Did you use a credit card this past Christmas? You are not alone. On average, people spend almost $1,000 on Christmas while carrying credit card debt of $9,000 to $12,000! So chances are better than even that most, if not all, of that $1,000 was on credit. What about you? Did you go deeper into debt this past Christmas?

How to beat your Christmas debt

First of all, don’t beat yourself up. Wanting to spend money to buy presents for family or friends isn’t a character flaw. Let’s look at a few ways to beat your Christmas debt and make plans to insure that next year’s Christmas is debt free.

1. Sell some excess stuff

Opportunities are all over the place from Craigslist to eBay to auction sites galore. Don’t neglect your local newspaper though … ours allows you to list any item free if its prices is less than $100.

2. Make some extra money

I’ve written several articles about making extra money:

• 26 Ways To Make Extra Money And Keep Your Day Job
• New Ways to Earn Extra Money
• 10 Businesses You Can Start for Peanuts (or less!)
• Need Extra Cash? There Are Only 4 Ways to Get It
• Mining the Miners: A Different Way to Make Money

So long as you use the extra cash you make to pay down your Christmas debt, you’ll be able to beat it. The problem is always that we want to spend what we see as “excess” cash.

Don’t.

As soon as you receive any extra money, use it as soon as possible to pay down your debt.

3. Move your credit card debt to a zero interest card

The best option here is The Discover More Card because of their “long duration balance transfer” — zero interest for up to 18 months! You can make a lot of progress on credit card debt when there’s no interest involved.

4. LOWER your interest with a peer-to-peer lending company

Your two options are:

• Prosper
• Lending Club

Both offer rates better than your average credit card and both have moved from mere curiosities to lending powerhouses. Lending Club will loan over $250 million in 2012 and Prosper will lend $70 million. Both claim that the vast majority of their borrowers use the money to pay down their credit card debt. You really aren’t alone!

Rates for borrowers are LOWER than you can believe! Check out Prosper HERE!

5. Take on an extra job

Kind of a yucky option, but it’s one you may have to consider if you want to beat that Christmas debt.

6. Move your checking account to PerkStreet

PerkStreet is a checking account that pays you debit card rewards similar to credit card rewards. Paying you up to 2% on all your non-pin debit card purchases can mean an additional $600 or more to you for next Christmas. For a huge number of PerkStreet customers, Christmas of 2011 didn’t mean debt because they used their debit card rewards to pay for it.

Move YOUR checking account to PerkStreet and make certain that Christmas 2012 is debt free … paid for by debit card rewards from your PerkStreet checking account.

7. Save a tiny amount from each paycheck in an online savings account

I use two main banks for my online savings:

• Ally Bank
• ING Direct

No matter how small the amount, saving just a little from each paycheck for next Christmas will mean less stress in a few short months. It’s like a gift you give yourself. Set it up to be automatic and you’ll never miss that cash.

Make the right choices now

By taking a few minutes to make some changes now, next year your Christmas can be a lot more enjoyable … and it can be completely debt free.

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Yesterday I told you the story of when I borrowed money from my parents and how it really bothered me. I don’t think I could ever utilize my parents as my mortgage lender but as credit markets continue to tighten, more and more people are heading for the Bank of Mom and Dad for their own personalized mortgage deal.

Family mortgages

Family mortgages can work as long as everyone fulfills their end of the bargain, timely payments are made, and the taxes and insurance premiums are paid. When you consider the minuscule returns on “safe” investments such as certificates of deposit or money market accounts, getting a 5% return on a mortgage backed by real estate can be appealing. Additionally, when you combine these type returns with the tight lending standards many young home buyers are facing, you begin to realize that there’s a need and a way to fill it. With many Baby Boomers now unwilling to risk their life savings in the stock market, financing a child or other family member’s mortgage could be an opportunity for a win-win situation.

I personally have some friends who, though the creation of a family trust, are able to offer mortgages to family members. They operate via a committee of 6 or 7 people who evaluate each applicant and then make a determination whether to offer a mortgage and how much. The original money came from the sale of a large business that a great-grandfather had started back in the 30′s. That money he made is still helping his family today. Great legacy, huh?

The roll of the IRS

Parents who finance a child’s home purchase can easily find their generosity in conflict with the mission of the Internal Revenue Service. Some of the possible problems:

A mortgage with far too generous terms

If the interest rate is less than the government’s applicable federal rate at the time of the loan, the IRS may want to have a meeting. Those rates apply only for loans of a certain duration (such as ten years) so it’s best to run anything like this by your accountant or tax advisor.

Gift Taxes

Gift taxes were instituted to prevent the wealthy from giving away their fortunes before they died. If a parent is thought to have gifted the mortgage proceeds, the IRS won’t be happy. It’s best to keep all paperwork handy and to insure that the mortgage really is a mortgage and is being repaid.

The potential for missed tax deductions

Anyone using the Bank of Mom and Dad for a mortgage should make certain their mortgage is registered with a government authority and filed at the courthouse in their county or parish. Non-registered mortgages are not eligible for the interest deductions and subsequent tax breaks that a regular mortgage is so register that mortgage! A reputable attorney should be able to help you complete this step.

