One of the most popular posts on The Wisdom Journal is 26 Ways To Make Extra Money While Keeping Your Day Job. Many of the ideas in that article require cash seekers to start their own small business of sorts, from babysitting to plant maintenance to tutoring kids to “mining the miners.”. But there are at least three other ways to generate extra cash in your pocket.

The fours ways to make money are:

• Start a business
• Work more
• Passive income
• Spend less

1. Starting a business – okay, we’ve got that one out of the way.

Starting a business takes a special personality type. It takes someone with the motivation and ability to handle the details involved in putting an idea into motion and the wherewithal to follow through. The time, effort, money and nerves that it takes to run a business (that has no guarantee of success) means that very few people will take this route.

2. Alter your work situation

If you can manage to get some overtime at work, a major promotion or raise, or take on a second job, changing your work situation DOES have a guarantee of sorts: you show up, clock in, and work and you’ll get paid. Whether you take on a second job, get a raise because you went back to school to finish your degree, or because you seized an opportunity to move up in the company, make sure your lifestyle doesn’t absorb your extra earnings.

3. Go passive

No income source is completely passive. Everything requires some sort of effort from someone at some point (even an inheritance was earned in the past). Examples of “passive” income could be the interest earned on your investments, getting royalties for past work, or some sort of arbitrage. The key to making money through your investments is accumulation. The more you’re able to save, the more interest you’ll earn. Even if you can manage to get a 25% return, if you only have $500 in that investment, you won’t make much. Eventually it will make a difference, but it will take a while without major contributions on your part (maybe from that second job?).

4. Spend less

Sure, this is a way to increase the cash in your pocket. Before income taxes, Ben Franklin said “A penny saved is a penny earned” but today a penny saved is one and a half or two pennies earned. If you can avoid spending, you can stretch your dollars and put those “earnings” into your bank account.

One of the downsides of making extra money is, of course, taxes. In our progressive tax system, the tax loss resulting from entering a higher income bracket is not prohibitive, but it is discouraging. You work harder (and many times longer), but the returns on your efforts diminish as your income tax rate increases.

Don’t let it deter you though, especially if you set up a small business. Many times you can offset most of your income through business deductions and the legal avoidance of these progressive taxes but and still come out ahead.

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If you’ve recently lost your job (like the other 8.5 million people in the last 2 years), I know you’re in a state of semi-shock. All sorts of questions are running through your head and you’re probably wondering about a lot more than your budget. You’re wondering about how you’ll live day to day until you find employment elsewhere. But making adjustments to your spending habits is an important part of the process of finding your next job whether you budget with YNAB or just a pencil and paper. How?

If you’re relatively confident in your ability to weather this storm financially, you won’t seem desperate in your interviews. You’ll sleep better, and your relationships will be better because you’ll know your limitations and your budget prognosis for the future. You’ll be better able to respond to interview questions with ease and confidence because fear won’t be hanging over your head.

Budgeting steps after losing your job

• Understand what income you still have
• Assess your assets
• Know your fixed expenses
• Evaluate your variable expenses
• Accept that desperate times call for desperate measures
• File for unemployment
• Negotiate everything
• Initiate calls to your creditors

What income is still coming in?

Before you make any budget, jobless or not, you need a clear understanding of what money is coming in from ANY source (spousal income, unemployment compensation, interest, dividends, side jobs, etc)/

What other assets are available?

How much do you have in liquid assets and available savings. Do you have a whole life insurance policy with cash value? What about your emergency fund? If you’re reading this and actually still have a job, get a big, fat, healthy emergency fund in place now (check out 17 Sneaky Savings Strategies). You’ll never regret having cash in your bank account.

Know your fixed expenses

Fixed expenses are items where the payment doesn’t change that much – things like your mortgage or rent, food (not dining out), medicines, your student loans, minimum payments on credit cards, car payments, required insurance, communication bills (cell phone), utilities, or child support payments. You need to have these written down.

Evaluate your variable expenses

These are items where your spending can change month to month. They include clothing, dining out, entertainment, vacations, gifts for friends or relatives, and those impulsive trips to the mall or to Target.

