Debts

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Alternatives to a debt consolidation loan

Home equity

One popular way people pay off debt is to use the equity in their homes. Home equity loans and home equity lines of credit (HELOCs) let borrowers use their homes as collateral in exchange for financing. Just be sure to factor in the risks if you’re considering this option. The lender can seize your home if you can’t make the payments.

Who this is best for: Borrowers who have built up equity in their homes.

Who this is not good for: Those unsure of their ability to maintain the monthly payments. 

Home equity loan versus debt consolidation loan: Home equity loans and HELOCs may offer lower rates than debt consolidation loans, though they come with more risks, since your home is used as collateral.

Debt relief services

Debt relief services, including debt settlement companies, offer another way to deal with your debt if you can’t qualify for a consolidation loan. These companies reach out to creditors and debt collectors on your behalf and try to settle the debt for a lesser amount.

If you decide to pursue debt relief services (perhaps as an alternative to bankruptcy), be aware that the fees these companies charge can be steep. Take your time to fully research fees, reviews and other details before applying. It’s also wise to compare multiple debt relief companies before you commit.

Who this is best for: Borrowers who are experiencing financial hardship and cannot pay their debt.

Who this is not good for: Those with a thin credit history or less-than-stellar credit score.

Debt relief services versus debt consolidation loan: Unlike debt consolidation loans, debt relief services aim to eliminate some of your debt without you having to pay it. With that said, pursuing debt relief is a risky move, and it can damage your credit score.

Credit counseling

Another option that can help you get debt under control is credit counseling. Credit counseling companies are often (though not always) nonprofit organizations. In addition to debt counseling, these companies may offer a service known as a debt management plan, or DMP.

With a DMP, you make a single payment to a credit counseling company, which then divides that payment among your creditors. The company negotiates lower interest rates and fees on your behalf to lower your monthly debt obligation and help you pay the debts off faster.

DMPs are rarely free, though, even if they’re done by a nonprofit credit counseling service. You may have to pay a setup fee of $30 to $50, plus a monthly fee (often $20 to $75) to the credit counseling company for managing your DMP over a three- to five-year term.

Who this is best for: Borrowers who need help structuring their debt payments.

Who this is not good for: Those with little wiggle room in the budget. 

Credit counseling versus debt consolidation loan: With a debt consolidation loan, you’re in control of your payoff plan, and you can often apply with few fees. With credit counseling, a third party manages your payments while charging setup fees.

Balance transfer credit card

With a balance transfer card, you shift your credit card debt to a new credit card with a 0 percent introductory rate. The goal with a balance transfer card is to pay off the balance before the introductory rate expires so that you save money on interest. When you calculate potential savings, make sure you factor in balance transfer fees.

Keep in mind that paying off existing credit card debt with a balance transfer to another credit card isn’t likely to lower your credit utilization ratio like a debt consolidation loan would.

A debt consolidation loan is also going to offer higher borrowing limits, enabling you to pay off more debt, as well as fixed monthly payments, which make it easier to budget and stay disciplined with paying off debt.

Who this is best for: Borrowers who can pay off existing debt quickly.

Who this is not good for: People with a young credit history or a less-than-average score. 

Balance transfer credit card versus debt consolidation loan: Balance transfer cards are often the best choice for borrowers who have the means to pay off their debt within 18 months, which is a standard 0 percent APR period. If you need longer to pay off your debt, or if you have a lot of debt, a debt consolidation loan is a better choice.

Source: thesimpledollar.com

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A government debt default could send mortgage rates to highs not seen in over 20 years, a new Zillow analysis suggests.

The unprecedented scenario would send mortgage rates as high as 8.4% in September and the typical cost of a mortgage up 22%, the real estate platform’s analysis found. The Treasury Department has suggested the U.S. would fail to meet its debt obligations as soon as June 1, a situation which would significantly disrupt the housing market. 

Mortgage rates could soar past 8% in the unlikely government default scenario, said Melissa Cohn, a regional vice president at William Raveis Mortgage, in an email to National Mortgage News. The rate for average 30-year fixed loans has hovered above 6% in the past six months, after momentarily rising above 7% last fall. The average hasn’t surpassed 8% since August 2000, according to data from the Federal Reserve. 