The risks of a family mortgage

Obviously the biggest risk is of default and that’s a huge concern for parents. Many times one parent will be gung-ho and the other … not so much. The concern is that a parent will fund a mortgage only to have to eventually evict their own child or risk losing their life’s savings. That isn’t a fun thing to have to consider as a parent.

Another risk is the loss of financial flexibility for the parent. A mortgage isn’t exactly a liquid investment and should another more profitable or more appealing investment opportunity come along, the parent is generally stuck.

What about you? Would you consider lending your child $250,000 for a mortgage or even $50,000 for their down payment? Would you consider borrowing that amount from YOUR parents? I wouldn’t want to be on either end of that deal, but for many people a family mortgage is just the ticket to get Mom and Dad a reasonable rate of return and to get Junior into that house.

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Have you ever borrowed money from your parents?

Speaking from my experience, borrowing at the Bank of Mom and Dad isn’t always a pleasant thing. Approximately 15 years ago I was promoted to a management position on the East Coast. My company’s moving policy was – “move yourself, submit your expenses, we will reimburse you, maybe.” That weeded out a lot of tire-kickers but probably weeded out a lot of really good managers as well. Despite the shortsightedness of such an asinine policy for a multi-billion dollar company to arbitrarily use, I decided that a lack of money wasn’t going to stand in my way of success.

So I asked my Dad for $1,200. I was in the throes of financial stupidity and had no emergency fund, no budget, no savings account, no spare cash of any sort. My credit cards were maxed out and delinquent. I was behind on my student loans, behind on hospital bills, and behind on anything that required a payment … except rent and utilities. That $1,200 was just barely enough to rent a U-Haul, make my first month’s rent payment, and make the deposits for my utilities on my newly rented condo. But that was all.

Thankfully, my Dad said yes, despite the misgivings of my Mom. She wasn’t happy that we were moving her grandchildren 12 hours away and that $1,200 was enabling me to do exactly that. It was an emotional meeting we had that day and things only went downhill from there.

I had never officially borrowed money from my Dad and as a grown man of 30 years of age at the time, it gnawed at me. Voices inside my head kept repeating: “You aren’t able to take care of your own family without help. What kind of man are you?” I was in even more debt now and it truly bothered me. That loan was something that hung over my head every single day and my Mom’s dunning me wasn’t helping either. Even though the company didn’t reimburse me fully, after only 45 days, I was able to pay my father back with my monthly bonus in my new position (it paid substantially better than my previous position). My wife and I eventually moved back closer to my parents, thanks in large part to the experience I was able to garner as that store manager.

I haven’t borrowed from my parents since.

Back in 1996 peer-to-peer lending companies like Prosper and Lending Club weren’t around. I wish they had been. I would rather have borrowed from a stranger than have to stare at my family across the Thanksgiving dinner table knowing I owed them.

If you find yourself needing some cash, why not consider a peer-to-peer lending company like Prosper or Lending Club? Both have interest rates and terms that will let you keep your dignity and prevent that Thanksgiving turkey from tasting a little strange. I dunno, maybe it’s the canned cranberry sauce?

On the other side of the coin, if friends or family ever come to me wanting to borrow cash, my plan is to direct them to Prosper or Lending Club and then help fund their loan myself. I believe that’s the best way to maintain a good relationship as well as keep money from causing hurt feelings and bitterness.

What about you? Have you ever borrowed from friends or family? Have friends or family asked to borrow from you? How did it work out? How did you feel about it?

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What’s so great about being debt free? Would you believe that someone actually asked me that question? “Flabbergasted” wasn’t a strong enough word for me at that moment! As a matter of fact, I was so taken aback by the question that it stumped me for a minute, and made me step back and think — what IS so great about being debt free?

I understand the premise of the question and it WAS asked honestly. For someone brought up in a consumer culture, debt was a means of remaining a consumer, of keeping up with the Joneses, and having it all, now. Debt under those circumstances, is just means to an end and for too many consumers, the end (having stuff) justifies the means (debt).

For the record, I’m not 100% debt free just yet – I still have a mortgage and one small student loan to pay off. But, I don’t believe all debt is bad. Mortgage debt, student loan debt, and business loan debt can all help you better yourself by living in a nicer home, increasing your job possibilities, and getting a business off the ground. Though you want to get those types of debts paid as soon as possible, they aren’t like the life-sucking, income-draining, never-ending-pain-in-the-neck that high interest consumer debt is. That stuff is poison and you want to get it paid off quickly.

