My Wife and I hit Coast FIRE number which is close to $500,000 this year, allowing us to quit our 9-5 jobs, move abroad to China, and more fully pursue our passions in life at age 26.
You may be asking yourself, what is this Coast FIRE term exactly?
In a nutshell, Coast FIRE is a popular retirement strategy involving saving enough money so your nest egg can grow without additional contributions. Once you reach Coast FIRE, you no longer need to work to save for retirement; instead, you only work to pay for current living expenses. This allows you to enjoy a more relaxed lifestyle and focus on activities you enjoy rather than working simply to earn a paycheck.
Before breaking down our $500,000 net worth, I want to share some interesting statistics.
The average net worth by age for Americans
Let’s see the average net worth by age for Americans according to CNBC.
For those under age 35, the average net worth of Americans is $76,300.
For those ages 35 to 44, the average net worth of Americans is $436,200.
For those ages 45 to 54, the average net worth of Americans is $833,200.
For those ages 55 to 64, the average net worth of Americans is $1,175,900.
For those ages 55 to 64, the average net worth of Americans is $1,217,700.
For those ages 75 and above, the average net worth of Americans is $977,600.
Our Net Worth Breakdown
Now let’s take a closer look at our net worth broken down into 7 categories.
1) US Checking Accounts: $5000
Not much to add here, we have about $5,000 cash sitting in our checking accounts in the US.
2) China Bank Accounts: $3100
We currently have around 20,000 CNY which is $3100 in our China bank account. If you wonder how much it costs to live in China, you can check our other blog post – Cost to Semi-Retire in China (Our First Month Expenses).
3) High Yield Saving Account: $21,000
We have one high-yield saving account, which acts as our emergency fund.
Having an emergency fund gives us peace of mind. For example, we have rental properties in the US and if something happened, we have money to fix it.
Actually, we have $40,000 total because of the Biden student loan refund. We put it there to receive higher interest payments. Once we know if the forgiveness part will pass or not we know how to use this money. We don’t account this as our net worth since we don’t know the final results yet.
4) Retirement/Tax-Advantaged Accounts: $100,000
These include all of our Roth IRAs, HSA, Rollover IRAs, etc. Even though after hitting Coast FIRE you can choose to stop investing, we still want to max our IRAs if possible so our nest egg can grow even larger.
5) Brokerage Accounts: $2,300
In Robinhood, we did some higher risk investing like crypto, but only a very small bit compared to the rest of our net worth. As you know recently the market has not been very good so the value dropped a lot!
6) Single house rental Property: $200,000
We built a single-family house and finished the basement and yard after we moved in. In total, it is 0.12 ace with 2300 sqft. 4 bedrooms and 3.5 baths.
When we move to China, we decided to rent it out.
The total home value now minus the loan we have is about $200,000, which is our equity.
7) Condo Rental Property: $150,000
We have another rental property which is a cozy 3 bedroom/2 bath condo.
We checked condos in the same community and can say we have at least $150,000 house equity in it.
Side note: when calculating net worth for home loans you take the current market value minus what you owe on the loan.
TOTAL: $481,400
“When you invest, you are buying a day that you don’t have to work.”
Aya Laraya
Thank you for reading! Please drop a question or comment below – we’d love to hear your thoughts.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
Debt has a way of getting out of hand quickly. The snowball effect can leave you feeling hopeless and like there’s no way out. But there are options available to help you get your debt under control and on a path to being debt-free. One option is debt settlement.
That’s what we’re going to talk about today. We’ll review debt settlement, its pros and cons, and if it suits you.
This post may contain affiliate links; please see our disclaimer for details.
What Is Debt Settlement?
Debt settlement is negotiating with creditors to settle a debt for less than the total amount owed. It is an option for people who struggle to repay their debts and face financial hardship. The goal of debt settlement is to reach an affordable agreement with the creditor to help the debtor get out of debt.
The process usually begins with the debtor contacting the creditor to express an interest in settling the debt.
The creditor will then review the debtor’s financial situation and determine if they are eligible for debt settlement.
If the creditor agrees to settle the debt, the debtor will negotiate an acceptable payment plan for both parties.
Debt settlement can be a good option for those struggling with debt, but it is important to remember that it will hurt your credit score.
Debt settlement is negotiating with creditors to settle debts for less than the full amount owed.
It’s a bankruptcy alternative and can be a way to avoid damage to your credit score. The process usually begins with a request for a “hardship letter,” which outlines your financial situation and why you can’t pay your debts in full.
Once the creditor agrees to enter settlement negotiations, you’ll make regular payments into an escrow account.
When there’s enough money in the account to make a lump sum payment, the debt settlement company will negotiate with the creditor on your behalf.
If an agreement is reached, the debt is considered “settled,” and you’ll be responsible for paying the agreed-upon amount. You may also have to pay the debt settlement company fees and the lump sum payment.
Before entering into a debt settlement, key factors include whether you can save enough money for a lump sum payment and whether you’re willing to damage your credit score.
