Your Debt Makes Decisions For You

Posted on May 16, 2008

The thing about debt is that our financial systems are setup to make it as easy as possible to spend money you don’t have. Your mailbox is littered with credit applications, and if you sign up at a store they give 15% and you are approved in about 3 minutes. At a car dealership all you have to do is sign a few papers. Even a mortgage is easy, although you have to sign a lot more papers. Thousands of dollars can transfer hands in a few minutes, and you are usually left with a depreciating asset and the obligation to pay back the money they gave plus whatever fees and interest they decide to charge you.

The ironic thing is that we often think we are buying stuff that we think will make our lives easier and more free, when in reality we just gave control of a portion of our earnings to someone else.The fact that you gave someone else control of some of your money means that they have a say in what job you work, how much you will save, and how much you will spend.

Now you can’t quit your higher paying dead end job that you hate to take a lower paying job doing exactly what you dreamed about all your life. Can you save $500 a month for some goal that you have always dreamed off? There is a good chance that Wells Fargo, Chase, Amex, or Honda will let you know that there are a lot of things that you can’t do now.

For those that trying to get out of debt or those that think I am overlooking the benefits of debt, do this calculation. Total up your monthly debt payments: mortgage, student loans, car payments, credit cards, everything. Now divide that total by the amount you take home after taxes and you will see what percentage off your own money you aren’t in control of.

Scary, depressing? It was to me. After getting rid of $70,000 of debt, we just have a small mortgage left. It represents about 10% of our take home pay, which means I am in total control of 90% my money. The encouraging part is that you can do something about it! It might take a while, but it is worth it.

» Filed Under Debt Elimination, Psychology of Debt, 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

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

Can We Buy Meaning During The Holidays?

Posted on December 16, 2007

Consumers planned holiday-related spending increased to $923.36” in 2007. Gift card spending alone was 24 billion dollars last year while the national spending average rises about 4.76% year after year.

The money that gets tossed around on Christmas is staggering. Debt keeps us paying for Christmas well into the New Year. Gifts are often relegated to impersonal gift cards, because we don’t know what else to buy. We keep on buying though. Stress and frantic running are hallmarks of the season. Sometimes you can’t wait until it’s all over, so you can rest and recover.

I often wonder if we don’t spend ourselves into a frenzy to cover over our lack for the deeper things in life. Do we buy more to cover the lack of depth in our relationships with friends, children, and spouses? Do we spend enough time telling and showing people how valuable they are the rest of the year or are we trying to recover from a deficit with gifts? Maybe we don’t feel like the holidays have much meaning, so we buy to try to imbue the holidays with meaning through consumerism. I am not saying all or any of this is true, but I think it might be worth asking the questions.

Does it have to be this way? For those that want something more, what can we do?

Sources :

» Filed Under Holiday Wishes, Living with Purpose, Psychology of Debt, Psychology of Spending

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

Finance Tool : Debt Snowball Calculator

Posted on October 31, 2007

Over at What’s The Cost I came across a handy debt snowball calculator. The calculator lets you add up to 20 debts, their interest rate and monthly payment, and asks for how much money you can put each month towards debt. From there it will generate a nice text summary of the snowball calculations, some stats against consolidating your loans, and a nice table that plans out the snowball month by month.

The part that I think is really interesting is that it will let you chose between paying off the highest interest debt first and the Dave Ramsey method of the smallest debt first.

I loaded the calculator with 3 debts which should be a bad scenario for the Dave Ramsey snowball:

10,000 @ 12% for student loans
4,000 @ 5% on a credit card
3,000 @ 1% to finish off a new car loan

The results were interesting. Both methods will take 24 months to pay off the debt, and the Ramsey snowball will pay $254 more in interest($1,661 vs. $1,407). For me, this is more evidence to go with the Dave Ramsey method of changing our spending patterns. This method changes behavior by helping us experience positive change through small debt payoff wins. The amount of interest in the plans is negligible, since most people who are just starting to get out of debt need behavioral changes, not absolute perfect math.

So have fun, play with the numbers, and kick your debt to the curb!

» Filed Under Debt Elimination, Psychology of Debt

Payments And Credit Aren’t Leading Us Anywhere Good

Posted on October 27, 2007

Often, a huge part of getting out debt and achieving financial security is removing the option of purchasing with payments and credit from our brains. See, payments set you up to stay in debt and spend more then you can afford. We end up looking at purchases through a short term lens rather then thinking about the long term impact. Breaking things down into small conquerable pieces is a great strategy for achieving goals that seem too big, but when we do that with purchases we are remove ourselves to far from the real impact of the decision.

