Debt Hater

Don't Nickel and Dime a Hole Into Your Finances

We can nickel and dime ourselves into debt.

I wonder if most people in considerable consumer debt got there by drips and drabs, not by deluge. I bet it started with a few missing dollars here and there in their checking account or charged to a card. Those tiny amounts of money can eat big holes into your finances. How many times have you heard people say they're drowning in debt but they have no idea what they bought?

I almost tried to explain that to my little cousin, who couldn't understand my brow furrowing over $4 I couldn't account for.

I am visiting my family for the holiday weekend and, as is typical, I've already spend a wad. I was hosting my mother, brother and grandmother in D.C. for a few days and they wanted to eat out each day. I paid for one meal, paid for myself another and then insisted we eat breakfast at my place where we could eat for pennies instead of dollars.

After that, we drove up to visit the rest of  our little clan, and I went to the mall to do some tax-free shopping. So, this morning, I sat down with my remaining cash and receipts to check where I am on budget for the month (yes, just four days into the month!). As I added everything up, I couldn't account for $4. So I recounted, readded, rechecked and still couldn't account for the $4. My nosy little cousin sat down beside me at the table and, all up in my spreadsheet, started reading off some tallies. He saw me muttering to myself and checking my accounts.

"What's the matter?" he asked. "I'm missing $4," I said. He said, "Four dollars? What's the big deal?"

I turned to him with a  sharply raised eyebrow. Four dollars?! What's the big deal about four dollars?!

I'm sure some of you are asking the same question: "Calm down Debt Hater."

Four dollars isn't the point. As I climbed my way out of debt, there were two things I learned the hard way:

1. You MUST have a budget.

2. You really HAVE to know where every dollar goes.

Lesson one taught me lesson two and vice versa. I tried several times to go without a budget (Suze Orman even said in Young, Fabulous & Broke, the first personal finance book I ever read, to forget about budgeting because no one sticks with it anyway and we don't need it. She didn't have to tell me twice!).

I really wanted to skip the budget to get out of having to keep track of every penny. I was never a fan of numbers and handling money that way was akin to handling dirty diapers. I didn't want to do it. But each time I tried, there would be $4 missing here, $10 there, $2 here and by the end of the month it'd be a shock when I didn't have the cash to cover a simple, and expected, expense.

I got in the habit of getting receipts for absolutely everything and writing down any cash that I spent. If I was off by a dollar at the end of the month, I didn't trip, but I made sure to be careful. I didn't always get it right (I have many posts about how I screwed up my budget in a given month), but the habit of keeping close track is ingrained now. I know where every dollar went. Except, this $4 I couldn't quite figure out at the moment.

So I turned to my nosy little cousin and asked him what he planned to buy with his recently acquired birthday money. He was deciding between a new i pod nano and some Teen Titans figures. I said to him "Suppose you took your money to the mall, got to the Apple store, whipped out your cash for your nano and then the cashier said 'You're short $4'. Would you to him, 'Four dollars? What's the big deal! I have the rest.' Do you think he's say Ok and give you the i pod?"

He smiled. "No," he chuckled.

"That's the big deal."

DH

"Only Greedy People Save" And Other Things Crazy People Say

I know people, I am related to people, who believe that saving money is either a waste of time because life is too short or who actually think saving is wrong because you can't take it with you. Saving means you're greedy.

Call me greedy. All I know is, a savings account may be the difference between you living in your own place or living on the street.

I volunteer with a local university to provide financial counseling to people who have applied for government assistance programs. Last week, I met with a woman who was living in a shelter. She wasn't on drugs. She wasn't an alcoholic. She wasn't on the run from an abusive husband. She hadn't been involved with any scams or schemes that robbed her blind. She hadn't done anything "wrong" or had anything wrong done to her. She just hadn't saved a penny.

Like thousands of Americans, she lost her job recently. But when she lost it, there was nothing. She didn't have a savings account. She spent her paycheck as soon as she got it. There was nothing in checking. When the rent was due, she just didn't pay it. Before too long, she was evicted, her stuff was sitting in a kind friend's basement and she was living in a women's shelter, working part time in retail.

