Debt and the Man: How A Good Plan Can Get You Out of Debt

Debt and the Man: How A Good Plan Can Get You Out of Debt

Ask anybody drowning in credit card and other forms of debt about his/her American dream, you will discover that  keeping their head above water and making their next payment on time is high on the wish list. The fundamental fact here is that if you have too much debt and is struggling to make payments each month, you should remember you are not alone. A lot of people have been there before too – and they survived.  And like you, many are still there, unfortunately. The bottom line here is clear: When it comes to keeping your head above water and getting out of  debt completely, the gold standard is to realize that no matter how bad it is there is a way out because you do have options.

Some of these options include debt consolidation, debt settlement, and even bankruptcy. However, before choosing any of these options, it is best to consider one important option first: a debt management plan(DMP).

Plan, But Also Negotiate

With a DMP you can negotiate, arrange and even implement an easy and affordable debt repayment plan through a consumer credit counseling service or a debt management company. A DMP typically takes 4-5 years to pay off, depending on how much debt you carry. The DMP option is very simple to implement: your debt service provider(that is, the consumer credit counseling service or a debt management company) works directly with each of your creditors on your behalf to cut your monthly payments to an amount you can realistically afford each month,  lower your interest rates and stops any over-limit or late fees. So, once the repayment terms are negotiated, you will be required to do only one thing each month: make one affordable payment each month to the consumer credit counseling service or the debt management company. They will then distribute the fund to your creditors for you(Templeton, 2013).  You should know one important thing though: the , the consumer credit counseling service or a debt management company will charge a fee to manage the DMP and disperse the fund each month. The typical amount charge is usually$10- $20 per month, but this fee varies from one DMP  provider to the other.

Choose A Good and Reliable DMP Service Provider

It’s best to choose a nonprofit consumer credit counseling service that is a member of the National Foundation for Credit Counseling(NFCC). I recommend this option for three reasons. First, knowing that the chosen nonprofit consumer credit counseling service is a member of NFCC – the accreditation agency and watchdog for the consumer credit counseling service industry – will give you a piece of mind. Second, unlike a debt management company,  a nonprofit credit counseling service have no ulterior motives other than helping you get out of debt. Thus for them, it’s not about them making a profit  from your situation – it’s to make you debt-free. Third, I am very skeptical about the operations of the debt management companies: They often advertise that they can help you pay off your debts for “pennies on the dollar.” However, many of them have drawn intense criticisms by both regulators and consumer advocates  for not only failing to help the consumers but also for charging high fees that drive consumers deeper into debt.

My advice: Caveat emptor!

The Catch

The benefits of DMP is, to some extent, blunted by the fact that you won’t be allowed to open any new credit cards or take out any new loans while you are in DMP program. As a matter of fact, because your credit report will tell them that you are in a DMP, a lender or a car issuer will decline your application anyway, if you do apply. You shouldn’t let this border you because it’s part of the DMP agreement. You will become eligible to apply for credit as soon as you get out of debt and is back on track.

The other downside of DMP is clear: Your creditors will most likely close the accounts once your debts are paid. When they do this, you will lose the credit history on them because they will eventually fall off your credit reports. This will make both your credit and credit score to suffer – but only if you never open another credit card or line of credit again. My advice: Once the debt is paid, get one or two credit cards for your credit scores. It is more healthy that way if you manages them wisely. Good credit history is very important too.

The Good News

On the positive side, you will begin seeing offers for credit once you are out of the DMP plan and have paid off all your debt – the oddity is that some of the offers are even from the same company you just finished paying off(to sign back up and open a new credit card account, albeit at a higher interest rate). Be smart! Of course, you would have learned good lessons about how to better manage credit cards after five years of repaying and digging yourself  out –lessons that would prevent you from falling into the same trap again.

References

Templeton, D.(2013): How A Plan Can Get You Out of Debt. MSN. Retrieved May 20, 2013 from http://money.msn.com/how-to-budget/how-a-plan-can-get-you-out-of-debt

Wall Street Smart – Riding the Bull Market

Wall Street Smart – Riding the Bull Market

With the U.S. stock market showing good performance this year, it is naturally enticing to invest and ride the bull market. If anything, common sense indicates that it will be a smart move to put your money and contributions into actively managed U.S. large stock funds. According to Wasik(2013), an employer group(known as Plan Sponsor Council of America) surveyed 90 percent of all retirement plans and recommended investment in actively managed domestic stock funds. Hence it is not surprising that most IRAs and 401(k)s hold these funds.

