Plan to Beat the Economy This Year

First and foremost, if you plan on beating the economy this year, you have some work to do. No way to beat around the bush on that one. But it's not really so bad once you have developed some habits. The hardest part of personal finance is being psychologically prepared to make the necessary changes.

The best way to approach the situation is to start by looking at exactly what it is you make and spend, line by line, so that you can see what you can truly work with and live without. I have included some resources on this lens to help you out, and there is software through Amazon right here and below that will help you with exactly that. It will also help you in your further personal finance needs as you move forward with your process.

The most important aspect of mindset development is stepping outside of your situation and look at it from a very cold, emotionless, objective standpoint. I'm not going to try to mislead you into believing that this is an easy thing to do. It isn't. There are people who dedicate their entire lives to helping people accomplish this since they are not always able to do it on their own. If you are one of the lucky (or well-taught) ones who is easily capable of taking emotion out of the equation, then you are well on your way, and good job!

For the rest of you, there is a very inexpensive book called "Naked Thinking" that teaches you in a very open and explicit way just how to grab onto the power of your mind to make better decisions instead of letting your heart tell you what to do. Without your heart, you can have no dreams, but it's your head that helps you make them true.

Okay. So now you've discovered where you are saving and wasting money and gotten your resolve to move forward. Well, what's the next step? Simple. And it isn't building your bank account yet.

If you are like most of the people in this country, your personal finances are mired in debts. A lot. And much of it is on credit cards. Step one: kill them all. This sounds hard, but it really isn't. As a matter of fact, once one debt is gone, it gets easier and faster. Dave Ramsey likes to call this the "debt snowball." Start by knocking out your smallest debts if you can pay them off quickly. You owe the doctor $150? Go ahead and pay it off. Are all of your debts large and going to take some time? Take care of the ones with the highest interest rates first since they are the most expensive.

In the first step, you should have figured out where money is being wasted. This is where the discipline comes in. STOP IT! See, this is why the mindset is so important. You are going to have to make some changes. The money you are spending on that super sports package on your all-complete digital cable package that you're being monetarily raped for can be used to make your life considerably easier later if you're not keeping up with the Joneses today.

Anywhere you can cut corners- eating out, movies, sporting events, whatever- do it. Pump that money into your most expensive debt while maintaining minimum payments on the others. When the first one is gone, apply all of that to your next most expensive and so on. With each paid debt, you have more money to throw at the remaining obligations, and the faster it disappears.

Think about it. Any investments you make are not going to outweigh that 19% APR on the credit card you missed a single payment on. Or even that 12% one you didn't. Ben Franklin said it best: "interest saved is interest earned," right? Today's interest isn't in pennies, though, so the money you will save (and have as a result) in the long run will not only be great, it will actually belong to you!

I want to touch again briefly on debt, getting out of it, and some of the things you hear about what you can do to get your hands on some money to help make that happen. These may or may not be the last things I have to say as far as it's concerned. I have neither need nor desire to beleaguer the point, yet it is one of the most important and significant aspects of people's financial lives and what is stopping them from being financially free.

You have surely heard of different ways of getting out or drumming up funds to take care of the situation. Let me be up front about one thing: I do not, have not, and never will endorse trying to find ways of skipping out on what you owe someone. Ethics are what I live by, so this is the realm within which we will be working.

Personal finance is in large part handling honestly the situation you have put yourself in (yes, I've done it, too). But be careful not to get trapped by what some of the people you run into might tell you. There are a couple of strategies in particular that you may hear that are frequently used to get rid of debt that I will cover. Those include the use of home equity, the use of 401(k) funds, consolidation loans, credit counselors, and paid credit repair companies.

This stuff is actually pretty intuitive for many, but you could be surprised at some of what I have to say. First off, let's talk about home equity. Clarke Howard would hate me for this one, I'm sure (big time money guy on the radio- I'm actually a little jealous and a big fan, but we disagree here). Obviously, there are two schools of thought on this. The first says "hell no, why would you want to take an unsecured debt and secure it with your house?!" Good point, but here's why and how to handle it properly (clearly I'm of the other school of thought- that of using it if you have it): first, if you use a LOAN (never use a line of credit- EVER- for this purpose), you will have fixed payments over a fixed amount of time, which is a strategy that forces discipline. Second, the interest rate is pretty much guaranteed to be considerably lower. Third, the interest you do pay is tax deductible. Simple as that. If you don't have enough equity in your home, use what you can, but you'd better pay it off, even if you have to deliver pizzas on the side to do it. This is your home we're talking about, so it's priority 1, baby, right with your mortgage. Also, be sure you weigh out whether the origination and closing fees are low enough to warrant the trouble.

I have had many people ask me about using 401(k) funds since theirs has a loan provision. Now, many don't, but don't go looking, got it? This one's super easy for me (my firm is an institutional firm, which means 401(k)s are the thing that we do). The answer is "are you high?" Look, there are a couple of things to look at with this one. Your personal finance is more than just budgeting and honesty. It's looking at the forest, not just the trees. So here's some forest for ya. If you start digging into your 401(k), during the loan period, you can't contribute. You have to pay yourself back with interest. Okay, left pocket to the right. But you had to sell assets to get the money you needed. Well, let's say you did that in today's market. You sold low, at a loss, to get the funds. You no longer own those assets. Let's also say that the stock market comes back during the loan period. You no longer own those assets. And you're not allowed to buy any more of them during this time that they are so damn cheap. See where I'm going with this? It's called opportunity cost- the price you pay for giving up assets that could be appreciating in value so you can pay yourself a much lower interest rate to refill the hole you left when you took out the money to begin with. In short, whatever is in your 401(k) is for retirement only (there may be provisions for hardship, medical, or first home withdrawals, but you've gotta prove it up before you get the cash). Any other purpose is stupid, so don't even ask.

Consolidation loans are actually not a bad idea if you can get them. Just remember that most banks will charge a pretty high rate of interest for an unsecured loan. It could be variable based on prime, probably with about 9 or so percentage points added to it, or it could be fixed from 12 to 15 percent at a commercial bank. If you have collateral (home equity), you can usually do better. This one can be bank specific, so you'll want to shop around.

Credit counselors work. Now, they don't do anything you can't do yourself, but maybe they can, you know what I'm sayin'? They negotiate with your creditors on your behalf for a certain fee, typically pretty low, a small percentage of the assets. This is something that can be seen and may hurt your credit during the "counseling" period, but who cares? Do you really need more credit and debt when you're struggling to get out? Remember- forest, not trees. Once you get a grip on things, then you can move forward.

Last is these credit repair companies. Short answer is no. They can't do anything to make your credit score higher. It can't be done. Don't be a sucker to their promises. If they were really that successful, don't you think you'd see more people offering the service that could afford to advertise in ways better than posting cardboard signs on the side of the road? 'Nuff said.

Look, there's no magic formula. Well, yes there is. Just one. Pay off your debts. The only time you should file bankruptcy is when you are in such a financial disaster that you cannot even handle your needs- not getting your nails done or your hair "did"- eating, clothes, shelter, power (not cable or internet service), taking care of your babies. Personal finance is a discipline. It's hard at first, but I promise it gets easier. Trust me, I do this for a living. I do this for my life. Like Dave Ramsey would say, "Live like no one else now so you can live like no one else later."