The Moment of Change

I think my aha moment was when I realized that debtkid still has way more debt than I do but he has substantial savings. I think this is mentioned in the post about his mom. He has $177,266 in debt but on the other hand he has $59,130 in savings. If that were me last week, I’d have put at least $50k towards my debt. Think of all the interest that payment would save me! However, reading that made me realize that I had put myself in a precarious situation. Yes my debt is dropping quickly, but if I lost my source of income, not only would I not be able to pay my day to day expenses (like rent!) but I also would not be able to meet my credit card payment for the next month! Just because I pay much higher than my minimum balance and have been for so long does not give me extra time to pay. On the other hand, if DK’s income for some bizarre reason disappeared, I think he’d be able to live for another 2-5 months and meet his debt obligations.

What this all means

I am dramatically slowing down my debt payments and I’m going to focus on building up my savings. I don’t feel comfortable with only $1k in savings. I’m also going to put more money towards doing things i enjoy now such as travel. Yes, I will pay more in interest but I will consider that extra amount the price of having fun and gaining security. First things first, I’m going to sign up for that photography class I’ve been putting off for almost 5months.

What are you thoughts?

I just don’t get it!

I would have to say that I have a hard time understanding some financial terms and concepts. I do though try to find ways to help myself to learn about what I do not understand. One site that I have found to be extremely helpful for me is feedthepig.org.

Weekly tips…

There is a weekly newsletter that you can sign up for that is free. It is set up so there is one topic per week and they give you different tips that pertain to that topic. I am someone who loves getting advice and helpful tips so I think the newsletter is the greatest.

Check it out!

While exploring the site you can look up a plethora of articles on many different financial topics. I have read a few of the articles and even though some don’t necessarily pertain to my life at this moment they will at some point and it has helped me to put things for the future into perspective. They also have different calculator and worksheets as well.

One site fits all!

I think this site is a good resource for everyone no matter what your financial understanding is. I am sure someone that is very financially savvy would be able to find a few interesting things. For someone like me that wants to educate themselves on different areas of finance this is a wonderful tool.

Best regards,

Maeghen

1. Sell Unwanted Electronics

I don’t know how many people know this but I just found out – you can sell your unwanted electronics to best buy. You just put in the model number and condition of the item and they give you an estimate of what they can pay you. They pay you with a best buy gift card which is not quite the same as cash but still useful. They buy everything from old phones to laptops and GPS systems to cameras and car audio. It is definitely worth looking into. I know most people have an old phone or dvd player they don’t use anymore.

2. Sell Some Books

To those that live in New York, there is a bookstore called the Strand bookstore. They buy back all books (except textbooks) from you. I have found this to be more lucrative than selling on half.com as there are no commissions to pay anyone.  They pay more for hardbacks than paperback and like the books to be in pretty good condition. I can’t speak for other cities but I’m sure you can find similar places in any major city. On a side note, this is also a pretty good place to get brand new looking books for cheap.

3. Sell (Old, unwanted, too big, too small) Clothes

Moving away from books, you can also make some quick money by selling your clothes. It’s time too get rid of that collection of clothes that you are “waiting” to fit into (some of you ladies know what I mean) or clothes you haven’t worn in the last 5 years. On the east coast we have places like Platos Closet and Beacon’s Closet that buy back clothes. Obviously, the better condition your clothes are in the more money you receive.  I know Plato’s closet is located it numerous states but if it’s not available near you,  you should definitely look for something similar in your area. It’s a great way to clear out your closet and make some money.

4. EBAY

No list would be complete without talking about ebay. The only thing I have against ebay is the listing fees which is basically what you pay to post your items on their site. They are not high but I see how they can deter someone who is not sure if their item would sell. I think the best way to look at it would be to think of it as paying to list something in a newspapers classified section. You wouldn’t expect to do that for free would you? Ebay has so many users that I think it’s worth it. Someone will be interested in you mickey mouse shot glass that you got in 1979.

5. Take Online Surveys

I am putting online surveys last because they take a little more time to do. I belong to a bunch of survey sites; pineconeresearch, suveyspot and toluna to name a few. Even though the surveys take about 20-30 mins to fill out, I think they are worth it.  I have made about $150 in the last 3 months or so. It’s not an earth shattering amount but for me it’s valuable because I can put that much more against my debt.

