Get Out of Debt in 9 Steps # 2(a) – Why You Should Make a Budget

Posted on | by Franklin Thoreau | 577 Comments on Get Out of Debt in 9 Steps # 2(a) – Why You Should Make a Budget

Step 2 is Make a Budget, but I thought I should break that step into two parts- first explaining why you should make a budget, followed by how to make a budget.

We have all heard that you should run your finances like a business and all businesses have budgets right? Well, I imagine that any successful business does have a budget, but I’m not an accountant and I don’t know about you, but that advice never resonated with me. Let me tell you why I, a person who never had a budget before and never planned my finances ahead of time, think you should have a budget. It comes down to one word for me- empowerment.

You may think that making a budget will be boring, time consuming, difficult, nerdy, restrictive, or any other number of negatives that seem to surround the word budget. Guess what- I thought all of that before too, but since I’ve started living on a budget I can tell you that most of those words do not apply.

  • Boring – Yes, unless you love math and details this will probably be a bit boring.
  • Time Consuming – Yes, it will take a lot of time, especially at first, but it will get faster each month.
  • Difficult – Somewhat difficult at first, but once you’ve set it up the first time you are basically done with only minor tweaks left to make here and there.
  • Nerdy – Subjective, but nerds are a bit more popular these days so it isn’t all bad. 🙂
  • Restrictive – Not at all. I have found it to be exactly the opposite!

I think the greatest hurdles most of us face when it comes to budgeting are the fear of the budget restricting our fun and the amount of time we will have to spend managing it. These are valid concerns and it does take time to properly manage your budget, but the time commitment is far outweighed by the empowering benefits and control you gain after making a successful budget.

Empowerment

I’ve used this word a lot now so let me talk about how I find a budget to be empowering. If you are anything like me, your finances have probably been out of control for a long time. A budget is the only way to take control of your finances, and it feels really good to take back control of something that I couldn’t handle for so long.

Benefits

  • Make faster decisions – Can we afford XYZ this month? Just look at the budget and you will have your answer.
  • Resist temptation – can I afford a video game this month? The numbers don’t lie. You can lie to yourself about how good or bad your finances are, but if you have it all on paper the truth is easy to see.
  • The power to say no – Having a hard time saying no to friends or family who want you to spend your money? It’s a lot easier to say no if you know for a fact that you can’t afford to spend the money and as an added benefit you can blame your budget for forcing you to say no.

If you still aren’t convinced, I can only encourage you to give it a try. Commit to at least two months and see what you think. I’m speaking to you as someone who was skeptical, but I am now convinced of the benefits of having a budget.

It’s nice to know why you should start a budget, but you still have to take the time to make a budget. In the next part, I will cover how to make a budget.

9 Steps to Get Out of Debt

How to Stop Borrowing Money

Posted on | by Franklin Thoreau | 649 Comments on How to Stop Borrowing Money

So you’ve realized you’re spending more than you earn and you want to stop borrowing money. It can be a hopeless feeling—one that I personally know very well. How to stop borrowing money, of course, is simple—but actually doing it isn’t easy. But there is good news—if you’re asking the question, you’ve already taken the first step toward solving the problem.

The solution is figuring out how to live below your means. Again, this is something that sounds easy, but personal finance isn’t easy. There are two ways to start living below your means:

  • Increase money coming into your life (usually income)
  • Decrease the money going out of your life (usually spending)

Doing them both is ideal, but getting there from a big financial mess will take time so look for low-hanging fruit and quick wins to get the ball rolling.

You probably can’t just push a button and increase your income tomorrow. Although, you can ask your boss for a raise. If you aren’t at least asking, it’s probably not going to happen, and the worse they can say is no.

But, you probably have an easier way to quickly increase your cash flow and stop the financial bleeding: You can sell all the junk you bought with debt. I suggest using Amazon (you can sell used stuff on Amazon), Ebay, and Craigslist. Anything small-ish (easy to ship) and worth more than $10 should get listed on Ebay or Amazon. The best approach is to search both sites for the item you want to sell and get a feel for prices. Generally, I find selling on Amazon to be a lot less hassle than Ebay, so I prefer to list there if I can. If you bought the item you want to sell on Amazon, just search for it in your past orders, click the link, and check used prices. You can get right to listing your item for sale from this page. Bulky things you can’t or don’t want to ship should go on Craigslist.

The most common debt problem is credit cards. If you are serious about getting out of debt you need to stop using credit cards and that probably means you need to cut them up too. If cutting the credit cards isn’t enough to stop you from using them, then close the accounts. This decision comes down to personal responsibility and how well you can resist the temptation to use your credit cards. *Important- don’t destroy or close all of your credit cards until you have an emergency fund! Lets be real here, most Americans have no savings- what would you do if your car broke down tomorrow or you lost your job? Cash is the ideal way to handle these emergencies, but most of us can’t just snap our fingers and have an extra $1,000 in the bank.

If you have accounts that are behind, make getting current your top priority. Late fees or over the limit fees are only going to bury you further. Call the banks and try to negotiate. It costs you nothing but a few minutes of time and aggravation to ask for help. They are likely to at least cut some of the fees and give you a chance to get current. You will have more luck here if you can also promise to send an immediate payment when making the phone call (just don’t give them direct access to your checking account).

