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Dreams

Ever since she was a little girl, my wife has wanted to be a horse. Err, work with horses.

The problem is that most jobs working with horses pay horse-crap. It’s hard to raise a family on a stablehand’s income.

Her alternative was to own horses. This comes with a different set of problems. The biggest problem is that we live on 1/8 of an acre in a first-ring suburb. That’s not a lot of room to graze, though I would be willing to give up my spot in the garage.

I rock like that.

Boarding a horse costs a minimum of $200 per month. Two girls means two horses, otherwise, they won’t both be able to score in the saddle club. For the math challenged, that’s $400 per month, plus about $300 in preventative vet care per year.

$5100 for a year of boarding an extremely obsolete car.

Then, you need a trailer to get the horse to shows. You need saddles and reins and and short-legged stirrups and feedbags and muck-rakes and brushes and combs and hoof-cleaning-thingies and other stuff that will catch me by surprise for years to come.

Expensive.

My rough estimate is that it costs at least $10,000 to get into horse ownership, and that’s not counting the horse itself.

You can buy a horse for well under $1000 if you aren’t concerned about registration or speed. A 15 year old horse can last 10-15 more years, so it’s not money down the drain.

That’s $12,000 to get in and $5100 per year to stay in. Minimum.

Never let it be said that I’m not a pushover. Last month, we bought an SUV that can pull a horse trailer. Last weekend, we bought the trailer. That’s two major steps towards making my wife’s dreams come true. The rest of the plan culminates in a hobby farm in the sticks.

There are several steps in between.

I just need to put the brakes on every other step. We’ve been offered the free use of one pony next season, and we may be able to get another for the same price. Beyond that, we need to be patient. There will be no ponies purchased until the new truck and old mortgage are paid.

Period.

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Debt Scams

Finance

When you are up to your eyeballs in debt, praying for a step-stool, sometimes life–more accurately, con-artists–try to trip you when you are vulnerable and look for a solution. They aren’t muggers on the street. They come at you wearing ties, invite you to a real office, with real furniture and a real nameplate on a real desk. They are a real company, but that doesn’t mean they aren’t trying to scam you out of the little money you have left to put towards your debt.

Yes, I am talking about debt management scams. These scams come in 4 main varieties.

Debt Settlement companies instruct you to stop paying your bills completely and send them the money instead to be placed in a settlement fund. When your creditors get desperate enough, they will be willing to settle for pennies on the dollar.

In theory, this can be a good strategy for some debtors. Unfortunately, it has some drawbacks, even if the company is legitimate. They tend to charge high fees as a percentage of your deposits. Some take another fee when a settlement is accepted. The entire time you are building your settlement fund, your credit rating is sinking, leaving you open to being sued or garnished. The bad companies take the fund and run, while even the good companies can’t guarantee your creditors will play ball.

Ultimately, they aren’t doing anything you can’t easily do yourself. If you want to go the settlement route, stop making your payments and funnel the money into a savings account that you will use to offer settlements from. It takes discipline, but there is no upside to paying someone else for the same function.

Debt Management plans are used when you owe more than you can afford to pay. These companies work with your creditors to adjust interest rates and minimum payments and they try to get some fees waived for you.

A good company will work with you and your creditors to make sure everyone is working together towards the goal of eliminating the debt. A bad company will tell you they are working with your creditors while ignoring any contact from the creditor. They’ll tell you the creditor isn’t willing to negotiate while never stepping up to the negotiation table. Another trick is to offer the creditor a set payment, with a “take it or leave it” clause. Any input from the creditor is interpreted as a refusal to participate. This, coupled with high fees paid by the debtor, make debt management firms a risky proposition. Most states require the firms to be licensed. Check to make sure they are before giving them any information.

Debt/Credit Counseling companies work with you to establish a budget and eliminate expenses; in effect, they are training you to be in control of your finances. They are often organized as a nonprofit, but not always.

