Lootcamp

4 Weeks to Reducing Debt and Increasing Your Financial Fitness

Laura J. McDonald, Susan L. Misner

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118586648
• Edition: 1
• Topic: Personal Development
• Subtopic: Personal Finance

Four Weeks to Financial Fitness!

Welcome to the Golden Girl Finance Lootcamp, a month-long program designed to break up the daunting task of getting yourself financially fit into small, daily steps…that will have you well on your way to a more financially secure life in no time flat!

• Week One will get you organized with an accurate picture of your finances—what you have, what you owe, and what your debt is really costing you.
• Week Two will help you tally up your spending—how much, on what and how, for both fixed and variable expenses.
• Week Three is dedicated to dealing with your debt.
• Week Four is all about planning for the future and developing good financial habits.

It's about getting your true bottom line in shape and primed for a fabulously fit financial future!

Week 1

Know Your Stuff

Lootcamp: Week 1, Day 1

Know Your Stuff: Open 'Em Up!

Congratulations on choosing to take back your financial power! Despite how hectic your life is, taking the time to sort out your finances is a brilliant move. We would expect nothing less of a clever gal or guy like you.

Here's what you need to have on hand to get ready to rock and roll and take financial control during this Lootcamp:

• calculator
• file folders
• small file box or filing cabinet drawer
• highlighter pens (in multiple colours)

And, of course, you'll need an open mind. These are the tools necessary to keep you organized and contemplative. Nothing difficult about that.

You can do this, and, best of all, in four short weeks you will figure out how far you've fallen into the proverbial debt hole—and how to start climbing out of it.

Ready for a journey of financial discovery? Well, grab those trendy reading glasses and hold on!

It turns out that there is a very good reason the dog always wants to bite the mail carrier: the only things that show up in the mailbox are bills, bills, bills! (We hear ya!) Nowadays, though, that paper trail is diminishing because many of us have made our payments automated. Automated payments are great for utilities and ongoing expenses, and setting up an automated minimum payment or flat monthly payment on revolving credit, such as credit cards or a line of credit, is good for your credit score because you don't miss payments. However, this hands-off approach to payments can also lead to a pile of unopened statements on your dining room table—or worse, online ones that you delete before even assessing. And that's not a good thing.

Remember, you can't change what you don't see. If you are ever going to get your debt under control, you need to look at all your balances every month and keep an eye on transactions, interest rates, and changes to your account that you may not catch if you're in housecleaning mode. We call this getting organized, and although it is tough—frightening, even—you need to do it. There is no right or wrong here, just reality.

So pour yourself a glass of wine, round up all your statements, and take a seat. It's time to rip off the financial blindfold. One, two, three . . .

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Just for Today

You are going to organize all your statements. Locate your credit card, line of credit, and mortgage statements. To check the balance of your car loans, personal loans, and other non-revolving debts (meaning credit that is not open to borrow from again, up to a certain pre-approved limit), you may have to call your bank. It doesn't matter what you have to do to find your statements and loan balances, today your goal is to collect the information in one place and get it organized.

If you're a digitally savvy, choose a personal finance management website (PFM) and sync up all your accounts. You can use finance management tools on your bank's website (if they're offered), or you can use an independent PFM such as Mint, Moneytrackin', BudgetPulse, or MoneyStrands.

However, if you love your hard copies, gather up all your paper statements, create a file folder for each separate account (most recent statements at the front), and store your files in your file box.

Tomorrow, you'll be doing some math!

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Lootcamp: Week 1, Day 2

Know Your Stuff: Add 'Em Up!

Now that you're a little more organized, it's time to take the next step. Yup, it's time to seriously look at what's been going on (rather than looking the other way, as you've been doing until now). Even if it means white knuckles or chewed-up nails, it's worth ingesting a little fingernail to have a good understanding of your total debt.

Ready?

First, can you state your total debt off the top of your head? Few people can. This all-too-common lack of awareness is a major part of the problem. Those polite, unassuming Canadians, for example, have one of the highest average household debt-to-income ratios in the developed world—second only to the British (no wonder they are so jolly, they've been investing in a lot of retail therapy!). Americans, who are third in line (not to the throne, for now that would be Prince Harry), have done a good job at lowering their debt-to-income ratios, which hit their peak right before the housing and financial crash of 2008.

What this tells us is clear: don't let media reports of “economic recoveries” or “strong economies” lull you into a false sense of financial fitness. You should be comparing yourself to the you of one month ago and the you of one year ago to see how you are progressing and where you are struggling. We can't stress enough how truly important it is that you know where you are in terms of your total balance in any given month.

When you completed yesterday's task, you may have been tallying balances in your head, but it wouldn't be a shocker if you kept your mind from reaching that grand total as you sorted through the dizzying array of numbers. It may require a double espresso, but do what you must to wake up to reality. Find out your total debt amount, to the penny. When it comes to debt, remember this little rhyme: “What you don't know increases the risk that it will grow!”

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Just for Today

Quick, off the top of your head, what's your total debt? Write the number down on a piece of paper. Now take out your lovely little file box or log in to your PFM and add up your true total. Compare the two totals to see where perception and reality meet.

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Lootcamp: Week 1, Day 3

Know Your Stuff: Know Thy Rates!

Oh thou lovely plastic card, how much does that cool new tablet with all the gigs really cost? (That would be including the added cost of interest you'll be paying if you don't pay off the balance this month.)

Wake up, friend! If you knew what that tablet would actually cost over time, you'd definitely realize that you could easily make do with your boring old laptop for a while longer (like, until you've saved up the cash for it). Sorry to be a downer, but we are here to help you make informed financial decisions, and that means shining a light on your spending.

Here's the thing: the interest rate you pay on anything you borrow is a very important variable. And what really matters about the rate is how much it costs you in the end—we're talking over time. An interest rate is greatly affected by time. Unfortunately, in an effort to secure lower payments, many people make their purchases far more costly.

Take mortgages, for example.

Say you borrow $250,000 over 20 years at an average interest rate of 5.2% over the life of your mortgage. Now, when you make monthly payments at that rate, do you have any idea how much total interest you'll pay? The magic number is more than $150,000 in interest, which is 60%—more than half—of the amount you borrowed. And this is at a rate that many would consider pretty decent over the life of a 20-year mortgage.

If you had that same average rate of 5.2% on that same $250,000, but stretched your amortization (the total repayment period) to the maximum 25 years, you'd pay a whopping $195,000 in interest. That is nearly 80% of the amount you borrowed! In saving just under $200 per month in mortgage payments, compared to the 20-year amortization, you'd pay an extra $45,000 in interest, or an additional 18% of your original borrowed amount. You might as well put it on your credit card!

Worse, there is a greater risk to dragging out debt repayment. That is, after the first 5 years of the 25-year mortgage, your balance when you renew would still be roughly $222,000. This means that even though you've paid almost $89,000 in 5 years, you've only put a $28,000 dent in your balance—and there's a good chance you'll have to renew at a higher rate.

Now, how many Caribbean vacations can you fit in for $89,000?

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Just for Today

Over the last two days, you've looked at all your debt statements. If you haven't noticed them already, locate all your interest rates. We told you earlier in this section that it isn't just the interest rate that's important—the true cost-determining factor is the length of time that it will take to pay off the debt. Find out the real cost of your current debt by using one of the free online debt calculators listed below. The calculators may be denominated in a slightly d...