This is for anyone who has under 250k dollars in stocks and bonds and also has debt.
If you listen to me, I GUARANTEE YOU that you will earn a greater return than 90pct of the richest, supposedly smartest money managers ON THE PLANET. All those Wall Street fat cats, they can’t earn as much on their money for you as I can help you earn.
Sound too good to be true ? Read this and decide for yourself.
First thing to understand is that Wall Street wants you to believe that if you give them money, every month, forever, to buy stocks, that you will most likely will earn 7 or 8pct per year. When compounded, your money will double every 9 or 10 years. Sounds great, right ? One problem with it. You know what you would call someone on Wall Street who made you 7 or 8 pct a year, every year without ever losing money in a year ? Non Existent. Those managers don’t exist.
You can however do what they can’t and even better if you do the following:
1. Write down a list of every penny you owe to anyone and the interest rate that you pay on that amount. Your mortgage, your car payment, your student loan, the Rent A Center TV and Dell Computer Loan, your loan shark, your uncle or grandparents and most of all your credit cards
2. I’m willing to bet that you have absolutely no idea what your true, effective interest rate is on any of the above. Between penalties for using the wrong type of stamp, being 37 seconds late, and moving interest rates that are triggered by every crazy thing, its hard for anyone to know. However, a glance at Citibank Platinum Select Mastercard details as an example, would tell you that if you are late on your payment, your rate is:
“All default APRs equal the greater of (1) the Prime Rate plus up to 23.99% or (2) up to 28.99%. PLUS LATE FEES of 10pct OR MORE ON BALANCES UNDER $250 !!!! (There may be something in the fine print that asks you to bend over too, but my eyes couldnt focus on print that was that small….) ”
All of Wall Street would give you the choice of either testicle to be making returns that high. A quick glance at IndexCreditCards.com tell us that not only are the average rates for any card, higher than the biggest promises from the best Wall Streeters, but they have been trending higher.
So in a nutshell, while the interest rate on your credit cards is going up, the return on your investments has been going down. You know what they call someone who keeps on giving money to their stockbroker, mutual fund or 401k, but doesn’t pay off their credit card balance in full every month, BROKE AND STUPID !
The first thing you do with your money is if you have money market funds, you take the money out and pay down your credit card debt. If that doesn’t pay it off. This is what you do next:
You make a list of every stock, bond, fund, whatever you own, and mark what your cost is, the current market price, the current dividend yield on your cost basis, if any and whether it is in a 401k, fund or brokerage account. For any stock or bond at a brokerage account that is yielding less than what you are paying in interest rates on your credit cards, and for which the current price is less than what you paid for it. YOU SELL IT. When you call your broker to get the prices, you do not let them give you a bunch of BS about why you shouldn’t. YOU SELL IT.
You dont hold it to see if you can make money with it. If you love it, you immediately fall out of love with it. ITS A FRICKING STOCK, not a family member, and you sell it. You take that money and you pay down your credit card debt.
Then you start with the stocks/bonds you have made money on. Beginning with the stock/bonds you have made the least amount of money on, if it isn’t yielding you more than the interest rate plus late fees that you pay, you start selling, and selling and selling. Sell as much as you need to until you can pay off your credit card balance.
Once you have sold enough to pay off your credit card balance, you RIP UP YOUR CREDIT CARDS and replace it with a debit card. The only way Credit Cards cost you less than 9pct, or possibly as much as 40pct or more is if you pay it off monthly. Debit cards make that happen automatically. You cant afford to pay 9pct, 40pct or more. Both are far more than you can expect to make in the stock market, or any market. If you have gotten here to this point, and you just tore up your credit cards, YOU HAVE JUST EARNED A GREATER RETURN ON YOUR MONEY IN THAT PERIOD OF TIME THAN ANYONE ON WALL STREET COULD EVER EARN YEAR IN AND YEAR OUT.
If you still arent to the point of paying off your credit card, its time to borrow against your 401k. Switch all your money from whatever funds to insured, guaranteed funds like money markets. Then find out the rate of interest you pay, how long you have to pay it off (usually 5 years), and then borrow the money to pay off your credit cards. I have never seen a 401k that charges more than credit cards in interest. Credit cards accrue interest and penalites a lot faster than you can earn and accrue interest and returns in your 401k. So borrow the money, pay off the credit card, and start paying back your 401k with what your credit card payments were. You will have your 401k loan paid off a lot faster than you could ever pay off your credit cards.
Once your credit card is paid off, then you go to your debt list and pick out the next highest interest rate and start the process all over again until all your debt except your mortgage is paid off.
If after paying off all your non mortgage debt, you still have money left, then you need to sit down with someone who knows your tax situation. Since mortgage loans are usually deductible, ask them to help you figure out what your effective interest rate is on your mortgage and what your outsanding balance is. If you are fortunate and your net effective rate is less than 7 or even 8pct, and you can make the monthly payments, then you probably don’t need to do anything with your mortgage.
If you have a mortgage that is variable in any way , shape or form, you are probably paying more after tax in effective interest rate than you can earn on your money anywhere that is legal. With this information in hand, you and your accountant or whoever you turn to for help (and please make it someone who really knows what their doing, not someone who got a refund using some tax software) can set up a meeting with your banker, or whoever happens to own your mortgage if you can find that person, and start discussions on how to buy down, pay down , buy out, or pay off your mortgage. They may say no, but if you can get them to renegotiate, and these days thats a very real possibility, you should be able to get a greater return from this process than you can get from the money being in stocks, bonds, or any thing else for that matter. This is particularly applicable if you have a subprime , ARM, or any type of variable rate mortgage.
If you have read this far you have hopefully picked up on the basic principle of debt vs investments. The people who lend you money can guarantee you that they are going to charge you a ridiculous percentage, and throw on top of it, any and every fee they can, thereby increasing the effective interest rate you pay. They can do it every year forever.
On the other side, no one in the universe can guarantee you that they can earn you more than what Consumer lenders like credit card companies charge you in interest. No one. If they could, the lenders wouldnt lend the money to you, they would give the money to those people to invest, right ?
If it takes selling every stock, bond and whatever you have to pay off your debts, do it. If it means borrowing against your 401k and paying back yourself instead of the credit card or finance company, do it. It is a far better return than you will ever make putting that money elsewhere.
If none of this applied to you. You kept your debt at levels that you could afford and at rates that were fixed and low, congrats. Hopefully this just reinforced what you already knew.
If on the other hand, this set you on the right path, and you still have money in stocks and bonds, you are fortunate. You probably need to make sure that what you own is very, very safe and not at risk. My recommendation is 6 month CDs, you can probably go to your bank and convince them to pay you 4 or more percent. If you havent heard, there is a bank liquidity crisis. Banks want your money. They have been ripping you off with credit cards all these years, go take some of their money…
One last point. It would not be out of the realm of possibilities to see a collapse of credit card debt like we saw in mortgage debt. Default rates are going to go up. That means credit card company income is going to go down. You know what banks do when their income goes down ? They try to figure out more ways to charge you more money to make it up. Which of course pushs up default rates. Its a viscious circle and you pay the price.
Get out now while you can.