Desperate times call for desperate measures

If your income and available assets cannot cover your fixed and variable expenses, it’s time to do some cutting. First cut your variable expenses, then begin evaluating your fixed expenses, trying to find ways to reduce them. You may have to pull the kids out of private school. You may need to eliminate your land line and only use your cell phone. You may have to forego that morning coffee stop. Cable TV may be a thing of the past. You may have to bump up your air conditioner to 78 degrees and turn on the fan or bump down your heater to 68 and don a sweater. You may have to jettison that second car, or the camper you haven’t used in 4 years (or was it 5?). You may have to have a yard sale and get rid of the clutter in your garage or attic. You may have to become a coupon clipping maniac.

The bottom line is you have to stretch every single dollar as far as possible.

File for unemployment

It’s disgusting, I know. I had to do it once and I was so embarrassed I left the office without filling out the paperwork and found a job within an hour – digging ditches … literally. But since you’ve paid into the system, it makes perfect sense to get back what you deposited over the years.

Negotiate everything

Your creditors may be willing to negotiate your interest rates, but you have to know what to say to get your credit card interest rate lowered. Whatever you do, never let on that you’ve lost your job in these negotiations – that comes later.

Initiate calls to your creditors

Don’t make them have to come looking for you. Initiate the call yourself, explaining your situation and the fact that you’re desperately looking for employment and you plan to pay minimum payments, even while unemployed. Your creditors may even have programs to temporarily suspend your payments, but you’ll never know unless you inform them of your situation. Make certain you answer their calls and perform exactly as you promise.

Making a budget is about setting priorities

Your creditors know this – they just want to be a higher priority than anything else. But remember, you’re the one in control. You decide who gets paid and how much. Don’t let a pushy debt collector take your food money or your mortgage money or your child’s medicine money. Explain where they are on your prioritized list and tell them when and how much you’ll send them. Then follow through.

“When worms are scarce, chickens keep scratching.” ~Bill Lee

Be prepared to scale back – big time. That part is inevitable, but also know that this too shall pass. Get off the couch and get started interviewing. You’re lifestyle may take a hit, but if you don’t give up and keep on scratching, you’ll make it.

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Know any “lucky” people? You might want to pass this article along to them so they don’t wind up in hot water with the IRS. With revenues declining for local, state, and federal governments, you can be sure the Tax Man will be on the lookout for his cut of your winnings, even if those winnings aren’t in cash. And you don’t want to end up on this list of people with tax troubles.

Being lucky may not be all it’s cracked up to be. Most people realize that winning a huge jackpot automatically means a large chunk of change goes to Uncle Sam, but gambling winnings can show up in the strangest of places. Like where?

That iPad you won is taxable

Various sites around the Internet giving away prizes ranging from iPads/Pods/Phones to costume jewelry, and winners are required by law to report those prize winnings on form 1040.

All income (including non-cash prizes) from gambling of any sort has to be reported on form 1040. Form 1040A or 1040EZ users are not allowed to use these forms to report gambling winnings. This rule applies regardless of the amount and regardless of whether you receive a Form W-2G 1099-MISC or any other reporting form from the casino, track, bookie, company or … website.

Income includes, but is not limited to, winnings from lotteries, raffles, and random drawings. It includes cash winnings and also the fair market value of those prizes. It doesn’t include qualified educational scholarships, non-cash employee achievement prizes and designated prizes transferred to charities (check with your tax advisor or the IRS).

Prize winnings are fully taxable and must be reported on your tax return.

1. Income includes – but is not limited to – winnings from drawings, raffles, and lotteries, as well as the fair market value of prizes you may have won.
2. Depending on the type and amount of your winnings, the payer might provide you with a Form W-2G or a 1099-MISC and may have withheld federal income taxes from the payment.
3. The full amount of your prize winnings for the year must be reported.

Don’t let the taxable nature of any prize stop you from entering a drawing or contest.  After taxes are deducted from the winnings, the winner is still ahead of anyone who didn’t enter! But don’t forget your legal obligation either. You and I are legally bound to report any and all prize winnings on our tax return. Failure to do so could come back to bite you and cost a lot more than just an iPad.

For further information, see Tax Topic 419, Gambling Income and Expenses on the IRS website.

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Rescuing your dwindling paycheck from the tax-man has become an important part of formulating an investment strategy, even if you are a rich politician.

Regardless what you were promised in 2008, your taxes will go up once the “Bush” tax cuts are allowed to expire. A recent article in Investor’s Business Daily outlined how those making far less than that magical $250,000 per year will see their taxes increase. Families making $50,000 per year will pay as much as an extra $835 per year.

