Managing Debt: From Credit Cards to Foreclosures

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Managing Debt From Credit Cards to Foreclosures

• Marilyn Capelli Dimitroff, CFP
• CFP Boards Financial Planning Clinic
• Washington, DC
• September 13, 2008

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How Did We Get Here?
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The Old Days Limited Lending

• Cash or Layaway
• Store Accounts
• Visa 1973
• Mortgages 20 Down, Fixed (30/15)

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The 2000s Plentiful Lending

• High Limit Credit Cards, Accepted Everywhere
• Mortgages Fixed, Funky

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Upside

• Convenience
• Expanded Home Ownership and Lifestyle

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Downside

• Easy to Overspend
• Teaser Rates Mask Potential Problems
• Complexity Masks Potential Problems

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NOW

• Higher Gas and Food Costs
• Less Money Available
• Falling House Prices
• Upside Down Loans and Illiquidity
• Job Cuts Fewer Options

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• What to do?

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• Figure Out Where You Are

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Step One Financial Statements

• Balance Sheet Current Snap Shot
• Cash Flow Statement 12 Months

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Balance Sheet

• Everything You Own Now
• Minus
• Everything You Owe Now

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What You Own

• Two Buckets
• 1. Personal Use Assets
• House(s), Cars, Stuff, Checking, etc
• 2. Working Assets
• Savings, Investments, Retirement
• Accts, Inv Real Estate, Businesses, etc.

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What You Owe

• Credit Card Balances, Mortgages,
• Credit Lines, Student Loans,
• Personal Loans, Retirement Plan
• Loans, etc.

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Bottom Line Net Worth

• Is Good
• Working Assets Are Great

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Cash Flow Statement For 12 Months

• Income
• Minus
• Out Flow

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Income

• Earned Income (Salary, Commissions, Tip,
  Overtime, Bonuses), Insurance Payments, Tax
  Refunds, Alimony, Child Support, Pension, Social
  Security, Gifts, Winnings, Rental Income,
  Reimbursed Business Expenses, Rebates, etc.

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Spending

• Three Kinds
• 1. Committed
• Discretionary
• Taxes (Federal, State, Local, Payroll)

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Committed

• Loan payments (mortgages, credit cards, car
  loans, etc.), Rent, Property Taxes, Utilities,
  Repairs, Insurance, Car Expenses, Commuting,
  Food, Dependent Care, Phone, Alimony/Child
  Support, Medical, Basic Clothes

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Discretionary

• Entertainment, Meals Out, Vacations, Recreation,
  Club Dues, Hobbies, Home Improvements, Gifts,
  Education, Charitable, etc.

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Taxes

• Federal, State, Local
• Goal Withholding What You Owe
• Payroll (Social Security, Medicare)

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Bottom LineCash Flow

• Good
• - Cant Be Sustained

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Step Two How To Improve?

• Increase Income
• Decrease Expenses
• Both

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Increase Income

• Sell Stuff
• Find Additional Employment
• Be Creative Ex.Take Roomers

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Decrease Expenses

• Lowering Debt and Debt Payments

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Credit Cards

• 1000 Balance 18 Interest
• 1. Pay monthly minimum of 2.5 or 25
• 153 months (12 yrs 9 mo) to pay off
• Interest Cost 1,115.41
• 2. Pay 50 monthly
• 24 months to pay off
• Interest Cost 197.83

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Credit Cards

• Utilize a Lower Cost Card for Permanent Use
• Do Not Add New Purchases
• Pay Off Highest Cost Cards First
• Avoid Late Charges
• Work Out Problems Immediately
• Do Not Get New Cards!

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Spending

• Limit Discretionary Purchases

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Goal

• Maintain One or Two Cards (In One Name Only)
• Pay Balance in Full Monthly, On Time

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Mortgages

• Fixed
• Hybrids
• ARMs
• Option ARMs
• Interest Only
• HELOCs

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Goal

• Fixed Mortgage
• Low Costs

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Unable toMake Payments?

• Work With Lender
• Seek New Financing
• Seek Outside Help
• Review Government Programs
• Increase Income

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Upside Down?
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Options

• Wait Out the Poor Market
• Work with Lender
• Review Government Programs
• Seek Help
• Foreclosure

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Goal

• Positive Cash Flow
• Money to Save and Invest
• Build Working Assets

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No Quick Fix

• Worth The Work

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Pay Off Peace of Mind