach a settlement with creditors. Freedom Debt Relief does not guarantee settlements.

How much does Freedom Debt Relief cost?

Fees from Freedom Debt Relief only apply when you approve a settlement. The fee is broken down into a monthly fee that’s paid from an account created when you start the program.

Freedom Debt Relief can save you money through a settlement, but it comes at a high cost. You should also consider other options (we’ll talk about some below) before you work with a debt settlement company.

Service

Cost

Debt settlement

15% – 25% of your original debt amount, but the amount may vary depending on your state

How long does the program take?

The negotiation and settlement process doesn’t start right away. You have to save up money in a dedicated account before debt negotiators start working their magic. It can take four to six months for you to get your first settlement, but the timeline will vary and there are no guarantees.

If you do get a settlement, you may be able to settle your debt for as little as 50% of your balance, according to Freedom Debt Relief. But the typical amount saved is 15% to 35%. Clients who keep up with the program by making monthly deposits into their dedicated account typically pay off around 70% to 75% of their debt over 24 to 60 months.

Is Freedom Debt Relief safe to use?

Freedom Debt Relief isn’t BBB-accredited, but the company has decent reviews on the BBB website. Customers report that customer service and consultants are helpful and respectful. The consensus is that customers are pleased with the service and how their debt is being resolved.

But there was a lawsuit filed against Freedom Debt Relief by the CFPB in November 2017. The complaint states that Freedom Debt Relief misled consumers on how the service works and that the company charges fees even if there isn’t a settlement reached. Freedom Debt Relief has refuted such claims. If you use Freedom Debt Relief and it charges you a settlement fee without a settlement, report it to the FTC. This practice is prohibited.

How do I sign up for Freedom Debt Relief?

  • If you’re interested in Freedom Debt Relief, the process starts with you completing a form on the website or contacting a certified debt consultant for a free evaluation. Get started here.

What to expect after signing up with Freedom Debt Relief

Here’s how the Freedom Debt Relief process works:

  • Step 1: Receive your customized plan and start saving in your dedicated account. You’ll work with Freedom Debt Relief to come up with a debt plan that works for you. This plan includes deciding the monthly deposits you can make into your dedicated account. You may also be asked to complete some forms, including a form that gives Freedom Debt Relief permission to speak with your creditors. Each month, you deposit money into the FDIC-insured account to grow the funds you have available for debt repayment. The reason for the account is that creditors are more willing to make deals when there’s proof of funds available.
  • Step 2: Negotiation. Freedom Debt Relief will negotiate with creditors to try to settle your debt as you continue making deposits into your account.
  • Step 3: You approve settlements. You will be contacted to approve and authorize each debt settlement.
  • Step 4: Fulfill the settlement agreement. After paying off the settlement, creditors should report to the credit bureaus that you’ve settled your debt. You keep depositing money into your dedicated account and Freedom Debt Relief will keep negotiating until your debts are paid off.

Alternative methods to pay down debt

Debt consolidation

Debt consolidation is when you take out a new installment loan to pay off your other debt. A debt consolidation loan with a competitive interest rate could save you money. The average credit card interest rate is 15%. You may be able to find a personal loan for debt consolidation that has an interest rate as low as 5.99% APR (depending on your credit).

Pros

  • It simplifies your debt. A debt consolidation loan makes it so that you have fewer payments to worry about each month. All the debts are rolled into one payment.
  • It gets you out of the minimum payment trap. Making just the minimum payment on credit card debt (or none at all) will hurt you. Minimum payments don’t put a real dent in your balance and interest will make your balance steadily increase. An installment loan is designed for you to pay it off within a set time frame. It will force you to make more than small $20 or $30 minimum payments here and there so you can speed up repayment.

Cons

  • Poor credit may cause a problem. If you’ve gotten to a place where you have many unpaid debts and poor credit, you may not be able to qualify for a debt consolidation loan. But there are a few lenders who may be willing to work with people who have less-than-stellar credit. Learn more here.
  • Credit inquiry. Applying for a new loan typically requires a credit check. But the benefits of consolidating debt with an affordable loan may outweigh any minor hit that your credit will take because of an inquiry.
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Debt management plan

A debt management plan is a program typically offered by nonprofit credit counseling services. To create a debt repayment plan, a counselor goes over your income and debt to come up with a repayment strategy. They also speak with your creditors to negotiate lower fees and lower interest rates. You send one payment for the plan to the credit counselor and they disburse payments to creditors for you.

Pros

  • The guidance and debt management from experts. Working with a counselor can be worthwhile if you’re struggling to come up with a plan. They pay bills for you so that you have less interaction with your creditors. Nonprofits that offer debt repayment plans may also offer other credit counseling services that can teach you how to manage your credit in the future.
  • Faster payoff. You can get a lower interest rate and a break on fees negotiated, making it possible to repay debt faster.

Cons

  • The cost. Debt management plans are not free. There may be an enrollment fee and a monthly fee that can range from $25 to $35 on average.
  • It’s only for certain debt. The debts you can add to a debt management plan include unsecured debts such as personal loans, credit cards, medical bills and other debt in collections. Typically, you can’t include your mortgage, second mortgages, car loans or federal student loans.

Bankruptcy

Bankruptcy is usually looked at as a final resort because of what it can do to your credit. There are many types of bankruptcy, but individuals typically file either Chapter 7 or Chapter 13. Chapter 7 is a complete liquidation of your assets to repay your debts, and this form of bankruptcy generally does the most damage to your credit. Chapter 13 sets a repayment plan where you pay part of what you owe instead of liquidating all your assets.

Pros

  • You can get a clean slate. Bankruptcy can be a saving grace if you’re dealing with unmanageable debt and you’re close to losing your home. Some debts may be discharged completely, and bankruptcy may be able to save your home from foreclosure.
  • You can stop collections calls and litigation. Filing for bankruptcy should put a stop to collection attempts and lawsuits when your financial situation has gotten out control.

Cons

  • The fees and credit hit. There are filing, administrative and attorney fees. Bankruptcy stays on your credit and can negatively impact you for seven to 10 years.
  • Bankruptcy isn’t a quick fix. Bankruptcy is more than signing off on a few documents. Your assets will be reviewed closely to determine if you qualify. You need to take pre-filing and post-filing counseling classes. Some debts typically can’t be discharged, such as federal student loans. You also need to change your habits after filing to avoid going into deep debt again once your case is over.

DIY debt settlement

A do-it-yourself debt settlement will work much like a debt settlement service like Freedom Debt Relief, except you negotiate with your creditors to settle the debt for a lesser amount on your own.

Pros

  • You keep all the savings. If you land a deal with creditors on your own, you’re able to keep the money saved instead of paying some of it to debt negotiators. As part of the settlement, you may also be able to get a creditor to remove an account from your credit report. This is called “pay for delete.”
  • You’re incentivized to be aggressive. Debt settlement companies generally charge a fee that’s a percentage of your original debt amount. With this approach, there’s less incentive to get you the most savings possible. When you take the lead, you can push for the lowest settlement possible because it’s in your best interest.

Cons

  • The process may not be easy. Professionals are professionals for a reason. They may be able to get a settlement — and at a lower amount than you. Dealing with creditors and negotiating can be stressful. The CFPB has some tips for getting debt settlements on your own here.
  • There are still taxes to think about. Your creditor can report the forgiven amount to the IRS, and your savings is taxable. Speak with a tax adviser about your debt to avoid getting a surprise tax bill.

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Taylor Gordon
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Taylor Gordon is a writer at MagnifyMoney. You can email Taylor here

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Ways to Control Your Spending and Expenses to Reduce Debt

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Updated December 7, 2018

Getting out of debt is a special kind of challenge. Paying down any substantial amount can seem insurmountable, especially in contrast to how easy it probably was to rack up.

Small amounts of overspending can add up fast. Spending a mere $5 more than you can afford every day will result in almost $2,000 in credit card bills after just one year — and that’s before accounting for the sky-high interest rates that will compound your obligation. And of course, big bills can appear out of the blue — an emergency medical expense or a job loss can drive you into debt fast.

Regardless of whether small purchases are adding up or you have a financial emergency crop up, your finances are in hot water if you are spending more than your income. Even if you are able to tighten your spending and pay what you owe, you’ll be back in debt in no time if you don’t fix the underlying problem, which could include:

  • Carelessness with money
  • Unmanageable fixed expenses
  • Unstable income

Here are some tips to help you cut spending and get out of debt by steadily paying down your bills.

5 ways to trim spending and pay down your debt

1. Set up an ‘I love me’ plan

One of the best ways to reduce spending is to get a handle on where all your money goes and set limits on how much you can spend on each of your needs and wants. This may sound like a familiar concept, but it can help to reframe how you think about budgeting.

“I know everybody hates the ‘b’ word,” said Sonya Smith-Valentine, president and financial confidence expert at Financially Fierce, a financial training company. “But I don’t call mine a budget. I call mine an ‘I love me’ plan. In that plan, I’m trying to find every way possible to love me and keep my money in my pocket.”

Not sure where to get started? Check out these strategies for managing your money.

Still, the skinny of it all is this: You need to understand how much money is going in and out of your pocket every month. That means putting down in writing:

  • Your monthly income
  • Your recurring monthly costs (e.g. rent and insurance payments)
  • Your typical spending on extraneous things (e.g. going out for drinks)

Once you have those numbers in writing, you can start thinking about how you’ll approach paying down your debt. You’ll also be able to see which expenses you can start trimming, whether that’s negotiating your bill payments or cutting back on eating out.

2. Identify and trim discretionary expenses

The first and most important way to bring your expenses down below your income is to cut discretionary spending. It’s easy to spend too much without realizing how much is flying out of your wallet. A coffee here, a new pair of shoes there; a movie ticket, a week’s worth of groceries, a car payment.

Some of your expenses are necessary (the groceries). Others are fixed and non-negotiable (the car payment), and even more are discretionary (the movie ticket). Some of your spendings may be downright frivolous (expensive chocolate) or even wasteful (bank fees you can’t account for).

