October 26, 2005


One Paycheck at a Time

In my experience, getting out of debt sensibly takes time and a solid plan. I think the biggest mistake is to create a monthly budget. Most of your bills are due once a month, but your income may come in every week, every two weeks, or every other week. If you keep budgeting each month instead of by the timing of your paycheck, you will have more month left than money.

Life became so much more tolerable when I started budgeting my money based on the timing of my income. In fact, I felt as though I took control back from my creditors when I made this shift. Yes, I owed them and I had to pay them in a timely fashion but I wanted to pay them on my terms. When I realized that I could split up my payments based on the timing of my income becoming debt free finally appeared possible.

Some points to consider:

1. Figure out how much money you need to set aside each pay period for your income.
2. Begin thinking in terms of when you get paid not when your creditors want you to pay them. 3. Design a sensible plan for how your paycheck will be allocated each payperiod.

If you spend only an hour a week paying bills and managing your checkbook, you are not becoming a master at your finances. It takes time to design a plan and to work it. If you do anything consistently every week for 2-3 hours, it becomes a habit and eventually you will become really good at it. It wouldn't surprise me that you find your debt decrease more rapidly with this approach.

I hope this email finds you well on your journey to become debt free.

All my best,
Kimberly A. Griffiths

October 24, 2005


What IS Financial Freedom?

Financial Freedom!

Financial Freedom!

Financial Freedom!

Everybody's screaming "financial freedom"!

Most THINK they know what it is when they see it. Most THINK they know what it is when they hear about it. Most THINK they know how it feels when they finally get "in the money."

But honestly... The majority are clueless and have no idea what IT (true financial freedom) really is. And the sad part is that close to half of the majority are people "WITH MONEY".

Here's my proof... The average person with or without money, thinks that the guy or woman who:

* Drives a $100,000 mercedes.
* Lives in a $300,000 home or an expensive condo.
* Plays golf on the weekends.
* Wears power suits.
* Takes exotic vacations every summer.
* Kids go to private schools
* etc., etc. etc........

They THINK that these are "the people" who have financial freedom. Now... Don't get me wrong. Some do.

But in reality, most people who you see like this are in debt up to their necks! And besides this... They have an immense amount of stress trying to "keep up the front".

What do I mean? Well... Most of these people are living on debt, i.e....credit.

They're leased and mortgaged down to their socks!

Living beyond their means by the illusion of unlimited capital, which is i.e.... More "revolving" credit. And the "privilege" of delaying payments in full. But then they are ever pressured to keep up the payments. With interest attached.

QUESTION: How is that financial freedom? What...? Just because they can keep up the $1,500 a month car note? The $2,000 a month mortgage? The $600 a month private school bill? Insurance payments? Buy nice clothes? etc., etc. etc........ ???????

How is financial freedom being labeled as locking yourself into payments for 30 years, i.e. a mortgage?

How is financial freedom being labeled as locking yourself into payments for 24 to 36 months to lease (rent really) a vehicle? I mean, I could go on and on, but see... That's the illusion. Keeping you thinking that you can afford it because it's just 3-easy payments of $29.95, i.e....infomercials. (You've probably seen those late at night and even purchased some stuff)

Keeping you thinking that as long as you can make small payments every month, then you can afford it. But then what does the average person begin to do?

Because of their newfound increased cash-flow...

They begin to build a massive list of payments. Now it's 2 or 3 car notes. 2 or 3 homes. (Live in one and then you gotta have a summer home right?) Lots of new furniture --- more payments. etc, etc.....

And soon you have stomach ulcers from the pressure of trying to keep up with monthly payments. Living in fear of missing a payment. The embarrassment of getting a repo on your record. Having a foreclosure. etc. etc.....

Haven't you even heard stories of even movie stars going broke like this?

Sometimes even us (the wealthy) just don't get it. We blow it!

Now I ask you again... Is this financial freedom?

Even if the nice job with the fancy executive title lasts for the next 30 years and you never miss a payment... Just knowing that you're locked into the job because you HAVE TO make payments on your life is NOT financial freedom.

TRUE financial freedom is and can only be defined as being DEBT FREE!!!!!

Paying for things in full with no financing whatsoever. Not chasing money to make payments. Having cash-flow that far exceeds your bills. Being able to take advantage of financial opportunities at a moment's notice, without the stress of seeking monetary help from an outside source. Having a liquid (all cash) reserve of 30 to 50 percent of your entire yearly income. Paying bills the day they come in the mail and not juggling to see who gets paid first. Only having necessary residual bills, i.e....gas, electric, phone, etc. Living your life happily without the stress and negative emotion of "constantly chasing survival".

And once you experience it... You will see the true reality of your circumstances. You will start to see things how "they really are" and not how "you are".


If you take someone who is down in the dumps financially and plop them in front of a TV and one person on the news says that someone, somewhere is struggling...

They now believe that it's ok. They're struggling because the whole world is struggling. They're broke and so is everyone else. They buy into the "It's rough out there" campaign. The economy is falling, etc., etc...

But yet people all over the world continue to race at break-neck speeds to consume and spend at record numbers and the world becomes even more abundant.


And even when things seem to be bad economically, the rich seem to get richer.

Hey, did you know that in the stock market, you can make money even if even your stock goes down?

It's called "options".

it's called a "put".


Making money even if the value declines...


Why do you think that is?

Maybe because you need to start seeing things how "THEY ARE", which is ABUNDANT! I mean just look around you...

There is a sea of money out there in the world today. Everybody is "selling" and "buying" All you gotta know how to do is start (attracting) some of it. Use leverage to multiply it.

Then save at least 30 to 50 percent of it for savings, investing and lifestyle splurging. Live off (pay your bills) with what is left.

That's true financial freedom.

n income that frees you from a perpetual debt cycle so that you can stop chasing money, stop chasing payments and enjoy life!

NOT an income that enslaves and chains you to itself, so that you must totally depend on it, to continuously in-debt yourself, just to keep up a lifestyle.

October 17, 2005


Six Secret Solutions to Free You from Debt


Since I launched this website, I’ve spoken by phone and email with so many people overwhelmed with debt – often $50,000 or more in credit card debt alone. One of the most frequent comments I’ve heard is, “I’ve researched options but I am more confused than ever.”

But when it comes down to it there are about six basic options – everything else is just a variation on those.

My goal in this report is to help you cut through the confusion, find out what will work and take action. You can’t afford to wait…and I’ll tell you why later in this report.

But first, let me answer the other question I get all the time: “What’s your role in this?” What do you do?”

