Archives For Debt

That's a big snowball...       Dave Ramsey is well-known as a proponent of the “debt snowball” method. And because of his popularity, many personal finance writers tend to recommend that strategy for figuring out how to pay off your debts (with some exceptions). The idea is that you pay off your debts in order of the smallest balance first. As a debt is paid off, you tack on the payments you were making on previous debts to the next one in line.

       The problem is that many people (including Dave) tend to recommend this as the best strategy for everyone. And they have good reason – because you get a few quick wins at the beginning, many people tend to stay motivated enough to pay off the rest of their debts. The theory is that psychology wins out over mathematics. But the flaw here is that not everyone is psychologically motivated in the same way.

Not Everyone Needs Quick Wins to Stay Motivated

       The assumption behind recommending the debt snowball as a blanket strategy for debt payoff is that most everybody needs some quick wins in order to stick with something. And I agree that this is true for the most part. People tend to give up easily on a goal if they don’t see progress. The debt snowball method sidesteps that problem by giving you some apparent progress very quickly.

       But not everyone is motivated by quick wins. Some people, like me, want to know that they are making the right decision mathematically. That is, they want to do something because it’s the best way – not just because it feels good. When it comes to paying off debts, the debt snowball method is mathematically inferior to paying off your loans in order of highest interest rates first (the debt avalanche method, as some have called it). Even Dave Ramsey concedes that the debt snowball is not mathematically best. Assuming you stick with it all the way through, highest interest rate first is always the fastest and cheapest (least amount of interest paid) method for paying off your debts.

       Let me give you a quick example. Assume you have the following debts:
 

  • Debt 1: $2,000 – 13.00% interest rate – $60 minimum payment
  • Debt 2: $5,000 – 20.00% interest rate – $150 minimum payment
  • Debt 3: $10,000 – 4.00% interest rate – $100 minimum payment
  • Debt 4: $17,000 – 16.00% interest rate – $510 minimum payment

 
       This seems like a reasonable mix if Debts 1 & 4 are credit cards, Debt 2 is a store credit card (after the promotional period expired…), and Debt 3 is a student loan. Assuming you continue paying only the minimum payments, it’ll take you 10 years and 2 months to pay off all this debt.

       Now let’s say you have an extra $300/month to put toward paying off your debts. If you use the debt snowball method, you’ll pay them off in the order I listed them (1, 2, 3, then 4). It’ll take you 3 years and 1 month to do and you’ll pay a total of $6,990 in interest.

       But if you pay off the highest interest rate debts first (debt avalanche), it will take you 3 years even and you’ll pay a total of $5,996 in interest. You’ll get out of debt one month quicker than the debt snowball method AND pay almost $1,000 less in interest! That’s enough motivation for me, and I’m sure there are others who would prefer it as well.

If You Need Quick Wins, You Can Still Use the Highest Interest Rate First Method!

       Proponents of the debt snowball method insist on its psychological boost as being key to its success and popularity. It’s the only reason to push it harder than the smart method (highest interest rate first). But it’s not a very good reason because it’s not exclusive to the debt snowball method.

       If you need quick wins to motivate yourself but you don’t want to follow a mathematically inferior method (that is, a stupid method), then you can create your own psychological motivation by setting milestones for yourself. Plan to celebrate when you’ve paid off $500 in debt, $1,000, $2,500, $5,000, and so on. Recognizing your progress and celebrating it can give you a boost and help you keep going without paying more interest than necessary.

Another Problem with the Debt Snowball

       Personally, I think the debt snowball method tries to cover over a deeper problem inside that needs to be dealt with. If you can’t control your emotions enough to make a smart, rational decision in your finances, you risk falling into the same traps that got you into debt in the first place.

       The debt snowball doesn’t force you to deal with this issue until later if ever. Even it’s gradual benefits (quick wins first followed by a slower pace to the finish) can be replicated by combining the highest interest rate method with personal milestones. So even its psychological benefits are limited.

Most of All, I’d Rather You Be Successful than Right

       Although I would never personally use the debt snowball method, I would rather you use it than not if that’s what you need to successfully pay off your debts. If you can’t sufficiently motivate yourself with personal milestones so you’ll stick to the highest interest rate first method, then you might not follow through with it. And even though it’s mathematically the best method, it’s not going to be very good if you don’t finish.