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Herschel — who’s John Ramsey? I think you mean Dave Ramsey. John was the father the little girl killed several years ago in Colorado. Dave is the financial expert from Tennessee.
Comment by Prince of Thrift -
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Be interested to see how he explains this?
http://articles.moneycentral.msn.com/Banking/YourCreditRating/WhenPayingBillsCanHurtYourCredit.aspx
Comment by Rapier -
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Thank you for your timely advise. We all need to take responsibility for managing our personal finances. You can’t simply invest and forget! That’s financial suicide. Drastically reducing credit card debt, should be the major priority. As you do so, you will start to feel that you are getting more control of your finances. There is light at the end of the tunnel.
Comment by Randy -
I watched the Dave Ramsey show last night and a lady called in who has close to $700,000 in debt. My god! I thought I was bad a few years ago with student loans of around $50,000. Which are paid off thanks to some good people who have helped me get on a path towards success and investing in safe, conservative plans. Such as money market savings, having an emergency fund, having a budget. Slowly but surely my wealth in all areas of my life are building. Lastly we can only hope that the stimulus money gets to people who know how to invest and save not some dope who wants to smoke another one. It will create more opportunties for someone to help these people get on a plan to success. Save! It is so much fun to watch the money grow and still be able to give at the same time! Enough from me.
Comment by Ryan -
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The money that is in your 401K was not taxed BEFORE it went in the 401K and when you borrow it on a loan it is still not taxed. When you pay it back you must used taxed dollars but that is on the new income that you made not the original that was put into the 401K tax free… you are not taxed twice on loans from a 401K… you are only taxed when you remove the money at retirement or if you “withdraw’ the money.
Comment by linda2277 -
I think you mean well, but there were at least 2 posts earlier than I think people really need to consider. If you borrow from your 401K and then lose your job or switch jobs, you have to pay it back in full within 90 days. Otherwise, you’ll owe a 10% fee plus you’ll be taxed on that loan as income. For example, that can change that $30k loan to $3k in fees and up to another $7k in income ttaxes depending on your tax bracket. That’s another $10k that someone has to come up with…within the year. And if you’re borrowing from your 401K to pay off other loans…where is that $10k going to come from?
And the other point someone made that I thought was good was that money borrowed from your 401k is taxed twice. Once on the money you are using to pay it off, and once again when you eventually take it out (if you were able to pay it off).
Having said all that, I’m still one of those people who does have a 401K loan. I pulled $30k out 2 years ago when I needed to pay off some credit card debt at 25% interest. So…it was the right thing to do…but my job is pretty secure. So, it can work and it can work well. Just be careful and evaluate the rate of the loans you’re paying off vs. the risk of loosing your job and being forced to come up with even more cash in fees and taxes.
Comment by Carey -
You can not write enough about how people need to pay down their debt. That is what got us into this mess, and the only way out is to eliminate it.
Comment by Dave -
Mark,
A Taligent MVP programming model for .net has never been done before.
Doing so will displace the market position of Microsoft and its tools.
Asking for help to finish implementation. Code base will target both
silverlight and wpf.
Thank you
Comment by Rob Cuban -
Mr. Cuban –
This is the smartest, most intelligent thing I have ever known any sports franchise owner to say. Period.
It almost makes up for your vote for Obama.
Comment by Todd O -
Mark, your advice is going to hurt some people, so please set the record straight…
Canceling credit cards will almost certainly reduce your credit score. And this will make getting ccredit in the future more expensive. The reason is that the AGE of your credit accounts is a major factor in determining your credit score. As long as you pay off your card balances, you are way better off to keep the old cards and maybe use them only perodically.
Also, debit cards have serious issues too:
1. Fraud results in no fund access. When your debit card is used fraudulently, it’s your money that has been pulled, not your card issuer’s.
2. Fraud protections. Fraud protections on debit cards are MUCH less than with credit cards. A different law governs debit cards (EFTA or Regulation E).
3. Card blocking. Some retailers, including gas stations, hotels and rental car companies, will block a card in advance of the transaction clearing.
3. Often higher fees. Banks earn substantial fees on debit card transactions. Some consumer advocates are up in arms about this. Apparently, when you use your debit card with a PIN, some banks charge you a special point of sale fee.
Comment by Tom F -
So when i have no debt where do I put my money, Mark?
Comment by Tim -
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I just cannot believe what’s written in today’s post.
Nearly all of this is stuff I firmly believe – and have for years.
Comment by Mark Wolfinger -
Thing that is not in this post concerning the 401k is that you are in
a pinch if you quit your job or get laid off. I believe the law states
that the loan needs to be paid back in 60 days or the 10% early
withdrawl penalty is incurred among other fees. Last resort really..
Comment by Bizzy B -
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Oops, never mind, just noticed that the first sentence says it’s a post for those with under 250K and with debt….
Would be nice to have a post for those without debt and with over 250K…
Comment by kitty -
And what is the advice for those who don’t have any debt and actually have a little bit of money?
Comment by kitty -
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Suze Orman said NEVER borrow from your 401k because of double-taxation. The money you originally put in there was tax-free. When you pay back the 401k loan you are paying it with income that has already been taxed, then it will be taxed again when you start taking 401k distributions at retirement.
Comment by Polly -
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This is all a good point but it generalizes the subject. While i agree that you should pay off your debt as soon as possible because it puts you on sturdier financial grounds and eliminates the interest rates which you shouldn’t have to deal with if you play your cards right it is not always a good idea to pull out of your own investments. Everyone is different, and the best plan is to stay out of debt in the first place.
Especially credit card debt! There is no reason you should be using your credit car for things that you couldn’t pay back within the month or even better within the week. I use an American Express and I am not charged interest on things i pay within the week, making more sense for me to use it than a debit card so i can gain interest on my investments over the course of that week. If you can not handle making sure your payments get in on time a debit card is still a very useful solution.
The market is clearly in a state of disarray currently and putting people into a frenzy causing them to make hasty solutions that are not in their best interests. The last thing you want to do right now is sell out without looking at what your holding onto. Its a buyers market, to sell out now would be like trading in your car for a bike at the first sight of rising gas prices. If you are currently financially unstable you should sell out of any investments that are too risky for you or you can still get a good deal on. However, if anything you want to put more money into the stock market, collapse is a catalyst for growth. Now a key distinction to make here is that you don’t want to be dependent on the funds you are investing because the rewards are greater but the risks are also inherently higher. The author is right you want to eliminate credit card debt ASAP. But the money you would save by paying off more of your mortgage now will not be as much as you could make in today’s market. Now more than ever a cunning investor can come out on top. The economic crisis is not going to destroy the market, it should do the opposite actually. But you need the funds to stay in the market until it gets better and you need to remember its glorified gambling.
Comment by Alec -
If you bought a house this year (sometime between April and Jul 1)and make a certain income, you are eligible for that $7,500 dollar tax credit (which is really a no-interest loan that you have to pay back). Obviously this would go straight to my credit card if I carried a balance. I don’t, but it probably makes sense to put it towards my highest rate investment (my house).
Comment by Matt -
Note Guy,
I think Mark’s real point in this post is that you shouldn’t be carying the credit card debt in the first place. And if you are carying debt that has no real value you need to get rid of it as it is costing you more than you realize.
