Demystifying The Budget - Don’t Be Afraid

Posted on May 10, 2008

I am not sure many other finance terms inspire more fear than the word ‘BUDGET’. Ok, well maybe bankruptcy, foreclosure, and a few others, but you get the point. Some people even will physically squirm when they think about having to adhere to a budget.

I am here to squelch some of those fears and I am not even a fervent budgeter. A budget is nothing more than a plan for your money. That’s it! There isn’t anything magical, nothing scary, no straight jacket, just a plan.

Here is the formal definition :

Budget : a scheme or method of acting, doing, or making developed in advance

That captures what a budget it beautifully. You decide were your money should go before you spend. You can be objective and rational about were you money is going, rather than being ‘forced’ into decisions at the cashier’s counter. You also have a metric to help keep you accountability and give you feedback on how your spending is proceeding. Just, list your all your bills, debt, and goals like savings and divide up your monthly take home pay between the categories however you see fit.

One of the big concerns people have is that it will take the joy out of spending and turn them into a cheap miser, but the only way that will happen is if you let it. You are free to budget however you want. If you want to spend $500 a month on movies and eating out, by all means. I think what most people realize when they start to budget and track their spending is that you have more money than you think, or at least it will feel like you have more money.

Another concern is that you will miss something or not budget enough money. I am hear to tell you that a budget is a continual process. You will make mistakes. You will blow the budget, but with each mistake you will be able to budget better and better. Adjust and tweak is the name of the game.

So don’t be afraid, be willing to try it for a few months. Here is an online budget calculator from Crown Financial that will help provide a little context.

» Filed Under Debt Elimination, Financial Succes, Planning

Sleep Your Way To Better Finances

Posted on April 25, 2008

With the car breaking down on Sunday and still having a ton of work to do for the 149th Carnival of PF, I ended up only getting 8 hours of sleep on Sunday night. I can survive, and ten years ago I wouldn’t have thought twice about it. The thing I noticed for the next 48-72 hours was how much that lack of sleep effected my whole life. I was much more pessimistic, less energetic, less patient, less productive, and grumpy. Since I have been getting fairly consistent sleep for about two years, I didn’t realize how good I felt. I have even felt more energetic and rested since I went mostly vegetarian and have been eating healthier. When we constantly deprive ourselves of sleep we tend to acclimate to limitations on how we feel, how we act, and how much we can get done. Changes, both positive and negative, take a while to show themselves. During that time we easily forget how we feel until we experience something different sometime down the road. Those differences can have a huge impact on every area of our lives, espcially our finances. Below is a list of ways that our finances can be directly affected by lack of sleep:

Increased food costs. When we are tired we tend to eat out a lot more or by more expensive pre -packaged food.
Increased risk of accidents and sickness. This includes driving and normal around the house type injuries. These types of setbacks can cost money for medical services and oppurtunity cost at work and other endeavors.
Lower self control. The lack of control can lead to increased extraneous spending and debt.
Lack of energy and productivity. This means no energy to sell stuff on eBay or Amazon or to invest in other extra income tasks, perform well at work, or invest in budgeting and financial planning and learning.
Lose of creativity and intellectual prowess. Have you been stuck on how to solve a money problem? Well, research shows you really could find the answer in your sleep.
Grumpiness and impatience with others. This means less communication and teamwork in a marriage or with people who can keep you accountable. It means less satisfying relationship which will directly effect happiness and ultimately your wallet.
Pessimism and depression. In just a few days, I saw how quickly my outlook was effected in negative ways. Getting out of debt and having financial discipline isn’t easy and you need all the help you can muster.

So next time that you want to stay up late to watch some movie you have seen 5 times already, play a Wii game, or spend some not so productive time on the internet, remember what it might cost you. Some of you may be thinking that it doesn’t matter how much sleep you get because you feel about the same no matter what. I will tell you that I used to feel the same way, until with the Rockette’s help, I was able to consistently go to bed and wake up at similar times for an extended period(months). I didn’t realize how good I had been feeling, until I didn’t get enough sleep and felt like my old self again. If you are getting around 8 hours of sleep consistently and you still feel bad, it might be worth having some sleep tests done to make sure there aren’t any apnea or other sleep issues.

There is plenty of research on the benefits of sleep, but I don’t think we even need to go there. In my experience a little experimentation and anecdotal evidence will give us all the ‘research’ we need. Solve your sleep problems and your finances will most likely show a marked improvement.

