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02
Jul

Debt vs. Retirement - Perspective From A Young Person

By David 1 Comment
Categories: Attitude Adjustment, Debt Repayment and Investments

Yesterday, Trent from The Simple Dollar posted a rebuttal to a comment stating that sometimes it is more appropriate to invest than pay off debt. I mostly agree. After all, if your monthly payments are $200 per month and you have $300 extra, it can decrease your debt repayment time by many years; years in which you can invest $500 or more instead of the $300. Even if the percentages are equal (return vs. debt), it at least makes psychological sense to pay off debts before investing.

However, I know in my case, I have a retirement account that I contribute to faithfully, even though I have a ton of debt. I suspect that most younger people are in a similar situation; a ton of credit card debt, about $200-300 extra per month that can be invested, and an immense hope that they’re a more savvy investor than others. Even though that sounds like trouble from the start, I will give the reasons I choose to invest and why it makes sense in a long-term perspective.

1. Employer Matching

This one is way too overlooked in calculations I see online. A friend of mine refused to start a retirement account because he “had plenty of time to worry about that”, “Social Security would help him out”, and “that’s 5% I can use to pay off my debts”. However, what he did not calculate is employer matching at 3% (as well as the fact that Social Security will never last long enough for current twenty-somethings to benefit). While I could use my contributions to pay off my debt a little faster, the fact it has employer matching and it’s in there working for me right now is literally the difference in $300,000 when I retire compared to using that money to pay off debts right now.

2.  Fixed Limits

Benefits of Roth IRA’s are well known. However, when 2007 is over and you only contributed $2,000 to your IRA, that’s $2,000 you can never put in later. In most jobs, at least in my field, salary increases over time at a rate higher than inflation. This means that my current $8,000 credit card debt may be a big chunk of my current salary, but drawn out over a decade, it will be a pretty minimal amount to what I should be making then. However, a good Roth IRA can also easily beat inflation, meaning that in looking at VALUE of your debt versus the investment, you wind up with more money at the end, taking long term inflation and salary increase into account. Missing out on maximum contributions at such an early age winds up making the difference of hundreds of thousands of dollars at retirement.

3. Learning Experience

I know for me, I read about investing all during high school, and played with a few hundred bucks to test the waters. I also lost it all (mainly due to fees). The point is, it’s difficult to learn proper investing without having your money wrapped up in it. Since opening a retirement account, I have learned how mutual funds work, how to direct your financial adviser to wait longer between buys to save on fees, how to calculate return on investment, and tons of basics about investing that books can’t really teach you. When I finally open an IRA, I will learn more about the stock market and how to predict when things are going bad, how to read the latest news on the company, how to pick long term and short term winners based on the current state of the union, etc. The earlier you start, the more wisdom you gain along the way. Once you wait a year, you will never get that year back. My aforementioned friend is just now opening a retirement account. I’m three years ahead of him in learning how to manage those funds. I will always be three years ahead of him in investing, save for some lucky break. Time is money, and starting early is always a good idea. I only wish I would have started seriously around junior high.

Basically, there are many good reasons a young person should start investing even if he or she owes a lot of debt. It heavily depends on the person’s will-power. Do they have enough will to both invest properly and pay off more than the minimum debt payments (for those debts that are higher APR than their current investment return)? Can they make the proper calculations for their specific situation and see how it plays out in the long run? Is the debt causing mental stress that requires it to be payed off sooner, at emotional expense otherwise?

Personally, I have not opened a Roth IRA and will not until my major debts are payed off. As soon as the high interest credit card debt is gone, I will fund that IRA to the limit, as time is indeed money. Right now, however, I do have an employer-matching retirement plan gaining considerable snowball effect, and calculating the difference that makes in my nest egg, I will never regret that decision. Yes, it put a bit extra time on my debt repayment, but it’s a small price to pay for the benefits that investing early has given me, both monetarily and education-wise. I have run the calculations and my Roth can wait until 2009 with not too much loss on my future retirement, at least compared to the anxiety the debt is causing me right now. Nor would I be able to fund it fully with my current monthly payments.

The true answer is never clear-cut, and I’ve come to find it’s almost never purely mathematical. I think the benefits to investing at an early age easily transcends the obvious mathematical benefit to early debt repayment. For those of us who expect drastic salary increases due to years of experience and getting a degree, it may make more sense to not worry too much about drastic debt repayment measures. For me, it’s a challenge and that forces me to take some frugal steps. But I think for most people there is a happy medium in which you can both repay debt and invest intelligently.

