Any American who pays even the slightest bit of attention to television commercials or newspaper advertisements – not to mention the many direct mail inserts that seem to daily flutter through the mailbox – has likely seen his or her share of debt relief offers that seem to good to be true.

Certainly, the demands of the marketplace mean that the majority of the nationally renowned debt relief companies are legitimate without question. Of course, simply because the debt relief agencies (and the agency representatives) are not willfully fraudulent does not mean that the very nature of their approach to debt relief won’t end up rather different than the client originally thought.

It’s so very important that you ask questions from the moment you begin talking to a debt relief counselor about the smallest guidelines of their debt relief philosophy so that you’re not accidentally misled. Even though the debt relief professionals genuinely believe in the effectiveness of their own company’s system, that still doesn’t guarantee it’ll be the right fit for your particular circumstance.

Traditionally, when it comes to debt relief scams, most of the consumers who’ve previously fallen for one of the less than trustworthy efforts have one of three common complaints that absolutely must be avoided:

1. The supposed debt relief strategy actually created more unsecured debt than had formerly existed
2. Despite sky high monetary expenses, the debt relief firm did less than nothing to aid the situation.
3. Whether or not the debt relief agency did an effective job reducing the financial burdens, the client’s credit scores were seriously damaged

Now, to an extent, the criticisms of specific debt relief methods could just come down to the customer’s faulty recognition of what the debt relief programs represent. It should seem obvious to any adult that a debt relief plan seeking to lower the monthly payments, the interest rates, the amount of unsecured debt-loads, or all of the above will feature some comparatively less favorable consequences for the borrower alongside. However, since so many of the debt relief counselors (even the ones that work for technically non profit organizations) are paid primarily by the amount of business that they bring in to the company, they’re hardly going to stress the disadvantages of their program.

Also, remember, most of these debt relief professionals truly think their approach would be the best bet for erasing credit card balances regardless of the surrounding household circumstances. As a result, even if they know that the mandatory minimum monthly payments required under one strategy may be a bit of a stretch for one consumer’s income, they might push forward the debt relief payment schedule anyway in the hope that a bit of budgetary discipline’s what needed. Similarly, although they realize that their method of debt relief will wreak havoc upon FICO scores for up to a decade while closing accounts as a part of the process, some specialists might well believe that their clients could do with less capacity for thoughtless spending.

You could hardly accuse these debt relief professionals of scamming their customers, but neither did they take the needs and interests of their clientele seriously. For this reason, even if the company seems thoroughly above board, it’s always a good idea to ask a particular debt relief agent for recent recommendations so that you’ll make sure the debt relief offered will be just what you wish.

Credit card debt is wrecking people’s lives as we speak. The lure of the “easy money” ruins a lot of families because credit card holders are too weak to refrain from buying yet another thing they really don’t need. So what can you do if you are staring in the face of debt – debt that could result in a bankruptcy claim or a divorce because money issues are so bad in your family no one can handle them?

The answer is: use the snowball method

Before I go into explaining how this works, let me clear up an important fact that seems to cycle through people’s minds. Contrary to popular belief, it isn’t easiest to get out of debt by paying off your highest interest rate debt first. This is what many debt-ridden consumers tend to believe, but they are wrong (at least partially because the math proves us otherwise).

The problem with the “math supported scenario” is that people end up giving up along the way because they don’t see instant results. If you are stuck with thousands of dollars of debt and all you do is skimp money, the last thing you want is to wait for several months until you see your debt twiddle.

Instead, pay off your smallest debt first (this is what is referred to as the snowball method).

How to establish a debt snowball method

With the debt snowball method, you put everything on hold financially except the minimum payments and of course your utility bills and essential living expenses (and no, that does not include a subscription to cable TV). Scrape together everything you can.

However, before you start minimizing your financial expenditure, try and save money for an emergency fund. Speed is of the essence here since the interest clock is ticking.

Assemble all of your debts and create a spreadsheet listing them in order of size. Start with the smallest debt first and work your way toward the biggest (most likely your mortgage). This is not the time, nor the place to worry about interest rates as the idea is to start paying down your smallest debt as soon as possible, then move on to the next, and so on.

The snowball starts rolling…

Begin by paying the minimum on all of your debts except for the first one. Pay as much towards that each month as you can. The moment your first debt is paid off – which shouldn’t take too long if you are dedicated – apply that same payment amount to the next debt on your list. Once you’ve paid that off, apply that whole sum to the next one. So, $25 becomes $75, which becomes $125 and so forth.

In a short period of time, your snowball will gather pace and you will feel a massive sense of achievement. This will drive you to keep going.

Seeing results is psychologically important. It helps us to stay focused and result-driven.

…can you feel the rush of wind in your hair?

As you pay off more and more small debts your snowball will gather massive momentum. You will feel elated and actually start believing that is is possible to be debt free.