» Filed Under Careers, Debt Elimination, Happiness, Health, Marriage, Spending

Debt Is The Symptom - Fix The Problem

Posted on April 13, 2008

“Symptom - A characteristic sign or indication of the existence of something else” Source

Picture yourself driving down a familiar street. Out of the corner of your eye you see a huge nail in the road. You swerve, but only enough to drive directly over the nail with your tire. Arghhhh! You don’t hear a pop or a hissing, so you continue on. Everything seems fine until two weeks later when you go to leave for work and your tire is flat. It has been long enough that you forget about the nail, so you borrow an air compressor from a friend and fill up the tire. Everything is fine for four weeks, until you notice the flat tire again. You fill it and go on your way. The tire seems to stay inflated long enough that you just keep filling the tire, rather than actually getting the tire fixed. The flat tire is the symptom of a bigger problem that needs to be fixed.

Debt is just like the flat tire. Debt is almost always just the sypmtom of a larger behavior or planning problem. Although the symptom is usually what attracts our attention and keeps of from creating behaviors that will allow us to be financially successful. People all kind of things to get rid of debt: hire a consolidation company, transfer to a HELOC or a 0% credit card, sell houses, sell cars, ask for more loans, marry, and even declare bankruptcy. All of those methods never really address the huge nail in the tire that is causing the leak. If you don’t fix the source of the problem, you most likely won’t stay out of debt long.

It is often tricky to identify the cause of the problem, but it can be a wide range of things. Depression, no budgeting, no planning, lack of self control, retail therapy, coveting, lack of knowledge, and lack of caring can all lead us into debt. The tried and true debt snowball or similar debt reduction methods that require hard work and discipline usually help change our behavior along the way. That is why they work, and that is why playing games to get out of debt usually fails.

Debt is not your problem. You must address your behaviors that got you there.

» Filed Under Debt Elimination, Financial Succes, Psychology of Debt

The Myth Of The Bi-Monthly Mortgage

Posted on April 5, 2008

First things first, making bi-monthly payments on your mortgage WILL cut your mortgage repayment time down significantly. Using bi-monthly payments on a $200,000 mortgage at 6.0% you will have the mortgage paid off 6 years early and save about $50,000 in interest. What happens is that you are paying 26 bi-monthly payments which is the same as 13 monthly payments. In essence you are paying one more monthly payment a year.

If bi-monthly payments can save you a lot of money, then why do I mention them as a myth? Well, most of the programs that banks offer their lenders are really not good financial tools. Bi-monthly programs are really just budgeting tools that you have to pay extra money for. Most of the programs have a $200-300 enrollment fee and then charge a $2-5 dollar fee each payment. The fees go to pay the company that is handling your payments. That’s right, another company other than your lender holds your first payment and then pays the mortgage company when they receive both monthly payments. That is a lot of money for something that most lenders let you do yourself.

Another myth is that you save money because your first payment of the month gets applied early and cuts the amount of interest you have to pay. This isn’t the case. Almost every mortgage lender still has the same monthly amortization schedule whether pay monthly or bi-monthly.

So is it worth it? Probably not. The same outcome can be accomplished on your own, by either paying one extra monthly payment a year or paying an extra 1/12th payment each month. As long you make sure the extra money is going towards principal, you will achieve the same results. I would rather see people become responsible for their own money, rather then letting another company budget for them. Plus when you are in control you get the advantage of skipping the extra payment if times get tight. It should also be noted that most of us aren’t at the point were we should be considering paying extra on a mortgage. That will come once all your other debt is gone, an emergency fund is in place, and retirement accounts are growing.

Get Rich Slowly reminded us of another interesting way to payoff your mortgage early: pay an extra principal payment each month to get rid of your mortgage in half of the time.

» Filed Under Debt Elimination, Psychology of Debt, Real Estate

Don’t Let Your Credit Card Ruin Your Debt Reduction Progress

Posted on February 22, 2008

If you are in debt, you most likely know that access to your credit card is probably what got you there. If you are one of those people, just admit and live with it. It’s ok. Most of us have been there, but the true test is to learn from it.

Many of us get to the point were we are tired of being weighed down by our debt and begin attempting to undo our self inflicted damage. The thing is that most of us try to accomplish this without removing the tool that got us there. Removing the tool doesn’t have to be a forever thing, because the real point of getting out of debt is to change our behavior and our relationship to money. We create true change so that we don’t find ourselves making the same mistakes. In order to change our behavior though, it is often necessary to remove temptation while we regain our strength and perspective.

“But I love my credit card. It’s like a security blanky. What about my reward points? What if I get in a pinch and I need it?”

Sometimes truly important decisions in life require making bold moves. The change in perspective will do wonders for getting out of debt. Instead of riding the roller coasting in and out of debt, it might just change your wealth forever.