30
Jun

June Roundup

By David 0 Comments
Categories: General and Monthly Roundup

June has come and gone, and it’s been an exciting month, a month of experimentation. For the first time, I’ve kept good track of all my money and where it has gone. I have made a solid effort to decrease spending in my major categories. I have kept a budget and stuck to it. Most of all, I’ve explored the areas where I have psychologically been deficient and made an effort to correct those. I think the main problem most people have with finances comes down to problems in mindset. I have made frugality a game. However, I’ve also failed already. I bought a few things that, while useful, I did not need. I didn’t exceed my budget, but that is money I could be using this month to pay off some major debt.

So, let’s look at my current state. I began June with $8,486.40 in credit card debt, and ended with $8,680.16! What?! It really surprised me that since I have made all my payments on time, my balance would be higher. Totally unintuitive. However, I reviewed all my statements, did some math, and determined that there are 4-5 late fees from May that did not post until June’s statement, increasing my balance more than the minimums I payed off. Plus, I made no “extra” payments this month, choosing to get into a better payment routine over making more payments.

However, my biggest goal for June was to pay no bank fees, no overdrafts, no NSF fees. In this goal, I did wonderful, except for May’s credit card late fees seeping through to my balances. I had no overdrafts, even at the expense of digging deep into my pantry to avoid overspending. Not only that, but I have ended the month with $200 in my bank account to put towards July. It is my goal to carry a revolving balance of $500 before I make considerable extra payments to debt, because I need an extra $200 for the first half of the month anyway, and this can double as both a cushion to keep overdraft away, as well as an “extreme emergency” fund. Once I pay off some higher debt, I want to get a legitimate emergency fund going with a few thousand dollars, but until then I just need something in case my car’s water pump goes out, or something.

Overall, I think June was satisfactory, but I admit I was expecting that CC balance to start dropping. It makes me a bit disappointed I didn’t catch the late fees ahead of time. I am happy with my mental progress, as well as making better spending habits. And I am realizing this is going to be difficult work, not as easy as I expected initially.

My goals for July are simple. First and foremost, I am to maintain the lack of overdrafts and avoid all late fees from CCs too. I will be setting up automatic payment plans either with the CC or my bank. I hope to end the month with at least $500 in my account. Anything over that amount will be used in August to pay off more debt. In addition, I have a goal to do at least one or two side jobs for extra money. I will decrease yet again the amount of times I eat out (currently dropped 50%, plan to drop another 50% from last month). And most of all, I will continue to explore the areas in my mind that have a messed up view of money, and try to correct them. To top it off, I will encourage my friends who are also trying to become debt free and help them along the journey. July’s going to be a great month!

21
Jun

Money Myths for Young Graduates

By David 5 Comments
Categories: Attitude Adjustment and General

Looking at other people my age, I consider myself lucky to have already made the failures in finance that I have. While they are starting their first jobs, I have already learned how to function properly in the workplace. While they are only starting to come to terms with how to spend a lot of new income, I have already misspent enough to learn the lesson of budgeting correctly. While they are saying no to a 3% matching retirement plan to slightly increase their monthly budget, I made the calculations long ago to see the benefit of saving for retirement early on. While they are buying huge purchases on credit since they can obviously pay them off with the $36k they are making, well, I wouldn’t be doing this blog if I hadn’t made that mistake already and learned from it.

Don’t get me wrong, I don’t have all the answers either. But watching them go down the same roads I have already travelled gives me the opportunity to alert most of them to decisions I know are definitely bad, and hopefully save them from a pile of debt when they are 30. Knowing other 30 year olds that are worse in debt than myself makes me even happier that I’ve started now. When I am 30, I will be debt free and well on my way to a comfortable retirement.

There is no college course, or high school course, for real money management and personal finance. I find it appalling that most graduates can at least draw a supply-demand curve, yet cannot calculate how much they can be hurt by credit card misuse and calculate amortization tables to see how long it takes to pay off that new TV. Granted, the easiest way to learn is by experience, but I think we can all agree that there is far too much “experience” going on these days. Thanks to the internet, however, people have the opportunity to learn these things ahead of time. If just one young person comes across this blog, or one of the other finance blogs, and decides to be proactive about finance, it’s worth the whole thing. In that spirit, here are some lessons I’ve had to learn the hard way.

1. Money will bring happiness.
It is often said that money does not bring happiness, but I think we secretly believe money will indeed make us happy. At least, we act and spend like it. We look at drunken celebrities and say, “If I had that life I would never act like that,” ignoring the obvious fact that so many celebrities do act that way, meaning it may not be as glamorous as we think. We buy new things and trendy clothes since the companies say that we too can be happy, like the people in the advertisements. Look at them all smiling! They’re not worried about debt and budgets! Also, we think the right car or house or clothes will make other people like us more. The truth is that material goods can make for a more comfortable life, but only the intangible things of life can bring any sense of true happiness. I have seen happy poor people, happy rich people, discouraged poor people, and discouraged rich people. Money clearly plays no role in happiness, only the types of problems that detract from it.