Some–the sleazy ones–lie about what they are doing, or attempt to misconstrue what you are agreeing too. Be careful not to use your home as collateral to consolidate unsecured debt and don’t walk into a Chapter 13 bankruptcy without that being your intention. Both of those are common debt counseling scams. If the company isn’t able to provide all of the details of a transaction–company name, address, licensing information–or they aren’t willing to spend as much time as necessary explaining the details of the transaction, walk away. This is your life, you are in charge of it. Don’t let anyone bully or prod you into signing something you aren’t comfortable with.

Credit Repair is almost always a scam. There are ways to get correct bad information removed from your credit report. If the information is correct, those methods are illegal. There are two legal methods to repair your credit. First, stop generating bad credit. Make your payments on time and eventually, the bad items will fall off. Second, write letters disputing the actual incorrect items on your credit report. There are no quick fixes, and anybody telling you different is flirting with a jail sentence, possibly yours.

How do you avoid the scammers?

Be skeptical. If it looks to good to be true, it probably is. There is no such thing as a magic wand to fix your credit and make your debt disappear. Bankruptcy + 10 years of your life is the closest thing to magic credit repair in this world.
Only use a legitimate credit counselor. Verify them through the Better Business Bureau and the National Foundation for Credit Counseling (1-800-388-2227 or www.nfcc.org)
Check the license. Most states require credit and debt counselors to be licensed. If they’re not, run away and report them.
Read the find print. Don’t sign anything you don’t understand. Like every other piece of your financial life, own the transaction. Know what your are doing, or don’t do it.
Are they willing to work with you? If they’ve got a generic plan that doesn’t account for your specific situation, they are probably a con. At the very least, they are a worthless company and a waste of both time and money.
Are they willing to work with your creditors? If not, they won’t be accomplishing anything for you.
How much do they cost? Higher fees may not be an indicator of a scam, but call around and find out if they are in the right ballpark. Triple or quadruple the going rate is a sign of someone who will disappear late one night, with your hopes, dreams and savings in tow.
Above all else, trust your gut. If it doesn’t feel right, it probably isn’t. There is nothing a counselor can do that can’t wait a few days while you check them out.

There is no magic bullet to kill debt. You’re not fighting a werewolf, you’re fighting a lifetime of bad or unfortunate choices and circumstances. It’s important to keep a realistic outcome in mind.

Update: This post has been included in the Carnival of Debt Reduction.

Budget Lesson, Part 1

Finance

Over the next few weeks, I will be going over my budget in detail.

The first section is income, but that’s straightforward. A line for each income source, bi-weekly, monthly and annual totals. Simple.

Before we start, a word on the organization. There are five columns:

Category – This is the description of the line item.
Cost – How much do you pay for this item?
Time – What is the frequency of the payment? Valid values are ‘m’, ‘q’, ‘y’, ‘w’ for ‘Monthly’, ‘Quarterly’, ‘Yearly’ and ‘Weekly’.
Monthly – Cost and Time are combined to calculate the monthly expense, to make it possibly to budget. If this is $100, I need to set aside a C-Note each and every month to make the payment when it comes due.
Yearly – This column is mostly informative. It’s helpful to see this in comparison to my annual pay.

The first section I am actually going to address is discretionary spending.

Groceries/Dining $475.00 – We don’t budget heavily for groceries, which would be a surprise if you saw me. At the smallest I have ever been, fit, I was never small. We shop smart, buy in bulk when it makes sense, and rarely eat out. We also keep cooked rice and beans in containers in the refrigerator as a cheap and healthy way to stretch almost everything we eat.
Discretionary $250.00 – This gets used for household items, like toilet paper and soap. It also get used for the odd book or movie, or to cover the gaps between the other categories and reality.
Baby stuff $60.00 – We have two children in diapers. ‘Nuff said. This category does get progressively smaller as the baby items are outgrown and the children get potty-trained.
Gas/oil $200.00 – Gas and auto-maintenance. This is actually higher than monthly costs, allowing us to set some aside for larger maintenance issues.
Clothes $15.00 – All of our dressers are overflowing, so this is strictly replacement cost for the time being. Our kids wear a lot of hand-me-downs.
Blow Money $50.00 – Occasionally, habitual shoppers need to shop. If they don’t do it on-budget, they will do it off-budget and kill the whole idea.