“A government default would depress Treasury bond prices, causing bond yields to rise significantly,” she wrote.

The spread of 3-month Treasury yields over 1-month Treasury yields, a barometer of mortgage rates, reached 1.78 percentage points since April 21; the previous high was 0.79 points last October, Zillow said. 

“The gap suggests that investors were requiring much higher interest rates on debt maturing this summer, compared to debt maturing in May, likely due to the risk of delayed or reduced repayment in the event that Treasury hits the X-date without Congressional action on the debt ceiling,” wrote Jeff Tucker, Zillow senior economist, in the company’s analysis. 

One-month Treasury yields have since climbed to 5.5%, reflecting the looming X-Date, Zillow said. 

If a divided Congress fails to raise the debt ceiling by the “X-Date,” or the day when the government runs out of money, home sales would also drop, Zillow said. Existing sales volume, the firm said, would fall 23% to a seasonally adjusted annualized rate of 3.3 million in September from April’s 4.3 million rate. 

Specifically, 700,000 fewer homes would be sold between this July and December 2024 in the event of a default, or 12% of the 6 million sales projected in a market without a government default, according to Zillow. Home prices in the scenario meanwhile would remain insulated by low inventory and buyers remaining on the sidelines with elevated rates, dropping by just 1% through next February. 

Zillow puts the average home price at $334,269, a 5% year-over-year gain. Property value growth exploded last summer but has since relaxed, rising at a decade-low pace as of March.

Prices, however, could be dampened by a wave of unemployment, as a federal debt default would put government employees out of work temporarily or permanently. Under the default scenario, Zillow projects unemployment peaking at 8.3% in October. 

A government default would mar the country’s credit rating and affect the value of the U.S. dollar, along with disrupting the approximately 9 million Americans who rely on federal wages or funding. The U.S. has never defaulted on its debts.

While the scenario is worrisome, most people don’t expect it to happen, Cohn suggested.

“I don’t get a sense of great concern from people,” she wrote. “Everyone hopes this will not occur as the damage to the economy would be great.”

Source: nationalmortgagenews.com

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Save more, spend smarter, and make your money go further

If you’re in the market for a new home, chances are you’ll have to compromise at some point along the way. Maybe you’ll have to commute a little farther than you’d like in order to get the best value for your money, or perhaps you’ll forgo a huge backyard to be closer to the city.

And when it comes to finances, you might find a disparity between how much house you want and how much house you can afford.

Home loans are made against your ability to repay. While the mortgage loan is secured against the house, it is really made against your income. That’s what mortgage lenders look for — income to offset liabilities.

Simply put, the amount of income you need to purchase a house will vary by your payment comfort level, including any other monthly debt obligations you might have.

Important terms

Mortgage payment: Principal, interest, property taxes insurance and mortgage insurance, if needed.

Consumer debts: Minimum payment obligations on things such as auto loans, credit cards, student loans, personal loans and installment loans.

Other debt obligations: Alimony and/or child support or any other court-ordered repayment obligations.

Running the math

Here’s a simple formula to calculate the amount of income you’ll need to purchase a home:

(Target mortgage payment + consumer debts) ÷ .36 = Gross monthly income needed to qualify

Most lenders limit your debt-to-income ratio (how much of your monthly income pays debt) to between 36 percent and 45 percent. While the exact ratio varies by lender and loan type, it’s best to base your calculations on the lower end to ensure that you won’t overextend yourself financially.

So, if your target mortgage payment is $2,000 per month and you have consumer debts of $300 per month, you will need approximately $6,388 gross monthly income to offset your housing expenses and consumer obligations.

Down payment

Your down payment is another important factor in determining how much income you’ll need to buy a home.

Consider the following loan scenario using a purchase price of $300,000 (assuming no other debts) and the current rates on Zillow Mortgage Marketplace.

Conventional loan

  • Down payment: 5 percent ($15,000)
  • Interest rate: 3.26 percent
  • Approximate mortgage payment: $1,770
  • Gross monthly income needed: $4,916

So, at the end of the day, how much income you need to purchase a home is predicated on your monthly income, consumer debt obligations and down payment.

Impact of debt

For every dollar of debt, you will need double that in income. So if you have a $300 car payment, you’ll need at least $600 per month or more in income to offset that debt.

