Welcome to our week-long series on crushing your credit card debt. In this fourth of five articles, we look at several ways to free up extra cash to put toward your credit card debt.

In yesterday’s article about using the debt snowball, we saw how even an extra $50 a month toward your debt can make a huge difference. Now it’s time to find that extra $50 (or more) in your monthly budget. And it’s easier than you might think.

Now before we get to the details, let’s look at the big picture. There are only three ways to free up more cash to put toward your credit card debt: (1) spend less, (2) make more, or (3) do a little of both. Of course, reading an article telling you to spend less or make more isn’t exactly helpful. So we are going to take it a step further and give you some practical tips.

Spend Less

I’m convinced that just about anybody can find an extra $50 by reducing expenses without changing their lifestyle one bit. I call it “painless ways to save money.” Here’s how it works:

• Step 1: Make a list of your monthly bills: Here we are not talking about money you spend eating out, grocery shopping, or filling up the tank. Instead, we are talking about money spent paying your monthly bills like your mortgage, rent, cell phone, Netflix, cable, and utilities.
• Step 2: Eliminate the cost: Once you have your list, go through your bills and ask if there is anything you can do without. Do you really need a land line when you have a cell phone? With football season just about over, how important is the NFL Network? Are you using your Netflix subscription, or has the last DVD you ordered been on top of your TV for 3 months?
• Step 3: Reduce your costs: For those bills you can’t get rid of, scrutinize them to see how you can lower your costs. Here are some examples:
  • Refinance your mortgage: One of the easiest ways to save money, getting a lower rate on your mortgage can easily save hundreds of dollar a month. Knowing when to refinance will help you save the most.
  • Lower your insurance premiums: It’s so easy to compare insurance online that there’s no excuse for paying more than you should. You can compare auto insurance, health insurance, and life insurance rates online in a matter of minutes.
  • Combine cable, interest, and phone: We saved a bundle last year when we combined our communication services. Called a triple-play in the industry, every provider offers discounts when you bundle your packages.
  • Slash Cell Phone Bill: Cell phone’s aren’t cheap and most of us just accept this. However, there are so many ways to cut down your bill and most of the time it just requires us to look at the bill. These bills are confusing and because of this it’s tempting to not even look at the bill. Here’s a few quick things you can focus on: compare the minutes you use to the minutes you pay for, look for things you already pay for elsewhere like Roadside Assistance of Phone Insurance, and look for mistakes like a text package on a line that doesn’t even text.
  • Just ask: Ask your landlord to lower your rent. Ask your cable company if they have a better deal. Ask your cell phone provider if they can offer a better price. Ask your garbage collector for a lower price. Ask everybody you pay for a lower price. You won’t succeed in getting a better deal every time, but chances are you will end up saving money without sacrificing the service you receive.

For more ideas, check out 99 Painless Ways To Save. Most of us can save more money and this e-book teaches us how. There are simple things we can do to save that don’t require us to make significant changes. It’s packed full of tips and tricks to save money.

Make More

Getting another job might not be feasible for everyone, but that doesn’t mean there aren’t ways to earn some extra money to pay towards your credit cards. There are a variety of online tools to help you make some extra cash. Here are some ideas–

• If you don’t mind being a bit spontaneous and open-minded, then consider one of the many websites offer odd jobs. Many of these sites don’t require any special skills and you get to pick when you work. This makes earning money convenient and flexible to your already hectic schedule.
• Don’t forget about sites like Craigslist. I’ve made some decent money by selling unused cell phones, an old T.V., and an mp3 player. Just take a look around your house and find things you can live without or things you just don’t use anymore. It’s extra cash that can you can pay on your credit cards and you won’t even miss it.
• Start your own blog. It’s much easier than you think, costs very little, and the income potential is unlimited. These two articles will get you started: (1) How to Start a Blog in 3 Easy Steps, and (2) A Beginner’s Guide to Making Money Online.

Tomorrow in our fifth and final article in our series on how to crush your credit card debt we’ll look at some common mistakes people make and how to avoid them.

I often think of my mom and her frugal ways. She was a budget goddess. In the days before the pc, lap top, tablet and smart phone phenomenon, she implemented a budget system that anyone could manage – anyone who was committed that is.

It was the envelope system. When the paycheck came home my mother actually took it to the bank in person (crazy huh). She deposited re-determined amounts in the savings and checking accounts and left with the rest of the cash. Mom would come home and break down the remainder of the cash into envelopes she kept in her top dresser drawer.

Technology has eclipsed the old envelope system of budgeting for most people. Still, you may want to consider the envelope system; it worked for our family. But then again, it does seem a bit outdated with all the cool technology we have right at our finger tips.

In the past I’ve written about online budget tools and personal finance software. My favorite by far is Mint.com. But today I want to cover a few online tools that are probably new to most people. Each of these options offer a sound way to manage your money online.

So take a look at these 5 online money management tools to help you track your spending.

The Birdy

If your goal is to just track cash purchases, this is as simple as it gets. If you have an aversion to spread sheets and tons of instructional info, this may be for you. TheBirdy.com is free and they promise to never spam you. All you need to do to set up an account is enter your email address, a password, and your time zone.

I signed up to see how user friendly it was. It sets up a dashboard for your account. You simply enter your cash purchases in a little box as indicated by their examples. Your expenses show up as a pie chart depending on how you enter the cash amounts and the category. The cool part – they send you daily emails asking you to enter your cash transaction amounts. That’s what I call a neat little tap on the shoulder reminding you to pay attention to what you are doing – helping you become more aware of all those smaller purchase amounts. You know – the ones that can really add up.

Mvelopes

Mvelopes takes the traditional envelop budgeting method and combines it with innovative financial software to help folks manage their money. This tool not only helps you manage your monthly bills, but the standout feature is that it helps you plan ahead for future expenses. The idea is you don’t need to borrow money on your credit card to pay for things, you just need to plan. When using Mvelopes, it doesn’t mean you toss out your cards and just use cash, but you set aside specific dollar amounts in your online envelope just like you would if you were setting aside cash. Once you make a purchase, the dollar amount automatically comes out of the correct envelope so you have a visual of what you have spent and how much you have left. There is no cost to use Mvelopes.

