Wednesday, July 30, 2008

Freedom

I have been trying to think of something (hopefully) interesting to post - since we haven't paid off any more debt - and I read something that struck a chord and reminded me of why we do this.

Freedom.

Or to quote Mel Gibson, aka William Wallace, FREEEEEEDOMMMMMMMMM!!!!!!!

I read a post on the TMMO forum from someone who was all the way through the Baby Steps. They found Dave Ramsey in 2004 and had gotten intense about paying off debt. They had paid off ALL debt, including the house, in about 4 years.

Let that sink in for a second.

They.had.absolutely.no.debt.

If both of them lost their jobs tomorrow, it would be an inconvenience.

Not an emergency, an inconvenience.

They could work pretty much anywhere and make enough money to pay utilities, food and gas.

While I am proud of what we have paid off, I am really looking forward to the freedom of absolutely no debt.

What kind of life could we (my family) or you (whoever might actually read this) lead when almost every penny you brought home was your to spend/save/invest/give as you pleased?

Need a new TV? OK, no problem.

Vacation? When and where?

I can't wait!!!!

Saturday, July 26, 2008

Keeping up the intensity

I hope that I haven't made this all seem easy, because sometimes it isn't.

This whole process is more about behavior modification than simple math (although what we are doing is very simple math). Because it is about behaviors, sometimes you can slip back into your old behavior patterns, particularly when things really seem to be humming along smoothly.

That was us, earlier this month. :(

We started out the month paying a very large sum of money towards our credit cards (this is a good thing) and it kinda went downhill from there.

Since the kids were gone, we apparently decided that eating at home was not the way to go. I have not added up how much we spent eating out, but I am sure it is more than our entire monthly food budget.

We also bought stuff for the house (not budgeted for) like new door handles - because we wanted (dare I say, deserved) it.

*bleh*

This sounds like the 'old us' all over again.

So - after an appropriate personal wet noodling - we are back on the plan again. We are going to have to chock all of that up to more stupid tax and go on with our lives.

I just hate being stupid....it makes me feel so....well....not smart. ;)

So here we go - we still have $6500 left to pay off, and come heck or high water, it is going to get paid off by the end of August.

Maybe I will post some of our budget totals later....you know, we can let that horrify everyone.

Go ahead, leave a comment blasting us for our stupidity. We deserve it. Just keep it clean, the kids might read it. :)

Tuesday, July 22, 2008

Quick post - my daughter gets it.

I really love the idea of our kids not making the money mistakes we did, so we do talk about it a lot. So much so, that I feel like they might get tired of hearing about it.

Apparently my daughter gets it. :)

I have asked her (half jokingly) when she will be getting her first credit card. Answer: 'Never!'

We have watched TV shows with people (just like her parent's, but I don't mention that part) who had been really bad with their money and are now paying the price. She will ask 'Why did they do that? It doesn't make any sense.'.

She saves up her money for things she wants, even though I know it is hard for her to pass on opportunities to get stuff NOW.

She puts some of her money in her savings account and puts her own money (if she is carrying it) in the offering plate at church.

*As a side note to that, she likes to fill out the envelope in the seats and put her money in that. She actually got a tax receipt for that last year. :)

We have even been driving down 635 and she recognizes Dave Ramsey on a billboard. :)

I know when she gets older that the temptation will still be there, but hopefully these early lessons will be enough to keep her out of the financial messes we have gotten ourselves into.

Now if I can just convince her that dating should hold off until your late 20's/early 30's....

Monday, July 21, 2008

Stupid Tax - our Achilles' Heel.

At least, it feels like an Achilles' Heel to me.

A stupid tax, for those who have not read TMMO, is money you spent (and otherwise would not have) because you did something stupid. We have paid stupid tax with zeroes on the end. :(

I try not to beat myself up about it too much, but had we not done these things, we would be past BS3 right now and cruising towards our investment goals.

bleh

Stupid Tax #1 (this is a biggie): Trading in our Ford Expedition for a Honda Odyssey.

You may be thinking (particularly with gas prices like they are) that this does not seem too bad. Well, the truth is that we traded in a vehicle that we loved for one that we tolerate because we convinced ourselves that 'it is getting old and will cost more in repairs' and that a lower payment initially was really what we needed.

Well, we spent an extra $13,000 (that is 13 THOUSAND dollars) in payments that we wouldn't have once the Expedition was paid off (you think that could have covered a few repairs?) and we also just spent $1200 on maintenance items on the Honda anyway! That $13k even accounts for the larger payment on the Expedition initially.