Debt erodes income, and less income translates to less purchasing power.

So, does buying a home make sense?

Yes, so long as the amount you can borrow for your desired purchase price is in sync with your debt obligations and, of course, your down payment.

“How Much Income Do You Need to Buy a House?” was provided by Zillow.com. 

Save more, spend smarter, and make your money go further

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Knowing that you have life insurance protection can provide you and those you love peace of mind. While nobody wants to dwell on the unimaginable, life insurance can help to ensure that your dependents will have additional funds that they may require for paying off debts and / or continuing to pay their ongoing living expenses.
When you are searching for the best life insurance policy, it is important that you obtain the proper type and amount of coverage. That way, your loved ones won’t be left with too little to serve their needs.
It is also key to make sure that the insurance carrier that you purchase your life insurance coverage through is strong and stable financially – and that it has a good, positive reputation for paying out its policy holders’ claims. One company that meets these criteria is Phoenix Life Insurance Company.

The History of Phoenix Life Insurance Company

Phoenix Life Insurance Company has more than a century and a half in the business of providing coverage to its customers. Initially founded in 1851 as the Phoenix Companies, Inc., the company has grown and expanded throughout the years.
This insurer has a primary focus on helping those who are considered to be in the middle income market, as well as those who are more affluent, with securing the property life insurance protection for their needs.

Phoenix Life Insurance Company Review

Phoenix Life focuses on offering a variety of life insurance plans, as well as retirement annuities. These are offered via financial advisors throughout the U.S. The company also has a distribution subsidiary, Saybrus Partners, which provides insurance coverage to clients.
While Phoenix Life Insurance Company is considered by many to be a somewhat small insurance carrier – with roughly 600 home office employees – its products and services rate among the best. Phoenix Life is headquartered in Hartford, Connecticut.

Insurer Ratings and Better Business Bureau (BBB) Grade

Due in part to recent financial issues, Phoenix Life Insurance Company’s ratings are not currently among the best from the insurer ratings agencies. These ratings include a B+ (Credit Watch) from Standard and Poor’s (which is a rating of 14 out of 21 possible ratings), and a B (Stable) from A.M. Best Company (which is seventh out of a possible sixteen total ratings.
Even though the company’s ratings are not on par with where they could ideally be, Phoenix Life Insurance Company has been satisfying the financial obligations that it has to its current policy holders.
While Phoenix Life is not an accredited company through the Better Business Bureau (BBB), it has still been provided with a grade of A+, which is on an overall grading scale by the BBB of A+ through F). Over the past three years, Phoenix Life Insurance Company / The Phoenix Companies, Inc. has not had to close out any customer complaints through the Better Business Bureau.