And if you had an event where you lost your job and you needed your brokerage account money to get you through until you find another job, then you aren’t properly prepared.
John Ramsey and other financial advisors would tell you to have six months to a year’s worth of operating cash saved for a catastrophe like loosing your job.
Comment by Herschel -
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mark has a point.
but its also very important to point out. Its not the best idea to pull out all of your brokerage funds to pay off credit card debit. Reason?
Cash….
Lets say you have 10k in credit card debt and 9k in a brokerage account (fictional numbers here.. just making a point).
if a person pulls out all his brokerage to pay his credit card debt and then loses his job (not unrealistic in a bad market)… how will he pay his rent? you cant pay rent with a visa… and if you pull cash off of a visa.. well the fees will kill you to death.
so i understand the ‘simple’ math of emptying your brokerage to pay off your credit card debt.
but in reality. You always want to leave yourself in a CASH positive position.
in case something happens. Visa cant save you on everything.
Comment by note guy -
Thank you. Anyone else would charge for advice this good.
Comment by Nick Polino -
I have to say it’s refreshing to see such practical advice put
into straightforward black and white terms. Back during the internet
boom I was an entrepreneur with 84 million in venture capital
investment, stock options out the wazoo, paid myself a “measly” 250k
base salary, and an IPO that went out the door successful and fell to
earth a few months later. On paper I went from a multi-millionaire
to broke faster than you can say “burst bubble”.
3 years prior to that I was making 45k a year struggling to just
try and get the company off the ground. Ramen noodles were my friend.
So it’s not like I didn’t have any experience struggling with money.
What many don’t realize is that many of us who “partially” made it
during the boom were saddled owing an absolute ton of money to the IRS
since we technically had capital gains in the millions when we
converted some of our options. In my case I had 47 Million one month,
and a little over 4 months later had essentially zilch. What that
meant is I now owed the IRS a million dollars….but had no money.
Even after all the negotiations and wrangling with the IRS there
was still hundreds of thousands of dollars on the table that I’d be
paying off for at least decades.
At the same time, I’m out of a job, and my industry is in the middle
of a crisis of its own, I have a family, and we still have to live.
Fast forward to one year later. I now had been living essentially
off of credit cards, and other than the dollars coming in from
random speaking engagements and short-term business consulting gigs
there was no real income to speak of. Total credit card debt? 87k
(credit limits are virtually non-existent when you’re making enough
money)
Mark’s advice is absolutely spot-on, except there are a lot of you out
there going “that’s great, but I have no stocks, no 401k to speak of,
and no other investment source to pull from”. You need to immediately
get yourself into a debt management program. Period. However, the
challenge is that you’ll see and hear of these programs all around you.
And the likelihood is that the ones that are visible to you are not
really there to help you at all. I won’t make any recommendations
here on this site, just do your research. The one I chose may seem
a little hard-core, but in my opinion it’s the most responsible.
Basically they don’t make you a loan at all. There’s no consolidation
going on. What they do is negotiate with your credit cards and other
revolving credit sources to get your interest rate as low as possible,
in some cases essentially eliminate interest altogether.
Trust me, these are rates you could never get yourself. They then
take over paying each of your cards every month, and you pay a lump
sum to them every month. Here’s the catch. If you ever don’t pay
them, they walk away and your credit cards go back to where they were.
If you take out any new debt/loans (excepting replacement items like
autos, etc.) they walk away and your cards go back to where they were.
So you’re boxed in with plenty of incentive not to go astray.
My message to you is this, if you have money sitting around in
other financial vehicles then absolutely follow Mark’s advice. If not
then do the responsible thing, own up to your debt and pay it back.
But do it intelligently and you’ll get there much, much faster and pay
a lot less in the process.
Cheers,
MSR
Comment by MSR -
This sort of line of thought is why my savings is minimul. I have too many bills, but rather than run up a huge amount of debt and keep a savings, I pay off my bills. So at least I’m not going in the hole.
What I really need is someone to figure out how to get daycare costs down… that’s what’s killing me more than anything.
Comment by Kris -
Mark, did you know that your sound financial reasoning could stunt the unreasonable growth our entire economy? In all seriousness, thanks for this post. I’ve been preaching actually looking at the numbers for some time and the approach has helped my family and I make some more informed moves. We’re no where near the $250k mark, but we’re constantly comparing how much interest we earn and how much interest we pay and paying our debts
This is the first article I’ve read on your blog, but now I’m going to subscribe to it.
http://www.intermz.com
Comment by Ted Pin -
Mark – what are your thoughts on paying a mortgage off vs. investing?
Is the guaranteed return and peace of mind worth the opportunity cost of not being in the stock market?
Comment by Gordon Gecko -
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Great post.
One variable to keep in mind is a person can also change their income and simply make more money to pay off their debts. Sometimes one is buying time with credit cards, making those paykents, nursing his personal balance sheet along until that big job comes through. Then it all gets easy.
This is a good model if one doesn’t have any realistic expectations of future higher incomes, nor a need to learn the stock market for future investing. There is no better way to learn the stock market than to be actually doing some trading. I’ve lost money in doing so (not much) but learned a lot in the process, and won’t make the same mistakes when I am investing much larger amounts later on.
Comment by Nash -
Great post. I’m investing a lot of money in the Mavericks this year. I hope they don;t tank like the market has recently.
But seriously, by big question is this: I have $22,000 in Stafford loans at 8%. Should I put back some money to buy a house or put it all toward my student loans? I’m in a position to either pay down the loan really quickly or save a huge chunk for a down payment on a house since my salary has increased and I have no other debt. So what should I do?
Comment by Jeff in Dallas -
I absolutely agree! It is my personal philosophy not to indebt my future self with monetary contracts. It is a little annoying to track down services that don’t require long-term contracts, but absolutely worth it, IMHO.
Comment by Contract Attorney Kimberly Alderman -
Mark, Many have said similar things and you are absolutely right. My wife and I grew up in time and family background that instilled – don’t buy what you can’t already pay for and save save save. So by luck of a good up bringing, sticking it out with cheap employers (lucky again to both work) and trying to live within our means we’re debt free, hoping for two pensions when we retire and have a small nest egg (assuming Wall Street or the government don’t steal it!).
So yes your plan works and well too.
Here’s an interesting tip that has worked for over 20 years. My wife does the saving and I pay the bills. Sounds simple but the deal is I’m a hero if I can don’t have to ask her for money (or as little as possible) to pay the bills and she’s a hero every time she announces she has bought a new GIC.
We pay off our credit cards in full every month – that’s my job. We have a line of credit for cash flow which never runs past one or two paychecks. It seems to work for us as neither wants to mess-up and all those big toys (car leasing, winter trips,…) are second to monthly paying of bills and saving.
Actually now with all our debts gone we actually make money on our credit cards! The down side is the constant automatic raising of credit limits –I it’s a pain but we force them to drop limits so we are not exposed in case of a credit card theft.
So take Mark’s advice and stick it out. In the end you’ll be glad you did!
Comment by Bob -
Rats, I was hoping for some advice for me. I don’t have any debt. None. Paid off my house in January of this year (sold off most of my investments). Pay off my credit cards every month (I am late once in a while — but that balances with my “rewards”.) My regret: not living more off of debt back when I was poor, pinching every penny when I made 1/3rd of what I do now.
