We made it through the spending season mostly within budget, but there are a couple areas I’ll need to review in planning next year’s budget, and the corresponding contributions to our Christmas sinking funds.

In years past, we often blew through the budget and financed the remainder of our gift purchases on a credit card. Judging from the amount of swipes I saw in the check-out lines, I can assume we were not alone. Even in what most consider to be a fragile economy, there didn’t seem to be a shortage of shoppers willing to finance Christmas on their credit cards this year.

Assess the Damage

I’ve found the best cure for a holiday spending hangover is to address the damage head-on. No avoiding the bills until January 30th. No pretending it didn’t happen.

Between now and January 1st, figure out where you stand – how much damage was done. Did you blow through your budget and now find yourself low on cash? Did you rack up more credit card debt than you intended? Maybe a little of both?

Use Mint.com, or even a homemade spreadsheet, to take an updated inventory of your household finances. If you are able to transfer some money from savings, without jeopardizing your emergency fund, consider paying off your credit card debt before the New Year – debt free is a great way to start a new year!

If you don’t have enough cash around to pay off debt in one fell swoop, now is the time to devise a debt repayment plan for the coming year. How much will you have to pay each month to be debt free by April? Don’t let holiday debt hang around; it winds up becoming permanent debt, and two years down the road you’ll find yourself still paying interest on Christmas 2011 purchases. Not fun.

Update Your Plan for Next Year

Once you have addressed the damage done this year, consider updating your holiday spending plan next year. We underestimated our budget a bit for presents to extended family members and friends for which we wanted to give a gift. We also underestimated our “giving” budget, as we felt compelled to help beyond that for which had saved.

I don’t regret either decision, but I do want to build it into next year’s budget, because the earlier you start planning for a big expense, the easier it is to save for it.

Consider the following example:

Let’s assume next year’s Christmas shopping budget will be $600. If we start saving now that looks like $50 a month for the next year. If we wait until July, we’ll need to save twice that amount, $100 a month, to hit our goal. That’s a big difference. And it isn’t like Christmas sneaks up on us; it comes around every December 25th.

If you haven’t already created a separate savings account for these types of annual (or nearly as infrequent) expenditures, I highly recommend it. We have an online savings account that allows us to create a sort of subaccount where we save for infrequent expenses like car tag renewals, Christmas shopping, quarterly estimated self employment taxes, etc.

The sinking funds are funded by small contributions all year long, and when the expense is due, we simply transfer the money to our checking account and pay for it with cash. This has a way of smoothing out large budget blips, and reducing the likelihood of a spending hangover the next time around.

Before the New Year has us back in “holiday mode,” take a few days to reflect on this year’s holiday season. Hopefully, gifts will play but a small role in those memories, and instead you have happy memories of time spent with loved ones.

“I would like to lower the limits on two of my credit cards from $6,000 to $1,500, and $7,200 to $3,500, but I’m not sure what the repercussions would be.”

“My FICO score, according to my credit union, is currently 762.”

“I read your blog several times per week.  I am happy to report that after many years of struggling, my total debt is less than $10,000 ($8,400 in student loans and $1,475 on a personal loan at my credit union).  I’m on track to be debt free in a little over a year!”

Thanks for being a loyal reader, Emily. Congratulations on your progress – you are on the homestretch now, and will soon enjoy the freedoms of being without debt.

Lowering your credit limit seems to be the responsible thing to do. After all, you are eliminating risk for the card issuer by reducing the amount of potential liability they are exposed to, and you are reducing the potential for you going on a wild spending spree and adding thousands to your debt.

Keep Credit Utilization at 30% or Lower

Unfortunately, the credit scoring gods don’t quite see it that way. One of the major components of your credit score is referred to as “credit utilization.” That is, the percentage of debt you owe in relation to your credit limit.

As an example, if you owed $3,000 on a credit card with a $10,000 limit your credit utilization would be 30%, which most agree is the sweet spot, or at least the upper end of the utilization ratio. Anything higher and it actually drags down your credit score.

If you reduced that $10,000 credit limit to $5,000, but still owed $3,000, your credit utilization would double to 60%. Maintain this level for too long and your FICO score could decline.