If you are really that nervous or don’t think it is necessary, just give it a try. Cut the card up, shred it, whatever. If you really miss the credit card, you can get a new one in a few months. There will always be credit card companies willing to let you use their money to get into debt; it makes them billions not you!

For most I think it will be an eye opening experience, one that might just truly change your life.

» Filed Under Credit Cards, Debt Elimination

Tips To Kickstart Your Debt Reduction

Posted on January 17, 2008

For those of us who have a mountain of debt or a small income, the journey to get out of debt is a long process. Along the way it is easy to become bored, sidetracked, depressed, or even to give up. Keeping on track is not easy, I know from experience. It took us 4 years to destroy our 70k in debt, but I learned a few tricks to help keep us on track. I wanted to share a list of tips that will help you deal with the down times during your debt destruction process.

Find your motivation. I have said before, purpose one of the biggest motivators. It will fuel our passion. What I am talking about here is reflecting deeply on the positive benefits that you will receive when you are out of debt. Things like looking at pictures of your children and thinking about the security and family legacy you want to leave behind. Or maybe allowing yourself envision being able to quit the job that you hate, the stress that will be removed from your life, or the freedom that you will gain. One final trick that helped me focus was to listening to the Dave Ramsey Show. Hearing others struggles and successes and having the zero debt principles reinforced really renewed my focus.
Accountability and friends. Lean on your spouse or friends when you are weak. Hopefully you have relationships that can relate to your struggles and offer support. Many a time during our journey, either the Rockette or I felt week, but the other would carry the burden for a while. If don’t have those type of relationships, it would be worth trying to find some friends to walk through the struggle with you. Blogs and web forums can be an awesome way to connect others on similar journey. Maybe even starting your own blog could inspire you.
Track your progress. By this point in the journey you should have a strong understanding of your finances and how much debt you have left, but sometimes we lose perspective. If you have $15,000 left out of 40k, it is easy to forget that we have already come more than half way and focus on the tough struggles ahead. I found it amazingly cathartic to have my debt listed on a nice big shee to help provide perspective and and satisfaction as we crossed off each debt. Hanging the list on the refrigerator or in your office can also be a great reminder and motivator.
Increase your income. If you haven’t thought about it yet, think of ways to boost your income. Often our debt feels so insurmountable, because we have such a little shovel. Consider delivering pizza or doing some other side jobs for a while to give you an extra push. Remember, this isn’t a long term solution, but a short term answer to help clear up your debt. If you keep your purpose and goals in mind it makes the burden a lot lighter while you put in the extra effort. You could even try selling some of your stuff on eBay or craigslist. Maybe it is even time to ask for a raise, what you can do to get a raise, or overtime.
Try an experiment. Ideally the experiment should support your debt reduction, but it doesn’t have too. What this accomplishes is helps distract you from the pain that you are feeling, and breed confidence to help fuel your debt reduction. Often the change in focus can be quite fun and exciting. Some great examples of experiments would be canceling cable for a month, not watching TV for a week, cash only spending for a month, cooking all your meals at home, quitting coffee, volunteering, etc.
Treat yourself. Some people respond to this idea more than others, but often giving yourself a small, and I mean small, reward after a big goal or during a sluggish time can help get the juices flowing. Going out to the movies or a play, taking a long weekend to a cabin, or buying a video game are all great ideas. Remember to save and pay cash for whatever you purchase.

Hopefully this list provides you some good ideas to help kick start your debt reduction plan again. If you have any comments or other tips to offers readers, please feel free to comment.

» Filed Under Debt Elimination, Psychology of Debt

Debt Reduction Tip - Divide and Attack

Posted on December 1, 2007

Are you overwhelmed by the thought of trying to dig out of $15,000, $30,000, $60,000, or more of debt? Whenever the task at hand doesn’t seem possible, step back and divide the problem into small pieces that you can conquer. $25,000 may not seem possible given your current financial habits, but I bet most of can picture wiping out that $800 balance on a department store credit card.

This is why the debt snowball strategy works so well. Listing your debts smallest to largest, putting them on display, and then attacking the smallest one with a vengeance really makes things simple and manageable. As the debts begin to fall, you start to feel that the end is actually attainable. You behavior is changing and you get more courage and energy with each debt that is eliminated.

The divide and conquer approach not only works well debt destruction, but also on any task that seems too big to accomplish.

Other Resources: 0% APR On Balance Transfers is a good way to reduce your debt fast.