Life Insurance Products Offered by Phoenix Life Insurance Company

With its key focus on life insurance and annuities, Phoenix Life Insurance Company provides a wide range of products for customers to choose from. This can be quite beneficial, as coverage can change along with the client, as his or her needs change over time.
The company provides several types of permanent life insurance, along with final expense coverage. With permanent life insurance, there is both a death benefit component, and a cash value component. Typically, once an insured has been approved for coverage, the amount of the death benefit protection is locked in, as is the premium amount – which means that the premium that is charged will not go up, even as the insured’s age increases, and if he or she contracts an adverse health condition.
The cash that is inside of the cash value component is allowed to grow and compound over time on a tax deferred basis. This means that there are no taxes due on the growth of these funds unless or until they are withdrawn.
Policy holders who have permanent life insurance protection are allowed to withdraw or borrow cash from the policy’s cash component for any need that they see fit – including to pay off debts, to supplement retirement income later in life, or even to take a nice vacation.
One type of permanent life insurance coverage that is offered through Phoenix Life Insurance Company is whole life. The Phoenix Remembrance Life policy is a simplified issue whole life insurance policy, which also offers supplemental benefits that are designed for protecting the insured’s loved ones and for leaving a legacy.
Because the Remembrance Life plan is a simplified issue policy, it will not require the applicant for insurance to undergo a medical examination, or to answer a long list of medical related questions. Because of this, these policies will oftentimes be approved within just days – or sometimes even sooner. So, if an individual is in need of life insurance protection quickly, this could be a viable option.
Another form of permanent life insurance coverage that is offered by Phoenix Life Insurance Company is universal life. With a universal life insurance policy, there are some similarities to whole life in that there is death benefit protection, along with a cash value component. However, in many ways, universal life insurance is considered to be much more flexible than whole life, as the policy holder is allowed – within certain guidelines – to change the due date of the premium, as well as to allocate how much of his or her premium will go towards the death benefit, and how much will go into the cash component.
Phoenix Life offers the Phoenix Accumulator UL universal life insurance policy. With this plan, policy holders may obtain a higher cash value crediting rate than they can with whole life insurance. There is also an interest bonus feature with this policy.
For those who are seeking both death benefit protection, along with a potentially higher amount of cash value build up over time (in a tax-advantaged manner), the Phoenix Accumulator UL policy may be a good fit.
Another type of universal life insurance that is offered through Phoenix Life Insurance Company is indexed universal life. Here, there is also a death benefit and a cash value component within the policy. However, instead of having the cash grow based on a certain rate of interest, the growth is based on the performance of an underlying market index (or indexes) such as the S&P 500.
With an indexed universal life insurance policy (IUL), if the underlying index or indexes perform well within a certain time period, then the cash value will be credited positively – typically up to a certain “cap.” If, however, the underlying index performs poorly – or even in extreme negative territory – then the cash value will not lose value. Rather, it will just simply be credited with a 0 percent for that time period.
Because of this, indexed universal life insurance is used by many policy holders who are seeking higher potential growth (than that of whole life, or even CDs and money markets), yet with protection of principal.
Phoenix Life Insurance Company offers the Phoenix Simplicity Index Life policy. With this plan, the policy holder may choose from several different cash value accumulation options. There is also a death benefit included in the policy, with the option to allocate policy value in a fixed account and / or to two indexed accounts.
As with the whole life insurance policy that is offered via Phoenix Life, this indexed universal life product will not require a medical examination by the applicant for coverage. There is also no need to fill out a large amount of paperwork. Therefore, those who may have certain health issues could still qualify for this policy – and it could be a viable option if someone is looking for guaranteed death benefit protection, along with protection of cash value and possible higher growth.

Other Products and Services

While Phoenix Life Insurance Company is known for its offerings of life insurance coverage, the company also offers some options for retirement annuities. Today, because many baby boomers are reaching retirement age, there is worry about whether or not retirement income will be able to last through the remainder of their lifetimes. This is particularly the case as life expectancy has increased.
With an annuity, a guaranteed, set income can be received – and, if the annuity holder opts for the lifetime income option, they can literally receive an income stream that will last for the remainder of their lifetime, regardless of how long that may be. Do your research and make sure you’re getting the best annuity rates.
All of the annuity products that are offered via Phoenix Life Insurance Company are designed for flexibility – depending on what it is that a client needs. These annuity products include the following:

  • The Phoenix Personal Retirement Choice – The Phoenix Personal Retirement Choice is a deferred annuity that provides its holder with the ability to build up long-term savings over time on a tax deferred basis. Deposits can be made into the annuity over time, prior to converting the annuity to an income stream. This annuity has several different income options to choose from as well.
  • The Phoenix Personal Income Annuity – The Phoenix Personal Income Annuity is a fixed indexed annuity, so it allows the opportunity to grow cash over time, based on the performance of an underlying index – but if the index should perform negatively in a given time period, there are no losses of principal.
  • The Phoenix Personal Protection Choice – With the Phoenix Personal Protection Choice annuity, the client can deposit a single premium up front. Because this annuity is a fixed indexed annuity, the cash will be protected from market downturns, while at the same time having the opportunity to grow, based on an underlying market index. There are also several options that are available when it comes time to convert this annuity to an income stream.

How to Get the Best Premium Rates on Life Insurance Coverage

If you are looking for the best premium rates on life insurance coverage on plans from Phoenix Life Insurance Company – or from any life insurance carrier – then it is typically recommended that you work in conjunction with an independent life insurance brokerage or agency.
In doing so, you will be much better able to shop and compare – in an unbiased manner – from numerous life insurance policies and carriers, and from there, you can choose the plan and premium quote that works the best for you and your specific needs.
If you are ready to take a look at the life insurance coverage that may be available to you, we can help. We are an independent life insurance brokerage, and we work with many of the top insurance carriers in the market place today. We can get you the details that you need quickly, easily, and conveniently – all from your own computer – and without you having to meet in person with an insurance agent. Whenever you are ready to begin the process, all you need to do is just simply take a moment to fill out the quote form on this page.
We understand that the purchase of life insurance coverage is a big decision. There are many different variables that you need to be aware of – and you want to be sure that you are obtaining the property type and amount of protection for your needs. The good news is that this process can be made so much easier when you have an ally on your side. So, contact us today – we’re here to help.