But it gets even better than that. If the exhilaration of the wind in your hair isn’t enough, how about the fact that you will start to compound your remaining payments as you pay off more of your debts. Money is funny that way!

Every single dollar you pay off your existing debt will help to compound the remaining amount. The more you pay off, the quicker your debt will shrink until there is…

… nothing left to pay, finding yourself debt free.

As long as you keep adding the amount you paid to the prior debt to the next debt, you will see results with the snowball method very quickly. It will be the start of the rest of your life and hopefully re-educate you on money management forever.

This guest post is written by Timothy, a personal finance writer for Credit Card Finder, which specialises in providing credit card comparisons and information to help consumers get into a better financial situation. For more information on ways to reduce your debt, visit the Credit Card Finder website or subscribe to their RSS feed for additional practical articles.

Louise Tillotson writes for a number of websites on debt management, household budgets, savings and other personal finance topics.

If you have debts, then chances are you’ve got less than healthy spending habits. If you constantly find yourself thinking things like “If only I hadn’t bought that, then I could have this” or running short of cash a fortnight before payday, then you could do with taking action, kicking a few bad habits, and tackling some debts before they take over your life completely.

I won’t go into ways of cutting down your expenditure as there is tons of information out there on how to do that, and much of it is common sense anyway. Suffice it to say, if you have outstanding debts, then you need to put yourself in a position where you have enough disposable income to cut a sizeable chunk off of the balances.

Determining your financial situation

In order to do this, you need to know exactly what your financial situation is in. Getting copies of your credit report and score is the best way to understand your finances since trying to remember each debt, income and expenditure means you could easily forget about crucial ones. The goal is to find out how much you have coming in, how much is being paid out, and how much is left over.

Understand your debt obligations and make a plan

As well as knowing what debts you have, you also need to know how much the total amount owed is, the term left on each one, and what the interest rate on each one is. The idea is to pay off the most expensive debts first and get them out of the way as soon as you can. Debt that is taken out over a long period of time and has a high rate of interest is going to end up costing you more than a short-term loan with the same or a lower interest rate.

If you have a few small debts that you think you could pay off in one go, contact the creditors and ask about a settlement amount. They may be reluctant at first; some like to keep you paying interest for as long as possible; but don’t take no for an answer. Ask to speak to a supervisor or manager, and negotiate a lower amount with them.

What about your mortgage?

As for the rest of your debts, commit yourself to paying off a percentage of each one every time you get paid. Structure these payments depending on the interest, term and priority of the debt. For example, a mortgage will technically be the biggest debt you have, but clearing it isn’t really a high priority compared to one which may have some late payments. Any debts which you’re consistently up to date with payments on won’t be harming your credit score, so concentrate on those debts which you may have fallen behind on, and get these up to date.

This form of debt management is slow, but steady. Keeping up with payments is actually easier than trying to play catch up if you get behind. When you’ve had to do it once, you’ll do your utmost not to have to do it again!

April 15th is near and taxes are due. 2009 paperwork is being rummaged through, and Americans are working hard to get their taxes ready.

Paying taxes can put a big dent in our collective wallets, but a small percentage of people are going to come out owing more than they can actually afford (ouch!). So what happens if you truly cannot pay your tax debt?

This is a tough situation for anyone to be in. But like any difficult problem, there is always a solution. One thing you need to remember is that you should never just ignore your tax problems. A small or medium size debt could snowball into a huge problem that could even land you in jail. Also, the penalties for not paying your taxes and not filing your taxes are completely different! You will owe MUCH more for not filing, than if you simply can’t pay what you owe. Whatever you do, ALWAYS file your taxes.

A new trend among people that are having tax problems is to turn to their trusty credit cards. But, this might not be the smartest thing for someone who already has a debt problem. It depends on your history with credit cards and your current income. If you have a habit of not paying your bills on time, you might want to reconsider. Creating a credit card debt problem to replace a tax problem might just be digging yourself into an even deeper hole. But, if you have a steady income and the cash flow problem is just temporary, it might be worth it (only if you can pay it off quickly). Just make sure that you have repayment plan in place. You don’t want to let that interest grow into something you can’t afford.

What are your options if you don’t have the cash?

If you a facing financial problems, you might be able to negotiate a payment plan with the government. If you have less than $10,000 in tax debt you can fill out Form 9465 to set up an installment plan. The government may or may not agree to this. After you send in this form an IRS agent will evaluate your finances. If they believe you are truly having financial trouble, then they will most likely approve you for this installment plan. But keep in mind interest and penalties will still apply.

Now if you are really in financial hardship and an installment plan is still too much, the government may accept a reduced payment. This is called an “Offer in Compromise”.

