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Money Problems – Day 7: Paying Off Debt
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?
Cutting Healthcare Costs
It’s not a secret that health care can be expensive. Many people pay two and three digit bills for their prescriptions. A visit to the doctor’s office can hurt the budget. Glasses cost hundreds of dollars? How can you cut this cost?
Drugs
If possible, go generic*. There is no difference between Trazorel and trazadone, aside from the cost. Wal-mart, Target, and many other stores offer common generic prescriptions for $4-5. When you are talking to your doctor, ask if there is an drug option that has an available generic. When you are talking to your pharmacist, ask if there is a generic alternative available.
Get the price match. The Cub Foods pharmacy near me matches the Target generic drug price, giving us $4 generics for the asking. This is often an unpublicized deal, so make sure you ask. If your pharmacy will not match nearby prices, consider going elsewhere.
See if there is a 90 day plan. Many insurance companies sponsor a 90 day prescription plan that gives you a 90 supply of drugs for the 60 costs as long as you are willing to accept the drugs by mail. For expensive prescriptions, this 33% discount can be a substantial savings.
Physician
Does your clinic offer online consultations with your doctor or nurses? Some clinics offer a chat or email option to talk to your doctor without requiring a visit that will add fees and copays to your expense sheet. Most clinics and hospitals have a free nurse line for basic questions, like “When is my baby‘s fever dangerous?” It’s a great chance to save some money. I know, from personal experience, that they won’t be shy if they feel you need to come in, but they generally won’t try to convince you to come in if aspirin will fix the problem.
Stay in-network. Check with your insurance company to make sure the doctor you want to see if in your network and therefore, available at the cheapest out-of-pocket price. If not, and you really want that doctor, ask your insurance company if they accept nominations for the network and ask your doctor if he’d be interested in being nominated.
Stay home for your cold. Don’t go to the doctor for every minor problem. The best remedy a doctor can give your for your cold will reduce it to a seven day malady. On the other hand, if you do nothing, it will go away in about a week. Why waste the money? This counts double for the emergency room and urgent care. Strep throat is not an emergency. Wait until morning and go to the clinic, paying the lower fees instead of the large ER costs. Make an appointment for a doctor visit, if possible. Urgent care is billed the same as a regular visit, but most insurance plans double or triple the copay for urgent care visits.
Cash Flow
A Health Savings Account(HSA) is a pre-tax account to save for qualifying medical expenses similar to a Flexible Savings Account(FSA). The main differences are that HSAs are only available for people with high-deductible insurance plans and do not have to be spent on medical expenses. Non-qualifying expenses move from pre-tax to post-tax, meaning you will be charged federal income tax for non-qualifying withdrawals. FSAs are “use it or lose it” plans. If you don’t use it, it will go away, usually at the end of the year. That makes December a great time to stock up on over-the-counter medicines and possibly replace your eyeglasses, as both of those are qualifying expenses. Find out if you have either option available. If you use either one, set aside a place to store every imaginable medical receipt, so you can be reimbursed. Make sure you understand the FSA-eligible expenses.
An Ounce of Prevention
Get routine checkups. The earlier you find a problem, the more options you have. This goes for everything from cancer screenings to blood tests. Get a physical every year and know what is happening with your body. We may be living in the future, but replacement parts are still hard to come by.
Maintain Your Health
It’s cheaper to be healthy. Eat right, exercise, quit smoking.
I enjoy a good meal. It’s one of my favorite things. I won’t cut rich foods out of my diet, so we reduced portions. Beyond the first few bites, the flavor isn’t nearly as enjoyable or even noticeable. There’s no more enjoyment for huge servings than small ones.
Get more exercise, even if it’s just a 2o minute walks twice a week parking on the far side of the parking lot, or taking the stairs instead of the elevator.
Vision
Go online. This one is worth a write-up all by itself. I have 6 pairs of prescription glasses–all varieties of frames and coatings–that have cost a grand total of about $150. There is no noticeable difference between my cheapies and the designer alternatives. While I work on the write-up, the best site to introduce you to the concept of online glasses is GlassyEyes. Reviews, coupons, and discount likes. They have step-by-step instructions on turning an intimidating idea into a simple and cheap solution to an expensive problem.
How do you save money on health care?
