MONEY Financial Planning

The Surprising Power of a One-Page Financial Plan

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When it comes to thinking about the future, sometimes less is more.

Gather round, because here is today’s personal-finance lesson inspired by famed Hollywood screenwriter William Goldman: Nobody knows anything.

In other words, no one knows where the market is headed. No one can tell you exactly what financial moves to make. And no one knows where they are going to be 40 years from now.

Here is what you can do: Make your best guess and muddle through life the best you can. That’s the thesis of The One-Page Financial Plan, the new book by New York Times columnist Carl Richards.

Rather than over thinking everything to the point of paralysis, just jot down a few general goals, get started, and don’t beat yourself up over past mistakes. Reuters sat down with Richards to talk about the surprising power of simplicity.

Q: Personal-finance experts usually don’t talk about uncertainty. Why was that important for you?

A: The giant fantasy of financial planning is that we all know exactly where we will be in 40 years, so we just need to sit down and plan for it. That gives people a false sense of precision.

The reality is that most of us don’t even know where we will be six months from now. We don’t know what our utility bills will be in the future, let alone when we are going to retire or when we are going to die. So the natural human reaction is to say, aw, just forget it. But that’s not a good choice either.

Q: So what should people do?

A: Call it what it is—guessing. Give yourself permission to let go of all this anxiety, and just make the best guess you can and be committed to the process of guessing.

Q: Your book is called The One-Page Financial Plan. So what’s on that one page?

A: On my one-page plan, there is a statement at the top of what’s important: For my wife and I, it is to spend time with the family, and to serve in the community. Then there are three goals: To fully fund all retirement accounts, to fully fund our kids’ education accounts, and to put money away for a house.

That’s it.

Q: You have had some financial missteps yourself. How did those experiences inform the book?

A: When you write publicly about this stuff, people think you have everything figured out. But nobody is foolproof, and making financial decisions is hard.

We got caught up in a very basic mistake: Projecting a rapidly growing business, which meant we could afford a big house. It turned out the business didn’t keep doing that, and we were faced with the tough situation of owing far more than the house was worth. So we lost it.

Q: What is one trick people can use to get their finances under control?

A: I use what I call the 72-hour Test. Once I found myself with a stack of unread books on my desk, and I thought: ‘What if I just waited 72 hours between when I thought I had to absolutely have a book, and when I actually purchased it?’

The surprising reality is that after 72 hours, whatever it is, you usually discover you don’t need it anymore.

Q: What about debt—how much is too much?

A: I have yet to meet anyone who has paid down debt and was unhappy about it.

Maybe on a spreadsheet it makes sense to have some mortgage debt, and invest the difference in the stock market, and make a bunch of money. But paying off your home makes people really happy.

Q: We are all so anxious about money. Why is that?

A: Money is not just about math, it’s about emotions. The stuff you dream about, the stuff that keeps you awake at night, your most cherished dreams and your biggest fears. The rubber always meets the road with dollars. That’s a very potent cocktail.

 

MONEY Debt

Federal Consumer Agency Proposes New Rules for Payday Loans

New rules could require payday lenders to verify that customers can afford to repay their debt before allowing them to take out a loan.

Payday loan borrowers may finally be in for some relief. On Thursday, the federal Consumer Financial Protection Bureau released the outlines of new proposals that would impose restrictions on various high-interest lending products, including payday loans, which the bureau defines as any credit product that requires consumers to repay the debt within 45 days.

The proposals also contain new rules for longer-term loans, such as installment loans and car title loans, where a lender either has access to a borrower’s bank account or paycheck, or holds an interest in their vehicle.

The CFPB’s actions come as high-interest lending products have been receiving increasing scrutiny for trapping low-income borrowers in a cycle of debt. Payday loans, which typically last around 14 days, or until the borrower is expected to get his or her next paycheck, technically charge relatively low fees over their original term. However, many payday borrowers cannot afford to pay back their debt in the required time frame and must “roll over” the previous loan into a new loan.

As a result, the median payday customer is in debt for 199 days a year, and more than half of payday loans are made to borrowers who end up paying more in interest than they originally borrowed. Longer-term auto-title loans and installment loans have been criticized for similarly locking consumers in debt.

In order to protect borrowers from falling into such “debt traps,” the CFPB’s proposals include two general strategies for regulating both short- and long-term high-interest loans. For payday loans, one “prevention” alternative would require lenders to use the borrower’s income, financial obligations, and borrowing history to ensure they had sufficient earnings to pay back the loan on time.

Any additional loans within two months of the first could only be given if the borrower’s finances had improved, and the total number of loans would be capped at three before a 60-day “cooling-off” period would be imposed. Payday shops would also have to verify consumers did not have any outstanding loans with any other lender.

A second “protection” alternative would not require payday lenders to ensure their customers could repay their loan without further borrowing, but instead imposes a series of restrictions on the lending process. For example, under this plan, all loans would be limited to 45 days and could not include more than one finance charge or a vehicle as collateral.

