ZERO DEBT
The Ultimate Guide to Financial Freedom
Second Edition
Lynnette Khalfani-Cox
Published by Advantage World Press
P.O. Box 1307
Mountainside, NJ 07092
www.AdvantageWorldPress.com
Copyright © 2011 by Lynnette Khalfani-Cox
All rights reserved.
Smashwords Edition
ISBN: 1-932450-97-1
No part of this book may be reproduced or transmitted in any form or by any means, electronic, or mechanical, including photocopying, recording, scanning or by any information storage and retrieval system without the prior written permission of the Publisher.
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the author and publisher are not engaged in rendering legal, financial or other professional advice. Laws and practices vary from state to state and if legal or other expert assistance is required, the services of a competent professional should be sought. The author and publisher specifically disclaim any responsibility for liability, loss or risk that is incurred as a consequence, direct or indirect, of the use and application of any of the contents of this book
Table of Contents
Other Books By Lynnette Khalfani-Cox
Day 1: Stop the flood of credit card offers
Day 2: Make a resolution to “stop digging”
Day 3: Put all your debts in writing
Day 4: Order your credit report and FICO score
Day 5: Call your creditors & negotiate
Day 6: Switch cards if necessary
Day 7: Always exceed the minimum payment due
Day 8: Dispute any inaccuracies in your credit file
Day 9: Educate yourself about your legal rights
Day 10: Stop collection agency harassment
Day 11: Prevent identity theft to protect your credit
Day 12: Set up a good filing system
Day 13: Face the truth about your situation
Day 14: Create SMART financial goals
Day 15: Figure out the $69,000 question
Day 16: Scrutinize your spending
Day 17: Make a realistic budget
Day 18: Find 10 ways to cut your spending
Day 19: Adopt five lifestyle changes to save more money
Day 20: Adjust your W-4 withholdings if you get a refund
Day 21: Sell or donate stuff you don’t want, use or need
Day 22: Find a way to generate additional income
Day 23: Apply for a home equity loan or equity line of credit
Day 24: Refinance your auto loan
Day 25: Pick a proper debt payoff strategy
Day 26: Weigh the pros and cons of debt management plans
Day 27: Evaluate your existing insurance coverage
Day 29: Open a “hands off” account & automatic savings plan
Day 30: Prepare to become a positive financial role model
Day 31: Address other money woes or special circumstances
I first want to thank the wonderful man in my life, Earl Cox, not just for being a phenomenal husband and life partner, but for also being an incredible business agent and manager.
To my wonderful children, Aziza, Jakada, and Alexis, thank you for giving my life so much laughter, love, and purpose.
To Deborah Darrell, how many ways can I say “thank you?” I can’t express how much it means to me to constantly have your personal and professional support, your media smarts, and your heartfelt passion for everything I do.
To my exceptionally caring parents, my very special in-laws, my five fabulous sisters, my extraordinary Uncle Otis, and my entire extended family: thanks for all of your love and belief in me. Despite my hectic schedule, please know that you are constantly in my thoughts and the love I have for each of you is always in my heart.
Other Books By Lynnette Khalfani-Cox
Perfect Credit: 7 Steps to a Great Credit Rating
Your
First Home: The Smart Way to Get It and Keep It
Zero
Debt for College Grads: From Student Loans to Financial Freedom
Investing Success: How to Conquer 30 Costly Mistakes & Multiply Your Wealth
The Millionaire Kids Club Volume 1: Garage Sale Riches
The
Millionaire Kids Club Volume 2: Putting the ‘Do’ In Donate
The
Millionaire Kids Club Volume 3: Home Sweet Home
The Millionaire Kids Club Volume 4: Penny Power
When I first wrote Zero Debt, I described credit card bills as the most heinous financial plague afflicting Americans. That was nearly five years ago. Since that time, the debt crisis in the United States has worsened dramatically – and chances are, you’re caught up in it.
Do you worry or feel stressed out about your bills?
Are you living paycheck to paycheck?
Do you ever argue with your spouse or family members about money?
Have you been forced to put off certain dreams – like buying a home, saving for retirement or launching a business – just because you can’t afford to save for these goals?
Would you like to have more money in the bank each month, instead of turning over your hard-earned cash to creditors?
Is it difficult for you to stick to a budget and juggle today’s financial responsibilities, let alone set aside money for the future?
If any of these scenarios sound familiar, you’re not alone.