* There are no generics available on new drugs until the initial patent expires. This gives the pharmaceutical companies a change to recoup their research and development costs. Without this patent period, new private drug research would evaporate. Don’t hate the brand names, but don’t show undue loyalty.
Sunday Roundup: Father’s Day
On Father’s Day, 3 years ago, my third and final kid was born. My kids are all horrible brats and I love them dearly.
I wouldn’t give up fatherhood for anything. Watching my kids grow and learn, steering their development, and teaching them how to navigate life is the most fulfilling thing I’ve ever been a part of. Also the most frustrating. I can’t imagine being anywhere else, not being with my kids. I have no respect for deadbeat parents.
I am incredibly grateful that I had a proper model for manhood and fatherhood. My dad taught me the concepts of honor, integrity, and responsibility. I couldn’t be the man I am now, if he wasn’t the man he is. Thanks, Dad.
Best Posts
Sometimes, the coolest things in the world are the things most likely to kill you. Call me crazy, but I’d happily strap a 1200 cc propeller to my crotch and find out what 10,000 feet looks like.
Via Budgeting In The Fun Stuff, Super Frugalette reminds us that, when there’s a significant amount of money involved, spending a few hundred dollars on an attorney isn’t wasteful.
Fivecentnickel discuss multi-level marketing. It doesn’t matter which company you are in, if your downline is more important that your product, it’s a bad business model.
Keith Ferrazzi shows us how to improve our body language when it really matters.
When I started driving, I tossed my car in a ditch going way too fast. Naturally, it was my parents’ fault for giving me the curfew I was trying to beat. They never would have bought it if I would have told them I was driving like my grandma and it jumped into the trees by itself. Why does the FBI think that’s believable? Corruption, maybe?
Financial Samurai talks about living a life without regrets, which is a personal goal of mine.
Food storage will become critical when the zombies come.
Beer is good. Even the cave-men thought so.
Carnivals I’ve Rocked and Guest Posts I’ve Rolled
3 Ways to Keep Your Finances Organized was an Editor’s Pick in this week’s Festival of Frugality. Thanks!
5 Reasons Your Wealth Isn’t Growing was included in this week’s Carnival of Personal Finance.
Money Problems: Insurance was included in the Totally Money Blog Carnival.
Unlicense Health Insurance was included in last week’s Carnival of Personal Finance.
Thank you! If I missed anyone, please let me know.
Yakezie Blog Swap
Last week, the Yakezie shared what they would do with a single financial do-over.
– Melissa from Mom’s Plans shares her biggest financial mistake at Barbara Friedberg Personal Finance: Opening an eBay Store and Using Credit. It is a great story about how not to grow your business and how competing priorities can pose a real challenge.
– Budgeting in the Fun Stuff shares her biggest financial mistake and potential do-over at Super Frugalette: Investing in a Friend’s Business. Its a good, but costly lesson learned about small business.
– Eric from Narrow Bridge Finance shares how He Wouldn’t Have Paid Down His Student Loans So Fast at The Saved Quarter. This may seem counter-intuitive, but he has some good points. Check it out.
– Mr. S from Broke Professionals shares how He Wouldn’t Have Bought a New Car at My Personal Finance Journey. This has some great analysis, especially considering the new car was a hybrid!
– The College Investor posted at Wealth Informatics: What you should know when you are investing?
– Wealth Informatics posted here: If you had one financial do-over, what would it be and why?
– Barbara Friedberg shares how She Was Scammed at Mom’s Plans. You have to watch out for the hard sell!
– Joe at Retireby40 tells us about How He Invested his 401(k) in Company Stock right before the dot com crash, at Financially Consumed. A financial adviser may have helped avoid this one!
– Financially Consumed shares his Car Purchase Do-Over And Over at Retireby40. Car addicts have it tough!
– LaTisha from FSYA shares her do-over story in It’s Never Too Late at Little House in the Valley. Sometimes the do-over is quicker and more painless than most.
– Little House yell’s Do-Over! Do-Over! at FSYA Online. It looks at the road to saving more, starting on an elementary school playground!
– The Single Saver asks, What Are The Long Term Consequences of Small Purchases at Totally Money. A cool post on how past purchases cost future returns!
– Miss Moneypenniless from Totally Money shares her story of Vacationing to the Brink of Bankruptcy. Sometimes a vacation can be fun, but the bills afterward may be daunting.
