Mint.com Question: As a recent college graduate, I’ve incurred a number of student loans, credit card debt, and a car payment.  After budgeting for my monthly expenses, I’ve found that I have some extra money that I can use to pay off some of my debt.  Where is the best place to start?

My Answer:

I encourage my clients to have no debt because I believe that debt and unconscious spending steal our dreams.

I suggest you begin by taking the extra money you have in your budget and building a $1000 emergency fund so that you have the ability to handle small emergencies.

Once you have your $1000 emergency fund, organize your debts from smallest amount to largest; either on paper or in a spreadsheet.

Take any available money you have and pay down the smallest balance debt.

Once you finish with the first debt take what you were paying on that debt and add it to the minimum payment of the next largest debt – keep that up until you are out of debt.

You’ll find that getting fewer bills in the mail will reduce stress and seeing real progress will keep you motivated.

You are at an ideal time in your life to get out of debt and stay out of debt so that you can work towards living your dreams.

Good Luck,

Matt

This was a great question asked on Mint.com – see my answer and other in the Mint Answers section.

Personal finance coach, Matt Kelly, lives in Durango, CO.  He blogs here at www.debtfreetribe.com and writes a monthly newspaper column called Money Savvy.

Watch this Saturday Night Live skit – Don’t Buy Stuff You Cannot Afford, and see if you can relate?

Borrowing from your 401(k) is not advisable. Because if you quit or lose your job, you’ll likely have to repay the loan within three months – see your tax adviser to know for sure. If you aren’t able to do that, you’ll owe income taxes on the money, plus a 10 percent penalty if you’re under 59-1/2.

A better strategy is to consider selling things you own to raise the money to pay off your debt.  Also, consider selling anything, except your home, that will take more than 18 months to pay off.

Durango, CO resident and personal finance coach Matt Kelly owns Momentum: Personal Finance.

Why is college tuition rising faster than inflation?

Because colleges and universities can charge more when students and parents are willing to take loans to pay the tuition.

On average tuition is going up at a rate of about 8% per year. Like the housing market before the bubble burst…easy money means higher prices. And a lifetime of student loan payments just isn’t worth it.

Student loan debt has officially surpassed credit card debt.  One of the reasons may be that you cannot declare bankruptcy on student loans.

My advice, go to the best college or university that you can afford to pay cash for the tuition and living expenses.  And even if you can afford to pay cash for an expensive school consider a less expensive one because the Ivies just aren’t worth it.

Yes, rental real estate property is really debt.  If you doubt me just stop paying the mortgage and see what happens.

Many people bought rental property as an investment in the last run up of the housing market and today they are now the proud owners of an investment property that is worth less than they paid for it.

Don’t get me wrong, I love real estate as an investment…when you can afford to pay cash for it. Otherwise stay away from real estate.

I know too many people who bought a rental property knowing that they would not be able to cover the mortgage payment with the rental income.

Yes, there are some possible tax deduction opportunities, but in the end it’s just not worth the risk in my opinion.  There is just too many opportunities for financial stress; from gaps between tenants, to costly repairs or declining real estate values.

If you really want to own investment real estate consider forming a legal entity and investing with a group of people who can all invest together.

Today I’m going to review the United First Financial The Money Merge Account® Program; also know as a MMA for Money Merge Account.

They say, “Eliminate Your Mortgage.
The Money Merge Account program pays off mortgages faster using an interest-cancellation strategy. While many homeowners realize that they can save money by reducing the interest rate they pay on their loans, few think about the length of time they will be paying. The Money Merge Account program combines innovative software with traditional banking systems and personal coaching to drastically reduce your mortgage term and minimize your interest.”

So far so good; I totally agree with paying off all debt.

So how does the MMA system work?

First buy their system for $3,500.

Then they say the user will

1. Need a deposit account; usually a  checking or a saving account.
2. What they call a Facilitating Account which is a savings account or a Line of Credit.
3. Need their software to tell them when to transfer money between accounts.

What I’m not liking here is the idea of using debt to pay off debt. Not to mention that banks aren’t really excited about Home Equity Lines of Credit at this time.

What I’m seeing is that if you were spending less than you make the software might have you fill the facilitating account with surplus money and then pay off debt with that money.

Or as I saw with friends who bought this program, for $3,500, the software told them to pay off a higher interest rate truck loan with their Line of Credit and then there was nothing they could do until the paid down the Line of Credit.  All that advice for $3,500?

One of the reasons they say you can’t do this yourself is that it’s too complicated and requires very sophisticated software.

I just don’t agree – you could do this with a pencil, paper and calculator and some basic personal finance principles.

My opinion is save the $3,500 and do it yourself.

