Financial Freak Show

I’m not big fan of owing money to anybody. I really began to realize this when I began paying my debts off. I noticed that after I paid off a debt I felt all nice and fuzzy inside but when I acquired a debt I didn’t feel all nice and fuzzy inside. After hearing the proverb “The borrower is the slave to the lender” then realizing I had just spent the last two weeks working only to send it away to pay back some of what I owed – I was working for someone else and I don’t think they were paying me! I quickly came to the realization that, as I said above, I’m not a big fan of owing money to anybody.   

I think for many reasons debt can often do more harm than good, especially over the long term. Not just financial damage but emotional, relational, and sometime physical damage. Debt is not always a bad thing to have and in some cases it can work out. Though in my opinion for a lot of people and a lot of  situations it’s very often 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 all of these four rules a particular 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

 

When the blind lead the blind…get the hell out of the way!

Have you ever heard that saying? Well as stupid as the saying is it actually has some solid logic to behind it. When I was first working to take out my debts I got some great advice from someone that makes quite a heck of a lot more money than I do (I know that’s hard to believe). Anyway…he told me “never hire an accountant whose client list includes people that make less money than you do.” In other words always look for people that can help you grow into more than you are now instead of the opposite.  

This advice stands true with most of the advice we receive around money (and most anything else for that matter).  If somebody isn’t successful with the particular advice they’re giving why should you not be a bit skeptical?  This is exactly what many do with our money decision each day. Often we take counsel from people who make poor money decisions. Sometime it’s formal counsel like an advisor and sometimes it’s just a couple guys hanging out having a beer bs’n about a new ski boat. In either case always step back for a second and ask “where’s this information really coming from? 

In a business sales seminar I was once taught to “mentally step back” from a negotiation and pretend you are looking in on the conversation like an outsider. The idea being as an observer of both parties you get a better idea of where each party is coming from and where they’re trying to go. Whenever I receive money advice I do this as well, not in lame close my eyes and go to my “happy place” kind of way, but I try to step back and take an intentionally subjective look at what’s being said. Who’s saying it, What they’re saying, Where has their experience and/or expertise come from, Why are they really telling this to me, etc. Also you must always understand that some things rub off on us with or without an actual conversation, especially from friends and family. Always be alert to what people around you are saying and doing. If everybody around you is driving around in financed cars or living in homes with absurd mortgages you may find yourself taking their cues.  

With your money you need to be cautious of where you get your guidance. You must always be objective with new information. You must always consider who it’s coming from, where they are coming from, why they are passing these nuggets on to you, and what it has to do with you. Why would you allow people who continually make poor money decisions to advise you on your finances? Sad thing is we all do this stupid move everyday and often don’t even realize its happening.

So what steps can you take to avoid unintentionally honoring advice from broke people?

• Have a solid financial plan – you don’t have to be rich or have your plan completed but clearly knowing where you are going and how you intend to get there will help you do what you feel is correct not what others tell you is correct.
• Continue learning – the more you know the better information you will have to make more sound decisions. You don’t have to be a genius with your money but if you know more you will have more option available to you
• This is a big one….Don’t hang around with broke people! Okay, that’s a bit harsh but seriously if the people around you are not helping you reach your goals maybe you should consider how you interact with them. I’m not saying stop talking to your broke family, coworkers or friends (unless you want to, you can blame it on me I don’t mind) but if they’re dragging you out to dinner or continually convince you to do things that you really can’t afford this might be a good time to reevaluate when & where & how you spend time with certain people. They may unintentionally be creating obstacles to you reaching your goals.     

Step back and look at the advice, influence, or sales pressure and only then can you make a clear decision on your next move. Figure out what works best for you to keep yourself on track and always remember who you’re listening to because sometimes you don’t even realize you’re listening to them (and there’s a fairly reasonable chance they’re an idiot)

This post was inspired by a chat about a friend mentioning cutting out the purchase of a (get this) a CD per month to help ease their financial burden. When I say “CD” I mean the music type not the investment vehicle. Apparently she has a habit of purchasing 1 new CD each month with her first paycheck she receives each month. Her thought was that with this sacrifice and her other sacrifice of cutting morning espressos to a couple times a week will lead to the financial freedom her family is seeking.