       What I’m trying to say is that the highest interest rate first method isn’t the best for everyone either. And even though I don’t know why not everyone can use it, I’m willing to admit that it may be better to use something else. I’ve even suggested that you might want to pay off your debts in order of highest stress level first. The best method for you is whatever gets you to your goal – being debt free.

       But it is important to realize that you’re paying more and taking longer if you use any method besides highest interest rate first. That fact is enough to make the debt snowball method absolutely wrong for some people because they want to know they’re making the best, most rational choice (even if they’ve made mistakes in the past). So don’t assume that the debt snowball is the best method for everyone just because it works for Dave Ramsey, or some of his “followers”, or even you. It’s all going to depend on each person’s particular psychological makeup.

(photo credit: kamshots on Flickr)

       The personal finance world is filled with stupid rules of thumb that just don’t work when you want the right answer. Sure, they’re easy and simple. But the problem is that they ignore crucial bits of information that are absolutely essential to determining the right choice for you. One of these stupid rules is the idea that you can afford a mortgage that is 2.5 or 3 times your annual income. Here’s why this is just plain dumb.


A. H. Allyn Mansion by cliff1066TM on Flickr

It Ignores Interest Rates

       This one ought be be obvious. This 2.5 or 3 times your income rule of thumb completely ignores the fact that interest rates have a large effect on your payments.

       To keep our example simple, let’s imagine that Bob makes $50,000/year. This rule of thumb says that Bob can afford a $125,000-$150,000 mortgage. We’ll go with $150,000. Today, the rate on a 30 year mortgage is about 4.5%. At this interest rate, Bob would pay $760/month or $9,120/year – about 18% of his gross annual income.

       Rewind to just a couple years ago when rates were 6% and Bob would be paying $899/month or $10,778/year – about 21% of his gross income. Go back to the 2000s when rates were around 8% and Bob would be looking at $1,100/month or $13,200/year – about 26% of his gross income.

       Now, these all sound affordable for Bob but keep in mind that I’m only talking about principal and interest here. I didn’t include taxes and insurance, which could easily put him over the limit in that last example. So one major problem with the 2.5 or 3 times your income rule is that it cannot and does not account for changes in interest rates.

It Ignores the Time Period

       I assumed in the first example that Bob was getting a 30 year mortgage, but this rule of thumb doesn’t really say how long the term should be for your mortgage. I assumed 30 years because it’s the most common and it’s probably what people who spread this stupid rule are thinking. But look at what a difference it makes to go to a shorter time period.

       Using $150,000 as our mortgage amount and 4.5% as the interest rate, we saw that Bob would pay $760/month for a 30 year mortgage. Keep everything the same but change that to a 15 year mortgage with 4% interest (since rates are lower for 15 year mortgages) and Bob will be paying about $1,110/month. So he’s gone from paying about 18% of his gross income to almost 27% simply by choosing a different term for the mortgage.

       This rule of thumb doesn’t help us determine if we can afford a 30 year mortgage or a 15 year mortgage. There’s no distinction at all. That’s strike two!

It Ignores the Rest of Your Situation

       Finally, this stupid rule of thumb completely ignores the rest of your situation on a number of levels. Let’s look at them:

  • Taxes & Insurance – As I showed you before, Bob was getting close to pushing the limits on his income just with his principal and interest payments. What if real estate taxes are high in his area? What if insurance is expensive because he lives in a hurricane zone (or for some other reason)? This rule fails again.
  • Down Payment – What if Bob puts less than 20% down on his mortgage? Well, he’ll have to pay for private mortgage insurance (PMI). Bump up that payment a little bit more now. Oh wait, that doesn’t seem to matter in this rule of thumb.
  • Debt – What if Bob is up to his eyeballs in debt and on the verge of bankruptcy? This 3 times your income rule is absolutely ludicrous in that case, but it doesn’t seem to come with that caveat.



       These are just a few other areas where this rule proves to be absolutely stupid. I’m sure you can think of many more. The point is that simply multiplying your income by 3 to figure out how big of a mortgage you can afford is short-sighted, unwise, and just plain dumb.

