Financial Freak Show

As a follow up to my post I Call a Do-over I wanted to discuss how my goal of a Zero Credit Score and my actions of living with no consumer debts will affect my life in the future. There are two reasons I decided to eliminate my debts and work to live on less than I make.

The first reason is because this simplifies my life greatly in several ways. One I don’t have the stress of debt hanging over me every minute of every day. Second I don’t have many bills to keep track of and pay every month (I currently pay 8 bills each month and half of those are deducted automatically).

The second reason is the big one for me. Taking debts out of the equation means my income is no longer being used to support those debts. Not paying these payments means my income is now free to invest, spend & save. When debt is sucking your income out of your hands as fast (or faster) than you earn it you cripple yourself. You spend your energy and, more importantly, your time trying to climb a mountain you have the weight of payment books trying to drag you back down. You spend your days trying to make money for someone else – I don’t like that feeling.

So by eliminating debt payments you simplify your life and free up energy and cash that can be used towards more productive goals like retirement planning and building wealth. How hard would it be to stash away 15% of your income towards retirement if you had no car payments, credit card payments, or student loan payments? If you don’t believe me calculate your debt to income ratio then swing by the local old people farm and ask them what they would do differently if they had the chance. I’m sure they’ll be more than happy to give you their take on credit cards and car payments.

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?

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.

Those of you that have followed me may be familiar with one of my personal goals. A zero credit score (let me clarify I said a zero credit score…not a low credit score). I want to take a few minutes to explain myself on this one.

To many people the idea of a zero score this sounds like financial suicide. But for those that subscribe to the debt free FinancialFreak way of handling your finances you see the bigger picture beyond the FICO score, and can also see well beyond the “pay off your debts” talk into a more prosperous future where you stack up money instead of stack up bills. Again let me clarify I said a zero score not a low score. Though they sound similar these are two completely different things. A low score shows that you’ve been financially irresponsible (that’s not good a good thing). A zero credit score shows that you do not use debt and in turn do not have to repay those debts (that is a good thing). The credit scoring system is used to calculate the likelihood of a borrower paying back what they borrow, sounds simple enough to me. Credit scores are based on many things amount of debt, debt to income, number of outstanding debts, payment history, types of credit, available credit, blah, blah, and blah. Simply put the score is a number used to represent your borrowing history and your payment history combined with a dash of “what if” representing the near future.

First off let me start by saying the credit scoring system, in my opinion, is greatly flawed and very subjective in almost every instance it’s used. The biggest issue I have is that it does not take into account one of the most basic thing needed to properly repay outstanding debts – the amount of money  you have in your possession (assets) and how much money you have coming in. Now to me the first things I think of if when I make a loan would be “does this dude have a job and how much does he make?” If the answer to that question is yes and more than enough then we can go in to the person’s past repayment behavior.

To prove my point read these quotes from the myfico.comexplanation of what the credit score ignores – remember these are quotes from their web page

FICO ignores your Salary, occupation, title, employer, date employed or employment history

And another:

Any information not proven to be predictive of future credit performance

So according to FICO your “Salary, occupation, title, employer, date employed or employment” are not “predictive of future credit performance” – No wonder our lending institutions are falling faster than Dick Cheney’s hunting partner! And to think most people are making major financial decisions based on the effect it may have on this scoring system. I’m sorry, but I think “Salary, occupation, title, employer, date employed or employment history” are key factors in someone’s ability to repay money I lend them. Honestly I highly doubt they believe your income and assets are not proper indicators of your worthiness. The truth is they have no easy way of acquiring and selling this information legally.

After doing quite bit of research I have decided that there is very little need for a high credit score in my life. True, the last time I checked my credit score it was very high. This was due to the fact that I carried a good amount of various debts for many, many, years and never missed a payment The issue I ran into was that to better pay my debts, and someday create some wealth (hopefully), I had to eliminate the debts that were supporting my high credit score and eliminate them permanently. So the effect this has on my credit score is the more money I have (because I’m not supporting monthly debt payments) the lower my score will fall. So I figure if that’s the case lets shoot for ZERO! I know that may sounds crazy but unless I plan to borrow money often and repay it on regular basis there’s really little benefit in working to support this score.

So unless you plan to borrow and payback money again and again and again why would you base financial decisions on supporting your credit score? Remember these are companies that believe “Salary, occupation, title, employer, date employed or employment” is not “predictive of future credit performance.” I think I’m going to work on getting money and keeping money not work on borrowing money and paying back money.  Oh, and I guess this also means at some point I’ll have a paid for house too, and to that I say “how bitchin’ would that be!”

For more on this topic my post Issues with a Zero Credit Score I discuss some of the potential setbacks I may face with after completeing this goal

So how do you feel about the credit scoring system and your credit score in particular? How do you plan to manage you credit score in the future and why?  - go ahead call me a FinancialFreak, its okay…I can take it

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!