If you are concerned with maintaining a good credit score, and 762 is a certainly a good score, it might make sense to wait until you have paid off your balances entirely to reduce your credit limits, or to close a particular credit card account. At that time, consider how much you may be spending on the card each month and ask for a limit roughly 3.5 times that amount (round up to the nearest $500 just to be safe).

Assuming you plan to spend about $500 a month on items you purchase with a credit card (utilities, gas, etc) ask for a limit around $2,000 to ensure you stay under the 30% utilization threshold. If your billing statement cycles and a higher utilization ratio is reported to the credit bureaus, you could see a drop in your credit score, even if you pay off the card’s balance each month.

FICO Scores – Who Needs ‘Em?

Having said all that, a good FICO score is most important only if you plan to borrow again. Sure, credit scores are sometimes used to make employment decisions, and insurers often use credit scores to make underwriting decisions or to set premiums. However, it’s my opinion that we have become way too dependent on credit scores these days.

Make credit decisions that work best for your financial household, not because FICO suggests doing it one way or another. In the long run, you’ll be better off for it.

Thanks again for being a reader, Emily. Best of luck knocking out that remaining debt. Write back and let us know when you are officially debt free.

Ask the readers: Have anything to add for Emily? Have you considered asking issuers to lower your credit limit, despite the impact on your FICO score? Feel free to share in the comments below.

Folks like to talk about earning credit card travel rewards, but sometimes they eat their words when it comes to redeeming travel rewards.

Dave Ramsey says, “75% of airline miles “rewarded” are never redeemed” (Total Money Makeover page 90).  Unfortunately, there is no proof or documentation for us to decide if this is true or not.

However, if it is true, it is troubling.

It’s troubling because people are effectively wasting 75% of their reward earning potential!

Why aren’t consumers using their credit card rewards?

Deals We Like states that  “Nearly 60 percent of consumers will not have enough rewards for a spring getaway.”  So perhaps people are not using their rewards because they are still in the accumulation earning phase. 

However, a second detail from Deals We Like states, “Almost one-third of consumers (29 percent) will have to settle for a “stay-cation” instead as they indicated blackout dates would prevent them from using credit card rewards for a spring trip.”

Consumers aren’t using mileage rewards because they simply cannot find a good way to use them.

What Important Lessons Can We Learn From Unused Airline Mileage Balances?

1. People are earning points and miles with programs they don’t really understand.  If you are going to collect miles (and yes, they can be good), you’ll first need to educate yourself.  You need to know that 1-3 months is often not sufficient enough time to book an award ticket using miles.  Sure, it can be done, but to consistently expect to book flights with miles a month out is unrealistic.  If you don’t know this, you’ll likely be one of the 60 percent that feel disappointed.
2. Your credit card rewards earnings must be focused.  There is no point in starting to collect miles for a flight if you’re not going to finish the process to get enough miles to fly.  When awards start at 25,000 miles, then 20,000 is effectively as good as 0 miles.  Sometimes we have multiple cards in our wallets and don’t know which to use.  The problem is that we earn several partial points and rewards.  Don’t start something you don’t intend to finish.
3. Most people are not willing to put in the effort necessary to use their awards.  This benefits those of us who use our rewards because there is less competition, but I’d rather see you get on the free flight for which you’ve been saving miles.  Award bookings do require time to find the best booking that meets your needs.  If you get stuck, there are people on the web who can help you with your award booking.  Don’t just let your miles expire.
4. Choose your credit card wisely.  Having unused miles means you probably made a mistake when selecting the card.  If you’re not willing to put in the time necessary to book your free flight, then you should stick with cash back credit cards.  I love air miles, but I know they’re not for everyone.  Another option would be to use a points related credit card program that allows you to buy flights using points.  One such program is the Ultimate Rewards program.  The Chase Sapphire Preferred (with a 50,000 point bonus) is a great way to kick start your way to (or get everything you need) for a free flight.   You can use those points for up to $625 worth of travel without blackout dates and the work of an award ticket.
5. People neglect to see the real value in flyer miles.  If you use frequent flyer miles to book international business class seats, you can get over a 5% back value per point.  While cash back and points systems cannot really be stretched beyond their 1-2% value, you can stretch air miles if you book more expensive flights using miles. 

In the end, I think consumers need to be educated and aware.  You need to properly research your card before earning airline miles. 

