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Archive for the ‘Debt’ Category

Middle Class

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

When it comes to financial articles, I usually fall for click-bait. Such was the case when I came across this article a while back.  The article discusses seven things that the middle class can no longer afford.  I consider myself middle class.  I am probably upper-middle class with and annual income around $100K.  So, naturally I was curious about the things I was supposedly unable to afford.

Vacations

This first item listed is vacations. This is not something that I have given up.  Granted I don’t take an expensive vacation every year, but my wife and I still get away for a few days.  I am saving for two big vacations.  One is a family vacation to Disney World.  I am expecting the cost to be about $10,000.  The trip is planned for roughly 3 years from now.  I have been saving for it for the last couple years and should easily have the money when we need it.  The second vacation is the second honeymoon I am going to surprise my wife with.  That trip is going to cost in the neighborhood of $6,000.  That trip is also budgeted and won’t be an issue financially.  I think for middle class earners, a little planning can keep vacations easily accessible.

New Vehicles

I think the issue with cars, is that people buy too much car, much like they buy too much house. They then compound the problem by not driving the car for a long time.  My wife and I have two cars, one is 3-years old and the other is 13-years old.  Neither one of the cars is top of the line nor have all of the features you could buy.  By being sensible about what we buy and only buying what we need, we can still afford to buy a new car.

To Pay off Debt

Do I have debt? Yes, a car loan and a mortgage.  I could pay the car loan off, but with an interest rate less than 2%, it is not my priority.  I do not have any credit card debt, nor do we have student loans anymore.  We paid all of that off within the last few years.  Sure, we could have used that money for other things, but paying off those debts was a higher priority.  I think that’s the issue most people have, prioritizing where they want their money to go.

Emergency Savings

My emergency savings aren’t quite where I want them to be yet. I have about $15,000 dedicated for emergency savings and another $10,000 that I could use if it was a true emergency.  Establishing the emergency fund was one of my top priorities when I was digging out of my hole.  When life’s unexpected expenses would pop up, it would put me back in the hole.  The cushion allows me to absorb life’s expenses without having to go into debt.

Retirement Savings

This one is simply people not prioritizing the future. I currently set aside 7% of my gross pay and my company contributes another 8%.  When people say they can’t afford to set aside any money, they are simply not prioritizing their retirement savings.  Instead, they are going out to eat, buying a new TV, or buying the latest iPhone.  Sure, all of those things are nice, but not having to work the rest of your life is nicer in my opinion.

Medical and Dental Care

The article listed these two separately, but they are essentially the same to me. I’ve experienced both this year, first with my root canal and then with surgery for my little guy.  I was able to handle the expense for both because of my HSA.  I had been saving the money throughout the year in the HSA and used it when the expenses came up.  Once again by planning ahead, I was able to handle the expenses when the unexpected happened.

Plan Ahead

In my opinion, the middle class can afford all of these things with a little planning. Since their income is limited, the middle class just needs to prioritize where their money goes.  They may not be able to take a vacation every year or a buy a new car every 3 years, but it doesn’t mean they can’t have them at all.  By setting a little bit of money aside each paycheck, all of this is possible.

5-Year Progress Check

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

Just for fun, I decided to compare my budget today; to the budget I had in place 5-years ago.  This exercise isn’t something that I do on a regular basis.  It was prompted by a discussion I had with a coworker.  She is in the process of buying a house and that got me to thinking back on saving and buying my first house.  As I have said before, I have made decent progress over the past several years in managing my finances better.  How much better you might ask?  Let’s take a look.

Income

Five years ago, I had been with my current company for about 5 months.  My salary at the time was $79,000 a year.  Having a dependable income was precisely why I had left my previous job 5 months earlier.  The old job was commission based and I wasn’t a very good salesman.  Today, my annual salary is $95,000 a year and this year I received a bonus of $20,000.  So, I have managed to increase my income quite a bit over the last 5 years.  I wish I could say that this was deliberate on my part, but I can’t.  All I’ve done is simply work hard and changed positions internally when necessary.  I will say that I was surprised that my net take-home pay has not changed as dramatically in those 5 years.  Back in 2009 my monthly take-home was $4,776.  That is after taxes and benefits.  Today, my take-home is $5,267.  That is a difference of only $491 a month.  Where is the rest of it you might ask?  The rest of it is being saved.  Back in 2009 I was still trying to dig out of the hole that I had placed myself in, so I was not contributing much, if anything, to my 401k.  Today, I am contributing 7%; my employer is contributing 8%.  I am also maxing out my HSA account at $6,550.  That means I am saving over $12,000 a year.  That’s how you dig out of the hole.

