Recession-Proof Yourself: Five-Part Series

Part 5: Top Frugal Debt Reduction Ideas
Here are eight frugal ideas to boost your debt reduction efforts:

1. Have a Yard Sale

Extra junk around the house is money just waiting to be liquefied. Round up all of your old clothes, toys, housewares, and furniture, and have a yard sale. Then put the proceeds towards your debt of choice. Have valuable items to sell? Consider listing them on Ebay or in the classified section of your local newspaper.

2. Save Your Change

Do you have a change jar? If so, it's time to raid it. Roll all of your coins, and then make an extra debt payment equal to the amount that you've rolled. Repeat the process every time your jar is full.

3. Coupons

Couponing is a great way to save money on the things that you need, but it can also be a great way to boost your debt repayment efforts. Challenge yourself to use as many coupons as you can when you grocery shop, and then reward your efforts by putting the money saved towards your debt.

4. Hire Yourself

Do you hire someone to cut your grass or clean your house? If so, it may be time to hire yourself for the job. Tackle a couple of the projects that you'd normally hire someone else to do, and then "pay yourself" by applying the savings towards your debt.

5. Share Your Opinions

Got Opinions? Turn them into a paycheck by signing up for paid online surveys. You can complete as many or as few as you have time for, and then put the money towards an early debt send-off. For a list of the most reputable survey companies, refer to SurveyPolice.

6. Turn Cash Gifts into Payments

Have a relative that likes to send you money as a gift? Then pass that gift on to Visa, and watch your account balance go down.

7. Cash in on a Talent

Hobbies are usually a source of spending, but that doesn't have to be the case. Make a list of all of the things that you are good at, and then brainstorm ways to turn them into a source of income. Could you teach knitting classes? Hire yourself out as a muralist? Become a part-time landscaper? Find a way to market your skill or skills, and then turn your profits into payments.

8. Bank Your Bonuses

We all benefit from the occasional windfall, whether it's a work bonus, a tax return or something else entirely. Vow to turn your bonus money into bonus debt repayments, and fear those credit card statements a little less.

MICHELLE

Ideas.com, SurveyPolice.com, Intelligence for your Life

Recession-Proof Yourself: Five-Part Series

Part 4: Get Rid of Credit Card Debt
A Step-by-Step Guide to Getting out of the Worse Kind of Debt

To get out of debt, you need to:

1. Assess Your Debt
2. Create a Budget
3. Cut Your Spending
4. Start Saving
5. Attack Your Debt

1. Assess Your Debt

Jump start your debt reduction efforts by figuring out just how much debt you have to deal with, and how you're going to deal with it. Here's how:

Download and Print the Debt Load Worksheet!

2. Create a Budget

A well thought out budget will help you to get out of debt and stay out of debt. Spend a couple hours going over your finances; then, create a budget that severs your reliance on credit cards. Cash-only is the goal from here on out.

Download and Print the Build a Budget Worksheet!

3. Cut Your Spending

To free up money for debt repayment, you'll need to cut your spending. Look for ways to lower your electric bill, phone bill, homeowner's insurance, auto insurance and all of your other bills. Challenge yourself to eat out less, cut your grocery bill and to take up free or low-cost hobbies. Then, apply your savings directly to your debts, and enjoy the knowledge that you're one step closer to a debt-free lifestyle.

4. Start Saving

Getting out of debt is as much about paying off debt as it is about avoiding new debt. That's why it's important to prepare for the unexpected – car repairs, medical bills, time off from work – basically any expense that could cause you to pull out that credit card and start spending again. Estimate how much of a cushion you'll need to shield yourself from surprise expenses; then, set that amount aside in an emergency fund. If you can't afford to fully fund the account now, that's okay; just set aside a small amount each month until you reach your savings goal.

5. Attack Your Debt

Once you've completed all of the previous steps, it's time to start attacking your debt. Take the money that you've freed up with your new budget and spending cuts, and apply it to your debt. Then, keep at it, until all of your debt is paid in full. It may take a while; but if you stick to the plan, you'll arrive at that finish line a stronger, happier – and most importantly – DEBT-FREE person!

MICHELLE

Consumer Credit Counseling, BB&T, Leer Financial

Recession-Proof Yourself: Five-Part Series

Part 3 Recession-Proof Your Finances

How to Plan for and Survive a Recession

Does talk of a recession have you worried? If so, it's time to recession-proof your finances. Here are nine things that you can do to plan for and survive a recession:

Save More

Do you have three to six month's wages (or more) set aside for the unexpected? If not, now is the time to get serious about saving. Challenge yourself to save whatever you can—even if it's just a quarter here and a dollar there. In a weakened economy every bit counts.

Spend Less

Delay or eliminate unnecessary purchases. Then, add the savings to your emergency fund.

Shop Smarter

A smart shopper never spends more than she has to, recession or not. Look for ways to save on all of your necessary purchases, and hang on to more of what you make.