(editor’s note: try Cash Crate)

So those are my picks folks. If you have any other ideas you’d like to share, feel free to do it in the comments section. Also, if you’ve had any experience with anything on my list, I’d like to hear about it – especially if you know of places like the Strand and Plato’s closet in your area.

Starbucks probably wants to kill them.

But “giving up coffee” to get out out of debt is about as cliche as you can get. And if it were as easy as just giving up the Latte, wouldn’t everyone be out of debt?

The reality is that it takes more than just a single small sacrifice.

I’ve written about this before, but it really takes a complete mindset change to really “get it”.

I believe to be successful in getting out of debt it has to be something that you feel in every part of your body. You have to want it so badly to actually make the necessary changes to achieve it.

You might have too:

• Not see your friends as often (because their always going out)
• Get a second job.
• Sell everything you can
• live in your office.
• Give up coffee, eating out, netflix, movie rentals, your car, and more.

Yeah, you get the idea.

The idea of “getting out of debt” sounds very simple. You spend less. You try and earn more. And you pay off what you owe.

The reality is much more difficult.

Image from: The Vintage Moth, old pill advertisement

You can keep your 12 steps.

I’m addicted to becoming debt free, and that’s OK.

I woke up at 2:30 am this morning realizing that I’d just made a deposit, which meant I could pay the next bill on my “snowball list.” After writing the check, and posting the envelope, I was so energized that I sat down and balanced the checkbook and wrote a half-dozen articles for clients. More productivity than I usually glean from myself in a week (especially for a summertime schedule when my days are spent running kids from one place to another).

The elation I sensed after mailing that check (in my slippers and PJs) was so much that I was sure only drugs could give you that kind of high.

I researched addiction.

Helpguide.org cites a few symptoms of being “addicted.”
Cycles of being unusually “up” and talkative fair enough. I’m so hyped up about getting debt free that my friends and family are tired of hearing about it.
Increased irritability, agitation and anger just ask the kids how I respond to the bathroom light being left on again, or wrecking a pair of school jeans on the playground when they should have been wearing their playclothes?
Unusual calmness, unresponsiveness or looking “spaced out” unusual calmness is my new look. I can’t help but be calm knowing I’m on my way to freedom.
Paranoia and delusions I do think I’ve overcome this, but I’ve suffered from it before. I had a paranoia that the Macy’s sale du jour would never be repeated, and if I liked something, I’d have to buy it right now or I’d never see it again. See “unusual calmness” above. The paranoia has dissipated but I’ll be on the lookout should it appear again.
Temporary psychosis, hallucinations Yes. I’ll admit to regular daydreams and even night dreams about opening that final bill and seeing $68 due instead of $15,000. And writing the check for the balance of my credit card debt. And then doing the happy dance. In the street.

-Highest interest first—Suze Orman
-Smallest payment first—My financial planner from USAA
-Debt Snowball (smallest balance to largest balance)—Dave Ramsey
-Secured debt first, unsecured later—source unknown

I must confess, I’ve tried all of these methods in the past ten years, and the only one that has worked for me is the Debt Snowball. Why?

It’s all psychological.

I can do math as good as the next guy, and I know it doesn’t make sense to leave a credit card balance out there and pay off a subsidized student loan, but I also know myself and I don’t like to fight loosing battles.

Progress for me can’t be measured in tiny bites. I’ve said it before; being in debt is like being eaten alive by a duck. One doesn’t notice one little bite—or maybe even two. Before long though, it’s all out of hand.

For me to feel progress, I’ve got to take big whopping steps—burning the village steps—to feel like I’m making progress.

Listing my debts smallest to largest and working up the list feels good. The list lives by my computer on an index card and gets updated monthly. I cross off debts. I ring a bell, or twitter or have the kids do a happy dance—whatever strikes my fancy. We put payoff certificates on the fridge and celebrate them like an honor roll report card. It’s mom and dad’s report card for doing well. We can now officially take off the dunce caps we’ve been wearing (they respectively read “Visa” and “Master Card”).