To make a long story short, I’ve been helping consumers find solutions to their credit problems for years now. However, most of my income comes from developing financial education programs for corporate clients. That means that I am not trying to “push” one particular solution on you or anybody else. If you go to a bankruptcy attorney, she’ll tell you how to file bankruptcy. If you go to a debt settlement agency, they’ll tell you how their program can help you settle your debts. What I’ve tried to do in this report is give you as objective a view as I can of your options. The best one will depend on your individual circumstances.

Now here is the disclaimer: The information in this report is for educational purposes. Ultimate Credit Solutions Inc. does not provide legal, tax or financial planning advice. We are not a credit counseling or credit repair firm. While we do our best to provide you with accurate and up-to-date information and resources, we cannot guarantee any of the services provided by other companies.

Let’s Get Started….

First, I want to offer you hope. No matter how difficult and awful your situation seems now, if you’re open and willing to adapt, you can create a better future. I’ve been there and I’ve seen it happen with others.

There are six basic ways to consolidate or eliminate debt that I’ll cover here. After talking with many consumers in many different situations, I’ve come to see these options as sort of a ladder.

You start on the bottom rung. If the first option works for you, great, use it and get off the ladder – if not, you move up another rung. Each step up gets a little more “drastic” in terms of the effect on your credit or financial life, but don’t get discouraged. Always keep in mind your goal is to get out of debt! Here are the six basic options in a nutshell:

1.Debt Roll Up
2.Unsecured Debt Consolidation
3.Secured Debt Consolidation
4.Credit Counseling
5.Debt Elimination or Negotiation

I’ll tell you the pros and cons of each of these options in this report. But first…


The ideal for most people is to get a debt consolidation loan at a low rate with lower monthly payments. You pay it off and you’re out of debt.

Here are some key basic facts about debt consolidation:

1. Debt consolidation is only the first step. The process doesn’t end until the debts are PAID IN FULL! If you want to avoid ever getting in this situation again and if you want to truly build wealth for your family, you must turn your debt into wealth.

2. Debt consolidation can get you deeper in debt if you’re not careful. I know, you think it won’t happen to you – but it does (I’ve been there done that like many of you!) and I hear the stories all the time. I’ll try to steer you clear of those problems.

3. Be honest with yourself about your situation. I’ve seen people make great changes in their financial situations but not until they were really ready and willing to do what was necessary. I’ll give you some resources that will help at the end of this report.

4. Get some help creating a plan for your financial future so you don’t get into debt again. Most of us go through thirteen years of schooling – and then college – without being taught a thing about how to handle money. Don’t be embarrassed – you’re in the same boat as a LOT of other people.

5. Don’t be afraid to shop around. Do you belong to a credit union? They can be an excellent source for personal loans. Or you may also have some negotiating power with your bank if you are a long-time customer. “Not asking is an automatic no!”

6.Don’t be stuck with the “all or nothing” mentality. If you can’t qualify for a loan to consolidate all of your debt, perhaps you qualify for one to consolidate some of it. The lower your interest, generally, the less you’ll pay. I’ll show you how small changes can make big differences!

7. Make sure you read and understand all of the fine print, rules and regulations of any loan agreement before you sign. I’ll warn you about traps to watch out for.

Important: Don’t procrastinate! If you need help with your debt, please use the resources in this report before you start cashing in your retirement funds, selling assets, refinancing your house to the hilt, etc. The biggest mistake you can make is to continue digging that hole without getting help. The deeper in you get, the harder it can be to get out.

Rung #1: Debt Roll Up

You Can Do It!

The first step in your effort to cut your debt is to find out what you can do without consolidating. Don’t stop reading yet! I know you’re probably thinking, “I wouldn’t have requested your report if I didn’t need to consolidate.”

But if you stick with me you’ll see why I suggesting you start here.

The average person has a stack of bills and credit cards. They pay as much as they can, but they don’t have a specific plan. In fact, they don’t really know how or when they will be able to pay off all their debt, or what it will take.

But with a clear plan, I’ve seen people who thought their only hope was bankruptcy find out that they actually can pay off all their debts on their own, with the debt and income they currently have. Want to see some success stories? The solution to paying your debts off faster may not require outside help. You may already have the solution and just don't know it! A Debt Roll Up plan helps you to pay your bills in a mathematically optimal manner, or pay them such that as much money goes to principal as possible, and as little to interest. The two main keys to this formula are:

1. Having a clear written plan for paying off your debts2. Knowing HOW to pay off your debts in the fastest way possible.

Let's say you have three cards with the following monthly payments due this month:

Visa $150
MC $75
Discover $35
Total: $260

This total is an amount of money that is committed to every single month – it’s your budget.
Now let's say you pay the minimums on each one this month and don’t charge any more on those accounts. Next month, because your balances have gone down your minimum required payments would probably be a little lower. For example, they may be:

Visa $149
MC $74
Discover $34
Total: $257

You’re committed to, and budgeted to, total payments of $260 every month. You’ve already learned to live without this money. So we’re going to have you stick to that total payment until your debts are paid. In Month 2 your required monthly payments only total $257, so you’ve freed up $3 “extra” to put toward your highest rate debt.

You pay minimums on all debts except the target debt, and you add every extra penny to that. This continues until you create a snowball effect where, after a certain point, you can pay off your debt very rapidly. The key is to always apply the biggest payment to the highest interest rate debt first and to follow a written plan!

Now, that doesn’t sound like much or like it could have much of an impact, but it does! Over time as you apply that money, you reduce the minimum payment even faster, you reduce it on multiple credit cards eventually by applying the little bit of extra money that is left, and you will actually end up paying off one of those accounts, freeing up the entire payment amount to apply to the next highest interest rate item. The results here can be dramatic!

If you’re really upside down and relying on the credit cards to fill the gaps, then a debt roll up plan may not work for you, but if you’re not to that point yet I strongly urge you to try this as the starting point. Even if you use some of the other approaches listed here, you can still plug them into your plan.

Rung #2: Unsecured Debt Consolidation Loans

This is what you’ve been looking for, right?!

A debt consolidation loan is an unsecured personal loan. This is what most people who come to my site are looking for – an unsecured personal loan to consolidate their debt and lower their monthly payment.

I have bad news for you…a good debt consolidation loan is hard to find. Credit cards have largely replaced the traditional debt consolidation loan. If you have a substantial amount of debt already, lenders consider you high risk – even if you have always paid your bills on time.

Here’s why: Did you know nearly a third of your credit score is the amount of debt you carry, including how close you are to your credit limits on revolving accounts like credit cards? That means, even if you always pay on time, high debt alone can lower your score.

What you have seen advertised as “debt consolidation loans” or just “debt consolidation,” is probably not the kind of consolidation loan you have in mind, but rather one of the other solutions listed in this report.

I’ve looked and looked but have found it difficult to find good national sources for unsecured debt consolidation loans at fairly low rates. That doesn’t mean you can’t try.

