I already told you about the money mistakes that make me crazy.  From fancy wheels on clunkers, to financed boob jobs (that last one didn’t make it earlier, but I’m adding it now) there’s a lot of money mistakes that make my skin crawl.  Now I’m going to tell you about some money mistakes that I’ve made—in the hopes that you won’t do the same.

All of this said, there’s a lot of things I’ve done right that I’m still thankful for. Some of these items (buying my house, for example) were mistakes, but they ended up working in my favor.  I’m attributing this to luck though, not any good planning on my part.

Here’s a few of the money mistakes I’ve actually made…. Some of which will be giving me heartburn for years.

1. Buying my car new.  I did this because–get this–at the time I couldn’t afford a used car because the interest rate would be too high. You may stop laughing now.
2. Buying our home before we were ready. Our first year of marriage our income tax bill was $11,000.  Holy SMOKES! We were BROKE, and needed some tax deductions, so we bought a house.  We stretched knowing our incomes would be going up in the near future (and they did). We didn’t buy all the “house” that we could for fear of stretching too far, but the mortgage on our zero-down condominium right outside of Seattle was pretty oppressive.  Within months, a serious flaw was found that had been missed in the inspection. We spent $5,000 re-building a bathroom—studs and everything.  Having a condo didn’t negate all of the home maintenance costs that we thought it would.  All that said, it’s been a good investment (it had doubled it’s value, and has since depreciated a bit but it’s still worth at least $125k more than we spent) our mortgage is now comfortable, but it really was a premature and risky gamble.
3. Taking a Home Equity Loan. “Hey look how much the house has appreciated—that cash sure would be handy, wouldn’t it?” Wait! That’s not cash—that’s equity, which can go up and down…. Dramatically! It was at 8%, so not punishing, and the loan allowed us to make some dramatic, positive improvements in our life, but we really should have just waited and saved with real money.
4. Consolidating our 2^nd into our first. Our first mortgage was 5.25%, our small second mortgage was at 8%.  So we consolidated them at 4.25 (now 15 year) to save on the interest.  We should have refinanced the first, and debt-snowballed off the second.  Stretching a small and manageable second over 15 years was just dumb.
5. Not shopping around. I used to buy everything new. Tags on, warrantee intact, and all that.  Then I got “smart” and started only buying things on sale.  Now I scrounge. I get four to five prices on items over $50 before I buy. I try thrift shops, pawn shops, online sales, craigslist  and freecycle for things I need. I wish I’d learned that years ago. The convenience of picking up everything at the mall just isn’t worth it—especially when you tack on the $7 at Cinnabon that can’t be resisted
6. Staying in jobs too long. I once kept a really bad, outrageously-low-paying job for three years out of loyalty.  I didn’t like the job. I only liked the people.  I shudder to think of the income lost as a result.
7. Not leveraging alternate income sources soon enough. I’ve got a number of “side hustle” projects. Freelancing, blogging, for a few years I sold books at gun shows! I stopped doing all of this when I became a mom, and didn’t start again until last January.  I missed out on four years of relatively unobtrusive income opportunities.
8. Living on college loans. My tuition, room and board were paid for under my scholarships and financial aid. I took loans for living expenses and books. I should have taken a second job. I was only working 10 hours a week. I could have easily worked 20-30 and lived on less.
9. Not learning to budget soon enough. This is especially true once my monthly income became variable and when we started the business. I roughly knew how to budget—money in, money out, etc., but I didn’t know how to plan cash-flow.  Learning this has been critical to our success.
10. Not saving enough before starting our business. We started the business out of necessity, but didn’t plan enough cash to last us through the startup costs plus 45 days of receivables plus payroll.  If I were to do it again, I’d save twice that much first, just because a new business is likely to have some payment problems from new clients if they’re not familiar with screening new clients. I was really fortunate (lucky) not to have a single bad invoice in my first quarter.

Getting out of debt is possibly one of the most difficult tasks you can face in life. One slip up, and it’s bankruptcy for you. Follow these rules, and you’ll be on your way to getting out of debt.

Follow these 9 Rules, and you’ll be on the right track to being debt free…

1. Know Where You Stand

You absolutely. Positively. Must. Know. How. Much. Debt. You. Have.

There is no getting around this critical first step.

Layout all your bank statements, credit card statement, mortgage docs, everything.

You can’t know where you are going until you know how far you have to go!

You can setup a simple folder system for each debt like I did in 2007….

2. Slash Expenses Like Shredder

You must cut expenses like a butcher. Slash away.

Everything non-critical must go. It’s a painful process.