Comment by Robert -
Student loans are more toxic than credit card debt or any kind of debt. Congress allows student loan companies like Sallie Mae to bully borrowers and double the borrowed balance by adding fees and penalties to defaulted loans making it impossible to dig out. See http://www.studentloanjustice.org/
Comment by Qlfin -
Appreciate your taking the time to write that out.
It all makes sense and I can’t argue against any of your points. I’m just starting out and intend to keep my debt down to nothing I can’t pay off in 30 days other than my mortgage, when I get one.
Jasper
Comment by Jasper -
Thank you Mark for more great advice. I have forwarded this to all 3 of our married children. I really enjoyed reading other financial advice and followed the links to learn your personal success story. Inspirational.
Best Regards, Bob
Comment by Bob Scuba -
You can do what I did! Lose your credit card at
Sports and now pay cash for everything. I find I spend about 15%
less per month when I pay cash.
About 4 years ago you snapped your AMEX Black card
in half and gave it to me. Is this when you started this anti
credit card push? I love it! Keep up the good work!
Comment by Matt O'Neal -
My son posted this link on his Blog (http://amanwithaphd.wordpress.com/) saying I would like it.
I do!! Wouldn’t it be nice if schools went back to teaching about interest and compound interest
in elementary schools as they use to? Thanks for making the point we have been trying to make for
years. I will send to all sorts of nieces, nephews, sons, etc.
Comment by MJ -
the only sound money advice I’ve heard since the year started.
this is the first step:
Comment by max -
Spoken like a true Billionaire !!!!
“ITS A FRICKING STOCK, not a family member, and you sell it. LOL love it
I don’t have credit card, Have not had it for the past 13 yrs and don’t miss it
However, I do have alot in investments Im not longer broke and stupid
Comment by Moneymonk -
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Well, duh! I can’t argue with most of the advice, but I find it
incredible that there are people with savings who carry credit
card debt. What are they thinking?
I disagree with the debit card recommendation, though. The credit
card companies offer a free loan. Why not use it?
Comment by David Robinow -
Hi Mark
Great Blog. This is the first time I have ever made a comment on a blog. But in reading yours, I was so personally touched that someone like you makes time to enlighten for the average person in matters of money, investing and dept. You are truly an inspiration and a role model. Question: what direction to you give to people who have lost a ton in the market but are still solvent with a very good income, day, in the top 10%? I would think that people with still a sizable portfolio (I am not talking billions of course) and a good cash flow, should consider reentering equites at this point. What is your advise for us? Thanks Michael
Comment by Michaelalmost40 -
I think that credit cards are great if you manage them properly- they can be used much more effectively than a debit card. If you wait until the few days to pay off monthly bills in full, this will mximize your cashflow. In addition, you will also benefit from air miles and other rewards programs.
Comment by sred -
There is an interesting paradox to the origins of present world financial problems.
Here in the UK we are told it began in the USA by the collapse of the sub-prime market, however you appear to have no shortage of houses – so was it oversupply of mortgages to people of poor credit rating? Here in the UK we have a huge shortage of housing and house prices have been forced up because of completion for property, a situation I must add that is compounded by draconian planning laws that all but prevent self-builders from constructing their home homes. So what is the reality, lending to people who can’t afford to pay, or the fact that supply and demand has created a bubble of ‘false equity’ among those who own property and, thinking they were rich have dipped deep into the non-existent equity through credit cards, I’m confused is anyone else?
Comment by sarsen56 -
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I didn’t relize that credit card can cost us a lot of money.
If i don’t have any debts anymore, what should i do next?
Comment by Hanstaruna Invest Tools -
What about investing for people who don’t have debt?
My wife and I have been married for 2 years, have no kids, and are socking away about 20k a year outisde of our IRA contributions.
We’ve signed up for an Online Savings Account that gets 3.5%…but we’re not sure what else to do.
Comment by Phil -
Hey Mark, I think you have made a lot of good points in your blog. I have to personally say that I have probably learned more from your blog about how to manage my money than I ever did in college. I think what you have to say is basically how I’ve always lived my life and I always felt that I never wanted to spend money that I don’t have, and trusting that somehow I’ll always have more money than I spend for the rest of my life. Now if I could only convince my gf to approach her debt in the same way that you have explained I would be less apprehensive of the future even if I have 0 debt.
On a side note good job on that trade for shawne williams, i think hes worth the gamble.
Comment by peter -
Hi,
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Comment by Sandra Cooper -
word. tell em, mark.
Comment by kristina -
Good advise and I do believe people can still get out before it’s too late. USA is too resilient and we will bounce back.
Comment by Adam -
Excellent, up until the recommendation to put money into CDs…even
at 4% the real rate of return is negative after inflation and
taxes…and that is using the low ball published CPI figures.
Dare I say, buy something that is not fiat based and that is not
someone else’s liability. Dry beans, canned goods, gold, silver, are
a few of the things that have always and will always have some value
if you rotate your stock and protect them.
Comment by Mike -
The unsinkable ship (US economy) is sinking. Someone should invest in this Titanic survivor. Want good publicity?
http://news.yahoo.com/s/ap/20081016/ap_on_re_eu/eu_britain_titanic_survivor
Comment by Jim Parham -
Pingback: Guaranteed « A Man With A Ph.D.
Where put money rigth now? .- someone is billionaire and boring of stock market and risky business
? do you want to do something that nobody has done before and make a great business that will bring a lot of bennefit fame and prestige world wide?, an investment around 250 million $, an average income of 50 to 100 million $ per year, a think that will remain for centuries that will bring fun, doing something that goes beyond that normal people can think, deep impact world wide,
and a great business that will remain for centuries, isn’t atractive and exciting?, why not?, it souns too good to be true?, world is made of great ideas,great ideas have made great fortunes and great fortunes have made great ideas to became real. if someone has the profile we can talk about it. sitill a lot of good business to do in this world out of the stock market.
bricoeconomia@gmail.com
Comment by Leo -
Pingback: Top Posts « WordPress.com
Mr. Cuban, You said, “Default rates are going to go up. That means credit card company
income is going to go down.”
Visa and Mastercard are only middlemen. They get fees on transactions,
and hold no consumer debt. Of course, if people stop using credit cards,
their business will be affected, but Visa, for example, holds 6 billion in cash.
If anything, the credit card companies’ revenue will be reduced as they
fight for the high volume spenders.
Comment by Matt Rafat -
Good article, but if you have no debt all you can recommend is 6 month CD’s? Now is the time to buy! Everything is so low. What’s in your portfolio? I’m sure you are not socking away money into CD’s but getting good stocks at a great price.
Comment by Christina -
The actual inflation rate is north of 13% per year according to Shadowstats.com. That being the case, so anything earning less than the inflation rate is a BIG MONEY LOSER. 4% on a 6 month CD is a pittance compared with 14% over the past year with gold. Plus, if you buy gold you’re taking capital OUT of the hands of the money-grubbing parasites that have been raping you with debt to begin with.
Comment by A. Magnus -
I did this very thing last month. Took out retirement money to get
out from under the cc thumbtack. Don’t have much left, but the
freedom from the monthly angst of wondering how I was going to pay
“this and that bill” are gone. The way things are going, no one is
going to retire soon anyway.