Since tax rates will be rising regardless of your income, you can take steps to prepare. Here are a few strategies to consider in anticipation of the coming tax hike:

Before you panic, use a buy-and-hold investment approach

With an investment that increases in value by 6% each year, it will increase a little over 26% in four years, excluding any dividends or interest payments. So, although capital gain and other tax rates will increase next year, you may also want to consider holding investments with growth rates exceeding the increase in the tax rate. Buy-and-hold (excluding annual rebalancing of your portfolio) is one key factor in How A Second Grader Beats Wall Street.

Sell appreciated assets

Current long-term capital gains tax rates generally peak at 15%, but the rate is scheduled to increase to 20% after 2010. To avoid paying tax at the higher rate, consider selling those assets it makes sense to take advantage of today’s lower rates.

Take investment profits while rates are lower

Single investors with a maximum taxable income of $34,000 (including any capital gains or qualified dividends), and married couples with a maximum taxable income of $68,000, don’t pay taxes on qualified dividends received or long-term capital gains recognized in 2008, 2009, and 2010. Taxable income is what remains after deductions and personal exemptions are claimed. After 2010, the lowest capital gains rates will be 8% and 10%, a tax increase for all income levels.

Collect all possible income in 2010

With tax rates scheduled to rise next year, it makes sense to collect as much income as possible this year.

• If you’re self-employed, bill all your clients promptly. This could get a little dicey in December because your clients may want to pay in January to off-set their income. Consider offering a discount equal to the amount of extra tax you’d pay on that income.

• If you have any nonqualified stock options, exercise them in 2010. The difference between the stock’s exercise price and its fair market value is considered ordinary income and is included in your W-2.

• Ask your employer if you can receive your January bonus in December. Again, the company may prefer to pay it in January to offset its income.

Move investments to tax-free options

Certain types of investments provide tax-free income, tax-free growth, or aren’t taxed at all.

Municipal bonds and municipal bond funds can provide tax-free income

It can be tricky to calculate the real yield for a tax-free municipal bond because  of the tax you don’t have to pay. Just remember that interest on certain municipal bonds is subject to the Alternative Minimum Tax.

Education savings plans also have tax advantages

Certain qualified tuition plans (QTPs), or section 529 plans, and Coverdell Education Savings Accounts (ESAs) allow you to save funds for your children’s future education expenses. Although the contributions you make aren’t tax deductible on your federal return, the earnings grow tax free and distributions to pay for qualified education expenses are tax-free as well. QTP contributions may be eligible for state tax deductions or credits. Unfortunately, the recent health care bill passed by Congress cut the amount you can set aside in your Coverdell account by 75%.

A Roth IRA grows income tax free

Roth IRA contributions aren’t tax-deductible, but you’ll pay no income tax on qualifying withdrawals. Generally, withdrawals are qualified if you’ve had the Roth at least 5 years and you are at least 59½ years old. A Roth IRA has many parameters and limitations, so be sure you consult an accountant or tax professional.

Life insurance proceeds are not subject to income tax

Life insurance can be a great way to pass wealth to your heirs without the worry about income taxes. In fact, if a life insurance policy is held until the insured’s death, the proceeds aren’t taxable. If the policy was owned by a life insurance trust, it may be free from estate taxes (again, check with a tax professional).

Get some advice

These strategies can be complex, with many potential features and pitfalls. Your financial advisor can explain your choices and help you determine which ones are most appropriate for you.

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Few circumstances could be more gut-wrenching than losing a home to foreclosure but if you’re facing the foreclosure of your home, you do have options. You may be able to save your home, your credit and maybe even some cash if you act quickly enough when you find yourself unable to pay your mortgage.

Call your lender and work out a deal

This should ALWAYS be your first step. Your mortgage lender may be willing and able to work out a mutually agreeable deal since lenders often lose money in a foreclosure. Though the Making Homes Affordable program is dictating interest rates and payments for some troubled homeowners, many cannot meet the criteria and lenders are learning to be more flexible.

Sell the home

If you can manage to sell your home before it is auctioned, you’ll be able to keep any equity. Granted, many homeowners are underwater (the home is worth less than the mortgage balance), but there are some specific ways to make your home more appealing. Once you DO sell, make sure your housing choices reflect the new reality of your financial condition.

