Credit Repair Guide

Sometimes people are too close to their own situation to make rational decisions about how to cut costs or how to make some extra money to make ends meet. Unless you paid a lot of attention during tougher economic times – or watched your Depression-era parents save everything for recycling and reuse while watching every penny – you may not know how to make better use of your money.

For many, the obvious expenses have been reduced. More and more families are eating at home; many of them are having to learn how to cook. Eating out is expensive, whether you’re eating fast food or trying to eat healthy. An added benefit of eating at home is you have better control of the health factors of what you eat. Fast food has a lot of fat and sodium, as does prepared food that you buy to fix quickly at home. Cooking at home is not only less expensive – it’s better for you! Eating out in restaurants is definitely healthy – but also more expensive. If you’re looking to cut costs, start with your food budget. Eating out at a restaurant should be reserved for special occasions.

Auto dealers are making unprecedented deals on cars and car loans – but can you really afford it? The sales pitch is the same one that got many consumers in trouble in the first place! The loan may be 0% – but you still have to make the payments every month. If you have to have a car and you’re unable to get a used car loan at a decent rate, it may make sense to buy a new car at 0% – but plan on keeping the car for a very long time, so shop carefully. Remember that new cars lose a significant amount of their value the minute you drive them off the dealer’s lot. New or used, buy a car that you trust will be reliable for years after you’ve finished paying for it. Go to the library or go online and check consumer ratings so you select a car with a good record as far as reliability and low maintenance. Your goal is to get the best deal not only in financing, but on the car price and longevity.

Reconsider entertainment costs, starting with the cable TV. Do you really watch all the channels you pay for, enough to make it worth the monthly fee? Many of us have become so adjusted to the monthly costs we pay that we’re immune to them. Re-evaluate your channel lineup and consider dropping premium channels – you can always rent the DVDs when they’re available or watch the shows online. Going to the movies is also expensive because it isn’t just the price of the ticket. Do you really need to see the latest movie as soon as it’s released? Most likely, you’ll survive until it comes out on DVD, and then you can make a family night of it and make your own snacks instead of paying for high-priced concession stand snacks.

Sit down and write down your monthly expenses so you can see where your money goes – then start sacrificing or renegotiating. You can survive the economic downturn.

Being smart about your taxes involves deciding early how you are going to minimize your tax liability.  Much of this is deciding which deductions will reduce your taxable income.

Medical Expenses

Medical costs are one of the tax deductions you can itemize.  However, many people ignore this deduction since the total medical expenses have to be a minimum of 7.5% of their adjusted gross income.  There are many ways, other than the obvious, that you can contribute to this deduction and perhaps reach the minimum threshold.  For example, insurance payments made from post-tax income can be included.  Also, items like eyeglasses and contact lenses that aren’t covered by insurance can contribute to your medical deductions.

In certain tax brackets, for relatively healthy individuals, it’s very difficult to make this write-off work. If your employer offers a medical savings account, take advantage of it.

State and Local Taxes

If your state requires you to pay income tax, the amount you pay can be used as a deduction.  Other taxes can be deducted as well.  Taxes you pay on personal property, investments, real estate, and some disability can be deducted too.  In addition, sales tax paid can be written-off.

Mortgage Interest

Are you paying on a home loan?  The mortgage interest that you pay on your loan can be deducted.  In addition to your primary home, if you have a second home that you use for personal reasons, you can deduct interest paid on that mortgage as well.  For new loans, points – money paid to the lender to obtain the loan – can be deducted, even if the seller paid the points.  If you take the points deduction, make sure you have paperwork supporting the deduction.

Charitable Contributions

You probably already know that you can deduct the amount of any contributions that you made to a charitable organization.  This includes donations made in cash as well as goods that are donated.  Did you realize that there are some non-cash contributions that you can deduct as well?  If you drove your personal car to do volunteer work, then you can take the standard mileage rate deduction of 14 cents per mile.  You can also deduct the cost and upkeep for any uniform required for your volunteer work.  Remember, if your contribution was over $250, you need a written statement from the organization.