Comment by john -
Pingback: Christopher Jagers » Cuban’s Money Advice
Pingback: Christopher Jagers » Planet Money
One further add-on to a great article, Mark–
Money you use to pay down debt is invested at the interest rate TAX-FREE. That’s because you’re not taxed on money you SAVE. When you decrease expenses, that’s tax-free income. So as hard as it is to invest money at the going percentage rates of say, credit cards, it’s that much harder to find one that pays you that tax-free!! So just DO IT!!!
Comment by david smith -
Mark, great post… what I like the most about it is that it is plain old common sense at it’s best.
Comment by Ben -
I agree with the smartest advice is to pay off the balance. But why the need to cut up the card? CC’s are a great tool to build credit, defer payments, gain points, avoid per tranaction fees, and neatly pay everything off at the end of the month.
I think RESPONSIBILITY should be preached. If someone has to cut up the card to prevent them from carrying a balance, they will find another way to get themselves in the hole.
Comment by Nav -
It’s sad that such an easy concept is rarely understood in life.
Just plain sad…
Comment by Iconoclast -
Why pay down my debt when the credit card industry will be the next
domino to fall and the government will step in to bail them out?
I want my free ride too.
Moral hazard, what’s that?
Comment by John -
American lifestyles will be undergoing radical changes over the next 12-36 months and this can only be a good thing in the longer-term. Making the changes won’t be easy but will lead to a much healthier economic base. The recommendations from Mr. Cuban are extremely sound advice. Ignore them at your peril.
Comment by GlennP -
Pingback: Read. Learn. Do. « Athensboy’s Weblog
Great advice, Mark. I used to work in the self improvement business. A lot of the personal finance gurus out there skim over the basics of eliminating high interest debt and then very quickly get into topics like asset allocation, selecting mutual funds, or selecting stocks. My personal theory is that they do this because there’s simply not enough material if they focused primarily on credit cards or ARMs. Can you write a book about paying off high interest debt? No. Not enough material. Can you get 20 minutes on Oprah or two hours on PBS talking about paying off high interest ccards? Nope. Not enough material. At best, you can get a solid blog post out of it. And repetition of the message never hurts. But your schtick would get old real quick if that’s all you had to say — even though it’s all most people need to hear right now.
Comment by Sam -
This is another suggestion for those of you who insist that you cannot perform basic transactions without a credit card, get a pre-paid credit card. This solves two functions: (1) You get the convenience of a credit card without the interest rate; (2) You get similar “cash” accounting and flexibility of a debit card without the risk to your checking/saving account.
Pending Mark Cuban’s approval, the best option would be to purchase the “Dallas Mavericks Pre-Paid Credit Card” that will soon be available at all Dallas Mavericks games. Purchasing this card will allow you to fully benefit from Mark Cuban’s financial prowess by eliminating your “addiction” to credit cards. The Mavs card is also a good option for parents to give their kids to reinforce credit responsibility and proper fiscal management. With Christmas approaching, I can think of no better gift for college students in America than the Dallas Mavericks, Pre-Paid credit card.
As indicated, Mark Cuban must facilitate, approve and negotiate the development and design of this proposed pre-paid credit card. To my knowledge the card does not currently exist but I expect Mark to seriously consider such a venture because of his desire to help people become better manager of their money. (aka “Get Rich”) In the interim, please go to any local vendor and buy your own pre-paid credit card to save yourself the 30% in interest that you are paying credit card companies.
Comment by TomH -
nice article, hope more to come. regards, emil
Comment by emil -
Pingback: 25 Ideas for Employees and Employers in the Financial Crisis | YourHRGuy.com
I will probably post a link to your blog at http://www.investmenttips.com providing I can get approval. Thank you.
Comment by obamasprayer -
Surprised to read a post getting down the fundamental basics again. (although you have done some of that lately) It is so basic. One can not grow financially if money is coming in from investment interest but going out as debt interest. You have be positive each month.
One note though: If you are good at managing your money, credit cards are not the evil of the world. I use several cash back credit cards to earn $600/700+ cash back per year for stuff I would buy normally.
Comment by Prosperity Junky -
Pingback: links for 2008-10-15 | The 'K' is not silent
Mark,
Looking for advice here. What would you do if you were me.
I’m 27 and single. Thinking I should take a risk.
About a year ago, a stupid bank (who suprisingly hasn’t gone under yet) gave me a $100,000 home equity line of credit with a 4.5% interest rate for 10 years where I can lock the rate in at any time. I don’t really have $100K in home equity, but their “computer model” said I did. I got a lower rate for taking a bigger line, so I took it.
I’ve paid off the balance on what I orginally needed the line for, and have no other debt except the 1st mortgage. Shouldn’t I try to arbitrage the credit in the stock market by buying dividend paying companies (or preferred shares), or pretty much anything since the market has sold off so much, as opposed to just sitting on this low cost of capital money that isn’t going to work for me? I know quite a bit about investing and trading as that is my background.
What do you think you would do if you were me? Thanks,
Parker
Comment by Parker -
The most important part of this is to make sure people understand what got them into debt in the first place. They have to be able to spend less than they make…every month. Simple as that. Figure that out first (and cut unnecessary expenses), and then see how long it will take you to pay your debt down.
If you are only a year or two away from being debt-free on your own, I wouldn’t sell stocks (or especially touch the 401K) to pay off the debt. I’m assuming the CC rates aren’t ridulously high or in default though. If they are in the 20’s or in default, then you’re…pay them off by any means possible ASAP.
Comment by Parker -
Mark, you listening to Dave Ramsey again? Sound advice.
Comment by Christian Ross -
The ultimate high is to MAKE MONEY OFF YOUR CREDIT CARDS. I was
a typical American for years and bought whatever I wanted on credit.
Now I am debt free, except for my mortgage (which is fixed, below
5.25 and I put 18% of my pay into a 401K (I know its above the 15%
limit, but you can make up for years you were not at the limit.
Having the cash to use a debit card I rejected that for cards that
give me back CASH. Last year I paid most of my expenses on two cards
that I pay off every month. On the Chase card which I use for
household expenses I received over $500 back during the year.
All my travel, business costs etc, are on a COSTCO American Express
card that has no annual fee and pays back 1,2 or 3% depending on the
category of the expense, and because I said I had my own company
(me) I get back 5% on gasoline purchases. My payback from COSTCO
(in cash) last year was just over $1000. So, not only did I not
pay any interest, the credit card companies paid me to use their
cards.
Comment by MickeyG -
Totally agree except for ONE MAJOR ITEM. In principle I like the idea of ripping up all credit cards and moving to debit cards. HOWEVER, debit cards do not have the same fraud protection mechanisms as credit cards… and fraud will be on the rise in the coming months and years. You can be burned bad by debit cards with ID theft, incorrect charges, stolen #, etc. And guess what the banks take advantage of this since it does not fall under the same regulation as credit cards.
So… same advice but different mechanism. Sign up for a FREE American Express and do NOT sign up for the optional “pay over time” plan. You will be forced to pay off that bill every month. Keep your debit card handy for non-AMEX stores but only use it when needed and keep an eye on your statements for fraud.