Short sale or deed in lieu of foreclosure

A “short sale” takes place when the bank allows you to sell your property even though the mortgage won’t be paid in full. The price you sell it for is “short” of the mortgage balance. But don’t think you’re getting away with anything – the bank will demand you repay the deficiency. Under a deed in lieu of foreclosure, the property is signed over to the bank in exchange for the bank giving up its rights against you. Why might a bank agree to either of these options? Lenders spend $30,000 or more to foreclose on a property. If it’s cheaper to allow a sale/deed in lieu of foreclosure, the bank will probably take that option.

Declare Chapter 13 Bankruptcy

Chapter 13 bankruptcy will allow you to keep your assets and make payments under court supervision over three to five years. You will have to present an income and spending plan to the court and it will have to be approved. Chapter 13 is different than full bankruptcy, in that you are able to make payments AND the delinquencies.

Declare Chapter 7 Bankruptcy

Chapter 7 is full bankruptcy. You will probably be able to delay eviction for a few weeks or months while the bankruptcy is processed, but you will most likely (95%) lose the home. Your debt will be wiped clean and your credit will be ruined for seven years.

Walk away from the home

Just pack up your belongings and leave. It isn’t a pretty option, but a lot of people are choosing it. If you do decide to walk away from your home, at least have the decency to let your lender know the house is empty. The only question remaining (other than where you’ll live) is whether your lender can sue you for any deficiency when they sell the home. That really depends on which state you live in and what type of mortgage you have. Please call a lawyer before you take this step.

There’s always the tax consequences

Anytime you receive a monetary benefit, there are tax consequences. Make certain you check with a tax lawyer and/or an accountant since forgiven loans or a sale/deed in lieu of foreclosure can be considered income by the Internal Revenue Service.

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My wife and I recently celebrated our 20 year wedding anniversary by taking an Alaskan Cruise through the Inside Passage. Simply put, we loved going to Alaska and immensely enjoyed the cruise itself.

Although we’ve been on several Caribbean cruises with Carnival Cruise Lines, we chose Princess Cruise Lines this time. We were “kid-less” and wanted a more mature and laid back cruise experience and Princess delivered. I’m planning a more in depth article about what we did and where we went but while I was on this cruise vacation, you just know I couldn’t help but spot ways to save money!

Cruise vacations aren’t necessarily cheap, but for us, cruising is a very pleasant way to get away. There is a distinct advantage to unpacking once, but getting so see so many different ports and destinations. Done right, a cruise vacation can be a great value and there are some specific ways you can keep the expense of setting sail from getting out of hand.

When you arrive, you’ll be given a “cruise card” that will act as your room key, your get-on/get-off key, and your onboard charge card. It will be tied directly to a major credit card and any charges you incur will be billed to your credit card automatically at the end of the cruise.

1. Book very early

By booking your cruise early, you can begin planning much earlier and you may be entitled to a lower price overall. Cruise companies love to fill their ships early and will incentivize their customers to do so.

2. Book very late

A last minute cruiser can sometimes get a fabulous deal, but there is genuine risk that you won’t be able to get the sailing you want.

3. Book your own airfare separately

My experience has shown repeatedly that booking your airfare apart from your cruise will get you a much better deal than allowing the cruise company to handle it. Oh yeah, it’s a myth that the ship will wait for you if your flight is delayed (or maybe it’s a scare tactic).

4. Handle your own transfers

Just on this last cruise I saved $60 by handling my own transfers from the airport to the cruise terminal and back to the airport.

5. Book for off/shoulder season travel

Try booking your Alaskan Cruise in May or September, your Caribbean Cruise in January or February. Those are the times that cruise ships are the least crowded and the fares will be cheap.

6. Buy some cruise company stock

Several cruise companies offer discounts to shareholders. Ask your travel agent or cruise representative if the cruise company participates in a program like this.

7. Ask about current and future discounts

As always, the BEST way to get a discount is to ask (or surf the Internet). What you may miss out on however, are future discounts. Ask your travel agent or cruise representative if any discount opportunities will exist in the future. You might want to delay your cruise if the savings are great enough.

8. Take your own pictures

The cruise ship will have photographers roaming the decks, taking thousands of photos of passengers. Soon thereafter, those photographs will be available for sale at a pretty hefty price.

9. Shore excursions

We’ve always booked our shore excursions through the cruise line, but I won’t do that anymore. First, we ate dinner with another passenger who told us how much he saved by booking directly with the excursion agent right there on the pier. Second, I spent $79 to tour Butchart Gardens for 3 hours … only to find that the admission price was only $29. All I had to do was hail a cab.

