What you don’t know about your debt

A former roommate of mine turned me on to an article recently that I found pretty interesting.  Apparently, an offshoot of the Occupy Wall Street movement, Rolling Jubilee, has purchased just about $15 million of debt.  But they didn’t pay $15 million for it.  Not even close.  They paid just over $400 thousand to purchase $14.7 million of medical debt, which they immediately forgave, making some peoples lives much much better.  While the purchase price of the debt may sound crazy but is actually a fairly common practice in the finance and healthcare industries.  There are companies that exist solely to purchase charged off or way, way past due debt from banks and hospitals for pennies on the dollar.  They then go and collect.  When you’re in debt up to your eyeballs and the collectors are calling everyday, well, that’s these guys.

I wish I could come up with witty slogans that rhymed

I wish I could come up with witty slogans that rhymed

Ok, so, let me back up.  I may have rushed into the idea there.  Let’s start with the concept of medical bills and debt being sold from hospitals to parties otherwise unrelated to your medical procedures.  A hospital may do $100 million in business a year at their cost but, at the end of the day, is only able to take in $30 million in revenue.  The difference typically amounts to several areas: medicare and medicaid reimbursement rates, charity care, and bad debt provisions.  The $100 million is what the cost of the services for the hospital should be but, after they get reimbursed by everyone and deal with debts and self payers, they only ever see $30 million of the revenue.

This is where the collectors come in.  A typical hospital will see about 60% of its gross revenue being medicare or medicaid based.  The remaining 40% will be broken up between those with insurance and people the healthcare industry call “self payers.”  Basically, uninsured people or people who have hit their lifetime spending cap under their insurance.  A hospital wants to limit how many of these people it sees because, typically, they will immediately write off 95-97% of self payer revenue.  So if our example hospital has maybe 15% of its gross revenues tied up to self payers ($15 million), they can sell it to a collection agency for some immediate revenue.  Looking at the example given by Rolling Jubilee up top, the hospital can receive $400K when it believed it would never receive a thing.  It saves them the time and expense of trying to collect on it.  The collector, meanwhile, doesn’t have to get the $15 million to make a nice return. If they can turn their $400K investment into $3 million, they have made a good return after expenses.

And this is where the point of this whole thing comes in: everything is negotiable.  Right now, 60% of bankruptcies in the United States come from medical bills, meaning that somewhere in the process I mentioned above, ordinary people are losing control of their financial lives.  What no one ever told them is that debt, when it is traded on an open market, is negotiable.  If someone is accumulating debt related to medical procedures or anything done at a hospital, well, the price is far more negotiable than you think.  Just look at the above!  The hospital is going to sell your debt to someone for 3% of the full price that they want you to pay.  If you can’t pay the full amount but can pay 10%, offer it!

I know this may seem like a crazy person’s advice but I honestly mean this.  I see a lot of personal debt out there.  I review financials of companies and people.  I perform due diligence on hospitals and see them losing money as the self payer amounts rise and they continuously write the amounts off.  One of the big problems in the world of healthcare is the rising cost.  A part of the rising cost is the fact that many people have, for years, been unable to afford the healthcare.  Because they can’t afford it, the hospitals write off the amounts and pass the charges along by gradually, inexorably, raising the costs elsewhere.  As they do this, more people can’t afford the care, it gets written off, so on and so forth.  It’s a bit of a terrible spiral down.  The only people who win, in the end, are the collectors.  And let’s face it, we all hate collectors!

The next time you find yourself falling into debt, whether it is credit card or medical debt, and you’re getting to the point where you cannot pay anymore, take a deep breath and pick up the phone.  Your bank, your hospital and your credit card company will all work with you to make sure that you can pay.  In the end, they just want to be paid for services rendered and you just want to be out of debt.  Remember, in the world of finance, everything is negotiable.  Until next time everyone!

 

Photo courtesy of Aaron Bauer

The do’s and don’ts of resigning

A huge part of personal finance is the cultivation of your career.  While your goal may be to reach Financial Independence, you do still need to do something to get there.  Your career will undoubtably be the biggest area of earnings for a large portion of your life and will, for years, throw off more income than your investments will.  It’s because of this that I’m a firm believer that nurturing your career is absolutely essential to the personal finance mission.  Part of this is knowing when it’s time to grow out of your current job and company and move on to a new place.  It’s almost always going to be tough if you’ve spent years in the same place, with the same people.  They become your friends and family.  But they also become your comfort zone and your security blanket, allowing you to coast a bit.  Going hand in hand with that coasting is most likely less than you’d like raises.  Typically, in a career, the only time you get big raises are for big promotions and moving on to a new job.  If you stay in the same job, you’re likely to see standard 5% raises year after year, if you’re lucky.  Maybe a bonus here or there but overall, not too much.