You Need A Budget

YouNeedABudget is budgeting software that’s all about controlling cash flow. You enter your monthly income and expenses and it tells you how much to spend and save. It also provides a four step program to help you gain control of your finances.

Step 1 helps you understand how to assign each dollar a job (category). Hey, that’s like writing the category on the outside of the envelope!

Step 2 helps you budget for the big bills by setting aside money for the inevitable. You know – the insurance bill, the real estate taxes and those other dreaded BIG bills.

Step 3 explains how their software will actually automatically deduct from your next month’s budget if you spent too much. In other words, you will have to make do with a little less.

Step 4 helps you focus on getting out of the “paycheck to paycheck” lifestyle, and it encourages you to start by saving enough to have one month in reserve. Then you can work toward having a bigger cushion in case of an emergency.

The cost of this program is $60 and includes free online classes. They offer a free 34-day trial if you want to give it a try.

Adaptu

This offers money-tracking tools and lots and lots of content. It can track all your accounts and expenses from your various banks and credit cards and allows you to see at a glance whether you have the ability to buy the item you are currently considering. Adaptu.com is free and has a free iPhone app. Your info is accessible by a 4-digit PIN and all information is encrypted and constantly monitored.

HelloWallet

Here you can find information to help you “avoid financial missteps.” They offer advice on creating a budget, saving for retirement, getting out of debt and tracking your cash flow. They monitor your progress and provide guidance.

They are not affiliated with any financial institution, which allows them to offer unbiased recommendations. The cost for HelloWallet is $9.00 a month and includes a free iPhone app.

If you tried any of these budgeting options, tell us what you think of them.

I‘ve been a long time user of Mint.com. If you’re not familiar with Mint, it is a free online personal budgeting tool that allows you to see your whole financial life in one place.  Whether it’s checking, savings, credit cards, PayPal, investments, retirement accounts or many other personal finance accounts, Mint.com is your one stop shop to manage them all. In this review, I’ll share my experience with Mint.com.

Before I go into specifics, let me say that there is a difference between liking a product and liking what it does for you. Mint.com is an example of an innovation that delivers on both. It’s an inherently good concept and very well executed.

How to Get Started with Mint.com

To begin, simply create a Mint account (it’s free). Once created, you will be prompted to add all of your financial accounts, including your bank account, credit cards, home loan and investment account information. This is the critical step to getting the most out of Mint.

You add these accounts in two steps. First you search for you financial institution on Mint. They have just about every bank, credit card company, and investment broker imaginable. Once you locate the financial institution you want to add, you’ll be prompted to enter the log-in credentials you use to access that account. This allows Mint to access your accounts and download your financial information into Mint.

There are three things to note about this process. First, Mint.com uses the same back-level encryption to protect your financial data that banks use. Second, the access you give to Mint is read-only, meaning it has no ability to actually move your money. It can only read the transactions and balances in your account. And finally, the process takes roughly five minutes.

I have to confess that I was a bit nervous the first time I entered this information. But I’ve used Mint for about two years now and have never had my financial data compromised.

What Makes Mint.com So Awesome?

First and foremost, it’s free.  Who can object to free when software like Quicken Deluxe costs $60. Second, Mint.com is easy to use, which is why over 6 million people use Mint.  It categorizes everything for you, every day.  You can name the categories yourself, if you’re not happy with the default options Mint.com has set up for you.

Overview

Called an Overview, the first thing you see when you log into Mint.com is a snapshot of your finances. I use this screen more than any other. From the Overview I can look at the balances in all of my bank accounts, see how my investments are doing, check my credit card balances, and get alerts about upcoming bills.

Here’s a screenshot of the Overview in Mint:

The Overview screen also gives you a snapshot of your monthly budget. From this snapshot, you can quickly see if you are on track or if you are spending too much in one or more areas of your budget.

Transactions

As the name suggests, with the Transaction page you see all of the transactions from all of the accounts you’ve linked to Mint. I use this page to categorize all of my spending. Mint does a reasonably good job at knowing how to categorize many transactions automatically. But there are always some transactions that I have to categorize myself.

The Transactions page has several helpful tools. First, it’s a snap to few your transactions by account, budget category, or payee. For example, I can quickly few the transactions for groceries across all accounts or just one. Second, Mint compares how much you’ve spent say on gas versus the U.S. average. This can be a helpful tool when setting up a budget.

Budgets

For many, this is the heart and soul of Mint.com. The Budget feature makes it ridiculously easy to set up and track your monthly budget. There are two approaches to creating a budget in Mint.

First, you can create one as soon as you sign up for Mint. You simply select the categories you want to track and how much you plan to spend in each category. Mint has a list of categories to choose from, or you can create your own. As noted above, for each category Mint gives you the U.S. average that people spend for each category, which can be a big help.

The second approach, and the one I used, was to wait a few months before setting up your budget. Let Mint track your spending, and then it will suggest a budget based on how you’ve spent your money. This makes creating the budget very easy. As you can see from the screen shot below, Mint has suggested a budget for me for groceries of $270 a month (a bit low because I had not categorized all my grocery transactions):

Goals

Mint Goals are a simple way to track your progress on important financial steps. While you can customize your own goals, Mint offers several goals to choose from, including paying off credit card debt or saving for an emergency.

Goals are useful in several respects. First, Mint integrates your account information with the Goals functionality For example, if your goal is to pay off your credit card debt, Mint automatically grabs your credit card balances and brings them into your goal. Mint also offers useful calculators to help you establish your goals, and it provides a simple and intuitive way to track your progress.

Investments

This is the disappointing side of Mint.com, at least for me. You can track investment accounts in Mint just like a bank account. Every day after the market closes I update the investments in my Mint portfolio. This snapshot is very helpful. But that’s about all Mint provides when it comes to investments.