The drawbacks of credit purchases in our lives are quite numerous, but I wanted to highlight a few.

Payments give salesman more room to create profit for themselves. We become so focused on the monthly payment that we miss the fact the loan car note was extended to 6 years, or 9% interest. Salesman would rather deal with payment people, rather than cash people.
Payments often mask the fact that we can’t afford what we are buying. $20,000 or $380 a month, which one sounds more feasible?
The items purchased with credit often go down in value faster than the principal on the loan. Negative equity is an ugly road, that isn’t going anywhere but towards disaster.
With the exception of 0% loans, payments mean you are spending money on interest. To put this into perspective, consider that on a $25,000 car loan at 6% you will pay about $30,000 for the car over five years. A $200,000 30 year mortgage @ 6% will cost you $231,667 just in interest.
Payments add stress and rob you of freedom. There was a correlation between the number of payments I had and the amount of stress that my finances caused me. Also, things like moving, changing jobs, moving to a profession you love, and spending more time with your family all become harder and more complicated. Shackles!
You don’t actually own the item you have payments on.
Each new payment makes the next one easier. You want more, because you can spread the pain out over years. In reality you can only diffuse the pain until the house of cards crumbles, or you wake up at 50 only to realize you don’t own anything.
It is quite depressing to know that the money you are earning now isn’t yours, it MUST go to someone else. Cash flow is one amazing benefits of being debt free. Think about the things you could do if you actually controlled your money and not financing companies.

I really could go on, but that is quite a list already! So, next time your discipline is wavering and you want to use credit, come back to this list and use it to renew your strength.

What problems have payments caused you over the years that I missed?

» Filed Under Chasing Dreams, Debt Elimination, Materialism, Psychology of Debt, Psychology of Spending

Why Personal Finance is Personal

Posted on October 24, 2007

The reason they call it personal finance is because there aren’t any right answers. That’s right, no right answers. If there were right answers, we could call it something like personal financial decision science. Everyone would be doing the same 20 step program and trying to achieve similar goals.

That isn’t how it works. It is our money. We are all different. We all have our own quirks, goals, personalities, and dreams. Personal finance can not escape that fact that it has to deal with humans, and that is where the personal side of equation comes into play.

Consider two families who just went through their house and de-cluttered. They are both left with a pile of junk, but they decide to do something different with that stuff. One family sells the items through eBay and Craigslist, while the other donates the items to the local children’s shelter. Did either family make a wrong decision? No, they both chose according to their own goals, desires, and values. One was willing to sacrifice income while the other willingly sacrificed the benefits of altruism. One of the tricks to learn to be aware of what our decisions are really costing us.

Sure, maybe the family who sold the stuff will have more money, but that isn’t the goal of personal finance, is it? If it were, we could move closer to a finance science since we have an empirical goal by which to judge all actions. The fact is our money goals are very personal and cover a broad range of topics.

Does that mean some choices aren’t better than others? Of course not. It is still possible to judge the value or helpfulness of a given choice, but it is hard to do without having some understanding of the personal and situational context within which the decision was made.

Ok, so why do I mention this? I honestly feel that we will only cause ourselves trouble without truly understanding the realm in which personal finance decisions are made. In order to make the best decisions and help others make wise decisions, we must be honest about imperfect nature of personal finance. We must be willing to judge actions by not only outside empirical evidence, but also how the decision relates to our goals, personality, and values.

» Filed Under Favorites, Personal Finance, Psychology of Debt, Psychology of Spending

If You Are Making Car Payments, You Don’t Own The Car

Posted on September 17, 2007

We usually talk like we own the car, but this is just a delusion. If you secure financing for an automobile, the bank or financing company probably owns your car. The person with the auto loan is most likely granted non-possessory security interest in the vehicle. Basically, the bank owns the car and you are not able to sell the car without the loan being paid in full.

The reason I mention it, is to clear up what I think is a major reason it is so easy to be in debt. The lending industry wants debt to sound rosy and cheerful, so that consumers will go into more debt. If we continue to fool ourselves into thinking we own things that are not actually ours, we will continue to by more things we can’t afford. Yes, I said it! If we are paying payments, we probably couldn’t afford the item. We delude ourselves by affording payments!

If you think I am crazy or sound foolish, you probably never received the title to a car in the mail after you made your last payment(or paid cash in full). It is just a piece of paper, but it feels so good for some reason. I would love the world to change how they talk about debt. Let’s talk more about the great feeling of working hard for something and paying for it in full, rather than tricking ourselves into thinking items that we don’t own are ours.