Source: goodfinancialcents.com

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Credit Card Debt Relief: 6 Strategies – MintLife Blog

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$1 trillion in credit card debt, there must be a sustainable option to lessen the stress of carrying large debts month over month, year over year. Credit card debt relief is a way to not only get out of seemingly endless debt but also to perhaps bring about a little bit of mental—and ultimately, financial—peace.

Rather than just assuming you can entirely write your debt off with little impact otherwise, it’s important to know the various credit card debt relief options that are available and the different impacts each approach will have on your credit and financial health over the long term.

Keep reading to learn six credit card debt relief strategies, or use the links below to navigate the article.

How to Pursue Credit Card Debt Relief

Seeking credit card debt relief can be an ideal option for those experiencing hardship from life’s unexpected happenings, whether that’s medical bills, a sudden loss of income, or debt that has become excessively difficult to manage. Before deciding on a course of action, it’s important to know the differences between each approach.

Here are six strategies to consider for credit card debt relief:

1. Do-It-Yourself

Credit card debt relief may be able to be reached through a resolute commitment to aggressively paying down debts as quickly as possible. Do-it-yourself options to credit card debt relief require discipline and may not offer the degree of immediate debt relief desired.

If you have a particularly good credit score, you may be able to negotiate a lower interest rate on your cards through individual credit card companies to lessen the burden of debt.

While you’re not necessarily entitled to a lower interest rate, explaining your hardship and mentioning the length of time you’ve been with the credit card company could help secure a better deal, making debt repayment more manageable.

You might also consider taking a new approach to paying down debt by:

  1. The debt snowball approach — paying off the credit card with the smallest interest rate first while making minimum payments on other debts.
  2. The debt avalanche method, which allows for accelerated debt repayment as you put extra money towards the debt with the highest interest rate, while paying the minimum on all other outstanding debts.

The snowball method costs more but can boost confidence in being able to fully tackle paying off one card before moving onto the next.

2. Consolidation

Consolidating debt means combining all outstanding debts you owe to different lenders into a new loan.

Credit card consolidation, while not a method that outright eliminates debt, can be a strategy to help you pay down debt faster. With this option, you’ll only be making one payment a month instead of several— potentially making it easier to keep track of what you owe.

By taking out a low-interest rate loan through a lending institution, you may be able to pay off the majority, if not all, of your high-interest credit card debt.

Another option for consolidation is to do a balance transfer from a high-interest credit card to a credit card with a lower or no interest rate to lessen the burden of interest charges. It’s important to note that this option may come with a fee and doesn’t simply get rid of debt, but it could make the credit card debt relatively easier to pay down.

3. Credit Counseling

Seeking credit counseling, which is usually a free service provided through nonprofit organizations and independent financial agencies, may help lead you in the right direction to achieve credit card debt relief.

  • How it works

Trained counselors can guide you through repayment planning by reviewing your budget, analyzing your debt, and offering recommendations to help find a sustainable debt relief solution.

Counselors simply offer suggestions, making the service free unless you opt to use their help in pursuing a course of action, such as enrolling in a debt management program.

4. Debt Management Program

If you decide to sign up for a debt management program (DMP) through a credit counseling agency, you’ll make a single monthly payment to the agency, and the agency will in turn pay your creditors. With this option, you’ll likely be able to pay off your debts within three to five years, as outlined in your specific debt management plan.

  • Considerations

By enrolling in a debt management plan, you won’t be able to obtain new credit until your debts are paid off. In fact, the credit counseling agency will close your active credit accounts while you complete the plan.

Closing your credit card accounts could negatively impact your credit score in the short-term, but by making regular monthly payments (that you can actually afford), debt management programs may help you find credit card debt relief over time.