I will say this, I am proud of her for making some more “grown up” decisions regarding her finances but I honestly think this is a waste of her time…and I let her know that (I know I seriously need a better opinion filter, but whatever). I told her that I doubt a $15 CD is really hurting her finances at all. I then told her that her newer car, her new couch and her new $2600 bull dog she bought with a cash advance with her credit card were her problem. Cutting CD’s out of the budget is cute but you’d have better luck trying to pick up a turd from the clean end! Seriously though if you think squeezing $50 a month out of your budget you haven’t address the actual problem…..YOU! 

The CD’s aren’t your problem girl. Your lack of planning & your lack of discipline are your problem. If you actually want to change the way you spend money then change the way you spend your money…ALL OF IT. Don’t just change the parts that are easy. Change all the parts that are broken, change the parts that hurt, change the parts that are will truly make a difference. Don’t try to nickel and dime your way out of 20k, 50k, 100k in debt cause we all know you sure as hell didn’t get in 20k, 50k or 100 worth of debt buying CD’s so why do you think this will ever get you out (if you did get in debt buying CD’s get your butt on Craigslist tonight and start selling!) Get out there and get mad, break something…break the habits that got you to this place. If you don’t at least try you will have no one to blame but yourself. True, it may not be only your fault you ended up here but will be your fault if you stay here (especially if you don’t want to be here).

So take a lesson from my friend and stop buying those CD’s if that’s what you need to do. Then take a lesson from Vinny Financio’s real financial world and cut deep into your lifestyle to the point it hurts, stop buying all the other garbage too until you have your stupid messes cleaned up. And then we’ll go drop some cash baby!

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.

I’m often asked how does someone function in our current world without the use of a stack of credit cards. Hopefully this page will help clarify why I feel the way I do and how it is possible to function in our society without using or relying on credit cards.

PART 1.

My lack of credit cards (the why)

Living without a credit card is actually not very complicated. In my opinion it’s actually more simple than living with one. I have now been without a credit card for over two years and have not had to change my lifestyle because of it – well atleast not in a negative way.

First I want to discuss the reasons why I don’t use credit cards. For many people who have “credit card problems” the reason is usually self control or a lack of financial knowledge. Credit cards are often used as a financial crutch to help people limp along when they don’t actually have the money to cover a purchase they can’t resist or truly need in the case of an emergency. Many people can manage credit cards without getting into any major trouble. This was the case for me personally, my credit cards and balances they carried were far from the point of blowing up our finances and we had no trouble handling the payments each month. I was even able to enjoy some of the “rewards” these cards offered to me.

So why did I decide to remove the cards from my wallet if they weren’t causing any problems and was reaping some rewards?  Well folks there were a few reasons…

I didn’t like the feeling of paying for last month’s expenses this month. I hated sending off  money I just received to pay for things I didn’t posses any longer. Even though I may have been able to pay the balances down to zero each month I still felt like my finances were a month behind. The weight of any debt no matter how small has a way wearing on me. The truth is carrying debt takes energy from your life even if it’s only the energy needed to check the statement and send the payment.

Overspending; a Dunn and Bradstreet study is often quoted in blogs, and the major media. The study reports on average you’ll spend 12-18% more when making a purchase with a credit card as opposed to cash. And to prove their point they noted the average McDonald’s transaction increased from $4.50 with cash to $7.00 when credit was used. When they looked at vending machines, the average transaction size nearly doubled. Now for me I don’t doubt that I unintentionally spent more using plastic at times (I’ve been guilty of supersizing my life a time or two!) I know for a fact I’ve done this with the thought that I’d be getting more perks by adding to what I charge. So even though this was not the key factor for dumping my cards it was defiantly a consideration.    