Additionally, lenders would have offer some way out of debt. One method could be a requirement to reduce the loan’s principal to zero over the course of three loans, so nothing more would be owed. Another option is a so-called “off-ramp” out of debt, which would either require loan shops to allow consumers to pay off debts over time without incurring further fees, or mandate that consumers not spend more than 90 days in debt on certain short-term loans in a 12-month period. The “protection” alternative would also include a 60-day cooling-off period after multiple loans and a ban on lending to any borrower with outstanding payday debt.

The bureau has proposed similar “prevention” and “protection” options for loans that exceed 45 days. The former would require similar vetting of a borrower’s finances before a loan is given. The latter would include a duration limit of six months and either limit the amount that could lent and cap interest rates at 28%, or mandate that loan payments take up a maximum of 5% of a borrower’s gross monthly income, in addition to other regulations.

Apart from new regulations on the loan products themselves, the CFPB also proposed new rules regarding collection. One regulation would require lenders to give borrowers advance notice before attempting to extract funds from their bank accounts. A second would attempt to limit borrowers’ bank fees by limiting the number of times a lender could attempt to collect money from an account unsuccessfully.

Before any of the any of these proposals can become a bind rule, the bureau says it will seek input from small lenders and other relevant stakeholders. Any proposals would then be opened to public comment before a final rule is released.

The Consumer Financial Association of America, a national organization representing short-term lenders, responded to the proposals by stressing the need to keep credit available to unbanked Americans, even while increasing consumer protections.

“CFSA welcomes the CFPB’s consideration of the payday loan industry and we are prepared to entertain reforms to payday lending that are focused on customers’ welfare and supported by real data,” said association CEO Dennis Shaul in a statement. But, Shaul added, “consumers thrive when they have more choices, not fewer, and any new regulations must keep this in mind.”

The Center for Responsible Lending, a nonprofit organization dedicated to fighting predatory lending practices, released a statement in general support of the CFPB’s proposals.

“The proposal endorses the principle that payday lenders be expected to do what responsible mortgage and other lenders already do: check a borrower’s ability to repay the loan on the terms it is given,” said Mike Calhoun, the center’s president. “This is a significant step that is long overdue and a profound change from current practice.”

However, Calhoun said, the “protection” options were grossly inadequate, calling them “an invitation to evasion.”

“If adopted in the final rule, they will undermine the ability to repay standard and strong state laws, which give consumers the best hope for the development of a market that offers access to fair and affordable credit,” Calhoun added. “We urge the consumer bureau to adopt its strong ability to repay standard without making it optional.”

According to the center, 21 states, including the District of Columbia, have significant protections against payday lending abuses. An interest-rate cap, which lending activists say is the most effective means to regulate payday lending, has been adopted by 15 states.

Earlier this month, MoneyMutual, a lead generator for payday loan products, was fined $2.1 million by the state of New York for advertising loan products with illegally high interest rates. According to New York law, unlicensed payday lenders cannot charge an interest rate over 16% per year, and licensed lenders are subject to a cap of 25%. MoneyMutual has acknowledged it advertised loans with an annual percentage rate between 261% and 1,304%.

 

MONEY Macroeconomic trends

8 Surprising Economic Trends That Will Shape the Next Century

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Douglas Mason—Getty Images

Here are the stories that will matter in the years ahead.

Forget monthly jobs reports, GDP releases, and quarterly earnings. As I see it, there are eight important economic stories worth tracking right now that could have a big impact in the coming decades.

1. The U.S. population age 30-44 declined by 3.8 million from 2002 to 2012. That cohort is now growing again. By 2023 there will be an estimated 5.8 million more Americans aged 30 to 44 than there are now, according to the Census Bureau. This is important, because this age group spends tons of money, buys lots of homes and cars, and start lots of new businesses.

2. U.S. companies have $2.1 trillion cash held abroad. Much of this is because we have an inane tax code that taxes foreign profits twice: Once in the country they’re earned in, and again when companies bring that money back to the United States. If Congress ends this rule and switches to a territorial tax system — in which countries can bring foreign-earned cash back to their home country without paying another layer of taxes, as every other developed country allows — there could be a flood of new dividends, buybacks, and investments in America. It’s huge, pent-up demand waiting to be spent.

3. U.S. infrastructure is in disastrous shape. Roads, bridges, dams, and other public infrastructure have been neglected for years. The American Society of Civil Engineers estimates that $3.6 trillion in new investment is needed by 2020 to bring the country’s infrastructure up to “good” condition. Will this happen soon? Of course not. This is Congress we’re talking about. But the good news is that this work must eventually be done. You can’t just let critical bridges and water structures fail and say, “Damn. That Brooklyn Bridge was nice while we had it.” Things will have to be repaired. Sooner rather than later would be smart, because we can borrow now for zero percent interest. But someday, it will happen. And it’ll be a huge boon to jobs and growth when it does.

4. The whole structure of modern business is changing. I’m not sure who said it first, but this quote has been floating around Twitter lately: “In 2015 Uber, the world’s largest taxi company owns no vehicles, Facebook the world’s most popular media owner creates no content, Alibaba, the most valuable retailer has no inventory, and Airbnb, the world’s largest accommodation provider owns no real estate.” Fundamental assumptions about what is needed to be a successful business have changed in just the last few years.