10. Come back to the ship for lunch

We planned our shore excursions so we could come back to the cruise ship and eat lunch onboard. That meal was already paid for with our cruise fare, so unless we saw a wonderful restaurant that we HAD to eat in, we saved that cash.

11. Forget the sodas

On our first cruise 20 years ago (for our honeymoon), sodas were included in the fare, but no longer. The last several cruises we’ve taken had seen ships offer a “soda card” or “soda sticker” that entitles the bearer to unlimited sodas. The price on our last cruise was $63. Since I rarely drink sodas, it was out of the question, but I was amazed at how many people couldn’t go 7 days without their soda fix. I also wondered if it was actually possible to drink $63 worth of sodas in a week …

12. Bring your own wine

Check with your cruise line to make sure, but those we’ve sailed on allowed us to bring onboard one bottle of wine per person. You can drink it in the stateroom but if you prefer to enjoy it at dinner, you’ll have to pay a “corking charge” of about $10 – $15. Yes, they charge to uncork a bottle of wine.

13. Avoid the casino

This tip should go without saying in an article about saving money.

14. Plan your onboard alcohol consumption

A bottle of Columbia Crest Merlot retails for about $11 on WineAccess.com, but it was $32 onboard. A martini will set you back $7 and a beer $5. Those numbers can add up quickly since you’re using an onboard charge card.

15. Plan for your specialty coffee drinks carefully

Lattes, cappuccinos, and espressos were $4 each but you can purchase a coffee card on Princess Cruises for $24 that will give you 12 coffee drinks. If you’re a caffeine lover, this card may be worth it (yes, I bought one).

16. Ask the cost before you sign up for anything

“Would you like to sign up for the wine tasting?” That will be $25 each.

17. Forego the upscale dining options

Our last few cruises have had “additional” dining options – restaurants – that cost extra. On our Alaskan Cruise, there was the Sterling Steakhouse for an additional $15 each and Sabatini’s, an Italian restaurant featuring a 17 course meal for an extra $20 each. We did celebrate our anniversary night at the steakhouse, but honestly, the regular dining options were fabulous. There is no need to spend extra in my opinion.

18. Relax — the Internet will be there when you get back

Yes, there was an Internet cafe as well as wireless onboard – for a ridiculous fee. I say unplug, relax, and enjoy your cruise. The Internet, all the negative news will be there when you get back. Ironically, you just may find that you really aren’t affected by the news at all.

19. Leave your cell phone at home

Ship to shore communications are ridiculously expensive since they run from satellite. And I didn’t even think about bringing my cell phone to any international destinations. I was on VACATION.

20, Bring some Woolite

Bring a travel size bottle to rinse any clothes that get soiled in the course of the week. It’s far cheaper than sending your clothes out to be washed by the cabin steward.

21. The spa people will drive you nuts

Go once and they will bug you all week to come back according to another couple we ate dinner with. My wife went to the spa just to see how much it would cost to have her nail polish removed and reapplied – $19. Ouch.

22. If you HAVE to shop onboard, wait until the end of the week

The deals get better as the week progresses.

23. Shopping near the pier is designed for tourists

The “shopping expert” onboard doesn’t necessarily work for the cruise line. Many of them actually get commissions from the stores they recommend. The shopping expert on our last cruise was out-ed by a store owner when one passenger asked if the port shopping expert worked for the cruise line. The response was, “No, she works for the stores on land to drive passengers to our stores.”

24. Bring your own Dramamine

If you get seasick easily, bring your own Dramamine. It will be far cheaper than getting that little patch behind your ear at the Medical Officer’s office.

25. Get only the cabin you need

We’ve had several types of cabins: balcony, inside, outside with a window. I can tell you that on Caribbean Cruises, while a window might be nice, most of the time you’re looking at the vast empty ocean. It isn’t worth it in my opinion. On our Alaskan Cruise, though, things were different. The scenery changes constantly and the photo opportunities just keep on coming.

26. Keep up with your onboard spending account

You’ll get a summary of your charges near the end of the cruise but you can always check your account at the Purser’s Office. Keep up with what’s been charged to your account because on the last day, there will be a long line of people asking the Pursers what each charge was. Happens every time and most people are incredulous that they racked up so many charges.

