Friday, December 31, 2010

Life and Debt Management - Part II

In Part I of Life and Debt Management, I talked a bit about cutting and restructuring elements from your life in terms of both time and material possessions. Another word for it is "sacrifice". Life and Debt Management, as a discipline, is about weighing out which sacrifices hurt most and in many cases selecting the less painful of the two. It may be less painful to have a debt than to give up a favorite past time, but down the road - what is it costing you? Having the long view of things is essential to making good decisions when it comes to your life and your debts.

Debt Management

I've mentioned before the excellent Total Money Makeover by Dave Ramsey. If you can barrow a copy or have enough cash to buy it, I can't recommend it enough as a resource for debt management strategies. So let's assume you're working some variation of the debt snow-ball and have a -tight- budget but you're still bleeding red ink. How do you restructure your debts to help this situation turn around?

In Part I, a major portion of the approach is finding the things you can eliminate, or restructure, to reduce expense and add to the plus-side of your budget. The strategy is very similar here but there may be some not-so-obvious applications.

Cutting debt sources should be obvious from Part I. If you can get rid of something that is costing you maintenance fees (a club membership or boat slip) or payments or premiums (insurance on your motorcycle which only sees the road in the summer), you're going to positively impact your cash flow. But let's say we have gotten rid of all we can really get rid of and we are still failing to produce a surplus. What now?


Consolidation is the core principle of the debt snow ball, but incrementally so. Instead of piling payments forward onto the next largest debt (a highly effective and gratifying way of killing debt which I urge you to utilize before consolidation ), we're going to group debts together into the largest single sum. The reason for this is that we tend to be able to get better lending rates for larger ticket items to which an equity can be attached. Your car and your home are considered equity or security against the debt they represent. When you take out the loan, you are basically staking the capital good as the guarantee that you will repay the loan. If you don't pay, your house will be taken to pay the mortgage through the foreclosure process or your car will be repossessed.

Because these assets anchor your debt and provide a base level of compensation to the lender if you default on your loan, you are given (typically) a better interest rate on your loan. Markets vary from one location to another and almost daily, but generally, you will be able to get a bank to issue a slightly better rate on a home or auto than a straight cash loan -- even if you list a home, car or other property as equity backing the cash loan.

So the objective with consolidation is to find and obtain the cheapest rate we can amongst all of our debt sources and then try to finance the sum of all debts on the one anchor or equity property. Some lenders are eager to do this - you may have heard of a home equity loan. Let me say I have used home equity and I do not recommend it. Taking a home equity loan if you still have a mortgage means there are two liens on the property and you are making two payments. If you can, refinance your existing mortgage and request the amount financed be more than the amount owed to pay the house (but NEVER more than what the house is worth!). Many lenders will allow this but regulations and tolerances change frequently. Ask around.

Doing a home refinance to consolidate debt is a popular tactic and means you can get credit cards and student and/or car loans rolled into one lump payment with a lower interest rate. Make no mistake: you are still paying interest and will be doing so for a long time, but now you have given yourself breathing room so that your monthly budget has a surplus.

So you consolidate your debt and now you are "debt free" except for your inflated mortgage. Now what? Be careful!!! If you fail to exercise discipline in managing your budget and your money (e.g. if you fail to CHANGE your behavior), you will soon have other debts and be stuck with more than you started with. DO NOT let loan consolidation give you "permission" to go get more debt! You will bury yourself FAST!

Also beware your house value declining. If you bought during a hot market and paid more than twice the state assessed value of your home, you probably paid what the market would bear rather than what people will be willing to say the house is worth when the market is cold. If the value of the property declines, you could wind up owing more than you can get by selling the property and find yourself "upside down". This is a painful and discouraging position to find yourself in, so DO YOUR HOMEWORK before getting into a refinancing scheme.