While I know that much of the personal finance world focuses almost exclusively on getting out of the office and into your own world, doing what you want, neglecting how to best play the corporate game is, well, negligent.  As I said before, this is where you get started making money.  When you get out of college and get your first job, you will likely be making more money than you’ve ever made before.  And when it is time to move on, there are some definite rules to follow.  Over at the people2people blog (an awesome Australian recruiting company that a friend of mine happens to work for) wrote about the 15 rules to resignation the other day and, since I recently resigned from my job to accept a new one, I thought I’d weigh in on the matter. Here are what I believe to be the top 5 items to think about with resignation.

1.  Never burn bridges: I’ve talked to people who, for some reason, want to leave their job and just piss everyone off.  Don’t.  Never ever do this.  The best currency in your life is your reputation and if you burn bridges, it’s gone.  You may have heard that before but it’s true.  Always be amicable on your exit, give good notice, and never badmouth your previous employer.  That’s just bad taste.

2.  Don’t take anything with you: I don’t mean the stapler or some notebooks, I mean sensitive client information or other such documents.  They don’t belong to you, they belong to the company.  If you take them and they find out, not only will you also be violating rule number 1 above but you could end up being sued.  Not the best option, if you ask me.

3.  Don’t ask for a counter if you don’t mean it: They mention this on the people2people blog and I 100% agree with it.  If you’re head is fully out of there, just go.  When you give your resignation to your boss, let him or her know that they don’t need to make a counter offer.  Making a counter offer actually takes a lot of work (conference calls with other bosses, taking money from the budget, maybe reducing future headcount somewhere else to keep you on) and it’s honestly not fair to put your boss through it if you won’t be staying.  On the other hand…

4. If you do want a counter, give them more than 24 hours: Like I said above, it takes time to put this together.  As a boss, you have to consult a lot of people, budgets, etc.  It’ll take time and honestly, your boss deserves a few days.  You did just tell them you may be leaving!  Which brings us to number 5.

5.  Say thank you and goodbye: people2people also mentioned this and once again, they’re spot on the mark.  You’ve spent years with these people.  Thank your mentors and give them your new contact info.  Just because you’re not there anymore doesn’t mean they won’t still help you.  If you’ve built up a good relationship, they will likely stick with you for the rest of your career.  Also, say goodbye to everyone you can but tastefully.  Never boast.  One of the things I hated most about leaving my previous job was that one of my favorite coworkers had gone on maternity leave and I wasn’t able to do it in person.  To this day, big sad face over here.

Leaving your comfort zone and moving to a new company can be a tough change, especially if you’ve been in the same place for a while.  But it may also be the change you’re looking for in your life, whether it is culturally, location, or financially.  Just remember, never burn bridges and always be a polite and courteous person when you’re leaving.  It always helps.  Until next time!

 

 

Finding extra cash in our every day lives

If there is one thing which we call all agree upon, it is this: we all have too much stuff.  Over the years we buy stuff, replace it with more stuff and eventually all of our stuff ends up in the closet together.  New stuff with old stuff hanging with the weird stuff no one wants to talk about.  The point here is that when you’re trying to rehabilitate your financial life, all this stuff is gold.  Especially when it actually is!  Where I’m going with this is that we all have movies, books, clothes, or jewelry that we don’t use or need.  And every single one of these items, although used, is worth something.  That means it’s something we can use.

We going to the pawn shop

We going to the pawn shop

When you’re looking at your financial life and you want to turn things around, you need to have a completely new way of looking at things.  If you have credit card debt but lots of shiny things, it may be time to have less shiny things.  The point is that nothing is off limits when financial freedom is the goal.  For example, I have an ungodly amount of dvds.  Near my old, scary apartment was this used dvd store that was always running a “buy two get one free” special.  In those days I didn’t have the internet in my apartment or a tv.  In fact, I didn’t even have a computer.  I watched my dvd’s on an old portable dvd player.  Dark times.  So, anyway, I’d go the store and buy three movies, paying may $7 total.  This was roughly a weekly thing (I’d get pizza once a week and it was next to the pizza place) and was a terrible use of my money.  Now, four years later, I have a massive dvd collection of terrible, awful movies.  And I need to get rid of them.  Doing some quick research, I find that there is a website (http://www.musicmagpie.com/) where you can sell old dvds and cds.  Perfect!  Just by selling half of my dvd collection, I’ll make an easy $100.  Not a ton of money but still, it’s money and it’s now in my bank.

