Total Money Makeover, Week 10

Week 10 of my Total Money Makeover process included the 7th lesson in Financial Peace University on retirement and college planning.

Confession: I have a matching 401(k) available to me through my job and I have never saved a penny for retirement.  Oops.  However, the Total Money Makeover is designed to be done in a prescribed order, and saving for retirement isn’t until Baby Step 4.  I’m still on Baby Step 2, so I don’t need to be worrying about retirement savings just yet.  Investing comes later.

To recap, the Baby Steps are:

  1. Save up $1,000 as your starter emergency fund
  2. Pay off all debt (except the mortgage) in a debt snowball
  3. Save a full emergency fund of 3-6 months of expenses
  4. Invest 15% of your income for retirement
  5. Save for the kids’ college
  6. Pay off the house early
  7. Build wealth and give

This week in FPU we cover baby steps 4 and 5, which usually happen at the same time.  My future children are lucky that I have all this time to save up for their college… they don’t even exist yet!  If we review my five year plan, I hope to be debt free and a mom within five years, so I will still have plenty of time to get a head start on college.  I never had college savings, so I had to take out loans.  My children will never have to go into debt for their education.

Baby Step 4: Invest for Retirement

Once you are debt free except the house and your emergency fund is in place, it’s time to start investing for retirement.  Dave recommends that you invest 15%, no more, no less, of your income.  If your employer matches a certain percentage of your 401(k), that’s great, but it’s not part of your 15%.

Dave’s standard diversification plan for retirement investments is to put 25% in growth and income funds, 25% in growth funds, 25%in international funds, and 25% in aggressive growth funds.  These are all types of mutual funds. A mutual fund is a group of investments made of several investors’ pooled money and managed by a professional portfolio manager.  Mutual funds are excellent long-term investments – you should plan to keep your money in a mutual fund for at least 5-10 years. When selecting mutual funds, check their track records to see growth over a long period of time.  And don’t panic if the fund’s value goes down – if you select funds based on long-term performance, you should be confident that they will go back up, like they have in the past.

Always save long term with tax-favored dollars.  That means that the investment  is in a qualified plan or has a special tax treatment. Qualified plans include IRA, 401(k), 403(b), 457, and Simplified Employee Pension (SEP) plans. A Roth IRA is an after-tax IRA (meaning you do not put pre-tax dollars into it, only after-tax take-home pay) that grows tax free!

I plan to fund a Roth IRA for retirement and also spread out the rest of my 15% across diversified mutual plans.

For more (LOTS MORE) information about investing for retirement, visit daveramsey.com where you can learn more and find an endorsed local provider in your area to help you decide how to invest for your retirement.  When I have put more time into researching retirement investments I will probably write more, but being on Baby Step 2, I haven’t put a lot of thought into it yet.

Baby Step 5: Saving for College

Baby Step 5 is to “save for your children’s college using tax-favored plans.”  Dave suggests saving in an Education Savings Account (ESA), also known as an “education IRA.”  You can save $2,000 per year per child, tax free, in an ESA.  Above that amount, you can save in a 529 plan, but only save in a 529 that allows YOU to be in control of the investment mutual fund.  There are some 529 plans that freeze your options or change your investments based on your child’s age (higher risk when your child is younger, lower risk as your child gets older) – these are plans to avoid.

Dave advises against saving for college using insurance, savings bonds, and prepaid tuition.

If you start saving late for your kids’ college, it’s still possible for them to go to school debt free.

  • Attend a community college or state school (or both! Kent State University, for example, has regional campuses with lower tuition rates, they have a similar feel as a community college)
  • Compare costs of living on- or off-campus
  • Get scholarships – merit based or otherwise
  • Get a J-O-B and work! The average college student at a state school could pay their own tuition working 20 hours a week.

Sorry I have been going long stints of not posting, lots going on in life! More soon 🙂

 

 

 

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Total Money Makeover, Week 9

This week at FPU (week 6) we talked about insurance.  Auto insurance, home insurance, health insurance, disability insurance, you name it.  I actually learned quite a few things, which I will now try to impart to you.

According to Dave Ramsey, the purpose of insurance is to transfer risk. Insurance is there to protect you from loss. Dave gives some tips for different kinds of insurance:

Auto Insurance

If you have a full emergency fund (3-6 months of expenses, baby step 3), you can safely raise your auto insurance deductible.  Auto insurance has two general areas where you select a deductible, collision and comprehensive.  Collision is for when you are in a car accident, and comprehensive is for things like theft, flood, fire, etc. My deductibles for each of these was $500, but I upped them to $1,000 because that is how much I have in my emergency fund and I doubt that I’ll have to make a claim for both things at once.  Upping the deductible saved me some money on my premium.

Carry enough liability. Dave recommends a minimum of $500,000 – half a million dollars in liability.  Liability insurance protects you. I took the following descriptions from Geico.com: Bodily Injury Liability pays if you are responsible for another person’s injury or death in an auto accident. Property Damage Liability pays if you are responsible for damage to another person’s property.