5. California is one of the most important agricultural states, growing 99% of the nation’s artichokes, 94% of broccoli, 95% of celery, 95% of garlic, 85% of lettuce, 95% of tomatoes, 73% of spinach, 73% of melons, 69% of carrots, 99% of almonds, 98% of pistachios, and 89% of berries (the list goes on). And the state is basically running out of water. Jay Famiglietti, senior water scientist at the NASA Jet Propulsion Laboratory, wrote last week: “Right now the state has only about one year of water supply left in its reservoirs, and our strategic backup supply, groundwater, is rapidly disappearing. California has no contingency plan for a persistent drought like this one (let alone a 20-plus-year megadrought), except, apparently, staying in emergency mode and praying for rain.” This could change rapidly in one good winter, but it could also turn into a quick tailwind on food prices. It could also be a huge boost for desalination companies.

6. New home construction will probably need to rise 40% from current levels to keep up with long-term household formation. We’re now building about 1 million new homes a year. That will likely have to rise to an average of 1.4 million per year, which combines Harvard’s Joint Center for Housing Studies’ projection of 1.2 million new households being formed each year and an annual average of 200,000 homes being lost to natural disaster or torn down. This is important because new home construction is, historically, one of the top drivers of economic growth.

7. American households have the lowest debt burden in more than three decades. And the largest portion of household debt is mortgages, most of which are fixed-rate. So when people ask, “What’s going to happen to debt burdens when interest rates rise?”, the answer is “Probably not that much.”

8. America has some of the best demographics among major economies. Between 2012 and 2050, America’s working-age population (those ages 15-64) is projected to rise by 47 million. China’s working-age population is set to shrink by 200 million, Russia’s to fall by 34 million, Japan’s by 27 million, Germany’s by 13 million, and France’s by 1 million. People worry about the impact of retiring U.S. baby boomers, but the truth is we have favorable demographics other countries can’t even dream about. This is massively overlooked and underappreciated.

There’s a lot more important stuff going on, of course. And the biggest news story of the next 20 years is almost certainly something that nobody is talking about today. But if I had to bet on eight big trends that will very likely make a difference, these would be them.

For more:

MONEY credit cards

Can You Pay Your Mortgage With a Credit Card?

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Robert Hadfield

Sometimes, lenders allow you to pay one debt with another, but there are a lot of things to know before you charge a mortgage.

You can use a credit card to pay many kinds of bills, and if you have a rewards credit card you pay in full every month, you can use those payments to increase your rewards. It’s a common strategy.

Still, just because you have the ability to pay a bill with your credit card doesn’t mean it’s a safe tactic. Some consumers are tempted to use their credit cards to make mortgage payments, if they have that option, because large transactions generate more rewards, but doing that might actually cost you, rather than save you money.

It’s not very common to have the option to pay your mortgage with a credit card, but if you have the ability to do so, you’ve probably wondered about the risks and rewards of paying a loan with a credit card.

What to Ask Your Lender

If you can use your credit card to pay your mortgage, find out if there are fees associated with the transaction. Credit card transactions can be very expensive to process — it depends on the card you’re using — so the lender may charge you that fee so they don’t have to foot the bill

If there’s a fee, compare that to the rewards you might earn by charging your mortgage payment. Say you’re using a card that offers 1.5% cash back on all purchases — any processing fee exceeding 1.5% means you’re paying to pay your mortgage.

You should also ask how that transaction will be processed. A Reddit user recently posted about paying a mortgage with a credit card, and the payment went through as a cash advance on the card. Cash advances start accruing interest as soon as the transaction clears, which means they can get extremely expensive. Also, cash advances generally carry a higher interest rate than normal credit transactions, hitting you with a double-whammy of higher interest that starts accruing immediately.

Should your lender not charge fees in excess of your rewards, and if it codes the mortgage payment like a regular credit transaction, the strategy could work in your favor.

At the same time, you may set yourself up for some serious financial damage if you miss a payment on the card and have to pay interest on what might end up being a very large balance. You can see how your mortgage is impacting your credit scores for free on Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Taxes

11 Smart Ways to Use Your Tax Refund

Tax refund check with post-it saying "$$$ for Me"
Eleanor Ivins—Getty Images

You could pay down debt, travel, tend to your health, or shrink your mortgage, among many other ideas.

Here we are, in the thick of tax season. That means many mailboxes and bank accounts are receiving tax refunds. A tax refund can feel like a windfall, even though it’s really a portion of your earnings from the past year that the IRS has held for you, in case you owed it in taxes. Still, it’s a small or large wad of money that you suddenly have in your possession. Here are some ideas for how you might best spend it.