The Solution

       There are other rules for figuring out how much of a mortgage you can afford. There’s the 28/36 rule, the 29/41 rule, the 4 times your income rule, the 5 times your income rule, and so on. Now I have to admit that the 28/36 rule is a little better than these “x” times your income rules. But it still ignores a lot about your personal situation.

       By now, the solution ought to be obvious to you. The best way to figure out how much of a mortgage you can afford is to look at your situation and your budget and work backward from there. If you blindly follow the conventional rules, you completely ignore the important factors that can help you make the best choice for you. You also fall into the trap of allowing society, culture, media, or businesses (banks and real estate agents, in this case) determine what your life should look like and how you should spend your money.

       Think for yourself. Work out the math on your own. (It’s not much more than addition, subtraction, and a little multiplication.) Figure out what you need and want. Then determine what fits in to your situation.

What Do You Think?

       What do you think about financial rules of thumb? Why do we like them? What are some rules of thumb you’ve heard that you’d like me to write about? Share your thoughts in the comments below!

       This is the final article in a ten part series on how to get out of debt. If you haven’t already, you should check out the previous articles:


Step 10 – Don’t Get Trapped Again!

       You’ve finally paid off the debts that have been dragging you down. You’ve topped off your emergency fund so you don’t have to rely on credit cards when things go wrong. You feel like you can rest easy. But your journey isn’t quite over.

       It’s taken a lot of work to get here. The last thing you want to do is go back to the patterns that got you into debt in the first place! I’ll be the first to congratulate you for reaching your goal, but the true measure of your success will be your ability to continue using the skills you’ve learned in this process. If you get back into overspending and not preparing for emergencies, you’ll have to do this all over again. I don’t think you want to go there.

       So to make sure you don’t get trapped by debt again, let’s take a few moments to consider what you’ll need to do to retain this success. My hope is that the process of paying off your debt has changed your habits so that you’ll maintain them for the rest of your life. But you’ll have to keep your eyes open so you never fall into the pits of debt again.

  • Limit Your Use of Debt – Debt can be useful for some situations, but using a credit card because you don’t have the money isn’t one of them. Limit your use of debt so that you only consider it as an option when it is wise. Buying a home, getting an education, or starting/expanding a business can be good reasons for using debt (but not always). There may be times when debt appears to be your only option, but make sure it’s your choice of last resort and that you absolutely need whatever it is you’re paying for.
  •  

  • Continue to Track and Optimize Your Spending – The single best way to make sure you prevent overspending is to keep an eye on what you’re spending and review it regularly. The simple action of tracking your spending will naturally lead you to spend less because you’re consciously thinking about every dollar that leaves your hands. You can also use the information you collect to find the areas where you can cut back on things that aren’t important to you.
  •  

  • Look for Ways to Earn More – If you’ve been in debt for a while, it’s likely you’re a bit behind on saving for retirement and other financial goals. To catch up you not only need to decrease your spending but you also need to increase your earnings. Combining those strategies will leave you with the money you need to save and reach your goals. Advance your career, earn some money on the side, or start your own business – there are many ways to increase your income.
  •  

  • Keep Your Emergency Fund Stocked Up – If you have to use your emergency fund, be sure to replenish those savings as soon as possible so you’ll be ready for the next Murphy’s Law event. Also, don’t look at that money as your “spend on anything” fund. It’s there for a purpose. Only use it for that purpose!
  •  

  • Have a Plan and Save for the Future – You got into debt because you didn’t have a plan. Fail to make a plan now and you’ll probably end up in debt again. Make a plan, choose your goals, and figure out how you’ll get there. Save for those goals so you won’t be tempted to use debt on a whim.
  •  

  • Learn to Find Contentment – Finally, seek contentment in all things. Comparing ourselves to others, wanting what “they” have, and not being happy with our situation all lead us to living beyond our means. And living beyond our means leads to debt. Discover what’s truly important in your life, eliminate what isn’t, and set your own standards for success and happiness rather than letting others do it for you.