Netflix. Slash.
Starbucks. Slash.
Eating Out. Whack.
Movies at the Theatre. Gone.
Vacations? Hope you like camping.

Look, no one said getting out of debt was gonna be fun. It’s not. But the rewards of seeing your debts eliminated make it all worth it.

The first time you completely pay off a credit card or collections account, it makes all this slashing worth it.

3. Spend Less Than You Earn

No, really.

4. Increase Cashflow

Once you’ve slashed your expenses to a skeleton of your former spending habits, you need to add some fuel to your debt attack. And then means increasing the cash you have coming in each month.

• Stop all retirement contributions.
• Sell non-essential items on eBay
• Ask for a raise at work
• Pickup extra hours at work
• Start a house-cleaning service in your neighborhood
• Get a 2nd/3rd job

None of these steps are easy either. Stopping retirement contributions is not always recommended by financial peeps, but I think it’s stupid to contribute to your future when you are drowning right now. Stop the bleeding now. Take that extra cash to build an “oh crap” fund or pay-down your debt.

5. Build an Oh-Crap Fund

Forget an emergency fund. You need a “oh crap” fund. A overdraft charge can easily send you into an “oh crap” moment. So setup a $1,000 (or whatever you need to avoid an “oh crap” moment) account and keep it stashed in an online account you can access easily, but not instantly.

5. No New Debt*

It’s debt diet time. Absolutely no new credit cards, car loans, etc while getting out of debt. I don’t care how much Best Buy is going to give you off that iPod purchase for opening a store card. Just say no to new debt.

*The only exception being if you’re consolidating your debt with a loan from Lending Club for example. Even then, you must payoff your cards with that loan and nothing else! Be careful.

Otherwise, you must be on a strict no new credit diet!

6. Change Your Brain

No matter what techniques you employ to get out of debt, they will all be fruitless unless you can change your mental relationship with money.

The brain isn’t just your biggest sex organ, it’s your biggest obstacle you must overcome. Over the years you’ve built up thousands of unconscious habits relating to money. Many of them must now be broken to get out of debt.

Recognizing the importance of changing how you interact and think about money was the most significant factor in my own debt turnaround.

7. Think Big

Sometimes just the thought of being debt free will be enough.

But sometimes it won’t be enough.

Where do you really want to be financially? Beyond being debt free? Do you want a 12-month fund for expenses? A new house? A million bucks?

Thinking big is OK when you can use those dreams to motivate yourself to get that 2nd job, or resist that electronics purchase.

For me, I put up a printout of a small plane that I would someday like to own. I put it up in my bathroom to remind me everyday of what I was working towards beyond just being debt free.

8. But Set Small Goals

If you have $60,000 of debt….that’s a big number. Too big to tackle all at once. Setup small goals.

You can go the Dave Ramsey snowball method and pick your smallest debt first to tackle. I’m a fan of this way of setting goals.

Small, baby steps.

9. Celebrate Every Win No Matter How Small

I remember very clearly what I did when I hit a big goal….I splurged on a frosty and fries from Wendy’s…and it was awesome.

Find a small, cheap way to reward yourself for following these steps and hitting a milestone on your journey out of debt.

What did I miss?

What rules are you following to get out of debt?

This post is part of Lending Club’s Debt Buster Challenge that I am participating in along with 4 other debt busting bloggers, Flexo, Digerati Life, Debt Free Adventure, and Steve the debt guy.

Kinda like busting a cap….but not.

I’m participating in the Lending Club Debt Buster challenge. They are giving away goodie bags to anyone who commits to paying off or down their debt with a consolidation loan from Lending Club. There will also be blog posts from various debt bloggers through Jan. 15th (I’ve got one coming up called “9 Rules To Getting Out of Debt”).

But I’m gonna take it a little further.

I wanna bust some debt.

My goal is to completely payoff my car (about $6K balance) by Jan. 15th.

That will eliminate an entire row on my balance sheet, and that gets me pretty darn excited. Plus, the future mrs. debtkid has said she would like the car to be paid off before we get hitched!

Other debt bloggers participating in the Debt Buster Challenge

Getoutofdebt Guy
Consumerism Commentary
Debt Free Adventure
The Digerati Life

Official debt buster blog post at Lending Club

Here’s my challenge to you

List a debt that you want to payoff or at least paydown, in the comments section below. I’ll hold you to it!

When I was really, really in debt, I signed up for consumer credit counseling and tried the whole consolidate your debt thing.

It was a nightmare.

The thought that you can let someone just magically take over your debt accounts and get out of debt that way dismisses the most important process of getting out of debt:

changing how your brain interacts with money.