Look for obvious things to painlessly cut. For example, you may consider:

  • Buying generic-brand products instead of luxury products
  • Forgoing a trip to the movies in favor of a home rental
  • Cooking at home more often

With a little-determined effort, you can probably cut your spending noticeably without feeling too much pain.

Keep your eyes off ads and hands off your credit cards
Preventing yourself from making bigger purchases can take some real willpower. Online shopping can be a danger to those who have trouble keeping spending under control. One easy way to reduce temptation on this front is to unsubscribe from marketing emails that stores send you.

“Those emails are effective,” said Smith-Valentine. “Sometimes it’s just, ‘Oh, that shirt is pretty.’ It’s not that you need another shirt; your closet is full. It was 30% off. Unsubscribing from those emails can do wonders.”

It can also be helpful to delete your credit card information that’s stored in the website of stores you buy from often. If it’s more difficult to place an order, you’re less likely to give in to temptation.

Another way to keep yourself from buying when you shouldn’t is to put all your credit cards but one low-limit one in an inconvenient location. Simply deprive yourself easy access to all that juicy, enabling credit.

“The commercial is, ‘What’s in your wallet?’ That’s a good question. Take it out — you don’t need it,” said Smith-Valentine. “If I’m only walking with the $1,000-limit one, not the $8,000-limit one, I can’t get into so much trouble.”

3. Eliminate these ‘invisible’ costs

Nothing’s worse than paying for things you no longer want or need to be paying for, or are paying for by mistake. Keep an eagle eye out for these recurring costs that may be eating into your budget.

Subscription services
Many consumers are signed up for at least one subscription service, whether that’s cable service, a magazine, or the gym. It is particularly easy to sign up for digital services, too, which could put you at a higher risk of forgetting about an unwanted subscription.

And don’t forget about subscription services that offer a free trial period. Signing up for one and then forgetting to cancel your subscription could spell trouble for your budget.

Bank fees
There’s no good reason to be paying fees on a checking account, whether they’re monthly fees, overdraft fees or ATM fees. But these can be hard to spot and remember.

Smith-Valentine described to MagnifyMoney her own bank fee experience. “I noticed a fee going back a couple months and I was like, ‘Why am I being charged this $25 per month fee?’” she said. “I called the bank and they said, ‘Oh, we’ll eliminate the problem.’ It would have been about $300 for the year.”

That said, a quick call to your bank could have the fee reversed — but do you really want to be forced to keep your bank on a short leash? You may instead want to consider switching to a free checking account instead.

High credit card rates
It can never hurt to call your credit card company to see if they’ll lower your rate, especially if you’ve made on-time payments for the last year. They’ll be more likely to oblige if you pay a bit more than the minimum each month. For example, if the minimum is $25, pay $35 or more.

You may be able to secure a rate as much as a percentage point lower than your current rate, or potentially even more. One percentage point may not sound like a lot but, according to Smith-Valentine, “that’s still quite a bit of interest, depending on what kind of balance you’re carrying.”

Smith-Valentine also said that she’s seen people get their credit card company agreeing to rate reduction as high as 5%, just by asking.

4. Tackle these fixed expenses

Of course, not all expenses can be so easily managed. Most people have quite a few fixed expenses that they need to handle every month — mortgage payments, car payments, and student loan payments, for example. Some of these you won’t be able to budget, but others might have some wiggle room. You can even overhaul some of these if you’re willing to do what’s necessary.

Mortgage
One way of reducing your mortgage cost is refinancing your mortgage. Are current loan rates favorable? If your interest rate is at least a half-percentage point higher than current rates, it may make sense to refinance. Keep in mind that refinancing comes with fees usually totaling $3,000 to $5,000, so you’ll want to do the math to make sure it makes sense for your situation.

It goes without saying that if you can’t afford your monthly mortgage payment, refinancing isn’t an option, and there’s no way for you to increase your income, you may need to reconsider your living situation. That could mean getting a roommate or downsizing.

Rent
It’s a good idea to limit your rent payments to 25% of your gross monthly salary. One of the advantages of renting is that it gives you more flexibility than a homeowner, so if you’re spending too much, find out what’s required to break your lease and start looking for a place you can afford. If you lose a security deposit or have to double up on rent for a month in order to move out early, it may still be worth it if you’re able to secure far lower rent that you can keep for the long-term.

Car payments
It may be difficult to get rid of an automobile you can’t afford. A car depreciates substantially the minute you drive it off the lot, so if you financed the entire car you likely owe more than your car is worth for a while right after you buy it. Once your loan amount is just a bit below the possible sales price, you can sell it and find a cheaper option.

Until then, if you have good credit and your loan balance is less than your car’s value, you can look into auto loan refinancing. Credit unions often have great deals in this space — they are often easier to deal with, and they tend to have incredibly low interest rates and none of the junk fees.

“Most people don’t realize you can refinance car loans as well,” said Smith-Valentine. “People should look into it especially if they have a higher interest rate.”

Insurance policies
Are you overpaying on your insurance? That’s a question you need to consider. There are so many insurance purveyors out there that shopping around can bring you quite a lot of savings, especially for auto insurance. Progressive, for example, could be a good option for comparing auto insurance rates.

Regarding life insurance, if you have a whole life insurance policy, you are almost certainly paying too much. The purpose of life insurance is to make sure that people who depend on you can pay for their needs if you die. Life insurance is not designed to be a way to save for retirement or to give your children an inheritance. That means term life insurance is almost always the best option.

Student loans
There are a few things you can do to change the amount you pay on your student loans. Look into getting on an income-driven repayment plan, which will match the amount you pay to how much you make. You can also refinance your student loans with a private lender if you have a relatively high interest rate.

If you have multiple student loans with different interest rates, it may be possible to combine them into one federal or private student loan. But while you may be able to qualify for a lower rate by refinancing or consolidating with a private loan, you’ll miss out on federal benefits. On the other hand, you may only consolidate federal student loans with a federal Direct Consolidation Loan, and the rate you get will be the weighted average of the loans you consolidate. Further, the Department of Education does not offer refinancing.

Other debt payments
If you took out a personal loan or charged up your credit cards to cover medical expenses or other costs, you may be frustrated by the interest you’re paying. High rates could make it harder to get out of debt.

In these cases, you may consider refinancing your debt or taking out a debt consolidation loan. Both refinancing and consolidating debt could help you get a lower interest rate and other more favorable terms. Consolidating debt has the added benefit of combining multiple debts into one. That means you’ll have just one monthly payment to handle instead of multiple monthly payments.

LendingTree, which owns MagnifyMoney, offers a debt consolidation loan tool you could use to explore your options for debt consolidation. You’ll need to enter personal information before seeing whether you qualify for any loan offers. Still, the tool could help you see what rates and terms you qualify for from reputable lenders.

5. Address the core issue

This last tip may be the hardest of the bunch: It’s all about ensuring you have long-term success with your finances.

Many people change their spending habits in minor ways or only temporarily and then expect their debt problems to resolve. But if your spending goes right back up after your short-term belt-tightening, or your income can’t cover recurring expenses you can’t negotiate, your problems will continue unabated.

That means you have two good options for ensuring long-term:

  • Increase your income (asking for a raise, for example)
  • Tightening your budget — and really sticking to it

This latter option may be the hardest to digest.

“It’s truly a mindset issue; you’ve got to truly shift your mindset,” said Smith-Valentine. “You’re not going to be successful at getting out of debt and reducing your spending if your mindset is still of the belief that you’re going to live your life exactly the way it is now.”

Despite the reams of information available out there to help people deal with their finances — including this post — millions of people are still in financial trouble. Obviously getting out of debt takes more than information; the mindset shift about how to approach spending is the missing ingredient for many.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

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What You Need to Know About Wage Garnishment

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Updated – December 6, 2018

Wage garnishment is a legal process that allows creditors to deduct money from a borrower’s paycheck to collect their unpaid debt. It is usually a lender’s last resort after other debt collection methods such as letters and phone calls are unsuccessful. With wage garnishment, you are forced to repay outstanding bills, back taxes or unpaid student loans out of your paycheck whether you want to or not.

While this collection method may seem unfair, it can take quite a while for your debts to fall so far into default that a creditor seeks a judgment against you and begins garnishing your wages. For the most part, wage garnishment only happens when you refuse to deal with your debts and do not take steps to prevent wage garnishment before it starts.

If you’re worried about having your wages forcibly garnished, it’s crucial to know how you can prevent this debt recovery tactic. But it’s also important to understand wage garnishment limitations, as well as the legal processes involved.

How wage garnishment works

While nearly any debt can result in wage garnishment, creditors of some types more commonly use the method. These include:

  • Federal student loans
  • Unsecured consumer debts
  • Federal taxes
  • Unpaid child support

But it’s important to note that wage garnishment doesn’t happen overnight — and there are limits to how much of your wages can be garnished. Here are the main steps involved in most wage garnishment cases.

Step 1: You default on a debt, whether that’s unsecured credit card debt, taxes owed to the federal government or child support you owe on a regular basis.

Step 2: Depending on the debt you have, you will likely receive letters and phone calls about your delinquent debt.

Step 3: A debt collector decides to sue you. If they win, the court could award a judgment against you or allow you time to appeal.

Step 4: If you don’t appeal or you lose your appeal, the debt collector can be granted a court order that allows them to garnish your wages.

Step 6: The creditor works directly with your employer to garnish your wages to the full extent of the law. The funds you owe will be deducted from your paycheck before you receive it until your debt is paid off.

What are the limits of wage garnishment?

The federal Consumer Credit Protection Act sets limits on the amount of money that debt collectors can collect from your wages and implements several more rules that protect consumers from some of the consequences of wage garnishment.

Employment. For starters, your employer cannot fire you for having your wages garnished the first time. But this rule doesn’t protect you against losing your job if your wages are garnished for a second time or beyond that.