Paying interest; this is an easy one in my opinion. Why would you save money at low checking or saving account interest rates while carrying a high interest balance on unsecured debt? It just doesn’t make sense to me – why pay interest when with a bit of planning you could be receiving interest? I never quite understood why people will say “don’t pay off you mortgage because you can make more in the stock market” and then use credit cards with 10%-30% interest rates. But it works for you have at it

I also saw no benefit to using a credit card. I know they offered me points, and insurance, and extended warranties and cash back, but to me I realized I was putting up with the issues above and found myself never getting any real benefit from all the extras they were offering me in exchange for dealing with the negatives. And as far as the convenience factor, well to be honest my credit cards weren’t anymore convenient than my debit card.  This was the big reason I now have no credit cards in my wallet…they do nothing for me, I didn’t see the so called “benefits”

This was my biggest reason….Why spend your time trying to outsmart the credit card companies? This is what they do for a living and they are better at it than I will ever be. True some people can beat them at their own game, charge up the month on credit, pay it off on the 30^th, never pay fees, never pay interest, and collect the rewards points at the end of the month.  If that’s how you roll and how you want to spend your time and energy. I’d much rather spend my time chillaxin and not worrying about trying to outsmart them while they’re trying to outsmart me. I’m not saying you can’t outsmart these folks but I am saying it’s a lot of damn work! 

This was the big reason…. So to briefly summarize why I don’t use credit cards…I don’t like to pay interest, I don’t like to being tempted to over spend, I don’t like the hassle of making the payments on time, and finally I never really received any benefit from the incentives they offered. So basically it came down to multiple negatives and no real positives.

Let’s put it this way….Let’s say you were dating a credit card. She charged high fees when you used her and possibly charged you when you didn’t use her, then tempted you to do things that weren’t in your best interest like overspending, then she drove you crazy by making you pay her a 25 days after the fun was over or risk having to pay her even more, then she offered you restricted “benefits” and “rewards” that you didn’t really care to use and if at any point you fail to keep your promises in the relationship she will call incessantly, threaten you then ultimately drag you into court and win. Then after you and her work out all your monetary issues you realized she never really cared about you in the first place and was only after your money – I don’t think that’s a very healthy relationship. Sorry, no matter how good that hot little number looked being flaunted around town with me I’d have to break it off!

To reinforce my thoughts around credit cards but with a little less Vinny Financio I want to refer back to my post So When is Debt Okay?  In this post I lay out four things to consider when determining if a debt is okay. Rule 1: Common Sense Rule 2: A Guaranteed way to repay Rule 3: Peace of heart and mind Rule 4: Unity;

In my opinion credit cards do not satisfy the four rules outlining when it is okay to borrow. Well it could fit into rules #1, #3 & #4 Common Sense, Peace of Mind & Unity. Though this all depends on your household situation but in my household we came to “Unity” on the fact that we didn’t see the “Common Sense” in borrowing money day to day and coming to that agreement gave us “Peace of Mind” knowing we were always living on what we had. As for Rule #2 Guaranteed Way to Repay; most credit cards I know of don’t have this guarantee built into them. They are only guaranteed by your future income but your future income is only guaranteed to the point that you have sufficient income. Lose your income and you have no guarantee there for it’s not a “Guaranteed Way to Repay.” Credit Cards are not secured by any real property which is why credit cards are referred to as unsecured debt.

I only have one more point to make regarding using any form of debt in your day-to-day life. This one though is intangible and hard to quantify with numbers. The feelings & emotions people feel around having debt in general. In several of my posts I’ve shared the experience others have had with their own personal battles with debt. Here are a few of those quotes:

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.  - Jeff, Deliver Away Debt

and I think of all our family can do with our money when he comes home. Things like a family vacation paid for with actual money. Out of our checking account and not on credit cards. Amazing.  - Military Mom, Deployment Money

he called me the day after our discussion and let me know he cleaned out his wallet to make room for some cash instead. 8 days later he’s still on the wagon as he puts it. I told him he sounds like a recovering crack head, he said that’s about how he feels.  - Mark, 8-days Clean

Now that I’ve laid all this out there for you I want to finish with the thought that you’re all big boys and you can make your own big boy decisions about your finances but that’s my $.02

Part 2.

Living without credit cards (the how)

Once I decided I was no longer going to depend on credit cards as a way of making purchases I needed to come up with another option that would allow me to make all the purchases I needed to without cramping my style too much.