The same concept above can sometimes work for a car purchase if you secure the loan apart from the purchase of the vehicle. Typically, car dealers want to handle your financing and deal with their preferred lender. You have more leverage to buy the car if you secure a loan in advance since you don't have to "qualify" at the dealer. You typically get a letter from the bank indicating your credit worthiness up to a certain amount. This is not what you want - you want a cashiers check made out to you so you can go shopping and not have to come back to the bank and get less than you need to cover car + another debt or two. You can more easily and quickly walk away from a deal that isn't the best you can find to go find a better one when you know the financing is covered. The dealer has little power over you here, though you won't get the 0.0% dealer financing either. In this case, you might secure a $6,000 loan and buy a $5000 car, using the remaining $1,000 to eliminate a credit card debt. Be up front with the bank, however, when you do this. You do not want to misrepresent yourself and in many cases you'll need equity already in place (your spouses car or your home) to secure the loan.

Even if you're not buying or refinancing a larger item, you can sometimes take three credit cards and roll them over to a new one. Watch for promotional mailings offering you a short term reduced rate to do this. You'll get a good deal, consolidate and save some money in the short term. Pay attention to what your actual rate will be after the promotional rate expires, though. You may wind up with a worse rate if you don't make payments on time or follow the guidelines of the lender.


These strategies are for worst case scenarios only. Remember - the primary goal is to get rid of debt, not get new debt. But if your budget is as tight as you can make it and you still can't get a positive cash flow going, some form of consolidation may be the option of last resort. It's also important to recognize that consolidating debts makes them harder to get rid of. You might do yourself a favor in terms of short term budget flexibility, but if you fail to capitalize on this to provide a safety-net savings and living expense account, you'll be short changed if any hardship should come your way later.

If that isn't clear enough, let me put it another way. If you do NOT have a budget and are NOT working hard to eliminate debt and work to a savings plan, the above strategy can easily KILL you financially. Only do this when you are well prepared to set aside money for the basic freedom generating goals (emergency and cost of living) and RIGHT THEN AND THERE AFTER, direct your savings into your consolidated loan pay off. In this way, you have a meager bit of flexibility to protect yourself from falling off a cliff in terms of debt but -- and I STRESS -- it takes iron-willed discipline!

Life and Debt Management - Part I

If you've read the other articles on this website, you've probably picked up on the idea that producing a net positive income produces the ability to save money and hence have more control over your life as well as your money. But for many people, getting to the point where the cash flow is positive is a very hard thing. In this article, I'm going to throw out some ideas for Life and Debt Management that should help you get the ball rolling and/or redirected.

Part I - Life Management
Our lives are complex. We have so many things in our sphere of influence that can distract us and demand our attention. Life management is the art of first discerning which things are distractions and which things are non-negotiable and then developing and enacting a plan for eliminating the distractions and getting a grip on the necessities. By simplifying your life, you have at your disposal the means to simplify your obligations. There are a couple of basic ways to approach reorganizing your life: cutting and restructuring.

1. Cutting
I've talked in the past about status payments. These are the payments we make on things we think we need. It is sometimes very hard to know when we are falling for this deception. Do we really need a fancy car? Do we really need the latest smart phone? Do we really need one more _______ (insert money gobbling collectible here)? Let me put it in terms that should make it a black and white question and answer. Is it something that directly and positively contributes to your ability to keep food on the table and a roof over your head? I didn't ask if it made you feel good or better or accepted... does it really have anything to do with the most basic of needs? If not, you don't need it.

Many will read that and scoff. Some will read it and wonder if they really have anything they can get rid of that might be costing them money on a regular basis. A few will read it and act on it. Can I encourage you to be one of the few and proud? If you're making huge payments on a car and have more than a year to go, get rid of it. Drive it to a dealer that sells good used cars and has a good reputation. Tell them you want to totally walk away from what you still owe on the car and try to buy down a modest and serviceable vehicle. If you've really over-done it and have already put a lot into an expensive car, you might be able to trade it and the remaining debt in for a 2k - 3k point A to point B ride. Even if you still have a car payment after the transaction - getting it from $500 a month down to $150 a month would be a huge improvement, would it not?

So that is but one example of cutting something out that is actively costing you money. But you can cut in other ways. Do you have a lot of something around the house that you just can't seem to get enough of?

ad·dic·tion noun

: the quality or state of being addicted
: compulsive need for and use of a habit-forming substance (as heroin, nicotine, or alcohol) characterized by tolerance and by well-defined physiological symptoms upon withdrawal; broadly : persistent compulsive use of a substance known by the user to be harmful

It doesn't have to be illegal to be an addiction. Video games, guns, motor bikes, tools, books, DVDs... collecting anything is a form of addiction. If you are in debt and have an inventory of something you could legally sell and generate some cash from, it would be money better spent getting you out of debt. Cutting excess in this case means selling off your excess possessions.