Initially, we used a “virtual envelope” system. We had a spreadsheet and every time something was spent in this category, we entered the amount and stopped when the category was spent. Didn’t work. We are going on a pure, cash-only system as of the first of the year. No money, no spendy.

Money Problems – Day 7: Paying Off Debt

Finance

Today, I am continuing the series, Money Problems: 30 Days to Perfect Finances. The series will consist of 30 things you can do in one setting to perfect your finances. It’s not a system to magically make your debt disappear. Instead, it is a path to understanding where you are, where you want to be, and–most importantly–how to bridge the gap.

I’m not running the series in 30 consecutive days. That’s not my schedule. Also, I think that talking about the same thing for 30 days straight will bore both of us. Instead, it will run roughly once a week. To make sure you don’t miss a post, please take a moment to subscribe, either by email or rss.

On this, Day 7, we’re going to talk about paying off debt.

Until you pay off your debts, you are living with an anchor around your neck, keeping you from doing the things you love. Take a look at the amount you are paying to your debt-holders each month. How could you better use that money, now? A vacation, private school for your kids, a reliable car?

If you’ve got a ton of debt, the real cost is in missed opportunities. For example, with my son’s vision therapy being poorly covered by our insurance plan, we are planning a much smaller vacation this summer–a “staycation”–instead of a trip to the Black Hills. If we didn’t have a debt payment to worry about, we’d have a much larger savings and would have been able to absorb the cost without canceling other plans. The way it is, our poor planning and reliance on debt over the last 10 years have cost us the opportunity to go somewhere new.

The only way to regain the ability to take advantage of future opportunities is to get out of debt, which tends to be an intimidating thought. When we started on our journey out of debt, we were buried 6 figures deep, with a credit card balance that matched our mortgage. It looked like an impossible obstacle, but we’ve been making it happen. The secret is to make a plan and stick with it. Pick some kind of plan, and follow it until you are done. Don’t give up and don’t get discouraged.

What kind of plan should you pick? That’s a personal choice. What motivates you? Do you want to see quick progress or do you like seeing the effects of efficient, long-term planning? These are the most common options:

Debt Snowball

Popularized by Dave Ramsey, this is the plan with the greatest emotional effect. It’s bad math, but that doesn’t matter, if the people using it are motivated to keep at it long enough to get out of debt.

To prepare your debt snowball, take all of your debts–no matter how small–and arrange them in order of balance. Ignore the interest rate. You’re going to pay the minimum payment on each of your debts, except for the smallest balance. That one will get every spare cent you can throw at it. When the smallest debt is paid off, that payment and every spare cent you were throwing at it(your “snowball”) will go to the next smallest debt. As the smallest debts are paid off, your snowball will grow and each subsequent debt will be paid off faster that you will initially think possible. You will build up a momentum that will shrink your debts quickly.

This is the plan I am using.

Debt Avalanche

A debt avalanche is the most efficient repayment plan. It is the plan that will, in the long-term, involve paying the least amount of interest. It’s a good thing. The downside is that it may not come with the “easy wins” that you get with the debt snowball. It is the best math; you’ll get out of debt fastest using this plan, but it’s not the most emotionally motivating.

To set this one up, you’ll take all of your bills–again–and line them up, but this time, you’ll do it strictly by interest rate. You’re going to make every minimum payment, then you’ll focus on paying the bill with the highest interest rate, first, with every available penny.

