Financial Freak Show

Debt is not always a bad thing to have. Though for most people and most situations it is either dumb or unnecessary. In Ron Blue’s book The Debt Squeeze he addresses when he feels it is okay to borrow money and carry the debt. He lays this out in four simple rules that I’ll summarize for you:

Rule 1: Common Sense; this rule is pretty straight forward. You need to seriously consider what this debt will do to/for your life. Will the payments stress you family, your business, yourself? Are you making a mistake at some level by bringing this into your life? Will this be a blessing now and in the future of are you signing up for another future financial disaster and just justifying it somehow? Does this purchase fit well into your financial plan and future goals?

Rule 2: A Guaranteed way to repay; this is the rule that caught my attention (it’s a good one so stay with me!)  Can you guarantee repayment for this debt? I’m not talking about promising all of next year’s paychecks, I’m talking about a guaranteed way to repay. What this means to me is not borrowing money towards things that cannot stand good for themselves. Real estate is a great example. A mortgage is secured against the value of the property itself – assuming you had a proper down payment or solid equity when purchased. If you can’t make the payments in theory the value of the asset would stand good for the debt liability. Purchasing a business may also fall into this category assuming you are buying true assets and not just a process or name.  

A car (especially new) almost never falls into the guaranteed repayment category. This is due to the value of vehicles dropping too fast. Cars almost never increase in value (well not the kind you drive anyway). So unless you are borrowing $1,000 on a $12,000 car I doubt a financed vehicle can truly stand good for the purchase on its own. I know this sucks but how many people do you know with a financed car can sell the vehicle and clear the debt with the proceeds from the day they drive it home and through the life of the loan? That’s not a guaranteed way to repay.

Sometimes you can pledge the value of one asset as collateral for another financed asset. If you have the ability to take that route then you may have fulfilled Rule #2 and if you’re okay with that then I’m okay with that!

Obviously there are many variables to consider for Rule #2 but this part of the debt decision deserves some serious consideration and some honest answers to some tricky “what if” questions. Can you remove this debt burden from your life if necessary without being kicked in your financial groin? If you can’t answer yes to that question stop right here and reconsider.

Rule 3: Peace of heart and mind; Rule 3 is a bit more spiritual than the others in my opinion. How is this debt going to make you feel? Are you going to beat yourself up over the next five years for making a quick decision? Are you going to unintentionally going to forgo some big goal in the future for a pick-me-up right now? Will you lock yourself in to a job you don’t really want because you strapped yourself with a house payment you can barely cover? Will you put off your saving for the kiddo’s college to drive a new truck? Will you be able to sleep at night after you sign on the line?

Rule 4: Unity; This rule is easy to explain. This rule relates to married folks or people partnering with someone else in one way or another. Basically what is being said here is if you’re going to be in debt you need to be on the same page with your spouse or partners on what is happening and what is going to happen in the future. That’s really it. The two of you need to have a solid agreement and commitment to carry the burden together as one.

So assuming you can come to terms on these four rules this debt may not be such a bad thing in your life. That said, if for any reason you question don’t have a solid honest answer for any of these rules you may be buying a ticket for a ride you didn’t really plan on taking. Financial decisions should be very deliberate and well thought out no matter what dollar amount is involved. Slow down, take a little time and consider all your options then move forward deliberately and cautiously – every time   

Do you agree with these 4 rules? Have you taken on debt without considering one of these principles? How’d that work out for you? Please share.

Here’s a guest post from my favorite military wife / mom. In this post she talks about her change in mindset around the extra deployment money that’ll be coming in soon from her husband heading off to do what needs to be done for those that can’t do it for themselves. For those of you not familiar with the military pay; “deployment money” is the extra pay they receive when they’re deployed…hence the name “deployment money” and to sweeten the deal many times this money comes to them tax free. Apparently they can earn a noticeable pay increase during the time they are taking on the bad guys – and in my opinion they deserve every damn penny they get!

Enjoy the following guest post – and when you get to the part about “a very wise man” and “single-handedly did something Superman and an army of super heroes couldn’t have done” remember that me she’s talking about- oh yeah!