MBNA does offer a program called the Debt Freedom Plan, if you want to call them at 1-888-628-7700 and see if you qualify. And you may want to try your local bank or credit union can help. But if not, you’ll have to try to put the other solutions in this report to work for you.
Consolidating with Credit Cards.

As I just mentioned, credit cards have largely replaced traditional debt consolidation loans. The good news is that because there is so much competition in the credit card business, credit cards may be one of the best ways to consolidate. If you’re already maxed out on your credit cards, and can’t qualify for a low rate, then skip this section and move on. You’re probably going to need to move up the ladder another rung. If not, keep reading.

The lower your interest, the less you’ll pay and the faster you can get out of debt. In fact, with the right plan, you may be able to knock out your debt much faster than you thought possible. (I’ve seen it happen with a Debt Roll Up plan many times.)

Start by calling your card issuers and asking for a lower rate! Find out what they would offer if you will transfer balances from other debts to their card, for example.

Don’t be afraid to negotiate! If you’re carrying a balance, the credit card company doesn’t want to lose you as a (profitable) customer.

Tip: A terrific resource for learning how to negotiate is Scott Bilker’s book Talk Your Way Out of Credit Card Debt

Scott has made and recorded hundreds of calls with banks in his efforts to lower interest rates for himself, family and friends. In his book, he uses this real-life illustration: e made 52 phone calls that took 403 minutes (6 hours, 43 minutes) and saved $43,147.68. That’s an average savings of $107.07 per minute. Wouldn’t you like to save over a hundred bucks an hour?

If you can’t get your rates down, try shopping for a new card. But be careful! too many inquiries into your credit in a short period of time can hurt your credit report. When you get a new card, ask the issuer to transfer the balance from one or more cards to it. Don’t close out the old account you just paid off, however: Fair, Isaac Co. (creator the popular FICO credit scores) says that closing old accounts can’t help your credit and may hurt it. Also, try to avoid using more than 50% of the available credit on your new card, if possible, to avoid knocking your credit score down some by having a new account with a high balance.

How Do I Know Credit Card Consolidation Is Right For Me?

First of all, make sure you can get a lower interest rate, and if you can get it, go for a fixed rate. Secondly, try to follow a Debt Roll Up Plan to pay off your debt as fast as possible and minimize finance charges.

On the plus side, people with good credit histories qualify for much lower rates on credit cards than typical bank and consolidation loans. And since credit card companies are in competition for your business if you have a good credit rating, you can use it to your advantage and negotiate!

There are traps with credit card consolidation, however:

Check for expensive transfer fees – especially if they are not capped at say $25 or $50. I’ve seen transfer fees as high as 4% of the amount transferred, an amount that can add significantly to the cost of the new loan.

Watch for steep penalty payments if you are late paying your bill on the low-rate card, or any other credit accounts reported on your credit report. The non-profit Consumer Action reports that nearly half of card issuers will raise your rate if your credit report shows late payments on other accounts – or even if they think you just carry too much debt. This “penalty rate” or “default rate” is can be very expensive (24.99% or even much higher), and can apply to your existing balances as well as new purchases.

Understand that if you transfer a balance to the card that already has an existing balance, the issuer will almost always apply your payments to the lowest rate balance first – the exact opposite strategy that we use in a Debt Roll Up Plan. If possible, transfer low-rate balances to cards that already have a zero balance.

If you have a lot of debt or a damaged credit history, you may have a problem qualifying for the better low rates. In that case, you’ll want to work on rebuilding better credit while sticking to a plan for optimizing the payments on the debts you already have….Or you may need to move up a couple of rungs on the ladder, so keep reading.

Another Creative Option: Borrowing From Friends And Family

Borrowing from friends and family to pay off debt can be a win-win situation, but too often it’s not. When friends or family don’t get paid back on time you can quickly ruin that relationship.
How do you make it work? Create a professional, legal agreement, pay interest on the money, and have a specific repayment plan. This can add a comfort factor for the lender, as well as to make sure the loan gets repaid.

Rung #3: Secured Debt Consolidation

While home equity loans, refinancing and loans against retirement accounts are very popular, I’ve made them Rung #3 because they do carry risk. Let’s face it – most Americans have NOT saved enough for retirement. Home equity and retirement plans are usually the bulk of what people have saved for retirement. Use those to pay off debt and you may have just taken what little you have for the future and used it to pay off things that are long gone. That doesn’t mean they can’t be helpful when really needed. But please understand the pros and cons.


Also known as second mortgages or home equity lines of credit, these loans allow you to tap into the equity you may have in your home. (Equity is what the home is worth, minus what you owe on it.)

Home equity loans usually offer attractive low rates, the benefit of deducting your interest if you itemize your taxes, and many have a no closing cost option. On the downside, interest rates are usually variable and can change over time, making them more expensive if rates go up. Also, you may be wiping out most of the equity in your home, which could make it more difficult to sell without taking a loss if needed. The biggest downside? You can lose your home if you can’t pay.


Another way to tap the equity in your home and pay off some other debts is by refinancing your house, and taking out more money to pay off other debts. This is usually referred to as a “cash-out refinance” as opposed to a “rate and term refinance” where you are just refinancing your existing balance.

With interest rates on home loans so low (lower, if you add in any tax deductibility), you may be able to get a lower monthly home payment and free up additional cash each month. With that additional cash, you can:

Create an emergency fund of three-six month’s expenses.
Pay off other higher-rate and non-tax deductible loans.
Invest it.

Here’s the downside (there is always at least one!)

1. You’ll start over with a new long loan. If you don’t prepay it, you’ll end up paying more in the long run.

2. You must figure in the cost of refinancing to see whether it’s financially worth it to consolidated this way. (You can use a breakeven calculator to figure out when you’ll come out ahead)

3. There may be a prepayment penalty on the new loan, so watch out.

4. If your credit is not great you may pay a higher rate.

One caveat: 92% of consumers who consolidate using equity in their home end up with new credit card debt two years later. So you absolutely must have a plan for really getting out of debt – and staying out.

Retirement Loans

It is usually very easy to get a loan from your 401(k) or 403(b) plan, and some pension plans. (You cannot borrow against an IRA). Essentially, you are borrowing against yourself. You can usually borrow about half the value of your account.

The benefits of these loans are low interest rates, usually in the single digits - -and the interest you do pay is to yourself. There is generally a quick payback period (usually five years) and it’s easy to borrow since there are no credit checks or income requirements. You can obtain the details about your plan usually from your employers’ HR department or the plan administrator.
If you have a chunk of money socked away in a 401(k), 403(b) or certain types of pension plans, you may find that using it to pay off costly debt may be the best use of your money – especially now when returns on most mutual funds and stocks are low.