Now I know that isn't easy. I have a couple of small but dear collections that you would have to pry from my cold dead fingers. But I waited till I had my debt under control before I started investing in these things. Yes - I do understand that collecting collectibles is an investment, and in many cases it can be a good one when well advised. But we make investments for a reason - because we want to make a profit at a later date. Can I suggest that if you are in debt, the cost to service your debt is eroding those future returns? Selling off a couple of items in your collection, even at a less than optimal return, is better that hanging on to it while debt expenses (interest) eats your cake. In most cases, you can always buy the item back in the future when you have your debt out of the way and are realizing a net positive cash flow.

2. Restructuring

Restructuring your life is a bit along the lines of cutting the excess above, but at a much more radical level. You know you always wanted to be able to lay claim to the title of "radical". Well here's your chance.

Every day, week and month, we have a routine. We go to work (hopefully), we go to the store, we go to church, we go to family events, we go to social events and so on. All of this going has a cost associated with it in terms of time and money. It is easy to just go with the flow (or not so easy) and take it as it comes. That's fine and that's normal. But if you want to get a handle on your debt, you have to be vigilant, ever on the look out for a way to reduce the money you spend so you can survive while eliminating your debt. Restructuring your life a bit can achieve this.

Let's look at your average week. If you live within 15 miles of the grocery store, it's likely you visit 2 or more times a week to get what you need. So your spending the time in the check-out lane, the time wandering the aisles and the time walking to and from your car (not to mention looking for a parking space) each and every time you make a run to the store. With a little planning, you can cut this down to 1 trip a week, reclaim some sanity, family or "me" time and help yourself control your spending.

Start with a grocery list. It's a simple tool that can help you keep from over spending or impulse buying and is another area where you can ask yourself how much you need something. We keep a notepad on the fridge. When we run out of something, someone says "add it to the list" and we try to do that right away. We then combine our trip to the grocery store with our trip to church. This saves time and gas and hence sanity and money. Then we use a little discretion as we shop. Someone scrawled "marshmallows" in crayon on the list. *wink-wink*. Probably not a real necessary staple. Or someone says "cookies!" while you're cruising down the isle. It's easy to gently and warmly say "hmm... I don't see that on the list!" and save $3.

Now don't think I'm a scrooge - I try to keep one box of cookies on hand for when someone gets the sweet-tooth munchies! :-)

Combining as many trips as possible is a great way to save time and money as well as wear and tear on your car. It may be awkward at first, but you'll soon establish a new routine and will enjoy the marginal savings in time and money -- and these will add up over time. After a while you'll be loathe to give them up!

How about something more radical? Do you have more house than you need? Still paying on a mortgage for a 4 bedroom home but the kids have moved out? Sell that sucker and down-size! You'll be paying less for a cheaper home on a like mortgage and you'll save time and money on upkeep on a smaller floor plan as well as in heating and cooling costs. Smaller spaces are cheaper to furnish, heat, cool and generally repair given like quality. Yes - this is a radical step. But do you want to tackle your debt on your terms or on the terms the collection agents set? (hint - answer b ain't no fun at all).

So take a long hard look at your life and its trappings. Do you really need or use all of the stuff you have accumulated? Really? Think about it. I bet there are some areas you can cut and restructure that will go a long ways towards helping eliminate your debt through life changes. Remember - every incremental decrease in expense can be redirected to eliminating debt or into your savings - and that's the name of the game.

In Part II, we'll talk about some novel ways to manage your debt.

Monday, December 20, 2010

Basic Principles or A Penny Saved

This is part three of my Basic Principles series. I recommend reading them in order.

Should I Carry a Debt?

Hows and Whys of Budgeting

This third part is useful to you after you've cleared the first hurdle of redefining debt in your mind and the second hurdle of coming to grips with your cash flow via a budget. I can't over emphasize the importance of both of these. Without them, this step, Saving, will do you little good.