Savings

No surprise, I had very little in the way of savings 5 years ago.  The best I could find for my bank savings and brokerage account were the year-end balances.  I had $3,300 in cash savings and $200 in the brokerage account.  Today, I have just over $26,000 in the bank and about $5,000 in the brokerage account.  The 401k balance is just as dramatic.  I was able to find the balance from April 2009, it was $407.  I had contributed for one month and then had stopped in order to eliminate my debt.  Today, my balance is just over $41,000.  I have become much more disciplined in my contributions and trying to increase my contribution whenever possible.

Net Worth

As I said, I was still digging out of a hole 5 years ago.  My net worth at the time was about -$18,000 or so.  I had credit card debt payments at the time of $400 a month and student loan payments of $140 a month, along with a car payment and mortgage.  Today, I just have the car payment and mortgage.  Both the car and mortgage have such low interest rates, that I have no desire to pay them early.  My net worth today is over $123,000.

Progress

I still can’t believe the progress that I have been able to make in just 5 years.  Certainly, the increased salary has made life a lot easier, but discipline was also needed and a change in mindset.  My wife and I had to change our thinking on wants versus needs.  We had spent too much on wants in the past.  We were tired of playing catch up.  By taking advantage of the increasing salary and saving more, we have built up a larger safety net.  The unexpected car repair or tax bill, no longer puts us back in the hole.  We plan for major purchases and save the money ahead of time.  This has allowed us to make the progress over the last 5 years.  I’m curious to see what kind of progress I can make in the next 5 years.

Two Different Planets – Money Views Differ

Money Tree

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

I recently read a Wall Street Journal article that completely surprised me.  I guess it shouldn’t have, knowing how most Americans think these days about money, but it still did.  The article discusses how the writer and her husband have different views when it comes to money.  They recently experienced some financial bumps that have caused them to fall into debt.  She seems to think that they are doing just fine; while her husband feels that their emergency fund was inadequate.  You can probably guess which person I would agree with.

It’s a Balance

It is something that we all have to deal with.  How do you save enough for future unseen events or lifestyles while still enjoying life today?  I know it’s something that my wife and I have struggled with over the years.  I am of the saving mindset and my wife of the enjoying life mindset.  However, my wife has seen the benefits that come from my mindset, while not completely abandoning hers.  Now that we have built up our savings and no longer have any credit card debt, we are able to absorb the minor financial shocks that appear from time to time.  That’s now comforting to my wife, she sees the benefit.

What About Another Hiccup?

The author of the article does not seem fazed by having over $10,000 in credit card debt because of their recent bad luck.  If I was in their shoes, I would be worried if something else were to go wrong.  According to the article, they are a single income family.  What happens if she loses her job?  That security she seems to feel like they have now will evaporate pretty quickly.  I’m not going to pretend my finances are in perfect order.  My emergency fund should be more robust, but it’s at about 3 months’ worth of expenses right now.  I would like to get it to 6 months.  For my wife and I, this has not happened overnight.  It has taken time, a few years.  However, we have been better prepared to handle some of the hiccups that we couldn’t handle before.  We recently had to cover some expensive car repairs.  The savings we have dedicated for anything car related took a hit, but we didn’t end up in debt because of it.

Undue Stress

The author writes about how her husband is concerned about the precarious nature of their finances, but that does not seem to bother her.  They don’t fight about money, which is good.  However, she seems too ambivalent about the stress she is causing him.  Maybe I’m reading too much into it.  It just strikes me as incredibly selfish of her.  I understand her point of view of not having money growing up and wanting to enjoy life.  However, I would think that you would also want to make your spouse happy.  In my marriage, I will generally think of my wife before myself.  It’s one of the reasons why we have different fun money (allowances) amounts.  At the time we gave ourselves an allowance, she wanted more things than I.  I tend to be very basic in my needs, so I suggested that her allowance be higher than mine.  I knew this would make my wife happy.  It was an easy decision.  So, if I knew that certain behaviors or practices were causing stress for my wife, you can be sure that I would attempt to alleviate it.