There was no cataclysm -- no earthquake, hurricane, divorce or death. She even knew the job loss was imminent. She just had NOTHING in reserve. Without me even asking, she told me that she never cooked at home and spent most of her money eating out. The take-out places she frequented knew her voice, her name and her regular orders. The Starbucks she went to would have her regular waiting for her at the same time every day. "Good afternoon Ms. So-and-So. Here's your latte!" She'd debit $4.35 and be back to do it again the next day. She had no credit card debt, but that was because she hadn't had a card in years -- she declared bankruptcy at 26 because of the debt she got herself into. She treated friends to expensive meals. She bought whatever. She shopped when she was bored. Now she was sitting in front of me, required by the shelter to save 30% of her income, hoping to get into an assistance program that would get her into her own apartment.

I didn't even know where to start.

My Financial Coaching Experience

I started to volunteer with a university-affiliated, volunteer financial coaching program (thanks to Mapgirl for telling me about it!).

All they really expect you to do is provide basic, common sense advice to people in a financial bind. There is a 12-hour training course and a big, fat binder full of materials to use in session so you're not just making stuff up or flailing about when meeting with your client. But I was still a little nervous because I am not a professional and money is not an issue to mess around with.

Especially not for these clients. These are usually people or the heads of families who are seeking some kind of government assistance and one of the requirements is for them to get financial counseling. They're not like me -- young, gainfully employed with a steady paycheck and benefits, no children and no worries as to where I'll sleep or when I'll eat in a given day. They might be facing eviction, have lost their jobs, have more than one child, are in debt and have cut their spending down to the bone as it is.

I got a client about a week ago and went to meet her. She was a mother of two and in debt because she wasn't making enough money to cover all the regular bills. She had borrowed against her 401k and took cash advances from her credit card. When she laid her numbers in front of me, I thought "Um, ok, you're screwed. You'd need to earn three times this to clean up this mess."
But of course, I didn't SAY that.
I just sat there eyeballing her balance sheet.
The money she spent on daycare and her rent essentially ate up her entire check. Thus, anything else she spent money on that month put her in the red.

"Ok," I said, feeling terribly inadequate and unprepared. "Let's break this into small chunks."
We spent the next hour hunting for money in her budget. I kept pressing her (nicely though) to find out where she might be blowing cash and not realizing it -- snacks for the kids? The movies? Starbucks? Cable? She did wind up spending quite a bit on birthday parties and all those random, annoying school expenses and dining out with other families. But she didn't know just how much. "Ok, you're going to keep a spending record for a month and track every single penny."

I told her to get in touch with her social worker and find out if there's any way she can get assistance with child care. I stared at her numbers some more. Her car note was big, but she was five months away from paying off the whole thing. "Ok, when's the last time you shopped around for car insurance?" She hadn't. "Good! Check into lowering that too without losing coverage."

Finally, we came up with the following action steps and I meet with her again in September to figure out where we can trim more fat to blast away her debt and build a small emergency fund (I'm talking maybe $500 to start).

1. Keep track of your expenses for one month. Hold onto all receipts and sit down each day to write it all down.
2. Shop around for car insurance with the same coverage, but lower premiums.
3. Visit HR to discuss adjusting tax withholding to keep more money in the paycheck.
4. Check with social worker and the county to find childcare assistance.
5. Check to see if the children are eligible for Medicaid (she was spending quite a bit on her son's dental work, which Medicaid would cover). If they are, see how much money you'd save if they were enrolled and not on your work health plan.

She seemed far more hopeful when she left than when she first arrived. She told me it was a big help and she'd be back in a month. I'm crossing my fingers.

Ok, so, how did I do? Anything that I missed in these initial action steps (and be gentle with the critique, it was my first time :-)  )

DH

Sharing What I (We) Learned #3 Saving and Investing

    Read Part 1: Introducing Nuri

    Read Pat 2: Banking and Budgeting

    Nuri: What are good guidelines for 401K options, which I'm pretty sure the company will have?

