Financial Freak Show

I know this is far from an entertaining topic but I’ll do my best to keep things saucy. Life insurance is something most of us should have in good order. With open enrollment season coming up for many employers I wanted to address the life insurance issue many people should consider. I was looking over a friend’s budget and noticed they we’re not paying out on any monthly life insurance premiums, since they have two young kiddos in the house I thought I would ask a couple questions. Turns out they’re both carrying life insurance through their employers. I asked why they went that route instead of carrying policies separate from their jobs. Apparently they saw they could buy it so they did, that’s about all the consideration they put into the decision.  

So the good news is they did have a reasonable amount of coverage in place and they were getting a heck of deal on it since the company covered most of the premiums. The bad news is they have no insurance in place if outside of the company. The main problem I see with this situation is that if they leave the company they’ll lose the coverage. True, as long as they remain healthy they could likely replace the coverage with a new term policy at that time but they also run the risk of not being able to get coverage at that time too (due to medical issues or the cost of a new unsubsidized policy.) I think having life insurance other than your employer’s plan is vital especially with two little ones at home. How many people nowadays are going to be at the same job 30 years from now…put a bullet in my head now please! It may be a good idea to look outside of your employer’s policies and see what all your options are.

So we decided they would look into getting a couple new 30 year term policies that they can carry with them no matter what happens to their work situation or their health. They’re also going to keep the current employer policies in place as  since it’s costing them less than $4 per month each for $350,000 in coverage (told you they had a hell of a deal!). Like I said, work insurance can often be a pretty sweet deal, just make sure it’ll meet your needs if you get canned or decide it’s finally time to tell your boss what you really think of him!  

Do you carry life insurance through your employer? Do you have outside insurance? Do you even have life insurance at all?

A couple years ago at the very beginning of my quest to become debt free I read a small little book called Debt Free on $5 a Day (at least I think that’s what it was called, I don’t really remember it was a couple years ago). The idea behind the book was that if you set aside $5 a day, every day before anything else and applied that to your debts you would work yourself out of your money problems. At the time I thought the idea was…well how do I say this best, ”retarded?”

According to my calculations if I would have stuck to the $5 a day plan every stinking day I would be completely debt free in approximately 21,400 days. Not a bad deal…if I wanted to be debt free around my 90th birthday! Actually it’s more likely I’d be debt free well before that because at some point I’d have to kill myself over it. Of course then my wife could bank the insurance $money$. Anyway, where was I? So at the time the thought of removing all my debt at the rate of $150 a month seemed laughable, but the idea behind the book made perfect sense. The idea was to get in the habit of paying your debts before you had the opportunity to spend your money on something else. At the time I took the book at face value I think because I was desperate for a solution. Now that I look back at it the book makes perfect sense even though the numbers don’t jive. In may posts Micro Paymentality & Sick Day Bonus Pay I talk about how this exact idea can work only on a larger scale. The idea is to fight like hell to find extra money each month then apply it to your bills.

If you manage to get a grasp on your finances and put a couple of the basics into place like a household budget and an emergency fund to prevent you from needing more credit to get by, the $5 a day idea could actually work. No matter how much you can manage to eek out of your budget, as long as you can eek out something, if you put it towards your debts before you allow it to wander out of your life, and assuming you don’t rack up any new debt, you’ll eventually become debt free. Though in my case I busted it and used what I affectionately call the Vinny Financio’s Debt Free on $60 a Day Plan and it worked. I guess I was just a little too impatient to wait until I was 90 or dead to live like this.

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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Calculating your Debt to Income Ratio is actually pretty simple. Grab your little list of debts (or big list), add all of them up so you have the monthly total – you’ll need that number in a second. Next figure out how much money you have coming in each month (add up all your sources of income). You’ve already completed two of the three steps. Now comes the easy part.

Step 1: Add up all your monthly debts (I know you already did this, but I’m just making sure!) Mortgage payments (including taxes, insurance, PMI, etc.), Car payment(s), Minimum credit card payments, Student loans payments, Child support, Doc bills, etc.

Step 2:Add up all your monthly income.  Add your Salary, any additional bonuses, tips, any additional income you receive through dividends, a side business, embezzlement, theft, or whatever your case may be. Total these all up and you have your monthly income.

Step 3: If you don;t have your calculator out yet you’ll want it for this part. First type in your monthly debt number, press the “divide” key, now enter your monthly income number, press the “equal” button. That will give you a decimal number, now move the decimal point two places to the right and you have your debt to income ratio. For example, if you came up with a $2,800 total debt payment number and monthly income of $4,500, that leaves you with a debt to income ratio of 52%.