To qualify for an Offer in Compromise you need to complete Form 656 and Form 433A. You will need to send complete records of your finances and an agent will decide if they will accept a reduced rate. The criteria for you to qualify for this compromise depends on the financial records you submit. If they believe you cannot pay the full amount, the amount due is incorrect, or that there are other special circumstances they might grant an “Offer in Compromise”. But keep in mind the IRS is tough, and they only offer OIC’s to people whose finances are in very bad shape. When you apply for an OIC, you admit liability of the tax debt. This will make it very difficult if you want to protest it later on.

Hire a CPA or Tax Attorney

There will be extra fees if you get outside help, but its possible that they may save you more money in the long run. A CPA or attorney will have much better knowledge of the tax laws, and may be able to work the system better than you could by yourself. But like with anything else, you need to shop around for the right company or you could get burned. Just like other areas of the debt settlement industry, these companies tack on fees that can add up quickly if you choose the wrong company. Make sure you read the terms of your agreement very carefully before you sign.

If your tax debt is greater than your income can afford, you need to handle it quickly. Remember that interest on your debt is always adding up. You can take the “do it yourself” route or hire a professional to help. There is also a lot of information on the Internet to get you started. Begin your research at home, then make some calls. It doesn’t hurt to call a tax professional just to pick his or her brain and get you moving in the right direction. The more you learn about the process, the better your outcome will be, and hopefully you’ll pay less in the long run.

About the author: This is a guest post by Garrett Driscoll from Debt Eagle. Visit his site if you are having debt problems or need information about bankruptcy, bad credit, or collector issues.

A neighbor, who is currently in college, had an assignment in her journalism class to create a investigative report on financial planning and students at her college. I happily offered some thoughts and suggestions on the piece.

After chatting for awhile, she asked if I would “officially” answer some questions as an expert (I think that term was used liberally). One of her questions was, “Can you give 5 tips or suggestions I can include in my article?”

I started jotting down thoughts beginning with a budget and so on. After a minute or so, I realized the gravity of what I was writing. Here I was limited to five ways a college student could improve his or her financial situation. Thoughts of my college experience started coming back (I’m sorry to everyone that was involved in that duck incident).

So here is my list of the top 5 suggestions for college students

No. 1 – Take responsibility for your money by creating and living by a budget. Sites like Mint.com or MoneyDesktop.com make it very easy to do. Also, remove or reduce as many fixed payments (subscriptions, cable bills, car payments, etc) as possible.

No. 2 – Pay off debt using techniques such as the debt snowball.

No. 3 – Have an emergency fund of at least $1000 and preferably enough to cover 3-6 months worth of expenses.

No. 4 – Start saving for retirement with the goal to save 20% of all your pre-tax income.

No. 5 – Give generously. You will probably receive more dividends from your generosity than any other investment. Also, if you can give when you are poor, it will be easier to give when you are rich.

All of the ideas listed above are widely talked about, but…

I’m not sure many college students fully grasp the fundamental nature of each one.

Let me give you an example. I have a coworker who is a pretty sharp guy. He graduated with a minor in Economics and worked at Goldman Sachs. He can explain credit default swaps and have in-depth macro-economics discussions with you. But he is lost when it comes to simple personal financial planning.

Maybe that’s why Wall Street is having so many problems.

So if you are a college student, take some time to understand how to create and use a budget. Stay out of debt and learn how to put together a portfolio of index funds in a 401k or Roth IRA. If your college offers a financial planning course, take it. I’ll bet you a shiny nickel that you will use that course more than the capstone course in your major.

So what advice would you offer college students?

I wrote a mock letter to Dave Ramsey several months ago lamenting the need to sell my car. Well, the deed is done. My baby is gone. And here’s why I’m better for it.

First, we were able to drastically reduce our monthly car payment.

Our car payment is 40.9% of what it was before. The extra money is going to pay off medical debt and the remaining car debt.

I love sleeping at night again.

Second, our car insurance went down.

But not for the reasons you think. We purchased an older car that is actually more expensive to insure at the same coverage level. However, since I didn’t like the prospect of higher insurance premiums (which reduced our cost savings), I spoke with a lot of insurers.

I had decided on American Family as it had the lowest rate, though still more expensive. Fortunately before signing up though, I remembered that Bear River Mutual (a local insurance company) supposedly had highly competitive rates. Come to find out, by switching my car and home owner’s insurance to Bear River, I saved about $20 a month over what I had before.

So if you haven’t checked in awhile, I recommend running some price comparisons on your auto and home owner’s insurance.

Third, we developed a bit more self-discipline through sacrifice.

I’ll be honest. I miss my SUV. I mean I really miss my SUV.

My lip trembles when other ones drive by.

But we made the responsible decision to forgo a car we really like for a less expensive car that we like, but still meets our needs. Making financially responsible decisions is difficult at times, but the rewards, both financially and emotionally, are tremendous.

Each time you make the “right” decision, the next time is easier. So what’s holding you back?

So Dave, what now?

