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Category: Articles Published: Wednesday, 25 May 2011 Written by Administrator

Savings tips for living well - debt free.    

By Steve Wightman, CFP

How do millionaires manage their debt?

How to make it from paycheck to paycheck and amass a fortune?

Tips told from Dr. Tightwad.

  • For low balances, pay off all credit cards monthly. For higher balances, move debt to cards with lower interest rates, cut your spending to basic necessities, and pay off the debt. Unless you are in business, select one credit card per adult for all your consumer purchases. I recommend the Quicken card. It lets you download and categorize each expense monthly. Quicken 2002 does this automatically for you! Now you know where every penny goes AND tax filing is a breeze at year-end because all your expenses are right there – all accounted for!
  • Limit the use of credit cards to basic necessities. If you want new furniture, clothing you can do without, or entertainment equipment, wait until you have the money to pay hard cash. Use the credit card for ordinary monthly expenses as you would your checkbook. Never use it to borrow money that you can’t pay back that month. If you’re sympathetic and are in the mood for giving a bank 20% of your hard-earned money, just write them a check and forget about your credit card. I’m sure the bank will be happy to take it. Just what kind of future would you have if you took that same 20% and invested it? The answer for the average person is that they would be very rich! For example, if your household income were $100,000 per year, you’d stash $20,000 at the end of each year. Assuming you did this in a tax-deferred account like a variable annuity (no income limits) at an average 10% rate of return, you’d have one million dollars saved in just 19 years and twice that amount seven years thereafter! That’s plenty to pay any college expenses. With this strategy alone, in only 30 years you would have amassed 4 million cool dollars that you would have otherwise given away to a bank. By the way, when was the last time your bank sent you a “thank you” note for signing away your future?
  • “Pay yourself first” is the axiom of a financial planner and prudent parent. Jump start your emergency fund. With the money you’re not spending now on superfluous luxury items and dining out, funnel that to a money market account. Set a minimum goal of how much you will save monthly and just do it! That way you won't have to pay credit card interest should you need crisis cash. I recommend six months' expenses in a money market account yielding at least the inflation rate. For those who are in a higher than 24% tax bracket, consider a tax-free money market. You may benefit more. For both, avoid banks. Unlike mutual fund companies, they pay the lowest rates.
  • When you get a raise, put 50 to 100 percent aside for investing or paying off consumer and then mortgage debt.
  • Shop around for the best deals and the best prices. Use the Internet to do this and you'll cover a lot of territory in a short amount of time. A great place to start is wightmanfinancial.com, packed with articles, ideas, newsletters, and links to ways you can save and have a better quality of life.
  • Don't tie up too much money in your mortgage -- not more than 25 percent of your gross monthly income. All debts -- mortgage, car payments, credit cards, etc. -- shouldn't take more than 30 percent of your gross monthly income. Reduce those percentages if you can. Just because the bank will give you a mortgage that's 28 percent of your monthly gross doesn't mean you can't take out a smaller mortgage that will let you keep a little more cash each month.
  • Still stuck? Find a competent financial planner who loves to work on this basic and common issue of personal finance. You’ll find thousands of professionals through a search engine at www.NAPFA.org, called planner search. The National Association of Personal Financial Advisors (NAPFA) maintain high standards for members, most of whom are licensed as Certified Financial Planners. A planner can guide you and coach you, just like you would want those whom you love most to be coached to be their best.

Moral of the story? You too can move from debt to riches if you just avoid these credit card glitches.

Steve Wightman, AKA Dr. Tightwad.

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