I’m a big fan of airline miles, but I can tell you that certain programs are junk.  Just like currencies, not all frequent flyer miles are the same.  A guy who has 1,000 Yen doesn’t have as much as someone with 1,000 US dollars.  If you’re going to collect miles and points, be sure you do it with a program that has a solid reputation for both ease of earning and ease of redeeming.

Airline miles credit cards can be a great way to earn credit card rewards, as long as you’re willing to endure a little work during the redemption process.  Otherwise, don’t let your rewards melt away.  Take advantage of a points based card or a cash back card.

Enacted on Oct. 1, 2011, the crux of the new regulation is the distinction between household and individual income. Household income can no longer be considered when analyzing an applicant’s creditworthiness. This change may prevent many stay-at-home parents from being able to open a credit card account.

While I’m not a big fan of credit cards in general, knowing that I probably no longer qualify to open an account in an emergency is a little alarming.The new rule dictates that only the applicant’s individual income may be taken into account by the credit card company when deciding whether to grant credit. So that means that a stay-at-home spouse with no income or only a small income (like me) would probably not qualify, even if the household income is substantial.

For those seeking to establish a credit history, improve a credit score, or gain financial independence, this is a knee-buckling change.The new rule is part of the CARD Act, the Credit Card Accountability Responsibility and Disclosure Act of 2009, discussed in detail in this creditcards.com article. The CARD Act makes the ability to pay off debt the paramount consideration when issuing credit. It is designed, in other words, to protect consumers from themselves. The act’s goal is to prevent cardholders from racking up mountains of debt that they can not repay effectively. Sounds good, right?

Living in a Material World

As we all know, even if you are opposed to making purchases on credit, having a credit card is virtually unavoidable. From simple transactions like renting a DVD or making a car reservation, to major transactions like qualifying for a business loan or a home mortgage, having a credit card is essential.

This change, although intended to protect consumers in general, places stay-at-home spouses at a distinct disadvantage.Imagine the case of a newly divorced or widowed spouse trying to get through the day without a credit card. In many cases, these people may have adequate resources, job skills, and assets to qualify for credit, but without individual credit history, a sudden change in marital circumstances could leave them high and dry, credit-wise.

This amendment also represents a major setback for stores that offer on-the-spot credit with a simple form filled out at the register. No longer will big retailers like Target, Home Depot and Kohl’s be able to offer customers credit cards at the point of sale—and they are not happy about it. While this rule may help curb impulse purchases, for consumers like me, there is a major downside.

Living abroad, I visit the United States a few times a year and normally arrive with a long shopping list in hand. Many items are dramatically cheaper in the States than here in Costa Rica, and other items are simply not available here. Last summer I racked up a big bill at Target, applied for the instant credit card, pocketed the 10% sign-up discount, and then zeroed-out the balance on the next bill cycle. Under the current regulation, I won’t be able to do this unless my husband is with me. Not a nice feeling.

Charging Ahead

If you didn’t apply for your own credit card before the Oct. 1 deadline, all is not lost. There are still several ways for a stay-at-home spouse to obtain a credit card, albeit with restrictions and caveats:

Authorized User: A non-income-generating spouse or child can be added as an authorized user on an existing account without being legally responsible for repayment of debts incurred on the account. The authorized user status does help establish credit history and so this is a workable option for many consumers.

Co-Signer: Just the word “co-signer” conjures up all sorts of credit horror stories, but for some people, it may be the only option. As a co-signer, you are legally responsible for debts incurred, so proceed with caution if you choose this route.

Work It: If a stay-at-home spouse has even a small income from a home-based business or part-time job, this may be sufficient to obtain a credit card with a very low limit. Properly managing a credit card account with a low limit can be a good way to establish credit history.

Hang On: If you have an existing credit card in your name, but anticipate a break in employment for any reason, consider zeroing out the card, but leaving the account open. Once your income ceases, it will be difficult to obtain a new account in your own name—so don’t close that account!

Note: In community property states such as California, Texas and Louisiana, different rules apply that may allow a non-earning spouse to receive credit in his or her own name. On the flip side, non-earning spouses may also be held liable for debts accrued by their partners.

This article was written by contributing author Laurel Gray.