Percentage limits. The law also sets the standard for how much of your wages can be garnished. In most cases, this is based on your disposable earnings, defined as the amount of money you have left after legally required deductions are covered. These deductions include federal and state taxes, payments for Social Security, Medicare and unemployment insurance taxes, and contributions to state employee retirement systems required by law. Deductions often paid through payroll such as health insurance premiums, union dues and charitable contributions are not deducted from earnings when calculating disposable earnings.

Once disposable earnings are calculated, the Consumer Credit Protection Act limits the amount of earnings that may be garnished in any workweek or pay period to 25% of your disposable earnings or the total of your disposable earnings above 30 times the federal minimum hourly wage — whichever is less.

The federal minimum hourly wage is $7.25 an hour, and 30 times that amount is $217.50. This means that individuals who earn less than $217.50 a week are not subject to wage garnishment in most cases.

It’s important to understand that this section of the law does not apply to unpaid child or spousal support or back taxes. We’ll go over limits and rules for those two categories in the sections below.

How wage garnishment occurs

If you’re behind on your debts and could face wage garnishment in the future, the next steps depend a lot on the type of debt you have.

Credit card debt and other unsecured debts

When consumers get behind on their credit card bills and other unsecured debts, a long and drawn-out process usually takes place before wage garnishment is even considered.

The process usually unfolds in the following manner:

1. You stop making payments on your bills. Once your bills are late, you will begin receiving late notices in the mail as companies try to collect from you.

2. Once your debt is 180 days in default, the creditor will either hire a debt collection agency to collect on its behalf or sell the debt altogether to minimize its losses. The debt collector will also try to collect from you by calling you on the phone and sending you letters.

3. The creditor may decide to file a lawsuit against you in your state’s civil court.

4. If you don’t appear in court or you do appear and lose the case, the debt collector will receive a judgment against you that says you owe a set amount to the creditor. This judgment is a formal decision by the court that confirms you owe the creditor a set amount of money.

5. The creditor has the right to enforce that judgment by contacting your employer and beginning a garnishment of your wages.

Most people who owe credit card debt have gone through a long and stressful collections process before the creditor files a lawsuit and pursues wage garnishment, according to consumer protection lawyer Jay S. Fleischman. Because of that, far too many people don’t appear in court.

Fleischman said this is part of the reason that wage garnishment for credit card debt and other unsecured debts is so common. It’s easy for creditors to win when debtors don’t show up to defend themselves.

When it comes to limits on wage garnishment for unsecured debts, the Consumer Credit Protection Act applies. This means that, for any given week of work, your wages can be garnished by the lesser of:

  • 25% of your disposable earnings
  • Any income that exceeds 30 times the federal minimum wage

But it’s important to note that some states do not allow wage garnishment for unsecured debts. Texas, Pennsylvania, North Carolina and South Carolina only allow wage garnishment for taxes, child support, federal student loans, and court-ordered fines and restitution.

Federal student loans

Wage garnishment to repay federal student loans is also common. This is mostly because the U.S. Department of Education has a mechanism in place that starts wage garnishment without a court order, Fleischman said. You must be given a 30-day advance notice of an opportunity for a hearing, but other than that, the process is automatic.

While your federal student loans become delinquent as soon as you miss a payment, your loan falls into default once it has been delinquent for at least 270 days. At this point, you will become ineligible for federal student aid and your default will be reported to the three credit reporting agencies. You could also be prohibited from buying and selling real estate, and you could be taken to court and charged collection costs and other fees.

Once in default, you will receive a letter from the Department of Education that gives you 30 days to resolve the default or begin repaying your loan. You can also request a hearing to explain why you shouldn’t be subject to an administrative wage garnishment.

If you do want to get your federal student loans out of default, you may be able to do so via a process known as loan rehabilitation. Under this agreement, you must contact your loan servicer and agree to make at least nine affordable, consecutive payments within 20 days of their due date over a 10-month period. Once you have met the terms of the agreement, your loans are no longer in default.

If you don’t respond or begin repaying your loan within 30 days, your wages will be garnished, with the same limits as unsecured debts.

Federal taxes

If you’re behind on taxes, the IRS also has rules in place that garnish your wages. But you will receive the following notices in the mail before wage garnishment and other legal processes begin:

  • A notice and demand for payment
  • A notice of intent to garnish your wages
  • A notice of your right to a hearing

If you opt to ask for a hearing, you can dispute your back taxes or ask the IRS for a payment plan. Fortunately, the IRS does offer short-term and long-term repayment plans that can help you catch up on your taxes while avoiding wage garnishment.

If you don’t pay the taxes you owe or make payment arrangements with the IRS, your wages will be garnished. The amount of wages it can collect from your paycheck depends on your filing status and how many dependents you have. Either way, wage garnishment limits are very high.

As an example, if you are single, have no dependents and get paid $600 a week, the IRS can take $369.23 of your paycheck each week until your tax debt is paid off.

Child and spousal support

You don’t want to fall behind on child and spousal support. Federal law allows much higher limits for wage garnishment in these categories.

For back child or spousal support, the Consumer Credit Protection Act allows garnishment of up to 50% of someone’s disposable earnings if they have remarried or have another child who is not part of the court order. If they do not fall into that category, garnishment can reach up to 60% of the person’s disposable earnings. Another 5% of disposable earnings can be garnished if support payments are more than 12 weeks behind.

But keep in mind that some states set lower limits on wage garnishment for child and spousal support.

Like many types of debt, wage garnishment for spousal and child support is determined by court order. The claimant will need to file a case with family court in their state to receive a judgment. Once the judgment is handed down, wage garnishment is set up through the employer.

How to get out of wage garnishment

When it comes to getting out of wage garnishment, an ounce of prevention is worth a pound of cure. In other words, you’re a lot better off figuring out a way to repay your debts from the start.

Plus, most of the avenues to get around wage garnishment are not quite ethical. For example, New York-based debt resolution attorney Leslie Tayne said you have the option to switch jobs or cut your work hours so that you earn so little that wage garnishment doesn’t apply. You could also quit working altogether to halt wage garnishment. Wage garnishment only works if you’re an employee receiving a W-2, she said.

Of course, Tayne said these are poor solutions when it comes to overcoming wage garnishment. Not only will you continue owing the debts in question, but you will suffer financially as well.

Another way to get out of wage garnishment is to try to resolve the debt with the creditor directly, Tayne said. Pick up the phone and call your creditors to see if a payment plan can be worked out. If it can, then you’re wise to stick with the plan and pay off your debts over time. Of course, this strategy works best if you negotiate your debts shortly after you default instead of later in the process.

You can also file bankruptcy to stop wage garnishment — at least for a while. When you file for bankruptcy, an automatic stay comes into effect that prevents most creditors from being able to continue involuntary collections activities against you. Depending on the type of bankruptcy you file, you may be able to discharge your debts completely or reorganize your debts and pay them off over time.

Living with wage garnishment

If you’re facing wage garnishment and are worried about the impact to your take-home pay, keep in mind that wage garnishment won’t last forever.

You might need to find ways to supplement your income, Tayne said. It’s possible you could pick up more hours at work to make up for your loss in pay, for example. You could also pick up a part-time job or a side hustle to make ends meet.

Having your wage garnished might also be a sign to approach your finances in a different way. Instead of trying to avoid bills and liabilities, you could try to focus on finding ways to pay them, Fleischman said. And don’t forget that you could make a huge difference in your finances by cutting your expenses. The less you owe in regular bills each month, the more money you’ll have to live on. You could try cutting your cable television package, finding a cheaper apartment or cooking at home instead of dining out.

Wage garnishment is far from convenient and you might even see it as unfair, but it’s something you may have to endure — at least until your debt is paid off.

“Sometimes you just have to live with it,” Tayne said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Holly Johnson
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Home Equity Loan or Personal Loan: How to Choose the Right Fit for You

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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Updated – December 6, 2018

For homeowners in need of some financial flexibility, a personal loan or a home equity loan can provide extra cash for financing an education, dealing with an unexpected emergency, or making home improvements. Both loan types offer different benefits as well as different risks, so it’s important to weigh your options before borrowing.

Personal loan vs. home equity loan

Personal loans and home equity loans offer different options for customers who need access to a larger amount of cash than they have on hand. While the end result of a successful application is the same (ready access to funds in a lump-sum payment), the process and the finer details are considerably different.

The primary difference between a personal loan and a home equity loan is that personal loans do not typically require collateral, whereas a home equity loan does. You may have heard lenders call this type of financing a signature loan or unsecured loan because in these types of transactions, your word is your bond (via a legally-binding contract, of course.)

Home equity loans are based on the amount of equity (the difference between what you owe and the value of your property) you have in your house. There are a few other differences regarding how the loan is structured and the loan cost, which is detailed in the chart below.

 Personal loanHome equity loan

Requires collateral?

No

Yes

Interest rates

6% to 36%

4.25% to 6%

Loan cost

There may be some fees, such as an origination fee or prepayment penalties.

In addition to a loan origination fee, borrowers may have to pay an appraisal fee, title report fee and notary fee.

How much money can you borrow?

The amount is based on your income and credit history.

The amount is based on the equity in your home. Typically maxes out at 70% to 80% or total loan to value.

Restrictions on use

No

Only if you care about a tax write-off.

Tax Benefits

No

Yes. If the money is used to make improvements to the home.

Rates sourced from LendingTree.com, which owns MagnifyMoney.

How personal loans work

When you take out a personal loan, the lender offers a lump-sum cash payment. Most personal loans can be used for anything you want. Common uses include:

Talk with your lender to find out if they have specific procedures for handling this type of personal loan.

Personal loans are widely available. It is imperative that you take your time doing research. Some of the personal loans you’ll find online may be nothing more than payday loans in disguise (with interest rates that can creep into triple digits).

Interest rates

If you want the best rates, you should work with a trusted lender. Many banks, credit unions and credit card companies even offer an online application process, so you can take advantage of the convenience of an online application while saving money.