So what’s the problem? Well, there are two problems. First, Mint does not provide any features to help with asset allocation. It would be very helpful if Mint broke down my investments by asset class much like Morningstar or Vanguard can do. Now in theory Mint can do this. When you go to the investment page, there is an “allocation” tab. Here’s what mine looks like–

Not exactly helpful.

The second problem is even more frustrating. Mint seems to have a problem when it comes to connecting with brokers and mutual fund companies. It’s not uncommon for Mint to have trouble downloading investing transactions. And even when it does download the transactions, they don’t always appear on its Investing page.

For example, my Overview currently shows all of my investment accounts. But when you go to the Investing page, my Scottrade account is mysteriously gone. Actually, it’s listed, but it is greyed out and the value of the account is not added to my total investments. this must simply be a bug in the system, but a very frustrating one.

The fact is that Mint.com is for budgeting, not investing.

Final Thoughts

So here’s where I come out on Mint.com.  If you’re a visual learner, like me, Mint.com has all the right graphs and charts to make me feel in control of my finances.  It’s orderly, easy, and don’t forget, free.  I suppose your expectation level will dictate how well you like this product. I expect mass market products to have pitfalls. Nothing can be everything to everyone.  If you’re on the fence on whether or not to use Mint.com, just look at all of the information you see simply after you’ve logged in.

Mint.com was already named the best online personal finance tool by Money Magazine, PC Magazine, and is PC World’s Editor’s Choice.  And since Intuit purchased Mint.com, there have been big improvements. It’s still not perfect, but I think it is the best overall option for online budgeting.

A lesson I learned early in life was not to judge a book by it’s cover.  Yodlee is an excellent online budget tool that is certainly more serious than it sounds. In fact, you might already have used it because in addition to Yodlee MoneyCenter being a free online budgeting tool, Yodlee was the software behind the popular, user-friendly Mint.com until they were purchased by Intuit. And if that wasn’t enough it also powers over 150 top financial institutions and portals, including thirty-two of the top fifty U.S. banks.  Very very impressive wouldn’t you say?

Starting from the beginning, signing up for a Yodlee account is easy.  After a few security questions and a confirmation email, you’re ready to login.  Immediately following your login, you land on the following dashboard:

Right away, you notice seven options at your fingertips, with another four tabs located at the top.

• Link Account – Yodlee works with over 10,000 financial accounts so linking them shouldn’t be a problem.  Each account takes less than a minute to add and on the rare chance you’re account cannot be linked, send an email and it should be added soon.
• Account Balances – Track all of your account balances including, checking, savings, investing and many more.
• View Net Worth – You certainly don’t want to see mine because it’s over $100,000 in the red but if it helps you sleep at night, check out the “view net worth” tab for a calculation of how much you’re worth.
• Track Spending – Follow your spending in categories like gas, groceries, restaurants and more.
• Create Budget – One of the most important steps of any personal finance mission, this area of Yodlee will allow you to create a budget that you can hopefully follow.
• Set Alerts – If you’re constantly surprised with large credit card bills, high utility charges and unexpected bank fees, you can set Yodlee alerts to receive emails when they post.
• Real Estate Center- Detailed analysis of your home’s value and any other real estate property you might own.

Some pretty straightforward stuff right?  Well adding to the basics, Yodlee has a tab dedicated to BillPay, where you can schedule payments from your accounts to your merchants free of charge.  Adding a payee is simple and this is what the basic search box for a payee looks like.

If you’re looking for a flashy, easy on the eyes website, Yodlee is not going to be for you.  Online budgeting software like Mint.com does a better job in graphics but if you’re looking for pure raw data, look no further than Yodlee.  Yodlee MoneyCenter puts more into its ideas than its wrapping paper.  That doesn’t have to be a bad thing because most of us would choose brains over beauty, right?

One reviewer gives you a great synopsis of just what Yodlee is all about:

“After checking out Mint yesterday, I was surprised by how much more robust Yodlee is.  It isn’t as pretty to look at it [however].  My guess is that they keep it sparse so their corporate customers can customize it with their own logos. As with Mint, it was very easy to import data for my accounts.  In addition to banks and credit cards, it can read pull from loans, investment accounts, even Gmail and PayPal.”

There are some smart cookies behind Yodlee, which was introduced about ten years ago.  While they are based in Redwood City, CA, they have a European presence and a growing India operation as well.  Although you won’t find much in the way of financial advice, calculators and added-value tools, Yodlee is my easy choice for best money management tool available today.  Simple, sweet, and to the point.

When you take into account all of the power Yodlee has behind it’s name you need to check it out.  If you’re not already using the software somewhere else, visit www.Yodlee.com and give them a try.  Yodlee a fool not to (I’m so sorry for that).

You’ve probably heard of ‘good’ debt and ‘bad’ debt. Good debt is when we borrow to buy something that generally goes up in value, like a home. Bad debt is when we borrow for anything else, like a car, a boat, a meal, a dress, a cruise, a wedding and so on.

Many teach that good debt is fine, while bad debt is not. The theory goes that good debt makes us wealthy as the value of our purchased assets go up, while bad debt makes us poor as we struggle to pay debts for which we have little to show. In fact, it’s a philosophy I’ve followed my entire adult life. And its flawed.

Not all debt is created equal, to be sure. A debt backed by an appreciating asset is far better than debt used to fund a lifestyle we can’t afford. Why? If for no other reason, we can always sell an asset to pay off good debt. With bad debt, all we have is the debt.

But the problem with ‘good’ debt versus ‘bad’ debt thinking is that it makes good debt seem more appealing than it really is. And there are two reasons for this.

First, debt, whether good or bad, takes away some level of our freedom. In my case, I’m 42 with enough ‘good’ debt for two families. If I were debt free, I could quite my day job and run this site full time. I’d really enjoy that, along with a few other business ventures I’d undertake. As it stands, my ‘good’ debt is requiring me to keep my 9 to 5 job. Thus, ‘good’ debt is preventing me from living the life I’d like to live.