Five key benefits of Debt Settlement
1. You can get out of debt without filing for bankruptcy.
Filing for bankruptcy should always be a last resort. Debt settlement can help you avoid bankruptcy and the long-term damage it can do to your credit score and financial future.
This is important because bankruptcy will stay on your credit report for up to 10 years, making it difficult to get approved for new lines of credit.
It can also make getting approved for a mortgage or car loan difficult.
2. You can save money with debt settlement.
When you settle your debt, you are only responsible for paying back a portion of what you owe. This can save you significant money, especially if you have a large debt.
The amount of money you save will depend on your debt and how much the creditors are willing to settle for. However, you can typically expect to save at least 50% of your debt.
Sometimes, creditors will even agree to settle for less than 50% of the debt. This is more likely if you have a large debt or can make a lump sum payment.
3. You can get out of debt faster with debt settlement.
Debt settlement can help you get out of debt faster than other options, such as debt consolidation or making minimum payments.
This is because you are only responsible for paying back a portion of your debt.
The amount of time it will take to get out of debt will depend on how much you have and how much you can afford to pay each month. However, you can typically expect to be debt-free within two to four years.
4. It’s possible to avoid damage to your credit score.
Unlike bankruptcy, debt settlement will not have a major negative impact on your credit score. Your credit score may not be impacted at all.
Debt settlement has a less negative impact on your credit score because it’s not reported to the credit bureaus as a negative mark. Instead, it’s reported as “paid in full” or “settled.”
5. You can get started without good credit.
One of the best things about debt settlement is that you can get started even if you have bad credit. This is because your credit score is not a factor in the decision to settle your debt.
This is beneficial because it means you can get started on the path to financial freedom even if you have a low credit score. It also means you won’t have to wait to improve your credit score before you can start working on getting out of debt.
Five key drawbacks of Debt Settlement
We just went through the benefits, and while they may be great, it’s essential to understand the drawbacks before deciding. So let’s go over them now:
1. Debt settlement can damage your credit score.
Although debt settlement doesn’t have the same negative impact on your credit score as bankruptcy, it can still damage your credit score.
This is because it will be reported to the credit bureaus as a negative mark.
2. Debt settlement can be expensive.
The fees associated with debt settlement can be expensive, sometimes costing as much as 20% of your debt. This is a significant amount of money, especially if you have a large debt.
Also, the fees are often charged upfront, so you must pay them even if the debt settlement process is unsuccessful.
3. Debt settlement can take a long time.
The debt settlement process can take a long time, sometimes taking up to two years. This is a significant amount of time, and it can be frustrating if you try to get out of debt quickly.
If time is of the essence, you may want to consider other options, such as debt consolidation or making minimum payments.
However, remember that debt settlement typically takes less time than bankruptcy.
4. Creditors may not agree to settle your debt.
There is no guarantee that creditors will agree to settle your debt. This is because they are not required to do so.
If the creditor does not agree to settle your debt, you will be responsible for paying back the full amount of your debt. This can be a significant financial burden, especially if you have a large debt.
5. You may have to pay taxes on the forgiven debt.
If you have debt forgiven through the debt settlement process, you may have to pay taxes on the debt. This is because the IRS considers the forgiven debt to be taxable income.
You’ll need to speak with a tax professional to determine if you will owe taxes on the forgiven debt. You might also want to consider this when deciding whether or not to settle your debt.
DIY Debt Settlement Vs. Hiring A Debt Settlement Company
There are two main options for debt settlement: DIY debt settlement and hiring a debt settlement company.
Both methods have pros and cons, and the best option for you depends on your situation.
DIY debt settlement can be an excellent option for those who are comfortable negotiating with creditors and have the time to devote to the process. However, it can also be risky, as there is no guarantee that you will be able to negotiate a settlement successfully.
Hiring a debt settlement company can provide peace of mind, as you will have professionals working on your behalf. However, it is vital to choose a reputable company, as there are many unscrupulous businesses.
In addition, debt settlement companies typically charge fees, so you will need to factor that into your decision. Ultimately, the best option for you will depend on your unique circumstances.
Here are the pros and cons of debt settlement and hiring a debt settlement company:
DIY Debt Settlement Pros:
It can be a less expensive option
You have control over the process
You can negotiate directly with your creditors
DIY Debt Settlement Cons:
It can be a time-consuming process
May not be successful in negotiating a settlement
It can be a risky proposition
Hiring A Debt Settlement Company Pros:
You have professionals working on your behalf
Can provide peace of mind
Typically charge fees
Hiring A Debt Settlement Company Cons:
You will have to pay fees
It is crucial to choose a reputable company
May not be successful in negotiating a settlement
Is Debt Settlement a Good Idea?
It all depends on your situation; no two situations will be exactly the same.
If you’re struggling to make ends meet and are at risk of defaulting on your debt, then debt settlement could be a good option. It could help you reduce your debt burden and get you back on track financially.