LendingTree
APR

5.99%
To
35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

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Interest rates vary from lender to lender, but they also vary from state to state. State usury laws dictate the maximum interest rates on various loan types, but each state offers different exemptions. For example, Arkansas caps interest rates on consumer loans at 17% per year, but in Utah, the legal rate is 10%, unless parties agree to different terms. For this reason, make sure you take the time to read the details of any financial agreement you are prepared to sign.

According to the Federal Reserve, personal loan interest rates averaged 10.1% at the end of August. Your credit score, loan amount, home state and credit history could affect those numbers.

As mentioned earlier, most personal loans don’t require collateral, but lenders make up for the added risk with higher interest rates than you’ll typically find on home equity loans.

Unsecured personal loans are a little harder to get than other types of loans (such as a title loan or a home equity loan) because the lender is allowing you to borrow money based solely on the information they get about you. If you have a lot of debt or a very low credit score, you may find it difficult to get a personal loan, or you’ll have to consider a higher interest rate.

Terms and fees

For true personal loans, expect loan terms up to five years. Personal loans are also fixed rate, which means your interest rate (and your payment) will stay the same throughout the life of the loan.

Some lenders charge an origination fee, loan insurance and/or prepayment penalties. Make sure to talk to your lender about their specific requirements before moving forward.

The application process is fairly straightforward. You’ll fill out some personal information and provide financial documents to show you can afford the monthly payments. Depending on your lender and the type of loan you are seeking, you could have access to the money in as little as 24 hours, though some loans could take up to a week.

Personal loans are a good option for borrowers who need access to cash fairly quickly but don’t have home equity and/or don’t want to pay the higher interest rates on most credit cards.

ProsCons

No collateral required

Slightly higher interest rates

Easy application process

Tougher credit history requirements

Lots of lenders available

Potential to run into very unfavorable terms

Cash available within a day or two

Average loan amounts are fairly low

How home equity loans work

A home equity loan operates differently than a personal loan because the lender looks at how much equity you have in your property. Then, they do a little number magic and offer a loan amount based on the loan-to-value rate.

One of the biggest benefits of a home equity loan is that it can provide access to a large sum of money. The equity of your home is determined by calculating the home’s current market value and subtracting any liens against the property (like your mortgage). If you purchased a home for $350,000 and still owe $100,000 on the property and you have no other liens (such as a second mortgage), your equity would be $250,000. If you run up against a major emergency, access to this type of money could very valuable.

To qualify for a home equity loan there are two major requirements:

  1. You must own a home.
  2. You must have equity in that home.

Your lender will check your payment history and some other financial information as well.
Documents you may be required to provide include:

  • Proof you own the home
  • Pay stubs and/or two years of tax returns
  • Tax assessments
  • Mortgage statements
  • List of debts (if using the money to consolidate your bills)
  • A form showing the value of your home

Borrowers should know that the maximum lenders will allow you to borrow is typically 85-90% of your equity. (So if you have $100,000 in equity, the most lenders would allow you to take out is $85,000-90,000, though many lenders prefer closer to 80% or less.)

A major drawback for this type of loan is that you are using your home as collateral. That means if you are unable to make your payments, you could lose your house. Another risk is that your home could drop in value, putting you underwater on your property.

Interest rates

Home equity loans may offer lower interest rates (because you are putting your home up as collateral, there is less risk for the lender), but they often come with closing costs and loan origination fees, which can eat into your borrowing power.

Like personal loans, home equity loans have a fixed-interest rate, which means you’ll know how much you have to pay every month for the term of your loan. A home equity loan provides a lump-sum payment (like a personal loan). Home equity loans tend to have slightly longer terms than personal loans (between five and 15 years).

Be aware that a home equity loan and a home equity line of credit are similar, but not the same, so make sure you know which one you are applying for if you decide to move forward.

Terms and fees

Some fees you may see when applying for a home equity loan include an appraisal fee (lenders use an appraiser for a more accurate home value estimate.) The fee will vary based on your lender but can cost between $300 and $400.

Your lender may also charge a title search fee (around $100), a credit report fee, lawyer and documentation fees and notary fees. Many lenders charge an origination fee, but some will waive this charge. These little fees can easily add up to $1,000 or more.

Money from a home equity loan can be used for any purpose from medical expenses to home repairs. However, recent tax changes made the tax incentives on these types of loans a little less attractive for borrowers.

The new rules stipulate that in order to qualify for tax deductions, the money must be used to substantially improve a property. Further, since tax deductions increased, you may not even need to itemize your deductions.

Homeowners can apply for a home equity loan through their original lender, but it’s not a requirement. The Federal Trade Commission recommends talking to several lenders and trying to get the best deal by letting them know you’re shopping around.

If you decide after signing for a home equity loan that you’ve changed your mind, federal law provides a three-day grace period where a borrower can cancel the agreement without a penalty. You’ll have to submit the notice in writing.

A home equity loan will take longer than a personal loan (typically two to four weeks). The timeline is longer because the loan process is more complex.

Borrowers who need access to a large amount of money and/or want to take advantage of some of the tax benefits may find the home equity loan attractive. Since this type of loan puts your house at risk, make sure to do the proper research and really study your finances to determine if this type of loan works for you.

ProsCons

Potential for access to a lot of credit

Takes 2 to 4 weeks to get funds

Lower interest rates than credit card or personal loan

More expensive upfront costs

Fixed interest rates

Your home is collateral

There are potential tax benefits for a home equity loan

The tax restrictions only apply to funds used to make significant improvements on the home.

Personal loan vs. home equity loan: Which is better?

There are benefits and risks to both a personal loan and a home equity loan. For borrowers who have a lot of equity in their home and know they can make the loan payments in addition to their mortgage payments, a home equity loan offers lower interest rates, which could mean lower payments and a lower loan cost over time. However, if you are uncomfortable putting your home up as collateral, can’t afford the upfront costs of a home equity loan or don’t need access to a lot of cash, a personal loan may be a better option.

No matter what you choose, make sure to ask your lender a lot of questions and don’t be afraid to shop around to get the best deal.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Angela Brown
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The 11 Best Budgeting Apps for $0

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With the New Year just around the corner, many people will make the resolution to set and maintain a budget.

The reasons for deciding to set a budget vary. Perhaps you own your own business and want to be better at separating your personal and business expenses. Maybe you recently got married, and you and your spouse want to combine your finances as seamlessly as possible. Or perhaps your credit card debt has reached an all-time high, and you’ve resolved to finally get it under control.

Whatever your reason for budgeting may be, there are many apps that can help you on your journey. The best part? The following apps won’t cost you a penny. Take a look.

1. Mint

Mint Budgeting
What it’s good for: Budgeters who want analytics and savings recommendations.
Available for: Apple App Store/Google Play

You’ve probably heard of Mint before — it’s included in nearly every roundup of the top budgeting apps. That’s because it has numerous capabilities and analytics tools, and has been around for 12 years. With this app, you can see your entire financial picture: credit card balances, bank accounts, bills and investments, among others. Mint also allows you to access your credit score for free.

The app also offers analytics information like trends and recommendations for how to make the most of your savings. You can also set monthly budgets to keep yourself accountable in the future.

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2. Buxfer

Buxfer Budgeting App
What it’s good for: People who want an easy-to-use app with basic budgeting tools.
Available for: Apple App Store/Google Play

Buxfer is fairly easy to use, with a simple interface that even the least tech savvy people could likely understand. You can sync all of your accounts with Buxfer so your entire financial picture is in one place. The dashboard shows a handful of numbers: your net worth and net loaned, the balance of your budget, your income and expenses. The app also features reports of spending over time (by week, month, or year) in which you can see a breakdown of how much you spent on things such as food, bills and shopping.

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3. Wally

Wally
What it’s good for: People who don’t want to link their bank accounts to a budgeting app, but do want to track spending.
Available for: Apple App Store/Google Play

Worried that you spend too much money eating out on the weekends or shopping online? Wally might be the app for you. This app allows users to manually input and track their income and expenses, ideal for people who only want an app for tracking their spending habits and nothing more. Plus, the app doesn’t require that users link their bank accounts. You can take photographs of receipts and input them into the app, too.

There are two options when downloading this app on iOS: Wally Lite and Wally Next. Wally Lite is a simpler version, while Wally Next offers more complex features like analytics and options for joint accounts.

4. EveryDollar

EveryDollar
What it’s good for: People looking for a no-frills method for setting and sticking to a budget.
Available for: Apple App Store/Google Play

EveryDollar comes from Dave Ramsey, popularizer of the snowball method for paying off debt and author of “The Total Money Makeover.” Although there is a paid option for this app ($9.99 per month to automatically link all of your accounts), a free option is also available if you manually input your information.

The app is fairly simple: You input your monthly salary, plan your expenses (things like groceries, bills and utilities) and then track your spending each month.

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5. Goodbudget

Good Budget
What it’s good for: Those who like the old-school “envelope” system for budgeting.
Available for: Apple App Store/Google Play

Goodbudget is ideal for people who simply want to organize their expenses and aren’t looking for any fancy analytics tools. The envelope system for budgeting involves putting a certain amount of money in different envelopes ahead of time in order to stick to a budget. This app digitizes that method, allowing users to create virtual “envelopes” for things like groceries, eating out, rent, car payment and entertainment.

Users can also sync their account with a significant other. (This app was formerly known as EEBA.)

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6. PocketGuard

PocketGuard Budget
What it’s good for: People who want a simple, streamlined view of how much money they have at any given moment.
Available for: Apple App Store/Google Play

PocketGuard allows users to link their checking and savings accounts, credit cards, investments and loans in order to get an overview of their entire financial picture. In addition, the app tracks users’ spending by breaking down what goes toward various categories like eating out, entertainment and rent.

This app has an “In My Pocket” feature that takes all of the information from your linked accounts to tell you exactly how much available money you have to spend. One added bonus is that PocketGuard connects to Apple Watch.

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7. Personal Capital

Personal Capital
What it’s good for: Tracking one’s investment portfolio and net worth.
Available for: Apple App Store/Google Play

Personal Capital is the ideal app for people who are avid investors and/or have a decent amount of money to their name. The Portfolio feature allows users to input all of their investments (e.g. stocks, retirement savings, personal savings and other accounts) to get an overall picture of financial growth. The app also features a spending tracker tool and can be synced with Apple Watch.