Second, selling the assets that underlie good debt is not always practical. For most of us, good debt is our mortgage, and that’s true for us. We have a mortgage and a home equity line of credit used to renovate our home several years ago. We could sell our home, even in the current market, and pay off all of our ‘good’ debt. We would have enough money left over to pay cash for a home in many areas of the country, but not we we currently live outside of Washington, D.C.

It’s certainly a choice we could make. We would uproot are two high school children, sever all of our friendships, and leave many of our family members behind. We’ve chosen not to do that, and that’s the right choice for us. But that just brings me back to all of our ‘good’ debt.

Borrowing to buy a house is a perfectly rationale decision. In our case, perhaps we purchased more home than we needed, although we do enjoy where we live. But the fact remains that ‘good’ debt, at least for individuals, is a myth. Instead of ‘good’ debt and ‘bad’ debt, maybe we should just think of it as debt and bad debt.

Last week I published an article called Dave Ramsey Unleashed. I learned long ago that any post about Dave Ramsey will receive a passionate response from readers. Those that follow his financial teachings do so with “gazelle like intensity,” as Dave would say. One response that I received in both comments and email is that Dave Ramsey teaches that one should stop contributing to retirement savings (whether 401k or IRA) while paying off non-mortgage debt. The question is whether this is the right choice.

The first thing to keep in mind is that there is no “right” choice. There is a reason it’s called personal finance, as a reader reminded me just the other day. That’s not to say that any choice is a good one. But there are almost always more than one reasonable approach to a money management decision. As an example, while Dave Ramsey would stop saving for retirement to pay off debt as would Michelle Singletary, Liz Pulliam Weston believes we should not stop saving for retirement to pay off debt.

With that in mind, let’s walk through several steps that will help you make the best decision for you and your family:

Evaluate Your Debt and Retirement Savings Options

Step 1–Size up your debt: The first step is write down all of your non-mortgage debt and the interest rates you are paying. Credit card debt can easily be at interest rates in the double-digits or even above 20%. Car loans, school loans and home equity lines of credit are typically at lower interest rates. It’s helpful to note the amount of the remaining balance, the minimum monthly payment, and how much of the monthly payment goes to interest.

Step 2–Size up your retirement savings options: Here, the big key is look at any company contribution matches you’re entitled to receive. A typical match might be 50 cents for each $1 you contribute to a 401k, up to 6% of your salary. Some companies will match 401k contributions dollar for dollar, although that is becoming more rare. You’ll want to understand how much money you’ll leave on the table if you do not take advantage of the matching contributions from your employer.

It’s also important to note whether your employer matching contributions vest immediately, or if you have to wait some period of time before the contributions actually belong to you.

Step 3–Calculate your debt free date: It’s helpful to calculate how long it will take you to pay off the debt if (1) you continue to contribute to your retirement, or (2) if you stop contributing to retirement and use the money to pay down debt. Keep in mind that contributions to a traditional 401k are tax deferred. As a result, if you stop making those contributions, you won’t have the full amount to put toward debt; you’ll need to subtract the amount that will be withheld for taxes.

Why step 3? Calculating your debt free date can be a real eye-opening experience. You may be pleasantly surprised or completely depressed.

Making a Decision–Retirement Savings, Debt Pay Off, or Both

To see these steps in action, let’s take a look at the following hypothetical financial situation:

• Household Income: $80,000
• Credit Card Debit: $20,000 @ 15% interest
• 401k Matching: $1 for $1 up to 6%

By setting out this example, we’ve taken care of steps 1 and 2 above. We’ve listed our debt and know what the interest rate is. We also know what our 401k matching contributions will be if we contribute to our retirement. Now let’s look at how long it will take us to pay off the debt.

As a rule of thumb, the minimum monthly payment on a credit card is 2% of the balance plus interest. This does vary from card to card, so if credit card debt is what you’re up against, you’ll want to contact the credit card issuer to see how they determine your minimum payment. But using this assumption, our next credit card payment on $20,000 of debt at 15% would be $487.50. If we continued to make that exact payment each month (even though our minimum monthly payment would decrease as our balance went down), we’d pay off the debt in 58 months, paying over $8,200 in interest.

If you are wondering how I calculated that time period and total interest payments, I used an excel debt reduction spreadsheet calculator. It’s easy to use, very flexible, and free. Here’s the link to check it out.

Now let’s assume that instead of contributing 6% to retirement (which would total $4,800 on $80,000 in income), we put retirement savings toward the debt. Since we’ll have to pay state and federal taxes on the $4,800, let’s further assume that we’ll actually take home $3,840 of this amount (after 20% in taxes), or $320 a month.

Using the spreadsheet debt reduction calculator, the extra $320 reduces the time to pay off the debt from 58 months to 30 months. It also reduces our total interest payments from about $8,200 down to about $4,100. During the 30 months to pay down the debt, you would have given up 6% matching contributions totaling $12,000.

We can now compare the results between paying the debt off in 58 months while we contributed to our 401k, with paying off our debt in 30 months by forgoing retirement contributions. Here’s how it looks:

A few things about these numbers. First, investment gains or losses have not be factored in. Second, the $13,650 for “extra savings” represents the amount that was being put toward the debt. Once the debt is paid off, that amount can go to savings.

At first glance, the numbers seem to strongly support continuing to contribute to retirement while paying down debt. The difference of $6,250 is a lot of money. But one thing to keep in mind is that the retirement contributions eventually will be taxed. Assuming a 20% state and federal tax rate, the extra $24,000 put towards retirement in the first column of numbers will eventually get reduced by 20%, or $4,800. Factor that tax into the math, and the difference between these two options is a lot smaller.

