Mitchell writes in:

Currently, we have around $100,000 in credit card debt and we’re having a very hard time making the interest payments. How can we consolidate that debt and get a lower rate? Should we go to our credit union?

Mitchell is falling into the same trap that I see a lot of people who email me falling into. To put it simply, they’re just prolonging the inevitable - putting off the necessary changes in their life because they don’t want to face it. They want to keep living their life as it is now.

I know all about this. For years, I did it myself. From 2003 to early 2006, I racked up tons of debt, and near the end of that period, I was concerned not with actually fixing the problem, but with thoughts about how I could move the pieces around to keep the game going. My thoughts weren’t directed towards the choices I was making to create that debt - I was instead thinking about how I could use “tricks” to not have to face those choices.

But no matter what kind of clever juggling I did - even once going so far as to do cash withdrawals from one card to pay the bill of another card - eventually, I found myself backed into a corner. I found myself with a pile of bills, no way to pay them, and a little child completely dependent on me to make good decisions.

When I finally faced facts and realized I had to make a change, I found out something painful. All of that shuffling of money to prolong my current standard of living had made my situation far, far worse than it could have been if I had just faced facts earlier on. The actions I had to take for recovery were more drastic and the lifestyle changes I made were much more stark. Even now, after years of working myself out of the situation, I can easily see how, if I hadn’t been so focused on just maintaining my lifestyle in 2005 and 2006, I would be in much better shape today.

The choices you make today will affect your future. You can either make the choice to keep spending with reckless abandon, or you can choose to take a real look at what you’re doing and see if you can make some changes.

Where can you start, especially if all you really want to do is just keep up your lifestyle? I suggest five things.

First, simply think about what makes you truly happy in your life. What do you do that actually brings you sustained joy? Most people immediately begin thinking about whatever action brought them a burst of excitement and joy recently - like a shopping experience - but that’s not what I’m talking about. Those bursts of joy fade quickly and don’t bring lasting happiness. Instead, look for the wells in your life that constantly provide joy, even days later when you think back on them. Family? A few very close friends? Good books? Going to church? Don’t worry about what others think - focus entirely on what makes you feel good. Whatever you find, that’s what you should be focusing your energies on - the other stuff can just fall by the wayside.

Second, think about the things that are broken in your life. Most of the time, I’ve found that when people overspend (myself included), they’re doing it to overcome some bad feelings about something. For me, it was a lack of self-esteem, which manifested itself in a desire to impress those around me. Other people might just spend money to cover up feelings from a hurt relationship. If you find those broken pieces, don’t flinch - instead, address them head on. End the painful relationship. Make an effort to patch up a relationship. Find new friends who lift you up instead of constantly dragging you down.

Third, set a one day goal. Can you get through today without spending frivolously? Instead of diving into opportunities to spend, look for inexpensive or free ways to enjoy the things in your life. Don’t worry about big things - just focus on the small. Then, when one day is a success, look to the next one. Then the next. Take it just one day at a time. And pair it with gravitating towards the positive things in your life and moving away from the negative things.

Fourth, discover things already around you. Look around your town for free things to do. Try new things. Glance at your community’s calendar (you can find it online easily enough). Visit the parks in your area, the museums, the community festivals. Dig into all of the opportunities out there instead of just doing the same old thing all the time. You can’t break bad habits and build good ones without dipping your toes into the pool.

Finally, focus on building relationships that aren’t built around spending. If all of your friends focus on shopping and going out all the time and criticize those who aren’t wearing expensive clothes, you might want to back slowly away from that circle. Instead, look for the people in your life who don’t focus on such things. The best friends are the ones who are perfectly happy to kick back on the couch and watch a movie together or simply have a great conversation over a bowl of ice cream. They add value to your life and don’t subtract from your bank account.

Yes, consolidating your debt at a lower interest rate is a good tactic for financial recovery. But if it’s not coupled with some other behavior changes, it’s just prolonging the inevitable - at some point, you’ll have to face facts or face destroyed credit and possible bankruptcy. Stop prolonging the inevitable - and instead start thinking about what really brings you happiness.