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8. Simple

Simple
What it’s good for: As the name implies, those looking for a simple way to track their spending.
Available for: Apple App Store/Google Play

This streamlined app allows users to sync their bank accounts so they can set and stick to a budget. There is a section called “Goals” that functions similarly to the envelope system for budgeting. Create savings goals (such as your upcoming honeymoon or a new laptop) and decide how much you’d like to allocate toward each goal — the funds will automatically be distributed. Simple also has a feature called “Expenses” in which you can ensure you’ve already set aside what you need to each month for things like bills and rent.

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9. Prism

prism
What it’s good for: People with many monthly expenses, such as bills and subscription services.
Available for: Apple App Store/Google Play

Netflix, Hulu, Amazon Prime (and Spotify). If you subscribe to these services (and others) and want to see everything in one place, Prism might be the app for you. It allows users to see all of their monthly subscriptions, bills and income in one place. A calendar view shows when each bill is due so you can plan ahead and never miss a payment.

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10. Tycoon

tycoon
What it’s good for: Freelancers who want to keep their tasks and earnings organized.
Available for: Apple App Store

Whether you’re a graphic designer, writer or surfing instructor, working as a freelancer means organization skills are a necessity. If you’re successful as a freelancer but lack these skills, you might want to download Tycoon. This app lets you track all of your jobs and earnings in one place, while also offering a breakdown of what you owe in taxes. You can see which invoices have been paid and which are still pending, and the app will even alert you when invoices are past due.

11. LendingTree

LendingTree
What it’s good for: People looking to increase their credit score or take out a loan.
Available for: Apple App Store/Google Play

The LendingTree app is ideal for those looking to improve their overall credit. The app allows users to see their credit score with a performance review for each category that contributes to one’s score (e.g. payment history or amount owed). LendingTree’s app offers recommendations for how people can improve their credit score and save money. The app also allows you to shop around and see various offers for auto loans, personal loans, mortgages and other types of loans.

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Regardless of the app you choose, you’re on the right track by finally deciding to set a budget and stick to it. Think about which features are most important to you and get started.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jamie Cattanach
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The Ultimate Guide to Budgeting

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In a consumer culture where we are bombarded with opportunities to spend money, whether it’s picking up a latte on the way to work, or splurging on a favorite retailer’s online sale, it’s easy to lose track of our money.

While creating and maintaining a budget is rarely how anyone wants to spend their free time, it is foundational to managing money.

“Everyone, no matter their financial situation, should have a budget in place,” said Rachel Kampersal, a marketing communications and program associate with American Consumer Credit Counseling.

Budgeting your monthly income can help you with everything from setting financial goals to making sure that you pay your bills on time and in full.

When you don’t budget your money, you are likely to overspend, said Melinda Opperman, executive vice president of Credit.org.

“A lot of people feel they simply don’t have enough money and think budgeting would be a waste of time, but budgeting helps people break even or even come up with extra money for savings and goals,” she said.

Those savings goals could be long-term, such as retirement, or for upcoming expenditures such as a new kitchen appliance, a down payment on a house, or a big vacation.

Budgets don’t have to be complicated, and there are plenty of tools to help you get started. The key is to find a budgeting strategy that works for you and stick with it.

5 budgeting tools to keep handy

An important component of any budgeting system is planning and keeping track of your expenditures, whether you are entering them into an app or spreadsheet, writing them on a paper calendar, or saving your receipts in a shoebox and tallying them on the weekend.
“Be sure to write a ‘receipt’ for everything you spend, including things like vending machines,” Opperman said.

“This is an individual process, so it’s important to try multiple tools until you come up with something that works for you,” she added. “A lot of people today might benefit from specialized budgeting apps, but there are still many who might prefer to keep track of their spending in a written journal.”

One convenient way to keep track of your budget is through an app or online budgeting tool that can help you manage your earnings and spending. Here are five to consider:

1. Mint

This free app, which is owned by Intuit, provides users with a comprehensive overview of their finances. Like many budgeting tools, Mint allows you to connect to your bank account from your mobile device and manage bills, build a budget with detailed categories, track spending, and analyze cash flow.

One of Mint’s best features is that it allows users to pay their bills — including credit card and utility bills — directly from the app. This adds another level of organization to a budget, as users can see what they owe, pay it, and see how the payment has affected their cash flow, all in a few clicks. For those who like a detailed analysis of their monthly spending and saving, Mint also provides charts and graphs and additional financial information, such as the current value of your house and your credit score.

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2. Pocketguard

This app, which is free, is marketed as a simpler approach to budgeting, and it does a lot of the initial set-up work for you. After you provide information for PocketGuard to sync up with your bank accounts, it analyzes your transactions and divides them into “pockets” based on repeated bills and charges it finds (you can manually correct any miscategorized items). After you enter spending limits for each category, the app lets you know how much money you have left in each category — a helpful feature when you need to know whether a purchase is within your budget.

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3. You Need a Budget (YNAB)

While this app is fee-based, many find it worth the price — it’s one of the most highly rated budgeting apps on the market. It asks users to set up a budget by “giving every dollar a job,” or assigning all of your income into categories that you create. YNAB encourages users to be intentional with their money and create categories for recurring and occasional large expenses. That way, when a large bill comes in for a car repair or a vacation, the money already has been allocated for it.

You can try YNAB for 34 days for free, and after that it costs about $5 per month, or $50 per year. Along with the app, the fee will give you access to helpful personal finance videos and resources, as well as an online community.

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4. HomeBudget

When budgeting is a family affair, HomeBudget is a great app to keep track of an entire household’s spending. Through its unique Family Sync feature, each family member’s income and expense transactions can be synced from their devices into one budget.

The app also allows you to track bills and payments due and correlate categorized transactions with your bank and credit card accounts. As of the date of publishing, the app currently costs $5.99 on Amazon App Store and has a monthly fee of about $1.66. You also can download a trial version before committing.

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5. Spendee

This easy-to-use app keeps it simple. It connects with your bank accounts to automatically enter expenditures into your budget (you can enter transactions manually, too), and then it creates infographics to help you understand and keep track of your spending and income.

The app costs $1.99 per month as of the date of publishing.

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How to create a budget in 5 simple steps

You do not have to have a college degree in accounting to set up a personal budget. You’ll need to collect some personal financial information first, and then figure out which budgeting strategy is best for you.

1. Determine your monthly income

This first step is short simple: Find out how much money you bring in each month. Track down your paychecks from the past few months for a more accurate picture.

If you are married or sharing expenses with a partner, you’ll need to work together to figure out your joint income.

2. Track your expenses for a month

This should include everything from big expenses, such as your mortgage or rent payment, to your “fun” money for eating out or spur-of-the-moment purchases.

“If you sit down today and start planning your spending, you will miss all sorts of small expenses and you will be frustrated when your budget doesn’t line up,” Opperman said. “But if you diligently track all of your spending for a full month, then you will know all of the monthly expenses you can expect to face, and your budget will be more realistic.”

There are many ways to track spending; choose what fits with your lifestyle. Anything from a spreadsheet to a notebook will work.

3. Decide how much you want to save each month

Savings shouldn’t be only for known expenses, such as a wedding or planned home improvement. You’ll want to consider incorporating other “emergency” expenses into your savings calculations, such as replacing appliances or costly car repairs — that way, when the expense comes, you’ll be prepared.

There are several ways to figure out how much you’d like to save. You can decide on a percentage of your income or a dollar amount that you’d like to put aside each month.

4. Work in some ‘wiggle room’

No matter how carefully you track and forecast your spending, you will never spend the same amount each month — and you need to be prepared. “You might have particular months where you always spend more, like holiday gift shopping or back-to-school expenses,” Opperman said. “You have to plan for those variances in advance.”

In these situations, you may need to make sure that your budget is flexible enough to allow for extra expenditures when needed.

5. Choose a budgeting strategy

Once you’ve compiled your income and spending data and thought through your saving goals, it’s time to choose a budget style. Keep in mind that there is no right way to budget — any method that helps you manage your spending and save money will benefit you financially.

“A budget should be personalized and tailored to fit an individual’s or family’s needs,” Kampernal said.

Here are some strategies for budgeting:

Penny tracking

While the most detailed (and the most eye-opening), this method will show you exactly how much you are spending and leave no question as to whether you are living within your means.

To start, choose an amount for each category in your monthly budget. You can determine this from your month of tracking your spending or use financial experts’ guidelines. According to Kampernal, professionals’ guidelines include:

  • Transportation: 20%
  • Investments/savings: 20%
  • Housing: 35%
  • Debt: 5%
  • Other expenses: 20%

Once you’ve allocated your income into categories, you can begin entering each expenditure on a spreadsheet or online budget tracker. For example, if you bring home $3,000 every month and allocate $75 for eating out, you’ll mark every restaurant visit expenditure in this category — even that $1.69 soda you bought at the gas station. As the month progresses, you’ll be able to see whether you are on track to overspend or are staying within your “eating out” budget.

This method forces you to be accountable for your spending and provides a real-time picture throughout the month of where you are with your budget. If the consumer above has spent $60 on eating out by the 15th of the month, for example, he knows he’ll need to rein in the restaurant spending for the next two weeks to stay on budget.

Penny tracking can be tedious and doesn’t have to be a lifelong practice, but if done consistently, it will show you where you tend to overspend and how to realistically allocate your money. It can help you pay off debt, build savings, and develop realistic spending habits that could provide a lifetime of financial benefit. And if you ever wondered where all your money went, now you’ll know.

‘Leftovers’ budgeting

This type of budgeting is a little more relaxed than penny tracking, allowing you to lump your discretionary money into one category while still providing enough accountability to keep you from overspending.

