Beating Broke

Personal Finance from the Broke Perspective

What is a Debt Management Plan

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As you no doubt know, this is a blog about personal finance with a leaning towards getting yourself out of debt, staying out of debt, and learning how to handle the money you make once you’re out of debt.  There are lots and lots of ways to get out of debt.  My personal favorite is pretty close to the Dave Ramsey “Total Money Makeover” method.  Not everyone is willing or able to go “gazelle intense” and bust their debt down to nothing the TTM way though.  For some, they’ve gotten so far down into that debt black hole that they just don’t know where to start.  Those people will, more often than not, end up at a bankruptcy hearing long before they’ll be exclaiming “I’m debt free!” on the radio.

But, if you’re one of those people, there’s one last stop on the debt freefall before you declare bankruptcy.  Call it a last ditch effort if you will.  That stop is a Debt Management Plan.  Too often, the DMP is associated with shysters posing as financial advisors who promise to get you out of debt, while loading you up with fees on the backend.  The problem with a DMP that charges fees is that you are actually adding on extra debt as you try and pay off your debt.  But, there are some reputable places that do offer a free debt management plan.  There are some that will help you to pay off your debt without going into further debt and without declaring bankruptcy.

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What exactly is a debt management plan?  The administrator of a DMP acts as your agent.  They contact all of your debtors, like credit cards, auto loan lenders, etc…  and negotiate a payoff schedule with a payment that you can afford.  Usually, that payoff schedule will include some pretty significant drops in the interest rate as well.  You make one large payment to the DMP agency, and they distribute the payments out to your debtors.  At the end of the DMP, you’ve paid off all of those accounts.  Any good DMP will require that you don’t add any new debt while on the plan.  It also will include at least a minimal amount of counseling to help you avoid getting back into debt when you’ve finished with the debt management plan.

A debt management plan isn’t perfect.  It’s not the ideal way to get rid of debt, but for some, who are having issues getting their debt under control, or, issues making all their payments, they can be a valid way to go about doing so without the pain of bankruptcy.  Your credit will still take a hit, however.  Not nearly the hit that a bankruptcy would deliver, but the accounts will get reported as being negotiated.

In the end, if your choice is between a debt management plan and bankruptcy, I’d take the DMP any day.

Creating a Simple Budget the Beating Broke Way

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One of the most important parts of paying off your debt and becoming financially independent is creating a budget.  At the very least it gives you an outline of where your money goes and where it should go.  At it’s most extreme, it serves to create strict limits for your spending.  How lax or strictly you adhere to the budget is up to you and how die-hard you are about your budgeting.

One thing remains constant however.   When the end of the month comes, the ending balance should be 0.  Money in – money out = 0.  If you have a deficit, you overspent and need to compensate for that by either reducing budgeted amounts in another category or by reducing the available money for the next month.  If you have a surplus, (good for you!) then you need to budget that money until your end result is 0.  Most of us looking to become debt free will budget any surplus towards excess debt payment.

Here’s how we have things set up at the Beating Broke household.

Income.  We keep a very simple income spreadsheet.  It lists the sources in Column A.  The amount in Column B and any notes for the income in Column C.  All of that gets totaled at the bottom.  That’s all we do with our income.  It’s the expenses that we really need to focus on anyways.

Expenses.  The expenses spreadsheet is a little more complex.  I have a field for the income that I carry over from the income sheet.  I also have a field for a total of all budgeted amounts.  I then have a few calculated fields.  The first is a field that gives me the budgetary deficit or surplus.  I get that by subtracting the total budgeted amount from the income.  A second calculated field gives me the true deficit or surplus.  This is calculated by subtracting the actual amounts spent from the income.  This field is really only useful for balancing at the end of the month, but if you’ve done your budgeting properly, the amount should be small and easy to take care of.

The meat of the expenses spreadsheet is everything else.  Column A holds the categories.  I’ve broken them down into header categories and sub categories.  For instance, the Health header category has sub categories for Health Insurance, Aflac, Prescriptions, and Medical Bills.  I could go even further and list each bill, but that would greatly increase the amount of time I spend on my budget.  I want it to do it’s job (keep my money in order), not take up hours of my time.  Column B holds the budgeted amount for that sub category.  Pretty simple really.  Column C is the amount that I’ve spent to date on that category.  Column D is the % the budgeted amount is of the income/budget and Column E is the % that the actual spent amount is of the income/budget.    I’ve also thrown in some totals for each header category as well as the % of total for those as well.

