In rough financial waters, debt-elimination schemes come out of the woodwork. And even well-educated, street-smart consumers fall for them.
It's hardly surprising. When people are desperate to make their mortgage payments, their car payments, their credit card payments, a quick fix sounds very intriguing. So much so that logic tends to take a back seat.
Unfortunately, quick fixes rarely work. They don't work with diets. Unless you make long-term changes to the way you eat, the pounds you shed pile right back on. Likewise, quick fixes rarely work with debt.
So what works? My belief is that small steps adopted and put into your every day life can add up to big progress. This was the reasoning behind "Pay it Down: From Debt to Wealth on $10 a Day," a book I wrote six years ago. I wrote it when I realized Americans were spending far more than we were earning. That recklessness eventually caught up with us, and was one of the driving forces behind the current economy and its shriveled credit market. Clearly, we still need help.
So this month, I released a completely updated version of "Pay it Down," revamped to reflect the current times. With it, I'm launching an online program called Debt Diet Online, which you can find on my Web site, www.jeanchatzky.com/debtdiet. Both will walk you through exercises designed to help you find the extra money you need to dig out of debt. You'll learn how to lower your interest rates, prioritize your spending, and refinance auto and mortgage loans.
Once you've learned how to recover about $10 a day, I'll tell you where to put it so that it stretches the furthest. And when the debt is gone, I'll help you build a healthy emergency cushion so it doesn't come back.
Here are five easy ways to find your $10 a day:
-- Change your withholding. Getting that tax refund every April is nice, but having that money in your pocket each month is even better. If you get a big chunk of change back after filing your taxes, you're basically giving the government an interest-free loan -- not something they, or any bank, would ever give to you. Instead, talk to your human resources department at work about changing your withholding so you get a little extra in each paycheck. The average refund last year was $2,345, which would give you $195 to work with each month. That's six dollars a day right there.
-- Refinance your car loan. Not everyone knows this, but you can refinance your car loan just like you can refinance your mortgage. In fact, it's even easier and less expensive. There's no appraisal process, and the fees are minimal ($5 to $10 for a new car title). If you didn't shop around for a loan in the first place, or your credit has improved, you can likely do better on your interest rate by refinancing. Going from an 8 percent to a 5.4 percent interest rate on a $25,000, 48-month car loan can save you $42 a month or $2,016 a year. A couple caveats: Most lenders require that the car be less than five years old and have a minimum loan balance of $7,500. For the best rates in your area, look on Bankrate.com.
-- Consolidate your student loans. True, if your federal loan originated after July 1, 2006, your interest is fixed at 6.8 percent for the life of the loan. But consolidating has another benefit -- it can reduce your monthly payments by allowing you to choose from a variety of repayment plans, anywhere from 10 to 20 and even 30 years, depending on your loan balance. The longer the loan term, the lower your monthly payments will be. Lenders estimate that consolidators will lower their monthly payment by $150 on average. Just keep in mind that you'll pay more in interest over the long run. But if you ever have extra cash, you can always pre-pay.
-- Refinance your mortgage. We are in the midst of another refi boom, and if you want to take advantage, you have to act quickly. You should refinance and cut your monthly payment if interest rates have fallen since you first took out your loan (even if only by a half or three-quarters of a point), your credit score has improved by 25 points or more, or you've paid down enough of your mortgage to turn a jumbo loan into a conforming loan. (The interest rates on jumbo loans run about one-half of a percentage point higher than the rate on conforming loans.) If this is you, call your current lender and ask about a loan modification, which is an abbreviated form of a refi with less paperwork. If they don't want to play ball, shop around.
-- Get rid of private mortgage insurance. You have to carry mortgage insurance if you put down less than 20 percent of the loan amount as a down payment when you bought your house. It's pricy -- anywhere from $16 to $50 a month on every $100,000 that you borrowed for your mortgage. But when the value of your home appreciates rapidly, all of that appreciation belongs to you, not the lender, which may boost your ownership stake above the 20 percent mark. If that's happened, you should try to get rid of your mortgage insurance. Your lender will require you to have the home appraised (at your expense, about $350), but if you plan on staying in the house -- and not refinancing -- for more months than it would take you to recoup that $350, it makes sense to proceed.
With reporting by Arielle McGowen
Jean Chatzky is the financial editor for NBC's "Today," a contributing editor for More magazine, and a contributor to "The Oprah Winfrey Show." She is the author of six books, including the book The Difference: How Anyone Can Prosper in Even the Toughest Times (Crown, March 10, 2009). To find out more and to read her blog, visit her Web site, www.jeanchatzky.com