Be advised that the better way is generally to borrow against your retirement account, rather than withdraw from it. When you withdraw funds early from these plans, you generally pay taxes and a 10% penalty.

On the downside, you may short-change your retirement, since you essentially won’t earn anything on the money until it is reinvested. (On the other hand, you won’t lose money on the account as many people have in the past few years in the stock market!) And if you don’t make your payments as agreed, the loan is then considered a withdrawal. You could then be on the hook for taxes and penalties if it is considered an early withdrawal. Having your payments deducted right out of your paycheck could prevent this problem.

Another warning: Some plans make you pay back the loan right away if you lose or leave your job, or your balance will be treated as an early withdrawal.

Also if bankruptcy is the right option for you, it may make sense to just go ahead and file and protect your retirement account, rather than raiding it first -- then finding out you have to file anyway. In many cases, your retirement funds will be protected in bankruptcy. Make sure you explore all your options before borrowing against your retirement account.

Rung #4: Credit Counseling

Some people can’t obtain any kind of consolidation loan, due to credit history problems or because they have too much debt. For them the right solution may be getting help from a credit-counseling agency. Most of these organizations are non-profit and some have helped consumers for many years. In general they:

1. Can obtain lower payments and/or lower interest rates with your creditors. (Usually an average of 8—10%. Some creditors go down to 0%, others won’t budge.) You’ll usually pay about 1.5 times your debt back through one of these programs, which can be much less than just making your current minimum payments.

2. You’ll make one monthly payment to the agency and then they, in turn, pay each of your participating creditors. Usually, this monthly payment is lower than what you were paying before because of better terms with your creditors.

3. You will be required to stop using your credit cards, except perhaps an employer-sponsored card for business travel.

4. The good ones offer budget counseling and educational services for free or at a very minimal cost.

How Do I Know If A Counseling Agency is Right For Me?

If you are paying your bills on time right now, but simply want a lower interest rate or better terms, you would not be the best candidate for a counseling agency. This service is aimed primarily at debtors who are falling behind, who are just making the minimums, or who are “robbing Peter to pay Paul” each month.

Beware of agencies that don’t take time to really evaluate your situation and just try to push you into a debt repayment program.

If you enroll in one of these programs, your creditors may waive late fees or over limit fees, and/or offer lower interest rates. Unfortunately, secured debt such as auto loans or home loans generally cannot be renegotiated as part of one of these plans. Some agencies may also offer separate programs for negotiating a mortgage or car loan but this will not be part of a standard credit counseling program.

Student loans are also a different ball game and must be addressed separately. Before joining one of these programs it is important to find out whether most of your creditors will participate, and whether the terms they offer are competitive.

How Do Counseling Agencies Make Money?

1. At one time, almost all creditors would contribute around 15% of the debtor’s monthly payment back to the counseling agency. This is called the “Fair Share contribution.” The trend, however, has been for lenders to cut way back on their “Fair Share” contribution. This has put a crunch on counseling agencies.

2. You may have to pay a one-time, up-front fee, and/or ongoing monthly fee for the counseling agency services. Watch out for agencies that charge high up front fees or take your first monthly payment as a “contribution.”

3. Counseling agencies participate in raising funds from both their communities, and the creditors. Some receive grants and charitable contributions.

How Will Credit Counseling Affect My Credit?

This is probably the #1 question I get from consumers about credit counseling.

Before I answer, ask yourself, “What will honestly happen to your credit rating if you don’t do something now?”

Keeping your credit rating in good shape is important, and I’ve written extensively on that topic. But if you’re maxed out, you may be able to keep up the minimum payments for a while, but you won’t get anywhere. One emergency, and one late payment on any loan, and suddenly you’re paying double-digit rates and really stuck.

Take a longer term view. Is it better to keep paying minimums for thirty years to protect your credit or is it better to take the short term hit, pay off all your debt and be debt free in three to five years?

And actually, credit counseling – if the agency is good – will not likely affect your credit as much as you think. Most creditors do not flag your account if you are in counseling. In fact, if you get on a counseling program and stick to it, many creditors will “re-age” your account, or bring it up to date, on your credit report.

In addition, Fair Isaac, the creator of the widely used FICO scores reports it does not take into account credit counseling notations on your credit report in calculating a credit score. If the counseling agency doesn’t pay your bills on time and those late payments hurt your credit – or if you don’t stick to the program -- that could affect your credit. But the fact that you have repaid your debts through a counseling program should not in and of itself hurt your credit score.

If you are planning to buy a home or other major purchase you should talk with the counseling agency about whether this will be possible while you are in the program.

You’ve probably seen the news stories about counseling agencies that do a lousy job and make things worse for consumers. It absolutely does happen so please be careful. Here are a few things to consider before signing up for one of these programs :

1. Will you be able to afford and stick with their program for the duration of the program, usually 3 – 6 years, depending on your level of debt?

2. Non-profit is a tax status, period! They still must make a profit to stay in business. The IRS is taking a closer look at agencies that might be abusing their tax-exempt status.

3. Ask them what’s their accuracy rate and how often have they been late to creditors. You will be liable for late charges, whether or not the late payment is their fault.

4. If an agency is advertising themselves as a “debt-consolidation” solution for anyone who wants lower rates, examine them carefully! Are they spending time evaluating your situation or just trying to get you to sign up?

5. Are their fees clearly spelled out? Get the facts and read the small print.

6. Do they offer educational programs to help you stay successfully on the program and make better choices for a debt-free future?

7. Check the counseling agency out with the Better Business Bureau in your area and in the areas where the company is located can help. Take your time getting the information you need to feel comfortable (even check the BBB to ensure that they are not giving you misleading information, Like William G. Mitchell for the Los Angeles BBB. Do a search of him on Yahoo! and you'll find that even is crookeder than a snake.) Don’t let yourself be “pushed” into any particular one unless you feel comfortable.

Rung #5: Debt Negotation or Elimination

If you’ve discovered the other options I’ve listed won’t work then it’s time to move up to this rung on the ladder and consider debt negotiation. Debt negotiation companies work to arrange settlements with your creditors for much less than you owe.

Here’s how they work: You stop paying your creditors and start making a monthly payment (usually quite a bit less than the total you’ve been paying) into a trust account. That money will be held for you. As you fall behind on your bills, they will likely be charged off (written off as bad debt) and perhaps sent to collections.

In the meantime, the debt settlement company will begin negotiating with creditors or collectors until they settle the bills, usually for a total of 50 – 60% of what you owe, including fees charged by the settlement company.