First, though, a tip: If you’re eager to spend your refund, but haven’t yet received it, you can click over to the IRS’s “Where’s My Refund?” site to track its progress through the IRS system. Now on to the suggestions for things to do with your tax refund:

Pay down debt: Paying down debt is a top-notch idea for how to spend your tax refund — even more so if you’re carrying high-interest rate debt, such as credit card debt. If you owe $10,000 and are being charged 25% annually, that can cost $2,500 in interest alone each year. Pay down that debt, and it’s like earning 25% on every dollar with which you reduce your balance. Happily, according to a recent survey by the National Retail Federation, 39% of taxpayers plan to spend their refund paying off debt.

Establish or bulk up an emergency fund: If you don’t have an emergency fund, or if it’s not yet able to cover your living expenses for three to nine months, put your tax refund into such a fund. You’ll thank yourself if you unexpectedly experience a job loss or health setback, or even a broken transmission.

Open or fund an IRA: You can make your retirement more comfy by plumping up your tax-advantaged retirement accounts, such as traditional or Roth IRAs. Better yet, you can still make contributions for the 2014 tax year — up until April 15. The maximum for 2014 and 2015 is $5,500 for most folks, and $6,500 for those 50 or older.

Add money to a Health Savings Account: Folks with high-deductible health insurance plans can make tax-deductible contributions to HSAs and pay for qualifying medical expenses with tax-free money. Individuals can sock away up to $3,350 in 2015, while the limit is $6,650 for families, plus an extra $1,000 for those 55 or older. Another option is a Flexible Spending Account (FSA), which has a lower maximum contribution of $2,550. There are a bunch of rules for both, so read up before signing up.

Visit a financial professional: You can give yourself a big gift by spending your tax refund on some professional financial services. For example, you might consult an estate-planning expert to get your will drawn up, along with powers of attorney, a living will, and an advance medical directive. If a trust makes sense for you, setting one up can eat up a chunk of a tax refund, too. A financial planner can be another great investment. Even if one costs you $1,000-$2,000, they might save or make you far more than that as they optimize your investment allocations and ensure you’re on track for a solid retirement.

Make an extra mortgage payment or two: By paying off a little more of your mortgage principle, you’ll end up paying less interest in the long run. Do so regularly, and you can lop years off of your mortgage, too.

Save it: You might simply park that money in the bank or a brokerage account, aiming to accumulate a big sum for a major purchase, such as a house, new car, college tuition, or even starting a business. Sums you’ll need within a few or as many as 10 years should not be in stocks, though — favor CDs or money market accounts for short-term savings.

Invest it: Long-term money in a brokerage account can serve you well, growing and helping secure your retirement. If you simply stick with an inexpensive, broad-market index fund such as the SPDR S&P 500 ETF, Vanguard Total Stock Market ETF, or Vanguard Total World Stock ETF, you might average as much as 10% annually over many years. A $3,000 tax refund that grows at 10% for 20 years will grow to more than $20,000 — a rather useful sum.

Give it away: If you’re lucky enough to be in good shape financially, consider giving some or all of your tax refund away. You can collect a nice tax deduction for doing so, too. Even if you’re not yet in the best financial shape, it’s good to remember that millions of people are in poverty and in desperate need of help.

Invest in yourself: You might also invest in yourself, perhaps by advancing your career potential via some coursework or a new certification. You might even learn enough to change careers entirely, to one you like more, or that might pay you more. You can also invest in yourself health-wise, perhaps by joining a gym, signing up for yoga classes, or hiring a personal trainer. If you’ve been putting off necessary dental work, a tax refund can come in handy for that, too.

Create wonderful memories: Studies have shown that experiences make us happier than possessions, so if your financial life is in order, and you can truly afford to spend your tax refund on pleasure, buy a great experience — such as travel. You don’t have to spend a fortune, either. A visit to Washington, D.C., for example, will get you to a host of enormous, free museums focused on art, history, science, and more. For more money, perhaps finally visit Paris, go on an African safari, or take a cruise through the fjords of Norway. If travel isn’t of interest, maybe take some dance or archery lessons, or enjoy a weekend of wine-tasting at a nearby location.

Don’t end up, months from now, wondering where your tax refund money has gone. Make a plan, and make the most of those funds, as they can do a lot for you. Remember, too, that you may be able to split your refund across several of the options above.

MONEY investing strategy

Most Americans Fail This Simple 3-Question Financial Quiz. Can You Pass It?

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Peter Dazeley—Getty Images

These questions stump most Americans with college degrees.

Following are three questions. If you’ve been around the financial block a few times, you’ll probably find all of them easy to answer. Most Americans didn’t get them right, though, reflecting poor financial literacy. That’s a shame — because, unsurprisingly, the more you know about financial matters and money management, the better you can do at saving and investing, and the more comfortable your retirement will probably be.

Here are the questions — see if you know the answers.

  1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? (A) More than $102. (B) Exactly $102. (C) Less than $102.
  2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, how much would you be able to buy with the money in this account? (A) More than today. (B) Exactly the same. (C) Less than today.
  3. Please tell me whether this statement is true or false: Buying a single company’s stock usually provides a safer return than a stock mutual fund.

Did you get them all right? In case you’re not sure, the answers are, respectively, A, C, and False.