Each week, we go over our checkbooks, credit cards, and all other financial happenings and enter them in the appropriate places.  By doing it every week, it keeps the task down to a half-hour or less which helps with reducing the stress level of working with your finances.  Especially if they are a little wonky to begin with.

Budget deficit and surplus.  Occasionally, we get to the end of the month and we have a surplus or deficit.  We’ve either spent less than we budgeted for or we have spent more than we budgeted for.  The latter is a little rough, but the first is always fun.  Because we don’t usually figure out the overall surplus/deficit until the month has ended, we can’t budget for the surplus/deficit in that month.  So, I’ve thrown in a field on the Income sheet that is titled “Carryover” and one in the expenses sheet that is titled “Shortfall”.  If we have a deficit, the carryover value is 0 and the shortfall amount is the amount of the deficit.  And vice versa.  This helps with taking the surplus and budgeting it as an extra debt payment or in accounting for previous months deficits.

Most of these ideas are pretty basic budgeting principles.  We’ve tweaked them around a little to fit our financial style and to be loosely based on the Dave Ramsey system.  If you’ve got questions on budgeting that we might be able to answer, drop us a line and we’ll try and answer them as soon as we can.

Debt Consolidation Loans: What, When, Why

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Many of us have heard of debt consolidation loans.  Some of you might have even used one before.  They’ve gotten a bit of a bad rap over the last few years because they get associated with debt consolidation companies, some of which can be a bit shady.  But, they aren’t all bad.  And, in some cases, they can be a very useful tool in your debt repayment strategy.

Debt Consolidation Loans: What Are They?

The concept is actually pretty easy to grasp.  As the name implies, a debt consolidation loan is a loan that consolidates all of your other debt and puts it all under one single loan.    Depending on the lender, you can consolidate just about any debt.  We’ll talk about some of the things you might not want to consolidate in later.  For many, the prospect of trading their high interest credit card debt for a lower interest rate loan can be very enticing.

Debt Consolidation Loans: When Should They Be Used?

While you can get a consolidation loan at any time, there are a few times when they are of the most use.  The most common of these is when you have several credit cards that have high balances and higher interest rates.  As we all know, paying only minimum payments won’t get us very far, but having several cards to pay sometimes leaves us with little left over to pay extra towards those balances.  A consolidation loan can reduce the interest rate, and reduce the payment amount, making it easier to pay extra on the balance. One of the biggest factors to determining if you should use a consolidation loan is your resolve to stay off the debt treadmill.  If you can’t commit to not adding any more debt, you’ll only find yourself worse off in the long run.Bank Debt Word Cloud

Debt Consolidation Loans: Why Should They Be Used?

A debt consolidation loan can be a great tool when you’re working on paying off your debt.  The reduction in interest rates and payments can help ease the burden of your debt while also enabling you to pay off the debt at a quicker rate.  Again, if you aren’t committed to not adding any more debt, and you start using those same credit cards again, you’ll find yourself in a much worse situation than you were before.  Combined with a commitment to no more debt, they are a great tool.

Debt Consolidation Loans: Caveats

With anything, there are a few things that you’ll need to watch out for.  Besides reloading your credit cards, that is.  Some lenders will attempt to roll a car loan or a home equity loan into the consolidation loan.  Only do that if there is no other option.  Why?  Both the car loan and the home equity loan are what are called secured loans.  There is some physical asset that the lender holds title to should you default.  If you roll either into the consolidation loan, you don’t own that physical asset until the consolidation loan is paid off.  Consider this example.  You have a car loan for $5000, on a car that has a value of $10000.  You roll that car loan into your consolidation loan along with $20000 in credit card debt.  The total for your consolidation loan is then $25000.  Until you pay that $25000 off, the lender will keep it’s lien on the car.  What if you get in a wreck and total the car?  You can’t use it as a trade-in, or sell it to a salvage yard until that $25000 is paid off and you can get the lien removed from the car.  It’s a hairy situation to be in, to be sure.  All that said, getting an unsecured loan can sometimes be difficult, and depending on your situation, some lenders might require at least part of the loan be secured.  You’ll have to determine if that’s a risk you want to take in order to take ownership of your finances.

Much like any other financial tool, a debt consolidation loan can be helpful under the right circumstances.  Be careful, examine the details, and learn how it works, and you can make sure that it remains that way.

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