Two out of three Americans with credit cards don’t pay off their balances in full each month. The sad truth is: they can’t afford to. If you’re one of these people, you likely owe nearly $10,000 on your credit cards, which is the average credit card debt in America, according to Cardweb.com.
Some of you are just trying to make ends meet, charging basics like groceries, gas and medical bills. Others of you whip out your Visa or MasterCard to satisfy your every whim, from designer handbags and fancy clothes to home furnishings and exotic vacations. I’m not passing judgment on what you choose to buy. But I am pointing out that no matter what you’re purchasing, the result is destined to be the same: if you’re constantly using credit cards to finance your lifestyle, you’re setting yourself up for long-term economic failure. It may not hit you this month, or even this year. But sooner or later, you’re going to hit rock bottom. You may not even see it coming. Yet some unexpected setback will happen – like getting laid off from your job, or going through a divorce – and all of a sudden, your debts will feel completely overwhelming. Think you have problems now? Well, that’s nothing compared to what’s in store if you allow your debt to continue spiraling out of control. That’s when the fretting and sleepless nights really begin. Nasty debt collectors will start calling you at all hours of the day and night. Your credit rating will suffer due to missed payments. And you’ll dread opening your mail because you can’t stomach the thought of facing yet another bill. Unfortunately, ignoring the problem won’t make it go away. Refusing to deal with your debts only causes you to keep living paycheck to paycheck.
Living the Bling Bling Life
Perhaps you’re in that situation now. Those of you living what I call “the Bling Bling” lifestyle know exactly what I mean. Yes, you’ve got all the outward trappings of success – maybe a nice car, fine clothes, a closet full of shoes, or various trinkets, gadgets and electronics galore. But none of these things are putting money in your pocket. None of these possessions is building your net worth. In fact, deep down you know that despite all the material goods you’ve amassed over the years, your life is far from secure financially. You work hard, but have very little of value to show for your efforts – and your mounting debt is a big part of the problem.
Despite this stark reality, living on credit has become the American way of life. Buying on credit is so common – for heaven’s sake, you can pay for everything from a Big Mac to your federal and state taxes with plastic – that 92% of those polled by KRC Research said consumers have “too much” debt.
However, until a serious financial crisis began pummeling the U.S. in 2008, our country’s leaders failed to seriously address our credit and debt woes. Before then, if you listened to some politicians and financial “experts,” they’d tell you that everything is just fine. They said the economy was growing, that jobs were being created, and that overall, Americans were in good financial shape. I’m not sure what America they were describing, because I saw exactly the opposite trends occurring and the numbers prove me right:
Consumer debt is at an unprecedented $2.4 trillion – including roughly $1 trillion owed on credit cards
A record two million households filed for bankruptcy protection in 2005, before a bankruptcy reform bill passed; in 2008 bankruptcies are again on the rise
The national savings rate is the U.S. is in the flat-to-negative territory, similar to the Great Depression
Mortgage foreclosure filings peaked at 2.2 million in 2007, and were expected to hit 2.5 million in 2008 as more homeowners struggle to pay for their homes
While the evidence is overwhelming to show that staggering numbers of people are up to their eyeballs in debt, I don’t need statistics to tell me that many of you are in financial trouble, and desperate for a way to fix your finances.
I know this is true because I hear from people like you every day; good people who are dealing with bad situations. And just as I don’t need statistics to tell me the truth about America’s growing financial crisis, neither do you – if you’re honest with yourself and what you see around you. Take a moment and think about it: Have you had to use credit or borrow money from a family member or friend in the past year or so to get by? Conversely, have you been asked to give or loan money to someone in need recently? If you said yes to either question, you probably have a glimpse of what it’s like to struggle financially.
Now you can stick your head in the sand if you want to, and pretend that everything is okay. Or you can face the truth about the debt problem in this country – and most important, your own debt problem – and you can begin to turn things around. The good news is that, believe it or not, you can make an incredible transformation in your personal finances in just 30 short days.
I Went From $100,000 in Debt to Zero Debt & You Can Too!
Some of you know that I’m a financial journalist by background and training. You may have read my articles in the Wall Street Journal, Black Enterprise and Essence magazines, or on Dow Jones Newswires and other publications. Or perhaps you watched me on television when I was a reporter for CNBC, or when I was a guest expert on The Oprah Winfrey Show, Dr. Phil, Good Morning America, The Tyra Banks Show, or The Rachael Ray Show. What many of you may not have known, however, is that at one point I was very deep in debt – to the tune of $100,000 worth of credit card bills alone.
