Real World Finance$

We finally made the plunge with our big debt for our A/C we had installed last year.  It was “financed” then with 1 year, no payments and not interest.  That was set to expire in Mid May and I’ve been putting together plans to make the move.  The total debt on that special card was $16,064 (we had no duct-work or anything, so we were starting from scratch, and we also qualified for the $300 energy tax credit this year because of this).

I have a scheduled transfer from our savings account of $4,000 on the 30th of the month.  That same day I have a scheduled payment from the checking account of $4,064.  The remaining $12,000 is in process to be transferred to a credit card that is in my wife’s name.  It didn’t have a balance previously and had room for the balance.  While we did have to pay a 3% transfer fee, the transfer offer is at 0.99% for 6 months and then goes to her current fixed rate of 5.99%.  The 3% fee basically washes out with the savings from the 0.99% for the first 6 months.  That said, the fixed rate on her card is outstanding for a credit card, so we don’t really have any complaints there.

The best news is still that there is $4,000 less of debt for the end of this month!  That’s a really big step and puts us near the halfway point of our goal for debt reduction this year.  Hopefully after we get some other work done on the house and plan for our vacation there will still be some money left for another big payment sometime in the next few months.

In a preview of our month end, I saw where we currently have less than $48,000 in “credit card” debt with these payments (though there is an interest charge yet to post on our line of credit account) and our net worth has gone up to -$12,000.  That’s another big jump this month thanks to the tax refunds and such.  Everything should be done and posted by the end of the week for me to get some final numbers by the first of next week. 

I can hardly believe it’s nearly the end of March already!  The last few months have been some good one’s for the family financially and I’m starting to feel a bit of momentum pick up.  I got a paycheck yesterday and sat down last night to enter the amount in MS Money.  I also know that I have paychecks coming on Monday from my part-time teaching job, so I entered those as well.

Typically, after getting a paycheck, I look at my bill pay schedule and see how much I need in my E*Trade checking account to pay the bills until the next paycheck.  I then tack on a extra hundred or so to make sure there is enough for the auto pay bills like the newspaper and Netflix.  Everything else gets moved over to the savings account.  Though the interest rate has dropped to the low threes from the low fives since I opened it in December, it’s still a better deal than most places.

So, after entering all of this last night I looked at our savings account and realized there would be nearly $6500 in there by the end of the month.  I was amazed.  Granted, I’m taking out at least four thousand of that to pay on our AC bill next month and the remaining balance will get moved over to a low interest rate credit card that we will begin aggressively paying on.  Also, I know my next paycheck won’t be as hefty due to my monthly medical insurance being deducted and it will still have to cover credit card payments and the mortgage, so some more will come out of the savings to cover.

Still, after all of that, we should easily still have $1500 or so left.  That’s an amount we’ve built up in only 3 months!  We’ve never been able to save money like that before.  With our tax refund coming (hopefully) in April and the stimulus check in May, then we should have plenty of money to do the work we need to get done on the house and pay cash. 

Since I’m a contract employee, I want to have a little more emergency fund than most people, but I’m projecting to have an extra thousand or two to make extra debt payments by mid-year.  The momentum is starting to show and I’m not noticing a change in our lifestyle.  This is starting to get fun!

I watched a great episode of Frontline last night called “Secret History of Credit Cards”

Now, granted, this show was originally aired in November of 2004, and the “update” at the end of the show said Americans now have more credit card debt than ever.  Big shocker there!

If you follow the link to the show above, they have some really great resources available.  You can also watch the entire episode online!

It was a very interesting show to watch about how the industry got so big, so fast.  Included in the interviews was former Governor of South Dakota (Bill Janklow) who got rid of the usury laws in the 80’s.  That is why you see so many of your credit card payments going to Sioux Falls, SD.  Evidently, laws at the time allowed credit cards to charge the rate associated to where the credit decision was made, not where the credit was being issued.  So, they could avoid credit rate limits in other states by having their operations in South Dakota.

While that may seem sneaky and underhanded, it made a lot of sense back then.  In an interview with the former chairman of Citibank (Walter Wriston), he stated the laws in New York capped what they could charge at 12%, but their cost of getting the money was 20%.  Kind of hard for them to make money that way. 

