Managing Debt From Credit Cards

Managing Debt: From Credit Cards to Foreclosures Marilyn Capelli Dimitroff, CFP® CFP Board’s Financial Planning Clinic Washington, DC September 13, 2008 How Did We Get Here? The Old Days: Limited Lending Cash or Layaway Store Accounts Visa: 1973 Mortgages: 20% Down, Fixed (30/15) The 2000’s: Plentiful Lending High Limit Credit Cards, Accepted Everywhere Mortgages: Fixed, Funky Upside Convenience Expanded Home Ownership and Lifestyle Downside Easy to Overspend Teaser Rates Mask Potential Problems Complexity Masks Potential Problems NOW Higher Gas and Food Costs »»» Less Money Available Falling House Prices »»» “Upside Down Loans” and Illiquidity Job Cuts »»» Fewer Options What to do? Figure Out Where You Are Step One Financial Statements Balance Sheet – Current Snap Shot Cash Flow Statement – 12 Months Balance Sheet Everything You Own Now Minus Everything You Owe Now What You Own Two Buckets 1. Personal Use Assets House(s), Cars, Stuff, Checking, etc 2. Working Assets Savings, Investments, Retirement Accts, Inv Real Estate, Businesses, etc. What You Owe Credit Card Balances, Mortgages, Credit Lines, Student Loans, Personal Loans, Retirement Plan Loans, etc. Bottom Line Net Worth + + Is Good Working Assets Are Great Cash Flow Statement For 12 Months Income Minus Out Flow Income Earned Income (Salary, Commissions, Tip, Overtime, Bonuses), Insurance Payments, Tax Refunds, Alimony, Child Support, Pension, Social Security, Gifts, Winnings, Rental Income, Reimbursed Business Expenses, Rebates, etc. Spending Three Kinds 1. Committed 2. Discretionary 3. Taxes (Federal, State, Local, Payroll) Committed Loan payments (mortgages, credit cards, car loans, etc.), Rent, Property Taxes, Utilities, Repairs, Insurance, Car Expenses, Commuting, Food, Dependent Care, Phone, Alimony/Child Support, Medical, Basic Clothes Discretionary Entertainment, Meals Out, Vacations, Recreation, Club Dues, Hobbies, Home Improvements, Gifts, Education, Charitable, etc. Taxes Federal, State, Local Goal: Withholding = What You Owe Payroll (Social Security, Medicare) Bottom Line Cash Flow + - Good Can’t Be Sustained Step Two How To Improve? Increase Income Decrease Expenses Both Increase Income Sell Stuff Find Additional Employment Be Creative: Ex.Take Roomers Decrease Expenses Lowering Debt and Debt Payments Credit Cards $1000 Balance 18% Interest 1.Pay monthly minimum of 2.5% or $25 153 months (12 yrs 9 mo) to pay off Interest Cost: $1,115.41 2.Pay $50 monthly 24 months to pay off Interest Cost: $197.83 Credit Cards Utilize a Lower Cost Card for Permanent Use Do Not Add New Purchases Pay Off Highest Cost Cards First Avoid Late Charges Work Out Problems Immediately Do Not Get New Cards! Spending Limit Discretionary Purchases Goal Maintain One or Two Cards (In One Name Only) Pay Balance in Full Monthly, On Time Mortgages Fixed Hybrids ARMs Option ARMs Interest Only HELOCs Goal Fixed Mortgage Low Costs Unable to Make Payments? Work With Lender Seek New Financing Seek Outside Help Review Government Programs Increase Income Upside Down? Options Wait Out the Poor Market Work with Lender Review Government Programs Seek Help Foreclosure Goal Positive Cash Flow Money to Save and Invest Build Working Assets No Quick Fix Worth The Work Pay Off: Peace of Mind