Unfortunately, I ignored many of their lessons with regard to money and spent much of my 20s digging out of debt. I certainly don’t want my own children to repeat these mistakes, and I believe it may be harder for them to dig out.

With all the economic turmoil going on, I realize being fiscally responsible will be more important (and more difficult) for my children as they grow into adulthood.

Parents have always had to battle things like unrealistic media portrayals and an overall culture of consumerism. But layer on top of that the ridiculous levels of debt we’ve piled up as a country, and their future looks a little less certain.

Put another way, our kids probably won’t have the backstop we had. It’s doubtful social security will be around. Who knows where health care will wind up. Taxes are likely to be higher, and at least in the near term (meaning the next 5-10 years), things will probably cost more thanks to inflation, currency devaluation or some combination.

But it isn’t all negative. There will still be opportunities for our kids. People will still be needed to teach, to build things, to design building and bridges and roads, to provide health care and nursing and rehabilitation. To work on cars, to serve in the military, etc, etc.

However, to take advantage of those opportunities, our kids must first set themselves up for success. With all that in mind, I offer up:

10 Things I am Trying to Teach My Kids About Money Before They Reach Adulthood

1. No one owes you a thing. Too many people go through their entire lives with the expectation they are owed something. This is not the case, or at least it shouldn’t be. All you should ever expect is to be judged, compensated and respected based on your work ethic and your ability to create, inspire and hustle.

2. Debt is a cancer. Debt is a cancer on our society, on households, and on us as individuals. It saps creativity. It creates pessimism. It robs your future dollars. It limits your freedom. Avoid debt like the plague. Remember the old adage:

“He who understands interest – earns it. He who doesn’t understand interest – pays it.”

3. Save for emergencies…big emergencies. When you are young and many years from considering retirement (and not earning much), it’s tough to save money. But I have discovered no softer pillow than having money in the bank for emergencies. Aim to save about a year of your basic living expenses in a simple savings account (no risky investments here). With a one-year cushion, you’ll be able to weather storms many others will not.

4. Live simply. In 2011, life seems pretty complicated. By the time you are adults, I imagine it will be even more so. There will be new gadgets and toys and cool services and “got to haves.” The problem is, all these things compete for your earnings. I’m not advocating living like a pauper, but limit yourself to only a few of life’s luxuries.

5. Sleep on big financial decisions. When it comes time to buy a car, or a house, or book your first major vacation as a family, sleep on the plans for a couple nights. People selling you these things want you to act immediately to lock in their commission, as I would expect them to, but remember that you are the one who has to pay the bill. Some of my biggest financial regrets came because of a knee-jerk reaction. Be slow. Be methodical. Listen to your gut.

6. Protect your credit. Not because you hope to borrow money, but because you may find people extending a service to you may do so for less cost if they think you aren’t a big risk. And if those people don’t know you well, your credit score may be their only determining factor. It’s not necessarily fair, but it’s a part of life. Credit blemishes can hang around for a decade, so it’s best to avoid them in the first place.

7. Learn to do things yourself, but don’t be afraid to call in the experts. You may remember the time your dad rescued a toy from the toilet trap, saving us an expensive plumbing repair bill. Or the time I climbed up in the attic to unclog the air conditioner drain. But your dad knows his limitations, and calls in the experts when necessary. That’s what emergency savings are for.

8. Shallow people judge your things, real friends judge your character. Some of the saddest, loneliest people I’ve ever known have been surrounded by the nicest things money can buy. They often acquired these things to impress people they thought mattered, and in many cases it did – temporarily. Meaningful relationships are based on things money cannot buy: trust, respect, integrity, compassion, love.

9. Don’t trade the things you care about for a big salary. Remember what mattered to you most when you were a kid: Family, fun, dreams. These things should remain important to you as a grown-up, but often adults sacrifice these things to earn a big salary. Now, everyone has to sacrifice some to earn a living, but by learning to be content, you may be able to earn a comfortable living while still enjoying other things.

10. Start saving early. Remember those money games we used to play when you were a kid? One of them was an attempt to get you to understand one of the great financial wonders of the world: compound interest. You see, when you save money you earn interest on it. The next month you earn interest on the money you first put in, plus the interest you earned the month before. That’s right; you earn interest on interest. Now carry out that example for many years, even decades, and you can understand how some people are able to accumulate wealth. The trick is, you have to start early.