    DH: Yikes, this is one I have to plead a little ig'nance on. Everything I know about 401ks, I got from Suze Orman's Young, Fabulous and Broke (an excellent primer) and from the Motley Fool online. Most of my allocations go to index funds like the S&P 500. I also put money in International funds -- they fluctuate more, are much riskier, but when they pay off, they pay off more than other funds.
    All I do know is that you should contribute up to the company match, at least. So, if they match 50 cents on the dollar (or dollar for dollar, whatever it is) up to 6% of your salary, then contribute 6% of your salary to your 401k, more if you want. The point is, don't leave any of that match money on the table. If they're offering it, take it!

    You mentioned to me also that you've talked to some folks who have said there are better places for young people like you to save money than in a 401k. I'm reading a book right now where the author says that it's dumb for young people to put away money that they can't touch for 40 years. But, that's obviously not the common wisdom, so I can't say that I agree. Like I said, at the very least, contribute up to the company match.

Nuri: With the student loans, is it better to pay the minimum amount they suggest, or go up to something higher that I can handle?

DH: This depends and it's an answer that will change depending on who you talk to! I didn't have to pay student loans. I had a generous family friend pay the little loan amount that I did have. But, since this is debt, then there's really only one way to handle debt -- pay it off as quickly as you can. Do you have any other debt besides the student loan? If not, then you'll want to pay down as much as you can afford to each month. Yes, it's always a good idea to pay more than the minimum. Paying the minimum will get you no where. If you don't want to do a lot of math, then pay double the minimum.

    There are a lot of debt calculators online, just punch it in Google (fool.com has one too I think). Input your debt, the interest rate, the minimum payment and either the amount you want to put down a month or the number of months you want to take to pay off the debt in full. The calculator will tell you either how long it will take you to pay off the debt (based on the monthly payment) or how much you'll have to put down a month to pay it off in the number of months you input.

    I would suggest doing it the second way -- pick a debt freedom date and aim for that. Whatever the monthly payment is, plug that into your budget and plan your budget around that. Keep in mind that may be impossible! But plug in the numbers and see if it's doable.

Nuri: And later down the line: investments? What are the best resources for total beginners?

DH: As soon as I find this out, I'll let you know!

Nuri: Any other advice you have to offer!

DH: Start with the Motley Fool Get out of debt seminar. Go to the site and poke around until you find it. Actually, I might have a link right to it on my site. Look at my Helpful Financial Tools box in the right rail.

Sharing What I (We) Learned #2 Banking And Budgeting

  Read Part 1: Introducing Nuri

  Read Part 3: Saving and Investing

  In the previous post I introduce you to reader Nuri, a young sister seeking some advice on how to get her financial house in order.

    Here's what she asked me about banks:

    Nuri: Which bank is the best to set up my primary savings acct with (best interest rate, least stipulations, etc)?  Or do you think I should use other routes to save, rather than the normal savings acct?

    DH: There are a lot of banks that might fit the bill. How you want to stash your emergency fund is up to you. I'd start with Bankrate.com. Click the checking and savings tab to get started. It will show you banks with the highest interest rates for savings account, but also how much money may be required to open the accounts, if any.

    I suggest not making it easy for yourself to get that money. In other words, you want to access it when you want to without much hassle, but DO NOT get a debit card linked to the account. You may also want an account in a separate bank from your regular checking.

    I use HSBC online accounts. They can be cumbersome, but I can easily transfer money from my regular checking and saving to those accounts.
Interest rates are far lower than they were just a a year or two ago. There may be way better ways to stash you emergency fund. That's something I'm researching for myself right now.

    Nuri: What did you use to create your budget?

    DH: Ha! I laugh because my budget went through at least 10 iterations before I created a method that I was comfortable with. I just used an Excel spreadsheet. At the top, I entered my monthly income. Then I subtracted my taxes. Then, I laid out all my spending categories (which came from keeping a spending record for a month). I subtracted them all from my income. If I spent more than I earned, then I went back and started making cuts.