It feels good know I’m becoming debt free.

This year, we received a very large tax refund due to our claiming the adoption tax credit. The intention of this was to pay off the plane tickets we’d purchased to adopt our daughter (still on a Master Card at 8%). Instead, we used it and paid off two smaller loans—an adoption loan of $4,000 and the remaining $2,000 on a student loan. The rest was applied to other small debts.

I know I could have made a serious dent in the credit card debt, but instead, we received two certificates of payoff, and whacked off half of our “smallest to largest” list—even if it is just half in length, not half the outstanding balance.

I think I know why it’s called the snowball.

Like a snowball rolling down hill, claiming more snow as it rolls, our cashflow has improved with each of these payoffs—substantially! Each of those little debts we paid off had a pretty high monthly payment. That $15,000 credit card balance has a monthly payment of about $42, but the student loan was $110, and the adoption loan was $150 and there were some other small loans in the $100/mo range. Having all of those paid off frees up several hundred dollars per month to apply towards our bigger debts.

Finally, we see progress on those bigger debts. Stretching and straining to send an extra $200 or $300 per month was miserable, but now we automatically send $200 or $300, and stretch or strain a little bit and send another $200 to be dropping our balance measurably each month. That feels good.

So good in fact, that it’s becoming addictive.

Now, each time my husband takes on some overtime hours, or I take on an extra project, the money we earn is earmarked for those bigger debts. The whole family is seeing progress and the excitement has caught. We’re getting “gazelle intense” about busting our debt….and it is fun.

Roth IRA – Gone!

Yesterday I called my Roth IRA company and withdrew the entire account, ~$4k. Over the past year and a half I’ve invested close to $5000 into the account. Since I’m only withdrawing my principal, there are no penalties or taxes on this distribution. It’s not the “right” thing to do but, again, I’m looking for a fresh start.

Investment Account – Next!

I plan on liquidating my investment account sometime next week as well. This will give me another $4k or so of cold hard cash to put towards. My investment account has been around since I was a child and I believe it has served its purpose for now (down payment on my first apartment). The leftover money since then has been mostly stagnant with the current market situation. I’ll be selling these funds as a long term loss, so I’ll get back some of that in my tax refund next year.

One Last Balance Transfer – Last Step!

My Citi credit card which currently has a balance of just under $14k at 3.99% for the life of the loan has offered me another balance transfer at 1.99% until July 2010. I plan on taking out $4k with this offer. Since credit card payments pay the lowest rate first, my 3.99% balance will not be paid down but I’m ok with that considering the rate. The key here will be to repay the 1.99% balance before it resets to a higher rate. At that point my payments would then go towards the 3.99% balance and I’d be paying a high interest rate on the balance of the original $4k loan. I don’t see this as a problem though since I’ll be making monthly payments of at least $500 towards this card since it will be my only card with a balance at this point.

Results

These transactions will give me approximately $12k, just about the balance I owe on my credit card which is about to reset from 0% to 15.99%. I will not pay off my 401k loan just yet but these moves will still leave me with ~$8k in my savings account. Good enough for an emergency, or in case I get laid off and need to pay back my 401k loan immediately. I’m still up in the air about exactly when to payoff the 401k loan. For now, I’ll wait on that decision to sometime early next year when I will owe less and have some extra savings buffer. I’ll also have a nice tax refund which will help too.

Overall, my net worth will not change much with these decisions. Again, I’m looking to consolidate for ease and peace of mind to pay off my debts as quickly as possible. Once my debts are gone by the end of next year I’ll have a new investment plan in place to start over again, but this time debt free!

Artwork Courtesy TheVintageMoth

My last post was about how to create a budget and discover, retrospectively, how you’ve spent your resources.

With that information in hand, it’s time to triage and stop the bleeding and with any luck, heal the wound.

If you didn’t read and follow the instructions in my “how to make a budget” post–stop. Do not pass go. Do not borrow $200. Return, and follow the instructions STAT.

Some of us have a bleeder budget, and some of us are hemorrhaging. When I was laid off in December of 2008, I had to stop a hemorrhage (1/2 of household income—customarily spent as soon as it arrived).