Parents, consider opening a kid’s savings account to get them started early. Our kids deposit a portion of allowance earnings every couple weeks and it has taught them a lot about the mechanics of banking – completing a deposit slip, balancing their savings register, etc.

Finally, keep in mind something your great grandfather taught your dad about finding balance. Be frugal, but remember to occasionally stop and smell the roses. Life is short, and it is meant to be enjoyed. Take an expensive vacation every now and then. Buy something of your “heart’s desire,” even if it doesn’t make sense financially. Be frugal in other areas of your life to make room for things you truly enjoy.

This post was included in the Family Finance Carnival at About.com: Kids and Money

Debit Cards—The Pros

A debit card withdraws funds directly from your bank account, which encourages responsible spending. You see your ledger account balance declining with each purchase, which offers an accurate (or sobering) picture of your spending habits.

Debit Cards—The Cons

If you do not keep a weather eye on your balance, you might overdraw your account. Most banks offer “overdraft protection” for debit card accounts, but this “protection” might come laden with interest charges and onerous fees. Be sure to read the fine print on your debit card agreement so you are aware of the bank’s policies on overdrafts.

Credit Cards—The Pros

If you are responsible in your use of credit cards—which means spending within your means and paying off credit cards completely each month—they can be better than debit cards in a few ways.

First, a credit card allows you to spend money you don’t have. I know this may sound like a slippery slope…but within reason, it’s justifiable. For example, if a major appliance is on sale early in the month, but you won’t be paid until the 15th, you can take advantage of the sale by using the bank’s money for the purchase. As long as you intend to pay off the balance at the end of the month, you come out ahead.

Second, many credit cards have great rewards programs. You can funnel all your expenses through your credit card, amassing loads of points that can be used for airline travel, free hotel stays, discount programs, or cash-back plans. As long as you still pay off your bill at the end of the month, you reap the rewards without losing anything.

Note, some excellect reward debit card programs are cropping up now, too.

Third, credit cards offer superior consumer protection. If your credit card is stolen, in most instances you will not be held responsible for the charges, save the first $50 (most issuers don’t even charge customers for this).

Read more on what to do if your credit card is stolen.

If you have a dispute with a vendor, the credit card company can withhold payment and mediate the complaint. This service is backed by Federal law, which empowers the credit card holder. Don’t recognize charges on your current credit card statement – here’s how to dispute a credit card charge.

When renting a car, many credit cards offer coverage for collision, loss of use, and towing charges. This can save you a bundle on car rental fees—just be sure to review the credit card company’s policy before declining or buying rental car insurance.

Credit Cards—The Cons

We are all familiar with stories of individuals and families struggling to overcome crushing credit card debt. We piled up a bit of debt ourselves a few years ago on excessive shopping, school tuition and related expenses.Fortunately, we kept our noses to the grindstone for a couple years and paid off our credit card and school debt.

Used irresponsibly, a credit card can blow up in your face like a personal finance grenade. Credit cards with high interest rates can turn inflate the costs of your purchases significantly as you pay for them over an extended period.

Be aware that credit card companies can raise your interest rate after your card has been issued. This practice has been reigned in somewhat by legislation enacted in mid-2010, but if you are late or miss a payment, the card issuer still has the ability to sock it to you. Check your monthly statements carefully to make sure your rate has not changed.

Self-Awareness Is the Key

Take an honest assessment of your spending habits, and then determine which card is best for you. In many cases a combination of credit and debit cards is the wisest choice, to maximize the benefits of each.

I’m not shy about talking about payday loans. In other entries to my blog, you’ve heard me condemn them up and down, backwards and forwards. (Trust me. I’m not done yet.) I’ve even put them near the top of my list of financial Weapons of Mass Destruction. I can’t say enough about how destructive this kind of lending is. They don’t call it predatory lending for nothing, that’s for sure.

I’ve laid out before a number of reasons why payday loans are a flat out bad idea, so I thought I’d use this entry to go into deeper detail about maybe the most important part of what makes payday loans such a rip off.

The APR. Trust me, it’s absolutely, positively, astronomical.