$13000 would have just about covered BS3 for us, we would still have the (paid for) Expedition, and the Honda doesn't really get better gas mileage than the Ford did...it is still a big, heavy vehicle.

Stupid Tax #2: We put granite counter tops in the kitchen.

Once again, this sounds like a pretty good idea. I mean, they look great and add value to the house, right?

Well, granite is pretty expensive to start with, and we have a pretty big kitchen. Added to that was the undermount sink you have to buy ($400), the new faucet ($250) and (this one we really didn't plan on) new backsplash!!

You see, we didn't think through the process very well. Our old counter tops were REALLY thick - like 2.5 inches. The new counter tops were 3cm think. Quite a noticeable difference. We ended up paying someone to come in, rip out the old backsplash and sheetrock, put in new sheetrock and a new backsplash (marble, of course) to the tune of about $1700.

The stupid is not done yet!!!

We also decided (since we had all this other new stuff) that we should have someone rip out the wallpaper, skip-trowel the kitchen and repaint.

Hey, while they're here, let's have them paint the living room too!!!

Are you catching all the stupid in this story?

Total stupid tax on this one: $6500.

Hey, wait a minute! That is almost EXACTLY what we owe to our credit cards right now!! That means that if we had not paid those 2 stupid taxes, we would no longer have credit card debt and our FFEF would be done.

I know there are other stupid taxes we have paid, but those 2 just kinda irk me right now.....

I will say that the only bright side to this story (if there is one) is that because we have been living on a budget all this time, we were able to pay cash for the kitchen renovation. We did not 'technically' incur any new debt....we just left the old debt untouched. :(

Friday, July 18, 2008

The 'B' Word

Do you have one? (I am talking about a budget, not a female dog.)

Do you know what one is? (A PITA, yeah I know.) Seriously, a budget is nothing more than you telling your money where to go, rather than wondering where it went (sound familiar to anyone?).

It took us MONTHS to make one that actually worked. It was more difficult than it seems like it should be, mainly because we spent a lot of extra money on junk, and there really isn't a 'junk' category.....go figure.

What we use is called a Zero Based Budget. That simply means that you start at the top with your income, lay out all your monthly bills and when you subtract bills from income, the answer should be -0-.

Here is a simple example:

Income $3000

Payments:

Rent $750
Car Pmt $400
Ins $110
CC #1 $50
CC #2 $100
CC #3 $120
Student Loan $150
Fuel $300
Groceries $300
Utilities $350
Eating Out $50
Blow Money $50
Entertainment $50
Snowball $220

Total $3000


That is a zero based budget in a nutshell. With that plan, you have now accounted for every cent you will spend during the month. If one item in the budget goes over, then you will need to trim another item back to make up the difference.

A few notes about some of the items I listed and just some general budget 'stuff':

1. Blow Money - it is just what it sounds like - money you are going to blow. Let's be honest here, you are going to blow money on something during the month. Just admit that fact and put it in the budget. Now it's legit! :)

2. Groceries - OVER budget this one. No matter what you think you will spend on food, it is probably more. Same goes for Fuel. You can always trim back if you are able, but it is hard when you first start to find extra money.

3. Don't get discouraged. I would expect a minimum of 3 monthly budgets before things really start to fall into place. Unless you have already started tracking monthly expenses at some point in the past, your numbers will move around - A LOT. That is just the way it is at first.


What we found when we started doing this was that we made plenty of money, we were just blowing all of it. We don't have the coffee addiction that many people do, but we had a HUGE eating out addiction. It was taking any and all extra money we might have put towards bills.

Here are some actual categories and sub-categories we used on our monthly budget (yes, this was actually it back in January - we no longer have the car payments or most of the credit cards).

I am a geek, so I have this all laid out on an excel spreadsheet that does projected vs. actual, etc. but you can just do it on paper. :)

Housing

1st Mortgage
2nd Mortgage
Repairs or Main Fees

Utilities

Electricity
Water
Gas
Cingular
Dish

Food

Groceries
Restaurants

Transportation

Honda
Toyota
Gas and Oil
Repairs and Tires
Car Insurance

Clothing

Adults
Children

Personal

Life Insurance
SBC HOA
Gifts
Blow Money

Recreation

Entertainment

Debts

Universal Card
Drivers Edge
HSBC
Discover

So get your bills together, get a Big Chief Tablet and a #2 pencil, and get a budget going. You might be surprised at what you find!

Thursday, July 17, 2008

Act Your Wage

Kind of a weird take on things, eh?

