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Debt Snowball vs. Debt Stacking

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Now Bateeilee blog will share Debt Snowball Vs. Debt Stacking. There are two popular methods that people use to pay off debt. The traditional method is called "debt stacking," while the latest craze is called the "debt snowball" and is recommended by popular financial expert Dave Ramsey. Let's take a look at the pro's and con's of each.

Debt Stacking

The "debt stacking" method recommends that you make a list of all your debts, ranked by interest rate, from highest to lowest. For example, you might owe:

Mastercard - $2,500 - 19 percent - Highest Interest Rate
Visa - $7,500 - 13 percent - Second-Highest Interest Rate
Car Loan - $4,000 - 8 percent - Third-Highest Interest Rate
Student Loan - $1,900 - 5 percent - Lowest Interest Rate

The "debt stacking" method advises that you make the minimum payment on all your loans. Then, you should throw all your extra money towards paying off your MasterCard, which has the highest interest rate, at 19 percent.

Once you've wiped away your 19 percent MasterCard debt, tackle the Visa balance, which has the second-highest interest rate, at 13 percent.

It'll take you a long time to repay the Visa, since it has the highest balance, at $7,500. Stick with it. Whenever you're done, you can start tending to the debts with lower interest rates.

Pros: This method saves you the most money in interest payments.
Cons: It might take a long time to get a high-balance debt crossed off your list. You may feel frustrated after investing so much time and energy towards getting paying down a loan, without feeling the mental "victory" of crossing it off your list.

Debt Snowball

According to the snowball method, you should throw every spare penny towards paying off the loan with the lowest balance, regardless of interest rate.

If you used the snowball method, you would re-order the above list as follows:

Student Loan - $1,900 - 5 percent - Lowest Balance
Mastercard - $2,500 - 19 percent - Second-Lowest Balance
Car Loan - $4,000 - 8 percent - Third-Lowest Balance
Visa - $7,500 - 13 percent - Highest Balance

You'd make the minimum payment on all your loans. Then, you'd throw every extra penny towards the debt with the smallest balance, regardless of the fact that - in this particular case -- it ALSO has the lowest interest rate.

The idea behind this method is that paying off the loan with the smallest balance will give you the psychological feeling of "victory" when you cross that loan off your list. That mental "win" will motivate you to continue saving money and repaying your debts.

Pros: This method gives you a more immediate feeling of victory.
Cons: It costs more. You'll pay more in interest, as compared to the debt stacking method.

Which Method Should You Use?

I like to say that personal finance is ... well ... personal.

Paying off debt is a little like dieting. Sure, there are more "ideal" eating plans out there, but let's be realistic: most people aren't going to stick to a perfect diet. The "best" diet is the one that you'll stick to.

Paying off debt is similar. Be honest about making a budget that fits your personality and keeps you motivated. You'll pay the most in interest if you don't stick with your debt payoff plan.

How to Become a Millionare

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Now Bateeilee Blog will share How to Become a Millionare. Think being a millionaire is out of the question? Guess again. If you avoid consumer debt and start investing when you're in your twenties or thirties, you can be a millionaire.

Here's how:

Let's assume you have $0 in your investment account right now. You have no debt, but you haven't saved anything, either.

Let's assume you put your investments into a tax-deferred account, such as a 401(k).
Let's also assume that your investments, over the long haul, with grow at an annualized average rate of 7 percent. (Investing legend Warren Buffet predicts the long-term annualized return of the U.S. stock market in the early-to-mid 21st century will be 7 percent.)

Remember: this is a very, very long-term average (over the span of 20 years or more). In any given year, your investments might be up or down.

Don't fret about that. One year - or three years, or five years - is small-scale when you're talking about a lifetime portfolio.

With those three assumptions in mind - you're starting at $0, you're investing in a tax-deferred account, and you'll get a 7 percent return over the long haul - let's look at how much you need to invest to create a $1 million portfolio.*

If You Save: $100 per month
You'll Be a Millionaire In: 58 years and 6 months. That's a long time - if you're 25 now, you'll be 83 by the time you're a millionaire - so I recommend saving more.

If You Save: $200 per month
You'll Be a Millionaire In: 48 years and 10 months. Notice how simply saving an extra $100 per month ($200/mo instead of $100/mo) shaves a decade off the time it takes you to become a millionaire.

If You Save: $400 per month
You'll Be a Millionaire In: 39 years and 4 months. That means if you're 25 now, you'll be a millionaire at age 64 - in time for retirement.

If You Save: $750 per month
You'll Be a Millionaire In: 31 years, 1 month. If you're 25 now, you'll be a millionaire at age 56. Did someone say "early retirement?"