Step 1. Collect your data!

Get out your budget and 90 days of spending history (see earlier instructions on how to create this).

Pile up your last 90 days of fixed bills.

Step 2. Take a day off

Keep reading, I’m not crazy. This is worth doing. You wouldn’t want your ER physician fixing a bleeding artery after a long day of surfing in the sun, or working overtime in the IT department after a mainframe crash. If it isn’t your job to get your finances in order—whose is it?

Besides, you’ll want to use business hours to your advantage.
There’s two main steps to this process. First is triage, second is treatment.

Triage

Take a look at those past 90 days and see how you spent your money. I surprised to learn my family spent $1500 dining out one month. (Holy #)*%)*#!) We’ve got two little kids—we don’t even go to places that don’t have mascots, so it’s not like we had one or two great dinners out. Food is our black hole—but yours might be auto expenses, or shopping or bookstores.

Take your grocery receipts (or the offending receipts from the black hole in your budget) and figure out a way to eliminate the eight most expensive items on your list. Beer, meat, laundry detergent…etc. We eat at least one vegetarian dinner per week, and I started making my own laundry detergent (it costs me $2.90 per year now vs $17/mo) and we’ve cut back on our alcohol consumption. We cut our food budget from $170 a week in March, to $100 a week now.

A  few more quick ways to cut the food budget
1. Learn to cook. It’s worth it.
2. Buy in bulk. We buy rice 50 lbs at a time, and pasta, oats, beans etc 5-10 lbs at a time.
3. Buy fruits and vegetables in season and store them (freeze, can, etc).
4. Check out liquidators—I found some yummy (albeit expired) pasta for 1/5 the normal cost at a liquidator. I checked out the realistic shelf life at www.stilltasty.com, it was expired, but safe to eat for years to come.
5. Find a few meals you can automate. I know that a breakfast of steel-cut oats for the whole family costs about $0.60. We eat that frequently because everyone likes it. The budget has noticed!

Treatment

Call every single “vendor” to your household. Seriously. Ask for a lower fee, a better rate, or a promotional bundle. Make them make you a deal. Here’s a few of mine, and how I managed them:
1. Call cable/mobile phone/Internet/phone provider. I asked for a smaller package. Comcast offered to “rebundle” my existing package into the (same) latest promotional bundle at a fee $60 lower per month. “Can you make that stick for two years?” I asked. “Yes!” SOLD.
2. Call the electric company—what can I do to reduce my costs? They suggested a energy consultation (free) and I found out I’m loosing energy with insufficient weather-stripping in my front door. They also sent me free water saving shower heads for my bathrooms—and the plumbing tape and everything to install them (cool!).
3. Call the pre-school, day care, whatever. I work at home, but my toddler goes to pre-school. I worked out a half-day arrangement so she’ll come home every day and have her nap at home, instead of at school, because this puts her down to part-time status, it saves me $100 a week.
4. Call your insurance company and ask them what they can do. We dropped the gap coverage on our two paid-off, high-mileage cars, and now just carry replacement cost insurance. We also cleaned out the garage and started parking one inside (saves us $ on our car insurance). Finally, we increased our deductibles to $1000 (from $200). This gets us a much better auto insurance rate. Better yet—shop around for a new rate BEFORE you start negotiating with your current company!
5. Call your HR department and figure out if your tax withholding is still the right amount. Maybe you can get some of that back now instead of next year, by withholding correctly?
6. Call your credit card companies and student loan companies and ask for a lower rate. And put a note on your calendar to call them in three months and ask again. This almost always works for me.

Anyone who bills you needs to get a phone call to see if you can find a way to pay them less. If you can’t think of what to say just call and ask “hey, I’m trimming my budget around here and looking for a better deal. What can you do to help me out?” They want to keep you as a customer, and they don’t want you to stop paying bills because you’re stretched. They’ll try to work with you, and they seldom laugh or hang up.

Have fun and good luck. When you’re done with this education, you’ll be able to call yourself a “budget doctor” and you won’t have any student loans to show for it. Now that’s healing!