One of the best personal finance articles I’ve ever read is Snowflaking: A Primer, at I Paid For This Twice Already. Here’s an excerpt so that you get the idea:

Snowflaking is a spinoff of the Snowball approach to debt reduction popularized by Dave Ramsey. With the Debt Snowball method, you figure out what amount you can pay to debt every month, and then you keep paying that amount, even as your debts shrink and your minimums get smaller. To implement it, in a nutshell, make a list of all your debts, order them from either smallest to largest or highest interest to lowest interest (that is a debate in itself), and you focus all extra money above the minimum payments on a single debt (either the smallest total or the highest interest, I use interest order). As you eliminate debts, you apply the payment you were making to that debt to the next debt in line until the snowballing effect of decreasing minimums and increasing amounts applied to particular debts eliminates all the debts on your list.

Well, what are snowballs made of? Snowflakes! I have a set amount I pay to debt without fail every month that is above my minimum payment due (about $800). On top of that, I also try to collect up little bits of money wherever I can and I apply those as well to my top priority debt as immediately as possible. I take surveys online, I sell possessions on craigslist and ebay, I have yard sales, and any money I get from these endeavors goes directly to my debt. I also keep a very strict accounting of all the money that comes in every month and what I spend and everything left over at the end of the month not earmarked for future expenses also goes directly to debt. These are my snowflakes. I have averaged over $200 extra going to pay down my credit card debt every month due to these snowflaking efforts.

Many small snowflakes make a snowball, and no amount is too small for me to snowflake. I used to pay my credit card directly every time I collected a snowflake through their online interface, but now that I have moved my credit card debt to another card with a 0% interest offer, I collect the snowflakes and pay them once per week (I am limited to the number of payments I can make to this card a month). If you are able to and your debt is not at 0% interest, I highly recommend the “pay snowflakes immediately” method. The faster your balance is reduced, the less interest you will accrue.

Snowflaking is, quite simply, a great way to get aggressive with your debts. It gives you a little extra push towards achieving your goals. Even better, you can also “snowflake” towards any savings goals you might have.

Don’t know how to get started? Here are 15 ways you can get snowflaking going in your own life. These are low-impact ways - far from starting a side business - to earn a few bucks without devoting countless hours to a major project, things that sync very well with what you already do or can be picked up whenever you feel like it.

Have a yard sale. Go through your house, identify the items you don’t use much, and sell them. Put them out for sale in your yard over a weekend (with reasonable prices) and put that money straight towards your debts or other goals.

Keep your aluminum cans separate. In Iowa (and in many other states), there is a nickel “deposit” that one pays for each aluminum can (or bottle) purchased. Keep these cans and bottles separate from other trash, then occasionally return all of them for $10 or so. It helps the environment and gives you a bit of snowflaking cash.

House-sit. If someone you know goes on vacation, offer to house-sit for them, look after their pets, and so forth. It’s pretty easy work and can earn you some quick cash to knock down some debts.

Walk pets. If you already walk your own pet in the morning, it’s not much of a stretch to stop by another house or two, pick up their pet, and walk that pet as well - for a fee, of course. Put that fee straight towards your financial goals.

Blow snow. Got a snowblower? You’ll be blowing the snow from your own lawn anyway, so why not set up an arrangement where you’ll blow the snow from your neighbors’ driveways and walks for $10 or $20. Then, take that cash and put it towards your goals.

Eat a “free” meal. Freeze your “utility” leftovers, then make a meal out of them once in a while - mix your leftover rice, vegetables, and chicken pieces to make a “free” meal. That’s worth $5, easy, so just snowflake $5 when you do it.

Take surveys. It’s a great way to make a few bucks at your computer while watching a TV show or a movie. It’s not a great money maker, but it’s low-intensity and can be done whenever it fits your schedule.

Mow lawns. Got neighbors who can’t mow very often? Mow their lawn whenever you mow theirs for a few dollars. You’ve already got the mower out, right?