Other people may be able to make much more money than me.  Maybe you have some really nice clothing or jewelry that can fetch a decent amount.  What we all need to do periodically is take an inventory of all the stuff we have in our lives.  Some of it may be stuff that we have no practical use for anymore but could help us pay off some debt or build our savings.  Doing this twice a year will help build an efficiency in your life, allowing you to be more aware of what stuff you use and don’t use.  In turn, this will help you to refine your spending habits further.  When you feel the need to buy something, you’ll think back to the last time you cleaned everything out and sold the exact same sweater.  There are only so many things in life we need (beer, friends, a roof) which means that there are numerous things which we can sell and eliminate from our lives entirely.  The real question here is how many of you, my readers, are willing to actually go through your things and find something, anything, you don’t use anymore and can sell for a little bit of extra cash.  Until next time!

 

Photo courtesy of  El Negro Magnifico

Why do student loans suck so much?

We’ve been over this before.  My hatred of student loans and debt in general is well known.  But now I feel I have some new reasons to despise them.  I’ve been working with some people lately on building their credit and during this time I’ve found out that student loans like to screw with us in ways that, quite honestly, don’t even make sense under normal circumstances.  Of course, in the insane world of banking they make perfect sense but that’s a story for another day.

Look at this accident I got into while contemplating my student loans.  Truly horrific stuff.

Look at this accident I got into while contemplating my student loans. Truly horrific stuff.

You see, when you’re going through your few years at school, whether it is undergrad or graduate, and you have student loans paying for everything, you’re hurting your credit score.  Most people will tell you that by taking on term debt, which is what a student loan is, that you’re going to help add credibility to your name in the eyes of the banks.  While this may be true traditionally, it fails to take into account the years you spent in school, not paying that term debt down.  Even though you’re in school and either no payments or just some interest payments are required, you’re dinging your credit score.

What?  No one has mentioned this to you?  Yeah, I didn’t know either.  What happens is that because your term debt goes years without declining, the algorithms at Experian and TransUnion (and that other one whose name I can’t remember) look at it as though you are a bad payer.  It doesn’t matter that no payment is required, just that the balance is either not changing or going up (if the interest accrues while you’re in school).  While I completely get it…wait  no I don’t.  Nothing is due!  Gah.

Ok ok, this is fine though.  Sure your credit score went down but you saved up a lot of money in your first job post school and you have decided to be super responsible and pay off your student loans early.  Sure you lose the tax deduction but who cares!  No debt!

The banks care, that’s who.  And because you paid the student loans off early and they didn’t receive their interest, you’re going to get your credit score dinged.  Insanity.  Despite the fact that you just paid off your debts and have proven yourself to be a good risk for the banks in terms of them receiving their principal, you have made yourself a risk to them.  A risk that they will not receive their profits off of the interest.  Once again, insanity.

Normally, I don’t rant like this.  I get the system has quirks and I accept that.  However, coming across these to items while trying to help people improve their credit makes me furious.  There’s just no reason for this to hurt you at all, especially when a student loan is considered “good debt.”  What this does whole experience has told me is that people need to keep track of their credit!  There are two websites that can help you do this.  The first is www.creditkarma.com.  This site is run by TransUnion and gives you your score and a quick rundown of your report.  It’s a good free way to make sure you don’t have any derogatory marks on your credit.  The other site is the government’s annual credit report website.  Government regulations require the three credit bureau’s to give you free credit reports once a year.  These reports will be thorough and will tell you everything about your credit, including the names and numbers of the firms that gave your derogatory marks.  These two websites can help you sort everything out.  Often, you will only need to make a few calls to remove derogatory marks from your record.  Not the student loans, just people saying you didn’t pay on time.

Hopefully this post makes people think twice before adding another $5K or $10K in student loans when they may not need them.  Looking back, I wish I had done more to prevent getting my student loans.  Until next time folks!

 

Photo courtesy of Rool Paap

What does affordable actually mean?