5. Debt Settlement

Debt settlement means negotiating with your creditors to pay less on your debt than the amount you actually owe. This agreement is typically arranged by a third party—a debt settlement company—that acts as an intermediary between you and your credit card companies.

  • How it works

In this scenario, you cease making payments directly to the credit card companies and instead pay the debt settlement company, which in turn offers a lump sum payment to appease the creditors.

  • Considerations

This avenue is typically a poor choice for credit card debt relief because as you stop making payments to your creditors, your credit score will not only deteriorate, but credit card companies can also come after you with penalty fees and even legal action for failing to make payments. There could also be tax implications if a large amount of debt is forgiven, because the IRS may consider cancelled or forgiven debt as taxable income.

6. Bankruptcy

Bankruptcy should be reserved as a last resort in extreme cases of credit card debt hardship, as it has serious implications on your credit score.

  • The two most common types of bankruptcy are:
  1. Chapter 7 which forgives your debts on the condition that you liquidate some of your assets to pay creditors.
  2. Chapter 13 in which you enter into a court-arranged debt repayment plan that lasts three to five years, after which your debts are dismissed.

Chapter 7 bankruptcy is the only true way to avoid paying your debts, as it essentially wipes out outstanding debt entirely and offers a clean slate. Creditors still receive some means of repayment, whether in assets or through the repayment plan, and bankruptcy can offer a way out of otherwise inescapable debt.

Effects of Credit Debt Relief on Your Credit

Depending on which approach you pursue to achieve credit card debt relief, effects on your credit could range from nonexistent to severe damage. Since credit utilization (the amount of outstanding balances you have compared to your credit limit) makes up 30 percent of your credit score, carrying high credit card debt month after month is likely to have a damaging effect on your score.

The self-managed approach to reducing debt may not necessarily hurt your credit, so long as you continue to make regular payments. Credit card consolidation may help you tackle debt faster, possibly leading to a better score in the long run. Credit counseling won’t have a direct impact on your credit unless you decide to act on the advice given, such as signing up for a debt management plan. Depending on the parameters of the specific debt management program you sign up for, DMPs could have either a positive or negative effect on your credit.

On the more extreme end, opting for debt settlement through a third-party has the potential to hurt your credit when you stop making regular payments to credit card companies. Similarly, filing for bankruptcy could critically weaken your creditworthiness and should only be a last resort option, as a Chapter 7 filing stays on your credit report for ten years, while a Chapter 13 will remain for seven years.

The Bottom Line

The best approach to credit card debt relief depends entirely on the individual level of hardship you have in paying back credit card debts. It’s essential to consider the different options to reducing the strain of credit card debt that will work for your lifestyle. Whether you opt to take the do-it-yourself route or find yourself filing for bankruptcy, taking a committed approach to minimizing your debt could lend itself to better financial health in the long run.

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I’ve written about the importance of credit scores before, especially when it comes to getting a mortgage, mentioning that you could save tens of thousands of dollars if you simply had excellent credit.

Fortunately, it appears that the general public is aware of this, per a new study from credit bureau Experian.

The company said some 45% of would-be home buyers (those planning to buy in the next year) are holding off until they improve their credit scores.

This is a good thing because it means they’ll be able to qualify for a greater array of mortgage programs, instead of say just FHA financing, and potentially obtain a lower mortgage rate (and lower monthly payment) in the process.

Still, 34% of those surveyed fret that their credit scores may hurt their ability to purchase a home. And one in five are holding off entirely for at least the next 5-10 years because of a low credit score.

But instead of worrying and accepting defeat, why not take action to improve things so you can shop for a home with confidence?

54% of Future Buyers Are Working on Their Credit Now

The survey found that more than half of future buyers were actively working on improving their credit before making an offer by paying off existing debt, keeping balances low, and making on-time payments.

This is wise given the difference in mortgage rates for an average credit score versus an excellent credit score.

Generally, you want to shoot for a FICO score north of 760 (though 740 might also do) to ensure you obtain the best pricing on both your mortgage rate and PMI, if necessary.

Sure, you can still get approved for a mortgage with an average or even poor credit score, but you’ll just wind up paying a lot more interest over the years. And poor credit history is still the number one reason why individuals are denied a mortgage.