There were a couple issues I took consideration before I got rid of all my cards. How was I going to have access to my money anytime & anywhere?  Second how can you function without a credit card, especially since I travel a bit and my wife almost is never carrying much cash? Here is what I came up with and so far it has worked flawlessly for us.

The first thing I did was create a place to stash the money. Since I wanted to have access to this money with the same ease as using a credit card I went for an account with a debit card. I opened a high interest free checking account at a local credit union. This is not the same place we have our primary checking account we use for everyday expenses though. I chose a different bank for our emergency savings for two reasons. One, I wanted to make sure the debit cards we were issued were Mastercard card since our primary debit cards were Visa. Two, I wanted to be linked to a different banking system. Both of these reasons were to ensure that I always had access to money if either Mastercard or Visa had problems or if either of the banks were having technical problems for one reason or another. After working with a credit card fraud team for some time and on the back end of a couple e-commerce websites I realized how inconvenient those issues are and how easily they can arise through no actions of your own. So far to date I haven’t had any issues getting access to my money. 

Now that we had a place to stash the money it was time to actually put some money in there. I first opened the account with $1200 we had set aside in our regular savings account. Now that I was going to only rely on this money instead of relying on this money and credit to get by I know I needed to add to this account as quickly as possible. So for a few months any money we could manage to pull out of our budget went directly into that saving account. At the time I was also working a second job to help knock out our debts too, so any money I made there went into this account as soon as we got a hold of it. This all quickly added up to several thousand dollars and now there’s even more. The funny thing is there is more money in there now than I ever had available on my credit cards.   

This new account was only to be used for an emergency and we BOTH had to agree this was an emergency. Since our marriage is based on trust and shared goals there is no issue with us both having easy access to the money. We trusted each other not to let the other down. Plus if either of us was going to screw this up it was probably going to be me.       

So at this point the only thing left to do is stick to our plan. To date we’ve not had any issues that have made me second guess this plan. We’ve traveled, we’ve rented several cars, we’ve bought things over the internet, basically we’ve have done most everything everybody swears they need a credit card but have done it with a debit card. If somebody were to steal my money or I have to disagree with a transaction (both of which I’ve had happen btw) I just grab my other debit card and put gas in the car just like you would with a credit card but without needing to pay it back next month.

To sum it all up….

1. We have more money available; like I said we have more in the account than we ever had available on our cards.
2. We now earn interest, not a lot but it is adding up. True we didn’t set this money aside for growth but it is a nice bonus to the deal.
3. We’re never owe anybody at the end of the month and if something were to self destruct in our financial lives we won’t be borrowing money at the exact time it gets most difficult to pay it back.
4. We have no need to use credit cards and no need to deal with the card companies – I don’t have any personal credit card horror stories but I sure don’t want to start any

People wonder how I can function without a credit card….I wonder why they can’t?

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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

Who cares if your coworker doesn’t like your car? Who cares if they laugh at your hatchback with the bald and flat spare tire. Who cares if you iPod doesn’t have the bitchin’ touch screen? Who cares if you’re still trying to rock last year’s sunglasses? Do you really care what they think about your possessions? Who really cares about your money? Everybody always says they don’t but seriously do you? These feelings are real though and they do have an effect on how we often live our lives. Many people destroy their financial plans (if they actually have one) by making buying decisions based on the judgments of others instead of what’s best for themselves and their family. Don’t get me wrong here I’m all for buying tons of stuff, even stuff you don’t really need, that’s how I made a mess of my finances in the first place.

I got rid of a lot of stuff when I decided to adjust my financial circumstances. A funny thing happened though when I began to do that. I really didn’t care at that point what people thought about the stuff I had anymore. It was good for me in many ways. Now I sort of wear the fact that I haven’t overspent my means as a badge of honor. I love telling people I sold my BMW and bought a Chevy and why we decided to go the National Park instead of Mexico for vacation. Now that we’ve made so much progress in our financial lives the people that are actually important to us and care for us brag about what we’ve done and to that I say “Who really cares about my money anyway?”

So go ahead and mock me (or more likely just think it…wimp) then shut up and get back to work so you make some more money to hopefully cover that ridiculous car payment again next month. I love it when broke people tell I’m wrong about money – thanks for more motivation!