I changed my liability limits from $100,000/$300,000 ($100,000 per individual, $300,000 maximum payout) to $500,000/$1M.  It only bumped up my cost about $8 total for six months.  It is worth it to have higher liability because that means you won’t get screwed if an at-fault accident causes more than $100,000/$300,000 in damage.  If a million dollars of protection only costs me $8, I will take it.

Other options you may have from your insurance coverage include medical, uninsured motorist bodily injury, and underinsured motorist.  Again, descriptions are from Geico: Medical Payments coverage pays medical expenses such as surgery, x-rays, ambulance, and physicians, regardless of who was at fault. Uninsured Motorist Bodily Injury will pay for your injuries caused by a driver without insurance. Underinsured Motorist (UIM) coverage pays you, your household relatives, and passengers in your insured motor vehicle for damages resulting from bodily injury or death arising out of accidents caused by motorists whose liability limits are not sufficient to cover your claim.

I set my Medical Payments amount to $3,000 because that is my health insurance deductible.  When I have a spouse and/or children, you bet that number will go up but for just me (since 99% of the time, I am the only person in my car), $3,000 seems practical.

Homeowner’s and Renter’s Insurance

Homeowner’s insurance should ideally cover the replacement cost of your home and possessions.  It’s generally recommended that you keep a list of your possessions and their value for insurance purposes.  Be aware of what your insurance policy covers.

If you are renting, you need renter’s insurance.  My apartment actually requires that I purchase it as a condition of my lease.  If you are renting and there is a fire or other catastrophe and your possessions are lost, your landlord is NOT liable to replace.  You need to carry adequate renter’s insurance.

Health Insurance

Such a hot button issue right now with the new ACA law and obligatory uproar (my political feelings aside, let’s not get into it)… health care is a big deal. And it is often expensive!  Medical bills are the number one cause of bankruptcies (article) and having appropriate insurance can help mitigate some of that risk so that you’re not facing a huge pile of health care debt. Dave Ramsey has the following recommendations for health insurance:

Increase your deductible or coinsurance amount to reduce your premium.  Only do this if you have the emergency fund to back it up.  I have a $3,000 deductible and that’s actually the buy-up plan at my workplace.  The basic plan is a $5,000 deductible that doesn’t even include co-pays.  Sure, it’s cheaper, and sure, I very rarely see the doctor, but that just seemed like too much risk for me.  So I pay more to get my fancy-pants, still-not-the-best $3,000 plan.  And I’m okay with it.  In the event I do need to go to the doctor, I can afford to do so.  I have used my insurance twice in 1.5 years.  Once for a double ear infection (knowing what I know now, I could have avoided that and self-treated), and once to get some moles checked out by a dermatologist (ugh, biopsies, and the subsequent emotional breakdown of being alone with no one to help me put band-aids on my back).

Check out a Health Savings Account, or HSA, to see if such a plan makes sense for you.  I am interested in learning more about HSAs, as I have never used one.  Seems like a cool setup though.  See: How Does an HSA Work? The HSA is a tax-sheltered savings account for medical expenses.  With an HSA, your deposits are tax deductible, you can save up to 100% of your insurance deductible in the account, you can pay most of your expenses with tax-free dollars, and unused money stays in the account and grows interest like an IRA.  HSAs sound pretty cool.

Disability Insurance

This is one that I never thought about before but will definitely look into in the coming months.  Disability insurance is designed to replace your lost income if you cannot work due to a short-term or long-term disability.  Dave’s suggestions for disability insurance:

Try to buy disability coverage that pays if you cannot perform the job that you were trained or educated to do – this is called occupational or own occ disability insurance. It’s often a short-term coverage option, paying for 2 years.

Beware of short-term policies that cover less than five years.

Always buy long-term disability coverage with after-tax dollars so that your benefits are tax-free.

Get disability coverage for 65% of your current income.  If you make $30,000 a year, your coverage should be at least $19,500.

You can lower premium costs by selecting a longer elimination period – the elimination period is the time between being declared disabled and the time you begin receiving payments.  It’s usually 90 days, but selecting a 180 day elimination period will result in a lower premium cost.

Long-Term Care Insurance

This type of coverage is for nursing home, assisted living, or in-home care costs. Dave recommends this insurance as a “must have” for anyone over 60.

Identity Theft Protection

Good ID theft protection includes restoration services and an assigned counselor to clean up any mess that results from ID theft.  Avoid protection services that only monitor your credit report.

Life Insurance

Life insurance is designed to replace lost income due to death.  30% of households do not have life insurance, and most people have no idea what kind of life insurance they own.  There are two types of life insurance: Term and cash value.

Term life insurance is for a specified period, is cheaper than cash value, and has no savings plan built into it.

Cash value insurance is normally for a person’s whole life and is more expensive to fund a savings plan.