I didn’t want to think about my debt problems. It seemed so much easier to just let this company handle it for me, and I would just pay them every month.

Well, that lasted 3 months before I couldn’t keep up.

A few months later, I went bankrupt.

So, what was the lesson?

The lesson I learned is that the only person who can help you out of debt is:

You.

Yep, you. You have all the tools to help yourself get out of debt. You can consolidate your credit cards with a loan from Lending Club. You can workout lower interest rates with your creditors. If you are just too underwater and need a fresh start, heck, that’s why you get one do-over (bankruptcy).

But if you try to outsource getting out of debt….it won’t turn out pretty.

Want real debt help?

- Get a debt battle buddy. Layout all your accounts with a trusted friend and get their advice and accountability
- Track your spending down to the penny. Write down every single purchase you are making. I did this when I was really broke and it helped me really see where my money was going. Or just use Mint correctly.
- Get a 2nd source of income. Clean houses for your friend (oh, you’re above that? Get real. I know a friend that is doing this to get out of debt). Pickup extra shifts. Once you’ve cut expenses, you need to bring in more dough.
- Eat healthy. Live healthy. Go for a run, or walk (100% free!), and your chances of medical bills drop like a rock.
- Stop making stupid money mistakes

What am I missing?

I received in the mail this week another notice from my credit card hiking my rate, for no apparent reason. It’s now up to 29.99% from 9.99% when I opened it just over a year ago. Luckily, this rate hike does not affect because I never use this card for purchases. This is the card which offered me a 3.99% locked rate for the life of my balance transfer which I consolidated all my debt to. I did call them to ensure this locked-in rate would not be affected by the recent rate hike. I will also call again to double-check before the new rate goes into effect.

A lot of people have been complaining about unsubstantiated rate hikes recently. In actuality they are not unsubstantiated, at least from the bank’s point of view. Almost every credit card that currently exists, even so called “fixed rate” cards, can have their terms and conditions modified at any point in time by the bank. You even signed something saying this was OK when you applied for the card. I’m sure you didn’t read it, but it was there in the fine print.

So, what’s the bank’s point of view?

Well, unknown, or maybe forgotten (since it was signed in May of this year), by a lot of people is the Credit CARD Act of 2009. This law was passed on May 22, 2009 but does not go into effect until February 22, 2010 and seems to have faded from the news lately. Basically this law will protect credit card users from the unfair practices the credit card companies have been using for years to make as much money as possible off us. The banks’ point of view is that this is the deadline for the unfair changes they can make to your credit card, and therefore they are trying to maximize their profit now by hiking up rates. You can read up more about the act here, but the main points as I see them are:

• No more “universal default” rate increases
• No more “double-cycle” billing
• Payments are applied to the highest rate balance first
• A hard credit limit (selectable by the card holder) in which transactions going over will be denied, eliminating over-limit fees.
• 21 calendar days grace period (increased from 14 days minimum now)

What to do if your rate is hiked?

The credit card I mentioned above is a Citi card and they allow me to reject the rate hike and close out my account at my current terms if I choose to. This means the account is still open until I pay off my balance at my current rate, but no new charges are allowed on the account. While Citi is doing this now, and I’m sure some other cards are as well, this option will also be available to all cardholders under the new law going in effect early next year. You might not want to close a credit card but at the same time, you just might not be able to afford not to.

Last week my girlfriend and I were watching, “Real Estate Intervention” on HGTV. It’s a heartbreaking show at times. It shows real families that for one reason or another (job loss, relocation) have to sell their home, often a price much lower than what they were anticipating.

Last week we watched the first episode where Mike, the expert real estate agent recommended a short sale. The man on the show broke down crying after he saw his wife get upset. They owed $520,000 on their home, and the market value was around $400,000. They had no assets to speak of, and purchased the home with 100% financing.

They didn’t mention any credit card debt specifically, but I’d like to pose a question:

If you are broke, do you pay your credit-cards or your mortgage?

The catch: You are significantly underwater in your home ($40,000 or more)

When I went to credit counseling back in the day, my counselor told me she always recommended people pay their mortgage first.

So, if you can only choose one, based on the scenario above, which do you pay?

It would seem that everyone is aware of the dangers of living with too much debt. After the events of the last two years, anyone who does not yet know that having a high level of debt will have a negative impact on your financial security in the present and years to come should quickly take a look around them.

For example, losing your job is a horrible experience made more so if you have to struggle to maintain your living expenses while repaying high interest debt. There simply is no reason to remain in debt at this point in time. Therefore getting out of debt and staying out of debt should be the main priority of individuals as the economy is teetering on the “recovery” period. Here are a few tips to help you get out of debt and maintain debt free living in the future.