I am living much of your advice and while I may have missed some of the ride up, I am happy that I experienced non of the downfall. I have no debts except mortgage (fixed rate at 5.5%), no credit card debt, and moved my entire investment portfolio including 401ks, IRAs, and investment accounts into CDs, TBills, and cash equivalents over 12 months ago.
Sleeping well… now waiting for the right time to move back in equities and potentially real estate… don’t think it will be soon though.
Comment by mbm -
Preach it brother.
Comment by DanF -
Pingback: On the 8 Spot » -Excellent Financial Advice From Mark Cuban-Where To Put Your Money Right Now « blog maverick
Regarding Matt’s comment, if everyone switched over to cash only, what you’d end up with is AArgentina, and there is nothing nice to say about the economy in Argentina.
Comment by Joseph -
Mark…
You are right regarding the vicious circle of credit card debt. Once an ‘average’ American gets in deep, it is nearly impossible to get out of the cycle. I agree that people should acknowledge responsibility for their debts, but I disagree when it comes to paying back the credit card companies (after a certain point). Credit card issuers are unscrupulous and unfair. Some of their practices should be deemed illegal. Have you ever tried to negotiate ‘reasonable terms’ with a credit issuer or collector. Suppose you lose your job and you contact the credit card company asking them to lower your interest rate and monthly payment… You know what they will tell you, “Tough!” To make matters worse, they soon raise your interest rate because you are now a bigger risk. It makes perfect sense. Poor folks should pay more (with very little of the payment going toward the principal) …That way they ‘can afford’ to be poor forever! Credit card companies will not accept smaller payments in difficult times. These same charlatans refuse to lower obnoxious 29.99% interest rates. The credit game is rigged. It is a legalized scam.
….So…….Finally you decide to walk away. In doing so, your credit rating is crushed. You have to accept that you will probably never own a house. Soon you get bombarded, even harassed, by lenders. Later on, snake-oil collectors call you relentlessly. And they don’t stop.
In the end, if you’re lucky, you finally learn to live within your means. You accept harassment as part of your daily life.
If anyone is still reading THIS, I’m sure your index finger is rubbing against your thumb as the World’s Smallest Violin plays ‘Cry Me a River.’ …….Reserve judgment until you’ve walked in another man’s shoes. At least I’m honest. Millions of folks know exactly what I’m talking about.
I have one question…
Is cheating a CHEATER really cheating? Let’s ask Robin Hood.
Comment by Jim Parham -
After you get a great start by paying off those credit cards start stashing 3 to 6 months emergency money. Preferably six months since we’re going in a recession.
Paul
Comment by Paul -
Mr. Cuban,
New to your blog and the advice you give here will help many people if they read it and follow the strategy. Your a straight shooter and wish more people with your knowledge would share their perspective. Looking forward to more reads.
Dave
Comment by Dave -
Pingback: Where To Put Your Money Now « Wellness Writ Large
Excellent advice. Since first setting foot in college ten years ago (they love to push them on campuses), I’ve avoided the temptation to ever get a credit card, though I’ve thought about getting one for emergency situations, relying instead on debit cards. The only problem with them is, the large hold some hotels will put on them.
Comment by Rebecca -
I certainly agree with not paying interest on anything, other than a low, fixed rate mortgage.
But in today’s world, particularly if you’re a business person, you must have and use credit cards.
Most businesses that buy and sell to other businesses work on terms of 30 Day Net. That’s essentially what a credit card does. In my business, I buy certain items or services, sometimes with my credit card, sell it to other businesses, who then pay me 30 days Net. I then pay off the credit card, no interest.
For travel, for ordering on-line, you pretty much have to have a credit card. Debit cards seem to be a lot more hassle to get people to process.
I charge everything, including all my monthly expenses (utilities, phone, internet, cable, food, gas, etc.) to one AA mileage awards credit card, as well as most of my business purchases and expenses. Pay the card off every month, no interest. And I get 4 free tickets a year on AA to use. Such a deal.
Of course, MC doesn’t have to worry about mileage rewards, since he has his own plane!
Comment by Mark -
Great point about banks re-negotiating mortgage terms. This might even take precedent over paying off your credit cards since the banks are particularly vulnerable right now and are offering loan mods left and right. It’s even worth it to work with a specialist if you vet them properly. Think about what shaving a couple points off your interest rate would save you over the next 5 years!!
Comment by Matt Bilinsky -
Mark,
Your advice is right on the MARK (Parden the pun!)If everyone
followed this advice and eliminated personal debt, including
ripping up all their credit cards they would live stress free. I
live have lived this way for the past 10 years(yes!) and would not
go back. The choices you make living on cash are amazing. I use a
prepaid credit card to do purchases on the net and travel, etc….
with my OWN money! Self management with monetary governance
is the FIRST step to wealth and abundance, Just do it! Keep up the
great blogs Mark. When I come to the USA to see the MAVS I will
travel first class…ON CASH! Cheers, Grant from Canada
Comment by Grant -
I tell people this all the time…”You want to make 15-25% on your money? Pay off your credit cards!”
The way this country is set up, one can only hope that rich & powerful are patriotic and would not let this country crumble from the inside (as so many civilizations do). I can honestly say that I know of one. Mark, we need more people like you right now.
Comment by Chris -
IMHO – the whole financial crisis can not just be blamed
on Wall Street or CEO’s with Golden parachutes. Look at all the people
living outside of their means – it is ridiculous what people think
they have to have. They say the average home has over 20k in credit
card debt??? WOW – why anyone would possibly need to put that much on
a credit card is beyond me. I definitely agree with what you say
about penalizing these CEOs and their contributions to the current
financial state but I think that ALL these other people who have been
spending way beyond what they can afford do not need to be bailed out either.
Like you say about the CEOs – whose to say that ALL these people are going
to learn their lesson this time and stop their excessive? Myself, I have a mortgage that I can
afford, I own my car and have a debit card and one credit card. The
credit card I pay off each month and I get bonus points on it that I
get a Home Depot gift card for XXXXX amount a few times a year.
Comment by James -
love the putting money into the CD
Comment by bob appletomn -
Hey Mark,
Thanks for using IndexCreditCards.com as your source for the credit info.
I always knew you were smart, and that only reinforces it 🙂
Justin McHenry
Research Director
IndexCreditCards.com
Comment by Justin McHenry -
I’ve been self-employed now for 20 years. For the past two years I have been telling people that if they want to start a business, they should consider ones that sell the necessities of life. IOW, we’re referring to the things people always need–even if the economy deteriorates. Unfortunately, the skills most people have today, such as being able to manage an Adwords campaign, game search engine algorithms, or sell credit swaps are likely to see their value plummet. A lot of people will be in serious trouble if we sink into a deep depression. Be a long term optimist but a short pessimist. Tool up with some practical skills.
Comment by Guerilla Billionaire™ -
In response to Ryan T. — How exactly did you buy a house a year ago being a new graduate and already owing 108k in student loans? Banks are so irresponsible it’s unbelievable.
Comment by Ed -
Mark,
You’ve stated in blogs before the tremendous amount of $$ requests you get daily. Probly more than others due to your accessibilty. I know you give A LOT to charity and The Fallen Patriots Fund is awesome.