Different Views

I don’t think that you have to have the same views on money when you are married, but I think that you need to be in agreement on your goals.  If a husband and wife have differing financial goals or even the importance of the goals, I think in the long run it will prove to be a problem.  In my mind, it highlights a lack of communication and that is a killer for a marriage.

Feeling Mature about Your Family’s Finances

LBalke

The following is a staff writer post from Libby Balke. She’s an amazing writer, work-at-home mother of two, and has been married almost 8 years. Please leave any questions or comments below for either Libby or Crystal.

We’ve been watching a lot of college basketball lately in our household, and one commercial has caught my attention. It’s for a financial services company, and the crux of the ad is “When did you know?” (I’m intentionally not naming the company, number one because this isn’t a sponsored post, and number two because I don’t remember the business’s name.) They’re basically asking consumers when they knew they were responsible adults; my husband and I both agreed that we started feeling like grown-ups when we were able to successfully manage our family’s finances. But we disagree on something to: exactly when that successful money management began.

My Husband’s Case

My husband believes we’ve been successfully handling our family’s finances from very early on in our marriage. We tied the knot during our last few months of school (grad school for me, undergrad for him), but by our eight-month anniversary, we were both gainfully employed, working full-time jobs with benefits. His version of success begins at that point.

My Case

I, on the other hand, think our successful management of our family’s finances started much, much later. Sure, we both had jobs with benefits eight months into our marriage; we bought a house 15 months in; we bought our first brand new car 27 months after tying the knot, and another one just shy of our fourth wedding anniversary – we also had debt, piles and piles of it.

Is that responsible money management? While it may be the status quo for most Americans these days, it’s not exactly ideal.

To answer the ad’s question, “When did you know?”, for me it was the month before our five-year anniversary. That’s when my husband and I sat down, looked at our family budget, and realized that we were wasting great gobs of money on things we not only didn’t need, but in many cases didn’t even want. We were spending over $1,000 a month on child care, while I felt like I was letting someone else raise my child; we were shelling out $200 a month for someone to clean our house, even though I found scrubbing toilets therapeutic. Examining our budget meant cutting out some luxuries, rethinking our priorities, and making some serious changes – changes that put me on the path to leaving my full-time job (the one with all those benefits that made my husband feel like a real grown-up) in order to ultimately become a work-at-home mom.

Over the next six months, we put our family’s finances into real order. We paid down debts; we shopped around for everything from car insurance to Internet providers; we redoubled our efforts to build our nest egg. When it was all said and done, I’d left the rat race behind and was able to find work/life balance doing my job out of my home office.

And that’s when I started feeling like a responsible adult.

What about you? When did you start feeling like a real grown-up? Would your spouse or partner agree?

Married… and Almost Out of Debt

LBalke

The following is a staff writer post from Libby Balke.  She’s an amazing writer, work-at-home mother of two, and has been married almost 8 years.  Please leave any questions or comments below for either Libby or Crystal.  :-)

When my husband said, “I do” – now nearly eight years ago – he wasn’t just agreeing to make me a part of his life til death do us part. He was also agreeing to take on the $55,000 in student loans I’d amassed during my undergraduate and graduate school years. It was a big change for my husband; as an athlete on scholarship, he’d attended the same school as I did, but without accruing a single dollar of student loan debt.

For the first three years of our married life – the so-called “Newlywed” period – we didn’t worry too much about that original student loan debt. In fact, we made very little effort to pay off the debt, with the exception of the bare minimum monthly payments. During that period, we applied for (and were approved for) loan after loan after loan. First it was one vehicle loan, then another; we took out a loan for our first house back when your signature was the only thing you needed to get a mortgage; we took out a $19,000 loan on a consumer credit card to pay for an addition to our first home. By the time we were celebrating our third wedding anniversary, our combined debt had ballooned to nearly $200,000.