Of course, sense that time, there have been all kinds of revised laws allowing credit cards companies free reign on the market.  While I believe they shouldn’t be restricted on what they charge, they also need to be forced to be more explicit in what and how they tell the consumers about their credit.  One very good point made was about credit card companies changing rates.  It was compared to changing the price of something after you buy it.  You buy a new TV at 9.99%, and then they decide to raise your rate to 24.99%.  It is an interesting idea, but the consumer has unwittingly agreed to that by not reading their credit card agreement.

In some cases, you can reject a rate increase on a card.  I’ve done that in the past myself.  However, in doing that, I was not able to make any more charges in order to keep my rate.  If I charged one more thing to the card it would hop up to the new rate for all balances.  I paid that card off and closed the account for good.

Some of the most telling parts of the story were the interviews with credit card customers.  The group they talked to actually had the money available to pay off their cards, but didn’t because they wanted the cash on hand in case they lost their job or had another emergency.  I guess they didn’t realize they could build back up their “emergency” fund pretty fast if they weren’t paying that monthly credit card bill!

Another amazing part was the interview with Ben Stein.  Just seeing how full his wallet was of credit cards was absolutely amazing (it had to have been 4-5″ thick).  Of course, he also said he’s never paid a finance charge on any of them and that the credit card companies hate him.

I’ve you’ve got some time some evening, I’d suggest taking to the time to watch this video.

Getting out of debt is a good thing.  You can run all the numbers you want and find thousands of reasons having less debt is a good thing.  Having less debt helps you save for retirement, save for a child’s education, and maybe even afford a nicer home.

However, even though we are talking about money, numbers and reason is rarely the biggest motivator to drive people to get out of debt.  Take me for example, I LOVE numbers, I’m great at math and have spent several years of my life doing financial analysis for a living.  Yet, I’m am in a huge hole of debt. 

Why?

Personal motivation.  I didn’t have the motivation to change anything.  I always manged in the past and figured there would always be a higher paying job around the corner.

Now, things have changed.  I have the motivation and I’m making progress towards paying down that mountain.  My motivation did not come from analytical reasoning, but from an emotional decision.  You see, though my brother and Free Money Finance would both agree that your career is your greatest asset, I personally disagree.

Even my own brother has called me a job hopper and said he wouldn’t hire me if he saw my resume float across his desk.  That’s okay by me.  I am currently enjoying work as an hourly contractor.  Though some would say there is little security in that, I say there is just as little security as an employee.  In Missouri at least, there is no law requiring severance or no employment contracts that will entitle you to your pay regardless of the situation.  Either party can terminate employment for no reason whatsoever at any time.

That being said, part of the reason I enjoy contracting is that I feel more independent.  Though I am not self-employed currently, that is the true goal for me.  It is that goal that was my real motivation to make the changes necessary to get out of debt.  What I’m discovering is that I can really live on a lot less money than I make now.  So much of it goes towards debts that if it wasn’t there, I would have a lot more freedom to work for myself and do something I enjoy.  I’m not sure what that thing is yet, but it’s out there.  I’ve got a few years while we pay down the debt to decide on my next step though.  Here are a few of the things I’ve always wanted to do someday, but don’t pay enough money for my family to survive at the moment:

• Go back to school for a PhD in Economics
• Get certified as  PGA Teaching Professional
• Make custom furniture
• Own a small, local retail store
• Become a landlord
• Remodel Old Houses

These are all things I like to think about or do in my spare time.  Getting started in many of these is very difficult with little or no pay to speak of.  What they all have in common is often a much more flexible schedule to allow more time for myself and my family.  Yes, you can still make money with some of these and spend hours and hours working, I won’t disagree with that.  But with little to no debt, the motivation to make a large income to keep your head above water is gone.

That’s why I’m getting out of debt.  Mine was an emotional decision. 

How about my handful of readers out there? 

What is you motivation to get out of debt? 

What do you want from life when you get there?