If you have not yet started an aggressive assault on your debt balances, you can not afford to put it off for another day. With changes happening in the credit card industry still not complete (like the number of 0% balance transfer credit cards), obtaining and using credit will surely continue to be an added cost for most consumers. The following tips can get you started to eliminate your debt and live debt free in the future.

Take inventory

If you haven’t already, you need to first sit down with records of all your financial obligations to determine exactly where you stand in terms of debt. Most people are surprised to realize just how much money they owe and how much it is costing them to pay interest charges and penalties each month if they are not paying each bill on time every time. List your debts in order of highest interest rate or lowest balance and determine if you have the resources available to begin applying all available disposable income toward repayment. You will want to do this one account at a time to see the best results. Hopefully you have a a savings account and have looked at the top high interest savings accounts page by Patrick.

Determine if you need help

There are situations that have gone beyond simply buckling down and paying your bills in the traditional manner. If you are facing a severe financial hardship and have no reasonable way to pay the minimum payment let alone more money, you may want to consider some of the other options available to eliminate debt. They all come with negative consequences, however for people who have no other way to get out of debt, it is a chance they often have to take to finally eliminate their debt once and for all.

Changing your spending mentality

Regardless of the method used to eliminate debt, the only way to avoid the same problem in the future is by changing the habits that caused your indebtedness in the first place. For the majority of individuals the problem is not the lending industry or other forces; instead the problem is in how you handle your own personal finances. Each person must accept responsibility for their own actions and make it a point to avoid unnecessary spending and living beyond their means in the future. Otherwise you are doomed to repeat the same mistakes in the future and find yourself dealing with the same problems in down the road.

These tips have been offered for years, however they bear repeating in that some people have made it through the recession relatively intact-financially. For those individuals who have not yet realized the problem of carrying too much debt it is only a matter of time before they face a situation which brings the problem to the forefront. Do not wait until you are unable to address the issue, take the steps necessary today to eliminate your debt and begin a life of financial freedom.

I mentioned last week how Murphy has visited our house. Car problems, house problems and other emergency expenses zapped our emergency fund. Now instead of making massive debt repayments, we’re concentrating on trying to revive our pathetic emergency savings account.

I hate doing that.

That said, I do have something to celebrate. We took care of the emergencies with cash. We’re not going to be paying interest on that auto breakdown (talk about rubbing salt in a wound!). We wouldn’t have done that a year ago. It’s fun to celebrate doing the right thing.

In an attempt not to become completely demoralized in what we thought would be the last three months of our journey to be debt free (now looking like the last five to six months), we’ve joined Financial Peace University.

This is a financial education program put on by Dave Ramsey through a local church. It will be two hours a week for thirteen weeks; A major commitment of time and energy from us. The class is held at various times throughout the year in churches all over America.

Our oldest daughter (turning eleven this week) will be attending with us, and these folks are good enough to provide childcare for our little one. Our oldest is actually looking forward to the program. She told me yesterday in the bookstore, “That Dave Ramsey guy is everywhere mom!”

The class covers thirteen different lessons, each with a different area of financial education from college savings and retirement to charitable giving and insurance. The first hour is a video class and the second is small group work sessions, which should help to keep us intense enough to keep us going. It will also provide a support network of other weird people (the kind who resolve to live without debt) to hang out and swap rice and bean recipes with.

We’re trying to intercede before the winter blues set in and derail our progress. We’re almost there and not giving up, but now nine months into this, the routine is getting a little old and we need to revive it.

Do you need to revive your program? Are you showing signs of regressing or loosing your edge towards beating your debt?

If you’re interested in attending FPU, there’s several ways to join. We found a discounted lifetime family membership for $100. Regular membership is usually a little more expensive than that. There’s also an online-only class. You can view a sample lesson online—it’s fun and engaging, just like we expect the class will be.

I’ll keep you posted about how we do as we go through the program.

Image from freedigitalphotos.net

OK, you’ve decided to get out of debt, but what’s the best way to pay it off? Snowballs, highest interest first, etc—there’s all kinds of theories, but the one we can all agree on is that faster is better when it comes to getting out of debt. It really isn’t much fun!

It helps to have a goal. Some people have a wedding to plan (ahem, Debtkid… looks like you’re making plans…congrats!), others are inching towards debt freedom because they think they should. In my house, my husband says he’s not agreeing to another adoption until it’s done cash–and there’s no debt. (He sure knows how to light a fire under me… I’m a planner, so I know if I want any more kids in the next half-dozen years, this has got to be tamed like yesterday!)

The trick is to pay as much as you can, as fast as you can, however you can!