2. Credit is an easy way to get that happiness now.
If you need proof we actually believe money brings happiness, then look straight to the credit industry. I would love to know the ratio of legitimate credit spending to “feel good” purchases; I bet it’s astronomical. In fact, the truth on this one is so twisted that the entire credit industry shouldn’t even exist. People think credit will make for a more comfortable life, when in reality the mounting debts causes more stress, fatigue, and depression than having nothing at all does. Yet the credit card companies insist that yes, you too can have a great life, and oh yeah, they also care about you as a person, and in fact, you happen to be an awesome person! They say you can flash that plastic and make friends. In reality, every time that card goes out of your wallet you’re building a higher wall to imprison you. The creditors are your wardens.

3. It takes a large income increase to make drastic financial changes.
While more income certainly isn’t a bad thing, the reality of personal finance is that time, not income, is the major component of change. I was shocked to see that adding only $40-50 extra per month to my debt cut the entire payoff time almost in half! In the same way, it only takes a little extra money to save each month to retire with an extra million. While doubling my salary would be nice, I think finding an extra $40 in my budget is a little more realistic right now. Yes, you sacrifice a little bit now on the front-end, but the return is always worth it!

4. Rebates, coupons, and sales are great ways to save money!
This is only true if you are buying something you would have bought anyway. Yes, you may have bought a $200 pair of shoes for $20, but you didn’t save $180, you lost $20! I would estimate that about 80% of the time I have seen a friend (or myself) buy something on sale, it was not something I would have bought anyway. Really, in any situation there is a winner and loser, and I can guarantee the stores aren’t losing. Otherwise, they wouldn’t put on sales! Sure, if you can replenish your wardrobe within your budget on sales, great for you! But do not get into the habit of finding deals on things you were not planning to buy anyway!

5. If you’re renting, you’re throwing away money.
I used to believe this as gospel. After all, if I were putting that money into a mortgage, I would own a house earlier, or at least build equity for later. The truth is, if I would have bought a house when I was thinking about it, I would be far much worse off right now. The simple fact is that owning a home costs way more than renting, in terms of both money and stress. It also makes life decisions more difficult to make; it’s no longer just breaking a lease to take a new job, you have to sell a house. If you are certain you can pay the mortgage, and certain you are willing to live there almost a decade, then buying is a smart decision. However, the cost-friendliness of renting an apartment (no unexpected maintenance costs!) almost always wins for young unmarried people, and likely a lot of young married couples too. A home purchase is a serious decision, and should be well calculated out beforehand. And with the market as it is now, it is clear that you are not guaranteed to make money on the sale of your home as the advice has been for a decade now.

6. You can save money by rolling debts into a mortgage or home equity loan.
If you spend $350 on credit card per month, you can indeed save $100 per month by paying them off with a longer loan with smaller interest. However, without calculating it out, you may very well be spending more in the long run by letting the debt ride for 30 years than if you had paid it off at the higher interest rate. If you really need the extra $100 per month (if your financial situation changes or something), it may be an acceptable loss. However, long-term consolidation loans are rarely the great deal they seem in such a situation, unless the interest rate is dirt cheap. A much better way is to negotiate for lower interest rates for the credit cards and try to pay more than the minimums consistently. Drop that magazine subscription if you have to.

7. All credit is bad.
Now, everyone is entitled to their opinion on this, but I personally believe that not all credit is inherently bad. If you have student loans at 3.5%, it is sometimes better to put any extra money into a 4.5% interest savings account and earn a little extra on it. Sometimes, peace of mind is more important and you might want to pay everything off first. Credit, when used wisely, is not always bad. The unfortunate reality is that credit, as used by the majority of people today, is indeed a bad thing. But if you have control of your finances and a stable income, and are paying rent anyway, taking out a mortgage is not a bad thing, as long as you’re purchasing within your means. Be pessimistic about your financial situation whenever credit comes into the picture (i.e. assume you will be making less next year, not more).

8. Having a very detailed budget is necessary to control spending.
I’ve seen a lot of support for this view out there, with hundreds of Quicken categories and microanalyzing every small subcategory of a budget. However, as a mid-twenties guy who procrastinates, I can say with confidence that normal people will give up if the budget is too difficult to handle. I personally use a 5-category budget, and am trying to figure out a way to get it down to four. Realistically, there are only a few things that change from month to month, and only a few things you’re flexible in. Why bother microanalyzing every little thing? It’s much easier to sit down and sort into 5 categories than 50, and takes less time. At first, consistency, not detail, is the key. Work on being consistent with 5 categories first, and then start getting creative with how you analyze. This is why I love systems like Wesabe or hopefully Mint will be, as they allow for tagging expenses to whatever you want (giving you organizational flexibility).