This is the third and last post in my International Perspective series.  Each of these was based on a single lunch time conversation at work with co-workers from Brazil and India.  The other posts can be found here:

International Perspective - NAFTA

International Perspective - Consumerism

Our conversation during lunch eventually drifted into the debt of most US consumers.  My colleague from Brazil made the comment, “If you wanted to buy a house back home, you saved and BOUGHT the house, it was paid for.  The same thing with a car, if you needed one you BOUGHT it and it was paid for.”  There is very little access to debt, credit cards, mortgages, etc. in a large part of the world.

My friend from India said something very similar.  “There are very few scholarships to college and no government money to help pay for it.  Your parents sacrifice and pay for your college.  Though they don’t ask, your first thought after graduating with your degree is how fast you can pay them back for your college.”  He said something even more interesting about buying a car or a house, “If you have to borrow money to buy a car or house, you first think about how quickly you can pay off that money.”

Isn’t that amazing?!  They first think about how quickly they can pay off debt, while us greedy Americans typically first thinking about how small we can get the monthly payments!  What a difference in philosophy.  That really stunned me to hear that when I realized what he was saying.  How different would the US economic situation be if consumers were more concerned about how quickly they could pay off debt rather than how long they can stretch it out to keep their payments low?

This is part II of my series on International Perspective.  These are based off of a single 1 hour lunch I had with co-workers who were from Brazil and India.  You can find Part I at the link below:

International Perspective - NAFTA

Our lunch conversation eventually drifted into consumerism here in the US.  Isn’t it strange how so many of us could live on so little money while in college, and can’t seem to get by on our large paychecks later on in life?  To the same token, it’s a sad testament that someone is not able to get by on a minimum wage job in this country while much of the world is able to survive quite well on pay lower than that.  What makes the difference?

The consensus between all 3 of us that day at lunch was the consumer mentality of people in the US.  When you get “old enough” (typically out of HS or College) you are expected to have your own car, your own job and your own place to live.  Add to that the expectations of cable tv, cells phones and the like and the “basic necessities” make up a large chunk of income.

Yet, it many foreign countries, extended families live together for a much longer period of time.  Our “necessities” are either not available at all or are luxury items.  Because of our own consumerism, we have set expectations of peoples possessions that are pushing them to live beyond their own means.  We are making our poor poorer not because they don’t make enough money to survive, but because they don’t make enough money to buy the things that are required of upstanding citizens.

My family has 1 car and no cable or satellite TV.  I can’t tell you the number of times I’ve gotten strange looks or an, “Oh” when I mention that to people.  They truly don’t get that it’s even an option for people.  You HAVE to have a car for each person in the house and you HAVE to have cable tv.  How many conversations at your workplace are about some show that was on a cable channel last night?  I bet it’s a lot more than conversations about that great book I read last week!

The sadness of this all is that our desire to keep up with others and give appearances of being middle class have lead many to buy things they don’t need and can’t afford.  Our financial industry has made that possible with easy credit through credit cards and home equity loans.  We are SUPPOSED to have lots of stuff and with that we are also SUPPOSED to have lots of debt, evidently.  Which leads us straight into tomorrows final discussion on the international perspective of debt.  Swing back in and see what others around the world have to say.

I have an update to make to our 2008 Goals. 

Originally, my goal was to get our Credit Card Debt below $30,000.  We currently have about $54,000.  That number was assuming we would be moving $16k over to a HELOC of some sort.

Well, it seems that we will NOT be doing that and instead be moving it to a low interest credit card in the next couple of months.  Now, rather than just raising the goal number by $16k, I have some more math to do here.  When we had planned on the HELOC, we also planned on having at least $4k to pay off of the $16k when we did the switch.  We’ll still have that money and plan to pay it off of debt as well.

Also, because the credit card interest will be lower than a HELOC, and the minimum payment will be higher, we will be paying off more principle each month. 

So, with all that said, I’m going to revise my Credit Card balance goal to $40,000 for the year.  By doing that, I’ve added $16k to the starting number, but only increase the goal by $10k.  That means we will be paying off more debt than we had planned on this year and keep us on track for being out of debt in 5 years.

Well, I don’t know about you, but I’m getting a little tired about all the worries of how the stock market is doing.  People get so obsessed it seems when the market goes through big swings.  They don’t realize it is not affecting their retirement because it’s only short term changes.  Still, people tend to spend more money when the market is going up and they get worried and sell off their investments when the market is going down.  Just doesn’t make sense to me.  I just wish I had some more money to put into some index funds about now, I’m sure they will be great investments for when I retire in 35 years!

