Tackling your debts
Getting rid of debt is the first thing that anyone needs to do to live a wealthy life, because debt is the opposite of freedom, and I believe that is an integral part of living a wealthy and happy life. So important, in fact, that I’m going to give it a brief overview here before we go into some of the one-off tactics I’ve come up with for reducing major expenses. Besides, for a lot of us (myself included), our debt payments overwhelm our other expenses.
From reading other finance blogs and several books on the subject, I have heard about two major tactics for paying off debt. The first is to pay the minimum on all of your debts and then take the highest interest one and pay that down more aggressively. Once you’ve killed that debt, you move on to the one with the next highest interest rate and roll the payment you were making on the just paid off debt into the new one. This makes the most financial sense because long term because it costs the least money, but if your highest rate debt is also one of your largest, it’s hard to feel like you’re making any progress. The other tactic is to pay off your smallest debt as quickly as possible, and then roll that payment into the next smallest debt. This can be slightly more expensive, but there is a sense of more immediate progress, because paying off that $2,500 credit card bill is a lot easier than the $25,000 car note or your $250,000 mortgage.
I’m honestly not a huge fan of either method. For one, while I think both are great ways to pay down your debt, I feel like both emphasize too much sacrifice without enough reward. If you are deep in the hole, and one of these methods is your only way back to solvency unless you declare bankruptcy, I say go for it. But for anyone that isn’t quite as deep in debt, I think both methods are a bit too drastic.
I like something a bit more flexible. To begin, any revolving debt or credit lines (credit cards, payday loans, etc) that aren’t getting paid off every month need to be paid off immediately. If you have the money in your emergency fund, use it to pay this debt off. If you don’t, forgo paying more than the minimum on your other debts until these are paid off. If you have more than one credit card carrying a balance, either consolidate it on one card (and stop using the others) or use one of the methods I described above to pay them off. You’ll never get this monkey off your back if you’re beholden to floating interest rates or whatnot.
For each of your fixed payment loans (student loans, car loans, mortgage), instead of paying one down aggressively and only the minimum on the others, take your monthly payment, divide it by 10, and add that to your regular payment. Some of your payments didn’t go up by very much, but you are now digging into the principle all across the board. Live with these new payments for 3 months – they didn’t hurt very much (if at all), did they? Every three months, add an additional 1/10th to your payments until you reach a point where you are starting to feel it, and then pull back just a bit. This is your comfortable debt payment, and at least you aren’t stressing yourself. If you pay off one of your debts, take half to three-quarters of that money and divide it among the remaining debts. Take the rest and treat it like you would a raise at work – save some of it and enjoy the rest. Consider it your reward for beginning the process of getting out of debt.
Will this pay your debts down as quickly as one of the other methods? No, but I feel like it’s quite a bit more sustainable than some of the other, more drastic measures. And if you are working to build up your credit score, it keeps more of those lines of credit open longer, giving you a stronger credit history, which will hopefully give you the opportunity to refinance some of those bigger loans to save even more cash.
Just be careful, some debts have early payoff penalties – if that applies to you (or you even think it might), it pays to talk to a financial adviser about what makes the most sense in that particular situation.
Where did it all go?
If we want to spend the next few weeks knocking down our biggest expenses, first thing we need to do is figure out where our money is going and how much we’re spending. I like using tools like Mint or Wesabe for this kind of thing, but if you have security concerns you could very easily use something like Microsoft Money or Quicken for this work. Heck, if you want to do some of your own programming, you could even use a series of spreadsheets to manage this stuff.
Whatever way you decide to do that is fine, we just need to determine what are biggest hits are to make sure we address them in an order that makes sense. Don’t forget to include any periodic expenses, like car insurance, and I like to lump my expenditures into categories and tackle a category as opposed to an individual bill. This lets me see trends in my spending that wouldn’t necessarily show up at a transactional level.
My top five spending categories since the beginning of the year:
- Home (this includes my mortgage, home owners insurance, property taxes, and housekeeping) – Yes I have a housekeeping company that cleans my place. It is definitely worth every cent, but that’s another article. This is artificially high for me at 39% of my net expenditures because I am aggressively paying down my mortgage, but is still by far my largest expense.