What’s so great about being debt free? Here’s a hint — it has the word “free.” (Read my book review of Debt Is Slavery)

Being debt free means:

1. My take-home pay … actually IS take-home pay.
2. I don’t pre-spend money I haven’t earned.
3. I can answer the phone without worrying it’s a debt collector.
4. I can pay for Christmas without fear that I’ll still be paying for it next year.
5. Being prepared for a job layoff … or a job loss.
6. Being able to confidently invest.
7. I never worry about having my car get repossessed.
8. Having a strong emergency fund.
9. Knowing I can handle most financial problems.
10. Watching my savings account balance increase with each statement.
11. Knowing that my credit score makes creditors want my business.
12. Three words: “Paid In Full.” Ahhh.
13. Knowing where my money is going.
14. Being able to negotiate better deals because I pay cash!
15. Being able to shop around since I’m not limited to buying from the only company willing to offer me credit.
16. Setting an example for my kids.
17. Knowing my checks will never bounce.
18. Peaceful sleep.
19. Never having to visit a pawn shop so I can put gas in my car (true story).
20. Being able to replace things I need without worrying about the credit charges.
21. Knowing that retirement will be a reality, not just a pipe dream.
22. No more late fees!
23. I’ll never be upside down on a car, or a computer, or anything else.
24. Buying what I want without worrying about how I’ll pay for it later.
25. Never having to use one credit card to pay on another.
26. The tax man doesn’t scare me.
27. That nice (but expansive) dinner won’t give me heartburn from the interest.
28. I have money left over each month to help my kids while they’re in college.
29. The things I own DON’T own me.
30. Money isn’t the foremost thing on my mind all the time.

I’m sure there are many more advantages but these quickly come to my mind. What about you?

What do YOU think is the best thing about being debt free – either now or one day in the future?

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The decision to begin investing while you still have debt hanging over your head isn’t a black or white proposition. A lot depends on what type of investments you’d like to make and what type of debt remains on your personal books. Is it high interest debt, low interest debt, or tax deductible debt?

If you are in debt but you want to begin investing anyway, it’s best to seek out investments with a greater return than you incur from your debt. For example, if you have a car loan at 7%, you’ll generally want to find an investment vehicle that returns greater than 7%. Otherwise, investing while you’re in debt can feel like taking taking two steps forward and three steps backward.

What type of debt plagues you?

• High interest debt
• Low interest debt
• Tax-deductible debt

High interest debt

The term “high interest” is relative, but I would consider anything higher than 12 percent to be “high.” The primary contributor to your high interest debt is your credit card. If you’re carrying ANY balance on a high interest credit card, paying it down should be a much higher priority than investing. Consider moving any high interest debt to a zero percent balance transfer card such as the Discover® More® Card Long Duration Balance Transfer because finding an investment that will return a greater rate than your credit card is next to impossible.

Low interest debt

This type of debt may stem from a car loan, a line of credit, or a personal loan from your bank or credit union. This type of debt is generally “prime plus” meaning that the interest rate adds a set amount to the prevailing prime rate. While it’s easier to overcome debt at 12% than at 24%, it is still difficult in today’s market. Difficult, but not impossible.

Tax deductible debt

If there IS a “good” debt, I would classify tax deductible debt that way. Tax deductible debt could include mortgages, student loans, business loans, or any other loan where the sting of the interest is lessened by the ointment of tax deductions. Since tax deductible debt is usually low interest as well, it’s much easier to build your investment portfolio while paying it down.

If you have low interest debt and/or tax deductible debt, continue reading but if you’re saddled with high interest debt – STOP. Pay it off first. After you’ve built an emergency fund, focus your energies and resources on paying off your high interest debt. Investing can come later.

Why invest while you’re in debt?

When you’re working to pay off any type of debt, you’re robbed of the capital – not just in money lost, but of compounding time lost. For any investment to pay off, the key is TIME. You need to give your money as much time as possible to compound and grow. That’s why it could be important to start investing now. Your investment amounts may be small, but with the added component of time, they will have the chance to grow to larger amounts than the greater amounts you invest later in life. Small amounts invested sooner generally outperform larger amounts invested later.

Start your Scottrade portfolio today and get your investment plan in gear!

An investment plan while in debt

Example:

• Funds available to invest AND put towards debt reduction: $1,000
• Debt payments (low interest and tax deductible debt only): $800
• Available for investment: $200

A typical portfolio has a range of investments, some low risk, some moderate risk, and a few high risk. While you’re in debt, you could consider the amounts you’re putting toward debt reduction your low or moderate risk investments. The majority of your “returns” will be in debt reduction and lower interest paid out rather than in the 3% to 6% you could get from bonds or other low risk investments. The balance of your available funds can then be invested in higher risk, higher return equities and investments. If you are a very low risk investor, then the majority of your investing activities will be focused on debt reduction with just a minimal amount going toward higher risk securities.

Even those of us with a higher risk tolerance may have to spend more than we like on debt reduction and force us to use a more conservative approach. In my example above, a high risk tolerance investor would put the $200 into stocks while a low risk tolerance investor might put only $100 into stocks and $100 into bonds.

You CAN invest while in debt

Paying down debt can be monotonous, boring, and even demoralizing. We tend to think: I need to pay off this debt so that I can live a normal financial life – saving, investing, and enjoying the benefits of having money. Debt puts our lives on hold. But by having even a small portfolio that we fund on a regular basis, we can escape the dreariness of debt elimination.

As long as you’re not paying on high interest debt, I believe you should contribute to an investment portfolio. If you want to grow your money, it’s critical to begin investing as soon as possible.

WiserAdvisor can find the perfect financial advisor for YOU.
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