However, there are also some risks associated with debt settlement. For instance, if you’re not careful, you could owe even more money than you do now. And, of course, there’s always the chance that your creditors will refuse to negotiate with you or that you’ll be unable to reach a settlement agreement.
Debt settlement isn’t a silver bullet that will magically fix your financial problems. But, it could be worth considering if you’re struggling with debt and are willing to take on some risk.
Just be sure to research and understand the pros and cons before making any decisions.
You should consider whether or not you’re eligible for government programs that could help you with your debt.
For instance, the U.S. Department of Education offers several programs that could help you if you’re struggling to repay your student loans.
You can learn more about these programs by visiting the Department of Education’s website.
You can also find more information on debt settlement by speaking with a certified credit counselor.
Counselors can help you understand your options and can negotiate with your creditors on your behalf.
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
This post may contain affiliate links; please see our disclaimer for details.
Every time you turn around, you see an ad for debt consolidation. And it seems like a perfect idea.
Who doesn’t love the idea of having one low monthly payment instead of a bunch of extra payments?
And, with the lower interest rate, you’ll save money too! But is debt consolidation the best option for you?
Let’s take a look at some of the pros and cons so you can make an informed decision.f
What is Debt Consolidation?
Debt consolidation is taking out a new loan to pay off multiple debts. By consolidating debts, you can often get a lower interest rate, which can save you money and help you become debt-free more quickly. Several types of debt consolidation loans include home equity loans, personal loans, and balance transfer credit cards.
Each option has pros and cons, so it’s important to compare your options before choosing a debt consolidation loan.
For example, home equity loans can be a good option if you have equity in your home, but they can also be risky because you could lose your home if you can’t make the payments.
Balance transfer credit cards can be an excellent way to consolidate multiple high-interest debts into one monthly payment, but they typically have high fees and low credit limits.
Personal loans are another option for debt consolidation, but they usually have higher interest rates than home equity loans or balance transfer credit cards.
No matter which type of debt consolidation loan you choose, compare interest rates, fees, and repayment terms before deciding on a loan.
Two main ways to consolidate your debt are with a debt consolidation loan or by transferring your balances to a balance transfer credit card.
If you decide to get a debt consolidation loan, you’ll need to apply for a new loan and use the money from the loan to pay off your other debts. You’ll then be left with one monthly payment, which will be the debt consolidation loan.
If you decide to do a balance transfer, you’ll need to find a credit card with a 0% intro APR period and transfer your balances to the card. You’ll then have one monthly payment: the balance on the credit card.
Both options can help you save money on interest and become debt-free more quickly.
Let’s break down what you need to do before getting a debt consolidation loan or opening a balance transfer credit card:
1. Figure out how much debt you have.
This includes all your credit card debt, student loans, medical debt, and other loans. Anything that you’re in debt on goes into this calculation.
2. Find out the interest rates on each of your debts.
The higher the interest rate, the more it will cost you to pay off your debt. So, you’ll want to focus on consolidating the debts with the highest interest rates first.
3. Review your options.
Now is the time when you need to research your consolidation options. This includes looking at debt consolidation loans, balance transfer credit cards, and personal loans. Compare each option’s interest rates, fees, and repayment terms to find the best one for you.
When is debt consolidation an intelligent move?
Debt consolidation can be smart when it helps you get a lower interest rate, reduce your monthly payments, or pay off your debt faster.
For example, consolidating your debt with a personal loan can save you money if you get a lower interest rate than you’re currently paying on your credit cards, and it can help you become debt-free more quickly if you choose a loan with a shorter term than your current debts.
If you’re struggling to make your monthly payments, consolidating your debt into one payment may make it easier to pay on time each month and avoid late fees.
However, before consolidating your debt, consider whether you can afford the monthly payment on the new loan.
You don’t want to end up in a situation where you can’t make your payments and damage your credit score even further.
If you’re unsure whether consolidation is right for you, talk to a financial advisor to get help assessing your options.
When is debt consolidation not worth it?
Debt consolidation isn’t right for everyone. So, when is it NOT worth consolidating your debt?
If you have a low-interest rate on your current debts, consolidating them into one loan with a higher interest rate doesn’t make sense. You’ll end up paying more in interest overall.
Also, if you’re only consolidating your debt so you can qualify for a lower monthly payment, keep in mind that you’ll end up paying more in interest overall because you’re extending the length of your loan.
So, in the end, you may not save any money, and you could take longer to become debt-free.
Another thing to consider is whether you have the discipline to not use your credit cards after consolidating them. If you consolidate your credit card debt but then continue to use your cards, you’ll end up right back where you started—with a lot of debt and high-interest rates.
If you’re not confident that you can change your spending habits, consolidation may not be the right solution. Likewise, it’s not the best idea to consolidate your debt if you cannot pay it off.
Five key benefits of debt consolidation
Now let’s take a look at the five key benefits of consolidating your debt:
1. One monthly payment
The simplicity of having just one monthly payment can be a huge weight off your shoulders. When you have multiple debts with different interest rates and minimum payments, it can be hard to keep track of everything and make all your payments on time.
