Monthly Archives: June 2013

Link of the week: People who triumphed over debt

Related to my own story of how we got into debt, here are several brief but inspiring testimonials of women who got OUT of debt. (I’ll revisit my own story at some point and talk about the progress I’ve made so far; until I eliminate our student loan debt I can’t consider our journey over; and really it won’t end unless our mortgage is gone too.)

If you have your own story to share, let me know! I’m happy to post it with your identity obscured if that’s more comfortable for you.

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Image courtesy of kongsky / FreeDigitalPhotos.net

My debt story

Today I feel like telling part of my own personal financial history. I’ve alluded to it on this blog, and those of you who follow my other, more personal blog already know my story. I’m not sure if it will be a cautionary tale or just a good horror story. Either way, I thought it would illustrate the reason I’m so dedicated to personal finance, and show why one of my greatest passions is eliminating debt.

I hate debt. I almost always have. At first, after graduating from college in 1996, when my first debt appeared in the form of student loans, it didn’t seem that bad. But then a couple years later, broke and dying for amusement (and food), I got my first credit card. Maxed it out. Got another credit card. Maxed it out. Got another one with a 0% intro rate so I could transfer both balances to it. Maxed all three out. You get the picture. Then my partner went to college and didn’t qualify for federal aid, so I took out a private loan to help with tuition. Plus she got some private student loans. Then we racked up more credit card debt.

Then we bought a home, essentially zero down, by borrowing the down-payment money from my dad. We also took out a home-equity loan for the amount of the down payment (on recommendations from our mortgage broker and real estate agent; this was the kind of advice naive home buyers got in the heady days of the housing bubble). Used part of it to pay back part of the debt to my dad, but the bulk went to furnishing our new condo.

I would have periodic battles to get the debt down, though I never seemed to get anywhere. I’d write all the debt balances on a Post-It note and carry it around in my checkbook, I guess for motivation. Of course, my impulsive purchases were always via credit card or cash (drawn from my overdraft, usually), so I never saw the debt list when it might have helped me resist spending.

My debt-reduction attempts resembled unsuccessful dieting, where I’d curtail my spending so strictly I’d eventually freak out and go on a spending spree just so I wouldn’t feel so constantly deprived of everything I saw around me. Other times I’d plod along, only taking on a few bucks of debt or even paying off a little, but the lack of progress was depressing; I could see no way out.

Then Anitra and I started an international courtship with Neil, our eventual third partner; we really threw caution to the wind. Plane tickets to England! $500 cellphone bills! Gifts shipped back and forth with shipping costs that rivaled the cost of the contents! Immigration application fees! When he joined us, I was the only one with a steady job for a while. Still in the honeymoon phase, we ate out all the time, and Neil bought home décor to make our place feel like home.

I started having a nervous feeling that we were reaching the end of our rope financially. There was only so long you could make all the minimum payments on debt when you kept borrowing to cover it. I hadn’t checked my amounts in probably over a year; it was time to take a good hard look.

I don’t remember exactly what spurred me to do it, but when I did, I realized we probably couldn’t have gone another month in the same fashion without starting to miss payments. Without actually defaulting on our debt, we had reached the end of the line. The house of credit cards was coming down.

So I started to claw my way out, little by little. But even as I started to see a bit of progress, I was becoming aware that there was a whole other financial crisis brewing in England, with Neil’s debts and dwindling savings account covering it. He hadn’t checked his account balances in months either, and he too had a weirdly psychic feeling when it was time to check. When we logged in to his main account, it was pretty obvious his next payments to his debts would max out his reserve line and he’d start to default there too.

We quickly transferred some money (with a gutwrenching transfer fee and a whopping service charge) to cover the next month. But it was clear my actions had to be far more drastic than they had been. I added Neil’s debt totals to mine and Anitra’s. That’s when, I think, I truly made it my life’s mission to get out of debt. That total number was transfixing, terrifying. I didn’t know how I was going to do it, but I was going to devote all my effort to making it go away.

That all happened in early 2007. In the 11 years since graduating from college with only student loan debt to my name, everything had gone horribly wrong in the financial part of my life.

I guess I’ll end there, with a big dun-dun-DUN! Things have gotten better for us, drastically so, in the past six years. But this was probably our lowest point.

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Link of the week: Budget annually vs. monthly?

Related to my post about building DIY escrow accounts for your non-monthly expenses, here’s an interesting post from Get Rich Slowly opining that planning your budget by year tends to be more accurate than month-to-month.

It’s an idea, and I don’t think you should look just one month ahead. I tend to budget anywhere from 1.5 to 3 months out in my “future checkbook” ledger spreadsheet, and I have a debt spreadsheet that includes automatic calculations of how long it will take to pay off each debt if I made only the minimum payment each month.

I have other planning sessions with myself (and sometimes my family, if I can wrangle them into it) that take the longer-term picture into account. I also know how much money we need to come up with every month for the next three years if we’re going to be ready to put a down payment on a house.