Once you have stopped using the credit cards and everything is current, you will have gone a long way toward slowing the growth of your debt balance. However, you are likely still being charged monthly interest on your credit cards. Make a list of your cards and order them by interest rate. Start calling the high rate cards to ask for a lower rate or look at transferring balances from high rate cards to low rate cards that you already have (consider the balance transfer fee first) . You can even go out and apply for new credit cards if you can get a better rate- a 0% introductory rate would be wonderful if the terms are decent. Just be aware of fees for balance transfers and how long these lower rates will last. Do a little math to see if you will really be saving money when all is said and done.

Putting an end to your borrowing is the most important step toward getting out of debt. Look at every dollar you are paying in interest as your enemy. Compound interest is a wonderful thing when it is working for you, but against you it is devastating. If you haven’t already, take the time to total up all of the money you spent in interest over the past month. On a personal note, I was really sickened when I did this. I had no idea how much interest was really costing me. Think about the number of hours you have to work in a month just to pay interest if you need some extra motivation to stop borrowing.

This step is where you ‘stop the bleeding’ and figure out how badly interest is hurting you. Without doing this, all other efforts would just be covering up the real problem, possibly making the symptoms look less menacing yet not treating the source of the pain. The next step, making a budget, is where you can start to take control of your money and treat the debt problem at its source.

9 Steps to Get Out of Debt

Savings Tip- Charge Yourself Exorbitant Bank Fees

Posted on | by Franklin Thoreau | 1,245 Comments on Savings Tip- Charge Yourself Exorbitant Bank Fees

If my bank charged me a 10% fee to transfer money between accounts, I would promptly be seeking a new bank. However, if those fees were being paid to me, it would help my savings to build up over time. That is the premise behind my simple idea to help increase my emergency fund.

We have all heard the advice ‘pay yourself first’ and I do that, but I am intentionally keeping my savings rate low while I work to get out of debt. I started a basic emergency fund with $1,000 and I set up an auto transfer of $25 each month to slowly build that up.

It seems that starting an emergency fund is all you have to do to start creating financial emergencies in your life! Only a couple of months after making the fund I have accumulated nearly $1,000 in ’emergency’ type unexpected expenses. I have put back all of the money I have used from the account, but when I have to tap into that $1,000 balance it always makes me start to wonder if that is really enough- even while I’m in this debt repayment phase.

To help build the balance a little faster I decided to implement a rule that I would repay any withdrawals from the emergency account plus a flat 10% fee, rounded up to the nearest dollar. It’s unlikely that an extra 10% would negatively effect my budget in any way and it will help to build up a more comfortable cushion of cash. It is also a smart system because it responds to my actual emergency fund needs- if I am making a lot of emergency withdrawals, then it makes sense that I need to be saving more for emergencies. If I rarely touch the account, then it makes sense to keep it low while I am working on getting out of debt. This month, I had to spend $170 from the emergency fund to get our oven fixed, so when I get my paycheck next week I will be transferring $187 back into the account.

This is a simple idea, but it goes along nicely with my philosophy of small steps and slow changes that add up to big progress over time.

Your Money or Your Life – Book Review

Posted on | by Franklin Thoreau | 1,615 Comments on Your Money or Your Life – Book Review

Review of Your Money or Your Life, by Joe Dominguez and Vicki Robin

Book’s website – www.yourmoneyoryourlife.org

Amazon.com link – Your Money or Your Life: Transforming Your Relationship with Money and Achieving Financial Independence

I actually started reading this book around the start of the year, but stopped after a couple of chapters because I found it too dull. Thanks to Trent at The Simple Dollar running an online book club with this book I decided to try reading it again. I think it’s true that this book gets off to a slow start, but I also think I gave up too soon before because I had no problem reading through the whole book this time.

Bottom line, this is a must-read personal finance book no matter where you are currently with your money. If you want to know more before you read it, I’ll cover the main themes of the book below.

Are you making a living or making a dying?
The first important theme deals with how we trade our life energy for money and figuring out just what it is we do with that money and why. Do you work 50-60 hours a week just to keep up with the bills and have money to blow on having ‘fun’ on the weekend? Do you know how many hours of your life you are actually giving up for the ‘stuff’ you own? Do you know how much you actually earn per hour at your job? This section shows you how to calculate your real hourly wage, which is likely much lower than you think, and how to start tracking every penny you spend and creating a budget. This section is laying the foundation for a sound financial plan, however the process of determining your real hourly wage and figuring out how many hours of you life you trade for ‘stuff’ was eye-opening for me.

How much is enough? Finding fulfillment.
The next big theme is figuring out what is ‘enough’ in your life. What do you spend money on that provides fulfillment and what do you spend money on that works against finding fulfillment? Not only does this apply to how you spend your money, but also to how you spend your time (life energy). Is your job fulfilling? Do you have to spend money and time doing things for your job that you wouldn’t do otherwise? These are important questions to answer because they lead to the ultimate question of determining what you should be doing to make a living and how you need to think differently about it.