Starting Off

In order to have something to save, you have to have worked out your budget to produce a small surplus. That means you are taking in more money than you are getting rid of through bills and other expenses. Check out the later half of the Hows and Whys of budgeting for some ways you can reduce your overhead to produce a surplus. My favorite is getting rid of status payments. What's that, you say?

I guess this should have been covered last time, but a Status Payment is the price you pay to have a new car vs. an old car, a smart phone vs. a basic cell phone or cable tv with the movie package vs. a DVD player and library card. If you are willing to part with your status payments, you can redirect that to SAVINGS!

There are many other ways to save money. If you own your own home, you have the option to make changes that can save you money on your heating and electric bills. We added a timer to our water heater and it's saving us about $40 a month. That, in turn, is going right into savings.

Be careful with home improvements. Some can cost big dollars and take forever to pay back if not never. We replaced our windows to the tune of about $8,000. There was a perceptible, but small, return on investment in the form of less need to run the AC in the summer and it's easier to keep the house warm in the winter. But it will take probably 12 years, or more, for the windows to pay for themselves. Plan carefully - look for low hanging fruit (like the timer for the water heater) if you are looking for low cost tweak with good returns.


So what's the big deal? Spend less and throw it in the bank for later - right? Sort of. Now that you have the ability to save, you have the ability to avert a lot of stress and crisis in the future. Dave Ramsey (and perhaps as a result many economists) advocates having your savings broken out in a couple of categories.

1. Emergency Fund. The emergency fund is just that - it's for emergencies. I like what Dave says here: "seeing a great pair of shoes you just have to buy is NOT an emergency." We have and have used our emergency fund. Usually this goes into car maintenance as that tends to crop up somewhat unpredictably. $500 to $1000 is a good amount. Since I have two cars I have to keep on the road, I went with $1000. Most non-catastrophic repairs are within that limit, and it happens to also be the sum of our insurance deductibles. So, in most cases, we are covered for car related emergencies.

The rule is: when you use it, pay it back FIRST, before any other savings or recreational spending. You want to have your emergency fund ALL THE TIME so you NEVER have to put something on a credit card. But aren't credit cards for emergencies? Yes - but only if you can and will pay it back before you start having to pay interest. That means you define emergency credit card use as "I am stranded and have no cash or ATM access". Otherwise, go get the cash and pay for the repair directly so you don't forget about the credit card payment (something I hope you someday are in danger of doing... it means you've stopped using your credit card for the most part!)

2. Living Expenses. Why would you want to SAVE for living expenses - isn't that what the budget is all about? Yes indeed - it is. But the key to a functioning budget is INCOME. Let's say you get laid off, or worse: fired. Unless you've been saving for this by establishing a living expense savings pool, you're in some dire straights and debt is just around the corner. Now - don't be fearful here. That's not the point. Unless you're totally without skills, you should be able to find something, anything, soon enough to get some small amount of income at the very least flowing again while you look for a better job.

There is also the possibility that you become injured on the job, in which case workman's compensation would kick in (but I will tell you from family experience - be prepared to fight for it). Then there's the possibility of just getting really sick for a long time and not being able to work. Disability isn't always such a sure thing and you are actively encouraged to become a sponge as everyone will be watching you to make sure you aren't out trying to work, hence demonstrating your lack of need for disability. This is really a whole other topic on which I have plenty to say having watched people suffer through it, but we'll save it for later. The point is - you will be glad you set up a living expense savings fund down the road.

How much is enough? How long did you spend looking for a job last time around? A week? (lucky you!) A month? Three months? A Year? If at all possible, you should have 3 to 6 months of savings. This is a long enough period of time to find a job, or rearrange your life if you have become disabled to reduce your expense or find a new career path that will allow you to be productive. If you have limited skills, you may want to consider saving for a longer time as your job options will be limited. This is always, by the way, a good reason to pursue continuing education while employed. You never know when you're going to need a fall-back plan.

I was without a paying contract for 5 weeks once upon a time. If I had not saved about 4 months of living expenses up to that point, we would have been in trouble. I aim for the 6 month level currently and am a little bit behind in that department. Why didn't I take unemployment? Because I didn't feel that I should. I was capable of working and was working to grow my own business at the time, so I just kept on truckin'. Taking unemployment would have meant playing by the rules someone else decided for me and ultimately, what better motivator is there to get out and find work than knowing your living on borrowed time?