Dave Ramsey teaches that to get out of debt you should sell so much stuff that the kids and dog think they are next. Here’s the list of items we’ve sold so far:

1. Hyundai Santa Fe
2. 32 inch LCD TV
3. Hard wood TV stand
4. DVD player
5. Printer
6. Palm Pilot

We’ve also donated a fair amount of clothing and other items that we didn’t want to sell but still let us de-clutter. Here’s a few more items on our list of things to sell:

1. Desktop computer (don’t worry, I still have a laptop)
2. Computer desk
3. Mini love sac
4. Possibly the house

To my wife’s chagrin, my golf clubs are not on the “to sell” list.

So what have you sold to get of debt or are not willing to sell? Let me know in the comments.

I had the opportunity to interview Jane White, author of America, Welcome to the Poorhouse. In this post, I intend to offer my review of the book as well as analyze her arguments and statements made in the interview.

Analysis of White’s Argument

Although White does an excellent job of raising the right red flags, there are several flaws in the changes proposed in her book. For the most part, I found that her argument lacks a strong understanding of economics as well as a false sense of entitlement.

For example, White proposes that companies be required to match 9% of an individual’s annual salary into a 401(k) plan. However, she fails to calculate the economic impact on companies. Further, she believes that any company with slim margins should layoff part of the staff in order to pay the 9% to others. Effectively, White will have slowed corporate growth and increased the unemployment rate.

Further, White strongly believes in the social contract or that the wealthy are responsible if not obligated to subsidize expenses such as college education for lower income tax payers. Why am I entitled to a part of the earnings of another individual? Now don’t get me wrong. It is my personal belief that individuals with excess income should seek out good opportunities to help others. However, I do not believe that the government has the right to dictate how that excess income is spent especially when you consider the inefficiencies in our government.

Further, White asserts that primary and secondary schools are free so college should be too. That comment is wholly unfounded in truth. For example, I paid my property taxes this past November. Approximately 90% of the bill went to the local primary and secondary schools. In fact, I will more than pay for the expenses associated with my children (especially since they are both under two).

White also asserts that corporations deceive Americans. She repeatedly refers to credit card promo offers and loans such as ARMs as bait and switch tactics by banks. Bait and switch assumes that an individual believes that he or she is receiving Good X when in fact Good Y is delivered. A credit card promo offer does not satisfy that condition. A promo offer is just that, a temporary promotional offer. There is no false representation. I do agree that too many individuals fail to fully appreciate the cost of the interest after the promo period, but that is the fault of the individual. Besides, the larger issue is why someone is using a credit card to begin with. If you do not use them, then a promo period is not really an issue.

Last, though certainly not least, White fails to estimate the financial and economic impact of the large tax burdens that she is proposing. In fact, she fails to recognize in several instances that a tax burden will even result from her proposed legislation. Case in point: She suggests that the government fund the 9% match for small companies. However, she denies that tax payers will have to fund the match. If that is not the case, then the government will have to simply print more money and cause inflation.

My Conclusion

I agree with White that change is greatly needed in America. We must change our spending and saving habits. White does a fine job laying out how we arrived at the situation in which we find ourselves. I also agree that there are bills that Congress should pass. However, I do not agree with what White is proposing. I believe that there are too many unresolved issues surrounding her suggestions that could be potentially detrimental to our economy and society.

I do not believe that the government is responsible for my or anyone else’s retirement. I believe that we as individuals need to make the necessary changes in our homes and not blame corporations or require the government (i.e. other tax payers) to bail us out.

Further, White suggests that we should expect the government and other tax payers to pay for our college education. Yet, she never suggests that families adequately save by using 529(b) accounts for example. As I mentioned at the beginning, White believes that the government, wealthy citizens, and corporations are responsible for our financial well-being and that we are mere victims without any power to prepare and pay for identifiable financial events ourselves.

In summary, this book speaks as if Americans are incapable of making good decisions and that we are constantly being lied to by corporations and politicians. While I am not so naive to think that either group always has my interest at heart, I do firmly believe that I am responsible for my own decisions. If I decide to use financial instruments such as credit cards or ARMs, then I am responsible for understanding the terms. If I do not understand, then I’m the fool for not asking more questions. I do not need the government to coddle me as White suggests.

But maybe you’ll disagree. I recommend reading White’s America, Welcome to the Poorhouse for yourself and arriving at your own opinion and conclusions. To purchase the book, visit Amazon.com.

Disclosure: I received a free issue of this book in order to write a review. I was in no other way compensated nor was I given any instructions per my review.

I have a real treat today. Seth Risenmay, the founder of MoneyDesktop.com, answered some questions from me and also graciously offered a promo code for a free 3 month trial of his product.

About MoneyDesktop

For anyone unfamiliar with MoneyDesktop, it’s an online tool to track your finances, plan for the future, and most importantly get out of debt. What’s unique about MoneyDesktop in a world of sites like Mint.com of PocketSmith.com is that the software auto-generates a plan using a variety of methods to help you get out of debt the most efficient way.