Making a Decision–Retirement, Debt or Both

When all is said and done, here are the things to consider:

1. Matching Retirement Contributions: The better the employer match, the more likely one should continue to save for retirement to take advantage of the match. If there is no employer match, focusing on debt is often the best choice. Even with a dollar for dollar match, if the interest on debt is high enough, the decision may still be a close call.
2. Debt Interest: The higher the interest rate on debt, the more likely one should stop saving for retirement until the debt is paid off. If the debt is on no interest or low interest credit cards, low interest home equity lines, or a low interest school loan, than continue to save for retirement while paying down debt becomes a better and better option.
3. Be Honest: Before putting a stop to retirement savings, be hones with yourself about debt. One of the worst outcomes is to stop saving for retirement to pay down debt, only to find yourself going into more debt. If you’re not serious about getting out of debt, or you think there is a good chance you’ll charge the cards back up once they are paid off, keep saving for retirement.
4. Time to Pay Off Debt: For those with debt that will take many years to pay off, putting retirement savings on hold may be a bad idea. It’s one thing to stop saving for retirement for a year or two. But we all know that the key to successful retirement savings is to start early.
5. It’s Not All or Nothing: Keep in mind that you can compromise. Rather than saving nothing for retirement or contributing enough to get the full company match, you can meet in the middle. You can contribute some to retirement, even if it doesn’t take full advantage of the company match, and put the rest toward debt.

In our case, the non-mortgage debt we have is at very low interest rates. The highest interest we currently pay, after taxes, is about 3%. On top of that, my employer matches 401k contributions dollar for dollar, and the matches vest immediately. So we’ll keep saving for retirement while paying off debt.

So how do you make this decision?

Dave Ramsey’s Baby Steps to financial peace have become a popular way to get control of finances. In case you’re not familiar with the Dave Ramsey approach to money, here are the 7 Baby Steps:

1. $1,000 to start an Emergency Fund
2. Pay off all debt using the Debt Snowball
3. 3 to 6 months of expenses in savings
4. Invest 15% of household income into Roth IRAs and pre-tax retirement
5. College funding for children
6. Pay off home early
7. Build wealth and give!

While there are those who quibble with some aspects of these steps, by and large it’s a sound approach to money management. If my children when they leave home decide to follow the Dave Ramsey way of handling money, I’ll take great comfort that they are headed in the right direction.

But what about those of us who aren’t just starting out or recovering from a financial meltdown. For many of us, when we look at Dave’s Baby Steps, we realize that we have been taking many of these steps all at the same time! For example, we have a lot more than $1,000 in our emergency fund, yet we also have non-mortgage debt, we save for our children’s education (my son starts college in three years), we save for retirement, and we give money to charity.

And all of this raises the question we are going to address: Should we ‘Dave Ramsey our finances‘, and if we did, would we be better off?

To answer this question, let’s walk through the Baby Steps (particularly ##1-3) using the following assumptions:

• Non-retirement savings: $50,000 in a mix of mutual funds and cash accounts.
• Non-mortgage debt: $200,000 (mainly from a home renovation) on a home equity line of credit and low interest credit cards.
• Mortgage: $400,000 on a 30-year fixed rate of 5.5%.
• College Savings: $10,000 in a 529 Plan with kids a few years away from college.
• Retirement Savings: $250,000 in 401(k) and IRA accounts.
• Retirement Contributions: Currently contributing 7% to company 401(k), and company matches up to 7%.

Everybody’s specific financial conditions is different, of course, but the above assumptions will allow us to work through some of the significant issues and opportunities Dave Ramsey’s approach can present.

Dave Ramsey Baby Step #1: $1,000 Emergency Fund

Unlike those trying to save $1,000, many who chose to follow Dave Ramsey’s Baby Steps would be in the position of draining their emergency fund down to $1,000 and using the funds to pay down debt. From just a numbers perspective, using an emergency fund to pay off non-mortgage debt is usually the right choice.

Emergency funds should be kept in a risk-free account, like an online savings account. These accounts almost always pay less than the interest on debt. In addition, the interest a savings account does pay is taxable, while interest payments on credit cards and personal lines of credit generally are not tax deductible.

Of course, many may have debt on 0% balance transfer credit cards or on home equity lines of credit that are tax deductible. But for the most part, interest on debt will be more than interest earned on a savings account.

The big issue here for many is psychological. Having taken some comfort in an emergency fund that could pay expenses for some number of months, it will be very difficult to reduce the emergency fund to just $1,000. If that describes you, how would you answer the following question: If you had no debt and $1,000 in savings, would you borrow money to add to your emergency fund? If the answer is no, then you should ask why you are holding on to more than $1,000 while you carry non-mortgage debt.

There may be some tax considerations that come into play. If some or all of your non-retirement cash is in mutual funds or stocks, selling the investments to pay off debt could trigger tax liabilities. But putting this issue aside, and returning to our example, let’s assume we follow Dave Ramsey’s Baby Step #1 and transfer $49,000 from our non-retirement accounts to pay down our $200,000 in debt. That leaves $151,000 in debt and $1,000 in savings.

Dave Ramsey Baby Step #2: Pay Off All Non-mortgage Debt

Baby Step #2 is to pay off all non-mortgage debt. Having reduced our emergency fund down to $1,000 as part of Baby Step #1, we now have two big questions to answer: (1) Do we use some or all of our 529 Fund to pay down debt; and (2) Do we use some or all of our retirement investments to pay down debt?

Recall that retirement savings is Baby Step #4, and college saving is Baby Step #5. As a result, if we followed Dave Ramsey’s approach to the letter, it would seem that we would liquidate college savings first (since it’s Step #5) and retirement savings second until we had paid offer all of our non-mortgage debt. Let’s take a look at each option.

College Savings Fund: There are tax consequences for using a 529 Fund for something other than our children’s education. Generally, there is a 10% penalty, in addition to taxes, on any earnings. And if you received any state income tax breaks on your contributions, those must be paid back. Given the market today, however, you may not have any earnings to speak of, so the cost of closing out a 529 Fund may not be significant. You can check out IRS Publication 970 for more information on 529 Plans.

In addition to the numbers, there are likely to be strong feelings among family members when it comes to a 529 Plan. Education is highly valued, as it should be, and the thought of draining a child’s education fund may not go over very well with your spouse, parents, or in-laws, not to mention your children. This is of particular concern if you are likely to rack up more credit card debt after paying it down with 529 Plan money.