For example, let’s say you owe $20,000 in credit card debt and you enter a 24-month debt settlement program. Your monthly payment will be roughly $500 and you will save $8000 plus any future interest charges. At the end of two years, if all your creditors settle, you will be free of unsecured debt.

Here are the most common questions I get about debt negotiation:

Q. What is the interest rate?
A: It’s high but largely irrelevant. As soon as you stop paying, your creditors will likely hike your interest rates to 22 – 28% or more. But remember, the debt will be charged off and settled for less than the total balance. At that point, you’re really dealing with a settlement situation.

Q: What happens to my credit?
A: It’s shot – for the time being. But if you’re trying to avoid bankruptcy, this may be your best option for doing that. (I have other resources that deal with rebuilding credit.)

Q: Can’t I do this on my own?
A: Maybe – if you have one or two accounts, only. But if you have multiple accounts you’ll need nerves of steel to deal with the professional collectors that are going to be calling A LOT.

Q: Do I have to include all my accounts?
A: Generally, yes. Creditors can pull your credit at any time to review it. They aren’t going to be too amenable to letting you off the hook if you are still paying another creditor in full, on time.

You should be very careful when choosing a debt settlement company. Here are a few things I think are important:

You’ll want to make sure the money is held in a separate trust account (away from the companies’ operating funds) but so it is still ultimately under your control.

Watch out for high pressure tactics from companies more interested in getting you enrolled than in identifying whether it is right for you.

Look at the how the company will be paid. While you will have to pay something up front, I personally think it is beneficial for the company to also get some of their payment after they are successful in settling your debts. That keeps them motivated to do the best job possible for you!
Some creditors may sue. A debt settlement company cannot, and should not, promise that you have legal protection against your creditors. They should try to warn you if any of your creditors are known as high-risk.

Another warning: Uncle Sam may expect a piece of the action too. The IRS considers debt that is forgiven “discharge of indebtedness (DOI) income” and will then expect you to pay taxes on these amounts as earned income. You may be able to get that tax liability wiped out with the proper forms to the IRS showing you are insolvent. But it’s not guaranteed! Make sure you understand this potential problem and get advice from a tax professional.

On your credit report your debts will usually be listed as “settled.” You’ll need to start proactively rebuilding your credit as soon as your program is completed. Consumers who do this may see significant improvement in as little as one to two years.

How Do I Know If Debt Negotiation/Elimination Is For Me?

Debt settlement is not for consumers who just want to pay off their debt faster or save money. It’s really designed for consumers who have a lot of debt and for whom bankruptcy or credit counseling is not a good option. Let’s take a look at this more carefully:

1. If, for some reason, bankruptcy isn’t a good option for you, and you are drowning in debt, this may be the option for you. Chapter 7 (straight) bankruptcies have become harder to file and Chapter 13 bankruptcies (where you pay back some of your debt) can be extremely restrictive. In essence, the courts are telling you how you can spend your money.

2. You may have a situation where you have joint debts with a spouse or relative who does not want to file for bankruptcy. In that case, you may not be able to file bankruptcy without including those debts, so debt negotiation may be a better option. (They will have to agree to the debt settlement program for any debts that will be included.)

3. If you are a professional with a license that could be jeopardized by filing bankruptcy, or if you want to keep you debt problems out of the public record where others can find out about them, debt negotiation may be an option to consider.

Can You Really Eliminate Your Debt?

There are services that make claim banks aren’t legally allowed to lend you credit. They make statements like, “The collection of interest on credit issued by a bank or a credit card company is in direct violation of all usury laws!” These companies tell a convincing story about how it is not even legal for a bank to lend you credit. They’ll ask you to pay a large sum -- $2000 to $5000 is common -- to get information or assistance in eliminating out your debts. (They’ll also tell you that you can charge that sum on your credit cards then wipe out the debt!)

Don’t fall for it! I interviewed a consumer who spent months in one of these programs and when all was said and done he ended up filing for bankruptcy anyway. In addition, some of these programs can land you in hot water with the FBI and the Fed! Also, read MSN Money reporter Liz Pulliam Weston’s report on this topic.

Please steer clear of these offers, no matter how convincing or tempting they may seem.

Rung #6: Bankruptcy

Bankruptcy is not an easy decision, but most people who file really need to. In fact, researchers have found that less than 5% of the cases of bankruptcy involve abuse of the system. Most people who choose this option have honestly gotten so overburdened with debt that it is the only way out for them.

The credit card companies would lead you to believe that bankruptcy is a moral failure, but I have a hard time seeing the card issuers as taking the moral high ground. After all, the interest rates they charge today are so high they used to be illegal a few years ago, they market credit cards to high schoolers who have no financial experience, and they are bypassing our American judicial system with sneaky mandatory arbitration clauses that force consumers into quick judgments even for disputed debts.

Congress recently passed legislation that will make bankruptcy more difficult and more expensive for consumers. If bankruptcy is something you are considering, I strongly suggest you talk with an attorney sooner rather than later.

If you live in one of the following states indicated in red on this map, call 800-493-6445 now for a free conversation to learn whether bankruptcy may be the right option for you.
While you may not want to file, if you need to go that route, it is much better to get advice early on in the process. If you do not live in one of the states listed on that map, you can visit http://www.nacba.org/ to find a bankruptcy attorney in your area.

I also want to emphasize that bankruptcy is a serious move, and you’ll want to explore all your options. But at the same time, don’t procrastinate! Many people I’ve talked with have waited too long to talk with a bankruptcy attorney. At that point they may have made serious financial mistakes (like raiding their home equity or their retirement funds) that could have made the process a lot less difficult. So even if you don’t want to file, meeting with an attorney to discuss your options may be wise.

Here’s a brief overview of personal bankruptcy. For more details, you’ll want to read John Ventura’s book, The Bankruptcy Kit. The goal of bankruptcy is to give consumers a clean slate in the face of debt they have no possibility of paying back. It can also be a way to work out payment plans that are reasonable and affordable to people without losing their homes. Bankruptcy protects consumers from losing certain assets when they can’t pay their bills, and can provide a “safe haven” of time and breathing room. For someone who is on the brink of not only losing everything to creditors, but who may have their wages garnished and/or be evicted, bankruptcy can be enormously helpful.

The Two Primary Types of Personal Bankruptcy

Chapter 7: “Straight” bankruptcy is a “liquidation” of sorts. Most people who file for personal bankruptcy file under Chapter 7, and this is the type of bankruptcy Congress doesn’t like. You may have to liquidate the value of property, except for those things that are exempt. Once you have done so, whatever can be paid to your creditors must be paid, at which time your bankruptcy is discharged. Creditors cannot keep you in “collections” after this and must accept whatever amount you did pay and close the book.

