Credit Card Debt

I spoke with a referral yesterday who was looking for some help, esp. with their credit card debt. Now, these are not my ideal referrals, as I really can only advise and work with people that have cash flow to SAVE and INVEST with me, not that needs to go to cc debt. But I like helping people, so I listened and this was the situation:
$30,000 of credit card debt on several cards ranging from 7-30% interest rates, not quite sure of exact rates or balances ( first sign there is a major problem)
age: 29 and 35
accumulated over time ( careless 20's? sound familiar?) and a new home purchase last year meaning all new furniture.
Mainly making minimum payments.

First off, it boggles my mind that people can rack up such cc debt and actually sleep at night? I'd probably go crazy. Oh and they were leaving for vacation next week! Vacation, really? You should be eating peanuts with that much debt, but I'm trying not to judge here.

Sooo how do you get yourself out of this one?

This is my simple 12 step get of of cc debt plan:

Step 1: ADMIT YOU HAVE A PROBLEM- overspending, shopping to make yourself feel better, not knowing how to say no to your spouse etc. etc.
Step 2: REALIZE THIS WILL BE VERY HARD AND WILL BE A COMPLETE LIFESTYLE CHANGE- You will have to learn to say "NO!"
NO YOU WON'T BE ABLE TO TAKE THAT VACATION THIS YEAR, CONTINUE YOUR NORDSTROM SHOPPING, BUY YOUR KIDS POINTLESS TOYS THAT THEY WONT EVEN REMEMBER or EAT OUT AS MUCH
Step 3: CHANGE YOUR HABITS, the first step to getting out of credit card debt is to STOP using your credit cards- cut them up. Store them in a safe. Put them out of your reach! However, you don't want to actually close the cards, keeping your available credit line open is what improves your credit score
Step 4: Sit down with yourself and/or your spouse and get out all of the cc statements for EVERY card. Add up all the debt. Look at what the interest rate is on each card. Then, really kill yourself and add up the amount of interest you are paying each year to make the credit card companies profitable, not yourself. If you're still not sick, calculate how long it would take you to pay off the cards, if you continue with your current payments.
Step 5: Call all of your credit card companies and ask for a lower interest rate. Yes, just simply ask. The worse they can say is NO.
This may take several calls, haggling, talking to the manager, BUT the credit card company would rather work with you then lose your business. Tell them you have an offer to transfer your balance to a competitor card with a 0% rate, that you are considering this if they won't lower your rate.
Step 6: Start paying attention to those 0% credit card offers in the mail. They weren't coming for a while, but they've started again. Example, if you have $10,000 at a 13% card, transferring that $10,000 to 0% can help you get that balance paid off faster!! Pay attention to when the 0% offer expires and set up a payment plan to get the balance paid off by then. When you do balance transfers, it does not hurt your credit, as long as you leave the 1st credit card open. For example, if you have $10k on a $10k limit card, and now transfer to a new 0% card, and leave the old card open, instead of your credit report showing you have $0 available credit, you now have $10,000 available credit that you aren't using, by leaving the first card open and not using it anymore- great way to improve your credit score!
Step 7: Once you have negotiated your rates and transferred the balances, also start paying more towards your highest rate card. This should be paid off first.
Step 8: Set realistic goals for your payment plan. 1 year may not be realistic. This may take 2-3 years, but you can do it! Put yourself on a budget.
Step 9: Also try to put money into your savings account too. This way you don't run into a debt spiral- you're putting all your cash flow towards the debt, but then inevitablely something comes up- your car breaks down, the a/c stops working etc. If you don't have any cash put aside, boom it goes right back on the cc card and you could be back to square one.
Step 10: Reward yourself when you get a card paid off-that is awesome!! Don't get all extravagant, but do something nice and simple for yourself. Put a big Congratulations! sign on your fridge or treat your spouse to a massage or simple dinner at home.
Step 11: Track your progress. Sit down once a month and see how you are progressing towards the goals you set. If you aren't on track, don't get discouraged. Identify why you are behind, set new goals and try try try again!
Step 12: Once you have reached your goal, start putting your money to work for YOU. Redirect the cash flow you were putting towards credit card payments to building up 6 months of expenses for emergencies, funding your 401k at work, starting a Roth IRA or setting up a college plan!

Gift Tax

My client, Brandon, called me with news that his mother recently passed away from cancer. It had been a quick battle, from diagnosis to death was about 9 months.

She leaves behind 4 children, Brandon, his sister, and 2 college age sons. She also left behind a life insurance policy with a death benefit of $300,000. ( which by the way, your beneficiaries do not pay ANY income taxes on life insurance proceeds).

His mother designated the sister as the sole beneficiary. Luckily, the sister is going to equally share the proceeds, although she has no legal obligation to.

This is a blessing for my client, as next week, Brandon and his wife Jennifer are welcoming a new baby boy that they are adopting! Adopting can be expensive, and this life insurance will be able to cover the costs, give them some time off work, and start some college funds!!

One question Brandon's wife, Jennifer, had for me was related to gift taxes- is their share of the $75,000 going to be taxable?

The answer is NO.