Tracking your progress
You could do this on a computer, you could do this on a paper wall chart (as the book suggests), but the key is to somehow track your progress and keep a visual reminder. I use a number of things to track my progress- this website, an Excel spreadsheet, Quicken, and a whiteboard on my refrigerator with my current total debt and how much I have paid down on it since starting my financial turnaround. Whatever you do, do something and make it easy to see on a daily basis. Not only is this an empowering step on it’s own, but it leads to the next great theme, the Crossover Point.

The Crossover Point
This is the most exciting part of the book. If you are tracking your income and expenses like the previous section told you to do, you will be able to add a third component to your chart, which is income from investing or any source of passive income. The goal here is to add your passive income to the income and expense chart (it is likely a tiny number at the bottom of the chart now), but to project it out into the future and find a point where that passive income number crosses over your expense number. This is the crossover point, the point at which you no longer need to go out and earn an ‘active’ income. If you are anything like me, that crossover point is a very long way off right now, but it is the ultimate goal of taking control of your money and finding financial freedom.

Summary
The book isn’t perfect, and I would guess you could cut about 50 pages out to make it really great, but the overall message was truly life-changing for me. I highly recommend it for anyone who thinks that maybe they could be doing better with balancing money and life.

Bad Financial Advice: ’10 Great Reasons to Carry a Big, Long Mortgage’

Posted on | by Franklin Thoreau | 482 Comments on Bad Financial Advice: ’10 Great Reasons to Carry a Big, Long Mortgage’

My Money Blog highlighted this article, 10 Great Reasons to Carry a Big, Long Mortgage, published by Ric Edelman under a section of the website titled Education. I don’t believe that My Money Blog was endorsing this author or article, but simply sharing the information. I’ve included both references only to show how I discovered it.

Before I go any farther, just think about the phrase “10 great reasons to carry a big, long mortgage”. How do you react to that title? Does it sound wise? Does it sound logical? I know what I think, but lets look at some of the information from the article to see if it sheds any more light on the subject.

Never own your home outright. Instead, get a big 30-year mortgage, and never pay it off – regardless of your age and income.

In today’s economic environment, a big, 30-year mortgage is the best thing you can have.

So: Never pay off the mortgage. Reject 15-year loans, never make extra payments, and forget about those biweekly mortgage payment plans.

First, understand that everything you know about mortgages and particularly what you fear about them is wrong. The myths you believe were told to you, bless their hearts, by your well-meaning parents and grandparents. They told you that mortgages are dangerous, that having one means you can lose your home. They told you this because they remember the Depression era, a time when millions of Americans lost their homes.

How do those excerpts sound to you? Wise? Logical? Here is what seems to be the main argument presented- things are different this time. Where have we heard that before? Right around the top of every stock market bubble is when you will regularly hear that phrase. Basically, everyone before was wrong, but now we have it all figured out because we are so much more advanced than those silly little people before us (you know, like the generation of Americans who actually had a positive savings rate).

Still, mortgages are expensive, and you’d rather avoid paying all that interest. That’s why you like the idea of sending in extra cash with your monthly payments. You know that paying off the mortgage early will save you huge amounts in interest charges. Although that’s true, you need to turn that coin over, because there’s another side you have overlooked.

Here it seems the author admits that having a mortgage isn’t a good thing, but wait…now he will tell us why it is. Confused  yet?

That’s why owning your home outright is like having money buried under a mattress. Since the house will grow with or without a mortgage, any equity you currently have in the house is, essentially, earning no interest. You wouldn’t stuff ten grand under your mattress, so why stash two hundred thousand into the walls of the house? Having a long-term mortgage lets your equity grow while your home’s value grows.

I don’t think you can compare cash to a home, but lets play along- IF you had ten grand under your mattress, would you go to the bank and take out a loan against it so you could invest it? Now this argument is a bit tricky because stuffing cash under your mattress isn’t really wise either, but you don’t need a mortgage to let your equity grow! That makes no sense at all.

There’s no way you can avoid debt in today’s society. Cars and college let alone big screen TV’s virtually require you to have loans. And you’ll find that mortgages offer you perhaps the cheapest way to borrow.

This one  really takes the cake This quote is so funny it got me wondering if this article was in fact an anti-debt satire piece of some sort. Did I read this right- “There’s no way you can avoid debt in today’s society“? I think Visa and Mastercard would love that quote. If you really think this is true, please stop offering ‘financial advice’ to anyone in any way, shape, or form.

Not only are mortgage loans low in cost, the interest you pay is tax-deductible. You can save as much as 35 cents in taxes for every dollar you pay in interest.

Yep! What a deal! If you think that is a good idea then please start sending your checks to me and I will pay you 35 cents for every dollar you send me!!!!

Honestly, that’s about all I can take of the article. Please visit the link and read the whole thing and please tell me where I am wrong because I just don’t see any sound arguments to support the title. Just think about the advice and see if it really makes sense to you. Don’t let someone tell you you aren’t sophisticated enough to understand it- apply simple logic and reason and draw your own conclusions.