With debt consolidation, you have just one payment each month, which can simplify things and help you stay on top of your debt.
2. Lower interest rate
If you qualify for a debt consolidation loan with a lower interest rate than you’re currently paying on your debts, you could save money on interest overall. This is because a lower interest rate means you’ll pay fewer interest charges over the life of the loan.
When you consolidate your debt with a personal loan, you may also be able to choose a shorter loan term, which could help you pay off your debt faster and save on interest charges.
3. Shorter loan term
As we mentioned, when you consolidate your debt with a personal loan, you may be able to choose a shorter loan term. A shorter term means you’ll pay off your debt more quickly, and you could also pay less in interest charges overall.
If you’re consolidating high-interest debt, such as credit card debt, a shorter loan term can help you get out of debt faster.
4. Potential to improve your credit score
If you’re consolidating debt that you’re having trouble paying off, consolidating your debt can help you get back on track.
When you consolidate your debt, you may be able to improve your payment history, which is one of the key factors in your credit score.
A good payment history can help improve your credit score, and a better credit score can mean you qualify for lower interest rates on future loans.
5. Peace of mind
When you’re struggling to pay off multiple debts, consolidating your debt into one manageable payment can be a huge relief.
This can give you the breathing room to get your finances back on track.
If you’re consolidating high-interest debt, such as credit card debt, you may also be able to save money on interest charges. This can give you some extra money each month to put toward other financial goals.
Five key drawbacks of debt consolidation
As with anything, there are also some drawbacks to consolidating your debt. Here are five things to keep in mind before you consolidate your debt:
1. You may pay more in fees.
Fees are those dreaded charges that can add up and eat into your savings.
When you consolidate your debt, you may have to pay fees, such as an origination fee, a balance transfer fee, or a prepayment penalty. These fees can range from 2% to 5% of the loan amount and can add up quickly.
2. You may end up with a higher interest rate.
You may not qualify for the best interest rates if you don’t have good credit. This means you could end up paying more in interest charges over the life of the loan.
The goal is to save money by consolidating your debt, so you’ll want to be sure you’re getting a good interest rate.
3. You may not be able to get a loan for the full amount you owe.
If you have a lot of debt, you may not be able to get a loan for the full amount. Unfortunately, this means you’ll still have some debt after consolidation, which may not be ideal.
The problem is that lenders typically don’t like to lend more money than they think you can afford to repay.
4. You could find yourself paying off the loan more slowly.
If you consolidate your debt into a longer loan term, you may pay off your debt more slowly. This means you’ll pay more interest charges overall.
If you’re consolidating debt to save money on interest, this may not be the best option.
5. You could end up in more debt.
If you consolidate your debt and continue using credit cards or take out loans, you could be in even more debt.
This is because you’ll have more available credit, which can tempt you to spend more. If you’re consolidating your debt to get out of debt, you’ll need to be careful not to run up more debt.
What are the requirements for a debt consolidation loan?
As with anything banking related, there are requirements for a debt consolidation loan. The requirements may vary slightly from lender to lender, but here are some of the most common requirements:
1. A minimum credit score
Most lenders will require a minimum credit score, usually around 640. If you have a lower credit score, you may still be able to qualify for a debt consolidation loan, but you may have to pay a higher interest rate.
2. A minimum income
Most lenders also require a minimum income, usually around $1,500 per month. This is to ensure you can afford the loan payments.
3. A debt-to-income ratio below 50%
Your debt-to-income ratio is the number of your monthly debt payments divided by your monthly income. Most lenders will want a debt-to-income ratio below 50%, which means your monthly debt payments are less than 50% of your income.
4. A home or vehicle to use as collateral
Some lenders will require you to use your home or vehicle as collateral. If you default on the loan, the lender can repossess your home or vehicle.
5. A cosigner
You may need a cosigner for the loan if you don’t have good credit. A cosigner agrees to make the loan payments if you can’t. This could be a family member or friend.
Should I consolidate my debt?
Well, the truth is, it all depends. If you qualify for a low-interest rate and are confident you can make the loan payments, then consolidating your debt could be a good option. Just be sure to do your homework and understand all the requirements and risks before you apply for a loan.
For some of you, debt consolidation might be a good idea, while for others, probably not so much. In the end, it all comes down to your financial situation. The main thing is, if you consolidate your debts, you need to make sure you’re not racking up more debt in the process. Otherwise, you could find yourself in a worse financial situation than before.
If you’re thinking about consolidating your debt, be sure to consider all of these things first. It’s not a decision to be made lightly, but if you research and ensure you’re doing what’s best for your financial situation, it could be a good way to get out of debt and improve your credit score.
The main thing to remember is that debt consolidation is not a cure-all solution. It can help you get out of debt and improve your credit score, but it will not fix all your financial problems. Some people think that consolidating their debt means they’re getting a “fresh start.” This is not the case. You’re still responsible for all your debt, and if you don’t change your spending habits, you could find yourself in the same situation as before, just with a new loan.