Do. Not. Buy. Cash value insurance. When you die, they keep the money you have saved and only pay out the face value of the policy.  Term life insurance is definitely the way to go, since you don’t need insurance for your whole life.  Right now, say you’re 30 with a spouse and a child.  You need life insurance to cover your lost income if you were to die tomorrow, so that your family would be taken care of. That makes sense! But in 20 years, assuming you follow the baby steps and build wealth throughout your life, you’ll have enough money saved up to be self-insured, the kids will be out of college, and you will no longer need life insurance.  Maybe it’s just my addiction to the Dave Ramsey show talking, but whole life cash value insurance is a bad choice.  If you have it, go get rid of it. Get a term policy and invest the rest of the money you WERE spending on your cash value policy in your retirement. You’ll end up with a lot more money.  Like, millions. But remember to not cancel any policy until you have replaced it with a new policy.

Buy a policy worth 10 times your income.  Invested with a 10-12% rate of return, this amount would then replace your lost income.

Insurance to Avoid

  • Credit life and disability
  • Cancer and hospital indemnity
  • Accidental death
  • Pre-paid burial
  • Mortgage life insurance
  • Policies with fancy options like return of premium or waiver of premium

When Dave got to talking about the little policies that “nickel and dime you to death,” I did a guilty squirm in my chair.  I absolutely have Aflac policies for accidents, cancer, hospital stays, you name it.  “It’s only $8 a week!” I said… yeah, but that’s why I have health insurance, right?  I can’t cancel them until April, so that gives me a few months to think about whether or not I really need them.  And according to Dave, I don’t.  Sigh.  We all make mistakes!

Other considerations

78% of Americans die without a will.  You can get legal forms online to help you with your will today.  BE THE 22%.

Your loved ones should know how to find all of your important documents about your insurance information, will, etc., so keep everything together in a drawer, file box, lock box, etc. so that it’s easy to find and carry out when necessary. Nobody wants to think about dying (I still get freaked out when my mom mentions her will and life insurance – she’s not ALLOWED to die, darn it), but it’s important to make things go as smoothly as possible.  You want to leave a legacy for your family, not a big mess.

Total Money Makeover, Week 8

Week 5 in Financial Peace University was called “Buyer Beware” and discussed the power of marketing and advertising, which are common saboteurs of a healthy budget! Companies want you to buy their product – and they go to great lengths to get your business!

Companies market via…

  • Personal selling
  • Financing and convenient payment methods (store loyalty cards, store credit cards, mobile payment, 90 days same as cash)
  • TV, radio, Internet, and other media outlets (did you know a 30 second TV commercial costs $300,000 to produce?)
  • Product positioning in stores (companies pay to have their product stocked in a particular area of a store)

An important note about the 90 days same as cash scheme – 88% of those are not paid off in 90 days and are slammed with 24% interest dating back to the date of purchase.  Don’t do it.  Save up your money and pay cash.  Nothing is so important that you have to buy it right now, brand new, on credit.

We go through physiological changes when we spend money.  That’s why Dave is such a proponent of using cash instead of cards – so you FEEL the money you are spending.  It’s the same even when we save up and buy significant purchases.  Significant purchases can mean different things depending on your budget, but Dave suggests $300 is considered a significant purchase.

When I was married, we did a budget. For one month. Because it didn’t work and I never wanted to try again. We decided that each of us could spend $100 without asking the other one, that was our fun money fund.  He financed a $1,000 laptop and justified it because “the payments were only $100 per month.”

I can’t even begin to wonder what that marriage would have been if I had discovered Dave Ramsey sooner in my life.  Just as well that I didn’t, though, because I now have happiness, self-esteem, and self-respect.  Can’t buy those.  Can’t finance them either.  #do-over
Dave’s suggestions for purchases include:
  • Sleep on it – wait overnight before making a purchase
  • Weigh your motives and intentions – do not purchase something to make you happy; no amount of “stuff” is going to fill a void
  • Know what you are buying – don’t buy things you don’t understand
  • Consider the “opportunity cost” of your money – you have to give every dollar a place to go; make sure it’s a good place
  • Seek the counsel of your spouse – when you are single, you only have to answer to yourself; when you’re married, every decision you make with money has the potential to impact your spouse.  Always talk about where every dollar will go.

My favorite part of the lesson was the discussion about negotiating.  I really can’t wait until the next time I need to buy something!  Some important tips:

  • Use cash
  • Walk away – they will follow you and make a deal
  • Learn to shut up – they will talk themselves into a lower price
  • Say, “That’s not good enough.”  Also see: Walk away
  • Identify the good guy/bad guy technique – a car salesman goes to “talk to the manager” and regrettably reports that the mean ol’ manager just won’t go for a deal.  Know when to walk away from this.
  • Master the “If I take away” technique – A salesman offers you a TV with a DVD player and surround speakers for $X.00.  Say, “Okay, but I don’t need the speakers or DVD player, if I take those away, what is the new price?” (also useful for car purchases where they want to sell you luxury options).