Fortunately, I managed to pay them all off – in less than three years – without ever missing a single payment. And no, I didn’t file for bankruptcy protection to get rid of my debts. Nor did I enter a credit counseling program. I certainly didn’t cut up my credit cards and go into one of those debt management programs advertised so often on the radio and television. Instead, I got smart: about my spending, how I was handling my money, and especially how I was managing my credit and debt.
After I became debt-free, I wrote Zero Debt, and it soon became a New York Times and a Business Week bestseller. Zero Debt is written as a 30-day action plan to help you wipe out debt, improve your credit, and jump start your finances – no matter what your current situation.
Zero Debt has touched a nerve with tens of thousands of readers, around the country and around the world, because debt is such a huge issue for so many people. And I mean all people: black and white, Asian and Latino; young and old; highly educated and not; well-paid workers along with those making the minimum wage.
All of the strategies I used to get out of debt – and more – are outlined in this book. I’m pleased to say that since the original publication of Zero Debt in 2004, I’ve remained debt-free. Over the past four-and-a-half years, however, scores of other people have become mired in debt. More significantly, the entire credit and debt arena has shifted enormously. Congress passed new laws concerning consumer debt and bankruptcy. Interest rates fluctuated, the global credit crunch emerged, and consumers faced higher borrowing costs for everything from mortgages to credit cards to auto loans. Additionally, new credit-related products and services emerged. Here are highlights of some of the important developments that prompted the need for this revised, updated edition of Zero Debt:
• A sweeping overhaul of the bankruptcy system
Bankruptcy reform legislation, passed in October 2005, made it more difficult for consumers to wipe out credit card debts. What options exist if you’re cash-strapped and can’t pay your bills? Also, what are the main differences between Chapter 7 and Chapter 11 bankruptcy filings now? How can you prevent serious financial difficulties and avoid bankruptcy? Finally, if you were among those individuals who did file for bankruptcy protection in recent years, how can you restore your credit standing? This updated version of Zero Debt provides the answers to these questions and more.
• The debut of entirely new credit scores
In 2006, the “Big Three” credit reporting bureaus – TransUnion, Experian and Equifax – surprised the industry (and consumers) by launching a new credit score, called VantageScore to rival the benchmark FICO credit score that is used by most banks and financial institutions. This new credit score gives you various credit grades – either A, B, C, D, or F – just like the ones given in school. So, should you buy this credit score instead of, or in addition to, your FICO score? Or do you need the new VantageScore at all? Are lenders starting to use these instead of FICO scores? And is the new credit scoring system, which promises to offer one unified credit score, more accurate than what is currently available? You’ll find the information you need here in the second edition of Zero Debt.
• Greater access to credit information
In the time since I first wrote Zero Debt, The FACT Act has taken effect nationwide, giving individuals in every state the right to obtain one free credit report per year. Now that you have ready access to your credit files, how can you best monitor, protect and improve your credit standing. Additionally, how should you battle one of the biggest problems of the industry, namely, that 70% of credit reports contain mistakes? This book gives you the tips and tricks that can help you tackle this issue, and more quickly boost your credit score.
• Higher minimum payment requirements
As of 2006, a new federal law increased the minimum payments on most credit cards from 2% to 4% of the outstanding balance. How can you deal with this change, and is this good or bad for you overall? This updated rendition of Zero Debt tells you everything you need to know.
• Rising late charges and credit card penalty fees
If you’re carrying plastic in your wallet – and 75% of all adults in the U.S. have at least one credit card – you’d be wise to know the true cost of using credit. This second edition of Zero Debt details the litany of fees you may be subjected to; including many charges that you didn’t know existed. I’ll explain how to avoid these costly fees, as well as how to fight credit-card penalties if they appear on your monthly statements. I’ll also tell you how to negotiate with your creditors to make your debts more manageable.
• Mandatory credit counseling
If you file for bankruptcy, credit counseling is now mandatory. This change is a huge boon to the credit counseling industry, which is notorious for consumer abuse. Even if you’re not on the verge of bankruptcy, I’ll reveal what you should look for – and what to avoid – in picking a credit counseling or debt management firm.
As a result of these and other important changes, this revised version of Zero Debt not only provides fresh insights throughout the book, it also contains 40% more content than the original.
Shift from Over-Spending to a Debt-Free Life
When I give financial workshops or keynote addresses around the country, I often cite a study from Northwestern Mutual which found that Americans in all income categories spend an average of $1.22 for every dollar that they earn. That overspending explains, in part, why excessive debt is the number one financial problem in this country. But trust me: if I could rid myself of $100,000 in debt in just three years, you can get out of debt and achieve financial freedom, too.