‘Deployment money” a military wife’s favorite words. Visions of Coach Bags and spa trips dance through her head while trying to fight back the tears as her husband boards the plane. We all do it, yet most of us won’t admit it. This time though I’m taking this deployment to a whole new level. I’m on a mission to go down in the military spouse hall of fame as the one who passed the Coach bags in the Exchange and with a disdainful smirk I head to the children’s section for the half priced shoes. Ever notice they put those gorgeous bags right in the front walkway of the store? I am on the road to paying off all of our debt. All of it, all $125,000 in credit cards, car loans, and the boat. Our awesome boat – yup, the one we can’t afford to put gas in.

Thank you to a very wise man who, in a 20 minute conversation, single-handedly did something Superman and an army of super heroes couldn’t have done. Got me (of my own free will no less) to pull every credit card out of my wallet, wrap them pretty in a rubber band and throw them in a drawer I affectionately call the “junk drawer.” Fitting name huh? I then proceeded to break the news to my husband. We sat down and had what was probably the most open and honest discussion about our finances in almost nine years of marriage. We mapped out a plan TOGETHER, figured out where we could cut back, then celebrated… by eating our first dinner at home in a long time! (a personal apology to all Olive Garden shareholders).

Using my husband’s first “deployment money” that came in from a recent short trip, I paid off the lowest balance debt. Seeing that first zero was almost as exciting as a new pair of shoes. The second zero balance I have achieved almost made me… well you get it.

It’s a game now. I created a sweet little excel spreadsheet staying true to my “excel goddess” nickname that auto-calculates our totals, gives me the percentage paid down on each debt and the total percentage of debt paid off to date. Are you ready for this? 10.24% in 2 weeks. TWO WEEKS!! That’s about $12,000 of worry, stress and interest we’ll never have to pay on again!! He leaves again in a few weeks for 6 months this time. And I will sit in my office every day and secretly curse all of the women telling stories of the money they spent the past weekends on shoes, clothes and manicures, and I think of all the things our family can do with our money when he comes home. Things like a family vacation paid for with actual money. All out of our bank account instead of on credit cards. Amazing.

I have a feeling the next 6 months is going to change the rest of their lives. So do you think she can pull it off? Do you think somebody’s going to get hurt if they stand in her way?

Please take a second and add an encouraging comment.

No, this isn’t a post about selling drugs to pay down your debts, though that could work pretty well until “the man” comes looking for you. Of  course once they catch up with you and slap you in prison for the rest of your life you probably won’t care much about repaying CitiBank.

If you follow my posts you will know that I recently sat my lazy butt  down on the couch and watched the entire 2-hour Cocaine Cowboys documentary. For those of you familiar with this program you’ll know that the people interviewed and discussed in this program worked diligently for years to become the best in the cocaine importers in the world.

So the question that came to my FinancialFreak mind after watching this program was what made these guys so special, how did these guys become the best in the business while others were being mowed down in the streets. Two things come to mind. They showed persistence and they performed with excellence, they paid attention to every last detail. These people never gave up, they were absolutely relentless. When they failed at a drop or a pick up they made corrections and went at it again.

Here is an excellent example of what made them so effective. According to a pilot being interviewed they came up with a plan to drop large bundles of cocaine fitted with radio beacons into the water off the coast of Florida from a plane then retrieve them by speed boat. Apparently they had an issue with the suppliers taking shortcuts while packaging the product so as soon as the first drop hit the water the bundles exploded spreading a couple million dollars with worth of high grade cocaine into the Gulf of Mexico. Here is where the persistence part comes in. Do you think this was their last attempt at this plan? Of course not these guys are grade A hustlers. So after delivering a couple mil’ worth of dope to the fishes they tried again. They readdressed the issue with their Colombian suppliers and demanded new packaging for a second attempt. Again the bundles leaked and the drugs were destroyed. So do you think this was their last attempt at the plan? Nope, again they contacted the suppliers had them fix the issue and after two tries and several million dollars in losses they finally got it right.