DOLP

This is the plan promoted by David Bach. It stands for Done On Last Payment. With this plan, you’ll pay the minimum payment on each debt, except for bill that is scheduled to be paid off first. You calculate this by dividing the balance of each debt by the minimum payment. This gives you an estimate of the number of months it will take to pay off each debt.

This system is less efficient than the debt avalanche–by strict math–but is better than the snowball. It give you “quick wins” faster than the snowball, but will cost a bit more than the avalanche. It’s a compromise between the two, blending the emotional satisfaction of the snowball with the better math of the avalanche.

Snowflaking

For each of these plans, you can give them a little steroid injection by snowflaking. Snowflaking is the art of making some extra cash, and throwing it straight at your debt. If you hold a yard sale, use the proceeds to make an extra debt payment. Sell some movies at the pawn shop? Make an extra car payment. Every little payment you make means fewer dollars wasted on interest.

Paying interest means you are paying for everything you buy…again. Do whatever it takes to make debt go away, and you will find yourself able to take advantage of more opportunities and spend more time doing the things you want to do. Life will be less stressful and rainbows will follow you through your day. Unicorns will guard your home and leprechauns will chase away evil-doers. The sun will always shine and stoplights will never show red. Getting out of debt is powerful stuff.

Your task today is to pick a debt plan, and get on it. Whichever plan works best for you is the right one. Organize your bills, pick one to focus on, and go to it.

Assuming you are in debt, how are you paying it off?

Budget Lesson, Part 7

Finance

It’s been a month(again!) since I’ve written a post for the budget series, so I’ll be continuing that today. See these posts for the history of this series.

This time, I’m looking at how to reduce my “set aside” funds. These are the categories that don’t have specific payout amounts and happen at irregular intervals. One of the convenient features of our set-aside funds–also a feature of our non-monthly bills–is that the money sits in our checking account, providing a buffer against overdrafts. The buffer is big enough that I can withdraw our entire month’s discretionary budget on the first of the month.

Parties – Twice a year, we have large parties. We have a barbecue(not necessarily low and slow, I’m in the midwest) and a Halloween party. We also have three kids with birthdays. Each year, we try to do something exotic at the barbecue. One year, it was a turducken. This year, we’ll be skipping the show-off portion of the show. The Halloween party is never expensive. I don’t drink much, so the bar stays well-stocked without frequent expensive shopping trips. We throw two large parties for less than $300 combined, and our guests start RSVPing a year in advance. We’re fun. The kids are getting gypped this year. I am over my addiction to expensive birthday parties for my kids. There will be a small party for one, a sleepover for another, and a party combined with some cousins’ birthday parties for the third. It sound horrible but all of them will have fun.
Gifts – We set aside money for presents, but we don’t feel we need to spend all of the money we have set aside. Anything left over stays here. Eventually, it will be something nice for all of us.
Pet Care – We have 4 cats and a dog. Cat litter and food are expenses that we can’t make disappear. We don’t buy the fancy food, but we also don’t buy the stuff that uses cardboard as filler. We have set a new limit at 3 pets, but that limit will only be reached through attrition. There’s nothing to cut here for a few years.
Car Repair – This is another category with nothing to cut. If we don’t spend it, and something catastrophic happens to a car, we’ll be covered. If it doesn’t, we’ll have a bit more cushion in our checking account.
Furnace Warranty – When we bought a new furnace and air conditioner, we got the extended warranty. This is an unlimited renewal warranty, so, in 5 years, we’ll have to buy it again to keep it. If we keep it forever, they will eventually replace our furnace when it dies.
Medicine/Medical – It’s a sad fact that people get sick. We set aside a small amount to cover our costs. The costs rise and fall, but over any given quarter, I don’t think I’ve been off by more than $5.

I’ve taken a hard look at most of the bills over time, so there isn’t always a lot to cut. Next time, I’ll be addressing our discretionary spending.

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Debt Snowball

Debt Avalanche

DOLP

Snowflaking