Chapter 13: Another name for Chapter 13 bankruptcy is “wage-earner’s plan.” With the help of the court, this plan allows repayment of some or all of your debts within a three to five year time period. You also do not give up exempt property.

Keep In Mind

1. You will need a good lawyer to file bankruptcy correctly.

2. If you’ve explored all the options and it really seems that bankruptcy is the best, or only answer for your situation, don’t “beat yourself up” emotionally. You are not a bad person, and all of us find ourselves in some kind of a deep pickle at one or two times in our lives. Get support from friends/family, take a deep breath and take the plunge. You will be making a huge step towards a viable future, and, hopefully, will take steps to insure you don’t get into debt like that again.

How do I know if bankruptcy is right for me?

Here are five things to consider. A bankruptcy attorney can also help you make a good decision:

1. You may have to give up property that you want to, or need to keep. Ask your attorney.

2. If you are low on money, don’t own property and have no debts jointly with anyone else, your creditors probably can’t collect, even if they sue you. You’re “judgment-proof” and going through bankruptcy is another expense. If you are working, however, they may be able to garnish your wages, but usually only after they take you to court and win a judgment. (State laws on wage garnishment vary.)

3. If your situation is complicated by the fact that you have some joint accounts, or someone has cosigned for you, the lender may go after this co-applicant after you are discharged in a chapter 7 bankruptcy. You may be able to prevent this by reaffirming a debt and paying the creditor off, even after discharge.

4. Some bankruptcies can be challenged where fraud or abuse is suspected. One example is when someone “maxes” out their credit cards on a shopping spree, and declares bankruptcy right after. Other such situations alert creditors to possible premeditated plans.

5. Finally, if you will need to borrow in the near future, the affect of bankruptcy on your credit can make it difficult for you. Most people, however, who are proactive can reestablish very decent credit in as little as two years.

Two Final Keys to Success with Debt Consolidation

Consolidating your debts could be a great way to move toward your goal of becoming financially free. But it’s not the only step. Ideally, you’ll also want to take two other important steps:

1. Create an optimal plan for paying off your debts as soon as possible. You need a debt-free date to work toward so you can handle the natural ups and downs that will happen as you work toward your goal.

2. Monitor and build your credit report. Your credit report will play a key role in the interest rates you’ll pay on your debts. The better your credit, the lower your interest. So work continually on improving it.


I’ve given you the straight scoop on your debt consolidation options in this report. But if you’re like most people you’re going to do one thing with this information:

That’s normal, but it’s a huge mistake. Let’s face it; dealing with debt is not fun. I know you’re sick and tired of dealing with your bills. If you’re like most of us you work too hard, relax too little and don’t have a whole lot to show for it. The cold harsh reality is that until you take a step in the right direction, nothing is going to change. And chances are things will get worse.

At the same time, the fact that you’re read this far into this report says something about you: that you are willing to make a change. Pat yourself on the back for the fact that you are taking the responsibility for your financial future! It takes willpower and guts to get out of, and stay out of, debt in a society that promotes spending past one’s means as a way of life. Now you’re ready to find a solution and take control. What are you waiting for?

Can I Help You?

I have consulted thousands of people to get out of debt. What you have read is only the basics. You’ll need to actually talk with someone that recommend a course of action for you. You may call me anytime Monday – Friday between 9 am and 5 pm PST at 1-800-404-8687 or email me at jae@edebtfree.org.Best of luck to you.


IRS Cracks Down on Credit Counseling

IRS Revokes Tax-Exempt Status of Four Credit Counseling Agencies

July 17, 2005 The Internal Revenue Service has revoked the tax-exempt status of four credit counseling groups and is continuing its investigation of several others accused of abusing their tax-exempt status, a senior IRS attorney said. She did not identify the organizations affected.IRS attorney Debra Kawecki addressed members of the Association of Independent Consumer Credit Counseling Agencies, which held its annual meeting in Washington last week.

According to the IRS Web site, A Better Way Credit Counseling of Greenacres, Fla., and the National Center for Debt Elimination of North Huntingdon, Pa., no longer qualify to receive tax-deductible contributions, the Baltimore Sun reported. AmeriDebt, once a major credit counseling agency, is being liquidated in bankruptcy court and its founder, Andris Pukke, is being sued for $172 million by the Federal Trade Commission.

Kawecki was challenged by a lawyer who represents credit counseling firms. David Borinsky said the IRS should issue rules to give the agencies more guidance.

But Kawecki shot back that credit counseling is not rocket science and said rules weren't needed. "It's basic bread-and-butter tax-exempt law ... You help people, you don't hurt people," she said, according to The Washington Post.

Credit counseling became a growth industry in the 1990s, as scores of supposedly not-for-profit organizations were created, each claiming to help consumers manage their debt. But consumers and investigators say many of the agencies charged high fees, funneled money to for-profit affiliates and didn't provide the consumer education they promised.

The crackdown has taken on added urgency because of the new bankruptcy law which goes into effect in October. It requires that consumers undergo credit counseling with a government-approved not-for-profit before filing for bankruptcy.

The IRS has reportedly received about 40 applications from agencies hoping to qualify for tax-exempt status and so far has notified about half that they don't appear to qualify, a senior IRS attorney told a conference of credit counseling organizations.

Consumer advocates have criticized the IRS for being too lenient in granting tax-exempt status to credit counselors.

In April, IRS Commissioner Mark W. Everson told a Senate committee that the IRS identified 60 credit counselors for examination. He added that the IRS revoked or proposed to revoke the tax-exempt status of counselors representing more than 20 percent of the industry's


As Bankruptcy gets Tougher, Choose Alternatives with are

Debt-laden consumers will find shelter harder to come by as tougher bankruptcy rules take effect. But alternatives are few and scammers who prey on financially strapped borrowers abound.

People with serious money problems who don't want to declare bankruptcy typically go one of three routes: They try to negotiate with creditors, use a credit-counseling agency, or work with a so-called debt-settlement company. Because there are drawbacks to all three, consumers need to choose with care.

Both the debt-settlement (also called debt negotiation) and credit-counseling industries harbor bad operators who make exorbitant promises to consumers, charge steep fees and offer little in the way of results. Finding a legitimate operator takes some investigation.

And dealing directly with creditors can yield widely variable results. Someone with high debt on many credit cards will likely be less successful than someone struggling with one or two cards.
"They have changed the bankruptcy rules but they have not changed any of the underlying reasons why people file bankruptcy in the first place," said John Ventura, a bankruptcy attorney in Houston and author of "The Bankruptcy Kit," adding that his clients often face medical hardship or job loss.

For most, the first stop will be a credit counselor. The new bankruptcy law requires consumers complete a credit-counseling course with an approved agency when filing for bankruptcy. Even if you're not planning to file, consumer experts suggest seeking aid from an approved agency.
"If there's a possibility that you're going to have to file bankruptcy, you're better off going to the agency that's already been approved" to provide the necessary certificate, Ventura said.