27. Budget ahead for “mandatory” tipping

Tipping, or more accurately “gratuities” will be added to your shipboard account, usually $10-$12 per person, per day. This money is split amongst various service crewmembers such as your cabin steward, assistant cabin steward, your waiter and your waiter’s assistant. These guys make about $500/month so the gratuities help a great deal. If you received poor service, you can request that these charges be reversed. Of course, if you received excellent service, you can tip more.

28. Walk off with your luggage (leaving it in the hallway is crazy)

We’ve used the “walk-off” option and loved it. We were able to easily exit the cruise ship and go through customs much more quickly than the traditional method. Traditionally, cruise passengers are instructed to leave their luggage outside their stateroom the night before disembarkation. The cruise staff then collects it and stages it for you off the ship for you to pickup after disembarkation. You’ll have to keep your toiletries and something to wear the next morning anyway, so pack a little lighter and walk off with your luggage. It’s a lot safer too – leaving your personal belongings out in the hallway for several hours just doesn’t make sense.

29. Bring plenty of batteries

They aren’t cheap onboard and they aren’t too cheap at all the shops near the piers either.

30. Bring binoculars or your own swim gear

If you’re going to Alaska, binoculars are a MUST! If you’re going to the Caribbean, be sure and bring your own snorkel, goggles. and swim fins. Those things are very expensive to rent.

Realize that YOU are a source of profit

Nothing is free and on a cruise ship, fewer and fewer things are “included.” It’s still a very pleasant way to travel but you have to realize that you are a source of profit. One thing to remember – in a town of 892 people (Skagway, Alaska), there are 23 jewelry stores.

Note: All photos were taken by me.

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“Pay off debt” and “save more money” are consistently among the top five financial resolutions made every New Year’s Eve, but you don’t have to wait to begin improving your personal financial picture. Most resolutions are far too general in scope anyway so here are a few ways to specifically plan for a better financial future – starting any month.

July
Summertime is a great time to complete home improvement projects around the house. Or, consider refinancing your existing mortgage at a lower rate (I recently did). Add your monthly savings to a savings account or use them to build your emergency fund.

August
August is well known as “back to school” time, but let’s plan beyond that. If you’ve got older kids at home, consider giving them a school clothing budget – loaded on a prepaid debit card. Make them choose between that trendy T-shirt and those must-have – but very expensive shoes or jeans. Kids learn a lot about finance and economics when THEY have to make the choices.

September
Do you have a child going to college this year? Help them start their financial life with a prepaid MasterCard rather than a regular credit card. They’re easy to use, but unlike a typical card, your student can only spend what they have. It gives the financial independence of a credit card, but without the risk of debt.

October
Got too much credit card debt? Outline a plan to get it paid off. Whether it takes three months or three years, you’ll feel great when you rid yourself of that burden.

November
Save a trip to the mall by giving gifts that send a financially positive message. Give the kids in your family a high yield savings account. Open it early in November and by year-end, they should be able to see some interest accrue. It’s a gift that keeps on giving!

December
Daydreaming about your summer vacation from under a blanket of snow? Start your vacation fund this month by putting aside a lump sum every month so you can take that cruise to Alaska in July – but without debt. Need ideas on where to find the cash? Check out my 17 Sneaky Savings Strategies.

January
Go ahead.  Make that financial New Year’s Resolution. Take stock of your finances, from the cost of life insurance and car insurance to the yield on your savings account and which online broker you use.

February
Tax time is the perfect time to take a big picture look at your finances. A tax professional can turn tax time into a bigger, more important discussion about retirement, your investments, and savings. Be sure to visit your tax professional with written questions in hand.

March
If you find that you owe taxes this year, consider reducing your tax liability with a traditional IRA. IRAs can lower your tax liability and help you save for the future. Ask your tax professional.

April
Take a look at your current deductions to see where you can reduce that tax bill next year.

May
Each spring, “Home For Sale” signs emerge like daffodils. If you’re in the home buying or selling market,  do your homework and shop for mortgage rates with the same passion you’re shopping for a home.

June
June is the perfect month for a mid-year financial tune up. What interest are you earning in your savings account? Do you need to sock more away for retirement? How’s that debt reduction plan coming along?

Each year we all make resolutions and think we’re “starting fresh.” A clean slate IS a thing of beauty, but the truth is that we can wipe our slate clean anytime during the year and there’s no time like the present.