If You Save: $1000 per month
You'll Be a Millionaire In: 27 years and 6 months. If you have a baby today, you'll be a millionaire by the time you dance at your child's wedding -- or maybe by the time your little grandchild is born. (Based on the rough average age at which Americans get married.)

If You Save: $1500 per month
You'll Be a Millionaire In: 22 years and 9 months. What a huge improvement over the "58 years" we were quoting at the $100/month savings rate!

If You Save: $2000 per month
You'll Be a Millionaire In: 19 years and 7 months. Have a baby today, and you'll be a millionaire when he or she is a college freshman/sophomore.

If You Save: $2500 per month
You'll Be a Millionaire In: 17 years and 3 months. Have a baby today, and you'll be a millionaire before your kid is out of the house. If you're currently 25 years old, you'll be a millionaire by age 42.
I'm guessing your next question is something along the lines of "How on earth am I supposed to save $2,500 per month?"

I can boil that answer down to four words: Earn more. Spend less.

Credit card offers are back

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Seem like you're seeing more credit card offers lately? You aren't dreaming.

Targeting everyone from teenagers to 80-somethings, credit card companies are cranking out more offers, especially to those with good credit ratings.

Lee Marengo, a retired state employee in Sacramento, said she and her husband have been getting lots of tempting credit card offers in the mail.

A longtime credit card user who faithfully pays off her balance each month, the 84-year-old is getting "wonderful" offers for rewards cards, such as a Chase Visa that dangles 5 percent cash-back on gas, groceries and pharmacy purchases.

Marengo typically only uses one card but, "If something new and better comes along, by golly, I'm gonna grab it."

She's certainly not alone in getting credit card offers.

During the recession, card issuers kept a low profile. They got hammered by record rates of defaults by consumers who couldn't pay off their monthly balances. They also got pinched by new consumer protections in the federal Credit CARD Act that clamped down on late payment fees, interest rates and other charges.

But that's old news. Today, as the battered economy starts to heal, credit card defaults and late payments are lower. Banks have adjusted to the new landscape, amping up efforts to grab new consumers.

"There are a lot more mailings going out. The competition among credit card issuers has definitely stepped up," said Bill Hardekopf, CEO of LowCards.com, an online credit card comparison site. "They are sending out many more solicitations, especially to the most sought-after customers: those with good to excellent credit scores."

The spike in credit card mailings was significant this past year, says Anuj Shahani, who oversees tracking services for Synovate, a global market research firm. Direct mailings from credit card companies skyrocketed from 1.39 billion in 2009 to 2.82 billion in 2010, a whopping 103 percent increase.

"With the CARD Act in place and the economy doing better, credit card mailers have come back with a bang and are making up for some lost ground," said Shahani in an email. "We expect to see a modest rise in mailings for 2011."

Credit cards that offer rebates or rewards are where competition is most intense, says Hardekopf. "Issuers are offering some great deals out there, especially in miles and cash back. That is what excites consumers."

But if you're contemplating a new credit card, do your homework. Here are some tips:

Balance vs. no balance

You have to know which camp you're in, says Tim Chen, CEO and founder of NerdWallet.com, a Redwood City-based credit card comparison site.

If you don't carry a monthly balance, get a rewards card. They typically have an annual fee but offer airline miles, cash-back on purchases (groceries, dining, etc.) or discounts at certain stores.

If you do carry a balance, generally go for cards with the lowest interest rate.

Read the fine print

No matter what kind of card you apply for, be sure to read the disclosures first. Otherwise, you might get hit with surprise fees later. For instance, a company that brags it has no "annual fee," might instead charge an "application fee," says Ken Lin, CEO of CreditKarma.com, a Bay Area-based credit card site.

"If you take 20 minutes to read the disclosures, it can save you several hundred dollars," said Lin.

Watch out for terms/fees

Many new cards entice people to switch by offering to move your outstanding balance to a new card with a lower rate. But those so-called "teaser rates" usually last only six months or so. Or they can disappear entirely and be replaced by a sky-high rate if you fail to make a monthly payment on time.

For instance, let's say you've got a $2,000 balance on your credit card that's charging 20 percent APR. You get an offer to transfer your old balance to a new card that's only charging 6 percent. Sounds good, eh?

But look at the details: There's an upfront fee of 3 percent. On a $2,000 balance, that's $60. "Not the end of the world," notes Lin, but it's still monIf you buy a lot of gasoline, look at a card that pays cash back. Or if you fly for business or vacations and live in a Southwest Airlines city like Sacramento, it might be worth getting the airline's credit card to rack up miles.

But note that some cash-back rewards are capped, say $250 a year for gasoline purchases.

NerdWallet's Chen likes to tell how he scooped up 225,000 airline miles in one year by signing up for three cards: 75,000 bonus miles each for an American Airlines card from Visa and American Express. And a Capitol One card that did a match-my-miles promotion.