The Basics of APR

I don’t want to assume everyone knows what I mean by APR, so let me frame it up for you quickly before I get too deep into why payday loan APRs are so horrible. Stick with me for a minute, and I promise – you’ll be able to see for yourself why payday loan APRs are not to be messed with.

APR stands for annual percentage rate. In summary, this is the rate at which your loan accrues interest. In plainer English, this is the amount of money you have to pay beyond what you were loaned. To the person who loaned you the money, this is the profit.

Simply having an APR isn’t bad. Most forms of credit and most loans are made profitable through an APR. It’s a necessary part of the credit industry.

What makes payday loan APRs so ridiculous is how high they are. Percentage rates on these are many many times higher than most other forms of credit reinforcing why you need to avoid payday loans at all costs.

Typical Loan APRs

As I mentioned, most forms of credit have an APR. The difference between traditional forms of credit (like mortgages, credit cards, student loans, etc.) and payday loans is that most traditional forms of credit have at least a somewhat reasonable APR, and a payday loan has an exorbitant APR.

For example, a typical credit card’s APR is somewhere between 7% and 36%. Now, I know that’s a big range, but it goes to show you where someone who doesn’t have good credit would be placed – out at the upper end of the 30% range. Please don’t get me wrong – that’s not, by any stretch of the imagination, a good rate. If you have credit cards at that rate, it might make sense to talk to someone about consolidating your debt. Our current Visa carries a rate of 9.99%, but also remember that we pay it off each month.

For a second example, a car loan APR is usually somewhere between 5% and 15%. 15% is certainly on the very high end, but again – I bring it up because it’s an excellent example of typical APRs, and will help to show you just how ludicrous payday loan APRs are.

As a third example (and then, I promise, I’ll show you some actual examples of payday loan APRs), let’s consider mortgage rate prices from January 2010 through to the end of October 2010. Over that period of 10 months, mortgage rates ranged from 5.21% to 4.19%. Keep that in mind as we move on.

It’s worth mentioned that car and mortgage loans are usually for large sums of money, so lenders can afford to charge a lower rate. They still make plenty of money. 4.19% of $200,000 is $8,380, and that’s before you take compounding into account. Not too bad for a few days work.

Some Actual Payday Loan APRs

How does 521% sound? That was the stated APR for a lady that I met with that was struggling with her debt. The was the highest rate she had, with the others all being above 300%. If you ask me, it sounds absolutely ridiculous. And that’s not even the highest it goes. Payday loan APRs can range from about 390% to 780%.

Did your jaw hit the floor yet? Well pick it up and make this promise to me and to yourself right now.

“I promise to NEVER get a payday loan. I promise to remember that there are other options, and to explore what they are before making drastic decisions about my finances.”

Trust me, they simply aren’t worth it.

To answer that question, we must first consider the less obvious answer: some people don’t care. Seriously. They are apathetic, believing debt is just something people are supposed to have. After all, who can afford to buy a house or a car with cash, and even if they had enough, who would want to drop that much cash on such a large purchase?

Ignoring for a moment the side argument on whether or not it makes sense to pay cash for a home, I can understand how people have come to accept debt as normal.

Unfortunately, we live in a debt-driven society. We are told to get out and spend to resurrect our economy, even when we don’t have the money, or prefer to save it for a rainy day (and even when we see storm clouds gathering on the horizon).

A Debt-Driven Society

We are inundated with advertisements from credit card issuers, banks, car dealers and on and on. Our media is saturated with messages that make us feel inferior, or somehow inadequate, if we don’t own the latest gadget, a bigger house, a fancier car, nicer clothes, more bling, more toys and more payments (OK, so they don’t advertise that last one).

The only way to break yourself and your family free from the vicious cycle of debt is to finally scream ENOUGH! Enough of the marketing. Enough of the feelings of inadequacy. Enough of being compared to others. It is time to start living withing our means, not the couple down the street with two sports cars, a boat, a bigger house and a condo on the beach.

I have nothing against those people, but I am not in competition with them either, because financially, we have little in common. We have more mouths to feed. We make different choices. We make less money because my wife stays home with our children. We forgo the trappings of today for the promise of financial independence in the future. And that is just fine with us. But it hasn’t always been.