Any time you’re considering taking out a loan, it’s essential to do your research and make sure you understand all the terms and conditions. This is especially true for debt consolidation loans. Be sure to shop around and compare offers from different lenders before you decide on a loan.
You should also make sure you understand the fees associated with the loan. For example, some lenders may charge origination fees, application fees, or other charges. These fees can add up, so be sure to factor them into your decision.
Another thing to consider is the repayment term. Some loans may have shorter terms, which could mean higher monthly payments. Others may have longer terms, which could mean lower monthly payments but more interest paid over the life of the loan.
Finally, be sure to consider the interest rate. A lower interest rate could save you money over the life of the loan, but a higher interest rate could mean you pay more interest.
These are just some of the things to consider when you’re thinking about consolidating your debt. Be sure to do your research and make sure you’re getting the best deal for your situation.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
This post may contain affiliate links; please see our disclaimer for details.
You may have heard about the debt avalanche method of becoming debt-free. It’s a popular method that has been gaining much traction recently, and for good reasons.
The debt avalanche method is a great way to become debt-free quickly and efficiently.
What is the debt avalanche method?
The debt avalanche method is a way of becoming debt-free by first paying off your debts with the highest interest rates. This method is effective because you will save a lot of money in interest charges by paying off your debts with the highest interest rates first.
For example, let’s say that you have two debts. One debt has an interest rate of 10%, and the other has an interest rate of 5%.
If you focused on paying off the debt with the 10% interest rate first, you would save a lot of money in interest charges.
Now that you know what debt avalanche is, you’re probably wondering how it differs from the debt snowball method.
The most significant difference between these two methods is how you pay off your debts.
With the debt snowball method, you first focus on paying off your smallest debts. This method is effective because it gives you a sense of accomplishment as you see your debt balances shrinking quickly.
With the debt avalanche method, you first focus on paying off your debts with the highest interest rates. This method is effective because you save much money on interest charges.
We were able to pay off $56,000 in student loans using the Debt Snowball Method. I created another article explaining further everything you need to know about The Debt Snowbal Method.
Which method is right for you?
The answer to this question will depend much on your personal preference.
If you want to see quick results with a lot of momentum, the debt snowball method may be right for you.
On the other hand, the debt avalanche method is probably a better option if you’re looking to save money in the long run and depending on the interest rate of your debt accounts.
Here are some of the pros and cons of both the debt snowball method and the debt avalanche method:
Debt Snowball Method Pros & Cons
Pros
You see results quickly
You stay motivated as you see your debt balances shrinking (momentum builds quickly)
Cons
You may end up paying more in interest charges overall
You may get discouraged if you have a large debt balance
Debt Avalanche Method Pros & Cons
Pros
You save money in interest charges overall
You’re more likely to stick with the plan because you see results quickly
Cons
You may get discouraged if you have a large debt balance
You may have to make some lifestyle changes to stick to the plan
As you can see, there are pros and cons to the debt snowball method and the debt avalanche method.
Helpful tips to make the debt avalanche easier
1. List all your debts, from the highest interest rate to the lowest.
You must go over your debts with a fine-toothed comb to ensure you include everything. This includes debts like credit cards, student loans, car loans, and any other type of debt you may have.
Making a budget is an essential step in becoming debt-free. First, you need to know exactly how much money you have coming in and going out each month. This will help you make informed decisions about where your money should go each month.
3. Get to know the interest rates of all your debts.
Interest rates are essential to the debt avalanche method. The whole point of this method is to save money by paying off your debts with the highest interest rates first.
4. Make a plan and stick to it.
You must make a solid plan before paying off your debts. This plan should include how much money you will put toward your monthly debts and which debts you will focus on first.
5. Stay disciplined; you’ve got this!
The debt avalanche method requires a lot of discipline.
Once you start paying off your debts, you must stay focused and continue making monthly payments. Otherwise, you’ll end up right back where you started.
Is the Debt avalanche method right for you?
There’s no right or wrong answer to this question. It all depends on your personal preferences and situation.
A debt avalanche method is a good option if you want to save money in the long run. However, if you want to see results quickly, the debt snowball method may be better for you.
Deciding to become debt-free is a big step. Whatever method you choose, the most important thing is that you stick with it and don’t give up. With perseverance and dedication, you can achieve anything.
The most important financial decision that you’ll ever make is the decision to become debt-free.
Once you’re debt-free, you’ll have much more money to save and invest. That’s the moment when your financial future starts to look bright.
No matter which method you choose, becoming debt-free is an attainable goal.
It may take some time and effort, but it’s worth it in the end. So don’t wait any longer; plan and start working towards debt-free today.
There are many free resources I’ve created to help you gain control of your finances! Check them out today at Biesinger FIRE Journey Freebies!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
If you’re in debt, you’ve probably considered many options for getting out of it. Debt management is one option that can help you get control of your debt and improve your financial situation.