You have probably heard (or said, if you are becoming your parent's like I am) 'Act your age!' at some point in your life. The meaning is very simple - you are being juvenile or - dare I say - bratty.

Well, the same thing applies with money. Act your wage! (Yes, I am shaking this finger at you!)

This has been a very important, albeit hard to learn, piece of the puzzle for us. We always figured that if the bank would let us make payments for it, we must be able to afford it!

Well, let me put this bluntly for you (ask my friends and family, blunt is my specialty), if you have to make payments on it, you probably can't afford it.

I say 'probably' because a house is hard to buy with cash. Not impossible, but hard. The 100% down plan on a house is a pretty sweet deal if you can work it.

Here are some rules to follow if you want to act your wage.

1. No car payments. Making car payments your entire life is a certain path to the poor house. Let's all face it, the government is NOT going to take care of you when you get old. If you want to retire and not have to live on the Alpo diet, you need to look out for yourself - buying used cars with cash can help you along your way.

Dave has a great (and eye opening) video piece about this on his site called Drive Free, Retire Rich. Take 5 minutes and watch it: Drive Free, Retire Rich

Seriously, go watch it!

2. Buying a house. I know I said that the 100% down plan is nice, but for most folks, it's just not feasible. What you should do when buying a house is be able to put 20% down, get a 15 year note and not pay more than 25% of your monthly take home pay towards it. If you can do that, you should be in good shape.

3. No new debt. Simple enough? :) If you have to make payments, you just can't afford it right now!

We all have to face facts (I am included in the 'we'), keeping up with the Jones' is a bad idea. They're broke! They are what 'normal' America is all about.

Step outside your front door and look left to right down your street. Somewhere around 90% of the people in those houses are living paycheck to paycheck. Many of them are not even doing that good, and are buying groceries with their credit cards.

This is not what you want to emulate! You want to be weird, not normal (when it comes to money anyway....being 'weird' is just...well...weird). Normal is broke! Normal has 2 new cars, a jet ski, a big plasma TV and $500 in the bank with a $2000 mortgage payment due!

Don't be the Jones'. Act your wage. Be weird. I promise it will be OK.

Wednesday, July 16, 2008

The Plan

Here is the basic plan, in a nutshell. (BS means Baby Step, not that other BS thing).

BS1 - Get current (if you are behind on any bills) and then get $1000 in an account somewhere ASAP as a 'Baby Emergency Fund' - hereafter known as a BEF. This is simply Murphy repellent. If something does go wrong (your A/C goes out, a tire on the car blows - whatever) you can pay for it IN CASH and not add to your debt.

BS2 - Pay off all debt using the Debt Snowball - List out all of your bills from lowest to highest, pay only the minimums on all but the lowest and start hammering away on it. You will want to add any extra income each month to the lowest payment to get rid of it as quickly as possible. This can give you a nice jump start, in that you will see your debts actually disappearing fairly quickly. After you have paid off the lowest debt, add its minimum payment (plus the extra cash) to the next debt in the list and start on it. That is the snowball part - as the snowball gets rolling, it picks up more and more money to really hammer away at the debt.

BS3 - Three to six months of expenses in savings. This is the Fully Funded Emergency Fund (FFEF). With this amount in savings, you can weather almost any storm Murphy hits you with.

BS4 - Invest 15 percent of household income into Roth IRAs and pre-tax retirement - this is where it gets interesting, because now you have no debt (other than perhaps your house) and you will start building wealth rapidly.

BS5 - College funding for children (if you have any). This can be a combination of things (529 plans, regular mutual funds etc) and will be happening at the same time as BS4.

BS6 - Pay off home early. Anything extra you have after your investment and college funding goes towards paying the house off. I mean, who doesn't want to own a house outright? Can you say 'no payments!!!'?

BS7 - Build wealth and give! This is where the rubber meets the road. Now that you have your retirement well in hand, you can start making money in other ways and giving some of it away to family, friends, charities etc.

BS8 - Invest in mutual funds and real estate - this really goes (in my mind) with #7. This is just part of the build wealth section.You can find out more about this one at Dave's website - http://www.daveramsey.com and they also have a forum: http://www.mytotalmoneymakeover.com

The start of our story

Honestly, it seemed very normal to us. We had debt, but who didn't?

We had our house payment - first AND second mortgage.

We had car payments - usually 2, but only 1 if we were being 'good'.

We had credit card payments - usually about 10. (yikes!)

We had loan payments (you know, for when the credit cards were maxed out).