    Be realistic. You may think you can get by on $10 a month for movies and entertainment, until you actually try to do it and find that it's either impossible or wholly unpleasant.

    Use your budget to see where the fat is. Maybe you cut down on the Starbucks. Maybe you don't go out for drinks 3x a week. Maybe you buy generic groceries. Maybe you cut down the cable or cut it off. Maybe you move to one phone line. Maybe you don't buy as much clothing a month (LOL, though I should talk!). Maybe you don't visit home every other weekend. Maybe you were spending a fortune on hair products and didn't know! Maybe you ease up on that.

    That said, there are a lot of budgeting tools out there. I thought Mint.com did one. Microsoft has a budget tool. There are budget worksheets all over the Net. Even better, get a Dave Ramsey or David Bach book out of the library -- it'll have instructions on creating a budget.

    Got any more help? Please leave comments below.

    DH

Sharing What I (We) Learned #1

Read Part 2: Banking and Budgeting

Read Part 3: Saving and Investing

    First, let me say that I really appreciate everyone who reads this blog be they lurkers, regulars and/or commenters.

    Second, I got an e-mail from someone fresh out of school and seeking advice on how to get started properly managing her money. My first thought was "She's asking me? She must not read my blog because I do all kinds of dumb things!" But, really, I was terribly flattered, because I'm not so retarded with money as I sometimes beat myself up for being.
    Besides, I know a little something, something -- enough to pay off my debts and put some money away and to keep researching to improve my knowledge and financial standing.
    I also recognize the importance of helping someone when they reach out to you. I did that a lot when I first started the blog, so I'm more than happy to share what I learned.

    Below is a transcript of our e-mails. She asked me some smart questions and I had to comb through my blog for things I did and to recommend some places she find additional resources. There are also bloggers who are much better at this than I am right now, and some of them are listed in my blog roll.

    Here's what I shared with the young sister:

Financial Literacy is Necessary

    I'm getting on board with HC at One Big Mortar Board and pfblogs.org to promote a program with DonorsChoose.org challenging personal finance bloggers to (financially) support financial literacy in classrooms (thanks to Single Ma for sending me the info on the challenge).

    I remember in elementary school when we had paper cut outs of American coins to teach us how to count money an add and subtract numbers. In middle school when we had a lesson on the proper way to write out a check.
    Unlike many other things I learned in school through the years, those are two lessons I actually still use! But it wasn't until years later, and I was saddled with a mountain of debt, that I realized that counting nickels and dimes and filling out a check are one thing, managing your finances, especially early in life, is something else entirely! Why didn't we have a class on that?

    So, it seems this is just what these organizations are trying to do. The challenge is to donate money to fund these programs.
    HC just posted an update about how all the money from pf bloggers has fully funded five projects and two more are in the works. He's also offering a prize to bloggers who contribute, so check out his post.
    Click on the widget on the left side of the blog for more information about the challenge.

    DH

Showing Up Grown Folks

    I always hate it when children (and by children I mean anyone younger than me) make me look bad by accomplishing more things in their short time on earth that I probably ever will as long as live.

    Read this article about a young man in Nashville who is building wealth flipping houses, by earning money working at burger joints! Makes you think differently about those McDonald's commericals featuring that young black kid, Calvin.

    Witness 24-year-old James Hatton Jr.'s work ethic:

    For the past two years, the Spring Hill High graduate has put in a total of about 80 hours a week between his shift manager position at the Maryland Farms Backyard Burgers and another Brentwood fast-food joint where he has worked since 2001. ... "He says he's willing to work such long hours for a very simple reason. "Nobody ever gave me anything, so I figure that if I want something, I've got to get out there and get it for myself," Hatton said. "I want to continue to make money, so I won't have to work 80 hours a week for the rest of my life. There's more to life than depending on the government to satisfy your needs."