Wonder what your thoughts on giving money away at Mavs games. Not because anyone deserves it, because many folks put themselves where they are today, but because you can and because you may get a little enjoyment from the impact and reactions you get. I’m not talking lottery winners…more like $5,000 or $10,000 or $2,000…whatever. Wrap it in the shirts they shoot into the 3rd level, hold a contest…randomly walk up to someone and say, “thx for coming to the game…it’s your lucky day.” You wanna talk about packing the 3rd level (not that it’s not already).
Always thinking… you probly wouldn’t be surprised by how much you helped out that person, but again believe at your core, hopefully you believe sometimes people need to catch a good break.
Either way, I like the markets now 1) good buying opps 2) you’re way more active on your blog when it’s same ole same ole
Comment by Michael -
Mark –
I read your post (as I’ve been doing w/ the majority of your posts for about 2.5 years now). I’m the person in which your post reinforced what I’ve already been doing…with that being said, I’m looking for advice on my situation. I’m 25. I graduated w/ a Bachelor’s Degree from Bentley College in 2001. I paid for school myself (in the form of federal and private loans). I’m not so concerned with the Federal loans, as they are at a low rate (I have approximately $28k in Federal loans). I am (and have been) very concerned about my private loans. When I started, I consolidated about 80k in private loans at 9%!!! I’ve been doing EVERYTHING possible to pay them down as quickly as I can. I’m down to about $52k right now. I desperately want to get out from under this burden. I have no credit card debt OR car payment. I bought a house about a year ago, so except for the school loans, my mortgage is the only other debt I have. I make a decent salary that includes a small commission aspect. I put every extra dollar towards my loans. Any thoughts on how I can pay off the $52k a year from now?
Thanks for all the great posts,
Ryan T.
Comment by Ryan T -
Good advice overall, Mark, though we disagree on borrowing from a 401k. I actively discourage borrowing from one’s 401k, especially during rising unemployment (6.1% last month vs. 4.7% a year ago). Layoffs force a 401k borrower to scramble for short-term funds since a 401k loan must be paid back in full upon termination, within 90 days maximum. If the 401k loan is not paid back in full, the outstanding balance is considered an early distribution which results in a 10% penalty for early distribution + federal, state, and local taxes owed.
Comment by Dorky Dad -
THANK YOU MARK!! AMEN!! You need to get on every single financial news TV show in America TODAY. Please go on every single one of these financial news shows/talk shows and debate Suze Orman, Kudlow, Cramer, and every single “personal finance” expert or “financial planner” in America on live national TV. Your recommendations and viewpoint so desperately need to be heard by every American TODAY. You are 110% correct in everything you say, and our economy and society must go back to one in which people actually have to have MONEY (cash) to buy goods and services, and in which people build wealth through actual capital and savings, not debt. You are also correct that the credit card system is going to collapse, which unfortunately is going to crush our economy since 70% of GDP is consumer spending and consumer spending is heavily reliant on credit cards. What would happen to our economy (and society) if all gas stations, grocery stores, department stores, and restaurants were CASH ONLY???? Thank you so much for your viewpoint and everything you said Mark. Please go on as many national financial news shows and talk shows as possible and express this viewpoint.
Comment by Matt -
Word! Great Post!
Comment by Steve -
Excellent post. If only more Americans would realize that it just doesn’t make sense to hold credit card debt, no matter what return you are receiving on your investments.
Comment by Chris Aram -
http://consumerist.com/consumer/clips/snl-skit-dont-buy-stuff-you-cant-afford-252491.php
Don’t buy stuff you can’t afford!
Comment by Bill -
Mark,
Very good read. When you take a 401k loan, Do you pay the the 401K
interest rate to your self or share it with the bank or financial
institution(some percentage goes to the bank and some to you)
Comment by Vash Narula -
Pingback: Mark Cuban Lays it Out @ Beating Broke
Even if your effective interest rate on your mortgage is 7% you should pay it down. You would have to make at least that amount in risk-free taxable yield to even out, and the last time I checked there was no such thing. (this doesn’t mean you should take a loan from your 401k to pay down your mortgage, but you shoudl run the numbers)
One caveat for everything in this article – You still need to keep 6 months to a year of cash on hand in a high-yielding money market account in case you lose your job.
Comment by Don -
*applause*
Thank you, Mr. Cuban, for saying that. There are many of us who are struggling every day to accomplish exactly what it is you’ve just described. Many of us have been doing it long enough that we can now feel the wondrous effects that doing so has given.
So, Thank you for being willing to help spread the word on the true way to find financial peace and make yourself wealthy.
Comment by Beating Broke -
Mark – always high praise for your advice/blog/comments. But….my husband and I are working haard to make our mortgage and always have. We owe no other debt. We can’t renegotiate our loan to a lower rate like those who have defaulted on their loans and our small retirement accoutns are not fareing well. So do you have advice for us?
Karen
Comment by karen -
Can anyone name a billionaire (or uber millionaire) that’s taken the time over the last few weeks to dish out some solid financial advice to the average individual? (there are only a few)
In any event, nice appearance on CNBC the other night, but how do you let the owner of the Bobcats “box you out” of more air time 🙂
Comment by TeknoMage -
These are some great cogitations how you can repay your debts.
The interesting part is that you realise these mistakes but in
Germany big companies are starting to do these mistakes like buy
your car now and pay it in 2 years. But people donßt read those
interesting small sentences like “you have to pay 8% a year etc.”.
And if this goes people in Germany will make the same mistakes like
you in the U.S. which won´t have such a great effect at the world
economy but a big effect for the economy in the Europeen Union. So
you should explain such things to the polician world wide and perhaps
even to some “experts” so this crisis won´t go on for many years
because every country is amking the same mistake.
Comment by Guy from Germany -
Mark,
You are EXACTLY right!
Correct in every aspect.
It is a difficult process to wean off of credit cards but
if you don’t do it yourself, the credit card companies
may do it for you , if you are in REAL DEEP.
It will come in the form of “charge-offs”, “write-offs”,
collection phone calls, letters from lawyers, process servers,
lawsuits, appearances in front of judges, etc.
Nasty stuff. Not fun.
Comment by Neil in Irving -
This is sound advice. I paid off my credit card bills once and for all more than a year ago. All my debt right now is fixed-rate mortgage debt. Granted, I have two mortgages and still owe about 95% of this condo’s value, but that’s all tax-deductable, and I’m growing my cash reserves in the meantime.
The sad thing is that I started putting MORE of my money into my 401(k) this year so that I could get an even bigger tax break. Everything I put in there is now gone. Suffice to say, everything I put in from here on out is going into a money market fund — crap return, but at least it’s a return.
If you follow Cuban’s advice and find yourself even, congratulations. You’re doing a hell of a lot better than Liverpool FC.
Comment by Dave's Football Blog -
My wife and I have credit cards, but we have never gone a month without
paying them off in full (except a few times on purpose to improve credit).
If you have the self control to do that I think credit cards are good.
We earn rewards, we delay most of our bill 1 month, and if an emergency
ever happens we at least have the choice to max out our credit cards.
Another smart thing to have is a few months living saved in a bank
account.