» Filed Under Debt Elimination

Listen To The Dave Ramsey Show For Free

Posted on November 25, 2007

Everyone who is struggling to get out of debt knows how hard it is. If you are looking for some support, advice, and motivation, Dave Ramsey is your man. During the 3 years it took us to get out of debt, I know listening to Dave Ramsey show kept my juices flowing. I don’t think I can give a better endorsement than the fact that listening to Dave’s show got me out of debt much faster(years) than I would have on my own. Listening to other people go through the same thing helped remove the embarrassment and fear and gave me some great new ideas. You can click here for a link to MP3 archives of his daily 3 hour radio show. The format of the site has changed a little bit, but you can click on the ‘Archives’ tab to get access to the MP3 files for his latest shows.

Some people don’t like Dave’s personality, but a lot more people are grateful for his help in getting them out of debt. For anyone who doesn’t know who Dave Ramsey is check out Total Money Makover.

» Filed Under Debt Elimination

How To Get Out Of Debt Faster - Big Shovel Edition

Posted on November 18, 2007

One of the best tips for digging out from under a mountain of debt is to get a bigger shovel. Outside of finding deep meaningful motivation for getting out of debt, increasing the amount of money you put towards debt each month will probably the next biggest catalyst for overcoming debt. Note that if you haven’t truly figured out your financial purpose, you may not have the motivation to finish the job. But if getting out of debt is truly important, why only use your current income to get you there? Here is a list of some ways to create more money to help bust your way out of debt.

Cut Costs – You should be tracking your weekly and monthly expenses, and testing them against your desire to get out of debt. Things like cable, eating out, and movies are all taking away from the amount of money that you can snowball towards your debt.

Ebay, Craigslist, and Garage Sales – Often our debt gets us a bunch of stuff that we don’t need. Look around your house and consider selling everything that isn’t a necessity. Use the extra cash to put towards your debt. This step also has the added benefit of helping break the pattern of materialism that runs counter to getting and staying out of debt.

Extra Job - Yes, I know you don’t have time or you don’t want too! But deliver some pizzas or packages, shovel some snow, or cut some lawns. Remember that this is a short term solution, to a huge problem. If you change you spending behavior in the process, you shouldn’t ever have to get a second job again. You will reap the benefits of putting forth the extra energy early in the process, and then you can quit your second job and be debt free!

Ask for a Raise – Consider asking for a raise, or taking on more responsibility at work. A positive outcome would have compounding benefits for not only ditching the debt, but also for the rest of your life.

Tap into your Savings – By savings I mean liquid accounts, not things like 401k. This one is usually mathematically logical, because the interest rate on our debt is worse than the rate on the savings. Even if it isn’t, I still argue that changing your financial behavior and dumping debt will radically change you perspective and life enough that you will overcome and surpass that lost savings in no time. This one comes with a caveat though. If you aren’t truly committed to staying out of debt and changing your financial behavior, keep the money in the bank. You will probably find yourself in debt again, but now you don’t have the money in the bank.

Now go out and kick those debt reduction plans into high gear!

» Filed Under Debt Elimination, Financial Succes, Materialism, Psychology of Debt

Do We Earn The Right Not To Budget?

Posted on November 7, 2007

I have admitted it before, The Rockette have never lived on a formal budget. The closest we come to real budgeting is what I label retroactive budgeting. This is when you come up with reasonable spending amount for the different categories like groceries, clothing, entertainment, etc. Then at the end the month you compare the actual totals to your suggested limits.

When we were in the midst of shedding our 70k in debt, we did this almost every month. As the debt shrunk, so did frequency of our retroactive budgeting. I have been trying to decide whether this is a negative thing.

Three things happened as our debt decreased and was eliminated.

Our behavior and spending patterns changed. With less debt and new spending habits our monthly totals feel within a reliable range.
As the immediacy of the situation abated, so did our intensity. Our intensity got us through the tough times and turned the tide, but then our attention slowly began to leak elsewhere.
I felt like we earned the right to not check. Not checking as closely became the reward!

The thing is, changing the direction of the net worth train and your financial habits is heavy tiring work. Work that pays off down the road and work that removes stress. For those of you that are in the midst of an intense debt struggle, this can be a light at the end of the tunnel. For those of us who weathered the storm and are in cruise control, you know that freedom that is created from not having to worry and stress over your finances.

Sometimes, I think I am sacrificing financial efficiency, because of laziness. Other times I remember that the reason I got out of debt was to have the freedom to focus on other areas of my life without having my finances dictate decisions. Obviously, I think the latter is more often the reality or else I would be much more diligent about checking.

What are the readers opinion on the matter? Are you earning the right to ‘slack’, or are you going to better off if you stay focused and efficient?

» Filed Under Debt Elimination, Energy, Favorites, Motivation, Productivity(Financial)

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