Financial Freak Show

A coworker of mine isn’t quite buying into the whole “eliminate all your debts so you can easily afford to fund you retirement plans and build wealth” idea. So we we’re discussing what is a manageable amount of debt if you’re not going to suck it up, focus, and go all the way and instead take a more half-assed approach and just sort of eliminate some of your debts (most likely temporarily though). I decided that I would look into the numbers for him anyway because any money discussion can be a good discussion for most and it can’t hurt to get a better idea of what many feel is normal debt (well broke people call it normal).

After a fair amount of un-reliable research on personal Debt to Income ratios here are some numbers I came up with – remember your home mortgage payment is also included in these numbers, no cheating here

45% or higher debt to income – Things are scary (you probably already knew that). You are walking too close to the edge and some drastic measures should be taken to address the issue.

35% to 45% debt to income - You’re still walking close to the edge but not quite as close as above. Don’t slip up here though since you likely have no cash cushion you’re one mis-step away from stumbling into serious trouble. Now is the time to make some changes while you still have a little breathing room.

30% to 35% debt to income - You’re probably feeling like you’re in pretty good control of things compared to your peers and lucky you they’re offering to help you run up debt as fast as they can get the offers into your mailbox. This area is manageable and should allow you to fund retirement at a reasonable level (especially with employer matches in place)

30% of below debt to income – Below 30% you looking solid! This means you pay 30% or less on your debts each year. You could save 15% towards retirement, pay all your debt payments and still have 45% of your money for all your other junk.

So take minute, pull up your little list you created here: No shortcuts here, now let’s calculate you debt to income ratio. For the steps to do this read check out Calculate your Debt to Income Ratio and see where you stand. This should help you plan your next steps accordingly, remember the more information you have to work with the better decisions you can make.

Members of the Financial Planners Association were asked in survey what monthly expenses are the easiest to cut back on. Not surprising, with 81% of the votes, the answer was “Eating one less dinner out per month.”  True, it does seem pretty easy to cut out only one dinner out over an entire month of spending. To me that barely seems like much of a sacrifice at all. 

The tough part for me was once I sacrificed a dinner, passed up a mocha, or dodged an evening with friends was putting that salvaged dough to good use. Normally the money would stay in our checking account until I managed to blow it on something else and not making any progress financially even though I “sacrificed” my lifestyle in some way. So I came up with a plan to attempt to pick up these scraps and try to take advantage of every little opportunity I could to crawl further out of the gutter.

It was pretty simple. If I “sacrificed” something, no matter how small, I would note how much money I saved from our budget. Once I get back home I would immediately access our checking account online and make a payment to our next debt in the same amount I just saved myself from spending. In some cases this was this was as small as skipping a $4 iced mocha or as large as us passing on the opportunity to spend a $100 night out with friends. No matter how small the sacrifice was I would transfer the money immediately towards the debts. Yes, this was far from a life changing debt elimination plan but when we added this to what we were already putting towards our the debts it all added up to more progress at the end of the month. Not to mention the motivation that came with making progress almost daily. I also recently used my Micro Paymentality habit and wrote about my Sick Day Bonus Pay. I figure I only have to skip those Starbucks mochas 32500 more times and I can afford my new car!

So have you tried this style of making payments? How did it work out for you?

My wife’s hospital trip last week reminded me how sweet high speed WiFi access combined with Netflix can be and more seriously that my company’s health plan’s open enrollment period will be coming up soon. As the end of the year approaches now is a good time to assess your insurance plans (exciting stuff I know!) Now may be a good time to get your thoughts in order for any changes you want to make to your policies for next year – I hate making important decisions on short time lines. 

Just as important as reviewing your insurance needs is burning through any extra dough you may still have laying around in an FSA and if you don’t participate in an FSA you may consider signing up this year. Here’s a brief refresher on how FSA plans work in just case you were sleeping though the HR presentation last fall. A FSA plan allows you to stash away money pre-tax to use towards “health related” expenses. For many this is a pretty sweet deal and can save you some cash every year on things you’ll need to pay for anyway. The only catch to using an FSA plan is if you leave any money unclaimed at the end of the year your company keeps it…how nice. Why they don’t make you pay the tax and keep what’s left I don’t know but that’s how the FSA rule book plays. This also means money you did spend but didn’t submit for reimbursement before the cut off also goes away for good. Many plans do cut you some slack and allow you till March to submit for reimbursement but I recommend staying on top of it as best as you can.