As you begin to explore your options to get out of debt, you must understand entirely what you’re getting into. This means knowing everything before you sign on the dotted line and make any commitment.
Debt management aims to lower risk (debt) to improve your overall financial health. I’m excited to share with you more about debt management, including the potential benefits and drawbacks of making your own debt management plan.
This post may contain affiliate links; please see our disclaimer for details.
What Is Debt Management?
Debt management is the process of developing a plan to repay debtors. Debt management aims to help the debtor repay their debts promptly and efficiently. Often, debt management plans involve negotiating with creditors to lower interest rates, monthly payments, and late fees. In some cases, debt management plans can also involve the consolidation of multiple debts into one monthly payment.
Paid services typically charge a fee for their assistance in developing and implementing a debt management plan. However, many free resources are also available online and through credit counseling agencies.
When done correctly, debt management can help reduce overall debt levels, improve credit scores, and reduce stress.
Debt management is the process of creating a repayment plan that fits your budget and negotiating with your creditors to lower interest rates and monthly payments.
This usually requires the assistance of a credit counseling agency.
The first step is to make a budget and calculate how much you can afford to pay each month.
Then, you will work with a credit counselor to develop a repayment plan and contact your creditors to request lower interest rates and monthly payments.
Creditors are not required to agree to your request, but many will be willing to work with you if they believe you are serious about repaying your debt.
If you stick to your repayment plan, you will gradually pay off your debt. I share my own experience dealing with debt collectors in another article. Feel free to check it out for some more tips: How To Deal With Debt Collectors | 4 Useful Tips And Our Story
What Are the Benefits of a Debt Management Plan?
Let’s go over the potential benefits of a debt management plan:
1. You could save money on interest and fees.
If you can negotiate lower interest rates with your creditors, you could save significant money on interest and fees over time. This could help you get out of debt faster.
Let’s talk a little about the interest rates you’re currently paying. Credit card companies typically charge high-interest rates, making it difficult to get out of debt. The average credit card interest rate is about 17%.
You could save significant money over time if you can negotiate a lower interest rate, even by just a few percentage points. This could help you get out of debt more quickly.
On the topic of fees, late fees and over-the-limit fees can add up quickly and make it even more challenging to get out of debt.
However, if you can negotiate to waive these fees, it could save you a significant amount of money.
2. You might improve your credit score.
As everyone knows, your credit score is essential. It’s used to determine whether you’re eligible for a loan and what interest rate you’ll pay on that loan.
Did you know that some employers check credit scores when considering job candidates? A low credit score could even prevent you from getting a job.
Fortunately, a debt management plan could help you improve your credit score.
Your payment history is the most important factor in your credit score. If you’re able to make all of your payments on time, it will have a positive impact on your credit score.
In addition, your credit utilization ratio (the amount of debt you’re carrying compared to your credit limit) is also a factor in your credit score. So, lowering your credit utilization ratio by paying off debt will also help improve your credit score.
3. You only have to make one payment per month
Anything that can simplify something as important (and challenging) as managing your finances is good, right?
A debt management plan can help to simplify things by consolidating all of your debts into one monthly payment.
Rather than having to keep track of multiple due dates and payments each month, you’ll only have to make one payment. This can help to make things a lot less confusing and stressful.
4. It can help to reduce or eliminate collection calls
If you’re behind on your payments, you’ve probably been getting a lot of calls from debt collectors. These calls can be very stressful and make concentrating on other things difficult.
Fortunately, a debt management plan can help to reduce or eliminate these collection calls.
Once you enroll in a debt management plan, your creditors will know you’re trying to repay your debt. As a result, they may be willing to work with you to stop the collection calls.
In some cases, your creditors may even agree to stop all interest and late fees so that you can focus on repaying your debt.
5. You’ll have someone to help you stay on track
It can be difficult to stay on track when trying to get out of debt. There will be times when you feel like you can’t make any progress.
A debt management plan can help to provide you with the support and motivation you need to stay on track.
You’ll have a debt management counselor to help you create a budget and stick to it. This can be a huge help when trying to get out of debt.
What Are the Disadvantages of a Debt Management Plan?
As you can imagine, you should know the disadvantages of a debt management plan. Here are some of the potential drawbacks:
1. It will take longer to pay off your debt
If you’re only making the minimum payments on your debts, a debt management plan will likely lengthen the time it will take to pay off your debt.
Your monthly payments will be lower under a debt management plan. It will take longer to pay off your debt in full.
The longer it takes to pay off your debt, the more interest you will pay.
So, a debt management plan is probably not the best solution if you’re looking for a quick fix to your debt problems.
2. You might have to close some of your credit cards
To enroll in a debt management plan, you will likely have to close some of your credit cards.
This is because creditors are often unwilling to work with consumers with open lines of credit. They view this as risky because you could rack up more debt while enrolled in the debt management plan.