Surprising numbers

The questions originated about a decade ago, with Wharton business school professor and executive director of the Pension Research Council Olivia Mitchell, and George Washington School of Business professor and academic director of the Global Financial Literacy Excellence Center Annamaria Lusardi. In a quest to learn more about wealth inequality, they’ve been asking Americans and others these questions for years, while studying how the results correlate with factors such as retirement savings. The questions are designed to shed light on whether various populations “have the fundamental knowledge of finance needed to function as effective economic decision makers.”

They first surveyed Americans aged 50 and older and found that only half of them answered the first two questions correctly. Only a third got all three right. As they asked the same questions of the broader American population and people outside the U.S., too, the results were generally similar: “[W]e found widespread financial illiteracy even in relatively rich countries with well-developed financial markets such as Germany, the Netherlands, Switzerland, Sweden, Japan, Italy, France, Australia and New Zealand. Performance was markedly worse in Russia and Romania.”

If you think that better-educated folks would do well on the quiz, you’d be wrong. They do better, but even among Americans with college degrees, the majority (55.7%) didn’t get all three questions right (versus 81% for those with high school degrees). What Mitchell and Lusardi found was that those most likely to do well on the quiz were those who are affluent. They attribute a full third of America’s wealth inequality to “the financial-knowledge gap separating the well-to-do and the less so.”

This is consistent with other research, such as that of University of Massachusetts graduate student Joosuk Sebastian Chae, whose research has found that those with higher-than-average wealth accumulation exhibit advanced financial literacy levels.

The importance of financial literacy

This is all important stuff, because those who don’t understand basic financial concepts, such as how money grows, how inflation affects us, and how diversification can reduce risk, are likely to make suboptimal financial decisions throughout their lives, ending up with poorer results as they approach and enter retirement. Consider the inflation issue, for example: If you don’t appreciate how inflation shrinks the value of money over time, you might be thinking that your expected income stream in retirement, from Social Security and/or a pension, will be enough to live on. Factoring in inflation, though, you might understand that your expected $30,000 per year could have the purchasing power of only $14,000 in 25 years.

Mitchell and Lusardi note that financial knowledge is correlated with better results: “Our analysis of financial knowledge and investor performance showed that more knowledgeable individuals invest in more sophisticated assets, suggesting that they can expect to earn higher returns on their retirement savings accounts.” Thus, better financial literacy can help people avoid credit card debt, take advantage of refinancing opportunities, optimize Social Security benefits, avoid predatory lenders, avoid financial scams and those pushing poor investments, and plan and save for retirement.

Even if you got all three questions correct, you can probably improve your financial condition and ultimate performance by continuing to learn. Many of the most successful investors are known to be voracious readers, eager to keep learning even more.

MONEY Credit

How I Got Out of $63,000 of Credit Card Debt

hand pulling another hand out from under piles of bills
iStock

A series of personal and financial struggles forced one California couple to make a tough decision to get out of debt.

Sleepless nights. A knot in the pit of the stomach. A gnawing sense of unease.

Charles Phelan was familiar with the physical and emotional toll of debt. But usually it was his clients who were experiencing those symptoms. This time, it was his turn.

He owed more than $50,000 in credit card debt and knew it was time to make the same kinds of tough decisions he helped people in debt make every day. But that would mean giving up on his dream. Was he ready to make that sacrifice?

An expert on debt settlement, Phelan had been showing consumers how to negotiate lower payoffs on their debts for more than 17 years. As consumers’ financial lives melted around them, he would calmly help them see the bigger picture and make rational decisions about their futures. But now the downturn was hitting home — literally.

In 2010, Charles and his wife Marcia purchased their dream house, a 2,500 square-foot ranch in Escondido, Calif., with sweeping panoramic views. Gazing out at the mountains in the distance, he told his wife, “Coffin, or urn. You can pick either one, but the only way I’m moving out of this house is feet first.”

This hadn’t been an impulse purchase. Although the sales price of $654,000 may seem high to those living in other parts of the country, in his California community it wasn’t considered extravagant and it was well below the amount he had been approved for. Phelan’s business helping individuals and small business owners navigate the ins and outs of DIY debt settlement and coaching had been booming, and he had been working 12-15 hour days and his income reflected that. The worst of the real estate crash seemed to be over. The timing seemed right.

When they purchased their home, the mortgage was the Phelans’ only debt; their credit cards were paid in full, and they owned their cars free and clear. Even the new mortgage payment seemed reasonable; after all it was not that much more than the rent they had been paying.

But as much as Charles loved their new home, shadows of doubt began creeping in. One of the first signs came when he couldn’t keep food down for three days after they closed escrow. About a week later, a blood vessel in his ear popped, and could have led to permanent hearing loss except for quick intervention by a skilled physician.

A combination of personal and financial crises seemed to come one after another. His wife was experiencing health problems that required surgery. Business began slowing down significantly as the number of credit card accounts going into default began to plummet and fewer consumers were trying to settle their debts. The stress began to feel unbearable.