After a few months of that, you realize that it really is no fun at all. You’d like to go out to dinner. It would be nice to get the car detailed. You really miss the local coffee shop. You may even indulge some of these off-track behaviors…

How do you stay motivated?

The trouble comes when you start to loose your motivation. I know myself well enough to that in the fall and winter, I just can’t maintain the energy through the lousy Seattle weather. The part of me that cares goes a little numb, and then I come out of it in the spring in a terrible panic. This year, between some goal-tending strategies and FPU, I resolve to stay on track—I’ll be debt-free by the end of winter if I do.

Here’s some strategies for staying motivated

1. Create rituals. I know, it sounds strange, but burning the credit card or the statement after you pay it off and close the account, is a LOT of fun. I put my old statements in my worm composter as bedding. (It makes me happy to see them gobbled up by worms and old potato peels).
2. Review your goals and progress to goals. When I revisited my goals and realized that we likely have six more months to go on this journey instead of the planned three months, I could have cried. Wondering if we’d had a setback like this before, I pulled out some old records and realized that already this year we’ve paid off about 4x what we have left to go. It’s the home-stretch, and I didn’t even realize it.
3. Draw a chart. If you’re visual, draw or otherwise create a chart—watch your progress evolve! PS. Don’t forget to celebrate! A friend draws a cartoon and then colors in parts as he reaches his goals.
4. Write down your goals for after you are complete. Like dieters have their goal outfit, you should plan for when you’re debt free. I was thinking of starting to save for a Magic Kingdom vacation, but the kids want to go to the Great Wolf Lodge water park (closer and cheaper, score!)
5. Create a visual reminder. Put M&Ms in a jar (there’s about 1,000 per cup, so one cup per thousand dollars of debt).  If you send your creditor a $200 payment, treat yourself to a couple-hundered M&Ms. Share with the spouse and kids–that gets them excited about the goal too!  I read somewhere the recommendation to create a paper chain, with a circle for each dollar owed. I did a little math and determined that if you have 1″ circles and a 12,000 debt, your paper chain will be 987 feet long. That particular exercise could be fun (especially in the home-stretch) but might be really tough to explain to the neighbors over and over.
6. Find a support network. This blog is a great support network–get to know the writers and commenters. For me, I listen to Dave Ramsey podcasts on the treadmill. Podcasts are an indulgence of mine as I find I can’t listen to them while teaching the kids or writing, so I only get to turn them on during “downtime.”

I  hope you find these tips helpful this fall as you continue on your journey to debt-freedom.  If you have additional ideas, please add them in the comments–you never known when you might inspire someone else!

When the topic of credit cards comes up, you’re probably used to hearing only the bad things. But, in reality, for most of us credit cards have done us a valuable service: helped us establish a credit history. Let’s be honest, few banks are going to hand out money for a big ticket purchase to someone who has never demonstrated responsible credit usage before.

Of course, just because credit card can be useful that doesn’t mean you should choose the first offer you get in the mail. You need to be selective because you really only want one or two at most. If you have more than that, you are going to be running the risk of getting into a serious debt situation that will only hurt your long-term credit history and defeat the purpose in the first place. Below are a few tips that can help you make the right choice when selecting a credit card.

• Look at the interest rates – Rates vary a great deal so always flip over the offer and read the small print in the box on the back. Obviously, lower rates are going to be better but you want to read the fine print, too. Many of the cards start you out at very low interest rates only to increase the rates after the first few months. You may also only be eligible for the low interest rate if you transfer balances. Pay attention to how much the interest rate will increase if you are late on a payment.
• Look at grace periods – The grace period is the amount of time between when a purchase is made on the card and when interest begins accruing on that amount. Longer grace periods mean you have a bigger window in which to pay off the purchases without owing any extra interest. That’s a good thing. However, credit card companies have been shrinking that window in recent years. While it was once almost always 30 or 31 days, today some companies have lowered it to around 25 days or less.
• Check the reputation of the company – Always learn more about the company offering you the credit card company. Some have some nasty reputations for playing games with customers when it comes to interest rates and payments. Read what other people are saying. If nothing else, apply for a credit card directly through your bank or credit union.
• Know about annual fees – Some credit cards do charge annual fees to their customers. The fees vary greatly but they are always paid through your actual credit card which means you could end up paying interest on that fee, too. Your best bet is to find a card that does not charge any fee. Unless you already have bad credit, you should be able to find a company that will offer you a credit card with no annual fee. Also don’t fall for other charges, such as processing fees.

Remember that having a credit card can be very useful but making the right choice and using it responsibly will determine whether you made a wise decision or not.