Beating Broke

Personal Finance from the Broke Perspective

January Financial Reset

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You’ve had your fun.  You spent the holidays with your loved ones, did some frugal gift giving (right?), and probably ate way more than you should have.  But, the new year is upon us, and it’s time to get back to business.  It’s time for a January financial reset.

With tax season right around the corner, there’s no better time to get all your financial books from the last year in order, take a good look at the balance sheet, and decide on the directions you’re going to take your finances in the coming year.  For some of you, that will mean finally getting a handle on your debt.  For others, it will mean finally paying off your debt.  And for more of you, it will mean finding the best ways to make your money work for you as you build your net worth and make strides towards financial independence.

For those in that last group of people, this post isn’t likely to help much, but you might want to take a peek at my Lending Club page for a great way to keep your money working for you.  The rest of you, stick around.

Reformulate your debt

January Financial ResetIf you’ve still got debt hanging around, a new year financial reset is a great time to investigate reformulating it. What the heck does that mean?  It means taking a good look at the debt that you’re carrying, and considering the options you may have to pay it off earlier.

  • Reduce the rates: The worst feature of credit card debt is the interest rate that they like to charge.  12%, 15%, 22%, or more.  The interest payments eat into any payment you make on the debt quickly, and make it that much harder to make any meaningful progress.  If’ you’ve got good credit, consider finding some good 0% balance transfer cards to transfer your existing balances to.  You should be able to find something with a 12 to 15 month 0% rate.  Be aware of the balance transfer fee when you do this, but otherwise it can be a good way to help you make some good progress on your credit card debt repayment.
  • Refinance: In some cases (mostly secured debt) you may want to look into a refinance of the loan.  If you can reduce the rate on a loan and extend the length of it, it can free up some of your debt repayment money to go towards loans with higher rates and speed up your debt snowball.

Recalculate your debt snowball

Now is also a really good time to update all the numbers on your debt snowball plan.  (or debt avalanche if you’re so inclined) Unless you’ve been keeping it updated throughout the year, the numbers are probably pretty out of date, and need to be freshened.  Take the time, while you’re doing this, to determine if you need to move one debt ahead of another, or if you can afford to increase the snowball payment to speed it up.

Seed your budget

Your budget can be the lifeline for your financial life.  It’s a blueprint for how you’re building your financial house.  Even a simple budget can help tremendously, and the beginning of the year is a great time to give your budget a full inspection (or just to start one) and make sure that it’s got all the categories you need, that it’s still balancing, and for planning out where you’re going to focus your efforts in the new year.

Examine your bills

We all get bills throughout the month.  In many cases, we throw them in a pile, then enter them into bill pay, (or, gasp, write checks) and then forget about them until they show up the next month.  While you’re going through your finances from the previous year, pay attention to the bills that you’re paying.  Are there bills that have increased?  How about ones that you meant to cancel the service but didn’t?  Or maybe there are some that you just haven’t called to try and get a better rate for?  Know what time it is?  You guessed it.  It’s time to cancel that service. It’s time to call and see why the rate increased, and if there’s a change you can make to get a better rate.  It’s time to compare your services with their competitors and see if there isn’t a better rate/service available out there.  You may think it’s a waste, but you could end up saving hundreds a month.  And that can quickly make your debt snowball grow!

Keep on your financial path

Here’s the most important thing you have to take away from this post.  You’ve got to keep on that path.  Once you’ve done the things above, you’ve taken some really solid steps on your path to being debt free, but they’ll only work if you keep working with them.  Keep that budget going, keep a close eye on your bills, keep your snowball updated, and know how much debt (and at what rate) you have left.  Whether your debt feels like a mountain, or just a molehill, knowing the what/when/where of it make the climb that much easier.

Will you take the time to do a January Financial Reset?

Compare Those Credit Card Offers

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Like many mailboxes around the country, mine seems to overflow on occasion with credit card offers.  I’m not sure what it is, if their marketing departments all work on the same cyclical calendar, or if there are certain market indicators that trigger a flood of offers, but whatever it is, they all seem to come all at once.  Normally, they all find their way to the shredder, to then find their way to the trash can.

One of the things that we still do, because we haven’t paid off all of our credit card debt, is to occasionally transfer the balances to take advantage of those same credit card offers.  One of those offers recently expired, and so I had been keeping my eye out for a new offer to make the move.  That offer came in the form of those little convenience checks that the credit card companies are so fond of sharing.  In this particular case, from a card that we’d already paid off, but had left open.  It had two checks in it.  One that offered 0% interest for about 13 months, and the other that offered 1.99% for about 18 months.

Which Credit Card Offer Will Reign Supreme?

Credit Card Offers

There was plenty of balance on the paid off card to take care of the entire balance of the other card.  It was just a matter of writing the check to transfer the balance, and mail it.  But, which one?  Most people, including myself, if making the decision in a quick manner would likely choose the 0% offer and mail it off.  However, it bears a little more analysis than that.  Especially if, like in our case, you don’t think you’ll have the balance paid off at the end of the 13 months.  When the transfer special expires, the rate bumps back up to the normal 12.24%.

I put a little thought into it, and thought that there might be some advantage to using the 1.99% rate with the longer term.  But, I had to be sure.  I’m no math wiz, especially when it comes to interest rates, so I went looking for a calculator that might help me figure out for sure if there was an advantage to one rate or the other.  I found two that gave me the numbers I was looking for.

Credit Card Offer Calculators

The first was a calculator from my friend Todd Tresidder over at FinancialMentor.  It’s a simple Credit Card Comparison calculator.  I think it’s meant to compare different credit cards, but I just punched in the numbers for the different offers on the same card and hit the button.  What did it tell me?

In both this calculation, and the second one, I used a few assumptions.  These aren’t really true assumptions, but I had to use some baseline to determine the difference.  I assumed that it would take us longer than 18 months to pay off the entire balance.  I used an approximate payment.  I also assumed (since the calculators didn’t allow for different payments) that we’d pay the same payment for the entire life of the credit card.  Here’s what I found.

In Todd’s calculator, the difference between the two offers was about 5 payments to payoff, and about $300 in savings.  Which one won?  The 1.99% offer. My initial thoughts were confirmed.  An interesting note; I played with the payment amount, and the more we pay as a payment, the less difference there is.  In fact, there’s a tipping point, where the 0% offer is better.  As I suspected, the more you pay, the sooner you’ll pay off the balance, and the more advantage you get from using the 0% rate.  But, remember that I made the assumption that we wouldn’t be paying it off in less than 18 months, so that isn’t an issue in our case.

The second calculator that I used is this credit card balance transfer calculator.  This calculator seemed to be set up a little more for this specific calculation.  It adds in calculations for the balance transfer fee which is something that you certainly need to take into account if you are thinking of transferring a balance.  With all the numbers punched in, and the calculator spinning up, my initial thought was once again confirmed.  In fact, this calculator seemed to show even more advantage to going with the 1.99% rate.  Here, I got an answer of about $405 in costs.  Again, massaging the payment gave the same results in that the more you pay, the more advantage there might be in taking the 0% rate.

We Have A Credit Card Offer Winner!

So, all that calculated, we filled out the check for the 1.99% transfer and sent it off.  But, it brought an interesting revelation to me.  You’ve got to compare the offers.  A difference of a few months, or a few interest rate points can make a much larger difference than you think.  Compare them thoroughly, and try and make accurate assumptions about your payoff behavior so that calculators like the ones I used can give you accurate information.

Have you ever found that an offer that, at first glance didn’t seem the best, really was?