“But I come from a tough New England clan,” Charles writes in a detailed account of his experience on his website ZipDebt.com. “So I did what we do. I sucked it up and bulled my way through these challenges and ‘got it done.’ We bought the house, moved in, and that was it for me.” He continues:

It’s hard to see a bubble when you’re inside it. This was true of the real estate bubble, and it’s also true for individual industries when they hit a boom period. Conditions were good for a long time (in my business), long enough that I overlooked the old adage that past performance is no guarantee of future results. I made the false assumption those conditions would continue for the foreseeable future, and I was quickly proven wrong.

Over the next two years, Charles dipped into savings until the balance became “a shadow” of what it had been before. He had $120,000 in credit card lines of credit available, and he began using them. By the end of 2011, his unsecured debt totaled $18,600. The next year it climbed to $38,550. It stood at $43,000 at year-end 2013.

The Credit Score Conundrum

There was another problem: those credit card balances were causing Charles’ credit scores to slowly go down. He watched his credit score drop from 800 when he bought the house, “into the 770s, then 760s, then 750s. All this with never having missed a single payment.” The reason? His balances were getting higher in comparison to the credit limits, a crucial factor in credit scoring models. (You can see how debt is affecting your credit scores and monitor changes over time with a free credit report summary from Credit.com, updated monthly.)

So far, he had carefully managed his accounts to keep interest rates low and to protect his credit as best as he could from high balances. But from his work with clients, he knew that if just one of his issuers decided he was too much of a credit risk, they could slash his credit limit, and that could cause other issuers to reevaluate his limits. “Once that process kicks in, slow-motion disaster is the usual outcome,” he explains. “One creditor lowers your open credit to limit their risk, which makes your usage ratio even worse, taking another notch off your score. Other creditors follow along, and soon you are maxed-out where before you had open credit. Game over.”

Despite the debt, Charles and his wife still had a positive net worth thanks to the down payment they had put down on the house, and appreciating real estate prices that were gradually picking up. He kept enough in reserves that he could settle his own debt if it came to that. “I certainly did cut it close, however,“ he notes.

Charles knew he didn’t want to keep treading water forever and decided he needed to look at his situation the way he encourages his clients to do: by doing the math. “Numbers never lie,” he says. He also used a technique he teaches called the “three-year rule” where he imagined what would happen if he learned he had only three years to live. Would he choose to stay in the same situation for the rest of his life? The answer was, “no” and he knew it was time to think about selling his dream house.

Taking His Own Medicine

It took a while, but in mid-2014 the house was ready for sale. His credit card debt totaled $63,000.

The day they sold their house, he expected to feel some pangs of sadness and regret. But instead he felt profound relief. “I felt liberated,” he says. He was able to pay off the mortgage and the credit card debt, and with his savings accounts replenished by the sales proceeds, he and his wife decided to move to a small mountain town, Idyllwild, in the San Jacinto Mountains. This time they decided to lease a home for a while. His credit scores improved when the debts were paid off as well.

When he recently decided to share his story, a friend cautioned him against it, warning him that it might scare potential clients away. But Charles felt it was important to share how he used the same exact advice he gives clients. “In the end, it comes down to honesty. When you are facing a tough financial decision, the path to a solution begins with an honest look at your situation. You have to face reality, and that is simply not possible until you strip away all forms of emotional pretense and denial,” he observes.

And, as Charles has learned, it may require being willing to give up one dream for another. He used to just look at the mountains from his dream home, but his new home is in the mountains. He continues helping those in debt, and now when they describe their fears and the toll that stress is taking on their health, he can truly say he knows exactly where they are coming from.

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This article originally appeared on Credit.com.

MONEY Student Loans

What Happens If You Boycott Your Student Loans?

Graduates with $$ on their caps
Mark Scott—Getty Images

A group of former Corinthian Colleges students have formed a group and pledged to boycott their student loan payments.

Fifteen former Corinthian Colleges students are angry. The group alleges they were taken advantage of and targeted by the for-profit college system. They’re not the first to complain about the institution, but what makes these students different is that they’re refusing to pay back their federal student loans. They’re called the Corinthian 15 and they’re going on strike.

“If you owe the bank a thousand dollars, the bank owns you. If you owe the bank a trillion dollars, you own the bank. Together, we own the bank,” reads the website of the Debt Collective, a grassroots anti-debt organization calling on other students to challenge their creditors. Specifically, they’re calling on people with student debt from Corinthian Colleges to join the Corinthian 15, who say they will no longer pay for “degrees that have led to unemployment or to jobs that don’t pay a living wage.”

The school, for its part, isn’t backing down.

“Corinthian Colleges stands by the education it provided for its students and we are proud of our track record of helping students meet their educational and career goals,” said Joe Hixson, a spokesman for Corinthian Colleges, though he wouldn’t comment specifically on the actions being taken by the Corinthian 15.

He did note: “The traditional community college graduation rate is as low as 20%. Many Corinthian students tried a traditional community college before coming to Corinthian and found the Corinthian education better fit their needs. There’s clear need for an alternative to community colleges and Corinthian provides that.”