So through their persistence they became the first guys to move massive amounts of Colombian coke into Florida. While striving for excellence in their chosen trade they only got better at this. The point here is that they never let up, they never folded, and they never stopped fighting, they kept throwing punches until ”the man” finally took them down.  Most people don’t even begin the fight to create excellence in thier lives let alone stay with it. This brings me to my question for you….

Why are you not the biggest, baldest hustler in your city? Let me know what you should be doing better in your life but haven’t displayed the excellence or persistence these guys have?

It’s pretty easy to pick some goals  then get off your butt and begin working towards them. It’s also just as easy to focus on too many goals at once. In a previous post Take Aim & Kill It I talk about focusing all your financial resources at your smallest debt and working to eliminate it as rapidly as possible. Here I want to talk about why focusing on your debts now is important to reaching those larger goals further in the distance.

A contractor friend once told me this quote:

When you come across an electrical problem and a plumbing problem…don’t try to fix them both at the same time!

In other words don’t try to do too many things at once. I decided I would be better served by focusing on debts now which has allowed me to focus more on financing my retirement and reaching those larger goals. I once heard a story about a apartment maintenance man that bought his employer’s apartment complex with cash and managed to retire with over $3 million in the bank years later (that story could be  total B.S. but I did hear it). Well the story goes like this…He saved his butt off and even though he wasn’t making a ton of money over time he managed to save up enough dough to buy the small apartment complex he worked at and began creating some wealth. That’s pretty much the story. Instead of spending his money he saved his money and as the story goes eventually had enough dough to make a big fat real estate purchase. My guess is this person was a pretty simple dude and probably kept himself out of debt (I don’ see any other way he could really save up a ton of money like this). The obvious advantage though is that he was able to use his income to build something instead of paying for crap he bought in the past + interest.

Even if the story I heard was total B.S. the theory’s still valid. Freeing up your income by clearing your debts will allow you to stash away more money and collect interest instead of paying interest. Do that long enough and large enough and you could eventually turn that stack of money into investments to replace your income and build some wealth.  In my post I Call a Do-over I talk about some other advantages to freeing yourself from your everyday debts. As long as your income keeps going towards interest payments on credit cards and cars its going to be hard to use this money for much of anything else (it’s hard to save it if you don’t really get to keep it). So by wiping out my debts I’m now able to save and invest money much more aggressively because I actually have more available money now. 

I’m a long way from paying cash for my an apartment building but I’m a whole lot closer now that my money stays with me at the end of the month.  Freeing up my income has now given me access to the one tool I need to begin building some wealth, my income. 

If you were able to free yourself up from monthly debt payments what would you do with all that money?

While cruising around twitter I came across a guy cruising around Detriot delivering pizzas in an attempt to cruise his way out of $101,000 in debt. To keep himself sane while he’s working deliverawaydebt updates his loyal followers on how his pizza delivery world.

With tweets like his “stiffy alerts” (when folks don’t tip him) and various other customer updates I had to learn more about Jeff and his leased Hummer H3 drivin’pizza delivery story. Actual tweets from deliverawaydebt:

4/14-Delivered to the local Moose Club. I deliver to their cook every friday night. I walk in and shout JIMMY! He shouts JEFF! back. Nice

0/21 STIFFED stupid lazy lady wouldn’t get off her big butt to sign the credit card slip. Had her kid walk it 2 feet to her- LAZY!!

3/18-1/31 Thanks for the buck! I loved climbing the 75 stairs to get to you door. Hope you don’t get any bbq sauce on you, 20 wings

STIFFY ALERT!! 0/13 Guy looked like a drug dealer. Had on a watch that looked worth $10 grand plus. Prob rhinestones from the be-dazzler kit

First the Lions win today and then my first run is a 5 dollar tip. What a day!

STIFFY ALERT-lady was singing the song from Dora the Explorer. I even finished the song for her and she still stiffed me. Guess I need vocal lessons

2/13- dude was in a smoking jacket. Must’a been expecting a playboy bunny. Sorry man no dice.

