The Debt Tsunami is a gimmick, but it probably doesn’t matter

I saw some people passionately advocating both for and against a new method of paying off debt: The “Debt Tsumani,” which focuses on paying off debt in the order of its emotional impact on you.

As someone who paid off more than $150,000 worth of debt over the course of about four years in the last decade, maybe what I have to say about that matters to you. Read more

Don’t let debt cripple you

Sometimes people ask me for help with their finances. And I’ve seen the effects that debt can have on people. I believe having no debt is best. Having debt that you’re paying off is second-best. Festering debt, however, is crippling. That’s what you want to avoid, before it catches up with you. Not only can bad debts keep you from borrowing more money, it can also make it more difficult to sign a lease or get a job.

Here’s how to make a plan to pay off that debt and improve your credit score.

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A late adopter’s survival guide to Facebook: Part 2 of 3

This is part 2 in my series of observations about avoiding potential pitfalls in Facebook.

What do your updates say about you?

It’s hard to know who’s watching you, and how your updates could potentially come back to haunt you. If your status updates or photos suggest questionable judgment, it could potentially jeopardize your professional life.

For example, it’s easy to make people wonder if you’re ever sober if every status update talks about going out drinking, and every picture posted looks like it was taken in a bar. That’s not necessarily career-killing–I had a coworker once who seemed to have a hangover every single day and he managed to outlast me at that place–but in these tough times, people lose opportunities over dumber things than that.

Boundaries

I’ve dealt with this before. Odds are, at some point, you’re going to run across old flames. I won’t revisit all of that. The most important thing is to live in the present, and set boundaries.

One of mine found me about 16 months ago. After maybe three days of back-and-forth and being part of her morning routine, I set down some ground rules. That ended the conversation, and she hasn’t contacted me since. Maybe that’s not the perfect ending, but it’s an acceptable one.

Every relationship is different, but it’s not uncommon for current spouses/significant others to be uncomfortable when old flames come into the picture. And depending on how the relationship ended, opening old wounds is a possibility. In my case, it was clear the 1997 she remembered wasn’t or isn’t the same 1997 I remember. Maybe she never knew, or just doesn’t remember anymore, that she messed me up pretty badly.

Ending communication showed she did respect those boundaries. And any reasonable person will. They don’t have to like it. The important thing to remember is that once a relationship is over, and especially once there’s a new relationship in the picture, a different set of rules applies.

And let’s talk about two of those rules. Is it wrong for my wife to not want to have to compete with a predecessor for my attention? No. Is it wrong for me to want to avoid getting hurt again? No.

If they don’t respect those boundaries, un-friend them. Or reject their friend request.

Privacy

It should go without saying, but don’t announce to the world, or even just your 999 closest friends, that the entire family is on vacation and your house is sitting empty. And I shouldn’t know that someone my wife knows received enough money in a lawsuit to buy a house. I shouldn’t know this, but I know that and then some, because she posted the whole story on Facebook.

If you want to talk about how great your vacation is, well, wait until you get back and talk about how great your vacation was. If you come into a windfall, well, those 999 people you barely know probably don’t need to know how much it was or where it came from. Maybe you trust those 999 people, but you don’t know who those 999 people are talking to.

And if a friend of a friend–or someone who just isn’t as good of a friend as you thought–finds out you just came into a lot of money and you just happen to be on vacation right now? You tell me what pops into mind. Maybe that person won’t act on it. But it’s better not to even take the chance. These are tough times, and someone may think they’re more entitled to that windfall than you.

Wasting time

I think Betty White put it best when she said, “[Facebook] sounds like a huge waste of time!” And yes, it can waste as much or as little time as you want it to.

Anymore, I check in every couple of days, usually in the evenings, to see what’s going on. A friend from high school got married last weekend. That’s a big deal, and I’m glad to know about that.

I used to try to set time limits for myself, so I wouldn’t get lost in it. Anymore, it’s usually a few skims, some page scrolls, maybe a couple of minutes to post a response to something, and I’m out.

Some people spend a whole lot more time on it than I do, but it isn’t necessary.

Part 3 of this series will follow tomorrow.

Wouldn’t you agree, more income is the answer?

So a friend of a friend came over the other night, pitching a pyramid scheme. He just told me he’d started a business. I figured (and kind of hoped) he wanted to sell me handyman services. Actually he wanted to get me out of debt.

"But I have no debt," I said. He told me I needed to keep an open mind.

I remember the last time someone told me that. It was two Mormon missionaries. To be nice, my wife and I let him keep talking.He kept asking me how much other people would admire me if I helped them financially. "But people have to be ready," I said. "They can go to the library any day of the week and check out a Dave Ramsey book for free and get on their way to climbing out of debt. But how many people do it?"