    By the way, he taught himself to speak Spanish (something I've been half trying to do for four years and can't speak a word!).

    Go 'head young brother, go 'head!

    I wish there were more young people like this man... but not too many more because then I would really feel like a slacker!

    God bless him.

    DH

Help A Brotha Out! -- Budgeting 101

    My brother is wonderful!

    He is paying his way through school to earn his master's degree, while working, and he's going to graduate this summer with honors! I am so proud!

    So when he called me telling about how he owed the IRS, I thought, "Huh?"

Running off to become a yogi

    I had my first yoga class on Wednesday morning. It's harder than it looks. Downward dog is no joke.
    I got a copy of the latest Yoga Journal magazine (well, in real life, they get sent to my job and I just happened to grab this copy). And there's an article in there about being happy with much less.
    Now, of course it's about only buying food and underwear and working less so you have more time to practice yoga, which I am not about to do, but there were a few thought provoking points in the article.

 "In order to afford things, you have to work long hours, leaving you less time for what truly sustains you. ... An expensive lifestyle also limits your choice of career, forcing you to take a high-paying job that may not be fulfilling."

    Every day I go to work, I wonder what for. Granted, I enjoy what I do and I am ambitious, hoping to climb the rungs to get to the point where I am paid well to do whatever I want. The problem is, more often than not I am going to work simply to crank out whatever needs to be done before I can go home. I just want the paycheck to pay for the things I've bought years ago, no longer have and probably never needed (hence, my credit card debt).
    But there's a difference between purposeful simplicity and reactive simplicity.

  "Self-denial will backfire. "Don't say to yourself, 'I'm not going to have this or that.' Instead of focusing on what you're denying yourself, focus on what's really healthy or, in this case, on whatever gives you true satisfaction."

    For example, I am ready to break out my checkbook and buy a new wardrobe. I was pinching pennies so tight for a while that I didn't do any new clothes shopping for a while and now I have a handful of ratty sweaters and button-down shirts with too-short sleeves.
    Every morning I wake up, look in the closet and my shoulders slump. "I can't wear any of this," I lament silently to myself.
    Self-denial in this instance has really backfired. I need new clothes, but rather than buy and replace things little by little, I'm ready to blow a whole wad on new stuff. And we all know I don't have the money for that.
    This is a perfect example of being penny wise and pound foolish (Flexo at Consumer Commentary has a great post about that you should read. Click here.)
    Obviously, I don't go to work naked, so what I own must work pretty well. While I do need new things, the article made me think about why I need them and how badly do I need them.

  "Train yourself to reflect before your buy something. Why do you want it? Do you really need it, or are you trying to escape negative emotions?"

    I often shop out of boredom or because I'm feeling down. There's something exciting about a new shiny thing or smelling new fabric. But, of course, it's temporary.
    Still, I think the most important message here is to always have a purpose. Being debt free for the sake of being debt free really isn't inspiring and I suspect you'll eventually be in debt again.
    But if you want to be debt free so you can go back to school and train as a musician, that's a purpose. If you're buying the coat because you'll freeze if you don't, that's purpose. Quitting eating dinner out because you want to learn to be more creative in the kitchen is less painful than cooking at home for no other reason than it's cheaper.

    Here's a list of tips I adapted from the article on deciding what's essential:
    Identify what gives you energy. Figure out what activities drain you and which ones juice you up. Do more of the latter and less of the former.
    Talk about it. Sometimes we consume (whether shopping or eating or draining other people) because we don't know what's bothering us. Sometimes we can only figure it out if we talk it out.
    Slow down. You can't really experience things if you rush through them. Only by slowing down can you learn what deeply satisfies you.
    Confront the numbers. You can't live the champagne life on beer money for long. Look at your spending record and see where you're leaking money on unimportant things.
    Visualize the simple life. Write down the things you wish you didn't spend so much time, energy or money on. Next, write down the things you wish you could have or do. Looking at both lists, figure out how you can reconcile the two.

    DH