In our example, however, let’s assume we close out the 529 Plan, and after say $500 in penalties and taxes (assuming we have little by way of earnings given the current market), we are left with $9,500 to pay down our debt. That leaves us with $141,500 in non-mortgage debt.

Retirement Savings: This is the toughest decision. Unless you have Roth accounts, withdrawals from retirement accounts generally result in a 10% penalty in addition to tax liability. In our example, assuming the retirement savings is not in a Roth, we’d pay $20,000 in penalty if we withdrew the entire amount. Assuming a state and federal combined tax rate of 25%, we’d pay another $50,000 in taxes (which are calculated on the full $200,000, not the $180,000 left over after the 10% penalty).

That would leave us with $130,000 to apply to our debt. So having liquidated all of our retirement and non-retirement accounts, we have our non-mortgage debt down to $11,500. If we did this, would we be better off? To answer that question, let’s compare our balance sheet before and after:

So why the difference in net worth? The difference comes from the $20,000 in penalties paid for withdrawing retirement funds and the $500 in penalties and taxes for closing out the 529 plan. So what if we stopped short of taking money out of retirement, but cashed in our emergency fund and 529 plan? Here are the numbers.

Here, the difference in net worth is the $500 in penalties and taxes for withdrawing money from the 529 Fund. Other than this difference, there are no changes in the bottom line on our balance sheet, at least not right away.

Where the difference comes in is with the interest savings, if any, we receive by paying off debt that costs us more than the interest we were earning on our savings and investments. As a result, the higher the interest rate on debt, the more benefit one receives by using savings to pay down debts.

Dave Ramsey’s Baby Steps ##3-7

So where do we go from here? Well, if cashing in savings and investments is enough to pay of all non-mortgage debt, Dave Ramsey would have us rebuild our emergency fund up to 3 to 6 months worth of expenses. But what if you still have non-mortgage debt even after using all reasonably available sources of cash to pay it down? Certainly we wouldn’t move on to Step #3 until the debt was paid off, but other questions still remain.

For example, do you stop contributing to retirement (Baby Step #4) until the debt is repaid? And do you stop saving for your children’s education (Baby Step # 5) until the debt is paid? While there’s no one-size-fits-all answer to these questions, here’s one approach to consider:

• Retirement Savings: Continue to contribute to retirement savings, at least to get 100% of any company match. In the long run, this approach should increase net worth more than leaving the company match on the table. This is the approach we are taking.
• 529 Fund: Stop funding your child’s education until all non-mortgage debts are paid, you have a reasonable emergency fund, and you are saving for retirement. In the worst case scenario, our children can pay for their own college and/or we can help them out of our then current income. It just doesn’t make sense to save for future college expenses while paying interest on current debt.

Conclusion and Warning

From all of this, here are the key points for those trying to apply the Dave Ramsey Baby Steps:

1. Cash accounts earning low interest rates generally should be used to pay higher interest debt.
2. Tax consequences should be considered before liquidating non-retirement investment accounts to pay off debt
3. Using 529 funds to pay of debt should be considered, factoring in any penalties and taxes you’d have to pay and just how angry your in-laws would be.
4. Retirement savings, because of the 10% penalty on withdrawals, will often not be a good source of funds to pay off debt.
5. Continuing to fund a 529 account while paying interest on non-mortgage debt could cost more in the long run.
6. Contributions to retirement accounts, at least to take advantage of an employer’s match, is a sound choice.

In the final analysis, we are following a modified version of the Dave Ramsey approach to money management. We are using most of our cash and any non-retirement investments with few gains to trigger a tax liability to tackle our non-mortgage debt. We’ll continue to fund our 401(k) up to the company match, but direct all other funds toward our debt. Once the debt is paid, we’ll beef up our cash accounts and education savings.

Finally, there are two big warnings to heed. First, every situation is different. The tax consequences of the decisions you make vary from person to person, tolerance for risk varies, and the need for liquidity can vary. The point is that the above perspective, while generally the approach we are taking, may not be right for you. If you are looking for advice before you make any financial decisions, seek the advice of a professional.

Second, it is important to understand your own tendencies. If you believe that you’ll likely accrue more debt once the credit cards are paid off, it may not make sense to cash in your savings account to pay them down. The one “advantage” to a maxed out credit card is that you can’t borrow any more on it.

All of which is to say, “To thine own self be true.”

It was the budget, with the spreadsheet, in the library–That’s who killed your finances.

The dictionary defines a budget as “an estimate, often itemized, of expected income and expense for a given period in the future.” Budgeting, the quintessential money management tool, should identify where we spend our money so that we can make better spending choices. While there is no one right way to budget, the purpose of any budget should be to give us the information we need to make smart spending decisions.

But what if it’s your budget that’s killing your finances. Imagine, you take the time and effort to prepare a budget in the first place, and the budget ends up causing more harm than good. Or at the very least, your budget doesn’t get you the results it should.

To help you avoid this, and to maximize the benefit of your budget, here are seven budgeting pitfalls and how to fix them:

7 Budgeting Pitfalls and How to Fix Them

1. Missing Expenses: Does your budget have a leak? With automatic bill pay, it’s easy to forget about regular monthly expenses. We recently lost track of an expenses that was charged to our credit card each month. It wasn’t a lot of money, about $15 a month, but every dollar counts.
   The Fix: Take the time each month to carefully review each credit card and bank statement. Make sure you understand where your money went, what automatic payments were made, and what was charged to your credit cards. This doesn’t take a lot of time, but in the hurry and rush of life, it’s an easy thing to forget.

• Unrealistic Budgeting: Have you or someone you know ever gone on an extreme diet? In their desire to lose weight, they deprive themselves of food in a way that’s just not sustainable. The result is almost always to gain more weight when the diet crashes. The same thing can happen with our finances. We put together an unrealistic budget that deprives us of any fun, and eventually we crash through the budget with a big spending splurge.
  The Fix: We need to keep our budgets realistic by providing for some measure of enjoyment in life. Whether that’s eating out, buying books, traveling, or whatever, our budgets need to reflect in a reasonable fashion who we are and how we want to live our lives. If you are looking for a place to start, try the 60% budget. Sixty percent of gross income should cover your fixed expenses: Mortgage, food, clothing, taxes, insurance and so on. The remaining 40% gets divided into 10% portions for retirement, long-term savings, short-term savings and fun money. These numbers are just a starting point, but it should help you to keep your budget realistic.

