The original post can be found here: Debt Free
I recently spoke to a young coupleÖ weíll call them Jim and Judy. Jim and Judy were both working, they had their $1,000 beginner emergency fund, they were working their debt snowball and were well on their way to financial freedom.
All of a sudden, life smacked them over the head. They got hit with some unexpected legal fees for $3,000 AND then a tax bill for over $2,000. They definitely donít have enough cash to cover over $5,000 of unexpected expense.
So their question was, ďShould we pay these bills using a credit card or a personal loan from the bank?Ē
As you know, I donít believe in borrowing money, if at all possible. So my first recommendation was to try to work out a payment plan for each of these bills, pick up extra hours or projects at work, start selling stuff and doing anything else that would keep them from having to borrow the money.
But it got me thinkingÖin a situation where all these possibilities have been exhausted, and there still isnít enough money to pay the bills, which option would I recommend? Which one is the lesser of two evils?
Credit Card or Bank Loan?
Letís take a look at the Proís and Conís of each:
Credit Card Proís
- You donít necessarily need great (or even good) credit to qualify. Heck, even childrenís dead hamsters get credit card applications.
- Some credit cards offer very low, or even 0%, introductory rates. So you could pay little to no interest.
- Itís very easy to apply for a credit card.
Credit Card Conís
- With credit cards, itís very easy to get stuck in the ďminimum payment trap,Ē keeping you in debt longer and paying more interest.
- If you still have a balance at the end of the intro period you will be subject to the cardís much higher standard rate. In fact, some cards will back-charge you for interest on the entire original balance.
Credit card interest rates are subject to change at any time with very little notice.
- You now have a credit card at your disposal, increasing your risk of getting into further debt.
Bank Loan Proís
- Bank loans have a fixed repayment period, forcing you to pay the loan off within a specified timeframe.
These loans usually carry a fixed interest rate and monthly payment.
- A personal loan will usually offer a lower interest rate than the standard rate on a credit card.
- You borrow a set amount of money. This means you canít borrow more the way you could with a credit card.
Bank Loan Conís
- These loans are risk-based, meaning you will usually need good credit and a low debt-to-income ratio in order to qualify.
- Often times, these loans arenít advertised. You will need to call or visit a local bank or credit union to apply.
Let me reiterate, I do NOT believe in borrowing money, if at all possible. But in the very rare case that it canít be avoided, I would highly recommend a Bank Loan over a Credit Card, any day of the week! The main reason is that credit cards allow you to make minimum monthly payments that are designed to keep you in debt for the rest of your life! If you must borrow, go with a Bank Loan and add the balance to your debt snowball. Then, attack your debts with such relentless force that everyone around you thinks you have literally lost your mind.
This is NOT a game. This is your life, your well-being, your future and your childrenís future we are talking about here. Life happens and we canít stop it. But you can prepare for it.
Step 1. Save up $1,000 as a beginner Emergency Fund.
Step 2. Work the Debt Snowball and become Debt Free as fast as possible.
Step 3. Save up 3-6 months of your living expenses as an Emergency Fund.
If you follow these steps, you will never find yourself in a desperate position with debt as your only option. And you will never, ever, ever have to borrow money again! THATíS TRUE FREEDOM!!!
Yours In Freedom,
Join the conversationÖwhich option would you have chosen in this situation? Leave your comments below!
Archive for June, 2011
The original post can be found here: Debt Free
The summer season is upon us. Kids are getting out of school, vacations are being planned and water parks are beckoning. But For many Americans, as temperatures begin to rise, so do their credit card balances. Family vacations, summer camp, higher food bills, updating wardrobes and high electric bills can drain a checking account faster than a kiddie pool with a hole in it. But it doesnít have to be this way.
While summer should be a season of family fun, it doesnít have to break the bank. If you are working to become debt free, save your emergency fund or just want to keep a rein on your spending, here are some tips to help keep you on track. They may not seem like huge changes, but these little things can add up to big savings. And just thinkÖhow much more fun and stress-free will next summer be if you are debt-free and have an emergency fund?
Enjoy Your Town For Free
Thereís no need to travel abroad for your summer fun. Most cities host free concerts, festivals and other events throughout the summer. With a little research, you may find the free event that will be the highlight of your summer. Without traveling far, your family may be able to enjoy outdoor movie nights, fireworks shows, concerts, museum days, library events and a lot more.
Pack Your Lunch
Itís almost always more healthy and less expensive to make a meal yourself than to eat out. Instead of going out, bring your lunch to work, organize a potluck or have a family picnic in the park. If youíre going on a road trip or to an event, pack a cooler to take with you. If youíre staying at a hotel, make sure to book a room with a microwave and a fridge. That way you can bring your own food and avoid the restaurant rip-off.
Fire Up The Grill
Using your oven and stove creates a lot of extra heat inside your home. Take your meal plan to the grill. You can enjoy delicious food and keep your home cooler. Get your family together for an evening barbecue. it will be fun, delicious and it will save money on your electricity bill.
Have Fun At Home
Instead of forking over big bucks at the movies or water parks, be creative and have fun in your own home. Buy popcorn, snacks and rent a movie for an inexpensive movie night. Fire up the sprinklers and break out the slip ní slide. Have a potluck and game night with your friends.
Ditch Your Car
This may not work for everyone. But with rising gas prices and nice weather, how much money could you save if you walk, bike or carpool to work? This takes some adjustment and planning. But you will save money, enjoy good conversation and get in a good work out.
Start Planning Your Spending
If you arenít operating on a monthly cash-flow plan (budget), now is the perfect time to start. Before you can blink it will be time to buy new school clothes and supplies, Halloween costumes and then Christmas presents. Start planning for how you are going to spend your money. Write it out and agree on it with your spouse. When you doÖyouíll actually have some! And having a plan actually gives you more freedom and peace.
With a little research, planning and creativity you can have a fantastic summer, avoid debt and save a pile of money.