A preliminary list of approved agencies is on the Justice Department's U.S. Trustees site at www.usdoj.gov/ust/. Click on "credit counseling and debtor education" and then on "approved credit counseling agencies." Visit the site.

When seeking aid from a credit-counseling agency, make sure counselors aren't paid commissions for putting people into debt-management plans and avoid agencies that charge steep up-front fees for, say, education pamphlets.

Also, make sure counselors discuss your overall debt picture. If, for instance, they don't consider your mortgage payment, you may find yourself struggling to afford the debt plan.

Debt settlement

Because counseling plans usually require consumers to pay back the full balance, debt settlement -- with lower monthly payments as consumers pay a portion of what they owe -- may work better for those at the end of their financial rope. Consumers stop paying creditors and instead put money aside each month for one final, lump-sum payment. The settlement firm negotiates with credit-card issuers so consumers can pay a percentage of the debt, often 40% to 50%.

While in the program, credit-card fees and interest accrue, and the consumer's credit rating deteriorates fast. And creditors and collection agents may keep calling. For that reason, people with unsullied credit records should stick to credit-counseling plans, which are less likely to hurt credit ratings.

If your debt-settlement program takes too long, there's a chance creditors will sue you before you're done. Remember, this isn't like credit counseling, which creditors fully support. The debt settler just tells the consumer to stop paying bills (because that's likely to make the creditor more flexible) and then tries to agree with the creditor on how much debt must be paid. Talks can take years. Impatient lenders may sue.

Despite the seemingly easier terms of debt settlement, not all companies fulfill the promises they make. And because the amount of debt owed rises as consumers save for the settlement, some consumer advocates say steer clear.

"It makes it very hard for people on a tight budget to save enough money to settle multiple debts," says Deanne Loonin, staff attorney at the National Consumer Law Center, in Boston, who wrote a report in March criticizing debt-settlement companies.

Reputable firms do exist, experts and bankruptcy lawyers say. "There are some debt-settlement companies that are really trying to help consumers avoid bankruptcy," said Gerri Detweiler, author of the "Ultimate Credit Handbook" and operator of DebtConsolidationRx.com, a consumer advice site. "The good ones are harder to find."

But first "talk to a reputable nonprofit credit-counseling agency. That's going to be your best bet if you can afford the monthly payment," she says.

While the credit-counseling industry has a rosier reputation (this is just not true. As a matter of fact it has a worst reputation. However, most banking companies will have you believe this as it is in thier interests), some agencies have come under fire recently for pushing consumers onto inappropriate debt-management plans and charging exorbitant fees without providing the education required by their nonprofit status.

Also, most credit-counseling organizations are funded by contributions from creditors. Some industry observers argue the agencies are more beholden to credit-card issuers than consumers.

Still, consumers may find debt settlement and credit counseling more appealing under the new bankruptcy law, as it's likely fewer filers will be eligible to write off their debts under Chapter 7, and more will be forced into repayment plans under Chapter 13.

"It's going to be harder to file a Chapter 7," said Alan Kopit, a legal editor at Lawyers.com and bankruptcy attorney in Cleveland. "If they can't solve their problems through bankruptcy, they're going to try whatever they can try, which will be [some form of] debt consolidation."
Consumers have been rushing to file before the law changes: Personal filings are up 19.4% year to date through Oct. 8, versus the same period a year ago. More than 102,000 people filed in the week ending Oct. 7, a record high and an average of more than 20,000 filings per weekday, according to Lundquist Consulting in Burlingame, Calif.

Vet any program

Obviously, cost is a key factor. Some companies charge as much as 30% of debt owed. Debt Settlement USA charges 12% of the amount of money owed when you enroll, spread out over 10 months, so if you owe $10,000, you pay $120 a month for 10 months.

Freedom Financial Network offers two payment plans: 25% of the amount the company saves you (based on balance owed at enrollment), paid each time the company settles with a creditor, or 15% of the balance owed, paid each month the customer is enrolled.

Be wary of plans lasting longer than three years. "When they stretch out beyond 36 or 48 months, that's very risky for the client. At that point, some creditors are going to want to sue," Detweiler says.

Also, a good settlement company will warn you about possible tax consequences: Consumers sometimes owe income tax on forgiven debt. There are exceptions. For instance, if your debts exceed your assets at the time of settlement, you likely won't owe tax.

For more information on the tax consequences, consult a tax expert. Or, find Publication 908 on the IRS Web site at www.irs.gov. Look for the "debt cancellation" section.

With any debt-solution program, check with the Better Business Bureau and your state attorney general's office to see whether consumers have complained about the firm.

Go to www.naag.org and click on "find your attorney general." You can search companies' names through the Better Business Bureau at www.bbb.org (see the box at the top of the page that says "check it out").

For more information on debt plans and a list of questions to ask when choosing a credit counselor, visit the FTC Web site at http://www.ftc.gov/bcp/conline/pubs/credit/debt.htm.

Andrea Coombes is a reporter for MarketWatch in San Francisco.

October 14, 2005


Living off Credit Cards

Credit cards cover living expenses for many

Americans' penchant for charging up a storm on their credit cards often has more to do with basic necessities than with a lust for the latest consumer goods, according to a survey released this week.

Seven out of ten low- and moderate-income households said they use credit cards to cover basic living expenses such as car repairs, utility bills, groceries or house repairs, according to the telephone survey of 1,150 adults who had owed credit-card debt for at least three months.

One-third of the consumers said they used their credit cards for basic necessities on average four out of the last 12 months. Only 12% of those surveyed said they never used credit cards for basic living needs.

The average level of credit-card debt among those surveyed was $8,650. Twenty-nine percent had credit-card debt topping $10,000, while another 31% said their credit-card debt was less than $2,500.

But, when asked about their payment intentions over the next three months, some appear determined to pay down debt: 41% planned to pay two to three times the minimum due, 39% said they'd pay the minimum plus a little extra, while 10% said they'd pay the minimum.

Often, credit-card charges were spurred by a medical emergency or a job loss, according to the survey conducted by ORC Macro for Demos, a nonprofit advocacy group that looks at economic opportunity, and Center for Responsible Lending, a nonprofit advocacy group focusing on predatory lending.

Consumers who suffered a recent job loss or who didn't have health insurance in the last three years were almost twice as likely to turn to credit cards to cover their essential needs.

Job loss and medical expenses "are the two biggest predictors of which households are going to have higher relative levels of debt," said Tamara Draut, a co-author of the report and director of the economic opportunity program at Demos, in New York.