This isn’t the first time this year that Corinthian Colleges has been under the spotlight. The Consumer Financial Protection Bureau recently sued the company for allegedly engaging in deceptive marketing and predatory lending practices. A company that recently acquired a number of Corinthian’s campuses has already provided $480 million to relieve the private student loan debt of Corinthian students. Hixson did not comment specifically on the CFPB lawsuit.

What Actually Happens When You Don’t Pay Your Loans?

It’s important to consider the ramifications of going on a student loan strike.

“I’m not sure we have anyone who’s going to get hurt except the people striking,” said Joshua Cohen, a student loan lawyer based in Vermont. “In order for this strike to really work, everyone would have to be untouchable.”

Before you sign up to join ranks with the Corinthian 15, consider what may very well happen if you default on a federal student loan, either intentionally or otherwise.

The government can send a debt collector after you. It can garnish your wages. If you have no wages, the government can (and most likely will) go after you once you start making money. The delinquencies, default and collection activity will do serious damage to your credit, making it difficult to rent a home, set up utilities and secure affordable rates on car insurance. (You can see how your student loans and any other debts are affecting your credit by getting a free credit report summary on Credit.com.) There also may be a variety of fees associated with these different scenarios, as well as interest that will continue to accrue on the loan, making your overall debt load even greater and more difficult to tackle. Furthermore, federal student loan debt is generally not dischargeable in bankruptcy.

In short: Boycotting your federal student loans could amount to exchanging one financial hardship for another.

If You Want to Join the Strike

The Debt Collective is not oblivious to these consequences. The organizers are personally following up with everyone who fills out a form on its website expressing interest in joining the strike.

Ann Larson, one of the Debt Collective organizers, said she starts the conversation with interested borrowers by asking what their loan status is — default, deferment, delinquency, etc. — and goes over the consequences for defaulting on federal student loans. She runs through the list of wage garnishment, losing federal benefits, credit damage and everything else associated with default, and then she asks if the person understands the default rehabilitation process, which is a long, difficult undertaking.

“I have a long list of students to call, we have volunteers, and we’re all working pretty hard to make sure they understand the consequences,” Larson said. She said many people she talks to have been in default for years. “This is not something new to them. They are already experiencing the consequences.”

She said she has told plenty of people they aren’t a good fit for this effort.

“Some people call, they’re excited about it, but you know they are concerned about their credit score and maybe they’re delinquent but not yet in default. … I say at that point, ‘I don’t think you’re a good strike candidate,’” Larson said.

Other student loan debt strikes are in the works. There’s a Debt Collective community forum called “Fight Sallie Mae and Navient” (Navient is a spin-off of Sallie Mae and services federal student loans), where a moderator called on borrowers to plan “the next strike.” The Debt Collective is also planning to dispute the Corinthian debts in a lawsuit, Larson said.

At the start of March, more than 1,200 borrowers had expressed interest in or support for the Corinthian 15 and their strike, and more than 500 have done the same for the potential Sallie Mae and Navient strike. Larson said they’ll have numbers on actual strike participants in a few weeks.

There’s no way to know how much education debt would have to go into default before the Department of Education feels the kind of pressure the Debt Collective aims to create. The national student loan default rate currently stands at 13.7%, representing billions of dollars in defaulted education loans.

And what if this doesn’t work? What if borrowers spend months and years in default and never get the leverage they want with the Department of Education?

Larson equated it to labor movements, where strikers risk having to walk away, perhaps worse off than when they started. In the student loan scenario, borrowers can choose to start paying again. They will be further in debt than when they started striking, but Larson said they’re making sure people understand this risk before they take it.

For the most part, Larson said the strikers are already living with those consequences, and the idea is to join forces with the millions of borrowers experiencing them, as well. “This is an effort to publicize that fact and turn it around from an individual situation of shame and suffering … into a public claim that they were wronged, and they’re going to fight back.”

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This article originally appeared on Credit.com.

MONEY Debt

The Hidden Threat to Your Retirement

More older Americans are approaching their golden years with heavy debt loads.

When Wanda Simpson reached retirement a couple of years ago, the Cleveland mom had an unwelcome companion: Around $25,000 in debt.

Despite a longtime job as a municipal administrator, Simpson wrestled with a combination of a second mortgage and credit-card bills that she racked up thanks to health problems and a generous tendency to help out family members.

“I was very worried, and there were a lot of sleepless nights,” remembers Simpson, 68. “I didn’t want to be a burden on my children, or pass away and leave a lot of debt behind.”

New data reveal that Wanda Simpson has company—and plenty of it.

Indeed, the percentage of older Americans carrying debt has increased markedly in the past couple of decades. Among families headed by those 55 or older, 65.4% are still carrying debt loads, according to the Washington, D.C.-based Employee Benefit Research Institute (EBRI). That is up more than 10 percentage points from 1992, when only 53.8% of such families grappled with debt.

“It’s a two-fold story of higher prevalence of debt, and an uptick in those with a very high level of debt,” says Craig Copeland, EBRI’s senior research associate. “Some people are in real trouble.”