So if you still have some cash sitting in your FSA order up some dentist chair time and get those gold teeth polished up and if that doesn’t fit your style I recommend you stock up on some Maalox to help you stomach next tax season.

Do you use an FSA? How has it worked out for you?

In an earlier post titled To Whom the Accidents Happen I wrote about how some people always seem to have something “happening to them.”  The issue I want to discuss here is the money problems that always seem to “happen” to these folks. When I was deeply in debt and had no money except my paychecks it seemed that every week, or at least every month, there was some sort of an emergency in my broke crappy life. Emergencies suck and emergencies when you have no money suck even more.

I also noticed when something went wrong while I was your broke I didn’t have an emergency…I actually had two emergences. The first was the actual emergency itself and the second was the money emergency that arises from the initial emergency. In the one case of a couple I was counseling a recent accident was further compounded by several hundred dollars in overdraft and late fees that were applied by their bank. The additional expense drug the problems into the subsequent months amd magnifying the financial fun they were having. They actually incurred over $400 in late fees and overdraft fees and if I remember correctly this actually required almost as much money to clean up as the initial emergency required in the first place!

The Emergency fund is really the only way to prevent this from happening without going into some sort of debt. The Emergency fund though can only prevent problems from growing to the extent you actually have enough dough to fight the battle. True in most cases you could go into debt to resolve the problem and that’s what most people do – it seems like an easy enough answer. Since they rarely have access to much real money they pull out the plastic crutch and beg for mercy. This does work but you have now stretched this emergency into the subsequent months, and often times years, until the debt is paid. The big problem with this strategy is that now you have weakened your current financial position and will have to fight that much harder to survive the next emergency. This is especially true if the next emergency arises while you are still trying to pay for the last one(s). So now do you not only owe money (plus interest) but you still don’t have any money, I know this because if you did have any money you would have used it in the first place.

I feel building an emergency fund is crucial to any financial plan. To be honest I think it’s more important than paying your debts off completely. Though I think to build a solid financial foundation you need to do both. It’s also much easier to build your emergency fund once you have freed up the cash you were previously paying towards your debts. If you added up all the money you pay out in credit cards, student loans, and car payments how long would it really take you save up 3-6 months worth of expenses in an account? This was a major motivator for me to pay down my debts, I knew that would allow me to build a bigger financial cushion between me and life and paying away my debts would free up the money to accomplish this relatively quickly. 

The first thing I did to build to save for emergencies was create a place to keep the money I knew if I saved this money in the savings account that was tied to my checking it would wander away from me like Seahawks Super Bowl win never to be seen again! So I took steps to “idiot proof” our savings. This post tells how I worked around the issue of having the money available when needed without using debt 29% Interest? Are you Kidding Me?

Another option is a money market account. These are nice because they usually offer a higher interest rate than a typical bank checking or savings account. Many will also allow you the ability to write checks from these accounts (often 4-6 checks per month are allowed). Personally I liked having a back up debit card in my wallet in case something weird went wrong with our regular checking account and I was stranded without gas somewhere.

My plan is to use both a checking account and a money market fund for our emergency money. I know that sounds a little complicated but it gives me the best of both worlds. We can have immediate access to a couple thousand dollars to get us through a pinch which for us should cover most anything that we have to deal with on the spot (a dead car, an exploding septic tank, etc.). All the while we’re earning interest on the remaining balance. If we need access to more we can write a check or do a quick transfer and have access to more within 24 hours or so.

How much money do you feel you need to have access to sleep well at night? If you already have an Emergency fund in place what type of accounts do you use for its safe keeping?

This is not a post about the cool deal my employer offers where I get paid out for not using all my sick days each year. This post is about the small but real pick-me-up that came along with the miserable cold I had the pleasure of enduring.