       That’s it for this series! As I mentioned in the last part of this series, my plan is to combine these ten steps with some valuable resources to help make getting out of debt achievable and easier. Make sure you’ve signed up for free updates to Provident Planning so you don’t miss out when I release this invaluable package! If you’ve signed up for free updates, you’ll be sure to see it as soon as it’s available.

       Have you gotten out of debt and stayed out of debt? How did you do it? What has been key to your success? Let me know in the comments below!

The Secret to a Successful Budget eBook
 
       Welcome to the Carnival of Personal Finance #271 – The Secret to a Successful Budget eBook Edition! My friend Craig Ford at Money Help for Christians is launching a new eBook today. It’s designed to help you discover the secrets to successful budgeting.

       I think it’s a great resource for anyone who’s ever struggled with budgeting, so I’ve included some quotes from his eBook throughout this carnival. You can get the book for 30% off if you buy before midnight (EDT) August 31st, 2010. Be sure to read through to the end of this carnival because I’ll be giving away two FREE copies to two lucky winners!

Editor’s Choice

       Here are my top picks from the submissions this week:

  • Mike Piper from Oblivious Investor presents Dealing with Investment Confusion, and says, “What’s the best approach to dealing with the confusion that comes from being a new investor?” – [Mike shares some good advice for people who are confused about investing. It won't immediately cure your confusion, but applying this strategy over and over will help you make informed decisions you can stick to.]
  • Briana Ford from Go Banking Rates presents Why Americans Can’t Afford to Die [Infographic], and says, “If you never thought about this problem before, take a look at how expensive funerals really are. You may discover you, like many Americans, simply can’t afford to die.” – [What can I say? I'm a sucker for infographics.]
  • Len from Len Penzo dot Com presents A Simple Trick to Get Your Credit Card Interest Charges Waived. – [I wish more people realized the power of Len's simple trick!]
  • Lauren from Richly Reasonable presents 4 Bad Deals, and says, “The term “Bad Deal” is relative. Not only is Necessity the mother of Invention, she is also the mother of many a Bad Deal. Necessity has a TON of children.” – [Funny, smart, and witty - and likely to open a few eyes at least!]
  • Jacob A. Irwin from My Personal Finance Journey presents Adjusting My Monthly Budget to Account for Home Ownership, and says, “A look at the steps I have recently taken to adjust my personal budget to account for the various elements of home ownership.” – [At our current rent rate owning a home just doesn't make sense. Just look at all the costs involved!]

       Congratulations to the editor’s choice picks! Here are the rest of the articles from this week’s submissions.

Money Management

  • MD from Studenomics presents Quick College Students Guide To Personal Finance.
  • Jason from One Money Design presents How Do You Live Well on Less Pay?, and says, “There are plenty of people that don’t make a lot of money and have trouble covering basic expenses each month. There are 5 essential tips to follow to live well on less pay.”
  • Revanche from A Gai Shan Life presents Shopping for the single life .
  • ispf from Grad Money Matters presents The American Dream of Home Ownership: 10 Things You Can Do as a Student.
  • Jim from Wanderlust Journey presents Royal Caribbean Cruise Lines Shareholder Benefits.
  • Jason from Live Real, Now presents Check Your Bills, and says, “Can you automate your finances too far?”
  • Elle from Couple Money presents Financial Tips for College Success, and says, “Many college students are surprised to see how easy it is to build a financial foundation for themselves. Learn how to set up bank accounts, pay your bills, and start a graduation fund.”
  • DE(a)BTh from Murder Your Debt presents Your Wasted Life, and says, “You thought financing a house and a fast car meant freedom. That an expensive education would lead you to a rewarding career where you could earn lots of money. You were wrong, weren’t you? You hate your career but you’re stuck. You’re stuck because you swallowed the lies you were sold. The lies that material possessions bring success. The lies that more money means more happiness. And now what? You’ve got it all; the cars, the house with the huge yard, the sexy outfits and shiny shoes. But you’re STILL not happy!”
  • vh from Funny about Money presents Social Security’s Bizarre Rules, and says, “Social Security’s restrictive rules make it impossible to get out of poverty when unemployment forces one into early retirement and stock-market losses militate against retirement fund drawdowns.”
  • J. Money from Budgets Are Sexy presents What would you do with an extra $1,000?, and says, “Montel Williams wants to know ;)”
  • Bob from Christian Finances presents How to spend unexpected income: 3 questions to ask, and says, “It can be tough to know what to do when you receive a large sum of cash – this article will give you some questions to help you figure out what to do with it…”
  • Mr. GoTo from Go To Retirement presents How Much Long Term Care Insurance Should You Have?, and says, “Insuring against a long term care event is part of personal risk management. Estimating the amount of long term care coverage to obtain requires careful consideration of several factors.”