My goal in revising and updating this book is to give you greater knowledge, skills and inspiration for living a debt-free life. Not only will I give you new pointers about how to achieve Zero Debt, I’ll also offer you some unconventional personal finance advice, including some pearls of wisdom no one has probably ever shared with you.
If you’re sick of making those credit card payments month after month – and year after year – without really getting ahead, it’s about time you learned the secrets of achieving Zero Debt. Otherwise, you’re bound to continue in the financial rat race, spinning your wheels, working hard but aimlessly in a fruitless bid to rid yourself of credit card debt and other bills. Getting out of debt isn’t rocket science, but it won’t happen by accident, either. To eliminate your debt you need a game plan. Zero Debt is that plan. It’s simple. It’s easy to understand. And it works. Try it for yourself and see if you can prove me wrong. With all the debt you’re carrying around, what have you got to lose – besides that stack of bills piling up each day?
Rising Credit Card, Mortgage and Student Loan Debt
Besides, you already know in your gut that you have too much debt. The same thing is probably true of most of your colleagues, friends and family members. Federal Reserve Bank data show that, as of 2008, Americans have collectively racked up $2.4 trillion in consumer debt, with about $1 trillion of that in the form of credit card debt. With the average credit card interest rate at nearly 15%, did you know that if you pay the minimum payments on $10,000 worth of credit card debt it will take you more than 25 years to pay it all off?! And that’s assuming you never charge another dime … which obviously isn’t realistic for most people.
I hate to be the bearer of bad news, but I have to point out that that $2 trillion in aggregate debt doesn’t even take into consideration what we owe on our homes. If you throw in mortgages, that’s another $10 trillion or so worth of debt in America. Plus, we haven’t even talked about student loans. The College Board reports that the average college grad leaves school with roughly $20,000 in student loans. One out of four graduates finishes school with more than $40,000 in college debt. Moreover, if you’re a doctor or a lawyer – or if you have a child in college – you know it’s not uncommon for people with advanced or professional degrees to graduate with $100,000 or more in student loan debt.
In the original edition of Zero Debt, I didn’t address student loan debt at all. In this updated version, however, I offer a wealth of tips for students, college grads and parents who are grappling with student loan debt. Over the past few years, the price tag for getting a college education has increased phenomenally – so much that I’ve written a sequel to Zero Debt called Zero Debt for College Grads: From Student Loans to Financial Freedom. While you’ll get some good advice about how to manage student loans and mortgages in the pages of this book, I’m primarily focusing on credit card debt throughout this updated version Zero Debt.
Consumer Debt on the Rise Internationally
Unfortunately, we’ve also exported our culture of debt globally. In decades past, credit-card use was not common at all in Europe, Asia and other parts of the world. But that trend has changed dramatically in recent years. When Zero Debt was originally published in 2004, the Bank of England reported that personal debt stood at a record $1.8 trillion. In the three years since, consumer debt in the U.K. has swelled by $400 billion to $2.2 trillion. Debt from mortgages and credit cards exceeds the U.K.’s annual national income from its production of goods and services. Like Americans, Britons have also been entering debt repayment programs and filing for bankruptcies at record rates. And experts forecast more households will go broke there and elsewhere.
According to the Office of the Superintendent of Bankruptcy, personal bankruptcies in Canada fell by 4.1% in 2006. However, the number of “consumer proposals” in Canada shot up by 6.7%. Consumer proposals allow people in debt to work out deals with their creditors to repay some, but not all, of their bills. Since a consumer proposal is one step short of filing for bankruptcy, this suggests that despite the drop in the number of personal bankruptcy filings, many Canadians are still living on the edge financially. The fact that Canadian debt levels are rising confirms this point. Currently, the average Canadian owes $5 for every $4 earned.
Meanwhile, the tide also continues to change in Asia, where citizens are noted for being fastidious savers and have preferred cash to credit for generations. However, in places like South Korea and Hong Kong, credit card usage rates now mirror those in America. The urge to splurge is even seen down under, as Australians max out their credit cards. Back in 2004, the typical Australian owed a record $4,937 in personal debts. Three years later, that figure rose by 15%, 2007 Reserve Bank figures show. Obviously, credit card debt is no longer merely a U.S.-based phenomenon, but one that is international in scope.
Keeping Up with the Joneses
It’s enough to make you wonder how this all came about. Certainly, our parents and grandparents never struggled with this kind of debt.