Write. You don’t have to start a blog and post regularly (though there’s success to be found there, too). Instead, just write articles and submit them to services like Associated Content or make “lenses” at Squidoo. It’s a great way to burn an hour or two on a lazy evening and earn a few bucks in the process.

Do simple tasks. Amazon’s Mechanical Turk will pay you a few cents for a mindless task that just takes a few seconds. One of my friends does this on her laptop during commercial breaks when she’s watching a television show and makes enough to cover basic cable.

Babysit. If you already have kids at home, put out your shingle as a babysitter. Most evenings, you’re already at home, so you’ll be getting paid just to mind another little one around the house. I know several people who do this.

Deliver groceries. If you know of any elderly folks or shut-ins who have difficulty getting out to buy groceries, give them a ring whenever you shop and offer to pick up what they need. They’ll often pay you several dollars extra for the service (and even if they don’t, it’s a great way to help someone in need).

Make crafts. Many people enjoy some sort of craft as a hobby. Create projects that reflect the best of your work, then sell them on sites like etsy. Anything from knitting to woodworking to scrapbooking to jewelry making can make you a few dollars in your spare time.

Be a “search guide.” If you’re just browsing the ‘net, why not help others find what they’re looking for online and make a few bucks? Cha Cha does just that - people send text messages to the service with questions, they pop up on your computer, you figure out the answer, send it back, and earn a bit to throw towards your debts.

Give charitably. Give what you can to charities - goods and other donations. Then, when you get the receipts for tax deductions, figure up how much you “get back” on your taxes and contribute that to your debts.

Good luck!

After chatting with a few readers lately, I’ve been thinking about trying the “book club” concept again, where a single book is discussed in detail over a series of posts.

I’ve done this three times in the past:

The first time, with Your Money or Your Life, went really well, with tons of good discussion. You can browse through those entries here.

The second time, with Born to Buy, went pretty well, though it seemed to engage parents much more than other elements of the audience. You can browse through those entries here.

The final time, with The Intelligent Investor, didn’t go well at all. I think the key problem was that the material was too dry and the topic was perhaps a bit too far away from what most Simple Dollar readers are interested in, at least with that much coverage. You can browse through these entries here.

One big thing I learned is that doing it weekly was too slow. If I bring it back, it’ll last about a month to a month and a half, with three entries a week. Another thing I learned is that the book really needs to be in sync with what you all are interested in, because if you’re not interested, the discussion isn’t interesting. You seemed to get into the first two (especially the first one), but didn’t like the last one at all.

So, are you interested? I’m considering these eight books as possibilities (click through to read my earlier shorter reviews of them): Getting Things Done, The Total Money Makeover, Never Eat Alone, Debt Is Slavery, Scratch Beginnings, The 4 Hour Workweek, You’re So Money, and Green With Envy. I think each of these books have enough information and enough material in them to discuss to really get some good discussion going as well as teach us all something along the way.

If you’re interested in doing this again with one of these books (or another one), leave a comment. If you really are opposed to one book or another (or to the whole concept), leave a comment. I’ll try it again if there’s a clear consensus towards a particular book (or two) - otherwise, I’ll let this sleeping dog lie.

40 Places Where Freelancers Can Learn More About Business I tend to think that these are resources that anyone can use to sharpen their business skills, particularly if they’re self-employed or starting a small business. (@ freelance switch)

Stocks Are for Losers? A more appropriate statement would be that individual stocks are for losers. Although the stock market grows over time, that growth is pushed almost entirely by the top 25% of stocks - the ones that really hit it big and drive industries. The other 75%? A net loss. Interesting - and a great reason for wide diversification. (@ five cent nickel)

5 Ways to Dramatically Improve Your Finances - Beginning NOW These are probably the best five principles around if you’re just getting started turning your finances around. Great article with tons of links to more information. (@ simple mom)

Failed Frugality: Five Clues You’ve Gone Too Far In a nutshell, if your frugality is interfering with your interpersonal relationships and driving people away, you might want to rethink things. (@ wise bread)

