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Job Loss – Save Money or Get Out of Debt?

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Job loss – prepare by saving or debt reduction?

DFA reader Tiffany asked:

My husband just came home from work and told me he may be laid off at the end of the semester (he’s an adjunct professor at a small liberal arts college). He doesn’t seem panicked, but I know he is worried and I am VERY worried. He has never managed the household finances, we’ve agreed that’s my responsibility because I am so much more careful with our money than him. I run a small business from home and we have a daughter in day care full-time.  We have a very small mortgage (10K), credit cards ($300/mo), and a household expense budget of about $3000/mo. plus $1000/mo for day-care. We have NO emergency fund. I bring in about $2500/mo. We had been using his income to pay for full-time care for our daughter, but that will end if he’s not working.

So here’s my question: Since we have advance knowledge that we may end up in a financial train wreck, how should we best prepare? Do we work on building the emergency fund, pay off the credit cards, pay off the last of the mortgage? Thanks for your advice. I am trying to be pro-active and not wait for the “crash.”

How to best prepare for job loss

Great question Tiffany.  First thing is first: make sure your husband has his resume updated and is searching out and applying for every available and relevant positions.

Focus on trimming the fat.  You mention having a $3,000 household expense budget… I guarantee that can be lowered if you put your mind to it.  Cancel your cable, cut back phone plans, apply my grocery hacks, make your own diy household cleaners.  Be creative… you will be amazed how much cash flow you can free up for savings.

Consider pulling your daughter out of day care to increase your cash flow.  You mentioned working from home, and I know this would be tough, but if it is doable it will instantly free up $1,000 every month to help you prepare.

How much credit card debt do you have?  When is the semester over (so we know how many months you have to prepare?)  Without knowing the answers to those two questions, this is what I would do if I were in your situation.

1.  Save $1,000 in a high yield savings account.

The first thing you need to do is give yourself some semblance of monetary security.  You mentioned having no money saved in your emergency fund, and that needs to change right away.  Save some money… at least $1,000 for now.

2.  Forget about paying off the mortgage for now

Unless you have some unique circumstance surrounding your mortgage it is probably your lowest rate debt and is also secured by the home, so put mortgage repayment on the far back burner.

3.  Pay off your credit card debt

If your credit card debt is minimal, go ahead and pay it off.  By minimal I mean minimal compared to your monthly cash flow.  If you can pay this debt off within a month or two… go ahead and do it.  If you owe multiple thousands and it would take you longer to pay off, then just increase your monthly payments while saving simultaneously.  With job loss looming, I would encourage you to save 75% of your available cash flow and put the remaining 25% toward your credit card debt.

4.  Save money

Continue saving money up until the day your husbands employment ends.  Depending on how much time you have, if you can save $1,000 each month on day care and get that credit card debt out of the way, you should be able to build up quite a bit of cash.  No liquid cash means no security.

In closing

Update his resume and start the job hunt.  Reduce your household expenses wherever possible.  Seriously consider pulling your daughter out of day care (even if just for a few months – it will be hard but the pay off will help your situation immensely.)  Save at least $1,000 to get your emergency fund started.  Pay off your credit cards.  Save more money.

Remember to bring your situation before the Lord in prayer.  He cares for you more than you could ever imagine and is always waiting to help you… you just have to ask.

“Consider the lilies how they grow: they toil not, they spin not; and yet I say unto you, that Solomon in all his glory was not arrayed like one of these.  If then God so clothe the grass, which is to day in the field, and to morrow is cast into the oven; how much more will he clothe you, O ye of little faith?  And seek not ye what ye shall eat, or what ye shall drink, neither be ye of doubtful mind.  For all these things do the nations of the world seek after: and your Father knoweth that ye have need of these things.  But rather seek ye the kingdom of God; and all these things shall be added unto you.”  – Luke 12:27-31

Do you have any other advice for Tiffany?

Have something to add?  Please share your wisdom and experience and help point Tiffany in the right direction.  Thanks!

Have a question of your own?  Ask Matt Jabs for free!  🙂

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/adviser relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.

Credit Card Minimum Payment Disclosures – Will They Help?

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This is a guest post from Kevin Bowen, a content writer for RESQdebt.com and employee of Greenshieldfs.com

Will greater disclosure of the dangers of minimum payments affect how people react?

CARD Act of 2009

Earlier this month, the Federal Reserve issued new rules that set out the practical procedures to enforce the Credit Card Accountability and Responsibility Act of 2009, a sweeping round of new reform laws that will change the way that the credit card system operates.

The long-range effects of these rules will not be known for some time to come.  How many of these changes will prove a benefit and how many of them will prove a disaster remains to be seen. However, there appears to be one thing that seems like an instant winner for the consumer – the new disclosure rules for minimum payments on a credit card account.

Minimum payments benefited credit card companies

The minimum payment has long been a tool that credit card companies have been able to use to rack up large sums of interest on some accounts. By giving some cardholders the opportunity to pay a very low minimum on a very large bill, the companies have been able to charge interest on significant amounts of money.

If done bill after bill over time, paying the minimums can throw consumers deeply in debt. For this reason the minimum payment has gained scrutiny from both academia and legislatures. A law was passed several years ago that required companies to raise the dollar figure on the minimum payment, in order to try to limit the amount of interest being charged to cardholders buried in debt. An English University also found that a minimum payment has a psychological “anchoring effect,” getting consumers to write checks for less money than if no minimum payment appeared on the bill.

Minimum payments – healthy new disclosures

Now, according to a Federal Reserve website, the look and substance of your credit card bill are about to change to help consumers understand this issue. These new Fed rules will require credit card companies to give consumers more information about how their payment choices affect their ability to pay and the length of their debt.

