QUICKLY OUT OF DEBT

One of the secrets of managing your debt load is knowing when to borrow and when to pay cash up front for purchases. As we’ve discussed before, some debt is good. When you’re making payments on an asset that will appreciate or retain its value, that debt is healthy. The problems set in when you start making high-interest payments on items that will quickly depreciate in value. Credit card debt falls into the bad debt category.

We’ve been taught to charge the things we want as well as the things we need. How many department stores offer us credit cards when we check out? Even smaller specialty retailers have credit cards now, and they’re eager to sign people up.

But almost anything you’d pay for with those credit cards should be bought with cash instead. Think about it: the clothing, appliances, and household items found in departments stores will decrease in value almost immediately. Then you’re stuck with interest-laden debt for items that haven’t retained their worth.

A better strategy is to put aside a portion of your income each month for incidental expenses. These are the miscellaneous purchases that don’t count as entertainment expenses, but don’t fall under your static monthly bills either. Always pay for incidentals in cash so that you don’t add to your debt. And before you sign up for department store credit cards, check out the terms and conditions; they might surprise you, and not in a good way. Store cards tend to have higher interest rates than regular credit cards.

A good rule of thumb is this: if something can be viewed as an investment, it’s okay to borrow money to make the purchase. Investments include things that will keep their value or even go up in value over time. A college education, for example, is something that will go up in value by opening doors to higher-paying jobs. A home increases in value as the house and surrounding land get developed.

Large appliances, furniture and housewares, though necessary and very useful, start to depreciate in value after their first use. For this reason, you should avoid borrowing money to pay for them. It’s not good to pay more and more for an item (payments plus interest) while the value of that item keeps going down.

On the other hand, big home improvement projects and other purchases that will add to the value of your home could warrant a loan. Just look for low interest rates and don’t borrow more than you need. Ideally, you’ll be able to repay such loans within five years.

The national unemployment rate has been hovering around 6%, but economists predict a recession where that figure might jump to 8 or 9%. Sadly, many American workers never realize their jobs are in jeopardy until they get laid off. You’ve heard the old adage, “Expect the best but plan for the worst?” There’s never been a better time to start planning. Here are some helpful tips to follow if you think your job might be in danger.

Be in the Know

Know what’s going on in your workplace. Have there been rumors of lay-offs? Have your benefits been scaled back? Did the office social get canceled? These are all warning signs worthy of your attention. When your workplace suddenly starts cutting back on jobs and extras, it’s time to formulate a Plan B.

If you work for a nationally known corporation, news and radio reports can be your best friend. Your boss might not tell you – or even know – when the business is facing financial problems, but reporters will. Keep your eyes and ears open for signs of trouble.

Change Jobs Within the Company

If you work as a customer service rep or administrative assistant, your job might be one of the first to go in tough financial times. Companies in crisis tend to hold onto positions that bring in revenue, such as sales and marketing, and do away with others. If you think a lay-off will be in your future, apply for a money-making position at your company. Even if you don’t like the position, it can tide you over while you look for a new job.

Dust Off Your Resume

If your resume hasn’t been updated in a year, dust it off and shine it up! You might be sending it to a prospective employer fairly soon. Instead of laying out your experience chronologically, grab people’s attention by starting with a summary of your relevant skills and accomplishments. Don’t be afraid to really sell yourself, and don’t hesitate to have a professional touch up your resume for maximum impact.

Network, Network, Network

Make friends and alliances within your company, and make sure they realize how valuable you are. (It is possible to toot your own horn without being obnoxious.) Be proactive; offer your assistance whenever possible. If you carve yourself a niche as the team meeting organizer or the new-hire trainer, you’ll add to your job’s security.

Networking outside of your job is important, too. If you get laid off, you’ll want to have people you can turn to for job leads. Many online job sites offer networking services. You can also make your own list of potential contacts by writing down all the people you’ve known and worked with through the years. If worse comes to worst, don’t be scared to give someone a call, even if they’re only an acquaintance. Times are tough, and they will understand that you need all the help you can get. Just offer to return the favor if they should find themselves in the same situation.

When you watch your bills pile up month after month, it can be tempting to take advantage of short-term loans or other quick-fix financial options. But some of these tactics will leave you deeper in debt than when you began. To give yourself a fighting chance, avoid these four dubious debt solutions; they’re just not worth the cost.

Fee Harvesting Credit Cards

These subprime credit cards are designed for people with poor credit ratings. They’re often the last resort for potential card holders who need credit, but can’t qualify for traditional credit cards. True, they can help you build your credit history, but at what cost?

Imagine applying for and receiving a $500 credit line. That’s not too bad until you factor in the $250 account setup fee, $90 annual membership fee, and $40 monthly usage fee. Sadly, those numbers are typical of the most predatory fee harvesting cards available. Some applicants end up paying more than their line of credit is worth.

If you’re in the market for a subprime credit card, be sure to shop around for one with minimal fees. 

Payday Loans

These loans are cash advances that you must repay in a short amount of time – usually two weeks. The really horrific element is the interest; expect to pay $2,000 or more for the questionable privilege of borrowing $1,500. It’s not uncommon for payday loan borrowers to fall into a downward spiral of debt when they’re unable to repay the loan on time. They borrow more money, fall short again, and borrow still more, all at exorbitant interest rates.

Never, ever take out a payday loan. If you’re having a financial emergency, it’s far better to borrow from friends or family members than to accept money from a payday lender.

Credit Card Cash Advances

When you need money fast, it’s tempting to take out a cash advance through your credit card. But stop and take a moment to decide if this is something you really need to do. Different interest rates apply to cash advances than apply to regular purchases. You might use your credit card to pay your electric bill at an interest rate of 12%, but if you get a cash advance to pay the same bill, you can expect to pay 25-30% interest.

The costly interest rates of cash advances will keep you in debt longer than necessary. If you have to charge something, go ahead and charge it. But leave the cash advance option alone.

Your 401K

Cashing out of your 401K plan before age 59 ½ is a fast way to drain your retirement funds. Premature withdrawals will result in hefty fees, penalties, and taxation. No matter your age, it’s best to leave your 401K alone until you’re ready to retire. If you want an account that you can call upon in tough financial times, get a traditional savings account or put your money into a ROTH IRA which doesn’t penalize you for cashing out.