There you go thats pretty much it. Now see my post Debt to Income Ratio and see how you measure up.

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?

A survey for AmeriCredit for Market Facts asked 1000 consumers the order in which they pay their bills when they know they’re going to be late. The results were good to see (maybe there’s still some comon sense out there.) True most of this seems like common sense but it never hurts to chat about it. You never know when someone might ask you the question.

Here are some of the results: (this shows what they would pay first - last)

1. Mortgage or Rent 79%
2. Car Payment 41%
3. Auto Insurance 39%
4. Credit Cards and/or Cell Phones 38%
5. Cable and/or Satellite Television 32%

The survey results look good to me. If someone is in crisis mode the first thing they need to do is shore up their position as best they so they can hopefully “live to fight another day.” This means taking care of the essentials first. Food, Shelter, Clothing, & Transportation. If these four things are taken care of you can hopefully keep workong to address whatever your other issues are (and we know people got some issues!) Beyond the essentials look to cover your secured debts next. Things next like car payments or other property. Since these debts are secured by liens the lenders may be much faster to attempt a repossession of the property.  Next address your unsecured debts. Things like credit cards, phone bills, cable bills, old medical bills etc. Obviously all these debts need to be addressed but aside from questionable and sometimes illegal collection tactics these folks have little ability to retrieve their money with out taking you to court first. True, you do need to get these thing taken care of but the dentist can’t usually repo your dental work instead he’ll have to slap a lawsuit on you before he can legally take back the fat gold grill in your mouth.

Remember the unsecured debts (especially credit cards ad payday loans) will likely be the first to start yelling since they are in the first loser’s position if you file bankruptcy. They yell loud and they yell often hoping that you’ll become emotional and pay them before you feed your kids.  All the creditors obviously need to be addressed but if you or someone you know finds themselves in a seriously tight spot try to leave emotion (as much as you can anyway) out of the process and address the bills in a way that gives you the most flexibility to keep fighting.

So I discovered there’s an advantage to being so far upside down in your SUV that you can’t easily sell it to get out from under the payment – I know that sounds hard to believe but I promise I will reveal it to you later in the post. 

When we began my war on our debts the largest debt (aside from our house) was my sexy black Chevy SUV. We were upside down by over $8,000! So in our plan to remove debt from our lives we struggled with this particular one. At the time I owed just over $21,000 on the car but market value was closer to $13,000 and our payment, not including insurance, was $496.71 a month (and to think I got a “good deal” when I bought it!)

We had several discussions about how to deal with this particular issue. Do we pay this bill down first so we can sell it to break even? Though at the same time we’d need to save up some money to buy something else. Do we try to borrow $10,000? $8,000 for the difference + $2,000 to buy another cheap car. My thought was I’d rather owe $10,000 than $21,000. This was a tough dilemma for me because I didn’t want to borrow more money but I did want to free us from this payment so we could put the money towards more important things. The first thing we did was develop a plan to work towards paying off our other debts. True, this did nothing to mitigate the balance of the SUV but it did free up some cash each month and relieved some of the stress of trying to make the $500 payment.

We decided for now the best thing to do was to create more income to help move things along faster. It was time to rely on a classic surefire way to make money that my dad taught me some time ago. You may have heard of this technique, I call it work.

So I made a few calls and found a second job….a crappy job, but a job none the less. Yes, working two jobs sucks, yes 14-20 hour work days suck, yes not coming home to my wife and daughter several nights a week every single week sucks, but we knew it was temporary and we knew in the long run it would be worth the sacrifice. That put extra cash in our pockets by the end of that next week.  True this wasn’t life changing money but when it was added to the money we were already working with it made a difference.  After a couple months of sucking it up the progress became noticeable. With a strict budget in place I was able to deposit the paychecks and send 100% of it off to the next debt on the list. Not to mention the added benefit of working so much I didn’t have any time to spend much money.  What would happen if you made an extra $1000 a month, next month? Would you piss it away or you make real life changing progress? 

As promised above I’ll now reveal the advantage of being so far upside down in your SUV that you can’t easily sell it. Here you go:
-It gives you a nice cozy place to sleep at night while you’re busting butt to clean up your financial messes and take better care of you family!

 So what have you sacrificed lately for your family? I’m not talking about how you skipped your double mocha last week at “4-bucks” I’m talking about sacrifices you made that may lead to changes lasting generations.