But for some reason I feel superstitious about planning an exact budget for a whole year out. Maybe it’s because employment always seems like something of a crap shoot, as does avoidance of major unpredictable expenses such as a big health issue or natural disaster.

But one attendee of the inaugural League meeting had an impressive spreadsheet that budgeted I believe it was 6 months at a time, and he’d been successful using that.

What do you think? Is there value in planning a yearly budget? Have you ever tried something like that?

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Image courtesy of Stuart Miles / FreeDigitalPhotos.net

Saving up for expenses outside the regular monthly budget: My DIY escrow method

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Do you ever get caught out by expenses that aren’t monthly, but should be able to be predicted or expected? On the League of Ordinary Savers Facebook page, I linked to an excellent post from SavingAdvice.com that enumerates these types of expenses. The list includes:

  • Birthday/anniversary/graduation gifts.
  • Christmas and holiday gifts and decorations.
  • Oil changes, new tires, and other routine car maintenance.
  • Charitable contributions.
  • Small trips, such as visits to family that you don’t consider “vacations,” but which cost money nonetheless.

It’s a part of budgeting that sneaks up on a lot of people. Say you’ve followed my advice (or that of a finance guru) and created a monthly budget that you stick to, as well as an emergency fund of at least $1,000. But then your annual homeowner’s insurance bill comes along, and you’re flummoxed. Using your grocery money to pay it will wipe you out. It doesn’t seem fair to use your discretionary spending money since that’s to be used for luxuries and fun things. If you dip into your emergency fund, you’ll have to start building it back up again.

So what do you do? Well, this time, you will have to dip into some line item, or earn some extra money to pay for it. But you can start to prepare for next year’s homeowner’s insurance bill now, so you won’t be caught out again next year. And you can use this experience to think about other expenses that tend to throw you off, and begin to prepare for them as well.

There are many ways you can do this. Mine isn’t necessarily the best or even the easiest, but it works for me. Even if you don’t like my technique, hopefully it will give you a starting-point for figuring out your own system.

You may have read my post about my main budgeting technique, or the follow-up post with links to the spreadsheets I use. Since I like my “Ledger” and “Bills & Budget” spreadsheets and update them frequently, I use them to create “escrow” accounts for expenses that don’t quite fit into my monthly budget.

When I created my monthly budget, I also added in other expenses that weren’t monthly but that I knew were (or probably were) coming. Since 75% of my expenses are monthly, I decided to treat every other expense like it was monthly too. So I totaled up the annual cost (or estimated annual cost) of each expense and divided it by 12, and put that number into my Bills & Budget spreadsheet as a recurring monthly expense.

Examples:

  • Our homeowners’ insurance ($225) gets charged once a year, so I divided by 12 ($18.75) and added it to the monthly budget.
  • Our diaper service charges us every four weeks, so 13 times a year. I multiplied the charge by 13 and then divided by 12, and added that number ($82.33).
  • We have prepaid cellphones, so we fill them up irregularly. But over time, it averages out to about $50 per month, so I made that a line item in my budget.
  • We get haircuts every five weeks, or 10 times per year, so I multiplied the barber’s charge ($80) by 10 and then divided by 12 ($67).
  • One of our student loans gets interest charged quarterly, so I multiplied the interest charge by 4 and divided by 12.
  • I know how much I want us to spend at Christmas and for each person’s birthday, so I totaled up the annual amount and divided by 12.

So, easy enough. But then what happens next month, when you’re balancing your ledger and deleting charges that have come through, and you get to the $18.75 for homeowners’ insurance? That bill isn’t going to come for another 11 months, so what do you do in the meantime?

I decided to leave that charge at the top of my spreadsheet, so it was subtracted from the available balance as if it were an upcoming charge. The next month, when the $18.75 came up again, I deleted that line and added that amount to the line at the top of the spreadsheet. I did that every month. Then, when the year was up and the bill came, I had $225 saved in my checking account, and I’d kept myself from spending it by just pretending it was already taken out of my balance.

I do that with all my non-monthly expenses. For the diapers, I pay my $76 but, since the line item in my budget is $82.33, I find myself with $6.33 left over. So I created a line at the top of my spreadsheet and add that surplus $6.33 there every month. By the time I have to pay diaper charges twice in one month (as occasionally happens with 4-week bills), I’ve saved up enough to cover that extra payment.

Here’s what the top of my “Ledger” spreadsheet looks like:

Escrow

If that sounds too labor-intensive or too mathy, take heart: There are lots of other ways to save up money for non-monthly expenses. For instance, you could add up the cost of these expenses once you’ve figured out how much each one costs per month, and withdraw that amount in cash. Then you could put it in one envelope at home, or divide the appropriate amounts into an envelope for each expense.

Or, you could add up the total monthly amount for all these expenses and create a regular transfer into a linked savings account, from which you could draw the money for each expense as it occurs. (Just be aware that many savings accounts charge fees if you withdraw more than four times per month, so if you have many expenses included you might not want to use this method.)

There are also budgeting apps and software programs that will “set aside” the money for you, so it’s in your checking account but not available according to your budget program.