- Food and Dining (this includes groceries, eating out, my bar tab, snacks) – This is about 11% of my net expenditures, but is pretty highly inflated because I eat out all the time and don’t track this well.
- Shopping (Electronics, clothes, housewares, random crap, games, books, and other entertainment) – this is about 10% of my expenses, and includes just about anything I might buy for myself on a whim that isn’t for social consumption.
- Other (petty cash) – this is how I categorize any pocket money that I don’t otherwise account for, and is usually spent on a mixture of #2 and #3 if I’m being honest. But it looks like my cash outlay is about 8% of my expenses – I’d like to get this figure down to around 5% if I could.
- Travel (vacations, hotels, airfare, my Penn State football tickets) – this is about 7% of my spending.
Last year when I still had a car payment, my auto costs were my second largest expense, at 14% of my spending, but getting rid of my car payment (I paid it off) was a huge boost to my bottom line. Note that this does not include any credit card payments – it would only make the list if you aren’t already paying it off every month, and should reflect what you could be paying, not the minimum due (the way I handle my mortgage overpayment is a good example of this – the number reflects what I’m spending in total, more than just the due amount).
Now, I’m not talking about a budget here, and those percentages are based on what I spent, not what I made. But if the idea is to cut the fat without cutting anything you’re going to miss, it doesn’t really matter how much you’re making. Once you start getting at cutting out things you’ll actually miss you are talking about budgeting, which much like dieting is really a dirty word in most peoples minds. So don’t think about that right now, and focus on getting your spending down as far as it can go without cutting out the stuff you want. Then, if you are still not bring in enough to meet your savings goals and pay all your bills every month it is time for a down to earth discussion with yourself.
What, you say? You don’t use cards for anything and don’t have this detailed a listing of your spending? First thing I want you to do is collect all your bills (including the credit card) and your bank statement. Then, based on that information, take an educated guess.
Yes, I told you to guess.
Then, for the next month, pay for everything using a piece of plastic if you can. Don’t trust yourself with a credit card, or don’t have one with a zero balance so you can avoid those nasty finance charges? Move money from your savings account into checking and use your debit card. Only for a month. The idea is to figure out where your money is going so you can focus on those areas where you are spending the most. The first guess will let you get started cutting down somewhere – lets be honest, you know where at least some of your money is going. The next month will give you the hard data you need to adjust your perceptions. Using a tool like Mint for this is great because I have almost two years of financial data now and can track my spending trends pretty readily as life changes occur and I pay off my various and sundry debts. But you have to start somewhere, and if you don’t have this information in a tool somewhere already, now’s the time.
If you’re really old school and don’t want to do the card thing at all, you could save all your receipts and get a scanner to load the info into Quicken (they have a tool for that I believe) or maybe MS Money, but there is a cost associated with that which I would avoid if you don’t need the scanner for something else. However you decide to do it, this will set you up for success down the road as we tackle our biggest expenses.
Focus on the highest value
I’ve been struggling a bit with the direction in which I want to take this blog. Do I want to take a more entrepreneurial route with my postings, writing about trying to start my own business (sort of what I’m doing here on this blog) and other ways to increase income? Do I want to blog about ways to reduce costs, figuring out novel ways to reduce spending and debt without reducing quality of life? Do I want to discuss investing with my readers, trying to figure out less obvious ways to allow the power of compound interest to do most of the dirty work for us? Maybe I should be considering more of the happy side of my little equation, going into detail about how to stop letting money rule our lives and our actions. Of course, I’ve been reading a ton of personal finance blogs to see if I can find a model I like that I can also put my own unique slant on.
On other personal finance blogs, I see reviews of financial books – these are books about how to buy stuff cheaper, get out of debt, refinance your house, and other things like that. I own a few of them, but I noticed that after the first couple of them, I wasn’t getting a lot more out of them. The more recent books might take a slightly different tone, present their message a slightly different way, but they didn’t actually teach me something different. However, I read a lot of books on business. Some of them talk about things like fixing meetings so they aren’t so boring; some of them are about figuring out what kind of business a person should go into. Like the financial books, they all seem to cover the same basic topics, and they all provide the same basic direction. But I’ve noticed that each one teaches me a slightly different lesson about the same topic. Unlike the financial books, which seem to all be fairly factual, the business books have to deal more with the slight irrationality of individuals, usually giving you the best tips on how to deal with someone very similar to the author.
