What Should I Do If I Get A Pay Cut?

Pay cuts are awful. Most people assume that every year they spend on a job will lead to increased earnings. Who hasn't come to expect a 3-5% raise for each year they spend on the job? It's perfectly natural. Even though we all know that we shouldn't be counting our chickens before they hatch, we oftentimes do.

And that's a problem. We tend to think of stagnating wages as the enemy, but a sharp pay cut can be troublesome as well. Whether it be new ownership, poor performance, or a poor economic climate, there are plenty of factors that can cause someone to endure a pay cut. When this happens, you will probably feel the lowest you have ever felt in your life, and you'll have no idea where to go from here.

You might start shopping for a new job, think about quitting, or do both. You might consider protesting the pay cut, pointing to your superior performance in the work place, and demand that your employer reconsider their decision. However, let's say you are stuck with a pay cut--what should you do?

The first thing you should do is make sure you have enough money to cover your basic expenses--gas, mortgage, utilities, and food. If you no longer have enough money to meet these needs, you need to consider severely downsizing your living costs. If you are still earning enough money to meet these financial obligations, you should cut everything else from your life until your once again a secure financial footing. No matter what happens, you should avoid credit card debt at all costs. It will eat you alive. A year or two of pain on a low-income is much preferable to the alternative of jeopardizing yourself for decades to come.

How To Fix Bad Credit

It sucks to have bad credit. Not only do you have to deal with higher interest rates, less forgiving terms, and the likelihood of rejection for certain credit requests, but you also have to contend with maximum limits and other restrictions placed on your borrowing ability. If you find yourself in a situation with a less than stellar credit rating, and you want to improve it, there are three easy things that you can do.

#1. By far the most important, don't ever miss any payments. Even if you're in the undesirable position of only being able to make minimum payments, you must be sure to make them. Nothing will lower your credit score like delinquency on debt, and if you're in the habit of missing payments, you'll never get ahead. It's absolutely imperative that you at least tender a monthly payment on all debts outstanding that you have.

#2. You should keep the gap between available credit (i.e. your credit limit) and the amount of credit you use as wide as possible. If you're allowed to borrow up to $5000 and you max your credit cards at $5000, you will not be seen as someone with a handle on your finances. Instead, you should get in the habit of spending less than $1 for every $5 in available credit, because your ability to resist using your total credit limit will make you seem like a better risk in the eyes of creditors.

#3. Keep a handle on the number of credit cards outstanding that you have. It's perfectly okay to have a Visa, Mastercard, and American Express card, but when you start to have a credit card from every department score that you frequent, you start to have problems. Odds are, if you a Uncle Jack's Liquor store card, you have too many. 

This is the most straightforward way to start rebuilding your credit. 

What To Do After Bankruptcy

Whenever an individual or a couple declares bankruptcy, they often feel miserable and have no idea where to begin their rehabilitation. But of course, there is light at the end of the tunnel, even if it's not apparent at the time. The smartest thing you can possibly do in your recovery from bankruptcy is to begin to build a cash reserve to the best of your ability. Hopefully, you can scrounge out $300-400 off the bat, and then add $50 per paycheck to the reserve, so your safety cushion can grow over time. Credit card companies and other lenders aren't going to be doing you any favors--your odds of getting favorable credit terms after filing bankruptcy are about as likely as the Cubs winning the World Series this year--I wouldn't bet on it. 

The smartest thing you can do is get in the habit of making your purchases with cash as you build up a slowly growing emergency fund. If you want to rebuild your credit score, the best thing you can do is use prepaid debit cards. There is no way that you should be applying for a credit card at this point in your life--after all, it is most likely that the irresponsible use of a credit card played a role in leading you to bankruptcy. Instead of focusing on getting back on the credit card game, you should try and establish footing by building cash reserves and increasing your liquidity. If you can get in the habit of having a little bit more cash on hand each month than you had the previous month, you're going to position yourself to do well in the long run. 

Eliminate Credit Card Debt put out a wortwhile piece on the topic, and the consensus disagrees from mine, but I still recommend it as a read. Be sure to check it out by clicking here: http://eliminate-credit-card-debt.us/click-here-to-help-and-is-now-out-of-debt-2-753.htm . 

The Paradox of Thrift

One of the more amusing paradoxes that surfaces up in textbook economics is known as the 'paradox of thrift,' which occurs when one person engages in a financial beneficial action, but has negative consequences when the whole country does it. For instance, let's say that, going into the 2008 recession, I had $20,000 in debt. When the economy tanked, I got spooked, and vowed to never get into that type of poor fiscal health again. Like a responsible adult, I kept my vow in 2010 and 2011 as the economy slowly but surely began to improve. Instead of going out and increasing my purchases, I use my excess disposable income to pay down my debt and improve my finances.

This is perfectly logical, smart, and leads to long-term financial security. But what if an entire country engages in this practice? The economy needs consumers to spend money in order to grow, and if consumers are paying down their debt instead of enjoying fancy meals and luxury goods, then it hampers economic growth, employment, wage increases, etc. It seems incredibly counter-intuitive that being responsible with your money doesn't add to the country's growth, but it doesn't matter. Getting in a position where you are no longer suffering from bone-breaking debt is the most important goal, and if that means it takes you longer to contribute to the GDP, then so be it.

Wall Street Daily recently put out a good post on this very subject: http://www.wallstreetdaily.com/2011/06/24/investment-news-in-perspective/ .