3. Goals So what goals do you have now? Really, once you have saved for emergencies and contingencies, you are free to dream. My favorite thing to do at this point is pile into debt elimination, like the mortgage or whatever your biggest remaining debt is. Hopefully you're already working on that, but now that you have breathing room, free from worry of being caught short, pushing money into debt elimination is the next best thing to do. Some would say you should get rid of your debt before anything else (and I think that is very prudent), but an emergency fund is pretty critical to keeping you out of debt, and the living expenses are pretty key to keeping things running in times of economic uncertainty. But, if your debt is a huge problem and is bleeding you dry, you may want to put living expenses on hold and kill debt first.

We chose to eliminate debt while saving for living expenses. It was a tight time, budget-wise, but we blew away tens of thousands of debts in about 2 years by focusing on it using Dave Ramsey's "Snow-ball" plan. With that, you pay your smallest debt off first. Once it's gone, you add the payment you had been making on it to your next largest debts payment, accelerating it's pay-off rate. When that one falls, you roll up your payments to the next largest debt. Pretty soon you have a massive ball of cash roaring down the mountain wiping out debt like so many small trees!

Other goals, if your debt is liquidated, might be saving for college for your kids or yourself, or you might save for your dream home or retirement. The world is your oyster when you have moved yourself out of debt repayment and into cash accumulation. You might also want to invest, but that's an advanced topic we'll touch on in a future installment which I encourage you to be thinking about.

Looking Back

So, if you've made it this far and have implemented the suggestions I've made along the way and you have a budget that balances, debt on the way down the drain, and a growing savings account, you're well on your way to what Dave Ramsey calls Financial Freedom. I have oft quoted him here and all of the material that is in my head that was put there by him came from "Total Money Makeover" or his radio show which I used to be able to listen to. It's only a $10 book but you get the equivalent of a $300 seminar in terms of education. It's a life changer which should affirm and reinforce everything I've covered in the Basic Principles series. You would be well served to go get a copy. I in no way derive any income from promoting it - it's just the right thing for me to do.

I also encourage you to continue your education beyond this website. If you just happened to find it or were referred by a friend, there are tons of free resources out there to get you educated on all things fiscal, fiduciary and financial. And I hope you'll check back here for more in the future... or go learn something cool and contribute an article that would help others learn to be financially savvy and free.

Till later...

Friday, December 17, 2010

Basic Principles or Hows and Whys of Budgeting

I don't expect I'll always have so many posts so close together on this blog. The big thing is getting the basic information in your hands and setting you off on your own adventures. To that end, I present another basic principle for your edification: the budget.

Why a budget?

You can read a bit about debt and why it is bad in an earlier post. One of the easiest ways to get into debt is to spend more money than you have. This is a very common problem for people who have not had any exposure to money management before but now have some money to spend. It's our natural first reaction to see the $100 in our hand and think that we can afford the $100 shoes, the $100 coat, pay the $100 electric bill and still have money left over. What our minds fail to realize is the limited nature of each dollar we hold. That is why we need a budget. Like a grocery list, it helps us organize and visualize and gain better understanding. So, while not managing our money gets us into debt, having a budget is an easy way to get out of debt faster, and hopefully start saving.

What a budget is

A budget is a break down and correlation of two things: the money you take in and the money you send out. It's a plan to be used over time and so works best with predictable amounts in these two categories. Ideally, the money you take in comes from a stable source, like a pay check. This may not always be the case, however. Also, budgets work well helping you to meet your fixed expenses with your stable income. The more predictable your expenses, the easier it is to budget.

I say "easier" but don't take that to mean required. Same goes for your income. You can budget to unpredictable income and variable expenses too - it just takes more foresight and discipline over the course of the year.

What a budget isn't

A budget is like a project plan... or like a grocery list. It's a rope to guide you along the path... not a noose to hang yourself with. Don't expect your first stab at a budget to be perfect. It's not meant to be. You'll go through a few rounds of revisions as you get a handle on what you really spend and the (hopefully) infrequent random expense pops up.