Amassing the Debt

My husband and I had always been financially responsible – or so we thought. Instead of going on a lavish honeymoon, we opted to put that money into what ultimately became our emergency fund; instead, we went on a simple, one-night “mini-moon” to a resort and spa near our home. We lived on a strict monthly budget, and never had to go in the red with those expenditures.

But we did a bad job of planning for the big things in life. While we had an emergency fund and a well-funded checking account, we didn’t have a real savings account. So when we needed (or wanted) to buy something new, we did what every other red-blooded American was doing at the time: we took out a loan and went deeper, deeper, deeper into debt.

Then the World Changed

Shortly after our third anniversary, three things happened all at once. The first was the completion of an addition we’d tacked on to our house – and the accompanying loan we’d tacked on to our debt. It put our total debts right on the verge of the $200,000 mark, and tipped our total net worth from the positive to the negative. We now officially owed more than we had.

The second big change to our world was the birth of our daughter, our first child. She joined our family on September 14th, 2008. And that’s the same day that, in many respects, the rest of the world changed forever, too.

That’s because just as our daughter entered the world, Barclays chose not to pursue the takeover of Lehman Brothers; the next day, the investment house filed for bankruptcy protection. The markets crashed. Unemployment started to soar. Bailouts were debated. The Recession was now front page news.

Our Perspective Changed, Too

Almost overnight, the idea of being deeply in debt went from being in vogue to being a curse. Prior to September 2008, much of the world – and my husband and I – had separated debt into “good” and “bad” categories. “Good” debts included loans on necessities like your education, your home, maybe your cars – and as long as your debts were squarely in that “good” column, it didn’t matter how high they were. But as the world’s financial situation continued on its downward spiral, this outlook underwent a rapid evolution. Suddenly, applying for a loan was out of style, and all the cool kids were into smart saving and investing.

Maybe it was the Recession; maybe it was my new title of “Mom”: whatever the impetus, how I viewed all our debts changed instantly, too. Just a few months earlier, the loans had felt like a pathway to our dreams; now they felt like a burden. By the time our daughter was just one month old, my husband and I had sat down to create a long-term plan for battling our debt.

How We Did It

Up to this point, we’d always lived on a budget. It allowed us to have everything we needed, and most of what we wanted, with some loose change left over at the end of the month. This was the first thing that had to change if we were going to pay down our debt. We revised our budget from one of comfort to one of restraint; we eliminated the things we didn’t need and found cheaper ways to get the things we did. Our new monthly budget meant saying “no” a lot more than we ever had before. Sometimes, the budget itself began to feel like a burden, until we remembered what the combined lessons of the Recession and parenthood had taught us: that debt only stands in the way of your freedom.

Every dime we saved went into paying down our debt. The first loan to go was our credit card debt for the addition; we managed to pay it off before the no-interest period ended. A year later, we’d saved enough to pay off the first of two vehicle loans; we paid off the second about a year ago. And last fall – with the help of my parents and their generosity – we paid off my student loans, the ones my husband had married right along with me on our wedding day.

Today, we’re out of debt… well, we’re almost out of debt. We’ve paid off every single loan with the exception of our mortgage. There’s a reason for this (which I’ll get into in a later post), but right now, we’re comfortable where we are.

Has life ever forced you to reexamine the way you think about debt? What experience(s) changed your perspective?

How I Spent My Inheritance

Money Tree

The following is a staff writer post from MikeS.  MikeS is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

Overall, I have made significant progress on my finances in 2013.  I am in a much more secure position now, than when the year began.  This is primarily due to large (to me at least) infusions of cash I received during the year.  The infusions came in 2 big waves, the first in the March/April time frame and the last coming in December.  The first wave was a combination of a performance bonus from work and the second was part of the inheritance I received from my mother’s estate.  The second was the remaining amount from the inheritance.  In total, they represented almost half of my normal annual salary.  Naturally, I was curious to see how it all ended up being allocated.