Comment by Lee -
You mean if I cant afford it, I shouldnt buy it?? 🙂
Comment by Frank D -
Mark offers quality advice for anyone with ANY credit card debt. Two additional items that I would suggest: (1) When you are considering which stocks/bonds to sell, factor in any capital gains tax you might incur when you sell; (2) Wait at least six months AFTER you pay off your credit card debt BEFORE you consider refinancing your mortgage.
Considering when you purchased your stock/bond, the capital gain tax (added with the other factors) Mark listed, might make it not a good idea to sell. This depends heavily on your annual payout to credit card companies (average balance x interest rate). So look at the non-cap gains tax options first. Barack Obama proposed allowing Americans to pull up to 15%(or up to $10k) out of their IRA/401k tax free for 2008 and 2009. If he is President, then this would be a good option to use to pay the first $10k of your credit card debt. This should be plenty for the average U.S. household(91%) who hold less than $9k in credit card debt.
Do not confuse when you need to wait; AFTER you pay the credit cards off. Do not wait to pay them off. This should be done immediately. Waiting to refinance gives your credit score time to recover from the dings that were on it. Be proactive and call or write all three credit bureaus to correct and update any balances or other outdated information that can result in a lower credit score. This time spent waiting also allows the credit markets to stabilize, thus improving your chances to get a loan with the best rate.
Comment by TomH -
I agree with paying off debt before investing, however, if you cash out things like a 401k, isn’t there a big tax penalty with that? I would assume that for some people it would best to divert new money from going to 401(k) and to paying off debt and only adding to their 401(k) once they’re debt-free.
Comment by Jason -
Mark, I had a thought that crossed my mind…
First off, I love reading your blog posts, they’re for the most part,
very insightful. But I have to ask – this post is about getting rid
of credit card debt… but you’re extremely wealthy, and it makes me
wonder how/why you seem to know so much, or ‘have experience’ with this.
Is it just alluding to what you know from your experience before you
succeeded? Or is there something I’m missing? 🙂
Comment by steve -
My wife and I did this right after we got married 10 years ago and haven’t looked back.
It has been a great mental & fiscal weight off of our shoulders and has helped us weather storms like this.
Great advice.
Comment by Scott Schnaars -
Why does this apply to “anyone who has under 250k dollars in stocks
and bonds and also has debt”? I would have thought more like under $50 or $100K.
Comment by vijay -
Great advise, however I feel that in this economy where some people have no choice but to not pay off their credit cards because they have lost 30% on their 401K in the past month, this might be over their heads. Maybe these same people should cancel their internet connection and put that money towards their debt, not to mention their premium movie packages, land line phones, netflix subscription, ect… Cancel all monthly non-necessities and start to pay down your 20% credit cards (that includes the fancy HD Plasma tv you got a great financing on), and find a low fixed rate card to transfer the remaining balance and close out your oldest credit line. Its not that hard, just takes commitment and time to do. Great article Mark. Speaking of investments, when are you going to buy the Cubs?! As a long time cub fan, I can’t wait to see you at the Cubby Bear!
Comment by Ryan -
Quite possibly the best post ever! Wish more people understood this
concept.
Comment by Tim -
Great post, Mark. I wish that our federal government would take your advice and pay down some of the national debt. Of the general federal budget (social security is in a separate fun) interest expense is our third largest yearly cost! In 2008 up till this point the Fed has paid over $451,154,049,951 in interest expenses alone! That is absolutely crazy and we are on pace to increase that substantially with this bail-out. So my question is, should the federal government follow your plan too? I think they should. How can we possibly regain our financial security and independence if we are constantly in debt?
Comment by Travis Stoliker -
Thank you for this Mark.
I’m a guy that lives well within my means, but I must admit I don’t know what my interest rate on my cards is. I’ll do that tonight. I have enough in savings (paying 3.5%) to be able to pay all of them off. I’ve been wondering what to do, if anything, with my savings. Thanks for this advice.
Comment by Jean Val Jean -
I know this is a broad generalization that does not apply to all. But is utterly amazing to me the number of Americans complain about our national debt. They say “How dare our government put us in such debt, this has to stop, we need change!”. It’s these same people that are mortgaged to the hilt (many bad mortgage terms), have car payments they can’t afford, and have 10’s of thousands in credit card debt. Pot, kettle, black. It’s the average American chasing the Jone’s that’s put our country in its current state.
It’s going to be harder than ever before to pick this country up by the boot straps because too many Americans aren’t prepared for an economic down turn or lay-offs. They have nothing is savings and can’t afford what they own with a good job.
…thank you. I’ll step off my soap box now.
Comment by Brad -
Wow. This was exactly the splash of water in the face that I needed.
I have been waiting for a few days for a “consultant” from a brokerage to return my phone call about taking a few old 401k & 403b’s from previous jobs and rolling them into a single new IRA. Do you think I should still roll them and then borrow against it to pay off debt, or cash out one or two of them and eliminate credit card debt?
My mortgage is 30 yr. fixed at a super low rate, I feel good about it. However, I have a ton of student loans. What do you think about putting more money to eliminating student loans vs. larger 403b contributions?
Comment by Chris -
I love that there is a billionaire that actually blogs and blogs honestly.. this is a must read..
However, can I also request a “Chapter 2” – more detail on investing the leftovers?
Your interview on CNBC was interesting and your mention of some dividend yielding facilities were a bit foreign to me.. would love more detail.
Thanks for the post.. Geiser
Comment by Jeff Geiser -
Mark, Great post. Thank you for giving us ideas to pay off debt and to survive the crunch. Thanks for your ideas.
Comment by Michael -
Great post. One thing I’d add. After you get yourself debt free, check to see if you kids or parents are debt free as well. If you have a strong relationship with them, propose buying out their credit card debt with a loan at a lower interest rate, with no annual fee, and no laate fees. In many cases, you have a loved one that is paying 30% interest and struggling to keep up. If you cut the rate in half, everyone would win!
If you are worried about them going out and running up there credit card, get them to change the address so the bill comes to your house. Worried about them opening up new credit accounts, ask them to put a fraud alert on their credit profile and it will at least make it much more time consuming for them to get new credit (although they could still get it if they needed if for a car or house, etc.). You can also pay a few dollars per month to a credit monitoring service and have the results emailed to you every month.
Obviously there is a trust element here on both sides. If you have a strong relationship, and would likely help this person out down the road if they couldn’t pay their bills anyway. Do the right thing and stop letting your family member pay outrageous interest and fees to a bank, while you search for a way to make a good return on your investment. Kill two birds with one stone.
Comment by Shane Jones -
Wise advice.
Comment by Mike -
Great post Mark. I really appreciate you taking the time to provide advice for
the readers who may really be struggling right now. I definately agree with you
on doing whatever it takes to pay off debt. I will aggressively pay off my debt as you suggested.
Comment by Michael -
With the rising costs of education, many recent college grads are
up to their neck with student loan debt. Is this good debt to have or
should they be paid off in the same manner as credit cards?
Comment by Recent College Grad -
Thanks for continuing to support the everyday people, we need you!!! I have season tickets to the Mavs because I liked you from the minute I met you and look forward to seeing you courtside this season!
Comment by shocked and awed -
But you are still going long, right?
Comment by SilentP -