If you are working 40 or more hours a week to earn your money, don’t you think it is worth an hour or two to set up a budget?

Isn’t it worth spending about an hour every week to manage the money you work so hard to earn? It is always better to manage what you have than to work yourself crazy trying to get more money.

- from page 21 of The Secret to a Successful Budget by Craig Ford


Finance


Investing

  • Dividend Growth Investor from Dividend Growth Investor presents 33 Dividend Champions to Consider, and says, “Dividend investor David Fish has created a list of dividend stocks which have raised distributions for 25 consecutive years and has named it the dividend champions list. His list includes 100 companies, which is more than twice the size of the Dividend Aristocrats. I ran a screen on the list in order to identify stocks for further research.”
  • Mike from The Financial Blogger presents Use the Loonie’s Strength to Invest in the Eagle Market, and says, “Canadian dollar is strong compared to the US dollar at this time. Use this as an opportunity to invest in US stocks.”
  • Div Guy from The Dividend Guy Blog presents Dividend Investing with Less Than $1,000 Part 3: How to Pick Your ETFs and/or Dividend Funds, and says, “Starting to invest is quite motivating but as a young investor, you must put greed and hype aside and start by looking for sound investments.”
  • Squirrelers presents Small Stocks = High Return and High Volatility, and says, “Small stocks, particularly those in the lowest deciles, have performed very well over the long-term. They can be an important part of your asset allocation, provided you can stomach the associated risks.”
  • D4L from Dividends Value presents My Top 6 Performing Dividend Stocks Just Might Surprise You, and says, “As I have stated many times, my goal is to create an ever growing income stream from dividend stocks. Secondarily, it is my desire to beat the S&P 500 over time. With that said, I rarely look at the capital performance of individual stocks. However, I recently sorted my portfolio by Total Gain % (total gain/basis) and was mildly surprised at the top performers.”
  • ElizabethG (Modern Gal) from Modern Gal presents Investing for Inflation in 2010.
  • DSO from High Dividend Stocks presents Big GE and it’s big dividend, and says, “One of America’s oldest and most prestigious companies has become an accidental high yielder.”


Budgeting in and of itself is useless.

Budgeting is part of a larger financial plan.

- from page 9 of The Secret to a Successful Budget by Craig Ford


Budgeting


Saving


Frugality


You need to focus your finances on accomplishing one major task at a time.

If you don’t, the danger is that every dollar will be diluted to a point that it makes little impact helping you reach your goals.

- from page 9 of The Secret to a Successful Budget by Craig Ford


Debt


Credit


The goal of the budget is to help you spend less than you earn.

Therefore, this becomes the single criteria for an effective budget – does it help you spend less than you earn?

- from page 12 of The Secret to a Successful Budget by Craig Ford


Reviews

  • PT from PT Money presents Free Prepaid Credit Cards, and says, “A thorough, original review of the best free prepaid credit cards, including those that are free of activation and monthly fees. These cards are great for those who need to avoid debt, or those that can’t get a traditional bank account.”
  • Silicon Valley Blogger from The Digerati Life presents Citi Dividend Platinum Select MasterCard Review, and says, “Here’s a review of a credit card I actually like.”


Real Estate

  • FMF from Free Money Finance presents How to Hire a Home Inspector, and says, “When you buy a home, you need to be sure you hire a good home inspector to identify any potential problems. This post gives tips on how to do this.”
  • Jeff Rose from Good Financial Cents presents Should You Upgrade to a Larger Home”, and says, ”
    In many markets, home owners are looking at homes in the next price range up as good buys, since foreclosures and a slow market are resulting in good deals. But, as tempting as it is to upgrade to a larger home, is it really a good idea? Here are some things to consider before upgrading to a larger home.”
  • Rob from Two Wise Acres presents 3 Things to Avoid When Buying a Home, and says, “When buying a home, it’s critical that you avoid these three credit mistakes.”
  • ctreit from Money Obedience presents Do renters really save money in the end?.