He said he agrees with some of the things Dave Ramsey says. But he kept trying to sell me on the pyramid scheme. Even when I told him I already had a side business. (I didn’t tell him I’m thinking about two others, neither of which involve any pyramids.)

"Dave, what would you do with an extra $1,000 a month?"

"Max out the 401K, think about real estate," I said.

That wasn’t the answer he usually gets.

Finally he pitched a mortgage scheme. "How many years before you pay off your mortgage?"

"Zero," I said.

He looked at me like I was from another planet. And that was pretty much the end, because he finally realized he had nothing to sell me.

But the one line from his folksy, almost-slick presentation that rang with me was this: Wouldn’t you agree, more income is the answer?

Usually it’s not. Better management is the answer. If you just throw more money into your bank account and manage it poorly, that extra money isn’t going to help you get out of your hole much faster.

And what’s worse, pyramid schemes rarely live up to their financial promises. And they benefit the people above you more than you. From the slide he showed, for every thousand he made, his "trainer" would make nearly two thousand.

I don’t care how you spin it, that’s just not right.

Taking on side work helps when paying down debt. I sure did a lot of it. But I was making money for me, not for other people in a pyramid. Sometimes I paid fees, but we’re talking 10, maybe 15 percent. When I made $100, they made $15. Not $200. I got 85% of the fruits of my labor, not 33%.

But how much I made mattered less than what I did with what I had. I slashed my electric bill. I brown-bagged lunch. I wore secondhand clothes. I bought Chase & Sanborn coffee. (A big can costs $4.95, lasts a few months, and it isn’t very good.)

People sometimes told me life was too short to cut corners like that. But I’d do it again. I think life is to short to spend it paying interest.

I figured out that every extra $10 I could pay every month on the mortgage shaved a full month off the end. Ten lousy bucks. So I nickeled and dimed my way through, finding $1 here, $5 there, and $10 there.

Getting out of debt took several years. But more income alone wouldn’t have done it. My rule was this: I paid 10 percent, minimum, of my monthly income toward debt retirement. Plus at least 90% of any windfalls. By windfalls, I mean extra income from working weekends, tax refunds, bonuses, or overtime.

And if there was money left over in the bank account at the end of the month, I paid that in too. I’d hold back a bit of a buffer for emergencies, and send the rest in to whoever owned my mortgage at the time.

Note that we didn’t have to pay anyone or buy any financial products to get a plan to get out.

Read my other blog posts in this category. You can track the whole journey. I won’t charge you anything. Go to the library and read Dave Ramsey’s books. You can get a plan for free. And that’s good, because you’re much better off putting the money you’d pay for a plan toward actually paying down a debt.

But whatever you do, don’t sign anything!

Running a marathon with no plan

Yesterday I commented on a popular financial blog about using a debt snowball to pay off debt. Another commenter said she would never use such "psychological aids" or some other derisive name, if she ever found herself in debt.

I commented back, saying she could call it whatever she wanted, but I’d call it what it is: a plan. And if you’re going to pay off debt, you either need a plan, or some phenomenal luck.

Just deciding to pay off debt without a plan is a lot like me deciding to run a marathon. A couple of people told me I’m pretty quick running short distances, so hey, I might be able to win, right?

Well, every time I’ve tried to run long distances, I took off and usually built up a pretty nice lead early on. But since I didn’t pace myself, not only did I fall behind, but usually I was struggling just to finish. What about winning? In my dreams, maybe.

And that’s why the debt snowball works. It sets a pace. Follow the plan, focus on just the next month rather than on the big numbers, and whether it takes you six months or seven years, you eventually write that final check. And then you’re debt free.

Sure, you can argue about which debt to pay first and all that, but it’s just details. Do it wrong, and you pay your debt off a month or two later than if you do it optimally. That’s not so bad. You still save thousands, whether you do it right or wrong.

My critic said she got out of debt by selling a condo she’d been renting out. That’s great for her. Unfortunately, five years ago I didn’t have a condo to sell. I still don’t. And neither do most people.

I could have waited for a windfall. But if I had, I would still be in debt.

Nickel and dime your way to prosperity

An old friend and I have been talking a lot about debt elimination these past few weeks. With any luck, both of us will be completely debt-free by age 45 at the very most, and probably sooner.

The trick is to dump as much money as possible into debt retirement. As recently as November, the interest on my Honda Civic was costing me $1.40 a day. Think what you could do with that $540 a year you’re paying in needless interest.

The challenge is finding the money to use to retire debt.Some of these tricks will only save you a few cents. You must get yourself over the it’s-only-25-cents mentality. That quarter can either work for you or against you. A quarter paid at the beginning of a 30-year mortgage saves you more than a dollar by the end of the loan. Can you find a safer way to quadruple your money? I doubt it.