The funny thing about these business books is that they invariably teach most of the lessons of the finance books as well, if you are thinking about it that way. One of the lessons I see reiterated over and over again in these books is that as a business owner (or leader of men, or whatever) you should focus on the tasks that add the most value to your organization, and outsource the others to someone else. Isn’t that basically the same thing as figuring out where you’re wasting the most money each month and then cutting it down? Think about it, if you were to cut down your largest expense (or take a big chunk out of your largest debt, or whatever), and focus only on that until it bleeds, aren’t you doing yourself a bigger favor than if you skip lunch?
Over the next few weeks at least, my goal is going to be finding novel ways to tackle the ‘big one’ and get it under control. Maybe that doesn’t quite answer my overarching questions about the direction I will finally end up taking the site, but it at least gives me a direction for the short term – and that’s enough for now.
What is Success?
Success [suh k-ses] the attainment of wealth, position, honors, or the like – Dictionary.com
A few months ago, my girlfriend’s sister brought her eldest son to DC to look at colleges as he’s getting ready to take the SATs and decide where he’s going to apply. Like any good mother, she’s trying to help her son make a good decision (and worried that he’d make a mistake), but after having met the kid only the one time I knew she didn’t have much to worry about. Whatever college he ended up at, he’d be fine – honestly, he’d probably end up a success even if he chose not to go to college and instead ran off to join the peace corps.
I’ve had the good fortune to meet some very successful people in my life, as well as the good fortune to be acquainted with plenty of not so successful people. The former all seem to be very secure and sure of themselves, while the latter were all just a bit listless, chasing some short term goal and never really achieving any kind of focus. I’ve tried to learn something from each one of them, although I’m confident that I’ve missed out on plenty of other lessons they could have taught me.
If there was one defining characteristic the successful people had that the unsuccessful ones didn’t, it was that they were extremely passionate about something and pursued that passion relentlessly. Now, I’m not saying that they were necessarily rich people – success isn’t a measure of money (although they were all wealthy in their own way). The definition from dictionary.com is practically a joke, because if you need a gold star to feel like you’re a success then you probably never will be. I personally define success as someone who has figured out what it is they love, and then done something to make it better. Usually, this requires throwing caution to the wind and sacrificing something else that you might otherwise cherish. Sometimes this success and sacrifice is institutionalized as it is in the field of medicine (I’ve never met a doctor who didn’t sacrifice something to get to where they were, although I’ve met a few who weren’t successes because they didn’t love it). And sometimes, it’s more a journey of personal discovery.
So, back to my girlfriend’s nephew – how did I know his mother didn’t have much to worry about? Because he was obviously good at math, and one of the stories his mom told about him was how he and his friends played math games.
You don’t play math games if you’re good at math, you play math games if you love math.
At that point, I figured that he’d be fine, and spent the rest of the weekend trying to impart to him that college is a time to discover your passions and then learn a lot about them. He said he didn’t know what he wanted to major in, and that’s okay. But I would be willing to bet right now it will end up being some sort of math specialty or an applied math degree like engineering or physics. And I’m pretty sure he’ll be successful in it too.
Memorial Day Weekend Edition
Happy Memorial Day weekend everyone! Don’t expect to see anything new from me until Tuesday, but I have some great stuff planned for next week.
This past week, in case you’ve missed anything, I’ve written about:
- Advertising hype
- Saving money on your next big purchase
- Quick tips on how to negotiate for just about anything
- Obsessions and how to keep them from killing your finances
- What I think saving is
- Not to mention a few other odds and ends.
I’d love to hear from you guys – let me know what you like and don’t like about my blog, and if you have any topics you’d like me to cover.
Puppy of Vice
Do you ever have nights like this? I don’t have any real reason to post this, other than I thought it was kind of funny and I thought the blog needed something a bit irreverant on a friday.
Don’t buy into the hype
Gadgets are a guys best friend. Some guys like tools, or cars, or stereos. Me, I like electronics. All electronics.
And I have the crap in my house to prove it.
So when I hear about a new technology for a better, faster, stronger television that might just out-do the monstrosity that is currently sitting in my living room, my ears perk up and I begin to read.