Taxes

  • pkamp3 from Don’t Quit Your Day Job… presents Tax Incidence, and says, “Who really pays for a tax when it is enacted? If the government enacts a new tax on washing machines, is the entire tax on Maytag? The consumer? Cameron Daniels breaks down the details.”


A budget lets your spouse see your values and priorities in a tangible way.

A budget forces you to communicate not just about your life goals, but also about your daily financial preferences.

- from page 16 of The Secret to a Successful Budget by Craig Ford


Career

  • Kristina from Dinks Finance presents A DINK in The Office, and says, “As a married or unmarried employee with no children, are you treated differently than your colleagues with kids?”
  • Nicole from Nicole and Maggie: Grumpy Rumblings presents Why did you go to graduate school?, and says, “Nicole and Maggie discuss reasons for graduate school and how sometimes we’re directed into a career for the right reasons and sometimes we fall into it for the wrong reasons. But it turns out OK anyway (or maybe it doesn’t, but you can always change your mind).”


Economy

  • Bret from Hope to Prosper presents Trillion Dollar Public Pension Shortfall, and says, “An article in the New York Times stated that there is a $1 Trillion dollar public pension shortfall. Despite repeated denials from PERS and public employee unions, public pensions are in big trouble.”
  • JLP from AllFinancialMatters.com presents Democrats, Republicans, and the Federal Debt Since 1979, and says, “Though the title may suggest it, this is not a “political” post.”


Budgeting is a process, not an event.

You won’t wake up tomorrow with an effective budget. Instead, you will start with a decent budget that later becomes a good budget. Eventually, it is a great budget.

- from page 16 of The Secret to a Successful Budget by Craig Ford


Other


The Secret to a Successful Budget eBook Giveaway!

       As promised, I’m giving away two free copies of The Secret to a Successful Budget courtesy of Craig. To enter, all you need to do is leave a comment on this post telling me how budgeting has helped you OR your biggest struggle with budgeting. I’ll use random.org to select two winners tomorrow evening (August 24, 2010) at 5:00 PM EDT so be sure to enter by then!!! I’ll update this post to announce the winners, but use a valid email address when you comment so I can reach you if you win. Good luck!

[Update: Laura has won a free copy of The Secret to a Successful Budget! Congratulations!!!]


The Secret to a Successful Budget eBook

       This guest post was provided by Ashley from TaxDebtHelp.com.

       There are few things worse than knowing you owe the government a huge chunk of money and one of those things is knowing you do not have the money to pay what you owe. No one wants to be indebted to Uncle Sam because the IRS is a powerful collection agency and typically supersedes other creditors. When the tax bill comes due and you can’t afford it, you can be fined or penalized, have your assets frozen, find a lien placed on your property, or potentially have your property levied. Levies may come in the form of the IRS taking money out of your bank or taking money out of your paycheck (IRS wage garnishment).

       So what do you do? The IRS is reasonable in understanding that not all taxpayers are capable of settling their debts in one lump sum but still want to do the right thing. There are resolutions that the IRS offers to help consumers catch a break and settle their debts in full.

How to Get Help with a Back Tax Bill

       The first thing any taxpayer should do is realize where their current financial situation stands. They need to be clear about the reality of their finances so they will be able to better negotiate the process of getting help. The IRS has several programs that assist people who do not have the immediate resources to pay off their tax debts. If you are in a great financial place, you shouldn’t have too much trouble paying the debt in full.

       If you have a decent financial situation where you can’t pay the taxes in full but do have reliable income and some cash left over after paying living expenses, you should be able to set aside cash from each check to make payments on your tax balance. Options for people who are doing OK financially include:

1. IRS Installment Agreements

       A common method to help consumers pay their taxes is the installment agreement. The IRS will allow reasonable payments to be made on a monthly basis until the balance is paid in full. If you do not owe more than $25,000, you have a good chance of being approved for an installment agreement without much paperwork provided you can satisfy the debt within a 3-5 year time period.

