Mortgage and Foreclosure Law Blog

What do you think the price of a loaf of bread was 40 years ago? The average price for a loaf of bread 40 years ago was .10 cents. Today it is about $2.50. Any guesses what it will be 40 years from now? Over $16! No way you say? Don't you think that's what people would have said 40 years ago if you told them they would be paying $2.50 for a loaf? That's what inflation does and it is going to continue to happen. So again, what does this have to do with consumer debt? The answer is here in part three of my series on winning the money game. You CAN NOT win the money game while you are in debt.

Let's take the same folks 40 years ago. What do you think somebody aged 65, with social security had to save to retire with a meager; but middle class retirement? 40 years ago they could have retired with $75,000 and a social security benefit. But what if you were 25 years old back then and you are getting ready to retire at 65 today? How much would you need along with social security to retire in a meager, yet middle class lifestyle? Today you would need $400,000 and that social security check. Well guess how many people who retire today have saved up $400,000? Less than 10 percent. Guess how many have saved up $75,000? Over 90 percent. Do you see the problem here? People didn't adjust for inflation. Do you know how much you will need in 40 years to retire middle class? $2.5 million! Don't think social security will be there either. So are you ready to do something about that debt?

So why am I trying to explain the money game? We are a law firm doing Mortgage Modification, Debt Settlements, Bankruptcy, and general consumer advocacy, right? I'm trying to stress the importance of getting out of debt and making your money work for you. I am going to give you an example of how devastating taxes can be on your investment earnings. This is going to be a simple example to show you the importance of getting out of debt at any cost and putting any amount of money you can into a tax free investment vehicle. For simplicity's sake let's say that you take a Dollar and double it every year for 20 years. How much do you think you will have in 20 years? Let's see...

Dollars--------Year
1-----------------2
2-----------------4
3-----------------8
4-----------------16
5-----------------32
6-----------------64
7-----------------128
8-----------------256
9-----------------512
10---------------1,024
11---------------2,048
12---------------4,096
13---------------8,192
14---------------16,384
15---------------32,726
16---------------65,536
17---------------131,072
18---------------262,144
19---------------524,288
20---------------1,048,576

Now who guessed you would have over a million dollars? Let me show you what happens when your money gets taxed every year after it doubles. I am going to use a 28% tax rate. So you start with a dollar. You double that dollar in year one. That means you earned a dollar. The government is going to tax the dollar you earned at 28%. That reduces your earnings by 28 cents in year one ($1.00 * 28% = .28 cents.....$1 - .28 cents = .72 cents). That plus your original dollar gives you $1.72. So in year two you are going to double your money and earn another $1.72 for a total of $3.44; but the government taxes your $1.72 at 28% leaving you to only add $1.24 and you have $2.96. Repeat this process for twenty years and guess right now how much money you think will be there in 20 years...

Dollar--------Year
1-----------------1.72
2-----------------2.96
3-----------------5.09
4-----------------8.75
5-----------------15.05
6-----------------25.89
7-----------------44.53
8-----------------76.60
9-----------------131.75
10---------------226.61
11---------------389.77
12---------------670.41
13---------------1,153.11
14---------------1,983.34
15---------------3,411.35
16---------------5,867.53
17---------------10,092.15
18---------------17,358.49
19---------------29,856.61
20---------------51,353.37

Now, all that money you are paying towards your credit cards and other debt is post tax dollars!! That means again, your money is working against you. See why it is so important to get out of debt by any means necessary? Debt Settlement, Bankruptcy, whatever. You can't depend on Social Security or the government to take care of your retirement. You must get out of debt and start saving in the highest interest rate accounts you can that are tax free! Next time I'll go over inflation and how that affects how much money you will need to plan on having in the future. Stay Tuned for part three.

Have you ever heard of Compound Interest and the Rule of 72? For those of us who need a refresher, let me quickly explain. If you are earning compound interest on an investment, divide 72 by the interest rate you are earning and that is the number of years it will take for your money to double.

Let's say you're earning 1% interest compounded annually. You put $100 in the bank. Divide 72 by 1% and you get 72. That means you will have $200 in about 72 years. What if you are earning 10% interest? 72 / 10% = 7.2years. Your money will double every 7.2 years. You can see that in the same 72 years (assume a longer than average life span) your money would double 10 times over the same period that your 1% interest investment doubles once. After 72 years your 10% interest investment of $100 would be worth $102,400!!

Do you know where you get 1% returns? Bank savings accounts. Why would anybody keep money in there when so many other investments guarantee higher returns? So what does this have to do with consumer debt? Your credit cards compound interest against you!! They are investments for the credit card companies. They are charging you outrageous interest rates and when you continue to pay the minimums you are making them rich. If you ever want to win the money game you must eliminate your credit card debt and stop compounding interest from working against you. There are many options to get out of debt including bankruptcy, debt settlement, borrowing from a 401K, even laddering your payments. If you are in a situation where your debt is too much call us to discuss what options might be best for your situation. Next time I'm going to explain how taxes work against you and why you need to avoid them at all costs.

As a Consumer Debt Protection Attorney, I have been getting calls and complaints lately from Consumer's who have excellent credit and have never been late on their mortgage or credit card payments. What they are telling me is that their Credit Card Companies have either raised their rates arbitrarily, or that they have simply raised the amount of their minimum payment. They are desperately looking for help with either their mortgage or their credit card debt. So what is going on?

I titled this entry as "The Big Squeeze" and that is exactly what is happening to Prime Borrowers. In fact, Prime borrowers now account for more than half the mortgages that are 90 days late, which exceed sub prime borrowers. Credit Card companies are looking for more cash to keep their bottom line from disappearing. Bankruptcies are up, people are settling their debt, and millions just can't afford to pay anything. Compounding the problem, so many people are without jobs, that wage garnishment isn't an option.

Normally, your credit card companies have ways to hedge their losses from people who don't pay. One of the first ways is to write off losses, including bankrupted debt, against their taxes. There is a limit to how much of this debt can offset taxes each year. They can also get a judgment against the debtor and put a lien on property, levy a bank account, or garnish wages. These options are very limited in this economy. So many people are in foreclosure, that putting a lien on property is a waste of time. People are so broke there is often nothing in their bank accounts to levy. Finally so many people are out of work or on unempolyment (which can't be garnished) there is no option to garnish wages either. So what are the bank's options?

The answer is to get more money out of their "good" customers. Don't be fooled, it has been proven over and over that these companies aren't scared to employ guerrilla tactics to take your money. It is confusing people why they would employ these tactics against their best customers. I am telling you that it is because they have tapped out everybody else. First of all let me tell you that most changes to your credit account are legal. They can change the rules on you almost at will. Generally, all they have to do is give you 30 days notice and an option to close your account if you don't like the changes.

What seems so amazing is that too many of their "good" customers, who have never been late are now being forced into making a choice between paying their credit cards or their mortgage. Not much of a choice. In the end if you can transfer your balances to another card, do it. If you have any money in your 401K, use it to pay off your debt. Most people don't realize that compound interest works against them, just as it can work for them. If you are paying high interest rates on your credit card and getting a low rate of return on your 401K or other investment, YOU ARE LOSING MONEY!

In my next blog I am going to explain the money game in more detail. Particularly, I am going to explain why Taxes, Inflation, and Interest are so important to have working in your favor and not against you. Stay Tuned.