At some level, it’s easy to see how readily many of us fall into debt. First of all, even though our paychecks may not go up every year, the price of everything we purchase is always rising: from healthcare premiums, to college tuition, to gas for our cars and homes. Secondly, Madison Avenue markets heavily to all of us. Advertisers are very clever at getting us to want to “Keep up with the Joneses.” If you allow yourself to get caught up in this “I-want-it-all” consumer-driven mentality, and if you habitually engage in unhealthy over-spending, you’ll find in short order that you’ve veered off the path to financial freedom and onto the road to economic ruin.
The Threat Debt Poses to Your Relationship
The consequences of rampant over-spending, mostly on credit, are enormous. Not only are credit card delinquencies, bankruptcies, and foreclosures on the rise, debt is even a huge factor in families being split apart. Studies show that seven out of 10 couples who divorce say that financial strife played a big part in the breakup. If you’re married, be honest with yourself for a minute. Has your partner’s spending habits or financial patterns ever driven you crazy? Or perhaps you actually need to look in the mirror. Does your way of handling money – maybe buying things that the two of you can’t afford – cause friction in the relationship? It seems like a cruel joke of the universe that so many couples are financial mismatches, with one person being a care-free spender and the other a staunch saver. So, I don’t care how lovey-dovey you and your honey were on that last vacation as you sipped champagne together in a hot tub. If you don’t take the time to straighten out money conflicts, no matter how large or small they may be, these issues will continually surface, and they’ll haunt you for the duration of your relationship. I know you might have vowed “Until death do us part,” after you walked down that aisle. But if you’re not careful, that once-happy marriage can unravel over money battles. Don’t let your relationship turn into a case of “Until debt do us part.”
Two Groups of People Who Are Deep In Debt
As a Money Coach, I’ve learned that individuals who are deep in debt generally fall into two categories. The first group can be classified as “over-spenders and poor money managers.” These are people who’ve never learned to manage their money the right way – simply because no one’s ever taught them basic money-management skills. Others among them are just serious spenders. They’ve bought into this materialistic society that tempts us to always want more. That was my problem. When I was deep in debt I was a classic over-spender. I was actually earning a six-figure salary. But I was spending as if I earned seven figures. Trips to the Caribbean. Time shares. Expensive private school for my two older children. You name it. If I wanted it, I got it – mostly on credit.
Watch Out for The Dreaded Ds
The other set of consumers who are deep in debt have fallen victim to circumstances in their lives, misfortunes that I call the Dreaded Ds. This refers to anyone who has suffered a:
• Downsizing
• Divorce
• Death in the family of the main breadwinner
• Disease
• Disability
If any one of those five things happens to you or somebody in your family, it can throw your finances out of whack and force you to live on credit.
Are You in The Debt Danger Zone?
It’s possible that none of the Dreaded Ds has ever happened to you. But chances are you’ve experienced at least one of these setbacks – or you will in the future. However, you shouldn’t have to go through a major personal or financial disaster before you take action to rein in your debt. If you’re smart, and I know you are, you’ll want to pay attention right now to the warning signs that you have too much debt. Unfortunately, a lot of us are in denial about whether we have a problem with debt and credit management. If you’re making your credit card payments on time, if you have a decent job, or if you earn a reasonably high income, you might not realize you are in a “danger zone” in terms of your debts and bills. But don’t be fooled. You have too much debt or are mismanaging your credit if you:
• are maxed out on any credit cards – or very close to your limits
• use credit card checks to pay for other credit card bills
• skip payments you can’t afford
• don’t even know how much debt you owe in total
• switch cards to get lower interest rates just so you can afford the minimum payments
• argue a lot with your partner or relatives about bills
• lose sleep or feel stressed out over your debts
• get turned down when you apply for new credit
• receive phone calls from creditors or bill collectors
• need credit for everyday purchases like gas or groceries
• have a low credit score because of the debts you carry
If any of these symptoms describe you, trust me, you are likely operating in a danger zone with your credit cards and your debts – even if you don’t yet realize it. Start using the Zero Debt plan TODAY to get rid of excessive credit card debts and become debt-free.
The Zero Debt 30-Day Program
By now, I’m sure some of you are thinking: “OK, Lynnette, what exactly do I need to do to have Zero Debt?” Well, before I advise you of what’s required, step by step, let me first explain why the program I lay out in Zero Debt is so powerful, and why it’s helped thousands of other people – people just like you – to get out of debt and better manage their finances.