But even those families that didn't suffer emergencies felt the need to turn to plastic to pay for living expenses, she said.

There's "a fundamental mismatch in the economy, where wages aren't keeping up with the cost of things like health care, child care, housing," Draut said.

"We have a lot of families living paycheck to paycheck. Any time something unexpected happens, whether it's an illness or a car breaks down or a furnace breaks down, they turn to credit cards to keep things running," she said.

Survey respondents earned 50% to 120% of their county's median income, with annual incomes of some as high as $75,000, said Ellen Schloemer, a co-author of the report and research director at the Center for Responsible Lending, in Durham, N.C.

Refinancing gone awry

Forty percent of the homeowners in the survey refinanced their home mortgage or took out a home-equity credit line in the past three years, and over half of these homeowners used the money to pay down credit-card debt.

But most of them quickly beefed up that debt again.

On average, homeowners who refinanced to pay down their credit cards still owed $14,419 on those cards versus the $8,810 owed on average by homeowners who refinanced but didn't pull out cash to pay off debt.

The group that refinanced to pay down debt also owed more on their mortgages: $111,460 on average versus an average mortgage of $99,338 among homeowners who refinanced without pulling out equity.

According to the survey's authors, the homeowners resorted to charging more credit-card debt, even after they had worked to pay a chunk of it off, because they faced basic needs they couldn't afford without the plastic.

"A lot of the difference between a family getting ahead and a family really struggling is misfortune and chance. The homeowners that had [beefed up their credit-card debt again] we're more likely to have a job loss and more likely to report a major illness in the family," Draut said.

Cap on interest rates?

The study's authors say more generous unemployment insurance and greater access to health insurance would go a long way in reducing consumers' reliance on credit cards, but they'd also like to see more laws governing credit-card issuers, such as a cap on interest rates. See related story on 10 cards with the best terms.

"Probably the easiest [solution] to adopt would be changes to some of the credit-card policies that really disadvantage people, really lock them into a continuing trap of debt," Schloemer said.
"Is it really fair, if someone makes one late payment, to increase their interest rate from 12% to 25% on their whole balance, on everything they borrowed up till now, and by the way the late payment doesn't have to be on their credit card, it can be on their utility bill?" she said.

"As a society, we have to really encourage the idea that an alternative to short-term credit is savings," Schloemer said. "If people weren't paying on really high-interest-rate cards, they might actually be able to save some money. That's a much stronger safety net than credit cards."

Andrea Coombes is a reporter for MarketWatch in San Francisco.

October 12, 2005


Budgeting – The Critical Flaw That Causes Most Budgets to Fail

Budgeting. It's a word we're all familiar with. Everyone knows what a budget is, right? Yet how many of us actually make and stick to a solid monthly budget? The truth is that most of us start out with the best of intentions, but an unexpected expense comes up and busts our budget. Then we give up and go back to juggling our finances and worrying about having too much month left at the end of the money. However, if you are striving to create a budget for the purpose of systematically paying off your debts, or to start a savings and investment program, then it's critical to develop a workable and realistic budget.

So what's the problem? Why do most of us fail at the simple task of creating a budget so we can live within our means? The simple truth is that most budgets don't work because they fail to account for irregular or variable expenses. Everyone knows how much their rent or mortgage payment is. It's the same amount month after month. If your rent is $1,000 per month, that's a "no-brainer." The same is true of many other fixed expenses, such as auto loan payments, cable TV subscriptions, insurance premiums, and so on. It's easy to budget for these expenses because the amounts don't change from one month to the next.

Besides expenses that are the exact same figure each month, there are numerous types of expenses that vary a little from one month to the next, yet we still have a pretty good idea what we spend each month. A good example is our grocery bill. Most of us have a fairly clear picture of how much we spend each week at the supermarket. So we can insert a realistic figure into our budget-in-progress and not be too far off the mark. Sure, the amounts may go up or down slightly each month, but we usually know the range we're dealing with. Other examples of this category include telephone bills, utility bills, and gasoline (although this one certainly seems to be going nowhere but up these days!).

The real culprit in busted budgets, however, is the variable or irregular expense. How much will you spend on car repairs over the next 12 months? What about medical bills? Home maintenance costs? It seems that bills for these types of expenses hit us out of left field, and there goes our budget. Before long, we're using food money to cover a new set of tires for our car, and the whole budget comes crashing down.

So what's the solution? There is no perfect answer to this problem. But we can come to a close approximation by using the simple technique of monthly averaging. Start by gathering 12 months' worth of checkbook registers, bank statements, and credit card statements. Write down (or enter into a spreadsheet) how much you spent each and every time your money went toward something that was not a fixed expense. Group these expenditures into categories, such as auto, home maintenance, clothes, etc. Don't try to break it down too far. What you want is a handful of useful categories. Then keep listing each of these expenses under their relevant categories for the full 12-month period.

When you are done with this exercise, you should have an excellent idea of your total annual expenditure for these variable expenses. For example, if you add up all the automobile repair or maintenance expenses for the year, and the figure comes to $1,200, then divide by 12 to get the result of $100 per month average. That's how much you need to allow in your monthly budget in order to build up enough reserves to handle an auto repair when it comes up. Again, this method isn't perfect, because an expense may come up that exceeds your estimated outlay, but at least it takes into account a closer approximation to reality than simply guessing, or worse, ignoring auto maintenance in your budgeting.

The trick here is to set up a separate savings account in which to set aside these "extra" funds. Let's say the "extra" $100 goes into the savings account for six months, and then you get hit with an auto repair for $400. You pull the money from your $600 savings that was purposely built up for this type of expense. This way, you're automatically setting aside amounts intended to cover each type of irregular expense that you encountered over the previous year.

Most people are shocked when they perform this 12-month analysis of irregular expenses, and it immediately becomes clear why their budget is always breaking down. This technique leads to the discipline necessary to recognize that "extra" money is seldom really extra. If we think we have our bills covered, and there is some cash burning a hole in our pocket, our tendency is to spend it on something fun. But if we know that there really is no cash left over, because we haven't yet set aside the extra $100 needed to keep our car on the road, then we'll be less inclined to spend it on pizza, beer, and movies.

Budgeting can be successfully accomplished by this technique of monthly averaging, especially if we consistently apply it year after year. As we move forward, our understanding of our true expenses becomes clearer and clearer, and we are no longer surprised by the occasional unexpected expense. The best way to implement this approach is to set up a regular savings program, where the amount you're setting aside to cover irregular expenses gets automatically deducted from your paycheck and forwarded to your savings account. If the money is deducted from your paycheck before you even see it, then you will be less tempted to skip this critical part of the budgeting process, and you will greatly increase the chances of making a budget work over the long term.

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