Making a budget

A good place to start is to download a tool. I recommend you take a look at Pear Budget. For most folks, the 30 day trial is going to be enough time for you to figure out a budget. The problem is it takes several months to fine-tune a budget once you have created it. For this reason, and while I am appreciative of the efforts that the folks at Pear Budget have put into things (and hope you can afford their subscription service), I have to recommend their older FREE spreadsheet version. Allow me to explain briefly because I do think we should reward those who do a kindness to us and subscribing to their service would indeed be a kindness. However - my experience has been that when you are trying to get a budget together, you are usually going to quickly realize that you don't have as much income as you do outflow. Adding a monthly expense is not in your best interest in this circumstance. If however, you have room in your budget, of course, use the pay service as it's much more up to date.

That said - you might still be able to find the free version here. If you wind up saving a lot of money using it - from what I've read you will much more enjoy the online version and its ease of use. But this will get you started and is what I use.

Now - did you start using Pear Budget yet? he he. If you don't read another word I say here and start using it right now, mission accomplished. But if you want some tips on creating and living within a budget from someone who has had to do it, read on.

What's coming in?

I hope and pray you have an income. Either you're on a salary, a fixed income like a pension or social security, or you are getting some sort of per diem or hourly pay. Or you may have access to a trust fund and don't want to blow it all at once. Good thinking! In any case, you need to start by tracking what you're taking in. Many people look at their weekly or monthly income and expense when considering a budget. This is fine for fixed income and predictable expenses. But if you own your own business or have a job, like sales, where the pay tends to rise and fall with the season, you'll want to consider your total yearly income. In the case of Pear Budget (spreadsheet) you will want to average this back to a month for the purposes of having a month to month health check on your spending vs budget.

Do this by adding up everything you make in the year and divide by 12 if you want to figure your expenses by the month or divide by 52 if you want to go by weeks. If you want to do it by four week periods, divide by 52 and multiply by 4. It's a tiny bit different than dividing by 12. Pick the method that fits how you will track your expenses. Don't forget to include all of the income that you consider accessible. If you are earning interest on investments and will be using it to pay your bills, don't forget to include it. If you have a part time job or two or more, figure out what you're likely to make on average by counting all of these. You may also be in the position where you are now living on savings due to the loss of a job. You may need to skip ahead, figure your expenses, then figure out how much to draw down each month.

What has to go out?

We all have expenses. If you don't, you don't need a budget. :o) Capturing all of your expenses can take some time and effort. An easy way is to take your bank statements and lay them out in front of you and begin to categorize them. For example, I lump all food retailers into grocery, and all gas stations into auto fuel. Then there's utilities, rent or mortgage payments, spending money and savings and so on. Be thorough! Your budget will be quickly "blown" if you miss something. Magazine subscriptions? Website hosting plans? Memberships? Dues? Starbucks?

It's important that you not go in debt - right? So make sure you are covering all of your mandatory expenses before you set aside "spending money" or savings. You can't do these things if you are racking up debt by not paying your bills. So make sure you add up all your bills and recurring expenses like food first. Like income, it may be necessary to add up several months of data or a year and average. Or just get last months statements and take a stab at it. Getting started is important - being perfect to the penny right out of the gate is not.

Finally getting some control

Now - this is the juncture where you start to have some control over your life. Take your averaged income and subtract your averaged expenses. Do you have something left over? Good! Now you can decide how much to save and how much you can blow each month. A good rule of thumb is tithe 10%, save 10% and play with 10% and do business with the rest. That way you're taking care of God first, your future second, and your sanity now. But - not all of us are going to have a 30% surplus, sadly.

If you subtracted your income from your expenses and you are still not meeting your expenses, it's time to exercise some control. You need to look long and hard at your expenses. I have friends who I love dearly who struggle with money and yet still have cable, expensive cell phones and the $90 plans that go with them and still buy new clothes regularly, and of course still eat out a lot.

It's important to be honest with ourselves about what we really, truly need. We really truly need food and shelter. And if we live a long ways from work and can't walk, ride a bike or catch a train or bus, we need transportation. Everything else is a luxury and you'll need to start seeing it that way before you can convince yourself that it can be cut from your expenses.