That being said, I was a little bored with all the doomsayer news stories and took some time to review our financial status so far this month.  Already I see we are up quite a bit on our cash account.  That’s good news considering I have another paycheck from both my regular and part-time job coming at the end of the month! 

So far we are over budget already in one category… but it’s okay, it’s the budget for debt payments.  We are under budget and under the pace for the budget in all the other areas, so we are pretty safe with putting a little extra towards the debt.

I know our net worth will look a little screwy next month thanks to the closing costs rolled into the new mortgage (including new escrows and thing we should get refunded next month), but despite that, the rest of our debt reduction progress looks pretty good.

The wife and I have been talking and debating still what to do when we roll the debt from our AC out of the current credit card.  We financed it last year with a $0 payments 0% interest for a year.  We’ve tossed around the idea of a HELOC or HEL to keep the payments down and focus on our major credit card / personal line of credit.  We do have a credit card with a $0 balance an enough credit limit we could transfer it over.  Our main concern was the 3% minimum monthly payment.  However, looking at our budget, the starting payment would only put us like $20 over our monthly budget for debt payments.  At 5.9%, that seems like a better deal than a HELOC and lets us safely keep the equity in the house.  So, we’ll probably talk with the credit card company soon about balance transfer offers to see if we can get a no cost transfer to move that balance maybe in March or April.

Can you believe how far into January it is already!

I got a kick out of this recent article over at Kiplinger’s:  The Cure For Your Debt Hangover.  The article, of course, it timed to the receipt of the dreaded post-Christmas bills that so many people are receiving about now.  The author, Erin Burt, gives 4 important steps to take care of the debt problem.  While the article is focused on holiday debt, the process is great for getting out of any kind of debt.  Here are some of Erin’s suggestions.

1. Restraint- Yeah!  It’s so great to see this as number one on her list.  We all know that spending less than you make is the first step to getting out of debt.  She gives 2 categories of problems here.  The first is “The Needy-Bugger Virus”.  This is those people who think the NEED that $4 latte and new stereo system.  The other is “The Big-Shot-Itis”.  Though very similar, these people are more concerned about appearances to others with houses, cars, etc. to keep up with the Jones’.
2. Strike a Deal -  Of course, asking for lower rates, or better deals on your debt is always worth a shot.  I’m probably not diligent enough about this to be honest.  I’ll need to be sure and investigate finding better deals to help accelerate our debt repayment this year.
3. Boost Your Income - I’ve done a great job of this in the past, and teaching on the side helps out as well.  My skill at this is one of the things that have kept us afloat the last several years when we should have been working more on #1.
4. Get Professional Help - I don’t think we are ready for this yet.  If we have too difficult a time sticking to our plan this year we’ll have to consider it.  But for now, we’ll work on what we’re doing.

All great pieces of advice from what I know (which isn’t always a lot).  I’m finding that we can stick to #1 pretty good when we don’t have money.  It always amazed me how we managed to not spend money when we didn’t have it in our bank account. 

Yet another reason why I’m putting only our “allowance” money in our bank account.  Bill money and savings money is going elsewhere so we avoid spending it!

We got our money from the closing on the home refinance earlier this week.  I’ll be moving that into our savings account shortly.  I’ll also be making my “mortgage payment” to the savings account next month as well. 

In the mean time, I’m going to be applying for either a HELOC or HEL in order to pay off an outstanding credit card that has $16k from adding our central air last year.  It has to be paid off by mid-May in order to avoid finance charges.  I’ll figure out which method I want to use depending on the rate and terms offered by the bank.

 My question is about the money I’ll have set aside in savings.  We’ll have an extra $4k-5k available by that point and I’m wondering if I should use it to pay down the HELOC or HEL at the start, or use it to pay off a chunk on our personal line of credit (currently about $37k at 10.99%).  We could afford the total payments either way. 

On one hand, we could keep more equity in our house which is a good thing in this housing market.  On the other, I REALLY want to get our consumer credit paid off.  I’m torn.  What would you do?