If you cannot close all of your credit cards, you might still be able to enroll in a debt management plan.
However, you might have to agree not to use your credit cards while enrolled in the debt management plan. This could make it difficult to make purchases or handle unexpected expenses.
3. It could damage your credit score
Another potential disadvantage of a debt management plan is that it could damage your credit score.
The problem is that a debt management plan will appear on your credit report as a “debt management plan.”
This could make it difficult to get approved for new lines of credit.
So, if you’re planning on taking out a loan or applying for a new credit card soon, a debt management plan might not be the best option.
4. You might have to pay set-up fees
Some debt management companies charge set-up fees. These fees can range from a few hundred to a few thousand dollars.
Before you enroll in a debt management plan, be sure to ask about any set-up fees. You don’t want to be surprised by these fees later on.
5. You may have to give up some assets
You might sometimes have to give up some assets to enroll in a debt management plan.
For example, you might have to agree to give up your car if you’re behind on your car payments.
Or, you might have to agree to a deed instead of foreclosure if you’re behind on your mortgage payments.
For this reason, it’s important to speak with a financial advisor or bankruptcy attorney before enrolling in a debt management plan. They can help you understand what assets you might have to give up.
Debt Consolidation vs. Debt Settlement vs. Debt Management?
How do you know which one is right for you?
Here’s a quick overview:
Debt Settlement: With debt settlement, you negotiate with your creditors to settle your debts for less than what you owe. This can be a good option if you cannot make your regular debt payments and you’re struggling with high-interest rates.
However, it’s important to note that debt settlement can damage your credit score.
And, in some cases, you might have to pay taxes on the amount of debt that’s been forgiven.
Debt Management: A debt management plan is a repayment plan you negotiate with your creditors. Under a debt management plan, you make monthly payments to a debt management company.
The debt management company then uses that money to pay off your creditors.
This can be a good option if you struggle to make regular debt payments.
You must know that a debt management plan will hurt your credit score.
And you might have to close some of your credit cards to enroll in a debt management plan.
How to tell which is best for you?
That’s only a question that you can answer.
You’ll need to consider your financial situation and your goals. Then, you can decide which option is best for you.
If you’re unsure which option is best for you, we suggest you speak with a financial advisor or bankruptcy attorney. They can help you understand your options and make the best decision.
Is Debt Management Plan a Good Idea?
The truth is, it depends on your situation and level of financial self-control.
A debt management plan might be a good option if you’re struggling to make your regular debt payments.
It can help you get your debts under control and make it easier to make your monthly payments.
However, it’s important to remember that a debt management plan is not a magic fix.
It’s still up to you to make your payments on time and stick to your budget. If you cannot do that, your debt problems will likely continue.
Debt is something that you must take seriously.
If you’re unsure whether a debt management plan is right, talk to a financial advisor or credit counselor. They can help you explore your options and develop the best plan for your situation.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
This post may contain affiliate links; please see our disclaimer for details.
If you’re in the market for a new car, you may wonder how to go about it. Don’t sweat it; we’re here to help.
Of course, we recommend buying a reliable car with cash if possible, but we also understand that buying a car is a big purchase. So following the 20/4/10 rule can help you in many ways.
What is the 20/4/10 rule?
The 20/4/10 rule for buying a car means putting 20% towards the down payment, financing the vehicle for no more than four years, and keeping your monthly car payment and all car-related expenses at 10% or less of your gross monthly income.
So not too complicated, right? Still, I want to explain it further and provide some examples.
The 20% Down Payment
Ideally, you should put down at least 20% of the car’s purchase price as a down payment.
However, if you can’t swing that, don’t worry! – you can still follow the 20/4/10 rule.
You’ll have to finance the car for longer (more on that in a minute).
The reason it’s best to put down 20% is twofold:
It will help you get a lower interest rate on your loan.
You won’t be upside down on your loan – you won’t owe more than the car is worth.
If you put down less than 20%, you may be required to purchase gap insurance. This insurance covers the difference between what you owe on your loan and the car’s actual cash value if it’s totaled in an accident.
The 4-Year Loan Term
Once you’ve figured out how much you can put down, it’s time to look at the loan itself. The 20/4/10 rule says you should finance your car for no more than four years if possible.
You may be thinking why four years? For one thing, the longer your loan term, the more interest you’ll pay. So the money that would have gone to extra payments could stay safely into your pocket, not the banks.
Credit Karma says the average loan length is 72 months or 6 years for those with high credit scores. Having a 20% down payment and great credit will go a long way to help you obtain a 4-year loan.
Remember that a shorter loan term will help you pay off your car sooner. And that’s a good thing because once your car is paid off, you’ll have one less monthly payment to worry about – woohoo!
Monthly payment of 10% or less than your gross monthly income
Let’s break down the 10% part of the 20/4/10 rule: keeping your monthly car loan payment and all car-related expenses 10% or less than your gross monthly income.
This part takes some basic math, but it’s essential to get it right.