So for example, the ever-popular debt snowball is built in. Also, the less well known mortgage checking account method is also available. You the user are able to select the method that you are comfortable with, tie it into your overall budgeting and finances, and get out of debt faster.

Essentially, it’s a one stop financial wizard.

The Interview

RabbitFunds: Why did you decide to start MoneyDesktop?

Seth Risenmay: I started MD because I wanted to get America out of debt. We look at debt as THE greatest threat to the future of our country. When you think about it, our country has been able to defeat Nazism, Communism etc… and the one enemy that actually has a shot at bringing down our country is debt.

RF: Where did you come up with the idea for the feature set included in MoneyDesktop?

Seth: We had a database of 39,000 customers that gave us feedback on our product. We asked all of them this question; “What does this product need to be to give you the best chance of success?” From this market research we learned that America needed a product that did not then exist and so we set out to build it. It took 4 years and about $5 million to build but we feel confident that MD is the greatest debt and personal financial management tool in existence.

RF: What is different about MoneyDesktop as compared to Mint or PocketSmith?

Seth: The greatest difference between MoneyDesktop and any of our competitors is that it is first and foremost a debt tool. Other PFM’s are typically tools that help you track where your money went, but if that is all you do that would be like driving your car down the road backwards, you’ve only seen where you’ve been, not where you’re going. Some products and companies help you project the future and your debt payoff but since they don’t track where your money is going the projections are inaccurate. MoneyDesktop is the only company that looks to the past by tracking your spending, to help you project an accurate future for debt elimination, with real time in the present instructions in the form of text messages and emails. We also have systems to help people make decisions with financial intelligence, which no one else has. We also help people increase their discretionary income to help them get out of debt even faster. We do this by actually increasing their cash flow while lowering their bills and payments. All of this is unheard of to most PFM’s. I would say that we are one of, if not the only DPFM (debt and personal financial management).

RF: Are there any plans to make the service free like Mint?

Seth: We have thought a lot about offering our services for free like Mint. The problem is that we have found that if a person is not paying for a service they do not value it enough to actually implement it into their life and become successful. We wanted people to actually commit to their financial wellness. However, we also understand that there are a lot of people who desperately need MoneyDesktop who may need our services for free. Because of this, we have created a promotion called 3 for Free. If a user of MoneyDesktop is willing to help us in our mission to get America out of debt then we feel they have shown the commitment necessary to succeed and deserve to receive our services for free. If they refer 3 other people to MoneyDesktop our system will automatically track that and when 3 others have signed up the referrer will receive MoneyDesktop free for life!

As mentioned above, Seth was kind enough to offer a free 3 month trial to any RabbitFunds readers with a special reduced price of $14.95 afterwards. Just use the promo code “Rabbit” when you sign-up.

RF: What do you hope that users will achieve by using your site?

Seth: Total financial wellness. We want our users to become debt free, achieve financial freedom, gain financial intelligence, and become wise stewards of their money and wealth. And hopefully by using the 3 for Free feature they can help start a community of people committed to getting out of debt which will help strengthen our country and in a lot of preserve what we know as America for generations to come.

RF: How has using the software helped your own family?

Seth: I know where every penny goes, I know when every debt will be eliminated and I have piece of mind knowing that I am being a wise steward of the things I’ve been blessed with. It has helped me eliminate all of my debt with a little left on my home still to go.

RF: What upgrades or changes can users expect to see in the coming 6-12 months?

Seth: With tax season upon us we are adding features that will allow a person to easily organize their finances for tax season with their CPA. We are also adding added benefits of ID protection and Credit Monitoring. Other companies like LifeLock will charge you upwards of $10 per month for each of those services, we are close to having those services provided to our subscribers at no additional fee as an added benefit of using MoneyDesktop. We are also redoing the set up wizard for a more simple and effective setup to get people using it more efficiently.

For More Info

Thank you Seth for your time. If you have any questions or would like to see more then visit MoneyDesktop.com or follow them on Twitter at @MoneyDesktop.

Our nation has been facing for more than a year now, one of the worst housing price decreases in history. Yet for some reason, many people seem to be confusing how this happened.

Let me give you an example. Obama has structured a Loan Modification program for individuals suffering “financial hardship” but desire to keep their home. U.S. News last March aptly described 7 key facets of the program. Apparently, homes worth up to $729,750 are eligible for the program. Last time I checked, a 3/4 of a MILLION dollars home is only a home that someone with a large, stable income should purchase.

But for some reason, that isn’t part of the American Dream. The American Dream has become to acquire big homes and toys incurring insurmountable debt. The Loan Modification program adjusts the interest rate on homes facing default down to 2%. If that is not enough, then the term of the loan is extended to 40 years. If that is still not enough, then the bank stops charging interest.

The goal of the program is to lower the monthly payment to 31% (actually 38% and the government, i.e. taxpayers, pay down the other 7%) of the individual’s gross monthly income.