For those stuck making minimum payments, the new information could be eye-opening. For instance, the new bill will reveal the time needed to pay off your current balance if the consumer consistently makes only the minimum payment from month to month. This number could surprise some credit card users, unaware of the sometimes lengthy time frames – and the resulting high interest payments – that minimum payments invite.  The new bill also will show the dollar figure that the cardholder would need to send in each month in order to pay off the balance in three years worth of time.

The bill will also have two warnings. The first is a late payment warning that explains that a late fee and an interest rate hike are possible effects of making a late payment. A minimum payment warning tells consumers that they will have interest added and a longer payoff time frame if they only make the minimum payment.  While these things might seem obvious to a seasoned credit card user, less experienced users might not be familiar completely or at all, with how things work.

In the past, credit card companies have been able to prey on the ignorance of some of its more vulnerable cardholders. The new rules rightfully make it more difficult for a credit card issuer to take advantage of inexperienced or unwitting cardholders, who might make that payment without understanding that it could sink them further into debt.   With the new payment information cardholders will be warned about the dangers of missing minimum payments; if they choose to make that payment, they will do so in an informed fashion. That seems only good for the consumer and fair for all parties involved.

What do you think?

Will this positive change in bill reporting make any difference in how unseasoned credit card users view and approach their debt payments?

photo by libertyslens

Credit Card Balance Transfer Advice – Bender Answered

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In case you haven’t heard, I am offering free debt help.

Visit the Ask Matt Jabs page and fill in the form to ask your question… for free!

Credit card debt relief for Bender

Bender asked:

Hey Matt! Thanks for offering your help!! I have over $5000 in Credit Card Debt with 3 different companies. Bank of America, Capital One, and GE Money. The BoA rate is 0% while the others are almost 30%. I called BoA in an attempt to transfer the high rate balances to the 0% card. Well, I am in between jobs right now and won’t start receiving a regular check again until Feb. I guess it was a bad choice to call and try to consolidate because after explaining what I wanted, they refused the transfer the balances and immediately lowered my credit limit from over $5k to $1,600!! So, in a fit of anger, I transferred my BoA balance AND my GE Money balance over to Capital One. I didn’t want to give BoA another cent of my money. Did I do the dumbest thing ever?? I called CapOne and asked for a lower rate while threatening to transfer THAT balance to BoA for 0%. I was obviously bluffing, but I thought I’d give it a whirl since I realized moving my debt to an almost 30% rate was kinda dumb. Base on a few late payments, they wouldn’t budge on the rate. So what’s my next move?? Should I close the BoA and GE accounts or leave them open and shred the cards? Should I just make it a mission to pay off the CapOne or attempt to move that to a lower rate card or apply for a Lending Club loan? How badly do you think I’ve screwed up my credit score, which was in the high 600’s?? As I said, I will start getting paid next month and should be able to throw, I hope, at least $1,500/month at credit card debt alone. Thanks so much for your time. I hope you get a chance to answer because I’m sort of at a loss. Best wishes and much gratitude, – bender

More detailed on my situation:
2 Credit Cards – Bank of America – $1315.50 – 0% Interest (Limit $5,500) – Capital One – $1551.24 – 29.4% (Penalty Rate for Late Payment) (Limit $8k) Line of Credit for LASIK – GE Money – $2677.98 – 22.98% + Periodic Finance Charges (Limit $3,200) I also have a car payment ($300/mo) and student loans ($200/mo.)

How to pay off this credit card debt

Before I start let me urge you to check out my credit card debt reduction handbook.

Bender, here’s a question:

  • Why did you move all the amounts off the BoA card?  If you are paying 0% interest then you are not, as you put it, “giving them any of your money” anyway.  Since you’re paying 0% you are not giving them any of your money, you are only paying them back for money they already loaned you interest free.

Here is what I would do Bender:

You still have a zero percent card and on top of that, if your credit score is still 660+ you may be eligible to consolidate through Lending Club.

  1. Since you still have a credit card with a zero percent interest and a $1,600 credit limit, the fist thing you should do is try to move $1,600 from the Capital One card back onto the zero percent Bank of America card.  If you are going to do this make sure that any balance transfer fees they may try and charge you will amount to less than the interest you’re currently paying on the Capital One card.
  2. Since your other 2 cards are carrying an interest rate of 30% *cough – gag – eh chem* (sorry… CC companies can make me gag easily) – consolidating debt through Lending Club may be something to consider.  You said your credit score was in the high 600’s… as long as it is still 660 or higher you may be able to get a Lending Club loan at a significantly lower rate than your existing 30% credit cards.
  3. If you cannot consolidate through Lending Club, simply pay minimum payments on the zero percent BoA card while you apply all other available cash flow funds toward the other 30% cards until they are paid off.
  4. Once the high rate cards are paid off, shift your focus to the 0% BoA card and pay it off accordingly.

One other thing to consider is the possibility of consolidating your auto loan into the Lending Club loan.  Depending what your auto loan interest rate is, you may be able to get a lower rate on the Lending Club consolidation loan… although this is not likely so only do this if you can indeed get a lower rate through LC and one low enough to offset the LC loan processing fee.

What do you think?

What would you in Bender’s situation?

If you need debt help or personal finance advice – Ask Matt Jabs.

*Disclaimer*
We accept no liability whatsoever for any loss or damage of any kind arising out of the use of all or any part of this material. Our comments are an expression of opinion. While we believe our statements to be true, they always depend on the reliability of our own credible sources. Any advice taken from this site does not in any way establish a client/advisor relationship.  We always recommend that you consult with a licensed, qualified professional before making any financial or investment decisions.