Confession time

I have a confession – I spent some money on a luxury this month.  I have a Facebook friend who is a coach for BeachBody, and I signed up for an exercise program and nutritional shakes.  There were three outcomes from this purchase:

  1. Best case: I love the DVDs and shakes, I get closer to achieving my fitness goals, and I like the purchase.
  2. Neutral: I don’t love the DVDs or shakes, I return them for a refund.
  3. Worst case: I don’t love them, but I forget to return them in time and I do not get a refund.  I learn a lesson to not buy things like this.

One week after the kit arrived, I’m going with case #1.  I only lost 1.4 pounds in the first week, but I did lose FOURTEEN INCHES over my entire body (measuring bust, chest, biceps, thighs, calves, waist, and hips).  It has definitely been a good purchase, in my case and in my opinion.  It’s easier for me to do the workout at home than to go to the gym.  This is not an endorsement that everyone should go sign up for BeachBody, but it’s my personal experience and I found that it was worth my money in this moment.  We’ll evaluate as time goes on.

Total Money Makeover, Week 7

Sorry this post is late!  The week really got away from me.

This week in FPU we talked about dumping debt (week 4).  This lesson made me get really mad at my debt, which is a good motivator for getting rid of it.  Debt is so aggressively marketed to our society that we think it’s the only way to get by financially.  That is just not true.  Just a couple generations before us, debt wasn’t something to be prized and sought, it was an embarrassment.

Dave spent some time during the lesson talking about debt myths and the facts behind them.  Some particularly good facts and points he makes from the lesson were:

  • More than 100 million Americans don’t pay off the balance on their credit cards every month
  • The typical millionaire avoids car payments by buying and driving reliable used cars
  • A car lease is the most expensive way to drive a car
  • A new car loses 60% of its value in the first four years
  • Debt consolidation saves little to no interest
  • You cannot borrow your way out of debt
  • Banks require a cosigner on a loan when the person is not likely to pay – cosigning is NOT a way to help someone you care about
  • The FICO score, or credit score, is calculated based on your interaction with debt, it has no indication of your ability to pay
  • 75% of the Forbes 400 said that becoming and staying debt-free was the number one key to building wealth

How to get out of debt:

  • Stop going into debt.  This seems logical, but many people continue to use credit cards or take out loans after they decide to work toward being debt free.  You can’t get out of a hole if you’re still digging.
  • You must save money – an emergency fund is key to getting out of debt, because then you have a little money tucked away.  When something breaks, you have the cash to fix it instead of using a credit card or loan for the repair.  Dave Ramsey recommends a $1,000 starter emergency fund.  Caitlin thinks it’s acceptable to cushion that a little more if you need it to be comfortable, maybe up to two or three thousand dollars.  That’s not Dave Ramsey approved, though, so take my financial advice at your own risk 😉
  • Sell something.  I have been listing things on ebay and selling paintings for a little extra income.  It’s slow going, but it’s a little bit of help.  If I had gotten started before the weather started to turn, I could have had a yard sale.  I’ll just do a bigger ebay push when I go through my apartment in the Great Fall Purge of 2013.
  • Get a part time job or overtime.  Check.  If you have any spare hours, try to spend them working to get ahead of your debt.  This is a sacrifice, but only a temporary one.
  • Approach your goals with positive energy and intent.  Dave Ramsey says that “prayer really works,” but I am giving you the non-denominational, sort of spiritual but not really religious way of putting that.  My mother always told me, “What you think about, you bring about.”  I totally believe it!  If you go through this process thinking “I’m never going to get out of debt,” then you won’t.  You’ll keep digging your hole, and you’ll make excuses, and you’ll stagnate.  I don’t say this to be accusatory – I have had this attitude.  I fully planned on paying my student loans for twenty five years of my life.  I am 25.  I was planning on making payments until I was 50!  What?  Helllllll no. Now, instead of “I’m going to be in debt forever, that’s just how it is,” I think, “I am going to get out of debt.  I am going to do everything I can to get out of debt as fast as possible!” I have motivation, and drive, and passion to get out from under this terrible mountain of bad decisions I made for myself.
  • Pay off all debt using the debt snowball.  The debt snowball is something we’ve talked about before – list your debts smallest to largest and pay them off in that order, making the minimum payments on all but the smallest.  For me, that’s the car, then a student loan, then another student loan.

Speaking of the car, I got my statement in the mail and my balance is now $4,433.90! I still have October, November, and December to get it paid off by Christmas and I believe I can do it.  I will do whatever it takes.  Next will be paying off my smaller student loan by my birthday.  Goal setting is something that is very important to me and my success at getting out of debt.  I have been worried about my motivation lagging once I get to my big $49,000 loan, because it is SO big and will take me a long time to pay (but two to three years is way better than 25).  I think my goal at that point will be to break it into $10,000 chunks and pay them off one at a time.  I’ll call it $10,000 for every semester of graduate school.