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In times past, all it took to get an interest rate cut on a credit card was asking for one. But no longer. Today when you call to ask for an interest rate reduction on your credit card, the representative on the other end of the phone call will likely have been trained to listen for clues about your financial condition. He or she will then quickly evaluate the risk involved with giving up those interest dollars. Innocently mention a layoff or financial struggles and you can kiss that interest rate reduction goodbye.

By sticking to a planned and rehearsed script, you’ll avoid those pitfalls and you’ll also avoid setting off alarms with your card issuer.

Your first step is to know what your interest rate actually is

Begin by laying out all your cards on the table along with the most recent statement. Circle your interest rate and the company’s customer service phone number and then re-arrange those statements with the highest interest rate card on top. Write down how long you’ve had the card and note whether your rate is fixed or variable.

Then pick up the phone and get started.

After you give the necessary information so a customer service representative will speak with you about your account, launch into your script:

You: I’m considering an offer I’ve received from another bank for [X] percent but before I sign up, I thought I’d give you a chance to match it since I’ve been with you for [X] years.

Chances are good that the rep will say he or she isn’t allowed to arbitrarily lower your interest rate.

You: Look, this other offer is so much better than what you’re giving me. You and I both know that when I transfer my balance, within 2 weeks you’ll send me an offer to come back at an even lower rate. Why not save yourself the trouble and lower my rate today?

If the rep says no because your card is at a fixed rate …

You: That really doesn’t have anything to do with whether you have the ability to lower my rate. All a “fixed” rate means is that it doesn’t vary with changes in the prime rate. You can increase my rate – with the proper amount of notice – and you can lower it at any time.

If the rep continues to claim that he or she isn’t authorized to lower your rate …

You: I’d like to speak with a supervisor.

Then go through the script again. Even if you get a cut from the first rep, speak with the supervisor to see if you can get an even better deal. Many times the front line representatives are only authorized to cut a rate a few points but supervisors may be able to cut it much more. You may have to INSIST on speaking with the supervisor because many reps will claim their supervisor doesn’t have the authority to lower your rate either. That simply isn’t true. Someone, somewhere within that company can lower your rate. You just have to speak with them.

As always, keep a record of each person you speak with. If that promised rate cut doesn’t show up, you’ll need a paper trail to fall back on.

If you’re still denied an interest rate cut:

1. Transfer your balance. Check into other cards like Chase Freedom^SM or the Bryant State Bank MasterCard both of which offer fantastic balance transfer rates. I’ve seen offers as low as ZERO PERCENT but check out their links since terms change frequently.
2. Threaten to close your account. Yeah, it might ding your credit score, but if the rep believes you will, and you’ve been a profitable and loyal customer, you may have a better chance of getting that rate cut.

One caveat – if you haven’t been a profitable customer (that is, you pay off your balance in full each month or you rarely use the card), don’t expect anything. But then again, that type of customer doesn’t really need a rate cut, do they?

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Nobel laureate Herbert Simon coined the phrase “satisficing” to describe a decision making process that takes the shortcut of defining what is acceptable and then settling on the first alternative that meets those minimum requirements. It’s a play on satisfy and sacrifice, meaning that you sacrifice the best alternative for one that adequately satisfies your demands at the current time. From where you park your car, to who you go out with for dinner, to how much you pay on your credit cards, you “satisfice” all day long without thinking about it.

Simon realized that most people don’t know how to adequately optimize. We don’t know exactly how to find the best choice among all choices. Most of the time, we’re in such a rush that optimizing is actually a luxury, whether it’s deciding where to go on vacation, who to hire, or what career path to take. Satisficing can be a very pragmatic and necessary approach in many cases. After all, you don’t want to experience the “paralysis of analysis” either. Many times it simply isn’t worth it to examine every single option.

The downside of satisficing

Given our tendency to satisfice, more often than not, the best we can get or achieve is just the minimum we’re willing to accept. “I’d be happy with that,” is the approach we take.

It sounds bad doesn’t it? But the truth is, we do it all the time. Herbert Simon believed the reasons we satisfice were fourfold:

1. We have a hard time actually quantifying what we’re trying to accomplish. Selecting the “best” choice can be daunting.
2. We usually do not know the relevant probabilities of outcomes. How many times have you been 100% sure of something, only to have it blow up in your face?
3. We can rarely evaluate all outcomes with any precision.
4. Our memories are bound by the recency effect. What happened yesterday is more fresh in our minds than what happened 2 years ago, even when the latter is actually more relevant.