Is Converting a Traditional IRA to a Roth a Brilliant or Stupid Idea Right Now? I actually get this question fairly often - and I agree with the conclusion. It entirely depends on the assumptions you make and your own situation - there is no blanket right answer, just like the 401(k) versus Roth IRA debate. (@ frugal dad)

Saying No This is one of the hardest lessons I’ve ever had to learn. If you’re good at something, the surest way to ruin it is to not know how to say “no” - you’ll take on more than you can handle and you’ll eventually fail miserably or burn out. (@ seth godin)

Yesterday, J.D. Roth at Get Rich Slowly posted an interesting article about whether repaying debt should be an obsession. His conclusion, to put it succinctly, was no:

When a person decides to make a lifestyle change — financial or otherwise — there’s a temptation GO ALL OUT. With the zeal of a new convert, you leap headlong into a life of thrift, for example, giving up everything you valued before.

There’s a problem with this.

Most people who leap from a lifestyle of deficit-spending to one of extreme frugality find the waters very, very cold. It’s a shock to the system. It feels oppressive. They struggle to stay afloat, but before long decide they’re going to sink rather than swim, so return to the warmer, familiar waters, the waters of debt.

I made several false starts before I found my way. I would decide to give up comics completely, or to never buy another computer game. These sorts of goals are foolish. Nobody has that kind of god-like self-control. Everyone needs an indulgence now and then.

Rather than quit cold turkey, I think the best way to begin a life of frugality is by taking small steps. Small steps eventually become big strides, but only after you’ve developed your frugal muscles.

I understand where he’s coming from here, and I think he’s speaking the truth about his experience in adopting a frugal lifestyle and overcoming debt. I also think that quite a few people will identify with this perspective - perhaps even a majority of people.

However, for a lot of people, laser-like focus is a key part of their personal finance success.

I find myself in this group. When I finally hit financial bottom, I dove into debt repayment and frugality with the fervor of a freshly-minted missionary, bent on converting the unwashed masses of my debts to the purity of clean financial living. I spent many long nights going over my bills, keeping track of every cent I spent, and reading every book I could find on personal finance. I spent my weekends trying every tactic I could find in those books, hoping to discover things that actually worked for me. In fact, The Simple Dollar was borne from this - I started it to simply share the things that were working for me and the things that were not.

It was only with that intensity that I was able to hammer away many of my worst habits and actually do the hard work that I needed to do to put my financial life in a better place. For me, day to day life is a series of patterns - and it’s hard work to change those patterns. It was only through serious intensity - yes, I would even call it obsession - that I was able to change a lot of patterns in a reasonably short amount of time.

Without that focus, I would have never found success. I might have been able to keep my head above water - or maybe not. One thing I do know - a leisurely approach to this would not have worked for me.

Gazelle intensity This is largely the same philosophy that Dave Ramsey espouses. As he puts it:

Gazelles are gentle creatures hunted by the fastest animal on earth, the cheetah. With the cheetah being so fast, you would think the gazelle would be extinct. However they’ve learned that the cheetah is only the fastest animal on earth while running in a straight line. So when being chased, the gazelle bobs and weaves and runs in circles until the cheetah gets tired and gives up.

It’s time to think like a gazelle. If you are a gazelle and the marketing and credit card companies are cheetahs, bob and weave and run; do whatever it takes to get away. When you get that new credit card application in the mail - you know, the one that promises low introductory interest rates and lots of bonuses - scream CHEETAH! and destroy it as quickly as you can!

What works for you? Every person is different, and different techniques work well for them. Some people learn from text, while others learn visually and still others from audio. Some people learn best by repeating lists of facts - others learn by figuring out the patterns.

In the same way, some people succeed by applying a laser-like intensity to changes in their life, while others succeed by dipping their toes in and gradually moving forward. There are different levels for each.

Here’s a great example of how it actually works on the ground. A while back, I wrote a list of 100 ways to start saving money. A person who succeeds by taking slow steps might try one or two of them, then try one or two more, bringing gradual change into their life - and that’s awesome! Others succeed by taking that list and trying to do as many as they can at once, hammering on them until many of them become new habits - and that’s also awesome!