If and when you have no debt, dump those pennies, nickels, dimes, and quarters into an index fund. An index fund just buys you the same stocks that are in the Dow Jones Industrial Average, or some other index. Historically, these funds double in value every seven years. Great Depression, Schmeat Schmepression. Dump a quarter into an index fund and don’t touch the investment, and in 28 years, it’s $4.

So let’s find some creative ways to get some quarters.

1. Pay your bills online. This potentially does more than save you the 37 cents in postage. My gas and electric companies both have arrangements with checkfree.com to allow online payments free of charge. I was invariably late in paying them, which subjected me to interest payments. The other nice thing about Checkfree is that it schedules the payment for the due date. So if by chance you have an interest-bearing checking account, that money can work for you until the last possible day. You probably won’t save more than a couple of bucks a month this way, but that’s $25 over the course of a year. If someone offered you $25 without any strings attached, I doubt you’d turn it down.

2. Make car and mortgage payments as soon as possible. I may be showing my ignorance here, but interest paid to me on most accounts I’ve had is calculated monthly. Interest on my car is calculated daily. So, making that payment as soon as my paycheck shows up in my checking account reduces the principle, thus reducing my interest payments by a few pennies a few days early. It’s only pennies? I’d rather they be my pennies than Honda’s.

3. Use credit wisely. I remember one day a few years ago, I was at the grocery store and instead of pulling out my debit card, I pulled out a credit card accidentally. I thought how awful it would be to have to pay for life’s necessities on credit.

But if you’re disciplined, and you have a credit card with rewards–and we should be talking cash here, not merchandise–then it makes sense to pay for life’s necessities on credit. Take a look at my Discover Card bill, and you’ll see the bulk of it is things like gasoline, groceries, my telephone bill, and $20 trips to Kmart, which means I was probably buying stuff like toothpaste and deodorant and other household necessities. I pay the balance in full every month, so the result is essentially some bank paying me to buy the things I’d need to buy anyway. This nets me about $80 a year. I never see a dime of it–I apply it directly to the card’s balance.

4. Buy a programmable thermostat. The cheapest programmable thermostats cost about $30. They can easily save you that much in a month. During my 8-hour workday, my thermostat only heats the house to 56 degrees in the winter time. It cools it to 82 in the summer. During waking hours and on weekends, it keeps the house at 70 degrees in the winter and 75 in the summer. During sleeping hours the temperature raises or lowers by 5 degrees depending on whether it’s summer or winter. I used to have $300 heating bills in the winter months. Now I have $175 bills. That’s still ridiculous, but it leaves me money to actually do something about it.

5. Cut out the sodas and snacks. I used to routinely spend $1.50-$2.00 a day at the vending machine and the cafeteria at work, buying coffee, soda, and snacks. Over a 240-workday year, well, do the math. The 34.5-ounce can of coffee in my fridge (it lasts longer when stored there) is marked 9-26, the date I bought it. I expect it will last me until the end of the month. So that can of coffee will last me five months. I buy the off brand, so I can sometimes get one of those cans for between $3 and $3.50. So my morning coffee costs me 2.3 cents. I quit drinking soda entirely and I pack a granola bar in my lunch. Over the course of the past year I am sure I’ve saved $300.

6. Pack your lunch. Lunch at a sit-down restaurant almost always costs you $7. Fast food usually costs at least $5. The cafeteria at work is usually $3-$4. Sometimes I pack leftovers that would otherwise get thrown away, so they’re essentially free. It’s fairly easy to pack a lunch for $2. Again, do the math over 240 days. Do you want to spend a house payment on lunch every year, or do you want to spend a car payment instead?

7. Eat out less. A couple of years ago I was dating a girl who had to eat out 3-4 times a week, at least. Usually it was places where I was lucky to get out for under $20. I always paid, of course. I couldn’t figure out why I didn’t have any money. But with a little creativity, it’s entirely possible to make dinner for two for $4. You can make a fairly impressive dinner for two for $10.

8. Shop the cheap stores. St. Louis has five different chains of grocery stores. At the top of the ladder is Dierbergs, followed by Schnucks. A third local chain, Shop ‘n’ Save, generally beats the Schnucks and Dierbergs prices by a few percent. But now I do most of my shopping at two stores that white-collar professionals rarely visit: Aldi and Save-a-Lot. In most cases the quality of the product is the same. But when I can get a loaf of bread for $.99 versus $1.59, the difference adds up quickly. For the things Aldi and Save-a-Lot don’t carry, I still go to Dierbergs, but I rarely spend more than $10 at Dierbergs now, unless they’re running a big sale on something.

8. Buy generics. A lot of people are afraid of generic products because they feel they might be getting ripped off. You’re actually a lot more likely to get taken with a costlier brand name. I’ve found the quality of most generics to be as good as the name brands. When it isn’t, I try a different generic the next time. Eventually I’ll find a generic that’s as good as the big name brand, and save a bundle. I’ll buy the name brands when they’re on sale, but aside from that, my pantry is full of generics and I don’t care who knows about it.

