A couple of weeks ago, I wrote an article about Standing Your Ground.  I discussed collectors and a few best practices when dealing with them.  At the end of the article, I made the following statement:

I encourage you though to find a way to resolve your debts so that you can build a solid financial house.  A house with holes in a few windows (the bad debts) doesn’t look too appealing. Does it?

Although I used broken windows as an analogy, it’s actually a theory first introduced by James Wilson and George Kelling.  A portion of the theory states:

Consider a building with a few broken windows.  If the windows are not repaired, the tendency is for vandals to break a few more windows.  Eventually, they may even break into the building, and if it’s occupied, perhaps become squatters or light fires inside.

Or consider a sidewalk.  Some litter accumulates.  Soon, more litter accumulates.  Eventually, people even start leaving bags of trash from take-out restaurants there or breaking into cars.

The underlying meaning is that when a window is broken in the neighborhood, it should be fixed immediately.  This more than likely will deter further damage from those that are attracted to vandalize.  Cleaning up the sidewalk every day, prevents others from seeing the need add to the pile.

Now, as I consider it here, I think about broken windows in terms of the financial house most of us are striving to build.  We all have some type of structure we reside in whether it be a single family home, condo, an apartment, etc, right?  Well, when a window is broken, you have to make one of two choices:  fix it or ignore it.

To warn you of potential danger, I’ve created a short list of “windows” to be aware of and offer some encouragement of right action along the way.

• Credit Limits

When you’re trying to get your money train back on the right track, your credit limit is something you might want to keep under your radar.  Why?  There are two reasons: one – to avoid the trap of the “over the limit fee”, two – to help your credit scores.  A high balance greater than or equal to your maximum credit limit does not have a positive affect on your credit scores.  And how does it look to potential lenders?  Not good at all.  Though you may pay your bills on time every month, you’d be considered a high risk.  

• Credit Reports

Since we’ve looked at the credit limits being a broken window, let’s look at the larger picture of the full credit report.  It must be checked.  You have the right to obtain a free copy of your credit report once every twelve months from each major reporting agency: Experian, Equifax and TransUnion by way of www.annualcreditreport.com.  A good idea is to not request them all at once.  Spread the three requests out asking for one every four months checking for accuracy.

Xenophon says, “…but accuracy is everything.”  I couldn’t agree more.  Checking everything from the personal and public information, as well as the credit history.  If anything looks strange, you have a right to request an investigation.  Don’t let the litter accumulate.

• The Mail

This broken window will probably require some time a patience, but it’s repairable nonetheless.  You know that pile of bills you’ve got stuffed over in the corner? Yeah, that one.  It’s time to pull it all out and deal with it.  Yes, the time is now.  Believe me, it’s not going away. 

It’s easy to put it to the side and say, “I don’t have time for this right now.”  But if not now, when?  Small debts become collections, collections become judgments, judgments become garnishments.  A little extreme, but some collections may even lead to jail time (click here to see a recent newspaper article about that).

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The bottom line is this:  Being held hostage to unwanted guests is not going to be an option if you don’t repair your windows quickly.  As stated earlier, this is a short list of ideas (things we may ignore).  You could probably think of some examples from your own situation or someone you may know.  Feel free to write about it in the comments.

 Thank you so much for spending your time here with me today!

Image Cred gregoreosz

Have you ever really thought about what “interest” really means?  Have you ever calculated  the amount of interest you pay over the life of a loan(s)?  Or the amount you pay in finance charges per year on your credit card(s)?

Interest is defined as the “rent” you pay to borrow money.  We have all used interest at some point and time in our lives to make purchases.  Either the cash for the total purchase wasn’t available or we didn’t want to spend our cash all at one time.

The goal of many consumers is to pay as little interest as possible by either maintaining good to excellent credit and be rewarded with low interest rates OR by paying off debt early.

On the flip side of the coin, there are many consumers who have to pay higher interest as a result of mediocre to bad credit.  According to bankrate.com, interest rates today are as low as 4.72% for a new automobile to as high as 19+% for a Visa Credit Card.

I once read a statement by Anthony Robbins that stated, “In any moment, a decision you make can change the course of your life forever.”  If you think of this statement in reference to purchasing items on credit, how does it change your life forever?  The answer – Paying continuous interest robs you of future wealth.  Interest can be very costly in the present as well as the future.  Let’s look at a couple of examples…

The above are only two examples of situations where we pay interest.  But in reality, we pay much more due to purchases of homes, additional cars, continuous credit card charges and never paying off debt.

Not to get too technical, but we can calculate the future value of the two monthly payments above:  $701 per month, 20 year time frame, min 5% compounding interest = $250,000+ dollars.  So, investing $701 for 20 years would yield at least $250,000.  This is an example of your money working for you, instead of against you.

Do you want to now assess the damage of your particular situation?  You may click here to use the “When Will You Be Debt Free” calculator at CNNMoney.com to 1) determine how much interest you will pay on your current debt OR 2) a payoff timeframe estimate if paying off debt early.

We must develop power over purchase – instead of allowing our purchases and the people from whom we make the purchases to have power over us.  We must remember that we can always spend more than we make.  I once met a man whose annual income in one year increased from $42,000 to $175,000.  Both years he spent everything he made.  He had no sales resistance, no power over purchase.   – Dave Ramsey

How Can I Avoid Paying Excessive Interest?

I guess this would be the magic question.  How can I avoid the “interest” trap?

1. Use cash as much as possible.  The envelope system is a great method for this area.  When using solely cash, it’s either you have it or you don’t.
2. Plan for large purchases.   When planning for large purchases, shop around to compare prices versus taking the first item seen (which may be the highest price on top of paying high interest ).  The budget is a great resource for planning. 
3. Avoid spontaneous spending.  Because we are inundated with so many buy now, pay later advertisements.  It’s easy to talk ourselves into "just this time".  But we should refer back to Tip #1.
4. Pay off debt early.  The debt snowball method gives positive motivation to get out of debt quickly.
5. Have discipline. Last but not least, discipline is going to be what’s needed to change the buying habits that have been created over many, many years.

The ultimate challenge for any consumer is to eliminate or lower the amount of interest paid for purchases.  Speaking for myself, we are still paying interest on our home, but we are working toward a quick payoff.  I also will not say that I will never have to borrow money again, but I will keep the cost of borrowing down so that I have more to invest for my family.  I’m all about saving money…..how about you?