I’m sure there are tons of other ways to accomplish the same thing, and I’d love to hear if you have any particular technique that works for you. The important thing is not to ignore an expense just because it doesn’t happen monthly. If you pay for it a little at a time, out of each paycheck, it’ll be much less painful and it won’t disrupt your regular budget.

Image courtesy of Vichaya Kiatying-Angsulee / FreeDigitalPhotos.net

Link of the week: Tracking vacation spending for the non-smartphone-phobic!

As I was wrapping up Wednesday’s post about controlling vacation spending, I had a “duh” moment when I realized that 90% of people reading this probably have a smartphone that they use for nearly everything. (It didn’t occur to me immediately because my household is lo-fi on that front, mainly to save money on phone expenses, but also because we’re online enough at home and work; we don’t really need encouragement to be on even more!)

So I went searching and found dozens of articles on great apps for tracking spending. I liked this particular one from MyBankTracker.com because it focused on just two; some of the articles had a dizzying array of 30+ apps to try! So if these two aren’t your cup of tea, I’m sure something is out there.

smartphone travel

Image courtesy of adamr / FreeDigitalPhotos.net

Controlling spending while on vacation

Hullo fellow Savers! Apologies for the two-plus-week break, but I was on vacation … and then recovering from vacation for another week.

So, what better way to get back into it than a post about vacation spending? Now I could talk about finding the best airfares or cheap lodging, but one aspect I feel like isn’t covered as much in the media is how to keep from overspending once you’re ON vacation. Even the most frugal people I know can go over budget while on a trip.

Back before my financial near-meltdown, overspending wasn’t even a possibility, because I put all vacation spending on credit cards — with no plan to pay them off. So I had no concept of how much or how little I should spend.

But nowadays, my household typically comes under budget on our trips. Only rarely have we gone a bit over or even spent the full amount allocated. I don’t have one fixed method; it depends on where I’m staying and what we’re doing. But I have a few rules of thumb:

  • Save up for the vacation well before it happens. We put a certain amount aside each month, and time our vacations for when we’ll have enough saved to take one. Now, I often purchase the airfare and hotel beforehand, but only when I’ll be able to pay off the credit card before it accrues interest.
  • Figure out how much we have available to spend. Once we decide when we’re going, I calculate how much money we’ll have set aside by the time the trip happens, and that’s the total we have for the trip. As I book the various planned expenses (car, airfare, hotel, etc.), I subtract it from the total. Whatever we have left is the amount we’ll get to use for discretionary money.
  • Figure out how much that is per day. It’s not like we spend the same amount every day; on this last trip, some days we went to mostly free activities and ate at home, while other days we went shopping and treated our friends to dinner. But having a daily average gives me an idea of what kind of trip it can be; fairly decadent and indulgent, or modest and thrifty. I don’t always look to cut corners; if we have enough money after airfare etc. to kick up our heels, I have no problem with that.
  • Track spending during the trip. I don’t think many people do this; one friend we were staying with was taken aback by it at first, but said it made sense once I explained what I was doing. Now that I’m more in control of my money, I find it hard to relax if I don’t know everything’s OK on the spending front. I know this because occasionally I’ve lost track of spending while on vacation, and the rest of the time I’m kind of worrying in the back of my mind that we’re overspending. On this particular trip, we ended up being well under budget, and I liked knowing that because it meant we felt comfortable making a few purchases that otherwise we probably would have nixed, for fear of blowing our budget.

So how do I track spending? It really depends, and often it’s nothing fancy. This particular trip I wrote down expenses and subtracted them from the total amount I’d determined we could spend. I carried the piece of paper wherever I went, we all saved our receipts, and whenever there was time to sit and relax I’d pull out the receipts, write them down, subtract from the total, and throw away the receipts so I knew I’d already accounted for them.

This isn’t a perfect system; at the end of the trip I compared what I thought the bank balance would be and was about $150 off. But, I checked off every purchase and I had written them all down, so I must have made a math error somewhere. Sometimes I use a spreadsheet or carry a calculator, so I’ll probably do one of those two things the next time we’re on a long trip. But considering we were traveling for two weeks and had a budget of thousands of dollars, that amount of variance isn’t the end of the world. I’d already determined we were under budget, and the correction from the math error was in our favor — we were even more under than I thought.

Another trip, I took out the cash we were allowed to spend and divided it into envelopes marked for the various activities we planned, with a separate envelope for each of our discretionary spending money. That worked pretty well, though it was harder to keep track and I worried about losing the envelopes. And a couple of things still required using a credit card while we were there, so it got a bit complicated setting that cash aside. Another time, when we had a private living space and Wi-Fi, I tracked our receipts in a spreadsheet. That was easier, and more exact than doing manual subtraction, but it does require that you have a computer and/or internet access. (We don’t have smartphones; I would imagine there are ways to keep track more easily that way.)

Whatever the method, I’ve found it actually increases my enjoyment on a vacation to know that we’re on track or can make adjustments to get back in balance. How about you? Do you have any particular methods for controlling your spending while on vacation?

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