First Pay Others THEN Pay Yourself.

I admit it. I bought into the hype. Why have $2000 sitting in a checking or savings account earning $0.10 a month when you have $20,000 worth of debt charging you $100 (or more) in interest every month. It just didn’t make sense to me.  At this time, I basically had a zero based budget. Every single penny was accounted for and if I ever underspent in any category, that extra went straight to my debt. I felt focused and in control. That is, until I got a $600 gas bill.  I panicked. I didn’t know what to do because my budget for emergencies ($80) that seemed extravagant was merely a pittance. Because I had been throwing the extra I had at the end of each month at my debt, I had no extra money whatsoever. At this point, I changed my tune.

First Pay Yourself THEN Pay Others

The above incident plus some other factors made me see the importance of having money that was “just sitting around.” I realized at this point that if I lost my job (not so far fetched in this economy) I would not be able to pay my next months rent. I realized also that I had forgotten to put my car insurance in my budget (I used to pay it off in one month or 2 so I forgot about it) and it was about to be renewed. I’m not sure how insurance works for everyone but I have to cough up 3 months worth in the first month (then I get the last 2 month payment free). I didn’t have that money. I thought about things and decided that my debt was not going to be paid off in a matter of months. It was too optimistic and naive of me to believe I could live so frugally and hand to mouth for 3-5 years. I decided that the little I would save in interest by paying my debt off faster was not worth the stress. At this point, I felt that being debt free in 4 years would feel the same as being debt free in 4.5 years. So I reworked my budget. I reduced how much I paid to my debt and increased my savings. I really wanted to have at least a months rent + expenses saved up.

Somewhere in Between

Today, I fall a little bit in the middle. I found that when I saved a lot for emergencies, so many things suddenly became “emergencies” and I would dip into my savings for it. They were not large amounts but it’s silly to divert money from paying down debt in order to save and then use that money to fill your tank. If I didn’t have that money available in savings, I just would not have gone wherever it was that I “needed” to go or I’d have found someone with a car. Nowadays I’m working towards having 1-2 months expenses and rent saved up. I know most advisors advocate 6 months living expenses saved up but that just does not work in my situation.  It won’t make sense for me to have $20,000 sitting in my bank account at my debt level.  The way I work it, whenever my savings grow significantly over 2 months expenses, I put that excess towards my debt. That way I’ve been equipped to handle emergencies (believe my you will have some) but I also am working on my debt. It’s obviously slowed down my debt payment progress but I feel more secure. You have to just find the balance that works for you.

Everyone reading this should go and ask themselves this question. “If I lost my job today, would I be ok for at least a month?” If the answer is no, you should really start contributing to an emergency fund – even if it means paying the minimum on your credit cards for a couple of months. Believe me, it’s worth it.

My introduction post dealt mainly with how I accrued my debt. To see the whole picture you need to see my savings and investments as well. I made some very stupid mistakes which caused me to get into debt but I also made some smart moves in saving for my retirement. Maybe they were too smart in that I put so much into investments that I didn’t have enough to live off of. Of course without having a budget I never even noticed it was happening until it was too late.

My finances are the following:

From “Too Good” back to “Good”

You can see I have a decent amount of money invested and saved for retirement. My current thinking the past few weeks has been that I was doing the right thing by saving for the long term but also that I was being “too good” in doing that. I have a lot of debt that needs to be paid off so I’ve made the following changes to increase my cash flow until the debt is gone. My changes from “too good” back to “good”:

Now I can attack my debt more aggressively!

All together this has increased my cash flow by $85/wk ($368/month!) but I’m still investing in my retirement. I lowered my 401k contribution to 6% because that is the maximum on which my company will match (I will not turn down free money!). If I decide to pay off my 401k loan now that will be another $49.95/wk ($216/month) to put towards conquering my debt. But it will also mean I cannot pay down CC#2 which will soon reset to 15.99%.

Some may not agree with these moves but I’m at the point where I want to pay off my debt as soon as possible. These changes will allow me to aggressively attack the debt but still save something for retirement. I’ve also been thinking about attacking my debt by what I’m calling the “clean slate” approach. I’ll talk about this more in my next article!