Successes this week:

The highlighted portion is my car loan balance.  Ignore the other numbers, they are my liquidated savings and checking accounts with the credit union... they have been SNOWBALLED.

The highlighted portion is my car loan balance. Ignore the other numbers, they are my liquidated savings and checking accounts with the credit union… they have been SNOWBALLED.

I'm going to turn them into artwork.  Classic me.

I’m going to turn them into artwork. Classic me.

Pre-Op Plastectomy

I canceled all my credit cards.  I had five open accounts: CareCredit, Kohl’s, Macy’s, Fifth Third, and Discover.  All have had zero balances for months or even years, except Discover which I paid off for the last time in September 2013 (and CareCredit which I never even used).

But Caitlin! You need credit cards to build good credit!

It’s true, having an open line of credit and making on time payments leads to a high credit score.  However, your credit score doesn’t actually tell you you’re good with money.  It is effectively your I Love Debt Score.  It tells creditors how effectively you can borrow and pay back money.

Your credit score doesn’t factor in your income, or even your debt to income ratio. It doesn’t account for your savings accounts, investments, liquid assets, or net worth.  All the credit score cares about is your debt.

When you say, “I need a credit score to buy a car,” what you’re really saying, whether or not you realize it, is: “I need debt so I can get bigger debt.”  That is the wrong kind of debt snowball.  To have a good credit score, you must go into debt, stay in debt, and pay your debt like a good debtor.  This used to be my plan.  This is no longer my plan.  I am getting out of debt, entirely.  I am going to be DEBT FREE.

How will you buy things? Egads! Do you know what pays for things, besides money you don’t have (debt)? Money you do have! Do you know what, besides credit, tells people how effectively you can pay money? A big pile of money.  If you can pay cash for a car, I guarantee they don’t give a crap about your credit score.

I think my car was around $18,000.  I really don’t remember. My payment was $325/month to start.  If I had saved up that much money monthly for a year, I would have had enough money to buy a $4,000 car.  Then I could drive that for another year while I did it again, sold the car, and bought a better car. And since my sister is still driving the car I had BEFORE I bought this one, I am confident I could have made it another year to save up for a car without a payment.

I assure you that if you walk in with a pile of hundred dollar bills, you will walk out with a car.  Negotiate. And pay cash.

Same with a house.  You don’t need a credit score to get a mortgage.  There is a process called manual underwriting, which is basically when they take a look with their human eyes and human brains at your finances and determine your ability to repay a loan based on actual things like how much money you make and how you have managed it in the past.  No I-Love-Debt score required.  Not everyone can get a manually underwritten mortgage.  You must:

  • Have a 20%+ down payment
  • Get a 15-year, fixed rate, conventional mortgage
  • Have a strong employment history and personal income to support the loan
  • Demonstrate 4-6 trade lines that span 18-24 months (regularly recurring expenses such as rent, electric bills, cell phone bills, etc.)

Read more: The Truth About Your Credit Score, http://www.daveramsey.com

You CAN live without a credit score!

On to my pre-op plastectomy:

A plastectomy is the process of cutting up your credit cards.  In “Pre-op,” I called all my credit card companies (I had five) to cancel my accounts.

First on my list: CareCredit.  I opened this one because my Chiropractor suggested it to make my supplements more affordable by paying small payments instead of all up front.  Big mistake!  I never used the damn thing, and I am disappointed I even opened it.

Ease of closing: 9/10 – I was able to close the account via the automated message service.  That’s handy.  Minus one point for making me deal with an automated message service.

Next card: Kohl’s.  Customer since 2010. I searched for “Close account” on the website, and got this:

kohlsVery helpful! I called.  There was an automated message thing again, and I had to go through two menus, but they did offer an option for closing the account.  I pressed two and was connected to a very helpful representative who took care of it without a problem.  He did ask why I was closing it, and I said I was closing all of my accounts.  He let me know that I could reapply at a later date if I wanted to open a new line of credit.

Ease of closing: 9/10 – talking to a human was good, but still minus a point because automated things are annoying and I had to look up their info on the website.

Next up: Macy’s.  Cardholder since 2008.  Searching for “Close account” on the website gets this:

macysNone of those things are what I wanted.  It was a chore to track down the right phone number, and the automated system did NOT provide an option for closing the account.  It was one of the speech-based systems where you have to say out loud, “Operator” because pressing 0 like my life depended on it wasn’t working.  The woman who handled my call seemed very sad to let me go and once again told me I could reapply in the future.  She also asked why I was closing the account.  I said, once again, I’m closing them all. Okay thanks, have a great day!

Ease of closing: 7/10. Minus three points for unhelpful website and stupid phone prompter.  But it was pretty easy and quick.