And he didn't get hit with annual charges.

"The fees were waived for the first year, so I just canceled the cards after I got the miles."

With his miles he's flying to Greece this summer.

That's not the kind of consumer that credit card companies are looking for, needless to say.

Every time you apply for a credit card, your credit score can get dinged. That's why it's best to do your homework before applying for too many cards. And if you have a card with a long history of good payments, don't cast it aside just because you see a better-looking deal out there. Hang onto it for the long-term benefit to your credit score.

Best tip: Always pay your credit card bill on time. "If you do, you're gonna save a lot of money. If you don't, that's where they get you," says CreditKarma's Lin.

ey out of your pocket.

And if you don't pay on time every month, that super-low interest rate could jump to nearly 30 percent, the typical "penalty pricing" rate. In the end, you could be worse off than if you kept your original card.

Choose rewards wisely

If you buy a lot of gasoline, look at a card that pays cash back. Or if you fly for business or vacations and live in a Southwest Airlines city like Sacramento, it might be worth getting the airline's credit card to rack up miles.

But note that some cash-back rewards are capped, say $250 a year for gasoline purchases.

And he didn't get hit with annual charges.

"The fees were waived for the first year, so I just canceled the cards after I got the miles."

With his miles he's flying to Greece this summer.

That's not the kind of consumer that credit card companies are looking for, needless to say.

Best tip: Always pay your credit card bill on time. "If you do, you're gonna save a lot of money. If you don't, that's where they get you," says CreditKarma's Lin.

Dynamic Wealth closes

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In a significant victory for the Financial Services Board (FSB), controversial Pretoria-based financial services company Dynamic Wealth, which has been mired in legal battles with the regulator and dissatisfied investors, closed its doors this week.

The closure follows a determination by the FSB Appeal Board to reject Dynamic Wealth’s appeal against a decision by Dube Tshidi, the Registrar of Financial Services Providers and the FSB’s chief executive, to withdraw the financial services provider (FSP) licences of two of its subsidiaries, Dynamic Wealth Management and Dynamic Wealth Stockbrokers.

An immediate consequence of the Appeal Board’s decision is that Metropolitan Collective Investments has taken control of the seven unit trust funds that Dynamic Wealth managed and marketed using Metropolitan’s collective investment schemes licence (see “Investors’ money in unit trusts ‘should be safe’”, below).

Commenting on the status of Dynamic Wealth, Cobus van Wyk, the company’s chief executive, says “we are for all practical purposes closed for business, as the company cannot do financial services business, and all assets that were managed have been (or are in the process of being) transferred”.

The FSB is still waging a court battle to place various Dynamic entities under curatorship.

Last year, Dynamic successfully challenged an application by the FSB to place the company under curatorship. The FSB has taken the High Court’s decision on appeal, which is still to be heard.

Dynamic Wealth initially attracted the attention of the FSB when one of its investment offerings started to go sour, which led to the curatorship application.

Some years before the FSB took action against Dynamic, Personal Finance had dealt with complaints from disappointed investors.

High-profile forensic investigator David Klatzow had taken up cases on behalf of investors, who claimed that Dynamic misled them into making incorrect investments.

Over the years, following reports and investigations into the company’s activities, Personal Finance received a number of what transpired to be hollow threats of legal action from Dynamic Wealth.

Among other things, Personal Finance revealed that Dynamic Wealth had a business relationship that involved property bridging finance with Attie du Plooy, who had run an illegal pyramid structure, Jean Multi-Management, which the Reserve Bank closed down.

Jean Multi-Management was the recipient of R200 million that was stolen by Angus Cruikshank, the owner of Ovation, the now defunct linked-investment services provider, from the unregistered and illegal Common Cents fund. Cruikshank committed suicide when the FSB moved in on him.

The FSB’s grounds for the curatorship application last year included the claim that a number of investment portfolios offered by Dynamic Wealth under the guise of investment clubs were in fact illegal collective investment schemes.

Among the “investment club” portfolios was a fund that was caught up in the collapse of Corporate Money Managers (CMM). The fund masqueraded as a unit trust money market fund, but in fact it pooled investors’ money to invest in failed property developments.

After the intervention of the FSB, the “investment club” port-folios were converted into com-panies, and the troubled money market fund became Specialist Income Ltd (SIL). SIL is likely to be the biggest loser in the collapse of CMM, with a potential loss of R230 million.

Converting the “investment club” portfolios into companies reduced the rights of investors, because they became shareholders rather than investors with a preferential claim to any assets.

Gerry Anderson, the FSB’s deputy executive in charge of market conduct, says the consequences of the FSB Appeal Board decision include:

* With immediate effect, Dynamic Wealth Management and Dynamic Wealth Stockbrokers are no longer authorised to do business or accept new business as FSPs.