In my opinion, the best personal finance advice is modular. In other words, people who move more slowly can take a piece at a time, while people with gazelle intensity can grab them all and dive in head first. I usually try to see both sides of the coin.

Which side of the coin are you on? Are you a practitioner of intense focus on your money and personal habits, or do you like to dip your toes into new tactics?

On Tuesday, the Senate passed the Credit Cardholders’ Bill of Rights Act of 2009, an act that will quickly be passed into law with the signature of President Obama, likely within the week. This bill has a huge number of ramifications for credit cards - for users who are late on their payments, for those who pay their bills on time, and perhaps even for the ability to use credit cards in stores.

Washington Wire summarizes the bill very succinctly:

Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
Bills: Issuers must send a bill 21 days before the due date.
Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
Minors: For consumers under 21 years old, a company must get the signature of a parent or another to take responsibility for the debt, or it must obtain proof that the under-21 consumer can repay credit.
Disclosure: Cardholders must get 45 days notice of change in terms.
Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.
Gift cards: All gift cards must have at least a five-year life.

Meanwhile, The Wallet offers a few predictions for what this means:

“We’re in uncharted territory here,” says Curtis Arnold, head of CardRatings.com, a credit-card comparison site. Mr. Arnold says consumers can expect issuers to work overtime to lure high-end, high-volume clientele while adding fees and rate hikes for customers with less-than-stellar credit profiles.

The rationale is that credit-card issuers make money off interchange fees (fees merchants pay to card issuers). So customers who charge everything and pay off their balances are seen as less risky and still profitable by card issuers.

The future of rewards programs is also up in the air. Mr. Arnold advises cashing in reward and airline mile points, as their purchasing power has been on the decline in the last year or so. However, he points to new cards from brokerages like Charles Schwab and Fidelity, which offer higher cash-back rewards that lure customers to their brokerage products.

Mr. Arnold also advises those customers with existing balances to pay them off as soon as possible and consider transferring them to smaller banks and credit unions, which may be able to offer more generous rates and repayment terms. He, and others in the industry, expect interest rates on existing balances to keep climbing before the proposed legislation kicks in. (An optimistic guess would be that card issuers would have to comply nine months or a year from now.)

Something else to keep an eye on: Annual fees. The era of reward cards, or even non-reward cards, with no annual fees may be at an end. Stay tuned to notices from your card issuers and the changing fine print of your statement

So what does this mean for you?

First of all, these rules do help people avoid getting into trouble with credit cards. I applaud the change that requires minors to get parental approval or to prove they have the ability to repay before getting a card. I also like that all extra payments always go to the portion of the balance with the highest interest rate - no more shenanigans with companies applying overpayments to 0% balance transfers. Eliminating fees for different types of payment is also a plus.

But what else will change? It’s important to remember that the full ramifications of this bill won’t be seen immediately. Obviously, the credit card companies will try to keep their level of profits the same, which means that, inevitably, they’ll have to change their business in some ways. However, as Arnold noted above, they don’t want to kill the golden goose - the interchange fees that they rake in as a result of wide credit card use.

So, beyond the immediate impact for credit card users noted above, I’m going to make a few predictions about how this bill will affect things over the long term.

Interest rates will keep climbing. The days of easy low-interest credit are ending. That means the role of the credit card will begin to change as smart consumers begin to use credit cards more like charge cards - they pay off the balance in full at the end of each month.

What this might mean for you: Paying down your credit card balances as soon as possible is more important than ever! If you’re carrying a credit card balance, now is the time to start buckling down and wiping out that debt. If you aren’t carrying a debt on your cards, don’t start one - stick to spending less than you earn and keep using the credit card as an intelligent tool.

The credit card syndicates (Visa, Mastercard, etc.) will seek to raise interchange fees as a first line of attack. Credit cards work most effectively when lots of consumers have them and then expect this service from merchants. Think about it from Target’s perspective, for example - if half of their customers use credit cards to pay, they’re somewhat tied to offering that service to customers. Thus, I predict credit card companies will use that to their advantage and raise interchange fees, particularly on large retailers.

