Tuesday, May 24, 2011

Living Debt Free... and how to get there.

The American Dream used to be home ownership and a secure income, now its just acquiring stuff.  Home ownership has dropped significantly and a secure income is a myth thanks to the recession.  So how does a household get ahead?  Stop using credit cards.
Credit cards are liars.  They give you the feeling that you can afford things that you really can't.  They dig your financial grave so deep that it can take many years to climb out of.  They make you think that item on clearance for $10 is a good deal, but $10 at an interest rate of, let's say, 18% adds up to $11.80 in the first month.  Doesn't sound bad?  Well, with credit cards its first in first out so if you have a running balance that prevents this $10 clearance item from being paid off in six months then it really costs you... $27.00.  That is over two and a half times more than the price of that 'good deal' clearance item.  Not so much of a deal now, huh?  Compound interest is always a bite in the butt.
Many people think that paying off the cards with the biggest debt first is the way to go.  I say it is just the opposite.  Pay off those little balances first, then take the payments you were making on them and add that amount to the highest interest rate card and keep doing this until they are all paid off.  Also, take advantage of those no interest balance transfers offers, but take into account the transfer fees and what monthly payment it will take to pay off the whole balance on the card before the balance transfer rate ends, not just the transfer amount because if you don't pay it all off, the balance transfer will be charged interest from the FIRST day it started- that is a lot of compound interest.
Now I'm not saying NEVER use a credit card.  I use a credit card every single month for automatic bill payments.  This way I keep my credit score up and rack up those cash back bonuses that I use as a Christmas Club account.  However, the amounts of these bills are included in my monthly budget and I have automatic bill payments from the bank account set up to pay the credit card off every two weeks.  This way I'm actually earning money by paying my regular monthly bills!  Yay free money!
The secret of getting credit cards paid off is making more than the minimum payments.  Usually minimum payments don't even cover the monthly interest charge.  This means that when you make the minimum payment only, the balance is eternal.  It will NEVER be paid off.  So put the cards away until they are totally paid off.  My suggestion, cut those suckers to pieces.  Its a great feeling and they cannot be used unless you order- and wait- for a new one to arrive.  This gives a lot of time to think about if a replacement is really needed.
Ok, the cards are gone.  Now what?  Budget, budget, budget.  This is something that I think should be a required course in high school..  Most people either don't know how to make a budget or don't know how to stick to one.  It's not rocket science, but it does take a lot of effort, at first.  After the budget is all figured and you've proved it is livable then it only needs to be reviewed every 6 months.  Sitting down and taking a hard look at your financial state is hard, heart breaking and head smacking, but in the end- totally worth it. 
When making a budget here are the things you need to take into consideration:
Housing costs- rent/mortgage payment, gas, electric, water, sewer, trash, cable, internet, phone, insurance, property taxes, upkeep and improvements.
Transportation costs- Monthly payments, insurance, gas, upkeep.
Food- groceries and eating out which if you have a busy life is inevitable.
Medical- health insurance, co-pays, medicine (prescription and OTC), vitamins.
Savings- emergency, vacation, college for child(ren), retirement, rainy day.
Clothing and Gifts- birthday/Christmas/Hanukkah, Easter, back-to-school, etc.
Entertainment- No matter how tight the money, this cannot be ignored.  Even if it is just $20 a month.
Personal- bank fees, gym memberships, hygiene (soap, shampoo, toothpaste, razors, etc), once in a while treat like gourmet coffee or manicures.
Debt repayment- Last but not least, credit cards, student loans, personal loans, etc.
I suggest assembling all bills and check registers from the last 6 months when making a budget.  This will give you an idea of what you actually spend on a monthly basis.  Take all the above things into account when you squeeze the blood from the turnip that is the paycheck(s).  When making a successful budget, sacrifice and creativity come in handy.  Who wouldn't be willing to give up a few luxuries now in order to have a much more luxurious life later?  If you answer ME then if you're going to delusional- at least you are making them delusions of grandeur!  To all those with common sense, here are a few money stretching tips:
  1. Make a weekly menu.  Include breakfast, lunch, snacks, beverages and dinner.  Take this menu and look through what you already have to determine what needs to be bought.  Shop only once for the week and don't shop hungry.  I don't know about you but when I step into a grocery store with hunger pangs I buy a lot more than what is on the list.  
  2. Reconsider buying the things that can be borrowed.  For magazines and books, use the local library.  For that power tool you need, check with a friend or neighbor.  Trade babysitting with a friend, watch their kids once a month and they watch yours once a month.  
  3. Plan your trips.  Run all errands on one day to save gas and time.  Hit the farthest point first and work your way home.  Create not just a grocery list, but a complete shopping list of what is needed.
  4. Consider a tailor.  Huh?  If those jeans you bought last year are now too big, a small investment of about $15 and a trip to a tailor can get you a like new pair.  I don't know any jeans that cost less than $20 that hold up to regular wear.  Kid's pants now high waters?  A tailor or even you can turn them into shorts for cheaper than buying a pair.  Gain a few pounds?  Most tailors can let out waist lines on a garment an inch or more, depending on its cut. 
  5. Determine a want over a need.  Take for instance, I want a new laptop but I don't need it or I want T-bone steaks for dinner but a London Broil steak costs less.  If its a want, determine how long it will take to save the money for it before buying.  If its a need, is there a less expensive version?  Do you really need the premium cable channels when you could subscribe to an online movie provider like Netflix?  You need a cell phone, but are you using all the minutes and features it provides?  If not, consider a smaller plan.
  6. New vs used.  I'm not ashamed of the fact that I shop at second hand stores.  One near me gets over stocks from Target.  I can pick up items that still have the original price tag on them that were last years must-haves for just a couple bucks!  I get some of my son clothes second hand because he grows so fast I will never get my money out of $20 pants or $30 shoes.  Although, I would never buy swim wear or undergarments there.  Some things just cannot be compromised on.
  7. DIY- don't pay someone else when you can do it yourself.  Example, I've started making my own clothes.  Our bathrooms need to be remodeled and we plan on doing it ourselves.  If you don't know how to do something like plumbing or electrical work, only hire out those parts.  
  8. Yard sale it!  Every year we have one to purchase a big ticket item like a new piece of furniture or a home improvement.  This year we are doing it to get spending money for our vacation.  If you have debt, use the proceeds to pay it down.  Hmm, clearing out the house clutter can clear out the financial clutter which will also clear out the stress.  Win/win!