Debt and Taxes

REDUCE DEBT

1.   Follow the 28/36 rule:

Your monthly household debt service including mortgage payments, property taxes, homeowner's insurance and other home-related costs should not exceed 28% of your gross monthly income.

Your total debt service, including your house payments plus all other debt payments such as credit cards, auto loans and other money owed should not exceed 36% of your gross monthly income.

2.   Pay off your highest rate debts (e.g. high interest credit cards) first. 
 
Use debt consolidation.  
Negotiate with the credit card companies for a lower rate.
Take advantage of loans from Prosper (see link on left)

3.   Make loans less expensive by using available tax breaks.

4.   Reduce interest costs by paying bills on time and improving the credit score.

5. Use tools such as the debt planner from Money.

6. Use debt counseling if you need it. 

7. Take advantage of loans for college:
  Loans for students: Stafford Loans, Subsidized Stafford Loans
  Loans for parents: Home Equity loans, Loans PLUS for parents

8.  Use Home equity loans/Home Equity Line of credit (HELOC) to consolidate credit card debt or use in place of auto loans. But remember these loans  reduce equity, so use with caution. Do the math at BankRate.

9. Choose mortgage loan type carefully depending on your needs. Fixed rate mortgage are predictable but
generally higher. Adjustable rate mortgages are good if  you plan to move in a few years (3-5), Interest only is riskier but for buyers who are confident their incomes will rise in the coming years. Lower total interest cost by opting for a shorter loan (e.g.15-year vs. a 30-year). 

10. Pay off mortgage early (extra amount of one-twelfth of the monthly payment every month, biweekly
 payments or 1 extra payment a year cuts the 30 year loan to 23 years). See Morningstar on how to
 aggressively pay down the mortgage. Check out the innovative Home Ownership Accelerator program
 from CMG.

11.  Improve your FICO score to get better interest rates by:
 
 Pay bills on time
 Correct mistakes in the credit report
 Pay off debt and not move it around
 Reduce your credit card balance
 Increase your balance to credit limit ratio by not closing loans that are paid off.
 Purchase all 3 credit reports with FICO scores from Myfico.
 Get a free credit report at Annualcreditreport.com

12. Get lower interest rates by shopping for loans at websites like bankrate.com and credit unions. 

13. Read credit cardholder agreements carefully, look at the Schumer Box.

14. Peer-to-peer lending, intra-family loans: lendingclub.com, prosper.com, zopa.com,
  virginmoneyus.com, loanio.com
 Peer-to-peer college loans: greennote.com, fynanz.com
 Microlending: kiva.org, microplace.com
      

OWE LESS TAXES (consult your tax advisor)  

1. Fund your 401k, IRA, Roth, 529 plans.

2. Deductions (charitable contributions, vehicle registration fee, mortgage
origination and discount fees if any, property taxes, state taxes etc.) and
credits (Child, Hope Education, Savers credit for retirement). Remember a 
credit is more valuable than a deduction of the same size. 

3. Get the tax refund in advance by increasing W-4 exemptions. Getting a very
large refund amounts to giving Uncle Sam an interest-free loan. But make
sure to avoid the IRS penalty.

4. Compare state income taxes, sales taxes, death taxes and estate taxes
when deciding where to live and where to retire.

5. Use Flexible Spending accounts (Health and Dependent Care).

6. Make the January mortgage payment in December. Prepay estimated state income taxes and property taxes.

7. When you own a home you may be able to deduct  all your mortgage interest,
state taxes etc. (contact your tax advisor) in an itemized deduction. But your real
benefit is how much the itemized deduction is larger than your standard
deduction. 

8. Convert a Traditional IRA to a Roth IRA when the investment (market) is 
down and pay lower taxes (check income for eligibility).

9. Use prior year capital losses to negate capital gains to lower taxable income.

10. Other fund/ETF tax strategies. Check out taxadmin.org

11. Some Tax free vehicles (consult your tax advisor):
 Income from Municipal bonds (free from federal taxes and sometime state taxes).
 Earnings from a 529. 
 Gift up to $12,000 per year.
 All withdrawals from a Roth.