Leftovers budgeting requires you to first pay your essential bills. Here’s an example of a budget for someone with a monthly take-home income of $2,700 (this is after taxes and a 401(k) contribution):

  • Rent/mortgage: $850
  • Utilities (power/water/sewer): $120
  • Cell phone: $75
  • Student loans: $250
  • Vehicle (monthly payment/insurance/gas): $250
  • Groceries: $400
  • Savings: $300

Your total monthly bills are $2,245. When expenses are subtracted from your income of $2,700, that leaves $455 for eating out, clothing purchases and any other spending you choose. Any discretionary funds leftover at the end of the month can be rolled into savings.

The envelope method

With this system, consumers assigned expenses to three categories of their budget following a 50/20/30 rule: Fixed bills (50%), savings and other financial goals (20%), and flexible spending (30%). You then monitor your spending within those categories.

For someone with a $2,700 monthly take-home income, that means fixed bills should total no more than $1,350 and savings and other financial goals should be allocated $540, leaving $810 for flexible spending — including groceries, entertainment and purchases.

The idea is that “when the money runs out, spending should stop,” Kampernal said. While you don’t have to literally put cash in envelopes for each category every month (the practice this style of budget is named after), you can imagine that when you’ve spent down a category to $0, the envelope is empty until it’s replenished next month.

Staying on track with your budget

No budget system will work if you cheat or stop paying attention to your spending — even for a few days. Here is some advice from budgeting experts on how to stick to your budget.

Keep it flexible: Unexpected expenses will crop up, which likely means you’ll need to re-evaluate your budget. Or, you may find yourself spending more in one category than you anticipated, and you’ll need to reduce another category to make up for it. “Stick to the process for a few months, making adjustments until you get the budget into a comfortable place for you,” Oppenheimer said.

Pay your debts off first: Debt payment can command a lot of your budget, and the faster you pay them off, the more quickly you’ll free up room in your budget for other spending.

Focus on paying off your debts up front. As you eliminate those obligations, you’ll have an easier time with the rest of your budget.

Automate your payments: Setting up automatic bill payments through your bank’s website for as many monthly payments as you can will ensure that those bills are paid on time and keep that part of your budget on track.

Consider going cash-only: Opperman said that many Credit.org clients benefit from living on a cash basis. “If people are struggling to stick to their budget, we suggest leaving the debit card at home,” she said. “This takes away the ability to afford unplanned purchases.” If you really want to buy something, you’ll be forced to think about it until you can return with your card.

An alternative strategy to limit impulse buying is to give yourself a pre-paid credit card or gift card with a small limit, Opperman said.

Be careful with credit cards: Credit card spending can sink even the most well-intentioned budget, especially if you are paying off debts.

Oppenheimer recommends making it a priority to end borrowing with credit cards, as you’ll only accumulate more debt — and throw off your budget.

“If you do use credit cards, you have to make it part of your budget that you pay off the balance in full every month — before the grace period, so you don’t add interest charges to your spending plan,” Opperman said.

Knowing how you are spending your money eliminates risk and allows you to take charge of your finances. Keep the long-term game in mind — disciplined spending now equates to more savings, and, thus, more financial freedom, in the future.

Give yourself a little freedom: If you stray from your budget, don’t give up or punish yourself, Kampernal said.

“Sometimes, life happens,” she said. “Allow yourself to make mistakes and aim to do better in the future. Budgeting is now an ‘all or nothing’ mentality.”

Give yourself a reward if you have a little space in your budget at times. Get that take-out meal or buy that small item you’ve had your eye on.

“That way, you don’t feel trapped within your budget, but know that discretionary spending is accounted for,” Kampernal said.

The most important factor in budgeting is that you do it. Take the time to organize your financial information, track your spending, and personalize a budget style to fit you or your family’s needs.

“No two budgets are equal, so make yours realistic and livable so you are more likely to follow it,” Kampernal said.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marty Minchin
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Marty Minchin is a writer at MagnifyMoney. You can email Marty here

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When it comes to debt, it can often feel as if you’re alone in your effort to become debt-free. However, the truth is that many Americans are saddled with debt.

Credit card debt alone has been on the rise since 2013. That year, Americans paid $74.6 billion in interest and fees on their credit cards, according to a MagnifyMoney analysis of FDIC data. By 2018, that number had risen to $103.7 billion. If you’re looking for help in becoming debt-free, then consider the following tips.

5 tips to get out of debt on a low income

There are multiple ways that you can get out of debt. However, the five most common include the following:

1. Consider a debt management plan

A debt management plan is designed to help you set up a payment schedule that will allow you to repay your debts. Typically, you enter an agreement with a credit counseling agency. Each month, you deposit funds with your agency, and those funds are used to pay your creditors. The benefit of entering a debt management plan is that your counseling agency can work with your creditors to eliminate finance charges and other fees. Your agency can also help reduce the number of collection calls you receive. Normally, it takes no more than five years to pay off your debts using a debt management plan. Plus, after you’re done paying, you may have improved your credit rating.

There are several nonprofit resources you can consult if you need more information about these kinds of plans:

Keep in mind that not all organizations claiming to have your best interest in mind can be trusted. Both the NFCC and the Council on Accreditation are accredited organizations that adhere to ethical practices. So to avoid scammers, make sure the organization you’re working with is accredited.

2. Set and stick to a budget

One of the quickest ways to getting debt-free is by creating a budget that you can stick to from one month to the next. Creating a budget can be done in seven simple steps:

  1. Set a financial goal you want to achieve within a year.
  2. Find out your net income for a month.
  3. Record what you spend for the month.
  4. Document all the payments you will need to make each month.
  5. Document all the spending you do that you don’t need to make.
  6. Adjust your spending by cutting out expenses you don’t need.
  7. Review your spending regularly to make sure you’re sticking to your goals.

Even the best laid-out plans can go wrong, though. It’s not uncommon for people to break their budgets even when they have a solid plan, which is why it’s important to keep up to date with your spending. Fortunately, people can now stay on top of their finances better than ever by using mobile apps.

One of the best apps for getting out of debt is the You Need A Budget app. Unlike many other finance apps, You Need a Budget app was designed to help people pay down their debts. It works by forcing users to live within their income and doesn’t let them create budgets around money they still don’t have in their accounts.

Another helpful app that you can use is Mint. Mint is a more general finance tool that users can use from their PCs or through a mobile app. One of the benefits is that Mint regularly finds offers that can help users save money.

3. Reduce your monthly spending

Although we’ve mentioned the importance of cutting spending, doing so can actually be very difficult for many people. However, with the right planning, it can be done. There are several easy ways that you can control spending.

One of the quickest ways is by creating a shopping list. It can be easy to go over your spending limit when you’re not watching what you’re doing. A shopping list is an easy way for you to calculate your costs ahead of time and control your spending when you go out.

Speaking of shopping lists, an easy way to reduce spending is by reducing the amount of dining out. You can save money by creating a grocery list that sticks to your budget, eating at home and cutting back on the number of times you eat at a restaurant. Simple steps like this can add up over a month, especially if you tend to eat out often.

It’s also good to make cost comparisons. Whether you’re talking about utilities or casual expenses, you’ll want to shop smarter. Finding the best deals can take a little time, but it can have a yearlong payoff if you find the right deals. It’s especially important to compare costs when you’re talking about signing long-term contracts.

4. Increase your income

One of the most basic ways of getting out of debt is by increasing your income, and one of the most traditional ways of increasing income is by getting a raise. There are a few basic tips that anyone should keep in mind when preparing to ask for a raise. First, employees should always compare their salary against what others are making in the same role.

Salary.com is one website where individuals can estimate their salary, but PayScale also maintains salary data. Users can compare data from both websites to determine how much others in their field are making. You can also look up salary averages on the Bureau of Labor Statistics website.

Once you know how much others in your field are making, you’ll be better positioned to negotiate for a raise. It’s best if you tie any request for a raise with your performance. This means that you will need to have a discussion with your supervisor about how you have performed and negotiate your request for a raise from there. Demonstrate to your supervisor the value you bring and tie your request to that value.

Even if you’re not able to get a raise, you may be able to earn income through a side job. It’s estimated that a person can make anywhere from $1,000 to more than $10,000 through side jobs annually. Finding a side job in the 21st century is also easier than ever thanks to mobile apps. Now, people in need of additional income can find new paying opportunities much more efficiently than ever before.

While most Americans are familiar with Uber by now, there are also other apps that can introduce you to numerous jobs you might be interested in. SideHusl.com, for instance, shows how much you’re likely to earn from a gig and connect you to side jobs. The benefit of SideHusl is that you can see what you’ll make after taking into account different expenses of the job. The app also makes it easier to find gigs for people with different skills.

5. Refinance or consolidate debt

When it comes to dealing with existing debt, there are typically two ways of dealing with loans and other debts: consolidation and refinancing.

Consolidation combines multiple loans into one. You streamline the debt paying process by consolidating. Instead of having to deal with multiple payments, you can make a single payment that addresses several debts. Refinancing, on the other hand, replaces one or multiple loans with a better loan. The goal of refinancing is to replace your current loan with one that has lower interest rates. This saves on the lifetime costs you will pay.

Debt consolidation works for multiple types of debts, which include:

  • Credit cards
  • Medical bills
  • Utility bills
  • Payday loans
  • Student loans
  • Taxes
  • Bills that have gone to collection

You could use a debt consolidation loan for your debt. Online lending marketplaces, such as the one by MagnifyMoney, can help you find and compare lenders. LendingTree, which owns MagnifyMoney, offers a personalized loan tool. Input your information and the tool may spit out loan offers from up to five different lenders you can compare.

Should you refinance or consolidate your debt?

Debt consolidation is best done when borrowers have a decent credit score and are experiencing a one-time reason for falling behind in paying their debts. The better your credit score, the more options you will have when shopping for a consolidated loan. These offers will typically feature better interest rates than if your credit score were poor.

On the other hand, debt consolidation can be bad if your debt is significant. If you have recurring reasons that you’re unable to meet your debts, then you may not want to choose a consolidated loan. Instead, a debt management plan may be a better alternative.