Pay Down Your Debt

A recession isn't all bad news. Since interest rates tend to go down during recessionary periods, your debts will cost you less; and your debt repayment dollars will go further. Translation: it's a great time to pay down credit card debt. Look over your budget, and determine if you can afford to divert more money to your debt repayment efforts.

Also keep an eye on the mortgage rates. Now could be the time to refinance to a lower interest rate and a shorter mortgage term.

Stockpile

Prices can be a bit unpredictable during a recession. The solution? Establish a stockpile of sale-priced foods and goods, and you'll only have to buy when it's a good deal for you.

Make the Most of What You Have

No need to buy new when you can make do. Use up leftovers; find substitutes for items that you've run out of; discover new uses for the things that you already have; and you'll keep that shopping list shrinking month after month.

Make It Last

Squeeze more life out of everything that you own, and you won't have to squeeze as much money out of your budget for replacement items.

Do More for Yourself

A recession is a great time to learn new skills and to brush up on old ones. Adopt a "can-do" attitude, and you won't have to pay others to do things that you can do for yourself.

Increase Your Income

The unemployment rate tends to go up during a recession. Protect yourself by finding ways to boost your income. Have a yard sale; sell items on Ebay; answer surveys for money; become a mystery shopper. A recession is a time to think creatively, to earn creatively and to live creatively.

MICHELLE

Good Housekeeping, Southern Living, BB&T

Recession-Proof Yourself: Five-Part Series

Part 2: 401k Loans & 401k Hardship Withdrawals
Accessing Your Retirement Money

The purpose of your 401k retirement plan is to provide for your golden years. There are times, however, when you need cash and there are no viable options other than to tap your nest egg. For this reason, the government allows plan administrators to offer 401k loans to participants (be aware that the government doesn’t require this and therefore it is not always available.)

The primary benefit of 401k loans is that the proceeds are not subject to taxes or the ten-percent penalty fee except in the event of default. The government does not set guidelines or restrictions on the uses for 401k loans. Many employers, however, do; these can include minimum loan balances (usually $1,000) and the number of loans outstanding at any time in order to reduce administrative costs. Additionally, some employers require that married employees get the consent of their spouse before taking out a loan, the theory being that both are affected by the decision.

401k Loan Limits

In most cases, an employee can borrow up to fifty-percent of their vested account balance up to a maximum of $50,000. If the employee has taken out a 401k loan in the previous twelve months, they will only be able to borrow fifty-percent of their vested account balance up to $50,000, less the outstanding balance on the previous loan. The 401k loan must be paid back over the subsequent five years with the exception of home purchases, which are eligible for a longer time horizon.

401k Loan Interest Expense

Even though you’re borrowing from yourself, you still have to pay interest! Most plans set the standard interest rate at prime plus an additional one or two percent. The benefit is two-fold: 1.) unlike interest paid to a bank, you will eventually get this money back in the form of qualified disbursements at or near retirement, and 2.) the interest you pay back into your 401k plan is tax-sheltered.

The Drawbacks of 401k Loans

The biggest danger of taking out a 401k loan is that it will disrupt the dollar cost averaging process. This has the potential to significantly lower long-term results. Another consideration is employment stability; if an employee quits or is terminated, the 401k loan must be repaid in full, normally within sixty days. Should the plan participant fail to meet the deadline, a default would be declared and penalty-fees and taxes assessed.

401k Hardship Withdrawal

What if your employer doesn’t offer 401k loans or you are not eligible? It may still be possible for you to access cash if the following four conditions are met (note that the government does not require employers to provide 401k hardship withdrawals, so you must check with your plan administrator):

1. The withdrawal is necessary due to an immediate and severe financial need
2. The withdrawal is necessary to satisfy that need (i.e., you can’t get the money elsewhere)
3. The amount of the loan does not exceed the amount of the need
4. You have already obtained all distributable or non-taxable loans available under your 401k plan

If these conditions are met, the funds can be withdrawn and used for one of the following five purposes:

1. A primary home purchase
2. Higher education tuition, room and board and fees for the next twelve months for you, your spouse, your dependents or children (even if they are no longer dependent upon you)
3. To prevent eviction from your home or foreclosure on your primary residence
4. Severe financial hardship
5. Tax-deductible medical expenses that are not reimbursed for you, your spouse or your dependents

All 401k hardship withdrawals are subject to taxes and the ten-percent penalty. This means that a $10,000 withdrawal can result in not only significantly less cash in your pocket (possibly as little as $6,500 or $7,500), but causes you to forgo forever the tax-deferred growth that could have been generated by those assets. 401k hardship withdrawal proceeds cannot be returned to the account once the disbursement has been made.