Here are the steps I teach in my personal finance class:

1. Save a $1000 Emergency Fund
2. Establish a budget
3. Start using the cash envelope system
4. Begin paying off your non-mortgage debt from smallest balance to largest
5. Consider selling anything that will take longer than 18 months to pay off
6. When your done paying off your non-mortgage debt, grow your emergency fund to equal 3 – 6 months of living expenses
7. Begin saving for financial independence
8. Begin saving for college, if you have kids or someone you want to send to college
9. Begin saving a $20,000 major medical fund
10. Begin paying off your home aggressively

I tend to put paying off your home last in the the process, but that is because I value peace of mind over not having a mortgage.

Don’t get me wrong – I want that mortgage done ASAP too.  I just don’t happen to believe in magical software and borrowing to pay off debt.

I ran into a friend of mine this morning and as we stood talking on the sidewalk I noticed that he had a Porsche keyring in his hand.  While we’d been talking I’d been admiring the Porsche Boxster parked right in front of us.

I asked him if it was his – knowing that he’d been wanting a Porsche for some time.  He’s retired and can well afford one.

What surprised me was that he said, “Matt, I did just what you said to do. I paid cash!” You need to understand that this is gentleman became financially independent with no help from me, but he loves my class Creating True Financial Independence and the concepts I teach.

He went on to tell me how he’d saved for three years for this car.  Three years ago he’d looked at a new one priced at $44,000.  The one I was looking at was a 5 year-old Boxster with just 16,000 miles.  He paid $26,000 for this one; instead of $47,600 for a new 2010 model.

He went on to add that he carries liability only insurance.

Here’s the three lessons from this story:

1. Financially independent people got that way by saving for their purchases.
2. Buying used cars is important.  Cars go down in value in the first few years of ownership.
3. Insure only what you can’t afford to replace.  This goes for electronics, cars and all other possessions.

Congratulations friend you deserve this Porsche!

Headlines abound, “The wasted 4.44% mortgage rate” or “Super-low mortgage rates haven’t stimulated home buying market” and nobody is talking about the elephant in the room. The Elephant is truth that mortgage interest rates are not the problem.

You don’t need a better mortgage rate; you need to spend less and if you have an income problem you need to earn more.

Yes, it’s nice to be able to get a low rate on a mortgage loan and rates have been low for years.  A quick look at historic mortgage interest rates over the last 10 years show the average to be about 6% with the high being about 8.5% and the low about 4.44%.

The problem with refinancing a mortgage is that you start all over again at 30 years, 15 if you opt for a little higher payment. Thus you keep moving your self back to start every time you refinance.  So who is getting ahead; you or the mortgage broker who makes a commission on your mortgage?

What should you do to get ahead?

1. Make a budget and live by it.
2. Cut up your credit cards and use cash for discretionary purchases.
3. Sell anything that has a loan that will take you more than 18 months to pay off – except for your house.
4. Consider selling your home if it is costing you more than 25 – 35% of your take-home pay.

Need some help jump starting the process?  Here are 10 ways to raise $300, plus there are an additional bonus 8 ways. Apply 1 way each month and for the next 18 months you’ll be on your way towards being debt-free.

This may sound extreme, but remember that if you get debt free and find that you don’t like it you can always go back into debt.

Take This Job and Shove It became more than a song when JetBlue Flight Attendant Steven Slater made his grand exit and became a working-class hero.

So why did he become a working-class hero to some people?  Because those people feel stuck in jobs that are less than satisfactory.

There are 3 steps be getting out of a job you hate.

1. Get out of debt by paying off all non-mortgage debt.  It will take you about 12 – 18 months if you are really motivated.  A great way to get the help you’ll need is to take a class like Creating True Financial Independence or Financial Peace University.

2. Establish an emergency fund equal to 3 to 6 months of living expenses.  This will give you the freedom to try something new without having to worry about short-term income.

3. Find your passion. The is a wonderful book called The Passion Test and there is an online Passion Test.

These 3 steps will change your life.  Are you willing to do whatever it takes to get what you want?

A recent CNN Money article featured Good Debt Vs Bad Debt.  The truth is all debt is bad.

The Good debt Vs bad debt article features these statements:

• Avoiding debt at any cost is not smart
• Good debt includes anything you need but can’t afford
• Bad debt includes debt you’ve taken on for things you don’t need and can’t afford

The key here is defining NEED.  We need very little of what we buy.

Basic necessities – food, shelter, clothing, utilities and transportation to get to work are needs.  Everything else we buy are wants and even these basics stray into wants very quickly.

I am all for enjoying life, buying nice things and having fun; however I wish that I’d learned the truth about debt and personal finances earlier in life.

Our beliefs determine our actions and our actions determine our results and experiences – examine your beliefs to see if you might be better served by a different belief.

For me coming to understand that debt and unconscious spending steal our dreams has transformed my beliefs, actions and life.