* The two companies must immediately inform all their clients and product suppliers that their FSP licences have been withdrawn.

* The two companies must, without delay, repay all uninvested funds they have received from clients.

* Where the two companies hold scrip, participating interests, investment vouchers or any other form of proof of investment that belongs to clients, these must be accounted for in full and returned to the people who are entitled to the assets.

* Where appropriate, the com-panies are required, after consulting with their clients and product suppliers, to take reasonable steps to ensure that any outstanding business is transferred to another FSP, in the best interest of clients.

* Shareholders in SIL and investors in the former investment portfolios are to be regarded as investors in Dynamic Wealth Management. Directors of SIL who have no interest in the Dynamic Wealth Group are invited to meet with the FSB to discuss solutions.

* The approved auditors of Dynamic Wealth Management and Dynamic Wealth Stockbrokers must oversee the above process and report to the FSB on their progress, any problems or delays.

Anderson says that investors in Dynamic Wealth who need legal assistance to pursue claims against Dynamic should consult their financial advisers or seek redress through the Ombud for Financial Services Providers, because the FSB is not equipped to help with individual civil claims against financial institutions or former institutions.

Apart from supervising the winding down of Dynamic Wealth’s remaining business, the FSB will continue to pursue legal action against Dynamic, he says.

The FSB’s decision to withdraw the licences of Dynamic Wealth Management and Dynamic Wealth Stockbrokers has been vindicated by the Appeal Board’s decision to dismiss, with costs, Dynamic Wealth’s appeal against its decision, Anderson says.

INVESTORS’ MONEY IN UNIT TRUSTS ‘SHOULD BE SAFE’

Your money should be safe if it is invested in one of Dynamic Wealth’s seven unit trust funds, according to assurances by the Financial Services Board (FSB) and Metropolitan Collective Investments.

Metropolitan has taken over the administration and management of the funds with immediate effect after the FSB Appeal Board approved the decision by the Registrar of Financial Services Providers to withdraw Dynamic Wealth’s financial services provider (FSP) licence.

But in a strange twist, the funds might eventually be managed by the same asset management team that was employed by Dynamic Wealth and that recently resigned from the company en bloc.

Metropolitan has been forced to intervene, because – in terms of a white-label arrangement – Dynamic Wealth used Metropolitan’s collective investment scheme licence to market the seven unit trust funds.

Robert Walton, the chief executive of Metropolitan Collective Investments, says the R900 million of investors’ money in the unit trust funds is not in danger. The funds have provided good returns for investors, Walton says.

Bert Chanetsa, the FSB’s deputy executive for financial institutions, says the FSB is in talks with Metropolitan to ensure that investors’ interests are protected.

Metropolitan was obliged to take over the management of the Dynamic Wealth portfolios in terms of an arrangement with the FSB, he says.

In terms of the legislation that governs white-label arrangements, the FSP licence-holder – in this case, Metropolitan – is responsible for the proper administration of a white-label collective investment scheme and is answerable to the FSB if anything goes wrong.

The seven unit trust funds are: the Dynamic Wealth Accumulator Fund of Funds, the Dynamic Wealth Creator Fund of Funds, the Dynamic Wealth Optimal Fund, the Dynamic Wealth Preserve Fund of Funds, the Dynamic Wealth Property Fund, the Dynamic Wealth Real Income Fund and the Dynamic Wealth Value Fund.

Walton says that Metropolitan will appoint GAMC Securities (Pty) Ltd (to be rebranded as Clarus Asset Managers) as the investment manager of the seven unit trust funds and will apply to the FSB to rebrand the portfolios. Until this happens, Momentum Investment Consulting will manage the portfolios.

However, investors in the funds were confused by a letter sent to them by John Bernard (JB) Smith, who headed the Dynamic asset management team, the members of which resigned from Dynamic.

Smith joined Dynamic Wealth in 2007 and was appointed chief investment officer in 2009.

Smith, in the capacity as a director, claimed in the letter that the unit trusts had been taken over by iBenefit and Valuevest Multimanager.

Gerry Anderson, the FSB’s deputy executive in charge of market conduct, says neither company has been licensed as an FSP and therefore Smith’s claim was untrue.

Walton says that once he was informed about the letter, he told Smith that iBenefit and Valuevest Multimanager cannot take manage the portfolios. Smith was not involved with the problems at Dynamic Wealth, Walton says.

The core of the former Dynamic investment team now works for GAMC Securities, which means that the seven funds could again be managed by the same investment team, albeit under a different brand.

Walton says that Smith would first have to obtain an FSP licence from the FSB to manage the assets. If this does not happen, Momentum will continue to manage the assets.