I personally recommend, and have done the following:
1. Get rid of the expensive smart phone / iPhone / Android and get an $8 tracfone or similar with pay as you go activation. This move saves me about $600 annually.

2. I also recommend ditching the cable and/or satellite TV. You'll LIVE! Honest! The library now loans DVDs, so get a library card and relax and enjoy the fact that you have made a net-positive contribution to your budget. You can save about $1000 a year on this one.

3. Shop at thrift stores. Seriously. People give nice clothes to thrift stores and if you are careful and make it part of your weekly grocery run, you'll find what you need for 20% retail. If you're diligent and stick to your guns here, you might save several hundred dollars each year depending on your tastes.

4. Drive your car into the ground. I do this now as a matter of course. I'm not saying you should abuse your car. I am saying even a $3000 transmission job is cheaper than a $20,000 car (and a $2000 "beater" is cheaper than a $3000 transmission). Dave Ramsey says: Nobody cares what you drive but you. I agree. My car has 178,000 miles on it and I take care of it so that it takes care of me in the form of NO CAR PAYMENTS. It saves me $3,600 a year if you figure a $300 monthly payment, and in turn I spend about $800 a year on really taking good care of it with regular maintenance and service. I net out $2400 ahead of the game.

Don't let pride keep you from making your budget and your money work for you!

So, this is the tough part. If you are in the red, you're going to either need to reduce your expenses or increase your income. The later is harder than the former for most people. Lots of us are lucky to HAVE a job these days, let alone be picky about what it pays. All of us, though, can sacrifice luxuries to get our money under control. Dave Ramsey has another oft-quoted line: If you're willing to live like no one else right now, you can live like no one else later on. That means if you are willing to have the discipline and do the hard work to get your money under control NOW and include some savings in your budget, you will one day be sitting on top of your money rather than under your bills.

Making Adjustments

With tools like Pear Budget, you enter your expenses in as you go or at the end of the month. I find it easiest to get my statements together at month end and sit down for 10-15 minutes of data entry. This tells me if I splurged too much or if I didn't budget enough for gas or food or if I estimated way too much for one category and shorted myself somewhere else. Make any needed adjustments at this time but try to be forward looking. If you figured $125 a month for electric based on past expenses but now it's $130 due to a rate increase, try to find out how much your rate is going up in coming months so you can budget for it. Similarly, if you took drastic measures to reduce your electric consumption and now you're going to be predictably below $125 each month, reduce your budgeted amount to a realistic level. Like I said earlier - it doesn't have to be perfect. You can hang onto the rope as tightly or loosely as you like.

For most people, just being ON a budget makes them more cost conscious and you will likely see a net savings over budget by the end of your first month - if you did a good job setting your budget in the first place.

Looking ahead

Now that you have a budget, it's time to start structuring your savings for maximum effect. That will be the next topic I cover in an upcoming post.

Stay tuned...

Thursday, December 16, 2010

Basic Principles or Should I Have Debt?

For anyone seeking to better control their finances, it's important to have a personal ethos concerning money. Mine has come to me through hard knocks and loving parents. More hard knocks than anything though.

My Money Credo

1. Don't spend money that you don't have. This means: don't borrow. Borrowing makes you a slave to the lender (Proverbs 22:7) with the result being you then spend all your time thinking about repaying the debt. Your life and every activity you undertake is shaped by having a debt over your head. By buying into the concept of having a debt, you are allowing others to control your life and well-being. Debt, therefore, sucks eggs. Don't be a sucker!

I know - you're saying "c'mon! no Visa? No Master Card??" - NO. Not as debt anyway. Use the card for convenience, but PLAN TO PAY IT OFF EVERY MONTH without exception. As soon as you start making monthly payments to service that debt, you're a debtor spending more than you needed to in the first place. Got it on sale for 10% off? Does you a fat lot of good when you're paying 22% interest.