Next: Fifth Third Bank.  I think I’ve had it for a couple years.  I called the customer service number and entered my card number.  No option in the menu for closing an account, but I pressed zero and was immediately connected.  The gentleman who took care of me was quick and very helpful, he just had me verify my name and zip code.  He asked why I was closing the account, and I said “I’m getting out of debt and canceling all my cards!” He said “Can’t argue with that!” and took care of it immediately.  He said that it would take 30 days for the account to be fully closed and taken off my reports, and that they’d report to the credit bureau that my account was closed at my request.  Informative!

Ease of closing: 9/10.  Really professional service, no arguments, but minus a point for the automated service giving me the runaround on a cancellation option.

Now, the one that has been with me through it all: Discover card.  Member since 2008.  This is the card I bought Egg McMuffins with when I was separated the first time.  This is the card that bought my first set of Barenaked Ladies VIP passes.  This is the card I dutifully ran up and paid off each month, the card that financed my first married Christmas “because we could afford nice things” (LOL), the card that is pretty and purple with a monogram C on it.  The card that brought this summer’s Florida vacation home with me and allowed me to re-live all the money I spent while away from home.

Goodbye, Discover card.  This one is tough.  I saved it for last because it’s got the most history with me.  It’s hard to give it up, because I still have a touch of the “Just in case I need it!” mentality, which is no good mentality to have.  If an emergency puts me into debt, then I was just really unprepared.  I now have a dedicated $1000 emergency fund.  I have Aflac policies with cash payout in the event of medical emergencies (like cutting off my finger, or a cancer diagnosis, or a hospital stay).  I have enough cash flow to handle it.  I have to.  If it comes down to it, I can sell my car and leave my apartment and go live with one of those dozens of people who opened their home to me when I asked.  My credit line is not going to save me from anything, and credit is not to be used for emergencies.  You’re supposed to save up and pay for your emergencies.  I will save up to pay for my emergencies.

I had a feeling that Discover would give me a hard time about leaving.  While they were very nice and courteous on the phone, they were the ONLY company that tried to get me to stay open.

discover

Goodbye, you pretty purple thing! You are of no use to me anymore.

“Can I ask why you’re leaving us, Miss Reed?”
“I’m getting out of debt so I’m closing all my credit accounts.”
“Getting out of debt. So no credit cards. Not even for an emergency?”
“Nope.”
“What if you need to travel and buy something online?”
“I have a debit card.”
“Oh, well that would work, I guess.  What if I could give you 0% for the next 6 months?”
“No, thank you.”
“Not enticing enough, huh?”
“Nope!”
“Miss Reed, did you win the lottery by chance?”
“Nope!”
“You do understand that by closing this account, you will have to reapply in the future to take advantage of the many benefits of Discover card?”
“Yes”
“And you still want to proceed?”
“Yes”
“Okay, well your account is closed, Miss Reed.  Maybe we’ll see you again down the road.”
“Alright, bye!”

Ease of closing: 6/10.  I mean, he did it easily, but he made me work for it.

Look at that.  I now have no credit cards.  Wow!

How does it feel to have no credit cards?  It feels good, honestly.  It feels really good.  Now I have no ability to buy anything I can’t afford.

It is now IMPOSSIBLE for me to purchase something beyond my means.

I’m one step closer to being free!

Total Money Makeover, Week 6

Week 3 in FPU is the Cash Flow Planning week.  It’s the week where we talk about the dreaded B-word… the budget.  I, being a nerd, love the budget.  As soon as I committed to making one, I was happier and more secure.  It was like an instant raise!

There are many reasons people don’t do a budget.  It may seem constricting or confining, with the connotation of never getting to do anything you want to do.  A budget may have been used to abuse or control you in the past.  You may have never had a budget that worked.  Or you may be freaking terrified to actually look at where your money goes.

I’ve said it before and soon I will no longer have to say it ever again: I make too much money to be this broke!  I make a very reasonable salary, and yet I was living paycheck to paycheck and overdrafting once every couple months when I wasn’t paying attention.  No more! I don’t even need the overdraft protection from the bank anymore, because I know I am never going to overdraft again, and that’s a very freeing feeling.

A budget should never be used to control, manipulate, or abuse someone.  A budget should be a joint effort between partners to come together an commit to a plan each month.  That’s all a budget is – just a written plan of where your money is going to go.  A written budget removes the crisis management of your money.  I used to be a crisis budgeter.  Oh crap, overdraft, move some money over from savings to cover it.  Oh crap, my electric bill was scheduled to be paid and I wasn’t paying attention and bought something with my debit card, I am going to overdraft! I even switched banks to one that would send me a text when I overdrafted and allow me to move money over from savings without sticking me with a $37.00 fee… I had been with the same bank since college, but I switched for better overdraft policies.  That’s serious.

NO MORE OVERDRAFTS.  It’s all about the budget.  I love my budget.

Here’s how my prior experience with budgeting in my life has gone.