The Slippery Slope of Debt

Philip over at Deliver Away Debt recently put out a great post about the slippery slope of debt in cluttering your life with unnecessary credit card payments. After all, every dollar you spend on credit today places a claim on your future earnings. Instead of shipping off a $300 a month credit card payment to Capital One, wouldn't you rather be investing $300 a month in Berkshire Hathaway? All it takes is a couple of boneheaded purchases on a credit card with a 14-25% interest rate to put you in an unfavorable situation. And as the pile of debt mounts, it's easy to develop the mindset of 'this little purchase won't make a difference' as your debt gradually increases. As Charlie Munger, Warren Buffett's right hand man once said, 'No one gets ahead paying 18% interest.' And I couldn't agree with Mr. Munger any more. If you find yourself accumulating large debts, the most important thing to do is stop the bleeding--cut up the cards, get your spending under budget, and then throw as much money at paying off your debts as possible without putting yourself in a financially vulnerable position. Be sure to check out Philip's tale of his journey in overcoming this type of experience by visiting his link here: http://deliverawaydebt.com/debt-elimination/how-i-delivered-away-my-debt/

How To Negotiate Lower Credit Card Bills

Okay, you've accumulated a $20,000 debt. You know you were an irresponsible borrower, but you are also aware that you don't own a time machine. As much as you wish you could, you can't buy a time machine and undo the mistakes of your past. And so you're stuck paying off a debt that is much larger than what you could afford. While you're likely facing a bumpy ride ahead, there are some things you can do to make your future smoother. The first thing you should do is call your credit card company and try to negotiate down the amount of debt that you owe. When credit card companies eye large debts and a consumer making minimum payments, they begin to fear that the money will never get paid back. If you can offer a large sum, like say, a one-time $10,000 payment to erase the debt, you'd most likely be surprised by the number of creditors willing to accept such an offer. Likewise, if you promise to double your payments, you might be able to get the debt lowered to $14,000-$15,000. While it may not be enough to get you out of the doghouse, it is still a worthwhile step, and hey--making $4,000 to $5,000 over the course of a phone call is not the worst use of your time by any means. If only we could make financial deals like that all the time! The most important thing to do is to admit your mistakes, acknowledge that you owe the creditor money, and ask them for leniency. The best case scenario is a reduction in debt, the worst case scenario is that you owe what you did before the phone call. Not a bad bargain. If you want to read a great article on the subject, be sure to read Andrew Wang's article at Rich Credit Debt Loan, link here: http://www.richcreditdebtloan.com/how-to-negotiate-with-credit-card-companies-to-reduce-your-debt/ .

Bankrupt Billionaires: This Could Happen To You

The laws of financial gravity affect everyone, whether you earn minimum wage or millions of dollars. If you spend more money than you make, and load yourself up on debt, then you are asking for trouble, regardless of the amount of money that you are earning. The website Smart on Money runs a great anecdotal story about Patricia Kluge, the divorced wife of media mogul John Kluge. Apparently, Mrs. Kluge took on gobs of debt to establish a vineyard right before 2008, and when the housing crisis hit, she lost everything, having to file for bankruptcy as her debt payments greatly exceeded the money that she was bringing in. This story is incredibly sad because it was so preventable, but Mrs. Kluge's story is just a larger reflection of the tragedy that faces so many Americans today. When the economy is tough, taking out loans in the hopes of paying it off when a better tomorrow comes is all too easy of a trap to fall into. To read a great profile of Mrs. Kluge's tragic story, be sure to visit the Smart on Money link here: http://www.smartonmoney.com/from-billionaire-to-broke-one-wealthy-heiress-and-her-slide-into-bankruptcy/ .

Debt Default Release Order

There is a great post at Money Beagle about debt relief orders and the type of person that would benefit from using such a service. Debt relief orders are alternatives to bankruptcy that do not cause quite the destruction to your credit that an outright bankruptcy would. Also, debt relief orders are most useful when you have an overwhelming, yet not grotesquely large, amount of debt to pay off. These products are designed for people who are in such awful financial shape that no realistic plan could ever enable them to pay off their debt fully--let's say you have $100,000 in credit card debt and you are middle-aged and earning $35,000 per year. Hopefully, you'll never find yourself in the type of situation where you have to seriously consider a debt relief order. But, as we all well know, life happens, and sometimes we have to make decisions where we have to choose the lesser of two evils. My area of expertise is definitely not debt relief orders, so if you want to read a more authoritarian source on the subject, be sure to check out this guest post at Money Beagle: http://www.moneybeagle.com/2011/06/what-exactly-is-debt-relief-order.html

Thoughts on How To Avoid Debt

You can't get ahead paying 18% interest to creditors. That's just a fact. Even if we pretend that it's 1960 and you invest some money with Warren Buffett's flagship Berkshire Hathaway, you're still not going to get ahead if you have to contend with minimum payments on debts compounding at 18%. Berkshire Hathaway, arguably the best investment you could have made in the past forty to fifty years, has only compounded at about 20%. So if you have high credit card debt, the odds that you'll get ahead are very slim. Without a doubt, the simplest solution is to avoid the debt in the first place. If you don't eat the ice cream, you won't have to lose weight. If you do find yourself in credit card debt, the first thing you have to do is stop increasing the debt, and from there, if you make double the minimum payments, you'll eventually dig yourself out of the hole. If you want to read a good article on avoiding debt in the first place, check out this gem from 'Not Made of Money,' link here: http://notmadeofmoney.com/blog/2011/07/five-ways-to-avoid-debt.html