But if you have multiple debts you’re making payments on, debt consolidation could make repayment easier. And it could reduce your overall costs of repayment.

Loan refinancing works differently from consolidation because rather than combining multiple loans into one, refinancing merely replaces one existing loan with a new one. You still have to make separate payments if you’re refinancing several loans.

Thus, refinancing can be helpful if you only have one debt you’re struggling with. Refinancing can help reduce your monthly payments by extending your loan term or by lowering your interest rate. And if you want to pay off your debt sooner, you could opt for a shorter term.

Conclusion

If you’re in debt, there’s no reason to feel alone. Many people are in the same situation, and there are many effective ways of getting out of debt. Whether by increasing your income, reworking your spending or renegotiating your debts, there are strong steps you can take toward achieving financial freedom.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jason Luthor
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On the surface, getting debt-free sounds like a simple process. Make your minimum payments each month and get your balances to zero, then you’re across the finish line. But with interest rates steadily on the rise, this isn’t much of a strategy. It’s a surefire — and expensive — way to keep yourself chained to debt for much longer than you need to be.

The truth is that saving the most money and getting out from under debt as quickly as possible comes down to learning the basics.

Here’s a rundown of the top mistakes to avoid while on the road to debt-free living.

1. Continuing to accumulate new debt

Deciding to take charge of your debt once and for all is an empowering move, especially when you start seeing those balances go down. But accelerating your payments on one account while continuing to rack up new debt is hardly a solution.

“You may feel better because you’re sending an extra $500 to your credit card every month to pay it down, but if you’re using a different credit card to buy groceries, you’re just cycling the debt around,” Michaela Harper, director of community education at the Credit Advisors Foundation, told MagnifyMoney.

This all-too-common scenario underscores how important it is to have an effective budget in place, which requires a firm grasp on your monthly income and expenses. If you’re spending more than you’re earning, you’ll never break the debt cycle.

Vid Ponnapalli, a New Jersey-based certified financial planner, recommends looking back and tracking your spending over the past six months. This should highlight any gaps between your spending and your income.

“If you’re bringing in $4,000 each month but spending an average of $4,500, you need to remedy that deficit,” he told MagnifyMoney. “This means either reducing your expenses or increasing your income.”

Crafting a solid budget is your best defense.

2. Focusing on the wrong debt

Not all debt is created equal. When you’re in over your head, Harper said to focus first on “people who can mess with you — [anyone who has] a judgment against you or has the ability to put liens on you.” Having your wages garnished or your car repossessed are never scenarios in which you want to find yourself.

From there, high-interest balances should be front and center because you’re paying the most to keep them around. This is precisely why it makes sense to roll these balances over to accounts that have lower interest rates. This process is called debt consolidation.

Let’s say your debt looks like this and you’re paying $150 a month on each account:

  • Credit card No. 1: $5,000 at 19% interest
  • Credit card No. 2: $2,000 at 14% interest
  • Credit card No. 3: $1,000 at 10% interest

Going that route will take you four years to pay everything off, and you’ll dole out $2,383 in interest alone (if you stick to $150 payments even after certain cards are paid off). But if you take all that debt and pay it off with a two-year debt consolidation loan at 8%, you’ll cut your interest payments by almost $1,700, lower your monthly payment by about $100 — and be debt-free in half the time.

Many debt consolidation loans come with an origination fee of up to 6%, but your savings could very well make up for it. To explore your loan options, consider using this debt consolidation loan tool from LendingTree, MagnifyMoney’s parent company. The tool could match you with up to five different lenders offering competitive loan options.

3. Tapping your 401(k) to pay off debt

Let’s talk 401(k) loans, which let you borrow from your future self and then gradually pay it back with interest, usually via automatic payroll deductions. You have five years to repay these loans, and the interest rate is generally the current prime rate plus 1%.

When face to face with a mountain of debt, it can be very tempting to use your retirement nest egg to wipe out your balances and start over, but think very carefully before doing so.

First, there can be significant tax implications. You’re putting pretax money into a 401(k). But when you’re paying back a 401(k) loan, you’re using after-tax dollars, Ponnapalli said. Then you have to pay taxes again when you withdraw the money during retirement.

What’s more, Ponnapalli said if you fail to make good on your loan terms, the loan is then considered a distribution. If you’re younger than 59 ½, you’ll also pay a 10% penalty.

“And if you leave your job for any reason, the balance will be due, in full, much sooner than originally planned,” he added. (Check your individual plan for details.)

By taking your money out of the market, you’re robbing yourself of future gains as well. Where retirement savings are concerned, your No. 1 weapon is time. The longer you’re invested, the more money you’ll have waiting for you come retirement.

4. Falling for a debt relief scam

When you’re overwhelmed by debt, navigating the situation on your own can feel impossible. Credit counseling is a legitimate option if you go with a reputable company that has your best interests at heart. American Consumer Credit Counseling and the National Foundation for Credit Counseling have strong reputations.

Through these groups, you can connect with professionals who’ll review your financial situation, educate you on personal finance basics and — hopefully — empower you to get back on the right track. Credit counselors also help clients create a plan of attack for addressing their outstanding debt.

But consumers are wise to beware of shady debt relief organizations. For-profit credit counseling groups are generally a red flag, as are companies that make too-good-to-be-true promises or guarantees about debt relief.

Harper said initial counseling sessions should be free and have no strings attached. He recommended going with one of the nationally recognized groups. “You’ll have assurance that you’re dealing with a reputable organization and staff that knows what they’re doing,” Harper said.

5. Neglecting your other financial goals

There’s nothing wrong with being laser-focused on paying down debt as long as it doesn’t impact your ability to move the needle on your other financial goals. Whether it’s saving for retirement or building up your emergency fund, you don’t have to ignore your other goals in the name of debt repayment.

Speaking of emergency funds, Ponnapalli recommends building yours up to at least three months’ worth of expenses, but this can be a tall order for those at war with debt. An alternative strategy is to gradually fund a mini-savings account of $1,000 until you’re debt-free. This should be enough to cover most pop-up expenses. After that, you can top off your emergency fund to that three-month mark, then start saving more aggressively for other financial goals.

No matter what, kicking into a 401(k) that offers an employer match should always be a top priority, even while you’re paying off debt. (It’s free money, after all.) As for the big things, Harper suggests breaking down these goals into bite-sized pieces. If you want to save $5,000 to put a down payment on a house in three years, how much do you need to save every month to get there? Is it possible to do this while still making progress on your debt payments? It doesn’t have to be an all-or-nothing situation.

6. Putting all your eggs in the bankruptcy basket

It isn’t all that surprising that money is America’s leading cause of stress, according to a 2018 Northwestern Mutual study. When you’re buried under tremendous debt, bankruptcy can feel like a gift that wipes the slate clean. In the face of financial catastrophe, it might make sense, but it’s a last-resort option.

Any reputable counselor will guide you toward bankruptcy if it is your best path forward, but Harper warns that it isn’t without consequences. While many of your debts might be forgiven, you could lose other assets, such as your home or car, in the process. Your credit score will take a hit as well. Chapter 7 bankruptcy stays on your credit report for 10 years, while it’s seven years for Chapter 13. The silver lining is that, according to a study put out by LendingTree, roughly 75% of those with a bankruptcy on their record end up restoring their credit after five years.

“I’m a big believer that if it’s the right thing to do for your family in order to move forward, and it’s truly an insurmountable situation or amount of debt, then by all means grab it with both hands, do it and focus on rebuilding behaviors,” Harper said.

For folks who are overwhelmed by debt, Harper said credit counseling is often the best medicine for understanding what you’re up against and making a plan to get out of it.

The most important things to remember

The road to getting debt-free isn’t always straight and narrow — sometimes life gets in the way — but knowing the basics can make course-correcting a whole lot easier. Pushing pause on accumulating new debt is crucial. From there, put out the biggest fire first. Tapping your 401(k) to pay off debt or ignoring your other financial goals, while tempting, could also come back to bite you.

It’s about prioritizing debt repayment without putting your future self at risk.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Pay Down My Debt

Which Debt Should You Pay Off First? Here’s What to Consider

Editorial Note: The editorial content on this page is not provided or commissioned by any financial institution. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and may not have been reviewed, approved or otherwise endorsed by any of these entities prior to publication.

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One of the most common questions consumers ask regarding paying down debt is which debt to pay off first. If you’ve recently made the decision to pay off your debt, you may be wondering the same thing.

There are multiple ways you can tackle your debt, and each strategy has pros and cons. This guide will walk you through some common debt payoff methods as well as how to determine which approach is the best in your situation.

Which debt you should pay off first? 7 factors to consider

When helping clients figure out which debt to pay off first, Chantel Bonneau, a San Diego-based wealth management advisor with Northwestern Mutual, takes a holistic look at their debt and financial picture.

“It’s a little bit math-based, but it’s a little bit customized to the client’s specific needs and situation,” she told MagnifyMoney.

Many factors contribute to how long it will take you to pay off your debt. Here’s what to consider when trying to determine which debt to pay first:

  1. Total amount of debt: The total amount of debt you have plays a role in choosing which to pay off first. If you are paying down $10,000 versus $100,000, you may approach your payoff differently.
  2. Minimum payment due: Each time you pay off a debt, you free up money in your budget to go towards your other debts, so take the minimum payments into account.
  3. Interest rate: Your debts mostly likely represent a range of interest rates. Naturally, the rate of each debt plays a role in how long it will take to pay it off. Also, consider promotional or introductory rates that you can leverage.
  4. Term of debt: The scheduled length of each debt makes a difference in how long it will take to pay it off.
  5. Type of debt: The type of debt you have and whom you owe it to should also be considered.
  6. Status of each debt: If you are past-due or delinquent, you may want to consider prioritizing those debts.
  7. How much you have available to put toward the debt: The amount of extra money you have available to pay down your debt will determine the time it will take to pay everything off.

In addition to looking at these quantifiable factors, your emotional and behavioral needs come into play.