For far too long we tried to keep up with those people by augmenting our lifestyles with debt. It was all a facade, and the funny thing about it was people probably expected that we were simply using debt to finance a lifestyle that they could afford, but we couldn’t. Who were we fooling? Ourselves.

Then one day I woke up broke with a dead end job, a wife and two kids and nothing to show for seven years in my first career but a pile of debt and high blood pressure. We decided it was time to quit fooling ourselves, and to dedicate our lives to a more frugal existence. If you can’t first be honest with yourself, you can’t be honest with other people.

It’s difficult to admit to yourself you’ve screwed up. But this admission is very important, because continuing a lifestyle of financial denial only leads to a bigger hole to dig out of down the road. Like the saying goes, when you find yourself in a hole, stop digging.

STOP…

• paying minimum payments on your credit cards.

• writing balance transfer checks from one card to pay another (yes, I did it).

• getting cash advances from ATM machines because having a wallet filled with cash makes you feel rich.

• shredding bills without even opening them because you’d rather stick your head in the sand than face reality.

• reaching for your card to finance “emergencies,” sales and groceries. So many people rail against those dependent on the government, but are just as dependent on Visa and Mastercard. Don’t be a slave to big banks.

• opening credit card accounts for free t-shirts (been there), or 10 cents off a gallon of gas (done that), or some silly rewards program that accumulates points so you can exchange them for more crap to put next to the crap you’ve already stuffed inside your home using credit cards (done a lot of that!).

• turning to debt to finance cars because you lack the discipline to save cash for a car, or the discipline to buy a less sexier car. Cars do not define you.

START…

• finding ways to boost your income. Overtime, part time work, a side hustle, selling your crap all qualify as potential ways to get your income up. There is no shortcut to getting back to even.

• accepting responsibility for the actions that got you in debt. For years I blamed my employer, school, medical issues, lack of financial education growing up, etc. for my debt balance. How ridiculous. So many people have had it much worse, and managed to live within their means. So could we.

• educating yourself about personal finance. Much of what I’ve learned along the way I learned from reading. I checked out books at the library. I read magazines about money. I even watched and listened to media geared towards personal finance (radio shows, television shows, etc.). Turn off the football game, or the IQ-draining sitcom, and pick up a book about personal finances, or budgeting, or investing, or mutual funds, or insurance, or maybe even a biography about someone whose financial situation you admire.

• thinking about ways to get money working for you, rather than the other way around. How much better would your financial life look without debt? Create a dream budget and replace your debt payments with contributions to savings accounts, college savings funds, and your retirement account. Replace interest payments with interest income. Figure out just how much being a slave to debt is really costing you.

• reducing your monthly expenses to free up income to put towards debt repayment. Cancel the cable. Stop eating out. Shop your car insurance. Cut your own hair. Bicycle to or from work. Get radical.

So, You Want to Be Free?

Leading up to last week’s election a popular theme was personal and economic freedom. Some people think government is infringing on our freedoms. Others think government isn’t doing enough.

I say many in both groups are forgetting that they have already given up their freedom. They are totally dependent on banks to finance their emergencies, their businesses, and their households. They willingly sign away future paychecks in exchange for borrowed money.

Businesses turn to banks when they can’t make payroll. People ask for loans to pay off other loans, or loans to finance their education, or loans to finance an emergency car purchase because their other one just died. They often find themselves begging someone thousands of miles away in a call center for credit limit increases to finance emergency travels to care for a love one.

So if you really value freedom, you will join me in first ridding yourself of the bondage of debt. When you sign up for a loan, you are at the mercy of the bank and its well-crafted fine print filled with legalese and the many ways they can control you for the life of that loan. And if you don’t play by their rules, remember they have your credit held hostage, and they don’t mind reporting to the credit bureaus the first time you slip up.

The next time you have an emergency, you can still call the bank, but this time it will be to move a little money from your emergency fund to your checking account to cover the plumber’s bill, or the hospital, or from your business emergency fund to cover repairs on the company truck. No longer will you be at the mercy of those holding the credit. Now, you are truly free.