How did we actually end up with this problem?

I recognize that regardless of how we arrived here, we are here either way. But let’s be honest for a moment. The interest rate is not the problem, neither are falling home prices. Irresponsible and hasty adults purchased homes that they could have never feasibly afforded and greedy banks made the loans.

Warren Buffett echoed my sentiments when he stated, “Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay.”

I once heard a banker describe the situation from the banker’s perspective. He explained that banks made the loans based on two erroneous assumptions. Assumption #1 – Owning a home is the American Dream and no one would ever default on the American Dream. Assumption #2 – Even if the value of the home is less than the size of the loan, home prices always go up and the home won’t be under water for long.

Well my friend, Americans are just mini-businesses. When expenses exceed income, then home owners chose to close up shop and foreclose.

This is the point where I say, “Is this a sick joke?!”

Let me make sure I understand this correctly. I carefully analyzed my financial situation and purchased a home that I can afford without financial stress. Now, 1000s of irresponsible home owners are going to financially benefit from being careless, greedy, or both.

For example, one of our neighbors qualifies for the Loan Modification program. In fact, it will lower their monthly payment so much, that they are going to buy and move into a second larger home and profitably rent out the first. Now do not forget that we are paying for that 7% decrease. I’m pretty sure that’s just not right. (Caveat: I don’t think they’ll ever qualify for the second mortgage)

The Real American Dream – We started a business

Last year, my wife and I were facing some unexpected bills. Instead of turning to the government and taxpayers, we started a business. We were able to pay for all of our needs and are expecting a good second year. That’s the American Dream – the ability to change your situation if you work hard.

So this is my resignation from responsibility. Why should I work hard, pay my taxes, make good decisions, and watch while others benefit from irresponsibility?

Isn’t this eerily like middle school?

I feel like I’m in middle school again. I was always amazed that the delinquents, the kids skipping classes and starting fights always had privileges and praises that the good kids never received. I recall a program that allowed poor performing kids to slightly raise their GPA and then receive public awards and rewards for mediocrity. Or remember the rebel or football player with a D average that always dated the cheerleaders. He used each one of them and then moved onto the next.

Why is our welfare system structured after the social intricacies of pubescent 15 year olds?

So I’m done. I’m done producing. I’m done being responsible. Why not simply do whatever I want and then wait for a social program to be structured to remove the consequences of my actions? Welcome to the new American Dream.

For those unfamiliar with the Prisoner’s Dilemma, it’s essentially a hypothetical scenario where a prisoner has to choose between two alternatives – rat out his accomplice or say nothing. The prisoner selects which action to take based on the potential payoff or outcome from either alternative.

The Prisoner’s Dilemma is a common way to explain a branch of economics called Game Theory or Industrial Organization, popularized in the movie A Beautiful Mind. John Nash realized that to reach an optimal outcome, no participant can be made better off by choosing a different course of action. Essentially, everyone is in the best place that they can be.

So how does this apply to personal finance?

Let’s use credit card companies as an example. ACME Credit Cards has a large marketing department who has one simple responsibility – convince you that the optimal outcome is using a credit card.

So let’s use game theory to analyze the true payoffs of using and not using credit cards. I’ll then show you how ACME Credit Cards has distorted the truth hoping that you’ll choose a non-optimal solution (though certainly optimal for them).

Setting up the participants and outcomes

Step 1 is setting up the game with the possible choices that each participant has.

As shown above, Consumers have the option to either use credit cards or use cash for purchases. For the purpose of this illustration, I am narrowing the Credit Card Issuer’s options to make money from either interest charges or transaction fees charged to merchants (this assumes that the Consumer pays off the balance in full each month).

Step 2 is setting the payoffs that each participant can expect depending on the outcome of the choices made.

Here is a recap of the outcomes:

• If the Consumer chooses to use credit cards and not pay off the balance each month, then the Consumer pays interest charges and the Credit Card Issuer makes huge profits. Bad outcome.
• If the Consumer chooses to use credit cards and pay off the balance each month, then the Consumer still pays more since Consumers spend on average 18% more when using credit cards versus cash and the Credit Card Issuer still makes money. Bad outcome.
• If the Consumer chooses to use cash only, then he or she saves money and the Credit Card Issuer goes broke no matter what it chooses. Good outcome.
• Optimal Outcome: The Consumer should always choose to use cash instead of credit.

Step 3 is setting up the outcomes as Credit Card Issuers would have you believe them.

Here is a recap of the outcomes:

• If the Consumer chooses to use credit cards and not pay off the balance each month, then the Consumer  was able to get just what he or she needed when he or she needed it and the Credit Card Issuer is the good guy. Good outcome.
• If the Consumer chooses to use credit cards and pay off the balance each month, then the Consumer was still able to get just what he or she needed when he or she needed it and the Credit Card Issuer is the good guy. Good outcome.
• If the Consumer chooses to use cash only, then he or she misses out on all of the rewards and fun that everyone else is taking advantage of and the Credit Card Issuer goes broke no matter what it chooses. Bad outcome.
• Optimal Outcome: The Consumer should always choose to use a credit card instead of cash.