  1. In college, I used to divide up my paychecks into cash envelopes and save toward my goals.  I never overdrew anything and never had a problem with money.
  2. In marriage, we bought a car with basically no money down and with no idea of what it really meant to be able to afford a car.
  3. In marriage, we had a joint checking account that was routinely overdrawn because neither of us knew what the other was doing.
  4. In marriage, we tried a budget, failed the first month, and completely abandoned it.
  5. In divorce, I spent a lot on my credit card and was on food stamps because I was seriously underemployed.
  6. In post-divorce, employed-full-time life, I basically had this mentality: LOOK AT ALL THE MONEY I MAKE I CAN AFFORD TO DO WHATEVER I WANT.

Nope.  No, I really can’t.  While I was able to afford things – like a zero-debt vacation to Spain, ahhh, Spain – I really could have put my money to better use.  I could have been doing this debt snowball thing a year ago and be practically done by now.  But I cannot allow myself to beat myself up over what I could have or should have been doing.  The important thing is that I’m doing it NOW.

Dave talks about the four walls: the things you need to take care of before anything else.  The things that will take care of your family.  The things that need to be a priority.  Food, shelter, basic clothing, transportation, and utilities.  In the lesson this week, Dave mentioned speaking with people who were current on their credit card payments but behind on their mortgage or about to have their electricity shut off.  You must prioritize the basic needs of yourself and your family.

I’m going to do something uncharacteristic of myself and quote a Bible verse.

But if anyone does not provide for his own, and especially those of his household, he has denied the faith and is worse than an unbeliever.  –1 Timothy 5:8

Now, I’m not really religious (in fact, I very awkwardly rejected an invitation to lead the group in closing prayer this week), but even I get this.  It boils down to this: If you can’t take care of your family, your priorities are whack.

You can reduce some of your four walls costs, like downsizing to a smaller house or apartment, selling your home to rent while you straighten out your debt, sell your expensive car and pay cash for a beater until you can afford to upgrade, shop at Goodwill, eat beans and rice, cancel extra utilities like cable or internet, etc.  It’s possible to maintain your four walls of security while scaling them back considerably.  Not everyone will have to do this, but some people might.  I am very blessed that I can afford these necessities and still have some room for a few luxuries.

A written budget has many benefits, including

  • Removing most money fights from your relationship
  • Removing feelings of guilt, shame, and fear from purchases
  • Identifying areas of overspending
  • Giving a sense of control over your money

The easiest and most powerful way to control your money is with the zero-based budget and the envelope system.

A zero-based budget just means that you plan out where every single dollar is going to go that month.  Write down your monthly income and expenses, and your bottom line should be zero.

For example, let’s say my monthly income is $3000.

  • Giving: $300 (10%, you can adjust as needed for your budget)
  • Housing: $500 rent
  • Utilities: $40 electric, $30 gas, $80 cell phone, $30 internet (total $180)
  • Groceries: $300
  • Gasoline: $200
  • Fun money: $60
  • Car payment: $280
  • Student loan: $100
  • Student loan: $350

These expenses add up to $2270, so I have $730 left to allocate.  Maybe I’m saving up for something (Christmas gifts, a car repair, an eye exam, a new computer), or maybe I can throw all of that extra money at my current baby step.  If you’re on baby step one, that’s $730 toward the emergency fund of $1000 – almost done!  If you’re on baby step two, like I am, that’s $730 extra you can throw at your smallest loan to finish it off faster.

But what about irregular incomes? So glad you asked.  Dave also has a form for managing irregular budgets, like if your income is based on commission or you’re self employed with a fluctuating income.  This is sort of like my freelance income, but I’ve rolled it all into one spreadsheet.  I am still finessing it all into a format I like.  With an irregular income, you should plan out the money you need at minimum to meet your four wall requirements.  Then make a list of the things you’d do with extra money – making payments, going to a movie, buying a new pair of pants, whatever you need or want beyond your four walls.  Prioritize those “extra” things, and as your income exceeds your minimum requirements, put the extra money toward the list.

The envelope system helps keep you accountable with your money.  When you have to part with cash, it’s a harder thing to do than just swiping a card and never really seeing the money come out of your life.  That’s one of the biggest things that got my finances out of control – that debit card!  Now I take cash out of the bank for groceries, gas, personal, and other spending (such as visiting my sister, or buying painting supplies, etc.) and keep them in labeled envelopes.  Whenever I add or remove money from my envelope, I write down the amount and the new balance.  At the end of the month, I put all the leftover money toward my debt snowball.

The most important thing to realize with cash envelopes is that WHEN THE MONEY IS GONE, YOU ARE DONE BUYING THINGS.  

I had to adjust my budget the first month because I under-budgeted for gas.  Running out of money in your cash envelopes does not always mean that you’re just done – for gas, you re-evaluate.  For clothing or personal spending or going to the movies, no. You’re done.