What this might mean for you: Many merchants will attempt to recoup this increase in interchange fees by passing the cost along to the consumer, so I would expect a slight bump in prices - 1% or so, spread out over many purchases and items. For most people, this will largely go unnoticed and will be seen as normal inflation.

Credit card issuers will get clever with fees, but annual fees won’t return. Most consumers have come to expect that their credit card will have no annual fees, so I don’t believe these will return in wide use. Instead, the companies will see other avenues for fees - cards that require a minimum number of uses per month, cards that have fees to enroll in particular rewards programs, and so on.

What this might mean for you: You’ll have to be more careful with credit card offers in the future. Also, when there are updates to your terms, you’ll need to read them carefully. Again, if you keep your balance paid, your credit will be good, so you can walk away from any cards that try to slip sneaky fees in on you.

I don’t believe rewards programs will go away. I would expect, though, that rewards programs will become more tied to specific “partner” retailers, like Target and Amazon, and away from more general programs like Drivers’ Edge. Why? Merchant-specific cards encourage loyalty to those merchants, and that has quite a bit of value to the merchants - those aren’t programs they will want to see go away.

What this might mean for you: Don’t be surprised if you find some of your rewards programs changing, particularly when your current card expires. For now, though, stick with what works for you.

Any thoughts or predictions on this new world of credit card rules?

One technique that I’ve always used to make my personal finance management easier is to round up regular debt repayments to the nearest $10 or $100. I do this for two reasons. First, a round number is much easier to handle for simple calculations. With a nice round number, it’s easy to just glance at my checking account balance, subtract those nice round numbers from that total, and get a good grasp of where exactly I’m at with my money. Second, the extra bit that I pay from the rounding usually chops a payment or two at the end, saving me a bit of money over the long haul.

The Dollars and Cents
Let’s walk through three examples that demonstrate quite clearly how rounding up can directly save you money.

The Scenario You’ve just taken out a $150,000 mortgage to buy a home. It’s a thirty year mortgage, locked in at 5%. Thus, your monthly mortgage payment is $805.23.

Rounding up to the nearest dollar If you decide to round the payment up to the nearest dollar, you’ll just submit a payment each month for $806 - an overpayment of just $0.77. Your final payment would be reduced to $165.16, and your total savings over the lifetime of the loan would be $363.64.

Rounding up to the nearest ten dollars If you decide to round the payment up to the nearest ten dollar increment, you’ll submit a payment each month for $810 - an overpayment of $4.77. Your payments would end four months earlier and your final payment would be only $112.15. This would result in a total savings over the life of the loan of $2,220.67.

Rounding up to the nearest hundred dollars If you decide to round the payment up to the nearest hundred dollar increment, you’ll submit a payment each month for $900 - an overpayment of $94.77. Your payments would end six years and four months earlier and your final payment would be only $2.95. This would result in a total savings over the life of the loan of $34,605.19.

The savings numbers are actual savings - the amount that the total interest on the loan would be reduced. I did these calculations using Bankrate.com’s excellent mortgage calculator.

The Psychological Benefits
For me, there are big gains from this method beyond the mere dollars and cents.

First of all, as I mentioned above, it makes personal finance calculations much easier. With rounded payments, I can easily do calculations in my head that, without rounding, would require a spreadsheet or a calculator. That convenience comes through time and time again, from thinking about ATM receipts to doing some basic budgeting on a piece of scratch paper. Rounded payments save time.

Second, I feel good in the realization that I’m paying ahead on the debt. While it’s not a large amount, it is an amount that’s going straight against the principal, and with each month’s overpayment, the interest burden is going down faster and faster and faster. It feels quite good to see that each time on the account statement.

Third, the overpayment amount is small enough that I don’t “miss” it. If I make an $8 overpayment, those $8 are not going to make the difference in my personal finances. I’ll silently make up the difference throughout the month with better buying habits at the store or an impromptu decision to not splurge on something. The “downside” of the early payment is small enough that it has no real impact on my finances - until, of course, the bill goes away earlier than expected.