Avoiding the marketing traps

Do not be fooled by slick advertising. Although Credit Card Issuers paint a very pretty picture of instant gratification, reasonable fees and interest rates, and a mass of incentives (e.g. miles, points, cash back), the reality is that they are making a lot of money. Visa posted profits of $713mm just for the first three months of 2010!

Meaning, they are doing a great job of distorting the truth. As shown above, the actual outcomes are not fun and fancy free living. Rather, avoiding credit and debt is the sure path to financial stability and growth.

This same logic and process aptly works for other areas of personal finance as well. I just like picking on credit cards.

Also, listed below are several articles and ideas on how to avoid debt and save money:

• How To: Get out of debt using the Snowball Method
• 6 More ways to stop overspending
• The 30-Day “No Spend” Challenge
• 4 Changes to make in this new economy

What are some other examples where the optimal outcome is being distorted by clever marketing? Also, sign-up for our RSS Feed for timely updates on this and other financial topics.

I like marketing. I market my website. I market myself to potential employers. I marketed myself to my wife and she fortunately bought. I believe marketing helps us gain knowledge of products, services, and opportunities that we might not have otherwise known about.

I believe marketers spend everyday trying to open our heads and rewire us to buy their stuff. I’m not cynical and I don’t think they are evil or bad people. However, as consumers we need to understand that they want our money and that it is Us vs. Them. My six reasons.

1) Discount pricing is a marketing ploy

I spent some time working at a major, national retailer. I’m not interested in pointing fingers, so let’s just call it Brand X. While working at Brand X, I was involved in many pricing conversations and observed the pricing process. We all know that stores use discount pricing as a means to incentivize you to buy now. I didn’t understand how deep that really runs though. For example, if a shirt or sweater costs the company $10 and they know from historical reports that consumers typically will only buy it at a price of $20, then they price it at $40. That way, they can discount it at 50% (oh my gosh! oh my gosh! oh my gosh!) and it will sell at the expected price of $20. Meaning, they don’t even expect you to pay $40! If you do buy it at $40, then you just lost. If you purchase at $20, not because you need the item but because you can’t pass up that great price, then you just lost.

2) They make us ask permission to buy from them

I’m borrowing this reason from Dave Ramsey and don’t take the credit myself. Banks, car dealerships, etc need us to buy from them in order for them to make money. And yet, we find ourselves asking them, and almost pleading at times, to take our business. They tell us that we’ve been “approved” so that we feel part of the club. “Honey, great news! The bank approved of us.” They put on a great dog and pony show to make us anxious that we might not get the “deal.” Stop and realize what is really being sold. Often, what’s being sold is enslaving amounts of debt. Liabilities, like cars, that masquerade as assets don’t make you happy. Money in the bank and peace of mind make you happy. Walk away next time someone tries to get you to say, “Please, can I have your stuff? Please, can I buy some debt?”

3) Research, research, research

Marketers spend a considerable amount of time learning their trade and then studying consumers’ behavior. Any good professional would. They track and analyze your buying and browsing behaviors, study psychology, and attempt to gain an intimate understanding of you. This is a double-edged sword. For example, Zappos.com is very customer centric. They are almost obsessively customer centric. They use an intimate knowledge of customers to better meet customers’ needs. But at the same time, these marketing departments use this knowledge to optimize the entire buying process to get you to buy. So what am I saying? Simply that marketers are constantly gaining new information about us and using that information to create extremely enticing advertisements. Just to put this effort into perspective, advertisers are expected to spend $242 BILLION on ads in 2009 alone. They have to recoup that investment and they expect to have us, the consumers, foot the bill. Don’t buy just because of the shiny ad.

4) They use fancy or technical names that confuse the issue

As the title suggests, a rowing machine is now a “1205 Precision Rower,” which sounds much cooler. Another example is the 12b-1 fee charged by some mutual fund companies. Rule 12b-1 was adopted by the Securities and Exchange Commission (SEC) in 1980 and allows fund companies to pay for sales and marketing activities by charging you a fee. This is in addition to the normal or stated expense ratio. It bothers me that fund companies charge consumers a marketing fee but don’t call it that. I understand that the name is derived from the SEC rule, but it is misleading to novice investors who are just starting out. Just call it a marketing fee so we can decide if we want to pay it.

5) “Where’s the pain?”