$62 on 13. Made more on Sunday than Friday again. Time to go home and go to bed 5am is just around the corner

4/16-0/12.96 STIFFY ALERT yeah she counted out the 96 cents for me. Thanks lady I guess it’s back to the Coinstar machine later.

This guy is killing it for all the right reasons! – enjoy this post written by the legend himself…

Everyone who’s working on paying down their debt has a specific moment they decide to start the long and painfully journey.  For my wife and me it was a couple of months after returning from an overseas assignment in China.

In February 2007 we had taken an excellent promotion which would fast track my career and put the money we needed into our pockets so we could pay off our debt.  At this point we still had not combined our money; we’d been married about 6 months.  She was working and paying for her car, credit card, and her other bills.  I was paying all of my bills, the house, and entertainment for us.  We were two people with proportional amounts of debt given our separate incomes.  We never sat down and talked about money, we never took the time to see the totals of our debt.  I was making good money and all the bills were being paid, so there must not have been a problem.  Budget, not us we didn’t need one.  Budgets are for poor people who don’t make as much money as we do.  The new job was going to take care of the debt anyway, right?  Our thought was once the normal bills were paid everything left over would be applied directly to our debt. 

We returned to the US in March 2008.  I decided I didn’t like the job and was not the right person for the position.  Add on the fact that we really didn’t like the location.  We were 2 of 20 foreigners living among 3.8 million Chinese.  I took a demotion and returned to my old job.  Now remember the new job was going to pay off the debt we had.  Upon our return we had made zero progress on paying down the debt, wasting a whole year of opportunity.   The next major problem was that we loss of the $1,950 per month by working outside the USA.  Upon returning all overtime was eliminated, the $2,000 a month I received before the trip was now gone.  We had a deficit of almost $2,000 per month to figure out how to cover. 

My wife worked in Media Planning (marketing) before our move to China.  She could go back to work to make up our money shortage, but we also found out we were pregnant for the second time.  Day care for a young toddler and a newborn would cost us $1800 per month, wiping out any money my wife could have made.  Back to the drawing board we went.  I’d been listening to Dave Ramsey for a couple of weeks when I heard him say that delivering pizzas was a great way to make extra income.  After talking it over with my wife, we decided that I would make the sacrifice and take on a second job.  I applied and was accepted to a new pizza joint down the street.  I started delivering in May 2008. 

In January 2009, I drafted our first budget.  Following Ramsey’s advice and after reading a ton on the subject of budgeting, I was able to put everything on paper and see how the money moved in and out of our hands.  We did this for a few months and felt that we were in control but the debt wasn’t going down.  There had to be a better way.  In April 2009, my wife politely suggested we seek out some professional help (she’d been asking to do this for quite awhile, but I was the roadblock to making it happen.)  Yep, I am definitely one of those people who never ask for help.  It’s a good thing my wife knows this and stepped in to straighten me out. 

I looked for a Financial Coach on the Dave Ramsey’s website under the Endorsed Local Providers section (ELP), and found one that was in my area.  With one call to the ELP we had an appointment set up for the next week.  After our initial counseling session my wife and I were excited to get started.  We drafted a better budget and started to use it.  Two weeks later we meet with our Financial Coach and were able to fine tune it and put his system into practice.

We had a total of 3 coaching sessions and after a little over 4 months after starting our plan we had paid off over $13,000 on our debt.  Wow, looking back this was the single most valuable step we’ve taken in our quest to eliminate debt.  Now 100% of the money generated through delivering pizza is applied to our debt.  We’ve paid off both vehicles and use that extra $700 per month to eliminate the debt.  We’ve also been able to pay off another credit card giving us another $100 per month.  That totals to around $2,000 per month including the pizza money that we put toward the debt. 

My wife and started with $101,000 to eliminate.  That’s including our second mortgage and all personal, credit card, and student loan debt.  We finally feel like we are making headway, our debt free date is Oct 2011.  This will be a long in difficult road, but having a plan and working it is the only way we will get there.  Being away from my family at night is one of most difficult things I’ve had to do.  When I look into my kids eyes though, I know it will be worth it.  They will have completely funded college accounts, they will have parents who don’t argue about money, and they will learn about money at an early age and will have their Father around to play with and love them.  It’s tough, but nothing in life that really matters is easy. 