The first thing we did after reaching debt freedom was realign our financial goals. The first, of course, was to secure a fully-funded emergency fund, one that represented about six months of expenses. Admittedly, it was tough to keep up the same intensity towards saving money as we had for paying off debt. That brings me back to the thought-provoking comment left by Rob from PassionSaving.com. Here’s a portion of that comment that struck me:

If your experience is like mine, it won’t be all smooth sailing from this point forward. I say this not to be discouraging, but to point out what might be a basic reality of human life — it is a journey of ups and downs no matter how skilled one becomes at handling one’s money issues.

What I believe today is that accomplishing a big money goal like paying off one’s debt does not so much solve all your problems as open you up to a higher class of problems. The old problems truly are solved. But solving them provokes you into taking on new adventures, which lead to new problems. You will continue to find yourself frustrated and stuck and in pain and in fear in days to come.

My initial reaction? Yeah right! What could possibly be any more painful, financially, than going through the motions of paying off debt? What money struggles could we face that are even close to the struggles faced in the past? I suspect most people still deep in debt probably had that same reaction. But as I thought more about Rob’s comment, and began to experience life after debt, I understand his point.

Yes, we no longer have to contend with debt, but that doesn’t mean more daunting financial challenges aren’t ahead. My oldest child will soon be ten years old, which apart from terrifying me as a father, also serves as a wake-up call to get her college savings in order. Because we spent so many years toiling with debt and trying to get on solid footing, her college savings have suffered. The good news? Without debt we can afford larger contributions to her 529 plan, which should help us make up ground.

It’s a similar story for our own retirement plan. I diverted money we could have, and probably should have, used for retirement savings to pay down debt. Unfortunately, this means we missed a great opportunity to invest in our 20′s and let that money compound for a few decades. Are you reading 20-somethings? Make long-term savings a priority now!

In the final analysis, I would have to admit that yes, life is easier after debt. Paydays are now an exciting event because it means making more contributions to savings, rather than distributing most of your income to credit card and auto finance companies. But life after debt is not without challenges. And those challenges can conjure up the familiar fears and anxiety felt when looking at a pile of debt.

How will I even save enough to retire? How much will my kids need for college? Will I ever be able to save in taxable investments to chart a course to early retirement? I’ll approach these new challenges the same way I approached, and overcame, the ones related to debt. We’ll tackle them head on, and remain disciplined through the same frugal approach we take towards nearly all of life’s ups and downs.

There have been few more controversial credit card practices than the one known as Universal Default. With the arrival of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, it is soon expected to be a thing of the past.

The elimination of universal default is one of the most important provisions of the sweeping federal legislation, signed in May and going into effect in stages through next August, that is expected to change the face of the credit industry, probably including ways that we do not yet expect.

What Is Universal Default?

Universal default provisions, often buried in credit card contract gobbledygook, have allowed the credit card companies to charge cardholders more interest for late payments that had nothing to do with that specific account. Simply put, this common provision has allowed the credit card companies to increase the interest rate when a consumer fails to make a payment on another unrelated account, be it another credit card account or some other type of credit account. Like a phone bill. Or a water bill.

The CARD Act would limit increases in interest rates to “a specific, material violation of the card agreement by the issuer,” according to a Senate Committee report on the bill. It also requires credit issuers to lower penalty rates after six months if the cardholder meets his obligations.

The dollar amounts involved in Universal Default can be significant. The finance website The Motley Fool calculated that an $8,000 balance could see an increase of $1,200 per year with an interest rate rise of 15 to 30 percent. If you are on the border of being able or not being able to pay your credit card bills, the default provision can make the difference, particularly when compounded over several cards.

Advocates of the universal default provisions would say that they are accepting the reality of a consumer’s overall credit profile. If a person fails to make a payment on another account, it could indicate that they will have a more difficult time making a payment on the subject credit card account when the time comes. Therefore the increase in interest rates can discourage further borrowing that cannot be met with payment. In addition, it keeps more reliable cardholders from having to pick up as much of the tab if in fact that person eventually defaults on the balance.

Critics of Universal Default, however, point out that having multiple creditors simultaneously raising the interest rates and charging the consumer more can create a credit card death spiral that would not have existed without the universal default provisions. In addition, they have questioned the fairness of altering a contract when the contract has not been violated. It is perfectly reasonable to think that a person can miss a payment on one card for a variety of reasons and still make the regular payments on another.

Is Universal Default really dead, or will credit card companies figure out other ways to accomplish the same goals? Only time will tell.