Affordable is a tricky word.  If you look at it simply enough, when an item is affordable then you can spare the money to buy it.  But I’ve been thinking a lot about this lately.  I’ve had discussions with various friends about this, largely stemming over the potential large purchases in life (cars, houses, engagement rings) or the month to month costs that we regularly incur (iPhones, iPhones, iPhones).  What I’ve realized is that most people have very different beliefs over what affordable means and when certain things are affordable.  So everyone is on the same page, I think we have to define the term for pretty much all purposes going forward.

So many iPhones, it's just...wait what the hell is that big thing??

So many iPhones, it’s just…wait what the hell is that big thing??

Defining what is affordable and what is not has to be a fluid state.  What’s affordable for someone making $20k a year will probably be significantly different than for someone that is making $100K a year.  That can get even more skewed if the person making $20k a year is actually just collecting that in dividends from their $1Million in mutual funds.  So let’s just try to set some base rules.  We’re talking major purchases and everyday recurring transactions.

1.  Homes: The rule of thumb that you will hear from bankers and mortgage brokers is that your monthly home payment shouldn’t be more than 30% of your gross income(income before taxes) for that month.  There is actually a decent amount of debate here in the personal finance community, mostly because frugality is constantly desired.  A modest home can achieve just as much love and happiness as an expensive home can, while saving you a huge chunk of cash.  Let’s look at the numbers here if you’re on a budget with a $50k a year gross income.  That means your take home gross is $4,166.67 a month, before taxes.  This means that your home payment can be as high as $1,250 a month.  That doesn’t sound bad until you realize that your take home, after tax income is only about $1,450 each pay period (semi-monthly pay).  So on the first of every month you pay your mortgage and than have only $200 until your next paycheck to cover your expenses.  In the interest of keeping our budgets in check and maximizing savings, I think that 20% is probably the actual best number for someone to pay for their home.  Realistically, this should be for both a rental and for a home (yes, I know that with property tax deduction you can do more for a mortgage but hey, we’re trying to simplify!).  Verdict: no more than 20% of gross income

2.  Cars: This is a simple one.  We’ve mentioned it in the past and I’ve stolen it straight from the Financial Samurai himself.  Never purchase a car that costs more than 10% of your gross annual income.  If you make $50K a year, then you better find a good and reliable $5K car to purchase.  I know that I’m guilty of not following this rule myself but, in my defense, I hadn’t started trying to turn my financial world around at that point.  And I wouldn’t do it again.  The truth here is that by using a disciplined approach on this big purchase, you don’t have to suffer the opportunity cost of money lost on car payments when they could have been spent on investments.  If you’re serious about getting your finances in shape, it’s essential to follow this rule.  Verdict: no more than 10% of gross income

3.  Cell Phones: Everyone has one.  Everyone.  And pretty much everyone out there has an iPhone or an amazing Android.  However, the plans from the big providers can cost you well over $100.  I don’t pay for my plan (company phone) but I know that the cost is somewhere around $125 a month.  Now, it’s ok for my company to expense it but for me, that’s a steep price to pay.  There are other, better plans, from some carriers out there that will run you less than $50 a month.  T-Mobile offers some extremely competitive plans in this area with unlimited data.  Another great plan is Republic Wireless.  On their network you pay $19 a month, get a pretty good phone and end up with unlimited talking, data, and texting.  You have to hook it up to your wifi network at home but I’d say it’s worth the cost.  If I didn’t have a work phone, I’d probably go with this.  Verdict: No need to ever spend more than $50 here

4.  Discretionary items:  A lot of every day items tend to be things that people think they can afford.  I’m talking about clothing, a night out, or an expensive dinner.  While I don’t think we should restrict ourselves completely (it’s ok to buy yourself something nice every once in a while), we all have to stick to our budgets and live within our means.  If someone has a goal of saving 30% of their salary a month and has 30% tied up in their car and home payments, well, they only have 40% left to split up amongst utilities, gas, groceries, and taxes.  Those items can take up to 30% of one’s income.  That means that only 10% is left for the fun discretionary things.  If you make 50K a year, you’re not going to have much more than that 10% to really spend on the extravagant things in life.  Verdict: 10% of your income is discretionary, no more!

I know that some of these items seem fairly harsh but we all know that we spend too much money. Without sitting down and really quantifying what affordable truly means in dollars, we will never really know.  Use these amounts as guidelines or maybe you have some of your own.  I’m sure that there might be a category or two out there that I’ve missed!

 

Picture courtesy of Nobuyuki Hayashi