“If I feel like someone will get discouraged or lose energy or not be motivated if they’re not getting rid of that $400 credit card payment that actually isn’t high-interest but it really annoys and frustrates them, then that’s when you have to take the behavioral component into account with how best to approach debt,” Bonneau said.

How to approach your debt

Let’s use an example to take a look at a few different debt payoff strategies. Let’s assume in the chart below that this is a married couple with six debts they want to pay down. They have an extra $200 each month to put towards their bills.

Here are their debts in no particular order.

Debt

Total Balance

Interest Rate

Minimum Payment

MasterCard

$450

18%

$15

Visa #1

$2,500

23%

$73

Visa #2

$5,000

31.99%

$184

Student loan

$45,000

4.25%

$235

Family loan

$1,300

0%

$0

Auto loan

$9,185

7%

$353

We’ll see how each debt payoff method prioritizes their bills.

Debt snowball

The debt snowball repayment method is a popular strategy championed by many personal financial experts, most notably by Dave Ramsey.

In the debt snowball method, you list your debts in order from the smallest balance to the largest. You pay the minimum payments on all of the debts, except for the debt with the smallest balance.

On that debt, you pay as much as possible, using any additional money you have until the balance is paid in full. Once that first debt is paid off, you take the payment you were paying on it, plus any additional money you have, and move onto the next debt.

You continue this pattern as you work your way down your list with the amount you pay on each debt (your snowball), getting bigger and bigger as you go. By the time you get to the debts towards the bottom of the list, the amount of money you’re paying on each debt will have grown significantly.

Here’s how the couple in our example would prioritize their debt using the debt snowball.

 

Debt

Total Balance

Interest Rate

Minimum Payment

#1

MasterCard

$450

18%

$15

#2

Family loan

$1,300

0%

$0

#3

Visa #1

$2,500

23%

$73

#4

Visa #2

$5,000

31.99%

$184

#5

Auto loan

$9,185

7%

$353

#6

Student loan

$45,000

4.25%

$235

With the couple being able to put an extra $200 toward their debt, they would pay off their first debt in just about two months.

The debt snowball method does not take interest rates into account; rather, it plays on the psychology and emotion of paying off debt. The primary goal of this method is to provide “quick wins” and keep you motivated throughout the payoff process.

“The debt snowball is about the momentum of getting rid of your debt,” Bonneau said, though she warned that mathematically, it may not work to your advantage. “At the end of the day, you can be paying significantly more in interest.”

Pros

  • You pay off your first debt pretty quickly
  • You build up momentum as you go
  • You see continuous progress
  • It’s simple and organized

Cons

  • You may pay more in interest
  • It may take longer

Debt avalanche

Another way to approach paying off your debt is using the debt avalanche method. Also called debt stacking, the goal of the debt avalanche is to pay the least amount of interest on your debt. Using this method, you put your debts in order from the highest interest rate to the lowest.

Similar to the debt snowball, you pay the minimum payments on all your bills, except instead of focusing on the smallest debt, you focus on the debt with the highest interest rate until it’s paid off.

After that bill is paid in full, you then move to the debt with the next highest rate and work your way down.

Here’s the order in which our couple would pay their debts using the debt avalanche.

 

Debt

Total Balance

Interest Rate

Minimum Payment

#1

Visa #2

$5,000

31.99%

$184

#2

Visa #1

$2,500

23%

$73

#3

MasterCard

$450

18%

$15

#4

Auto Loan

$9,185

7%

$353

#5

Student loan

$45,000

4.25%

$235

#6

Family loan

$1,300

0%

$0

On paper, this method comes out ahead of the debt snowball in terms of paying the least amount of interest and taking the least amount of time. You can plug in your debts in a snowball versus avalanche calculator to see how the two methods compare in your situation.

Bonneau usually looks to the debt avalanche when helping clients figure out what debt to pay off first. “Generally speaking, paying off the highest interest rate debt first will help your debt become reduced as quickly as possible,” she advised. “Any excess dollars that go towards interest longer than they have to is obviously not productive.”

But while this strategy looks best in theory, it doesn’t always work in reality, as Bonneau cautioned — “mathematically, the avalanche method will have you pay the least amount of dollars to get rid of the debt, but that might not be true if you slip up or if you don’t do your due diligence.”

In addition, she suggested that consumers can also get discouraged when using this method because it may not feel like they’re making progress right away, especially if their debt with the highest interest rate also happens to have a very large balance.

Pros

  • You’ll pay less in interest
  • You’ll pay your debt off faster

Cons

  • It can take a long time to pay off your first debt
  • You may give up
  • It does not take behavior or emotion into consideration

Debt snowflake

The debt snowflake is another method. The goal with this strategy is to leverage the power of making small payments towards your debt.

With this approach, you make multiple micropayments towards each of your debts, even if the amount of the individual payment is less than the minimum amount due (however, you do want to make sure that the multiple payments cover at least the minimum amount due).

If you have extra money to put towards your payments, then you select one debt to focus on.

The idea behind this strategy is that the small payments add up. If someone is struggling with budgeting large sums to put towards their debt, this approach may work for them.

In our example, the couple wouldn’t prioritize their debts in any order; they would make payments as often as they can regardless of the amount.

Bonneau said she doesn’t recommend using the debt snowflake as a primary way to tackle debt, but mentioned that it can enhance an existing approach. “I don’t I think it’s a method comparable to the avalanche or the snowball,” she said. “I think it’s an ancillary or peripheral method.”

Pros

  • Small payments can add up
  • It’s good for those who have a hard time budgeting their payments

Cons

  • Can be confusing and disorganized
  • You can possibly pay less than the minimum payment

Debt tsunami

No one is quite sure why debt payoff strategies all have weather-related names, but now we come to the debt tsunami. This strategy focuses purely on the emotion behind paying off debt.

In the debt tsunami, you rank your debts in order of their emotional impact, prioritizing the debt that you want out of your life the fastest.

Suppose in our example, the couple’s family loan is to their parents or in-laws. If the relationship has soured because of the loan, then they would pay that $1,300 debt off first, even though there is no interest and no minimum payment.

They would attack that debt with a vengeance — like a tsunami — until it’s gone, then move on to the debt that will provide them with the next biggest emotional impact.

Pros

  • Provides emotional relief
  • Builds momentum

Cons

  • You could pay more in interest

Hybrid

You could approach your debt payoff by combining any of these methods, or by taking your own unique approach.

When Steven Donovan, a Miami-based financial coach, decided to pay down his $100,000 of debt, he started using the debt snowball method. But when he discovered that the minimum payment on his $19,000 private student loan was going to triple from $70 to $210, he turned to the debt tsunami.

“I hated that student loan so much that I made I sure I paid it off before the smaller loans in the debt snowball,” Donovan told MagnifyMoney. “It made me happier to pay it off than to knock out the smaller debts.”

With a hybrid approach, you could choose to follow one debt payoff strategy, but you can then prioritize a debt for one reason or another.

In Donovan’s case, he used the debt snowball method and prioritized a debt for the emotional benefit. Another example is using the debt avalanche method, but prioritizing a small debt even if the interest rate is lower — you can get a quick win while building up some momentum to continue paying your debt.

Similarly, you could prioritize debt because of its urgency: for example, paying a federal student loan or tax debt to avoid wage garnishment. Using a hybrid approach allows you to customize your strategy.

Pros

  • Gives you flexibility as you pay off your debt

Cons

  • It could throw you off a consistent pattern

Equal treatment

Another way to approach paying off your debt is to give them all equal treatment. Like the debt snowball and the debt tsunami, you make the minimum payments on all your debts, but instead of applying the extra payment to one particular debt, you spread the amount equally over all your debts.

Pros

  • You pay extra on all your debts

Cons

  • You won’t see significant progress on one debt

Debt consolidation

Debt consolidation is another strategy you can use to pay off your debt. In this method, you would get a single new loan or credit card, and you use that to pay off all the other debts.

The goal with debt consolidation is to save interest and reduce both your total monthly payment and any anxiety or stress of dealing with multiple creditors. Debt consolidation can be done in various ways including a credit card balance transfer, a personal loan, a home equity loan or a HELOC.

Bonneau said she has worked with clients who successfully used debt consolidation, but cautioned that the primary motivation of consolidating debt should be to reduce interest and not just to feel better.

To kickstart your search for a debt consolidation loan, you can explore MagnifyMoney’s debt consolidation loan marketplace. LendingTree also has a personal loan widget below you could use to see personalized rates from various lenders.

LendingTree
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5.99%
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35.99%

Credit Req.

Minimum 500 FICO

Minimum Credit Score

Terms

24 to 60

months

Origination Fee

Varies

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LendingTree is our parent company. LendingTree is unique in that you may be able to compare up to five personal loan offers within minutes. Everything is done online and you may be pre-qualified by lenders without impacting your credit score. LendingTree is not a lender.

Pros

  • May save interest
  • May reduce total monthly payment
  • One loan could be more manageable

Cons

  • You could pay more in interest if you consolidate low or no interest loans
  • You could extend the amount of time you’re in debt
  • You could lose protections on federal debt

Paying off your debt

These strategies, while different from each other, all have the same goal — to get you out of debt — and the one that’s best for you is the one you’re going to stick with. Consider what will keep you motivated as you pay down the debt.

If seeing immediate progress gets you excited about paying down your debt, then go with the debt snowball method. On the other hand, if a logical and mathematical approach appeals to you, the debt avalanche might work better for you. If you prefer some flexibility, then consider a variation of any of the methods we covered.

“Everyone is different,” Bonneau said. “At the end of the day [a debt payoff strategy] only works if you set goals to have accountability, if it’s realistic to implement, and if you are tracking it.”

Regardless of the strategy you use, make the most of it by putting as much as possible towards your debt. Seek ways to bring in additional income, and create a monthly budget to make sure every available dollar goes towards your debt.

“Make sure you set yourself up for success by putting those external factors in place to help you stay committed to your priority,” Bonneau advised.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alaya Linton
Alaya Linton |

Alaya Linton is a writer at MagnifyMoney. You can email Alaya here

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