Another double-edged sword. A good marketer asks and answers the question, “Where’s the pain?” If a marketer can understand the problem a consumer faces, then he or she can develop a campaign or product that addresses that problem. Target pharmacy bottles are an excellent example of a marketer adding value to a product. Several years ago, Target redesigned its pharmacy bottle to make it easier to open, identify the prescription, and know to which family member the prescription belongs using color coded cap rings. The added convenience is worthwhile. On the other end of the spectrum, think about all of those late night infomercials. They offer solutions to common problems via their products. But stop and think to yourself, “Yes the Magic Bullet makes life a little easier for me, but my blender works just fine. So I don’t really need it even though it is newer, nicer, faster, etc.” In other words, they may be offering something that solves a problem, but you just may not really need the problem solved (at least not at the expense of your retirement). So next time you go to buy a product that you really don’t need, decide to put the money into your retirement account instead.

6) Illegitimate or illegal marketing schemes

I don’t want to dwell much on this topic since my purpose with this post is to address legitimate marketing efforts. However, there are a lot of marketers of ill repute out there attempting to bypass the law and cause you to lose your money. If you suspect that an offer is too good or just doesn’t seem right, please avoid it. Also, you can check sites such as Scam.com, ScamBusters.org, Snopes.com, or the Better Business Bureau to see if others have reported the offer as a scam.

Conclusion

Let me reiterate an important point – I have nothing against marketers. I know a lot of them. They have families, homes, dogs, and probably some consumer debt themselves. But buyer beware. Every institution, firm, corporation, etc must maintain a healthy revenue stream and that revenue has to come from someone. See it as a game. You are allotted X number of dollars each month to support yourself and your lifestyle. Marketers setup storefronts where you can choose to spend your dollars. At the end of the game, the person or store with the most dollars wins. The more you keep to yourself, the greater your odds are of winning.

Let me know in the comments if you agree or disagree.

I decided to take Dave Ramsey’s Financial Peace University. My work was offering to pay for the course and I’m always anxious to learn something new about financial planning. As part of the class materials, I received Dave’s book Financial Peace Revisited. Having now read the book, I’d like to offer my observations.

Pros

First, if you are unfamiliar with many financial planning techniques or why you should be budgeting, saving, or getting out of debt in the first place, then this is an excellent guide. The range of topics covered are not exhaustive but an excellent start to cleaning your financial house. If you are already budgeting and investing, then consider this book a re-motivator or a little “pick me up.” I was able to find several areas where my wife and I are improving our financial situation as a result of this book.

Second, I’m a Christian and I appreciated the religious tone that Dave uses. I personally believe that we will be held accountable for our money management and Dave uses scripture frequently to illustrate his points. If you are not a Christian, don’t be scared off. He keeps the religious comments to a minimum.

Cons

First, the book was originally written in the 1990s and updated and released again in 2003. The concepts and principles that Dave teaches are certainly timeless. However, I believe that some of the techniques that he teaches are outdated. For example, all of the budgeting is completed by hand on paper. Fortunately, his book comes with convenient forms to use. However, this is 2009 and budgeting software packages are readily available and inexpensive. I can understand that many people didn’t have computers in the 1990s and that budget software wasn’t that advanced. But Quicken and Mint.com are both excellent options. Or heck, you can even use Microsoft Excel pretty effectively if you don’t mind updating your spreadsheet manually. Either way, some of the information and approaches could and should be updated.

Also, there are two chapters that in conjunction raise an issue that I have with the book. The chapters titled “Only Buy Big, Big Bargains” and “Career Choice” are good chapters touching on important points. However, they both suggest that you need to find a career where you can make lots of money and then go buy lots of nice, potentially expensive stuff with cash. I don’t think there is anything wrong with nice stuff, especially if you are paying cash and not going into debt for it. But Dave suggests that that path is the right and only one. I disagree and here is why. My wife and I are considering several graduate school options. One route would land me in a lower paying job that provides much higher satisfaction while the other option we are considering offers much more money but may be less satisfying. According to Dave, picking the satisfying career (so the first option) will generate more money. In my case, that’s just not true. Further, just because I can afford a $100k car, doesn’t mean I should buy one despite how good of a deal I get on it. I think Dave still has a focus on a lot of material things. Fortunately, he teaches you how to pay cash for those things.

Last, Dave gives a basic overview of the mechanics and fees of mutual funds. I was surprised that he didn’t cover passively managed index funds or how to construct a simple, diversified portfolio (which he could write a whole book on). Also, I personally believe that the average investor never needs to purchase a fund that has a load (fee to purchase it). Dave suggests that there are certain load bearing funds worth owning but never describes the criteria for knowing when a load bearing fund is worth owning. Again, I believe that unless you have a reasonable understanding of the market, mutual funds, and how to construct a strong portfolio, then stick with no load funds. In fact, stick to index funds from companies like Vanguard or Fidelity.

Summary

All and all, the book is a good, an easy read, and offers practical suggestions. Even though it appears that I had more negative than positive to say, my negative points are minor issues. On a scale of 1 to 5, I’d give it a solid 3.5. If you’d like to see additional reviews and comments or to purchase the book, check it out on Amazon.com.