2. "Don't borrow money unless you can make money with the money you borrow." - Uncle Lou. This from my Dad's step-uncle who became wealthy digging ditches, outlived many of his children and enjoyed his work till the day he died, late in his 70's. This is, in my view, the core precept for borrowing if you are going to ignore #1 above. You shouldn't sign for that loan unless you have a budget and plan for how the money you are borrowing will be repaid and turn a profit. Most folks call this a business plan. A mortgage on a home is only the merest exception to this rule. Student loans? Unless you're getting a degree in turning lead into gold (and a large supply of lead on hand), you don't have a guaranteed income and therefore can't have a budget for repaying and profiting from your loan DEBT. Hence #3.

3. Pay as you go. If there is something you want to accomplish that will require more money than you presently have, budget your income and set aside a little bit at a time in a savings or money market account to either save for later expenditure or to put into the work as finances allow. Violating this precept means you are headed for red ink on your balance sheet, that is to say, going in debt... again violating principle #1.

Prior to 2000, most Chinese citizens lived quite austere lives and saved religiously for later expenses, like weddings, education for their children abroad or their first car. That has changed dramatically in the past decade as they begin behaving more like American consumers (that is to say - saddling themselves with debt)

4. Never take on a debt to get out of debt. Sounds pretty obvious considering the above but do you know how many people, faced with an expense for which they have no funds will put it on credit? This is why the first thing you should save for (like right now) is an emergency fund of $1000 or so. (Credit to Dave Ramsey)

Look at it this way. An expense lacking financing is a debt as soon as you commit to it. And you can only enter into such a transaction via a credit card (debt). Fortunately, lending regulations make it easy to see how painfully expensive this is over time these days. Just look at your credit card statement and it should show you the cost to pay back the money you borrow making only minimum payments. Keep in mind - the interest rate that is used to calculate the payoff is the "good consumer" rate. If you slip and miss a payment, you get upgraded to the "bad consumer" rate, which will significantly impact the time and cost to repay the debt.

So - short answer to "should I have debt" is NO!!! Read carefully above again. The truth is: nothing puts you in the hole faster than debt and poor management of that debt.

The corollary to this truth is that nothing gets you out of the hole faster than carefully managing your income and setting aside specific money for specific needs (budgeting).

Careful readers will notice the word budget above... several times. In an upcoming post, we'll talk about budgeting as I believe this is one of those important things they should teach every High School student (but somehow many of us graduated HS without knowing a thing about it!)

Till next time...

Tuesday, December 14, 2010

Contributors Wanted

I'm just smart enough to know I know nothing. I have my nice pile of accumulated experience but my experience alone isn't going to totally lift the veil off of the mysteries of money management. If you have practical and sensible advice you wish others could take advantage of and have been looking for a place to post it, please consider working with me to make Fiducate a better resource for the cash challenged.

You can drop me an email at datatribe AT gmail DOT com.


Why Fiducate?

Ben Franklin said there are two things which drive men - love of power and love of money. I have no love for either but whereas I lack political power, I do have some control over my money. This is because I have acquired through careful study (and lots and lots of pain) a growing understanding of money. And having such, I understand how our government works a bit better. I also understand how banking work a bit better, how credit cards work, and how the money I make works.

Lacking understanding is a very very painful thing. You may be in this situation now. I've been there and have a strong aversion to it much in the same way one misspent night in college has forever ingrained in me a strong aversion to Peach Schnapps. I mentally wretch at the thought of ever being at the mercy of money again. And I don't want you to be there either. I know, it's a bad place.

So that's what this blog is here for. I want to make understanding money plain and simple. I want the complex stuff to be digestible and approachable for people who work a simple blue collar job or have no job at all. Why do I want this? Because I believe that people who love power have more of it when they have a better grip on our money than we do. I believe they work tirelessly to attain that position at your expense.

Just look at the stack of documents you have to sign or initial just to buy a home. Do you think that was designed to be easy to understand? On the contrary. It was designed to be so difficult to understand that most people will not fully comprehend what they are signing and will likely be bit on the hiney by that fact later. It's how you wind up on the hook dangling over the trout pond.

So, friends, brothers and sisters, countrymen and women, lend me your ear and let me help you get a grip on that which seems so elusive. The more of us who are in control of our finances, the less of us feed the system that makes its living abusing the unwary and ignorant. Yes - I said ignorant. That's where I was and that's where I suspect a lot of you are now. Hopefully you don't want to stay that way.

Stay tuned.