How to Take Action Today

If you’re unsure of how to turn things around, it’s actually pretty easy if you have the means. Assuming you’ve made timely payments on all your credit accounts but your score still isn’t where it should be, consider paying down those outstanding debts.

Last month, I revealed that that my own credit score tanked after the holidays because I made a ton of purchases on my credit cards, this despite paying all the balances to zero well before the due date.

The problem is that credit scores are simply a snapshot in time of your situation, and if you make a bunch of charges you could look worse off than you really are.

So the easiest way to keep your credit scores elevated is to avoid as many purchases as possible before looking for a home, while also paying down any existing balances. This will certainly boost your scores. Additionally, this budgeting can help you set aside more money for the down payment, closing costs, and reserve requirements associated with a mortgage.

Another biggie is to avoid opening any new credit accounts before you begin your home search. This is easy, just don’t do it. Those new credit accounts can drag your credit scores down and will likely increase your debt and take a bite out of your assets. Once your mortgage closes, you can go buy new furniture and whatever else you want.

If you’ve got some late payments on your credit history, your scores will definitely be depressed. One way to resolve this is by disputing the delinquencies with the credit bureaus directly, via their own websites. You don’t have to mail in letters anymore, so this process is a lot easier.

It’s possible to get negative items removed simply if the creditor(s) doesn’t respond to your dispute (even if you were still technically at fault). Once removed, your credit scores can skyrocket.

The takeaway is that a low credit score shouldn’t be the sole reason why you’re not buying a home. And it’s a very fixable problem.

However, it does take time for positive actions to reflect in your credit scores, so it’s never too early to start working on it. The moves you make today can save you thousands upon thousands in the way of a lower mortgage rate.

In some cases, you might even be able to buy more house because less outstanding credit card debt means your DTI ratio will allow for a larger mortgage payment. Your offer will also be more competitive.

Source: thetruthaboutmortgage.com

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There’s been a lot of talk about budgeting here at Get Rich Slowly. For instance, Kristin recently wrote about her adventures using the envelope system. I wrote about the reasons your budget might be failing. And, a variety of guest posters and staff writers have touched on the topic with articles like these:

How I kept to my budget and still have everything I want

Budgeting: The Most Important Thing You Can Do With Your Money

How to Build a Better Budget

When One Partner Won’t Budget

However, among the articles on budgeting systems and strategies, there has been very little written on using a zero-sum budget, which happens to be the budget that I use and love. So, I wanted to write about why I’m a zero-sum budget enthusiast, why I think they work so well, and how you can harness the power of the zero-sum budget for your own financial well-being.

Why Should You Use a Zero-Sum Budget?

In my opinion, a zero-sum budget is superior because it forces you to “spend” every dollar that you make. And, no, I don’t mean you should spend it on dinner at Outback or a weekly mani/pedi. Instead, you allocate all of your earnings into the different categories that your finances require. You don’t need an Excel spreadsheet or a complex software program to use a zero-sum budget. In fact, all you really need is a pen, paper, and the desire to begin budgeting for your benefit. So, how do you begin using a zero-sum budget?

Follow these simple steps:

Step 1: Determine how much you make
Whether you’re paid hourly or salary, you need to figure out how much money you make on any given month. So, you need to ask yourself a few questions. For instance, “How many paydays fall within this month?” And, “How much will each paycheck be?” For salaried workers, this should be fairly easy. For those with a fluctuating income, it can be much more difficult. However, one of the easiest ways to make a zero-sum budget work for your family is to get all of your finances “one month ahead.” Easier said than done, I know. But, using that method, a fluctuating income won’t matter as much. Since you’re using this month’s income for next month’s bills, it will be much, much easier to plan.

Step 2: List your bills
Once you determine how much money you’ll make this month, you need to figure out how much money you need to spend next month. Using pen and paper, write out all of your monthly bills, estimating bills that fluctuate, like utilities. You’ll also need to set a reasonable allowance for spending categories that you’re trying to keep under control (like groceries and gas). And, don’t forget about bills that are paid quarterly or seasonal expenses. The best way to make a zero-sum budget work is to include everything.