I confess that I did add $20  to my September “Personal/Fun Money” envelope for going to a city-wide yard sale with my mom. How I would correct this for the future would be to take a look at my budget and create a “mom” category for things like yard sales, etc. (seriously, it’s a great bonding time for us, as we are both warrior bargain shoppers). I shouldn’t have just added $20 willy nilly.  I’d also like to point out that I did NOT get Chipotle when I was only $0.45 short.  I waited for the next month. See, I have a little self control. 🙂

What I am looking forward to doing is filling out Dave’s Allocated Spending Plan form.  It has weekly columns so that you plan out not only WHERE your money will go but WHEN.

For example:

In week 1 of this month, 9/20-9/26, I took out money for cash envelopes

In week 2, 9/27-10/3, I  paid rent and took out more money for cash envelopes

In week 3, 10/4-10/10, I will pay both loans, my car payment, and my electric bill

In week 4, 10/11-10/17, I will pay my gas bill, my phone, and internet

…and so on and so forth.  The gym is in there somewhere too!  I really need to fill it out.

At the end of each lesson, we’re asked to write down a one-minute takeaway.  This week, mine said:

“Communicating about money is important for a healthy marriage and will eliminate money fights.”  Can you tell I have marital finance PTSD? If I’m going to do it again (and I hope to, someday), I want to be better prepared for a marriage of open communication, especially about money!

If you aren’t following a budget (a WRITTEN budget) right now, I encourage you to do so.  Let me know if it surprises you to see where your money is going.  It sure surprised me when I actually tried to look.

Total Money Makeover, Week 5

Week 5 of the Total Money Makeover and Week 2 of Financial Peace University.

Budget recap

I just finished up my first month’s budget – a full four weeks adhering to the outline I set for myself.  Dave says that it takes 90 days to really hammer out the budget, and he’s probably right.  I had to readjust a couple things, like gas money (ran out, oops), and adding some money for a visit to my sister, a day of yard sales with my mom (only spent $20!), and money for “business expenses” relating to my paintings.  Overall, I feel comfortable with how I did in my first month.

The biggest change to the budget was the fact that I had initially planned it from 8/23 to 9/26, but that was one week too long.  I need two paychecks before the first of the month to make the budget work, otherwise rent will be paid for but I won’t be able to eat or pay any other bills.

Income for the period of 8/23-9/19 came from my full-time job, freelance income, and liquidating all savings beyond my $1,000 emergency fund.  I also sold a few things on ebay.  All told, I have $1635 to pay toward my car this month!  I cannot wait to write that check.

FPU Class

FPU was better this week.  Though it’s still just me and one other couple, we had more discussion as a group this week and I felt more comfortable.  I did get a little teary talking about my divorce and how my life would have gone so much differently if I had known how to handle and communicate about money.  But I wouldn’t change my life at all because I am happy where I am.  And I will learn from my (immense, innumerable, inane) mistakes and be a better steward of my money in the future.  I will also be better at relating with money with any future partner or spouse.

Men and women think of money differently.  Dave says that women have a gland men don’t have… the security gland.  And when they feel insecure about money, or work, or whatever, the gland goes crazy. And the gland is attached to their face, so they go like this:

Do not doubt how much I love this blog.  I do this for you.

Do not doubt how much I love this blog. I do this for you.

And that’s why ladies need an emergency fund.  Guys think the emergency fund is boring, but women need it so our faces don’t stick like that every time something happens.

Don’t let my face stick like that!

There are also generally two types of people in a relationship when it comes to money, budgets, decision making, planning, etc.  The nerd and the free spirit.  Guess which one I am, as soon as I tell you all about my spreadsheet.  Hint: It’s a nerd.

There is also generally a spender and a saver.  You can be a nerd spender or saver, or a free spirit spender or saver.  I am definitely a nerd and still trying to figure out if I’m more of a saver or a spender.  I think I’m a saver, though I am currently spending every extra cent to pay off debt.  At least it’s not shoes.

The lesson also touched on raising your kids to be debt free.  DR suggests putting children on commission, not allowance.  This allows them to make the connection very early between work and money.  If you just hand them money every time they ask for it, you’re not teaching them realistic things about money.  No one in life is just going to hand them money.  Kids under 5 can save up their cash in a large clear container, so they can see it grow.  Kids from 5-12 can use cash envelopes, one for giving, one for saving, one for spending.  They divide up their money in that order and then spend or save accordingly.  Kids 13-15 can get a checking account and learn to write checks and balance their checkbook.

FPU Homework

Identify your accountability partner: It’s pretty much this  blog and my friend Kate on Facebook.

Share your budget with your accountability partner: I totally sent it to Kate on Monday! Winning.

This month I am budgeting for a haircut and some savings to save up for new tires in the next few months.  I will also need new glasses soon.  Hmm, perhaps I shouldn’t liquidate my whole savings account just yet.  I’ve also decided to start investing $2,000 per year in a Roth IRA.  Gotta start NOW!!

What I did in the past week

What I’ve done since we last checked in was start a new job!  I got a side job working on the weekends.  I also had seven paintings go up at the local farmstand to be sold, so I am hoping that works out and people really love paintings of chickens and flowers.