Non-Financial Hardship 401k Withdrawal

Although the investor must still pay taxes on non-financial hardship withdrawals, the ten-percent penalty fee is waived. There are five ways to qualify:

1. You become totally and permanently disabled
2. Your medical debts exceed 7.5 percent of your adjusted gross income
3. A court of law has ordered you to give the funds to your divorced spouse, a child, or a dependent
4. You are permanently laid off, terminated, quit, or retire early in the same year you turn 55 or later
5. You are permanently laid off, terminated, quit, or retired and have established a payment schedule of regular withdrawals in equal amounts of the rest of your expected natural life. Once the first withdrawal has been made, the investor is required to continue taking them for five years or until he/she reaches the age of 59 1/2, whichever is longer.

A 401k hardship withdrawal should be a last resort. An IRA, for example, has a lifetime withdrawal exemption of $10,000 for a house with no strings attached.

MICHELLE

Welch Wealth Management, Leer Financial, BB&T, CUNA.

Recession-Proof Yourself: Five-Part Series

Part 1: Quick Ways to Raise Cash During a Crisis

How to Come Up with Funds for Use During Emergencies

Say the worst comes to pass, and you need cash in a hurry. It's not a great position to be in, but you don't need to contemplate knocking over a convenience store. Whether you need quick cash, to cut back on spending or unload major debt, this five-part series will help gain your bearings.

1. Create a Temporary Line of Credit Backed by Securities

The first option probably isn’t available for everyone, especially if you are just starting out, but for those who have been diligent and disciplined, the odds are good that you have built up a respectable brokerage account outside of your retirement accounts. If you’ve been at this long enough and have a decent job, it's probable that you’re in the six-figures range; e.g., a 40 year old that began investing $5,000 per year at 22 after graduating and landing his first job would have just shy of $228,000 assuming a 10% rate of return.

Were you to need emergency funds, it’s possible to temporarily borrow against your securities to create a margin loan, withdrawing the cash. This is not without risk! Not only is your interest rate floating and subject to change, but if your stocks and other investments fall below a specific threshhold, your broker could sell your assets to pay back the loan without contacting you. Many brokers will give you the courtesy of a call (known as a margin call) to deposit more funds so this doesn’t happen, but they aren’t required to do this by law. This could either lock in losses or trigger big capital gains taxes, depending upon the success you’ve had with the positions in your account. Worse yet, you have no control over which stocks are sold; that is entirely at your broker’s discretion.

A friend of mine, back in her early twenties, built the first few businesses from scratch that helped her form her current investment vehicle. She often had more ideas than available liquidity. Although her properties and operations generated relatively substantial funds, they weren’t always available at convenient times and opportunity doesn’t wait for you to come up with cash. Thus, this was a method that she was able to use with tremendous success. One of the successful e-commerce startups was funded by writing a check against an account that held some of her Berkshire Hathaway shares, enabling her to float the company its working capital until it generated the funds to repay the entire contribution (which only took a few months). The beautiful thing is that now those companies pour cash into their own brokerage accounts that have even more assets piling up for them, including shares of Berkshire Hathaway, General Electric, and other great businesses. It’s a virtuous cycle.

2. Swallow Your Pride and Get a Second Job

Sometimes the fastest and most effective way to generate immediate funds is to take on a second job. One close family member of mine found that by working the night shift at a mid-scale restaurant, she was able to generate more than $30,000 per year in tips above and beyond her day job. Her skill was connecting with people and she found a second job that leveraged that talent.

For many people, they argue they don’t have time. The Internet has changed all of that. The world is now filled with those who make thousands of dollars a year on eBay, working only a few hours a week from their homes. Creativity often pays off more than just putting in more hours, so think outside the box.

3. Take Out a 401(k) Loan or Hardship Withdrawal

This should only be done in extreme cases, but it is possible to borrow against the assets you’ve built up in a retirement account. There are very specific rules to follow or else you could find yourself paying huge tax penalties. If things should get worse before they get better, you could have inadvertantly wiped out your retirement, causing yourself much bigger financial problems down the road. For more information, see Part 2 about 401ks.

4. Redeem Your Rewards

Most of us have some type of rewards based credit card, the most popular being the venerable American Express. Over the past few years, you might have rung up some pretty hefty reward balances, especially if you pay for things such as gas and groceries on your card.

Check into your program and consider redeeming your points for gift certificates or merchandise from retailers that can free up cash. At the time of this writing, for instance, I have 114,719 points on one of my American Express cards. If I needed, this could translate into nearly $1,100 in gift certificates to Wal-Mart or Target to cover household expenses or to Brooks Brothers to buy clothes. That’s money that won’t come out of my household budget.

5. There's Serious Cash in Gold

It may seem cliché. It may seem odd. But it works. Almost every household has excess gold in the form of jewelry and with gold prices soaring for the past few years, there are plenty of businesses that are happy to take that scrap and melt it down, giving you a big fat check in exchange.

MICHELLE

Welch Wealth Management, Leer Financial, BB&T, CUNA.