I’ll use a generic version of one of my old budgets as a real-life example:

  • Mortgage: $1,426
  • Electric: $200 (estimate)
  • Gas: $25 (estimate)
  • Groceries: $500
  • Daycare: $500
  • Internet: $35
  • Fuel/Miscellaneous: $200
  • Cell Phone: $55
  • Health Insurance: $377
  • Life insurance: $77.31 (paid quarterly)
  • Trash: $56.25 (paid quarterly)

Total: $3,451.56

Of course, everyone’s categories will be different. Obviously, you’ll need to include all of your bills including any debt payments that you make on a monthly basis. Make sure to list all of your bills (even the ones that you’re trying to forget!). Confronting them is the first step to making them disappear for good!

Step 3: Compare and contrast
This is where it gets fun, I think, and why using a zero-sum budget can be life-changing for so many people. Once you see your monthly income and your monthly bills on paper, a clear picture of how much money is left over emerges. You might find that thousands of dollars are being spent on “wants” each month. And, you could use that knowledge to begin saving that money instead. Regardless, once you determine how much money is left over after you pay all of your required expenses, you can decide what to do with the rest.

If my husband and I earned a net income of $7,000 for the sample month, we would update our zero-sum budget to reflect the overage:

  • Mortgage: $1,426
  • Electric: $200 (estimate)
  • Gas: $25 (estimate)
  • Groceries: $500
  • Daycare: $500
  • Internet: $35
  • Fuel/Miscellaneous: $200
  • Cell Phone: $55
  • Health Insurance: $377
  • Life insurance: $77.31 (paid quarterly)
  • Trash: $56.25 (paid quarterly)
  • Short-term savings: $1,500
  • Long-term savings: $1,500
  • Vacation Fund: $548.44

Total: $7,000.00

But, what if nothing is left? If you’re spending every penny you earn, it’s probably time to reconsider that strategy. Start by making a list of things you could live without. Some possibilities include cable television, eating out, or excessive entertainment spending. And remember, everyone’s priorities will be different. Although I do just fine without cable television, I have no desire to feed my family on a bare-bones grocery budget. You may feel exactly the opposite. And, as J.D. so eloquently put it, you have to do what works for you, whatever that is.

Step 4: Spend all of your money on paper
Once you determine your own excess cash flow, you can decide where that money will serve you best. For instance, if you’re still in debt, you can decide to pay X number of additional dollars toward those debts. Many people, including me, tackled their debts using the snowball method. Using this method, you focus on one debt at a time, paying over as much as you can until that debt is demolished. Then you can move on to the next.

Or, if you don’t have any debts to contend with, you can allocate all of your extra cash toward your savings or investments. Obviously, it doesn’t have to be all or nothing. You can choose to tackle your debts and continue saving at the same time. It’s up to you. However, the key is to go ahead and transfer the money you have allocated to savings right away. That way it doesn’t get squandered on those dinners at Outback, weekly mani/pedis, or anything else.

Step 5: Track your spending
If you have a preset spending limit for your zero-sum budget categories, you’ll need to check in periodically throughout the month to “see where you’re at.” I’ve found this to be particularly helpful when it comes to grocery and miscellaneous spending. I have a tendency, in fact, to completely blow through my grocery budget if I don’t watch myself. ($8 organic oregano, anyone?) So, to combat my grocery spending weakness, I usually check my spending about once a week. And for the most part, when it’s gone, it’s gone. This often means that we’re eating freezer food and leftovers by the end of the month, which seriously annoys my kids. But, it works!

Step 6: Make adjustments
Your zero-sum budget may be an epic failure for the first few months. And, that’s OK. You’ll probably need to make some adjustments to get it just right. Maybe you need to add a little buffer to your grocery category. Or, add some wiggle room to the entertainment portion of your budget. Whatever it is, making adjustments shouldn’t be seen as a failure. In fact, it’s just part of the budgeting process.

One More Thing

Unless you want to have a specific budget category just for emergencies, an emergency fund is a crucial part of using a zero-sum budget. Having an adequate emergency fund means that a surprise car repair or medical bill won’t knock your entire financial plan off track. And, whenever you have to tap into your emergency fund, it’s important to replace the funds you use. You can do this by budgeting to add to your emergency fund in the following month (or months) until it’s back to its former glory.

Have you ever used a zero-sum budget? If so, did it work? Also, please feel free to share your favorite budgeting strategies below.

Source: getrichslowly.org