How to overcome our tendency to satisfice

Set the bar high. Set standards that you won’t compromise. Start out with what is “right” rather than what is acceptable because you’ll probably have to compromise somewhere along the line. You’d much rather compromise a little when you’re close to a higher standard than when you’re close to just “acceptable.”

What does this have to do with personal finance?

Plenty. Set your standards high when it comes to living within your means. Set them high when it comes to paying down high interest debt. Set them high when it comes to living by a budget. Set them high when it comes to having the right life insurance or car insurance.

In these areas, “I can live with that,” will only satisfy you for a short period of time and may require a much larger sacrifice later on.

Photo by MOmilkman – Darin House

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I know you’ve seen the television commercial and heard the radio announcements about debt settlement. In fact, it’s hard NOT to run across these ads at some point during the day or night.

“Do you have more than $10,000 in credit card debt? If so, you MAY qualify to have your credit card bills CUT IN HALF! Hurry and call 800-bla-blah and take advantage of this limited time government program that lets consumers stick it to the credit card companies … “

Just remember, if it sounds too good to be true, it is. And it certainly is when it comes to many of these debt settlement companies. Those commercials make it sound like you’ll sail off into a beautiful sunset, with not a care in the world.

Back in 1997, I worked with a member of the National Federation of Credit Counseling to help me get my financial life back under control. There were no promises of “debt elimination” or of “sticking it” to the credit card companies. Rather, everything was handled professionally as they helped my wife and me draw up and live by a budget, pay my creditors responsibly, and get out of debt.

The National Federation of Credit Counseling (NFCC) and the Association of Independent Consumer Credit Counseling Agencies (AICCCA) contacted me to get the word out about debt settlement companies and help readers and their families steer clear of offers that on the surface may seem good, but in the end leave folks worse off than when they began.

Not all debt settlement companies are members of the NFCC or the AICCCA

Before you deal with any company, organization, or group, make certain they are members of one of these organizations. If a company isn’t a member, you should move on to one that is in my opinion. Check out their website at DebtAdvice.org. Here are six truths about debt settlement the debt settlement companies don’t want you to know:

1. Settlement companies charge hefty fees

How else can they pay advertising bills and pay the salaries of the people that work for them? The two primary ways that fees are charged – to you – are:

1. A percentage of your total debt, usually 13 to 20 percent
2. A percentage of the debt they help you “eliminate,” sometimes as high as 35 percent

In addition to these fees, debt settlement companies also charge a “monthly maintenance” fee, typically between $20 to $90 per month while you’re on their program.

2. Some debt settlement companies “front load” their fees

In other words, they get their cut before any funds are forwarded to your creditors. It’s a beautiful cash flow system … if you’re the debt settlement company. The truth is, it may be months before any money is sent to your creditors.

3. A debt settlement company may suggest you stop paying your creditors

Instead, they instruct you to send your payments to a third-party escrow account while they negotiate your debt. While these negotiations are on-going, you’ll be racking up more interest and penalties and by the time negotiations are completed, you may owe more than when you started. The negotiations can take months while you’re credit score suffers and your creditors initiate legal proceedings against you. Those could include judgments, wage garnishments, and liens.

4. Your credit report will certainly suffer

Debts that are paid through a settlement company will probably show up as “Paid by Settlement” and every creditor knows what that means: you didn’t pay everything you agreed to pay. As a result, you may be denied credit in the future.

5. Your credit score will suffer, too

Your report is just raw data, your score is a numerical interpretation of that data. The higher your credit score, the better. Scores are weighted according to various factors with the highest weight given to your past history of payments:

6. Forgiven debt could be considered income by the IRS

It just gets worse and worse. If you have more than $600 in forgiven debt, you could be responsible for paying taxes on that money.

Both the NFCC and AICCCA strongly encourage consumers to thoroughly investigate and understand any debt resolution option before making a decision. Keep in mind that it’s up to you to do your homework before working with anyone, particularly if it involves your finances.

Many of these companies offer promises that make the path to financial freedom sound very appealing, but the reality may be very different than the dreamy pictures in those commercials, so DO YOUR HOMEWORK!

Photo by ME – taken with a Canon Powershot as we sailed out of the Puget Sound on a cruise through the inside passage to Alaska in June 2010.

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