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.

Money Talk Night is an event sponsored by American Express promoting teaching children and young adults about personal finance. I’m not a fan of their credit cards and debt, but I like teaching kids about personal finance.

The host of Money Talk Night is Jean Chatzky.  Chatzky is an award-winning journalist and financial expert. She’s a New York Times best-selling author, financial editor for NBC’s Today, contributing editor for More magazine, and a columnist for the New York Daily News.

Visit JeanChatzky.com to get more of her tips on how to lower debt and find financial security.

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.

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.

Starting August 15, 2010 banks will have to decline customers’ withdrawal requests at ATM’s and point-of-sale unless they give express permission to banks to let them overdraw their accounts for a fee. This change is a result of a change in the Federal Reserve’s Regulation E policy.

In Durango, CO this fee is running between $27 and $40

Bank of the San Juans – $27.00 fee

Bank of Colorado - $28.00 fee

First National Bank of Durango – $35.00 fee

Wells Fargo Bank – $35.00 fee

Alpine Bank – $40.00 fee

I understand that motivation of the banks; they want to make a profit.  They market this service as a privilege.  And it’s relatively risk-free for the banks.  Most overdrafts are small, on average about $17, and most customers make good on their bad checks while banks earn fees.

This new regulation is all about banks being able to allow your debit card and ATM transactions to overdraw your account; then they cover the transaction and charge you a fee for the “privilege”.

I recommend that you don’t opt-in for your bank’s overdraft “privilege” and instead you take control of your personal finances and stop paying unnecessary bank fees.

3 steps for avoiding overdraft fees are:

1. Create a budget and follow it.
2. Use cash for all discretionary purchases.
3. Balance your checkbook each month.

Found money is any money that comes to you unexpectedly…money you did not necessarily earn as Jimmy Buffett would say.  And there are 3 things you must do every time you are lucky enough to fine some money.

I’ll start by describing what you should not do.  A volunteer firefighter in Colorado won a $1.2 million home in Maryland.  After selling the home and paying the taxes the found money amounted to about $200,000.

So what did she and her husband do with their found money?  They took $50,000 and bought a new truck, paid off some debt and saved the rest.

• $50,000 for a new truck.  Not a good choice.  The truck will go down in value fastest in the first years of ownership.  I would have suggested buying a 2 year-old, low mileage truck.
• Paid off some debt.  I would have suggested paying off all debt.
• Saved the rest.  Good and I would suggest it go in an emergency fund.

The 3 things you must do when you get found money are:

1. Establish a $1000 emergency fund.
2. Catch up on any past due bills and if there are none then use it to pay off debt.
3. If you have no debt, other than a mortgage, then use it build your emergency fund to equal 3 to 6 months of living expenses.

Following these 3 steps make sure you are on the path to financial independence.

Money Savvy, the monthly column I write for the Durango Herald was published today.

This month I wrote about the affects of employee personal finance problems on a business.

Worker’s debt can be company’s problem

Employees with personal-finance problems can be a drag on a company’s bottom line.

The stress and anxiety that come with money issues at home can lead to diminished productivity at work, health problems and workers looking to change jobs in search of a higher salary.

Employers who aren’t concerned about their employees’ finances are hurting only themselves. Companies can do more than provide a paycheck to help their workers achieve financial security. Read More

This is a very interesting prospective – I don’t agree totally.  However, the best college education is the one you can afford to get without borrowing.

Check out 7 Reasons Not to Send Your Kids to College featured on Daily Finance

Use this tool to determine your personal finance grade.

How Healthy Are Your Finances?

Now more than ever companies are evaluating the credit reports of job candidates.  But why?

Because personal finance stress causes employees to waste up to 20 hours per month worrying about their money problems at work.

What about the current employees?  Their personal finances may be in disarray too.

You could:

• Do nothing – except that impacts your business
• Pay employees more – except that won’t change anything

Or better yet… you could begin a systematic plan for personal finance coaching. With a class like Creating True Financial Independence.

A survey of 10,000 employees who took a personal finance class reported:

• 89% were using a written budget to manage their money in the future.
• 91% felt more confident about their financial futures.
• 94% stated the personal finance class had been beneficial to them.
• 95% were establishing an emergency fund
• 98% recommended personal finance education to fellow employees.

Team members who aren’t worried about their personal finances are far less likely to have unplanned absences. They are better able to engage and concentrate while at work.

Their productivity and loyalty increases, while their stress and money problems decrease.

So why wouldn’t you want to help your team members through tough financial situations? Not only are you helping your workers, but you’re also helping the company as a whole.