Today I was reading a piece over on cnet about 240 Hz televisions. The idea with these kinds of TVs is that they have less motion blur noticeable during action scenes, and companies like Sony are trying to convince everyone and their cousins they should buy a new TV with this 240 Hz technology, even though every review I’ve checked out basically tells me that they can’t tell the difference between this new technology and the older 120 Hz designs.
They are using an advertising technique that writers of fantastic stories have been utilizing since the dawn of time, hyperbole. The idea behind hyperbole is that they exaggerate the features of whatever this newest, hottest item is and make you want it. And sometimes, I’m a sucker for it, which is why I have stuff in my house that I will never use.
These new TVs perform better on synthetic benchmarks than their older predecessors, but there is no way the human eye can tell the difference. Even CAD monitors (these are monitors that have to be very precise and have response times that are very fast to allow for detailed engineering rendering) don’t perform at this 240 Hz rate. It’s completely unnecessary, like owning a custom made sports car when you never get it over 75 mph.
Do you want to be wealthy? Figure out a way to ignore the hype and only buy what you really need or will really enjoy.
Make it easier to say yes!
One of the simplest, but most detrimental mistakes a negotiator can make is to make it easy to say no. The fact of the matter is, if you’re in a retail setting where your average employee isn’t making a commission, they have little or no actual incentive to help you save ten dollars on that new Halo video game you want. If you go up to them and say something like ‘Can you sell me this game for less than the sticker price?’ the easiest answer for them to give is no.
Don’t get me wrong, sometimes just asking will get you what you want. But most of the time, you either need to be persistent or find another way to make it easier for them to say yes.
Think of it this way – we all have to ask people for help in our daily lives. The fact is, none of us live in a bubble, and we are all reliant on someone to do something for us. Asking someone to reduce the price of an item for you is a lot like that, but we need to find a way to incentivize the activity. Lots of people have a ‘default no’ answer built in because they deal with crappy people every day who treat them poorly. Some people just like being difficult.
Okay, so what can you do? In a retail environment, you are pretty limited, but here are the things that I find are most successful for me:
- Treat the employee as if they were one tier more important to you than they actually are
- Ask for what you want in a way that makes the person you are addressing have to think about the question
- If they say no, restate the request and ask them again – perhaps with a new twist
- If all else fails, ask them if there is someone else in the store that can help you
#1 is a great way to break through the natural barriers you’ll see in lots of retail outlets. Most people treat retail employees like servants (or worse). Simply taking the time to learn their name, smile, and treat them with some respect will get you closer to your goal than you can imagine. Even if they know it’s because you want something from them, that’s okay, because everyone wants something from them.
The next part can be almost as important. Instead of just asking for a discount, it’s best to phrase the initial question in such a way that they know what you are asking for without giving a knee jerk reaction. This throws people off just enough to make them think “hmm, maybe I actually CAN give them a 10% discount.”
If they do turn down your request, it’s okay to repeat your request one more time and ask them for assistance. If they say no again either they just don’t want to help you, or they can’t. The only appropriate follow-up to this, other than choosing whether or not to complete the transaction, is to ask if there is anyone in the store (i.e. a manager) that might be able to help.
Here’s a transcript of how shopping for an HDTV at your local electronics store might go:
TV Shack Employee: Can I help you with anything?
Me: Yeah, that’d be great! My name’s Keith, and you name is…?
Or, if he was wearing a name tag, I’d go with “Yeah, that’d be great Mike! My name is Keith – it’s nice to meet you.”
TV Shack Employee (Mike): My name is Mike, nice to meet you. What are you looking at today?
Me: Hi Mike – I’m looking at this HDTV over here. I was wondering if you had any sales going on that might bring the price down a bit.
Notice I just asked for a discount here, but phrased it in a way that keeps the dialog open.
Mike: (Mike checks in the computer for the current list price) Sorry, that unit isn’t on sale.
Me: Really? I like this unit but it’s more than I want to spend. Can anything be done to reduce the price?
I did not say I couldn’t afford it, just that it was more than I wanted to spend. Don’t lie, ever – it makes people not trust you and that makes them less likely to help. Also note that I didn’t ask him for a discount directly, because if there was a coupon around he could give me to save 10% that would be an acceptable solution as well.