Automation
Having said that, it’s worth pointing out that automating your finances changes this pattern somewhat. Instead of worrying about a round overpayment on each of my automatic bills, I instead make sure that the total amount of the bills I pay automatically each month is rounded to a nice even number.

Here’s how I do it. Each month, I have a payment due for my student loan, my car, and my mortgage. When I add these together, it comes up to a very odd number. That’s the number I round up, to the nearest hundred, then beyond that I contribute several hundred more in an effort to pay down the debt early. In the end, I have a nice flat number I use each month in my calculations - $2,500, to be exact.

Since I pay all of these bills on the same day automatically, it’s easy for me to look at my balance and do the mental math necessary to make sure everything is in proper order.

“Michael” writes in with a common question:

What do you do when you find your car is worth less than you owe on it?

This is a pretty common question, particularly given the current state of the economy. Some people are out of work. Others are looking to seriously cut back. Thus, there are a lot of people out there that would like to get rid of their current car loan - but they’ve found that their car is worth less than they owe on it. Often, there’s not enough cash laying around to make up the difference, either.

So what do you do? I see a handful of options.

Ask yourself if you really need to change cars. Many people who are underwater in their car loans are looking at upgrading their car. If you’re in this situation, spend some time asking yourself if you really need to make a change. Would this upgrade serve any purpose other than aesthetics? If there is a purpose beyond that, is it worth the huge amount of debt you would incur?

Delayed gratification is the key here. If you can put off the purchase for even a year or two, you’ll end up in substantially better financial shape than if you pushed things right now and wound up even further in the hole than you are now.

Trade down. If you still need the car for transportation, consider trading down - you’ll take a big loss on the value up front, but over the long run, it will definitely balance out.

Let’s say, for example, that you’re driving an almost-new 2009 Toyota Avalon that’s worth $6,000 less than you owe. You realize you can’t really swing the $500 a month car payments. So, you take it in and trade it for a $7,000 late model used low-end sedan. Some dealerships will accept this trade - others won’t - but what you’ll wind up with is an upside-down loan on this used car. However, the car payments will be significantly lower, as will the insurance rates.

Park it and remove insurance. If you don’t need to drive the car right now, consider parking it somewhere safe and eliminating insurance on it. This will reduce your monthly bills (no insurance), plus you’ll not actually have to give up the car - it’ll still be there for you if you return to work. It’s not accumulating miles or wear and tear, so you save on maintenance costs as well.

This strategy works well if you’re in a situation with a healthy emergency fund and are anticipating several months without work. I know of several people in this position - they’re currently staying at home, either looking for work or trying to get their own business started while living off of savings.

Get a different loan, then sell. If you have very strong credit, you might have the option to get a personal loan or perhaps add to a home equity line of credit in order to pay the car loan down enough so that you’re not upside down in the loan. When you’ve done that, actively seek to sell the car.

This is a great solution if you have strong credit (or at least access to a healthy credit line with low interest elsewhere). Essentially, you’re just eliminating the car (and its value) from the loan, leaving you with just a small debt that can be repaid over time. Plus, you get the additional savings of no insurance and no vehicle tags.

Are there any other good ideas that Michael might be able to try?

Recently, an astute reader pointed me towards a very interesting Yahoo! Finance article entitled Suze Orman and the New Rules of Credit Card Debt. In the article, Suze changes her usual tune of paying down debt above all else - here’s a key quote:

“If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can.”

Furthermore (with my own emphasis added):

Orman says that all spare dough–after making the minimum payments–should go into an emergency savings fund. Ideally, she says, that fund should contain eight months worth of living expenses.

This is a pretty surprising shift, since Orman was, until very recently, a very strong advocate of focusing on eliminating all high-interest debt. Obviously, this shift has been brought on by the recent economic downturn - but is it really a sensible change in philosophy? I’m not so sure.

Let’s start with the basics. My philosophy on debt repayment is pretty typical: get a small emergency fund built up, then start snowballing all of the high interest debt (anything over about 6% or so) by focusing all of your energies on paying off the debts in order of descending interest (highest interest first). If you’re interested in how to get this philosophy rolling in your own life, I’ve discussed it in detail before.