These are just the major lessons I’ve learned thus far. What are some major financial lessons you learned, that you wish you would have been taught in high school?

14
Jun

Whatever It Takes

By David 2 Comments
Categories: Attitude Adjustment

This week has become a real test to whether or not I am serious about this. This is not the first time I have tried to reduce debt, which is why I’m blogging it now; if I fail, it’s in front of many people this time. It is not that public opinion drives me to do things, but at least if I fail this time I can’t do it quietly where nobody sees.

Tuesday my bank account went to about ten bucks, due to the mistake of budgeting monthly and not bi-weekly. Now, I will fix this mistake for the future, but that left me 4 days of having to eat and get gasoline. On ten dollars.

I had enough fuel on Tuesday to get me to work 2 more days. This meant that yesterday, I had to take the bus in. The bus route from home to work (25 miles) has six (6) transfers and takes right under 2 hours to make. Crazy, no? I’d love to ride the bus more often if it didn’t take so much longer (30 mins to drive). That’s Atlanta for you. The bus only costs about $1.50 each way, which is probably half of what I’d pay for gasoline. Also, have you ever went to the bank to withdraw $3.00 in cash? I got some pretty funny looks. It was only slightly embarrassing, but I had the upper hand (it was my money, and those tellers are probably deep in debt doing nothing about it anyway).

Now, this left me $7 to eat on for 6 meals (I had breakfast covered already). One meal was covered via an old (I mean old!) TV dinner in the freezer. It was nasty, and I’ll never do it again, but it sufficed. So, I was left with $1 per meal for 6 meals. This was difficult, but not impossible. I had frozen hamburger patties, chicken broth, mushrooms, and milk in the pantry. I bought some egg noodles and some canned vegetables with my $6, and made an extremely faux beef stroganoff that has last me well. I have two meals left of it, enough for today, until I get paid tomorrow.

But the thing is–I could have, and in the past would have– put food expense on a credit card that wasn’t maxed out. But that one little step is a step backwards, and one I am determined not to make again. I had to endure 3 days of not the greatest food, but it worked out. If I wasn’t motivated before, I am now. I’m not used to having to sacrifice much, and this was a good test, one which I passed. Granted, there is only $0.56 left in my checking account, but I know I can do it from now on, even if it means sacrificing a little. I know I can do whatever it takes.

Note: For those interested in how I made a faux beef stroganoff out of minimal ingredients for cheap, I’ll post a comment about it.

12
Jun

Navigating a Close Call

By David 2 Comments
Categories: Attitude Adjustment and Budgeting

Today I had a close call. Historically, I have had 2-3 overdrafts in that period between my first and second paychecks each month. It has always bothered me because looking at a whole month my budget always added up. I’ve always had a budget, but these fees have pretty much rendered it useless over the past year or so.

The root cause was that a few things are debited that I did not know about. I own about 23 domain names total, for various people and purposes, and when one expires, I get renewal fees debited. I reactivated my World of Warcraft account a few months ago, and that one gets debited the 10th as well. There were a few miscellaneous fees also debited that I was not expecting. The total cost wound up dropping my bank balance to $230, which is only bad because my car payment of $249 is debited the 12th of each month. Looking at my accounts over the weekend, I knew it would overdraft yet again. Even after my post on the joy in frugality, I was getting pretty down; it was a small failure.

I was saved by Quicken, and not the way you may think. I bought Quicken 2007 for Mac a few weeks ago, but hated it. It wasn’t as functional as the Windows version, nor did it have the “Mac Experience” UI. So, I asked for a refund, which luckily was applied this morning before my car payment! No overdraft, even though my balance is cutting it close.

I’ve noticed that in the first two weeks of each month, I bring home $1100 and expenses are around $1300. The second two weeks, my income is the same, but expenses drop to $600 or so. Basically, I am going to have to either change due dates to later in the month, or try to keep $200-300 at the end of each month to float the first two weeks.

So, it was indeed a close call, as a $35 overdraft is $35 I don’t get to put toward my debt at the end of the month. This time, a little bit of good luck and timing kept it from happening, but I have to be more proactive in the future to keep it from happening again.

11
Jun

Mentioned On Carnival of Debt Reduction!