2. Partial Payment Installment Agreement

       For those who can afford some payments but who are unable to qualify for a normal installment agreement, a Partial Payment Installment Agreement may be set up. The taxpayer will be able to make monthly payments towards their tax bill, but with a PPIA part of your debt will exceed the statute of limitations on debt collection. In essence, you end up paying less than you owed. You must provide financial documents to prove your financial status and get the IRS to agree to approving this option.

3. Take a Loan

       If you feel you would be successful approaching family or friends for a loan on the amount you owe, it may be an option to avoid fees and IRS paperwork to borrow the cash you need and satisfy the debt in full. Only exercise this option if you are comfortable dealing with family and money and be sure to pay back the loan amount within a reasonable period of time.

       If you have poor finances, meaning you can not pay the taxes you owe and there is nothing left after basic needs have met, you may find the IRS can offer a resolution to paying owed taxes.

4. Offer in Compromise

       This option will allow a taxpayer to settle the tax amount due for a sum less than is owed. Many taxpayers hope to get approved for this option but few will because the IRS ensures only those who really need the assistance get accepted for an Offer in Compromise. If the IRS is assured they will never be able to collect the amount owed, they will likely approved the offer from the taxpayer.

5. Currently Not Collectible Status

       In a situation where the IRS is sure that collection of a tax debt would be unfair due to payments resulting in the loss of basic necessities, they will declare a taxpayer’s debt to be currently not collectible. The IRS will not release the debt but will essentially offer a forgiveness for a period of time usually up to 18 months. They will check in for updates on financial status until they deem the amount collectible. The good thing is normally the statute of limitations on your debt (time the IRS has to collect) continues to tick. However, penalties and interest can still accrue.

6. Bankruptcy

       Bankruptcy should be a last resort to resolve debt issues but it is a serious matter and should not be used just because you can’t afford to pay taxes. Bankruptcy will negatively affect credit for ten years to come, and it may be in a taxpayer’s best interest to seek the assistance of the IRS for better options on settling a back tax debt. Additionally, bankruptcy is never a guarantee. In the end, a taxpayer may not even be approved for a tax debt dismissal.

       Whatever method works for both the taxpayer and the IRS should be considered and action needs to be taken to resolve the matter of an outstanding debt. Avoiding the situation will only make the debt larger and the legal consequences more severe.


       This guest post was provided by Ashley from TaxDebtHelp.com. If you are looking for more self-help details on IRS tax debt payment plans, or if you are looking for ways to resolve IRS tax levies like IRS Wage Garnishment, visit their site today.

       Yesterday I posted an article about how to create a balance sheet. Part of that process includes calculating your net worth. After I wrote it, I realized I should talk about net worth from a Christian perspective. After all, the tag line for this site is “Personal Finance from a Christian Perspective”. There’s nothing particularly Christian about that article. It’s helpful for Christians and non-Christians alike to review their balance sheet and net worth. But as Christians, we must be especially careful to realize that we are more than our net worth.

       There is danger in obsessing over your net worth – in defining your success based on a number. It is wise for you to prudently manage your finances, and tracking your net worth is part of that process. But you must always be aware that your value comes not from what you own but from who you are in Christ. It is in being a child of God that Christians find their true worth.

       Our net worth is infinitely positive. Christ has canceled the debt of our sin and we will inherit immeasurable heavenly riches. What you own or owe here and now does not matter in eternity.

       This warning goes both ways. Those who are rich must grasp this concept just as much as those who are poor – even more so. It is easy for the wealthy to trust in their riches and forsake God. Their prosperity may even tempt them to think of themselves more highly than the poor. Both outcomes are sin in God’s eyes, and the rich must be careful to avoid both. The rich should not glory in their high estate, and the poor should not be shamed in their low estate.

       The Bible actually has much to say about this topic. I’ve chosen a few verses to help you see why it’s important for us to understand our true net worth. Consider what God’s Word says:

       The rich and the poor have this in common: Yahweh is the maker of them all.

Proverbs 22:2 (WEB)

       17 …and lest you say in your heart, “My power and the might of my hand has gotten me this wealth.” 18 But you shall remember Yahweh your God, for it is he who gives you power to get wealth; that he may establish his covenant which he swore to your fathers, as at this day.