Educational Expenses

If you paid educational expenses related to your work, you can use this as a deduction.  The education must be used to maintain or improve the skills required in your current job or is required to keep your current job, salary, or status.  The limit for educational expense deduction is 2% of your gross income.

Tax laws change regularly. If you aren’t sure about a deduction, consult an accountant.

Developing and maintaining a budget plan can be daunting for many people, especially if you have never done it. Many people are simply not inclined to use spreadsheets, balance checkbooks or lay out a formal budget. Whether by nature, or as a result of a reaction to public school mathematics training, some people don’t consider themselves to be “number people.”

However, everyone will find it in their self-interest to make the effort to outline their expenses against income even if it requires getting someone else to help undertake the task. The budget should include monthly income and outgo, projections of expected increases and decreases and some buffer for unexpected expenses.

If you feel uncomfortable using spreadsheet software – which is available for free these days either through Open Office or Google Docs & Spreadsheets – at least jot down some figures on a legal-sized pad.

Divide the spreadsheet or page into two columns. In one, list income, in the other write down all monthly costs. In the costs column include all major regular bills, groceries, gasoline, etc. After doing that, add at least 10% for unexpected expenses, if you can.

Now, for an important add-on task that many people overlook: project different scenarios. Make another budget (an imaginary one) that shows monthly costs, income and the difference between the two… except:

• Exclude monthly credit card interest amounts.
• Exclude auto loan interest.
• Exclude 25% of any ‘impulse buy’ amounts.

Then sum the total of those three.These three represent the amount you could conceivably avoid paying every month. If the total is even as low as 10% of your monthly expenses (and for some it’s higher), you are paying a substantial amount of your income to charges that could be avoided.

No one but you, being as realistic as possible, can decide whether that 10% overhead you pay is worth what you get in return – having certain items earlier than you would by saving for them. But, consider this: saving that 10% APR paid on $2,000 for one year is:  $110. And many people pay only the minimum monthly payment, which amounts to much more. That’s $110 you are paying solely to have something costing $2,000 a year earlier.

Only you can decide which is worth more to you, but developing a budget will help you make those decisions rationally.

Society tells us that we should live a certain way.  It seems like the media is the scapegoat for many of society’s bad habits, but many people imitate what they see on television whether it’s conscious or unconscious.  If your favorite television star is wearing the latest pair of Manolo Blahniks or driving BMW’s newest addition to the 7 series, you tend to want to do it to.

The problem with imitating what we see on television and in magazines is that most people can’t afford to live that kind of lifestyle.  Instead of realizing they can’t afford it and striving to afford it, the “right now” mentality that many people have causes them to use credit and loans to obtain the lifestyle they desire.  This is where the problem starts.

If you have to use credit to obtain a lifestyle, you will also have to use credit to maintain that lifestyle.  Unless you drastically increase your income, you will not be able to play catch up while continuing to live a luxurious life.  Many people incur a large amount of debt people incur just to purchase consumable goods like clothes, food, shoes, and transportation.

Most of these consumable goods begin to lose value immediately after they’ve been purchased.  You couldn’t even sell them to repay the debt incurred to pay for them.  What’s worse is that in a few years, you might not even use these items, yet you continue to receive a bill for them each month.  Considering interest charges, you could end up paying over a thousand dollars for a hundred dollar purchase.

Debt keeps you from saving money.  Chances are, if you’re using debt to pay for your lifestyle, you aren’t putting any money toward savings.  What’s going to happen in the case of an emergency, if you lose your job tomorrow?  Would you be able to survive?  You can’t depend on your credit cards, especially if they’ve been maxed out on clothes and shoes.  Depending on your debt load, you might not be able to apply for a loan or credit card to help you out of the situation.

A lifestyle supported by debt is not a healthy one.  You can only live beyond your means for a short period of time.  Living a life that’s debt-free doesn’t mean you’ll be completely free of worries, but at least you won’t owe money to anyone.