By David 1 Comment
Categories: General

It has only been two weeks or so blogging here, but I’ve already received a great honor! I posted my last article, Finding the Joy in Frugality, to this week’s Carnival of Debt Reduction. Not only was it accepted, but the host, NCN Podcast, gave some excellent comments and additions to it. If you do not have NCN (both the podcast and blog) on your RSS feed reader, it’s a great read/listen, and I highly recommended it.

One thing the host mentioned is something I alluded to, but never explicitly stated. There is something true about sacrifice in the present creating success in the future. Spiritually, this is along the lines of “store up your treasure in heaven” or “he who is last will become first”. Emotionally, this is along the lines of my article. A few years of sacrifice right now will help my marriage in the future, and living below our means then will help my future children begin their lives as well as making our future retirement pain-free. There is simply something true to the notion that temporary sacrifice almost always leads to a better situation years down the road. And that is where the joy comes in, really.

And, to clear one thing up from the podcast, this is indeed a new blog, but I’m a long time blogger. I have a software related blog that I’m starting back up again, as well as a few personal blogs I maintain for family and friends. However, I’ve never really had something great to say or a reason to say it until I decided to take charge of my finances. I do hope my experience, and walking it out online, will be a help to someone along the way.

08
Jun

Finding The Joy In Frugality

By David 11 Comments
Categories: Attitude Adjustment and Debt Repayment

Though it is still quite early in my progress to becoming debt free, it has already been a hectic ride! It has been little more than a week, and already my life has been full of making calls to creditors, finding tools to help me budget and plan, cancelling services I don’t need (or can find a free substitute for), and trying to squeeze every last nickel out of my budget. And yet, completely contrary to my initial assumption about debt management, it is actually fun!

Despite how fun it is to save, I know that to make this a permanent lifestyle change, my attitude about finances has to shift. To some degree, it is about growing up. As a child, I was shown that money brings gratification. I would browse the toy aisle, knowing that just a few small bills was enough to get me the toy I so desperately wanted. As a teenager, I knew that money allowed for me to go on dates, and watch movies, and go on trips. As a college student, money is what got me “good” food, nice road trips, cool electronic equipment, and new books instead of used ones. All throughout my childhood and adolescent years, money was equated with gratification.

The problem is that money alone cannot gratify completely. It’s a hackneyed statement for sure, but it is so true. Nobody would be in such terrible debt if a $500 credit card could truly bring happiness or comfort into our lives. So we spend more and sometimes even justify it by putting legitimate needs on yet even more credit, but the conclusion is always a pile of bills and more stress. The vicious cycle continues, forcing us deeper and deeper into the hole. Now that I’m on the “other side”, or at least in the process of switching to the other side, I see an even greater happiness than acquiring stuff: living without being overshadowed by debt.

I never imagined that trying to live cheaply would be joyful. Nor will I fool myself into thinking it’s all peaches and sunshine from here on out! But even as I have started cooking for myself, selling things on Craigslist, cancelling subscriptions, moving my hosting server to someone cheaper, and logging every penny I let go, I have definitely found a joy in the process! There is such a freedom in being debt-free, even if it means having less right now.

Even though it sounds like an incongruity, it is something that I have heard often from the pulpit. Proverbs 22:7 alone speaks volumes, even if you don’t particularly believe the teachings of Christ (or his church) on money. It’s a simple truth; we can either be lenders or borrowers, and there is no question which is the position of both happiness and success. Today, borrowing is equated to credit, and lending is equated to investments, but the truth still rings clearly.

When I can cook a $6 meal that will last me five nights, that is just awesome. That amounts to about $6-7 per night I am saving by not ordering take-out, and the food tastes good! When it is only halfway through my pay period, my bills are paid, and I still have money in my account, it makes me feel good! Knowing that by doing this, I will pay off my credit in a little over a year, saving me thousands of dollars in interest, I am happy. When I know that by the end of next year, creditors will no longer own me, I am happy. When I find a way to cut my cell phone bill in half, saving me an extra $20 or so per month, that makes me happy. When I turn $300 in overdraft fees into $300 towards credit card balances, that makes me very happy. After being enslaved by my own wallet for so long, every small success makes me feel like I am finally beating my creditors in the game of personal finance.

There is a reason nobody sees debt victims going around hi-fiving each other. When you are buried under a mountain of debt, you feel depressed and feel like hiding it from the world. You look longingly at things like the lottery, or high risk investments, because it feels like something big is the only thing that can fix the situation. The truth is that the little, purposeful improvements are the real fix. Even though it is not easy to change a lifestyle, the joy it gives you (and knowing the joy to be found when it’s over), makes the whole process worth it! And what is life, if we cannot have joy and pass it along to others?

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