Recently I was struck down with a pretty hearty cold (actually it kicked my butt pretty bad!). This meant that I missed several days of work as to not infect my fellow employees and to bless them with my chipper attitude I’m sure I had during that time. To get back on my feet I took a total of three sick days off from work plus my entire weekend to get to the point I could be fairly productive again. The interesting side effect of being sick over this 5-day period was that I spent very little money. I because of that was able to make a small step forward toward our financial goals by taking advantage of the miserable situation. This sickness really worked out to my advantage and put a little extra cash between myself and future financial ruin.

I figured I saved approximately $48 during those several day, mostly on gas and food by not driving to work and not feeding myself at the office. That’s $48 saved after you deduct the $11.96 super-jumbo-Costco-sized economy pack of Nyquil I picked up to help me weather my personal storm.

So what did I do with my new found wealth you ask? I took advantage of this financial windfall by transferring the money I saved from out checking account into our six month emergency fund we’re working on (and making great progress I might add!) True this $48 won’t change our lives but it does mean the money will go towards something productive instead of vanishing like it normally would. Even though I was physically miserable for a week I was able to feel a little less financially miserable.

Please let us all know what odd tiny steps you’ve taken toward your financial goals recently? The more odd the better!

I’ve talked to many people that have well above average incomes but are not able to live a peaceful life at a level that co-insides with their income level and in many cases they are almost broke! FYI, according to the US Census Bureau, the US household median income in 2006 was $48,201.00. While talking with these people I realize in most cases thier financial situation is completely their fault! I know some will think that’s a bit harsh and uncalled for but stay with me here for a minute. Trust me I know “life happens” and sometimes it kicks the hell out of you and sometimes we can’t do much about it. I get that, I really do. People do get sick, people do lose jobs, marriages do implode, people do wreck cars coming home from parties, and yes a Peruvian stripper can steal your wallet when you’re not looking! In most though cases it really comes down to how you live your life both before and after these challenges arise. It usually comes down to you.  This brings me to a very powerful 100-something year old quote I found some time ago while reading:

Did you ever observe to whom the accidents happen? Chance favors only the prepared mind     -Louis Pasteur (1822-1895)

Maybe you didn’t make yourself invaluable in the workplace, maybe you failed to give your relationship the attention it needed, maybe you could have paid down debts to eliminate risk, maybe you could have cared better for your health, maybe you could have given a bigger tip to your stripper friend, and maybe you could have worked harder to build a solid financial foundation to plant your family on top of so when it rains (and it will rain) you’re still on a solid footing. Maybe you had a part in what happened.

After reading the quote above I realized there are certain people around me that seem to have crazy things happen to them almost every day. They seem to live life running from one fire to another. Does this remind you of someone you know, maybe even yourself? These people are usually easy to spot since they start most conversations with “you’ll never believe what happened to me”.  I think if you were to write down every retarded thing that’s happened them in the last 6 months you would likely find a common  denominator…THEM! It’s them…it’s how they live their lives. They have no focus, no self accountability, no self control, no drive and no discipline to change. Many poeple though do have the ability to recognize their positions and fight like hell until they either change it or die from it.

Lets take a minute and try an exercise, take a friend’s crazy life and write down all the nutty things that have happened “to” them in the last six months. Now have a good laugh at their expense, don’t tell them you did this though – it’s bad form! Then the next time they say “you won’t believe what happened to me yesterday” extend a bit of grace and maybe a little advice because we all know we’ve all been there. Now get off your lazy butt and do the same thing for your life. Make a list of your recent crazy happenings. Then make a list of what you’re going to do about it (note the only person who fix something about it is you….not your mommy, not your boss, and especially not the government!) Unlike many people who refuse to take responsibility for their lives, be a FinancialFreak and take control of your situation and work like hell to fix it!

Another great quote from Louis Pasteur sums it up pretty well:

When you work seven days a week, fourteen hours a day, you get lucky.

 Comment and tell me and the other readers what you’re going to do about this starting today. (A little accountability never hurt anyone right?)