Deuteronomy 8:17-18 (WEB)

       Riches don’t profit in the day of wrath, but righteousness delivers from death.

Proverbs 11:4 (WEB)

       For what does it profit a man if he gains the whole world, and loses or forfeits his own self?

Luke 9:25 (WEB)

       10 He who loves silver shall not be satisfied with silver; nor he who loves abundance, with increase: this also is vanity. 11 When goods increase, those who eat them are increased; and what advantage is there to its owner, except to feast on them with his eyes?

Ecclesiastes 5:10-11 (WEB)



       Focusing too much on your net worth can cause you to glory in your riches or to feel shame in your poverty. We must remember that the Lord is pleased with neither. What does please the Lord? Those who glory in their knowledge and understanding of Him and who boast about His loving kindness, justice, and righteousness.

       23 Thus says Yahweh, Don’t let the wise man glory in his wisdom, neither let the mighty man glory in his might, don’t let the rich man glory in his riches; 24 but let him who glories glory in this, that he has understanding, and knows me, that I am Yahweh who exercises loving kindness, justice, and righteousness, in the earth: for in these things I delight, says Yahweh.

Jeremiah 9:23-24 (WEB)


       A balance sheet is useful because it helps you see what you own and what you owe. It’s also useful in estate planning as it allows you to clearly list everything in one spot and can help you determine how much and what kind of planning you need. If you want to create your own personal balance sheet, here’s what you’ll need to do.

1. Give It a Date

       A balance sheet is a snapshot that’s only accurate on one particular date. When you create your balance sheet, you need to put down the date you made it or last updated it. Simply write “As of {Month Day, Year}” at the top just under your name.

2. List Your Assets

       Now you’ll want to break the balance sheet into two parts. On the left, you’ll list your assets. On the right, you’ll list your liabilities and calculate your net worth. Let’s start with your assets.

       Your assets include anything you own. This doesn’t mean you necessarily own it outright – just that legal ownership belongs to you or your spouse. You’ll want to list your assets in categories by order of liquidity – how quickly you can turn the asset into cash. Additionally, you’ll want to indicate the ownership of each asset (Husband, Wife, Joint, etc.). And finally, be sure to use the fair market value – the price you can actually sell it at. What you paid doesn’t matter. All that matters now is the price you can get if you try to sell the asset.

       The first category will be cash and cash equivalents (things that are almost like cash). This group includes actual cash, checking accounts, savings accounts, money market accounts, and similar assets. Next up are your invested assets. Stocks, bonds, mutual funds, retirement accounts, businesses you own, and any other investments you’ve made fall into this category. Finally, you can list your personal use assets – things like your automobile, furniture, clothes, and house. Some people don’t include personal use assets or they use a lower value. It’s up to you, but I say if you can and would sell it then list it on your balance sheet.

       Add up the total for each category and then add up your total assets.

3. List Your Liabilities

       In the right column, start listing your liabilities – anything you owe. Write down your liabilities in the order that they’re due. Short-term debts will go first (like credit cards or auto loans) and long-term debts will go last (like student loans or mortgages). Include any personal debts as well if you’ve borrowed money from family or friends. List the total amount owed along with who owes it (Husband, Wife, Joint, etc.). I think it’s helpful to also list your interest rate in the description of each debt.

       Add up your short-term debts then your long-term debts. Finally, add up your total debts and list it at the bottom.

4. Calculate Your Net Worth

       This is the easy part. Your net worth is simply your total assets minus your total liabilities. It’s what’s left over if you were to sell everything and pay off all your debts. Since you’ve already listed your assets and liabilities, all that’s left is to subtract.

       If your net worth is negative, you owe more than what you own. If it’s positive, you own more than you owe. It’s as simple as that.

5. Update It Regularly

       Now all you need to do is update your balance sheet regularly. Once a year is fine, but you can do this more often if you like. Remember to change the “As of” date each time you update your balance sheet.

       If all this sounds like too much work for you (it’s really not that hard), programs like Quicken and websites like Mint will help you create your balance sheet and keep it up to date automatically.