9. Don’t spend a dollar to get 14 cents. A common excuse for not paying down your house is that the interest is tax deductible. That may be, but you’re getting pennies on the dollar. My car payment was costing me $1.40 a day until I paid it way down.

It’s tax time. That means you have a piece of paper that tells you exactly how much interest you paid on your house last year. Are you paying $14 a day to inhabit a house you supposedly own? That tax deduction only reduces the net cost to $12. I can think of better things to do with $12, and I’ll bet you can too.

10. Don’t spend your windfall all at once. Are you getting a tax refund? Did you get a bonus? Have you been working a lot of overtime lately? It’s OK to reward yourself and/or your family. But don’t blow all of it indulging yourself. Spend 10 percent of it, tithe 10 percent of it, and use the rest to retire debt, and dream of the day when you have no mortgage payment and no car payment and every paycheck is a windfall.

11. Save your pennies. Coinstar, the makers of those change-converting machines in grocery stores, says the average household has $90 in loose change scattered about the house. A fairly painless way to save money is to dump your change into a jar at the end of the day, rather than spending it on frivolous things. At some point, convert the money into a more usable form, then apply the windfall rule to it.

12. Cascade your debt. I pay extra on my car every month. When the car is paid off, I’m going to start adding that amount to my mortgage payment every month, except in case of emergency. I estimate I can have my house paid off in about five years by doing this.

13. What will I have to show for this purchase? This is key. Before you spend even a quarter, consider what you will have to show for it by buying it. Just because you walk past a candy store in the mall doesn’t mean you have to go in and buy something. If you’re lucky, all it’ll do is rot your teeth and make you fat. You could have paid that quarter into your mortgage and turned it into a dollar.

Some purchases are unavoidable. In a couple of months, I’m going to need new tires. I can think of a million things I’d rather do with that money, but I need it. That’s OK. I’ll have it.

The trick isn’t to live in total self-denial, but to exercise restraint. Most of us live like millionaires, but the problem is that we’re spending our million dollars instead of letting it work hard so we don’t have to work as much. And it’s killing us.

A nice Labor Day.

Yesterday was nice. I got up late, then bummed around all day. I did a couple of loads of laundry, and I put a different hard drive in my Duron-750. Then I ignored my e-mail, ignored the site for the most part, and installed Wintendo (er, Windows Me) and Baseball Mogul. Around 6 I went out and bought a CD changer. My old 25-disc Pioneer died around Christmas time and I never got around to replacing it until now.
I knew I didn’t want another Pioneer. I’ve taken that Pioneer apart to fix it before, and I wasn’t impressed with the workmanship at all. And current Pioneer models are made in China. So much for those. I looked at a Technics and a couple of Sonys. Finally, swallowing hard, I dropped $250 on a 300-disc Sony model (made in Malaysia). I still suspect it’ll be dead within five years, but maybe it’ll surprise me.

I am impressed with the sound quality. It sounds much better than my Pioneer ever did. It’s really sad when you can tell a difference in sound quality between two CD players, but I guess that just goes to show how many corners Pioneer cut on that model. Next time I go CD player shopping, I’m going to bring a disc or two along to listen to in the store so I can hear the difference.

Anyhoo, I played two seasons of Baseball Mogul and guided Boston to two world championships and a boatload of money. But something happened that made me mad. I noticed over in the AL Central, Tony Muser’s Losers, a.k.a. the Kansas City Royals, were above .500, with essentially the same team that’s looking to lose 100 games this season. Well, there was no Donnie Sadler, Muser’s secret weapon, currently batting about .137 (which also seems to be about Tony Muser’s IQ, seeing as he keeps playing the guy). So the Royals minus Muser and Sadler were a .500 club. That’s nice to know.

Then, for 2002, Kansas City went and got the biggest free-agent bat they could afford. They also didn’t trade superstar right fielder Jermaine Dye, and they re-signed shortstop Rey Sanchez. And what happened? Well, the first round of the playoffs was a Boston-Kansas City affair, that’s what. I’d used the previous year’s windfall to buy myself an All-Star team, so I rolled over Kansas City in four games. I felt kind of bad about that, but it was partly because of my record against KC’s rivals that year that they made it that far, so not too bad.

It’s all I can do to keep from e-mailing Royals GM Allaird Baird and asking him why, if Tony Muser insists on playing Donnie Sadler every day, he doesn’t consider letting the pitcher bat and have the DH hit for Sadler instead.

And shocking news. HP is buying Compaq. I didn’t believe it either. Compaq’s recent problems, after all, were partly due to its purchase of Digital Equipment Corp. and its inability to digest the huge company. The only benefit I see to this is HP getting Compaq’s service division and eliminating a competitor–Compaq’s acquisition of DEC made more sense than this does.

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