Suze used to have a very similar philosophy, but now it’s changed in one significant way: instead of a small emergency fund at the start, she encourages people to get an eight month emergency fund before continuing on to repaying debts.

Although I agree with Suze that a change in strategy is appropriate, I disagree with this particular change.

First of all, it’s a long term solution to a short term problem. Many economists expect the economy to rebound in 2010. A typical estimate is that the recession will drag on for a total of eighteen to twenty-four months, with a bit more than half that time already elapsed.

What about jobs? The rate of job loss is slowing down across the country and in some areas is already beginning to rebound.

In short, it’s quite reasonable, based on the information before us, to conclude that we’ve already caught the brunt of the storm and that the future holds an economic rebound.

In this environment, making the decision to jump from debt repayment to emergency fund building is about two years overdue. Of course, two years ago, many fewer people would have listened to such advice.

At the same time, proposing an eight month emergency fund is really poor money advice to most people, particularly in the face of such a short-term concern. Eight month emergency funds are long term goals, taking years of careful planning and consistent saving to build. Proposing such an enormous goal to someone facing a big pile of monthly bills and a typical income isn’t great advice.

I know this from experience. If you had told me a few years ago that I should have eight months’ worth of living expenses in the bank, I would have laughed at you. It simply wasn’t realistic.

I propose a different solution.

First of all, ignore a huge, long-term goal like an eight month emergency fund. It took me years of difficult decisions and hard saving to reach that kind of buffer - and I had a strong income and a stubborn streak behind it. Sure, it’s a great long term goal, but if your focus is on getting through the downturn, your focus should be on the short term.

Instead, if you’re worried about the downturn, focus on three key things through the rest of this year (and thus, likely, through the bottom of the downturn):

One, apply some realistic frugality in your life. I’m not suggesting completely revamping your life and completely altering your behavior - that will simply fail most of the time, just like a crash diet.

Instead, look for truly effective ways to trim your spending, particularly things you can do one time and have them continually save money over the long haul. Work on improving energy efficiency, for example, by air sealing your home, installing a programmable thermostat (and actually programming it), and using more energy-efficient equipment (like light bulbs and appliances). Prepare home-cooked meals in advance and freeze them (so when you’re busy during the workweek, inexpensive homemade meals are very easy). Call and get your credit card interest rates reduced. Cut out services you’re not using - and try to negotiate any package deals you have, like a cable/phone/internet bundle. All of these tactics can be done once in a big energetic flurry, but they trim your monthly expenses thereafter.

Two, acquire no new debt. Instead of replacing things, stretch out their use a little bit longer or find alternate means. Take your credit cards and hide them, so you’re not tempted to use them for things you don’t truly need. Most importantly, take it one day at a time. Focus on just avoiding the credit cards in the here and now - don’t stress out about the long term.

Three, build up your emergency fund a little now, but be prepared to reduce it in 2010. If you’re really concerned about the short term, it’s okay to slow down the debt repayments in the short term. Just pay the minimums and put the extra payments (along with all of that other money you’re saving through the steps above) into your emergency fund. Then, when the economy rebounds and you’re clearly in a more secure state with your employment and other factors, don’t be afraid to put some of that savings towards your debts.

To put it simply, an eight month emergency fund, if you have high interest outstanding debt, is overkill. However, in the current economic environment, there is reason for people to feel much less secure about their employment. So, in the short term, I’d bulk up my emergency fund a little - but only in the short term.

If you take nothing else away from this article, take this away: everyone’s personal sense of risk is different. For many people, the current economic state goes far beyond their comfortable risk threshold - if you feel that way, bulk up your emergency fund in the short term. If you feel confident and comfortable where you’re at, pay down your debt - or, if you don’t have any debt, start saving for retirement. The key, as always, is to spend less than you earn. If you do that - and do it with all your might - the details of whether to pay down debt or to have a bigger emergency fund pale in comparison.