Mike: Personally, there isn’t much I can do, but let me ask my manager. (At this point, Mike is invested in getting you that TV and is actively trying to get you a better price) My manager says I can give you $200 off the price of the TV – would that be acceptable?
Me: Absolutely – thanks for your help!
I know, you’re going to tell me that it would never go down that way. Well, let me tell you, that’s basically the transcript of my conversation with a Circuit City employee when I bought my second to last television. I got exactly what I wanted, and all I had to do was ask. The conversation, as it stands, gave ‘Mike’ the incentive he needed to help me out, just by me being polite and hopefully making his day go by just a bit quicker. No magic tricks, lying, or even slightly deceptive practices necessary.
Negotiating, one tweet at a time
Living in South East Asia while I was in high school dramatically impacted my relationship with money. Everything (and I mean everything) was negotiable, all you had to do was ask. I got very used to negotiating the price for everything from DVDs to computers, and was in the habit of doing it – it just seemed natural to me.
When I moved back to the US, some people were shocked that I would ask for discounts on products. While I don’t do it all the time anymore, if I’m going to make a major purchase at a brick-and-mortar retail outlet, I always go for it. You’d be surprised how successful I’ve been at it (I got $200 off the price of a cell phone a few years ago just by asking politely), and this is a topic I plan to discuss quite a bit more as time goes on, but I thought today I would share some of my tweets on the subject with everyone.
- 99.99% of people who don’t ask for a discount don’t get one (the pizza guy gave me one once for waiting an extra 5 minutes without me asking)
- And the most important thing you need to do to get a discount on just about anything – ask, you’ll be surprised how often people say yes
- Dress the part – you want the salesperson to take you seriously, but not to think of you as their golden egg
- Don’t forget to stand up straight and smile – salespeople are more likely to give you a discount if you act look and act the part
- Talk to someone with pricing power (if you get shot down early for a discount, ask to speak with the manager)
- When buying more than one big-ticket item (maybe an HDTV, a blu-ray player, and some speakers), ask to bundle them for a discount
- Knowing what you want and how much you’re willing to pay for something is more important to getting a discount than you think
- Sometimes, the best way to get a discount on something is to walk away – if they really want the sale the salesperson will chase you
- The best time to ask for a discount is about 2 hours before closing at the end of the month because sales people have to boost their quotas
- There is no such thing as a fixed price (you can even negotiate at big box stores like Best Buy)
- When all else fails and you want a bigger discount on something, offer cash. Just make sure you have enough in your pocket.
- Offer cash only as a last resort, because using that rewards card can get you an extra 1% to 3% cash back
- Find an interesting way to ask for help, and whomever you are asking will probably try to find an interesting way to fix your problem
- If they can’t offer you a discount, ask them if they have a coupon you can use on your purchase (remember, interesting ways…)
- Even if your negotiations aren’t fruitful, always give thanks – you don’t want to burn that bridge in case they can help you in the future
I think the key thing to remember in all this is to NOT HAGGLE EVER. I’m not telling you to argue with a retailer about the price of something (that doesn’t mean you have to take no for an answer…), or lie to them and say you ‘can’t afford it’. If they can’t match whatever price it is you want to pay, thank them and walk away – don’t ruin someone’s day over it. This is simply taking back some pricing power from the retailer of whatever product you are trying to buy, and doing it in a way that is respectful of their time and effort. “Haggling” has a bad connotation because of that kind of bad behavior. This is a business transaction – treat it as such.
A good life or a good living?
Here’s another one from RulesofThumb.org:
A good life is of more value than a good living.
I don’t even have to reframe that one to make it apply. However, wouldn’t it be great if you could have both?
-
Find It
-
About
So, you want to know what's up with the brackets in the name? "Curly brackets (also called braces, or "squiggly brackets") are sometimes used in prose to indicate a series of equal choices" and "Square brackets are mainly used to enclose explanatory or missing material usually added by someone other than the original author, especially in quoted text." So basically, if you really want to be wealthy in life, you have to figure out how to get happy. Since that whole spiel would make a crappy name for a blog, I decided to do something a bit creative with some brackets.
Quotes from Wikipedia -
Recently Written
-
Categories
-
Monthly Archives
-
Blogroll
-
Twitter