If you’re interested in reading about the day in the life of a pizza delivery driver, follow me on Twitter at @deliverawaydebt.  I tweet about the crazy things that happen during my shifts. I’ve also started a blog to write about all the fun my family is having paying off debt.  http://deliverawaydebt.com/

Thanks to FinancialFreakShow for allowing me to share my story with you

 Jeff Kosola

-post written by Jeff Kosola - Thanks Jeff, your an inspiration!

The reality is you only have the opportunity to make so much money during your life. No matter what career path you choose, no matter how much you get paid, not matter what your investments return, no matter what you inherit, no matter how totaly awesome your blog is!…there’s only so much money you’ll have access to during your lifetime.

I was thinking about this the other day when I heard two ladies complaining about their money issues while they were sitting in Starbucks drinking two $4-ish cups of coffee. You can‘t really complain about not having enough for retirement while you’re sucking down eight bucks worth of coffee (well you can but no one will really care). Even worse I went to lunch recently with a friend who was complaining about how he was broke. That’s not the annoying part though; the annoying part was that he was complaining about being broke while we were driving in his $46,000 Lexus GS350.

My point here is that in both of these cases these people were likely thinking more short term than long term or their problems really weren’t as much of a concern as they were saying it was. Either way I’m fine with it, it’s not my money they’re spending. Though this is something I think about from time to time when I’m making spending and saving decisions. Remember you only get so much money into your life. If you don’t believe me ask an older person I’m sure they’ll tell you what they think about it the idea of infinite money. Ask them if they’d take a do-over if they had the chance. Ask them if they would make spending and saving decisions differently if they could.   

So the next time you hit “4-bucks” to grab a mocha or stop by the Lexus dealer to browse think about the fact that you only get so much money between now and the end of this road trip and consider how your decisions today may fit in and affect your life a little further down the road. If you’re okay with it at that point so am I just don’t take me to Starbucks in your new Lexus and complain about how your broke because I likely won’t care too much at that point. Don’t worry though….I’ll still let you buy my coffee

It’s funny how people will sometimes ask a question of you then argue with the answer you give. This blog has brought out the financial questions from people around me and sometimes people don’t want to actually hear the answer to the question. Yesterday one such question started a discussion with a friend of mine that went around in circles for what seemed like a month. Then we abruptly came to an agreement and this quote sums up the feelings around that moment of truth…

 Nothing sucks more than that moment during an argument when you realize you’re wrong. – unknown

 Luckily I wasn’t the one having this realization, at least not this time anyway. The question that sparked the chat was basically this: “how do you get out and stay out of the cycle of car debt?” For myself I saw a pretty straight forward answer (as most personal finance questions are in my opinion). The idea is to save up enough money to pay cash for your next car…that’s it, it’s that simple. The theory itself is simple but getting it done takes some work. We can discuss endlessly the different techniques of how you might pull that off (and I may sometime just not right now).

 My friend’s realization described above was sparked when I asked him the following question:

If you can afford make the payments why can’t you afford to save for it, especially a purchase you can plan ahead for?

Once this question was posed the conversation slammed to a halt faster than a school bus at the train tracks. He looked at me and said I guess you have a point. Things really are that simple. If you have some time to plan for the expenses all you need to do is plan for the expense. True, it’s not much fun and it sure isn’t very sexy but it works. That’s how most of our grandparents bought stuff like cars. They saved up for things and when they had the money they would make the purchase. So what’s different now? Try: marketing, peer pressure, greed, impatience, a lack of discipline, aside from those roadblocks (especially the lack of discipline one) this idea pretty much works the same as it did before.

I doubt our conversation will change the way he operates his finances moving forward but at least the question was recognized and there may be that little twinge of guilt each time he unnecessarily spends on credit. True this may not ruin his life but at least he can now add one more option to his financial text book in his head.

So I now pose the question to my readers:

If you can afford make the payments why can’t you afford to save for it, especially a purchase you can plan ahead for?

Go ahead you can post your excuses in the comment section.