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The forecast for your cost of living is not good my friends. No matter where I look I see storm clouds and it makes me worry that we are heading for some tough times.
Just consider what's been brewing lately:
- The devastation caused by Hurricane Katrina is going to affect every one of us. Much of U.S. oil refining and production is based in the Gulf area; with damages caused by the storm expected to slow down our domestic oil business, gas and oil prices are heading up. Expect gas prices to jump another 15 cents to 20 cents a gallon. Heating bills this winter are also going to be a huge hit for all of us, as both oil and natural gas prices are sharply higher than a year ago. And since natural gas is a big part of generating electricity, you can expect that charge to rise too. Bottom line: More pain at the pump and in your utility bills.
- Home insurance premiums are bound to rise. I am not just talking about the cost for folks in the regions affected by Hurricane Katrina. Ultimately, the cost of this sort of devastation is borne by all of us in higher premiums or scaled-back coverage. Bottom line: There's a high probability the cost of protecting your home is going to increase.
- Interest rates are on the rise. While long-term rates haven't budged too much over the past year, the interest rates on our credit cards, adjustable rate mortgages and Home Equity Lines of Credit are sharply higher. That's because those rates are tied to what Federal Reserve Chairman Alan Greenspan does with the Federal Funds rate. And over the past year he has increased that rate by two percentage points; that's made short-term rates jump just as much. And Greenspan has made it clear he expects to keep raising his Fed Funds rate in the near future. Bottom line: Credit is more expensive.
- Your minimum credit card payment is rising. At the nudging of federal regulators, credit card companies are changing the formula they use to determine your required minimum monthly payment. In the past, the calculation was set at just 1.5 percent or 2 percent of your outstanding balance. But now the rate is changing to 4 percent. While it's good news in the sense that you will get your debt paid off faster (and thus pay less in total interest charges), it's painful because you need to shell out more each month. Bottom line: if you carry a credit card balance your monthly minimum required payment could double.
- You can't expect Bankruptcy to bail you out. Beginning in October new bankruptcy rules will make it much harder to file for Chapter 7 bankruptcy. Many consumers who seek bankruptcy relief will be required to file Chapter 13, which entails repayment of at least some of the filer's debts. Bottom line: It's always best to try and work out your financial problems without turning to bankruptcy; but now even if you go the bankruptcy route it is going to cost you more.
- Increasing Home Values have a cost. Yes, you may be sitting on more equity, but the local tax assessor is licking his chop; you are probably going to get hit with higher property taxes. Bottom line: Rising home values mean rising property tax bills.
Add that up and it amounts to a scary perfect storm that is battering consumers. Just consider this scenario: you have $9,000 of credit card debt at 15 percent, you run through 20 gallons of gas a week, and you are repaying a $25,000 HELOC. A year ago, your monthly costs for all three combined would be in the vicinity of about $511. Now you're looking at close to $778. That's because your minimum payment on the credit card bill probably jumped from $180 to $360, filling up on those 20 gallons a week has risen to about $50 from about $35 bucks, and your HELOC interest rate jumped two percent to 6.5 percent, which sent your payments from about $191 to $218. So you are looking at an extra $267 a month. That's more than $3,200 a year just to maintain your lifestyle. And we haven't even added in the hit you are going to take on heating your home this winter and keeping the lights on. Longer term you'll also probably be looking at more expensive home insurance and property tax bills.
So please my friends, now is the time to really pay attention to your spending; you are going to need to scale back just so you can keep up with the rising costs of maintaining your life. If you carry a credit card balance, you are probably already feeling the pain of higher minimum payments. If you happen to have a FICO score above 720 you need to fight hard to get an interest rate below 10 percent. You should have plenty of leverage given your good score. If your card company won't budge, I want you to look for a balance transfer deal to a card that will have a lower rate than you currently pay once the teaser rate expires. But here's the real advice: you have got to do everything you can to get rid of the debt. The game has changed. You simply can't afford to keep a large balance. So get serious about staring to pay off what you owe. I know it will take some time, but the point is to start. Right now. This is your wake up call.
Same goes with your HELOC or your ARM mortgage. You have got to make it a priority to either refinance into a fixed rate mortgage if you are going to be keeping your property, or transfer your HELOC to a HEL. The best option for a HELOC would be to get it paid down ASAP.
If you are saving for the kid's college education and you are just making it financially speaking, stop right now. You read that right. You and your kids will be able to get student loans. I would rather you spend a year or two clearing up your debt issues, even if that means putting the college savings on hold. Same goes with your 401(k). Always invest enough to get the maximum company match. But don't put in more money than is needed to max out. That will boost your paycheck; and you are to use every penny of the extra money to pay down your debt. And do it as fast as possible. I want you to get back to your retirement investing ASAP. Right now though, getting your high-rate debt and adjustable rate debt under control is the best investment you can make.
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