I will like to note here that stock fund, unlike an index fund, may not track the market close enough. Besides, there are other asset classes that will worth your time to scrutinize. Hence, instead of focusing exclusively on U.S. large company stocks, it would make sense to cover a broad range of global options, especially if you are jumping into the market with a bit of cash that goes beyond what you have already set up – say, $15,000.

A natural question to ask at this point is this: if you are a moderate-risk individual already invested in large U.S. stocks, what kinds of funds should you consider? Here’s a few of them.

A Collection of U.S. Stock (Invest as Much as 60 percent here)

You are going to have natural bias toward  blue chips in the S &P 500 index(which has climbed  some 9 percent this year(dividends included) if you are a U.S. based investor. But the happy truth is that certain industrial sectors had done better than the blue chips in the S &P 500 index: Consumer staples have risen nearly 14 percent, consumer discretionary stocks(stocks consisting of companies selling nonessential goods and services such as retailers, media companies, etc) are higher by 11 percent, and healthcare is up 16 percent. Broadly speaking, you could be missing future gains if your actively managed fund covers  just a slice of U.S. market. Thus looking for a “total market” index fund that includes  large, mid-size and small companies (such as Fidelity Spartan Total Market Index Fund, which is up 12 percent this year) is very important: it put extra money into your pocket.

Developed Market Stock(20 percent of your portfolio should consist of this stock)

A clutch of financial  newspapers, mainly based on U.S. and European statistics, shows that while U.S. stocks are outpacing Chinese and European stocks this year, independent studies suggests that that is not the case with other countries. The prime example is the Japanese stocks: These stocks are showing a robust rebound. For instance, the iShares MSCI Japan Index Fund is up 11 percent this year. Note that the iShares MSCI Japan Index Fund tracks the Japanese market. A more broader choice is to invest in an index fund  that covers some 98 percent of the world’s public market capitalization, such as the Vanguard Total World Stock Index ETF, which is up about 10 percent for the year.

Emerging Market Stocks(10 percent of your portfolio)

Emerging market stocks represents potential economic growth even though  they are still trailing U.S. stocks. The stakes are equally high here: Brazil, India and China are growing in terms of population and economic activity. The bottom line here thus becomes that their citizens will be buying more goods, foods and energy as their standards of living rise. A good example of the emerging markets stocks of interest is the iShares MSCI Emerging Markets Index ETF. Even though this fund is down 1.5 percent over the past year, it is still a good investment  because it offers a good opportunity for growth  and focuses on the leading stocks  from South America, Asia and other developing regions.

Commercial Real Estate(5 percent of your portfolio)

Generally speaking, while other sectors are awash with investments,  companies that buy and hold retail, office, multiunit residential, industrial, health care and storage properties and mortgages are often ignored. But the recent performance of the FTSE NAREIT All-REIT index is a good reminder that this form of investment is profitable: The FTSE NAREIT All-REIT index climbed 9 percent after rising 20 percent last year(Wasik, 2013). You should also consider global funds that hold real estate investment trusts(called REITS in short form). A classical example of how profitable REITS can be is afforded by the performance of the SPDR DJ Global Real Estate exchange-traded fund – a fund that holds REITS  and emerging markets. SPDR DJ Global is up over the past year.

Global Bonds(5 percent of your portfolio)

If you are a U.S.-based investor, there’s a strong possibility  that you will be tempted to keep all of your money in U.S.  corporate or government bonds. The oddity is that you may find higher yields and returns in international bonds. The implication of this is clear: you have to invest in bonds from emerging and developed markets. The iShares  S &P Citigroup International Treasury ETF  is now ranked in the financial market as a classic example of a global fund that holds government bonds from countries across the world for one key reason:  it has gained almost  3 percent in the annual period(Wasik, 2013).

Concluding Remark

It is best to contact your investment adviser, financial planner or broker and have them properly diversify your portfolio with low cost index funds, especially if you are making an investment in the $10,000 to $100,000 range. You can equally do it yourself  by using the guidelines I described in this article.

Sources

Wasik J.(2013): A Five-Point Strategy for Riding the Bull Market. The Baltimore Sun(Business & Jobs Section).