Debt

First up, I eliminated three debts.  The first was leftover medical expenses from when my son was born back in 2011.  I had hoped that I would be able to pay off the remaining balance in 2013.  The improved cash flow allowed me to increase my 401k contributions.  The balance had been sitting on a credit card with a promotional 0% interest rate and it was set to expire.   I had hoped that my bonus for the year would be large enough to help me retire that debt plus another leftover credit card expense.  I had a small balance leftover, again with a 0% interest rate, from buying a new computer in June of 2012.  When our old computer had died, I could have paid cash, but I just didn’t want to deplete the emergency fund.  With the bonus and inheritance, I was able to eliminate both of them.  The last debt, student loans, I eliminate this year came from the second wave.  I eliminated this debt mainly for the cash flow purposes.  The payments were not particularly onerous, but by eliminating the $138 a month, I was able to budget for other expenses more accurately.  Overall, these payments represented                 just over 1/3 (34%) of the extra money I received this year.

General Savings

Naturally, I allocated some of the surplus into savings.  For this, I just counted the actual dollars that I set aside from the money, not any additional that I was able to save as a result of improved cash flow.  The savings went into two different places, liquid (Capital One 360 savings account) and illiquid (Vanguard brokerage account).  I consider both to be my emergency fund.  I had found early on when I was trying to establish my emergency fund that I would tap into it for non-emergencies.  So, I began the brokerage account as a way to ensure that it would only be tapped in a true emergency.  I allocated 16% of the extra money to savings.  Of that amount, 70% went to the Capital One account and 30% went to the Vanguard account.

Targeted Savings

Given my son’s condition, I thought it would be a prudent idea, to dedicate savings specifically for any medical bills that might pop up.  I know this money will be spent at some point, but at the moment, it acts as a buffer before medical expenses would impact my emergency fund.  Also, by having this money, I was able to take advantage of some medical benefits my employer offers.  This amount represented about 13% of the overall money.

Spending

Yes, I did spend some of the money.  Overall, I spent about 37% of the extra.  Some of it went to purchases right away, such as a playscape for my kids and a trip over the summer for my wife and me.  I also allocated some of the spending money towards future purchases.  My wife and I have talked about taking our kids to Disney World in about 5 years.  Knowing the trip isn’t something we’d be able to fund from normal cash flow, we started dedicated savings towards it.  The rest of the spending went to the dedicated savings categories I have for things like the car, entertainment or the kids.  I consider these expense categories and add a little to them every month.  I also allocated some money for a couple of “wants” as well.  The biggest for me is a new snow blower.  Living in the Northeast, it will certainly come in handy.

Overall

In the end, I was pleased to see that I allocated about 50% to straight savings and debt repayment.  This is a large reason why my net worth has done so well this year.  By managing the money effectively, I have increased my ability to save for the future with increased 401k contributions, as well as, an opening HSA.  I also was able to responsibly enjoy the extra cash too.  BY thinking ahead of time what I would do with the funds, I was able to maximize the benefit from it.

Be Proactive in Dealing with Debt

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People who have debts find it hard to sleep at night. The feelings of stress and guilt around being in debt have a massive psychological effect and interfering with your sleep can just be the starting point. Debt can have an indirect effect on your health and well-being and also cause problems in your relationship, quite apart from the practical realities of owing money.

Unless you take steps to deal with your debt, none of these symptoms are going to get any better, and of course, if you don’t start paying off your debts, the amount you owe will just increase through charges and increased interest on unpaid bills.

Although the amount of debt you have may feel insurmountable, there is always a way to work clear of debt. Different options will be open to you, depending on how much you owe and your personal circumstances.

If you are in a position where you earn more than you need to spend on the household every month, then you could work to a strict budget and use any excess income to gradually pay off the debts that you have. You can take steps to minimize your outgoings – such as getting the best deal on utilities that’s on the market, and by cutting your groceries bills – so that you gradually have more left over each month to pay off the debt.

Not everyone in debt will be able to work their way out of it by themselves. It may be that you can’t generate any leftover income, or can’t see how to do so. In this case, you may want to enter into a debt management plan with a debt management company or a financial charity that offers a similar service.

A debt management plan is a more structured way of paying off your debts. The debt management company helps you work out what you need for your household budget, then fixes an affordable monthly payment from you which is then redistributed amongst your creditors on your behalf. There’s a fee for the service, but the company should be able to negotiate interest rate and charges freezes with creditors on your behalf and it will take a lot of the stress out of the situation for you.

Whichever route you take towards being debt free, it’s bound to better than trying to avoid the issue. It’s not going to be an easy ride, but with perseverance, you’ll get there.

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