• Too Little Information: A budget should arm you with the information you need to make smart spending decisions. One type of budget that works for many is to “pay yourself first.” That means to save a portion of your paycheck first, and then spend the rest without worrying about where or how you spend it. While this can be an effective and easy way to budget, the lack of information on how you are spending the rest could be causing you to spend more than you should.
  The Fix: Every few months, track how you spend the rest. This doesn’t have to be a monthly exercise. A few times a year works for many people. And you don’t have to track your expenses for an entire month. Track expenses for a week or two. Armed with information on how you are spending money, you can make spending decisions that may allow you to save even more or accelerate debt reduction.

• Too Much Information: To much information can be a real problem, too. It’s a lot of work to track where every single penny goes. While there are good budgeting tools (see below) that make tracking expenses easier, for many, tracking everything is overwhelming and unnecessary. And the result can be frustration and a budget that ends up in a drawer.
  The Fix: Limit the spending areas you track to those that really cause you to overspend. If eating out is your financial Achilles’ heel, use a cash-envelope system for just that one category. In fact, many people overspend in just one, two or three categories. Tracking just those categories can move a family’s finances from red to black.

• No Real Time Data: We make hundreds of spending decisions every month. As you make those decisions, do you know how much you’ve already spent and how much you have left to spend? This is where real time data is important. While looking at how you spent your money after the fact can be helpful, there’s nothing better than knowing where you stand financially right now.
  The Fix: There are several budgeting methods to help you know where you stand at any given moment. The old fashioned cash-envelope system mentioned above is a good one. So is using debit or credit cards and reviewing your spending data online or downloading it into a personal finance software package like Quicken or Money. The key is to know where you stand at any given time, but only for those categories that you must track to properly monitor and control your spending.

• Using the Wrong Budgeting Tools: While there is no one “right” budgeting tool, it is important to use a tool that works for you. Use the wrong financial tool, and frustration can quickly end any effort at budgeting. While many swear by Quicken, for example, for us its budget function just didn’t work. We use it for everything else, but just not budgeting.
  The Fix: Recognize that there are many free and paid budgeting systems available. Take some time to review them, and give a couple of them a try before deciding. You can check out this list of online budgeting tools to get some ideas. You can also check out one of my personal favorite paid budgeting software systems, You Need a Budget.

• Forgetting Periodic Expenses: This one use to get us every time. We thought our budget was looking good, and then the car insurance bill arrived. I can still remember the feeling in the pit of my stomach as I realized we weren’t doing as well as we thought. But there is an easy fix for this budget pitfall.
  The Fix: Develop a Freedom Fund. Add up all of your periodic expenses such as car insurance, gifts, life insurance, vacation expense and so on, divide by 12, and save this amount each month. It takes some discipline at first, but there is no greater feeling when that car insurance bill arrives than knowing you have the money in the bank to pay it.

For some additional reading, check out these articles:

• How To Create A Budget (@ Moolanomy)
• 10 Personal Finance Essentials (@ Cash Money Life)
• How To Pay Off Credit Card Debt: A Success Story (@ The Digerati Life)
• Budgeting 101 – Why Budgets Fail (@ Suburban Dollar)
• Envelope Budget System (@ Frugal Dad)

Bank overdraft protection programs, at first glance, seem like a great safety net to have in place. Should you overdraw your checking account, an overdraft protection plan can kick in to cover the shortage. And because the bank cleared the check, you avoid insufficient funds fees that can hit $35 and the embarrassment and headaches that come with a returned check. Banks do charge interest on the money until you repay it, but for most, the interest charged is just for a day or two until the next payday. The problem with these programs, however, are the ridiculous and often hidden fees that banks charge. We’ll come back to the fees, but first, let’s take a look at the types of overdraft protection programs banks offer.

Overdraft Protection Plans

There are several different ways banks allow you to cover overdrafts. Each comes with different advantages and disadvantages, so it’s important to understand the differences.

Courtesy overdraft-protection, or bounce coverage, plans : Many banks offer a courtesy plan to pay a check or honor an ATM transaction even if you have insufficient funds to cover the transaction. Some banks will automatically enroll new customers in such a plan, and unless you read your mail very carefully, you may not know it.

These courtesy overdraft plans do cost money. Typically, banks charge betwen $20 and $30 per transaction. In addition, there is no guarantee under these courtesy plans that the bank will cover every overdraft.

Linked savings account: Some banks will allow customers to a link a savings account to their checking account. Should the checking account be overdrawn, the bank will automatically transfer funds from the savings account to cover the check or ATM transaction. As with the courtesy bounced check plans, banks also charge a per transaction fee for linked savings account plans.

Linked credit cards: Similar to linking a savings account, you can also link a credit card to your checking account in many instances. Banks treat these transactions like a cash advance, requiring you to pay the cash advance fee and whatever cash advance interest rate the card charges.

Overdraft line of credit: With this plan, customers apply for an unsecured line of credit designed solely to cover any checking account overdrafts. These unsecured lines typically charge double-digit interest rates, but if you pay off the line quickly (on payday, for example), then the interest charges are relatively modest. This is what we use at Citibank, and in the past, it came in handy as we neared payday. That is, until Citibank quietly began charging fees for each transaction that rival the cost of a payday loan.

Overdraft Protection Fees

Several months ago, Citibank began charging a $10 transaction fee for each check or ATM charge that required the linked line of credit to cover the transaction. If, on the day before payday, we used our ATM card four times without sufficient funds in the bank, Citibank charged us a total of $40, regardless of the amount of the overdrafts. We would pay off the overdraft line the next day when we received our direct deposit, but the $40 was already taken from our accounts.