The goal is not to have the car payment consume more than 10% of your gross monthly income. So let’s say you make $3,000 per month; you shouldn’t spend more than $300 per month on your car payment and related expenses such as gas, oil changes, and repairs.
Make sure you take into account any other debt accounts you may have. If you already have a significant monthly debt payment, you may want to go even lower than 10%.
Just a side note, life can be difficult when you get into too much debt. So I wrote this article that can hopefully help those trying to get out of debt: 11 Strategies to Get Out of Debt Fast!
If you are struggling with debt, remember the hardest part is starting, but you can definitely become debt free with time and effort.
Why the 20/4/10 Rule of Thumb Generally Works
The 20/4/10 rule is a great guideline to follow when buying a car. But why does it work so well?
For one thing, it compels you to be realistic about your budget.
Many people get in over their heads when buying a car because they’re not mindful of how much they can afford. The 20/4/10 rule takes the guesswork out of the equation.
Another reason the 20/4/10 rule is effective is that it helps you avoid being upside down on your loan.
As mentioned earlier, being upside down on your loan means you owe more than the car is worth.
This can happen if you put very little money down or finance the car for a longer period. It’s a situation you want to avoid because if you total your car, you could be stuck paying off a loan for a car that no longer exists.
The 20/4/10 rule is also an excellent way to keep your monthly car payments in check.
By capping your car payment at 10% of your monthly income, you’ll ensure that it doesn’t become a financial burden.
Of course, the 20/4/10 rule is just a guideline. You may be able to put down more than 20% or finance your car for a shorter term and still stay within your budget.
But if you’re not sure where to start, the 20/4/10 rule is a great place. It’ll help you stay financially responsible and avoid getting in over your head.
As with anything in life, there are pros and cons to the 20/4/10 rule.
Pros Of The 20/4/10 Rule
It Forces You To Be Realistic
The first and most obvious pro is that it forces you to be realistic about what you can afford.
It’s easy to think you can afford a luxury car when all you can afford is a beater, but the 20/4/10 rule doesn’t allow that thinking.
It gets You Out Of Debt Quicker
Another pro is that it gets you out of debt quicker. By capping your loan at four years, you’ll be debt-free sooner than if you had a longer loan.
Nothing is better than being debt-free, so this is a pro.
Avoids Negative Equity
The 20/4/10 rule also helps you avoid negative equity. As mentioned earlier, negative equity is when you owe more on your loan than the car is worth.
This can happen if you put very little money down or finance the car for the long term. And it’s a situation you want to avoid because owing more than something is worth just plain stinks!
Keeps Monthly Payments In Check
Finally, the 20/4/10 rule keeps your monthly payments in check. By capping your car payment at 10% of your monthly income, you’ll ensure that it doesn’t become a financial burden.
This is a big deal because a lot of people get in over their heads by financing a car they can’t really afford.
Cons Of The 20/4/10 Rule
It’s Only A Rule Of Thumb
The first and most obvious con is that it’s only a rule of thumb. There’s nothing magical about the 20/4/10 rule that makes it the perfect car-buying strategy.
It’s just a guideline that works well for most people and is a great starting point.
It Doesn’t Take Into Consideration Other Debt
Another con is that the 20/4/10 rule doesn’t consider other debt accounts.
This rule will be difficult to follow if 50% of your monthly payments are tied up in debt payments. It’s important to have enough cash flow and reduce overall debt.
It May Not Be Feasible
The final con is that the 20/4/10 rule may not be feasible for everyone.
For example, if you have a low income or poor credit, you may not be able to get a loan with such favorable terms.
Not everyone has great or good credit, so this is a con.
Why You Need a Budget Before Buying a New Vehicle
Some may wonder why you need a budget before shopping for a new vehicle. After all, can’t you shop around and buy whatever car you think will look cool?
Well, everyone wants to look cool, but the problem is that many people can’t afford the cars they want. And that’s why having a budget is so important.
For my wife and me, having a car is a need. Anything extra that is fancy or above average is what we consider a want and unnecessary right now.
Having a budget allows you to be realistic about what you can afford. It takes all of the emotions out of car buying and helps you think with your head instead of your heart.
And that’s a good thing because, as we all know, emotions can lead to bad decision-making. You see, many people get in over their heads when they finance a car they can’t afford.
Creating a budget may not be the most pleasant thing if you’re unhappy with your finances, but it’s a necessary evil.
Think of it this way, would you rather be unhappy with your finances for a while or be unhappy with your finances for a long time?
The answer is obvious, so get to work on creating a budget! You’ve got this!
Conclusion
Owning a car is a big financial responsibility, so make sure you’re prepared before you sign on the dotted line.
The 20/4/10 rule can be an excellent rule of thumb when buying a car. It’s simple, and it works for many people.
Just remember to think of the 20/4/10 rule as a guideline, not a hard and fast rule. It’s okay to be flexible.
By taking a good hard look at the 20/4/10 rule, you’re well on your way to being a smart and responsible car buyer.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
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