We had payments on almost EVERYTHING. I don't know if we ever actually owned anything, or if we were just leasing our stuff through Citibank.

To make things just that much more interesting, I had been unemployed/underemployed for about 7 months several years back and most of our credit cards were at the default rate of 33% because of a late payment here and there.

When we started our little journey in October of 2006, this is what we owed:

Citibank #1 -- $824 @ 32.24%
Chase -- $1100 @ 33%
Citifinancial -- $1100 23.99% (nice low rate, eh?)
Citibank #2 -- $1615 @ 33.24%
Cap One Business Card -- $2000 % 17%
Beneficial -- $11100 @ 23.24%
Car #1 -- $8486 @ 4.9% (don't ask me how we got that rate with our credit, because I really don't know)
Car #2 -- $17899 @ 7.9%
Stupid Tax (I will explain this later) -- $6500
Citibank #3 -- $9857 @ 32.24%
Citibank #4 -- $8735 @ 32.24%

So if I am counting correctly, that is a total of 10 payments (plus 1 stupid tax), totaling almost $70k, which added up to over $1900 a month. That is $1900 a month in debt payments before we ever made a house payment, paid utilities or bought groceries or fuel.

You have to admit, that seems pretty 'normal', right?

Well (to put it simply), we got tired of being normal. We wanted to be strange. We wanted no more payments, and we wanted to be out from under the collective thumbs of our creditors.

This all started when I heard this financial guy - Dave Ramsey - talking about living debt free. He kept talking about 'baby steps' and how to use them to live below your means and pay off your creditors.

He has a couple of books out - the best one (IMHO) is The Total Money Makeover (TMMO). It is a very easy read, about 240 pages in total, and make a LOT of sense. It's the kind of sense that makes you say 'I already knew that, so why the heck do I have all these bills?'.

I read it over the course of a couple of days (it is really easy to read, and once it has your attention you just can't put it down), and I was instantly hooked. I was more than hooked, I was EXCITED. I actually saw a light at then end of the tunnel, and this time it wasn't the train barreling down towards me.

*side note* I will be the first to admit it, I get this 'good idea' excitement fairly often. Just ask my wife....she can probably list a few others. [/*end side note*]

This 'plan' of Dave's was really different. It wasn't some grandiose, overarching plan that was doomed to failure from the start. It was a simple, step-by-step plan that was so easy to follow that even I could do it.

Laura (my wife, in case you don't know me personally) was skeptical to say the least. She had 'been there, done that' with me before. I asked her to just read the book and then we could talk about it. She later (as in, months later) told me that the only reason she actually started reading the book is because I kept pestering her about it. She was going to read it just to shut me up....but as soon as she started it, she was hooked!

I will type out the plan on another post, or this one is gonna be hella long. :)

OK, so here were were, in October of 2006, with a bunch of new knowledge, a couple thousand dollars in our checking account (and the mortgage due - we would be paying it a few days late as usual) and tens of thousands of dollars in non-mortgage debt to pay off. We owed almost as much in debt as I made in a year. More than I made once you took out taxes and insurance.

So what did we do?

We got 'gazelle' intense. WE SOLD EVERYTHING. I sold all of my computer equipment, all of my power tools. We sold everything in the garage that we did not use, and some of the things we did (as a bonus, that meant I got to park my car in the garage finally!). We did whatever we could to get that $1000 in the bank.

We wrote a budget (go ahead, boo and hiss - it was worth the pain). We stuck to the budget (mostly - our first few budgets weren't very good). It turned out that we made enough money to do this, we just couldn't continue to blow money like we had been.

We then started hammering away at the bills, one at a time. Every bit of extra money that came in went to a credit card or a loan. When we paid off a card, we called our other cards and threatened to transfer balances if they did not lower our interest rate. If they refused, we transferred the balance and canceled the card.

Chase refused to budge, so we paid them off and canceled the card. We will never do business with them again in any way, form or fashion.

It has been 22 months since this all started, and we have paid off around $63k so far. We no longer have car payments and we only owe about $6500 to 2 credit cards. That means that we are still on BS2, but we are very close to being done and on to BS3.


I hope that this gives an accurate picture of what we went through. It has certainly not been all roses and sunshine, but it has been worth it. Our monthly payments are $1800 less than they were. Talk about a stress reliever.

I will continue to post more 'stuff' about the plan, and answer some of the more common questions. I will also post when we finally get out of BS2.

Of course, if you have any questions, send them along. I would be happy to answer them!