For 2010, you can gift $13,000 without paying federal gift tax, which is always paid by the donor NOT the recipient, so it would be paid by the sister, not Jennifer. So the sister, can gift $13,000 to Jennifer and $13,000 to Brandon. If the sister was married, she'd be able to gift split with her spouse and give $26,000 to Jennifer and $26,000 to Brandon but she's not married.

Since they will be receiving $75,000, the sister can gift more than $26,000 in 2010, because we all have a $1,000,000 lifetime gifting maximum. So she can give the extra $49,000 this year, it will just be deducted from her $1m lifetime exclusion and she will have to fil form 709 at tax time. But no taxes will be due.

Another strategy for the sister is that she could write a check directly to let's say " Florida Prepaid" for the new babies education and there would be no applicable gift tax or exclusion. She could also gift $13,000 to the new baby to a UTMA account and also be gift tax free.

New Laws on Credit Cards

Click here for an article outlining new legislation from the Fed on credit card companies from doing things like raising rates on you when you make your payments on time, a limit on various transactional fees, and the best part- limiting issuing of cards to people under age 21 ( unless they have a parent or cosigner-very smart as most cc debt is racked up when u are still in college and dont realize the damage you are doing)

It's not too late!

The holiday times mean parties, holiday shopping, baking cookies, wrapping presents, spending time with family and friends, santa, christmas caroling ( my particular fav. thing) and funding your IRA's. Wait no, the LAST thing people think about around the holidays is finishing their savings goals strong by making sure they have contributed to their IRA's.
Luckily, our world has figured this out and the IRS allows you to contribute to your IRA's until April 15th of the following year!
Soo, it's not too late!
You can contribute up to $5,000 per year to a Traditional IRA ( which you can use only if are NOT contributing to a plan at work like a 401k, 403b etc. or make less than $55k to $65k Modified adjusted gross income for individual filers and $89k to $109k for married filers)
You can contribute up to $5,000 per year to a Roth IRA- if your income is less than $169k for married filers and $116k for individual )
Don't forget if you are over the age of 50, you can contribute an catch up of $1,000.
** also, if you are business owner and have a SEP IRA you have until when you file to contribute!
For more on IRA rules, refer to this publication on the IRS website.

New Year Financial Resolutions

Ok, so I have a new years resolution- blog more! I feel like I have so much valuable info. to share, I'm just so bogged down with managing my practice, my household, my investments, spending time with family, friends etc...phew!! Women are supposed to be superwomen right?!

Are things getting better in the economy?

On Friday, we got some good news- the majority of economists expectedunemployment to rise , but it actually ticked down from 10.2 to 10%- we lost about 11,000 jobs in November and they also revised the October down as well. So this is like many other things, we still had losses so we aren't out of the woods yet, but the losses were less than expected. Unemployment is suprisinging considered a lagging economic indicator, because in past recessions employers don't tend to really start hiring again until there is signs that we are for sure in a recovery.
Here is a good article from yahoo that I read this morning that explores if we are reaching the end of the recession.

Market Commentary from David Joy, Riversource

David Joy — Chief Market Strategist, RiverSource Investments
Slight Setback for Economic Growth
On the road toward a sustainable economic expansion, last week represented a modest setback. Weaker-than-expected reports on industrial production and housing starts suggested that the recovery remained fragile.
The weakness in housing may have occurred because of the uncertainty surrounding the status of the first time home buyers tax credit, since extended and expanded. Of course, we will find out the answer next month, but the weakness in the October report does exhibit just how dependent the housing sector is on government incentives. The strength in existing home sales as reported this Monday, which rose to the highest level since February 2007, was likely itself distorted by buyer anticipation of the expiration of the tax credit program.
The industrial production report showed a gain of just 0.1 percent in October after three successive, strong readings averaging increases of 0.9 percent in the third quarter. Both the manufacturing and mining components fell, while utility output rose sharply. A decline in auto production accounted for most of the manufacturing weakness.
Stocks mostly drifted lower last week in response to the softer data and a slightly stronger dollar, although the Dow Jones Industrial Average managed to eke out a small gain. Commodity prices were also generally higher, especially gold which rose another $30 to $1,148 an ounce.
Equity investors have been trying to come to terms recently with a number of indications that the recovery rally is showing signs of fatigue: light volume, relative weakness in financials and small caps, elevated sentiment, fewer new highs, full valuations and so on. This watchfulness is compounded by the suspicion that a correction might be due, since we haven't experienced one throughout the entire recovery from the March lows. But also causing some concern are divergent messages are coming from the bond market.
Last week, the yield on three-month Treasury bills turned negative. That's right, negative. In other words, some investors are willing to accept a return of less than zero for the assurance of getting their money back in January. Certainly part of the reason is related to large institutional parking of ample excess cash, but it also hints at some measure of concern. In addition, certain credit spreads have stopped contracting or have been widening recently, hardly a ringing endorsement of the momentum behind the budding economic recovery.
Assurances from central banks around the globe that liquidity will be maintained indefinitely do offer some comfort that the reflation story is still alive. But we are getting closer to the moment of truth when final demand will need to step forward, and corporate revenues will need to rise for this rally to keep going. Judging from investor response to recent statements from Federal Reserve officials, the easy money, weaker dollar story maintains the upper hand for now.