To make matters worse, Citibank doesn’t go out of its way to warn customers of this charge. It began charging the $10 fee without reasonable notice. We spent 30 minutes on the phone with a Citibank representative who claimed that Citibank had mailed out a letter notifying its customers of the new fee. The letter either never made it to us, or was part of a dense package of junk that Citbank regularly sends out.

We’ve made some adjustments to our finances to avoid using this line of credit ever again. It’s unfortunate that banking has come to this, but Citibank is not alone in charging its customers ridiculous fees.

In fact, last December the FDIC issued a scathing study of overdraft fees charged by major banks, concluding that the costs exceed that of payday loans. Here are the highlights of the study:

• Overdraft fees have APRs ranging from 1067% to 3520%
• Banks operating automated overdraft programs reported a median transaction of $36
• Customers with 5 or more NSF transactions accrued 93.4% of the total NSF fees reported
• Young adults paid the most in overdraft fees; responsible for the most NSF transactions
• Customers in low-income areas were more likely to pay recurrent overdraft charges
• Customers were automatically enrolled in overdraft protection programs
• Banks process large debits first; making overdrafts more frequent
• Banks allow ATM and debit card overdrafts, but do not alert customers in advance

One way to avoid overdrafts in the first place is with an effective budget. I’m working on several budgeting articles that will be posted soon. Until then, it is worth checking out You Need A Budget (YNAB) software, an effective, easy to use budgeting system that comes with a 60-day money back guarantee.

Lately I’ve become overwhelmed with clutter. Everything from my office to my home to my finances is filled with unnecessary stuff. And all this stuff creates stress and reduces efficiency. Just the other day my wife and I spent one hour searching for two bills that, as we eventually learned, were at the bottom of a pile of stuff on our kitchen counter. And now I am just plain fed up with all this clutter.

So I’ve started embracing what Leo Babauta (famed blogger of Zen Habits) calls The Power of Less. In his new book of the same title, he describes “the fine art of limiting yourself to the essential . . . in business and in life.” And that’s what I’m trying to do, beginning with our finances. So here are 10 tips to help you declutter your finances:

1. Reduce your mail and deal with it immediately: Mail can build up into an unwieldy mound of paper in no time. Let the mail go for even a day or two, and you’ll find a pile of junk mail, bills, magazines and everything else growing on your kitchen counter or wherever you throw your mail. And if you are like me, when this happens and uneasy feeling begins to build in the pit of your stomach that somewhere in that pile is a bill or other important letter that you need to deal with if you could only find it. To avoid the stress and distraction, give your mail the one-two punch.

First, reduce the junk mail you receive. There are some paid services you can use, but the Direct Marketing Association offers a free service that they estimate will eliminate 75% of your junk mail. You’ll find DMA’s online application form here. Second, deal with the mail you do receive daily. If you receive a bill, pay it immediately or file it with your other bills to be paid twice a month or on whatever schedule you follow. The point is to deal with every piece of mail the day you receive it.

2. Automate Bill Pay: For bills that you pay every month, set up automatic payment from your checking or other bank account. We pay most of our monthly bills automatically, including the mortgage, home equity line of credit, utilities, garbage collection, internet phone, cable, and cell phone. Not only does automatic bill pay save time, but it also eliminates the chance we’ll forget to pay a bill on time.

3. Go Paperless (Part I): Credit card companies, mutual funds, banks and other companies are moving towards paperless statements. Vanguard, for example, eliminates certain annual fees if you agree to receive investing materials electronically. Not only do paperless statements save trees and money, but they also cut down on your time processing mail and dealing with clutter.

4. Go Paperless (Part II): For those documents you do receive and must keep, consider scanning the document and saving it electronically. We have an inexpensive scanner that also serves as our printer and a copier. Scanning is easy, and it reduces the clutter in our home. Here are some Energy Star scanners from Amazon that are reasonably priced.

5. Unsubscribe via e-mail: Since you are reading this article, you do from time to time read personal finance blogs. You may even subscribe to The Dough Roller or other sites. If you do, consider using Google Reader or some other RSS feed reader rather than subscribing via email. We already have to process a ton of junk email, so why clutter up or lives more with subscription email?

6. Use Google Docs: This is one of my favorite personal finance tools. With Google Docs, you get a word processor and spreadsheet software for free. And because they are Internet based, you can access or share your documents via any computer with Internet access. The spreadsheet can be used to track your monthly budget or balance sheet. We also use spreadsheets to track important information, rather than keeping it in paper form. You can get started with Google Docs here.

7. Consolidate Debt: You may have debt from credit cards, car payments, a home equity loan and so on that can be simplified by consolidating some or all of it. Of course, there are factors that must be considered beyond just simplifying your finances, such as interest rates, the term of the loan, recourse, and so on. But if you can take multiple loans and reduce them to one or two, it can make life much simpler. I’ve done that with balance transfer credit card offers, and it makes paying the bills each month a lot easier.

8. Automate Investments: If you make regular investments or savings contributions, set up an automatic investment plan. You can have a portion of your paycheck directed to a savings account or broker. And you can set up automatic investments with any broker or mutual fund company. We invest in Berkshire Hathaway each month through an automatic investment plan with Sharebuilder. Once you set up the automatic investment plan, you don’t have to worry about missing an investment, and it makes saving a lot easier.

9. Use Personal Finance Software: Personal finance software such as Quicken or Money make tracking your finances really easy. You can download banking, credit card, or investment transactions into the software, and it makes setting up a budget really simple. There are also several free budget software options you can use, too. Either way, personal finance software packages are an important money management tool that beat tracking your finances on paper.

10. Use a Debit Card: We use our bank debit card for just about everything. Because it is a MasterCard, it is accepted just about everywhere. By using a debit card, we have a record of every purchase we make. It makes tracking our expenses very easy, and we don’t have to worry about carrying a lot of cash around. For online purchases, we use a credit card for security reasons. We also use a credit card to take advantage of travel rewards. But whether it is a credit card or debit card, the convenience and expense tracking our the same.

If you know of other tips to help declutter finances, please leave a comment.