To wit, 9.2% of families headed by older Americans are forking over at least 40% of their income to debt payments. That, too, is up, from 8.5% three years earlier.

The only bright spot in the data? The average debt balance of families headed by those over 55 has actually decreased since 2010, according to EBRI, from $80,564 to $73,211 in 2013.

Still sound high? It is especially so for those heading into reduced earning years, or retiring completely.

The primary culprit, according to Copeland: rising home prices and the longer-term mortgages that result, often leaving seniors with a monthly nut well into their golden years.

Seniors are even dealing with lingering student debt: 706,000 senior households grappled with a record $18.2 billion in student loans in 2013, according to the U.S. Government Accountability Office.

It’s not an easy subject to discuss, since older Americans may be ashamed that they are still dealing with debt after so many years in the workforce. They do not want to feel like a burden on their kids or grandkids, and so keep their financial struggles to themselves.

But financial experts stress that not all debt is automatically bad. A reasonable mortgage locked in at current low rates, in a home where you plan to stay for a long period, can be a very intelligent inflation hedge.

“I always suggest clients consolidate it in the form of good debt, like a mortgage on your primary residence,” says Stephen Doucette, a planner with Proctor Financial in Sherborn, Massachusetts. “You are borrowing against an appreciating asset, you don’t have to worry about inflation increasing the payment, and the interest is deductible.

As long as this debt is a small portion of your net worth, it is okay to play a little arbitrage, especially considering stock market risk, where a sudden decline could leave older investors very vulnerable.

“A retiree who has debt and a retirement account with equity exposure may not have the staying power he or she thinks. The debt is a fixed amount; the retirement account is variable,” says David Haraway, a planner with LPL Financial in Colorado Springs, Colo.

It is important not to halt 401(k) contributions, or drain all other sources of funds, just because you desire to be totally debt-free. Planner Scot Hansen of Shoreview, Minn. has witnessed clients do this, and ironically their good intentions end up damaging years of careful planning.

“But this distribution only created more income to be reported, and more taxes to be paid. Plus it depleted their retirement funding source.” he says.

Instead, take a measured approach. That’s what Wanda Simpson did, slowly chipping away at her debt with the help of the firm Consolidated Credit, while living off her Social Security and pension checks.

The result: She just sent off her final payment.

MONEY Savings

4 Surefire Strategies for Powering Up Your Savings

piggy banks of assorted colors on wood surface
Andy Roberts—Getty Images

You can't count on high investment returns forever. Take control of your future with these savings tips.

Welcome to Day 7 of MONEY’s 10-day Financial Fitness program. You’ve already seen what shape you’re in, figured out what’ll help you stick to your goals, and trimmed the fat from your budget. Today, put that cash to work.

It’s been a great ride. But the bull market that pumped up your 401(k) over the past six years won’t last forever. Even though the stock market is up so far this year, Wall Street prognosticators expect rising interest rates to keep a lid on big gains in 2015. Deutsche Bank, for example, is forecasting a roughly 4% rise in the S&P 500, far below last year’s 11% increase.

Over the next decade, stocks should gain an annualized 7%, while bonds will average 2.5%, according to the latest outlook from Vanguard, the firm’s most subdued projections since 2006.

While you can’t outmuscle the market, you do have one power move at your disposal: ramp up savings.

1. Find Your Saving Target

So how much should you sock away? This year Wade Pfau of the American College launched Retirement-Researcher.com, a site that tests how different savings strategies fare in current economic conditions. He found that households earning $80,000 or more must save 15% of earnings to live a similar lifestyle in their post-work years. While that assumes you’re saving consistently by 35 and retiring at 65, it does include your employer match, so in reality, you may be pitching in only 10% or so.

If you weren’t so on top of it by 35, you have a couple of options: Raise your annual number (Pfau puts it at 23% if you start at age 40) or catch up by saving in bursts. Research firm Hearts & Wallets found that people who boosted savings for an eight-to 10-year period (when mortgages or other big expenses fell away) were able to get back on track for retirement.

2. Think Income

New data show that people save more when they see how their retirement savings translates into monthly income, says Bob Reynolds, head of Putnam Investments. The company found that 75% of people who used its lifetime income analysis tool boosted their savings rate by an average of 25%. To see what your post-work payments will look like, check out Putnam’s calculator (you must be a client to use it) or try the one offered by T. Rowe Price.

3. Take Advantage of Windfalls

Don’t let all your “found money” get sucked into your checking account. Instead, make a point to squirrel away at least a portion of bonuses, savings from cheap gas, FSA reimbursements, and tax refunds. Eight in 10 people get an average refund of $2,800; use it to fund your IRA by the April 15 deadline, says Christine Benz of Morningstar.

4. Free Up Cash

Interest rates remain low. If you’re a refi candidate, you may be able to unlock some money that could be better used. Tom Mingone of Capital Management Group of New York suggests using your refi to pay off higher-rate debt. Say you took a PLUS loan (now fixed at 7.21%, though many borrowers are paying more) for your kid’s tuition: Pay that down.

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