– Super Frugalette shares How a Lawyer Could Have Saved Her $24,700 at Budgeting in the Fun Stuff. Maybe lawyers are worth it sometimes?
– Jason from Live Real, Now shares how he Amassed $90,000 of Debt at Debt Eye. A good lesson in living a little more frugally.
– Kevin from Debteye shares his do-over: Not Buying a House Right Out of College at Live Real, Now. I have said it before that buying a house can be challenging right out of college.
– Penny from The Saved Quarter shares how She Would Have Finished College Before Having Kids at Narrow Bridge Finance. An awesome story that has will soon have a happy ending!
– Jacob from My Personal Finance Journey shares how he was Scammed on eBay at Broke Professionals. An important lesson for anyone selling or buying online.
– Marissa from Thirty-Six Months shares how she Accumulated a Ton of Student Loan Debt at So Over Debt. If you are going to live the life, you’re going to pay the price!
– Andrea from So Over Debt shares How She Would Have Started Saving for Retirementat Thirty-Six Months. I would love to read a post on each of the stories you mentioned getting to where you are now!
– Below Your Means shares his story about A Missed Investment Opportunity. There are so many times I wish I could have gone back and bought a stock!
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Dealing With the Police 101
Last night, a friend called me up and asked me to accompany him to the police station. The police had knocked on his door, waking up his girlfriend while he was out. When he called, they wouldn’t tell him why they wanted to talk to him. Was it an ex trying to make his life difficult or one of his employees getting investigated?
This friend has had a number of interactions with the police, but never learned how to deal with them. Before we left, I gave him a crash course in “stay out of jail”.
Lesson 1: The Police Are Not Your Friends.
During an investigation, you are a suspect. They are looking for a conviction. There may be a “good cop” trying to “help you out”, but he is trying to put you in jail. “Protect and Serve” doesn’t mean you. In general, it means society as a whole. During an investigation, they are serving the interests of the prosecutor.
Generally, they are going to look at you–as the target of their investigation–as the enemy. This is normal. They spend all of their time dealing with scumbags and s***heads. Naturally, they start to assume that everyone who isn’t a cop will fall into one of those categories.
Don’t get pissed when they act rude, ignore you, or anything else. It isn’t a lack of professionalism, it’s just a different profession. They are using interrogation techniques that have been proven successful. Ignore it and focus on Lesson 2.
It will feel wrong to disobey the authority you’ve been taught your entire life to obey. You’re not. You are standing by your rights. Nobody cares about your future more than you do. Certainly not the guy investigating you.
Lesson 2: Your Lawyer is Your Friend.
The second a police interaction starts to look like they are investigating you, demand your lawyer, then see Lesson 4. When you demand an attorney, they stop asking you questions. You can take it back and start talking, so again, see Lesson 4. It’s your attorney’s job to talk to the police and, if necessary, the media. It’s your job to talk to your attorney.
You don’t need an attorney ahead of time. Criminal defense attorneys are used to getting calls at 3AM. It’s part of their job. If you have a low enough income as defined by whatever jurisdiction you are being investigated in, you can get a public defender. That’s better than nothing, but I’d prefer to hire a professional shark, even if it means mortgaging my future. Prison is a big gamble.
Lesson 3. Consent is Your Enemy.
The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
“Officer, I do not consent to any search and I would like to speak to my attorney.” Remember this. Memorize it.
They need probable cause, a warrant, or permission to search your stuff. Never agree to it. Don’t stop them if they search anyway, but never, ever agree to a search. If the search is done improperly, your lawyer(see Lesson 2) will get the results of that searched thrown out.
It isn’t possible to get into more trouble for standing by your rights. There is no crime on the books anywhere in the US called “Refused Consent to Search”. Your day will not go worse because you defended your Constitutional rights.
Lesson 4. Shut Up.
I know a few defense attorneys. According to them, most of the people in jail either committed a crime in front of a bunch of witnesses, or they talked their way into jail. Shut up. You’ll want to either justify or defend yourself depending on the circumstances. Don’t. Shut up. It may be one of the hardest things you ever do, but keep your mouth closed. The only thing worse than talking is lying. Don’t lie, just keep quiet.
There is nothing you are going to say that will make your interrogator invite you home for Christmas. He isn’t your friend, you won’t meet his parents, you aren’t going to his birthday party. There is absolutely no win in talking to him. Shut up. The answer to every question is “Lawyer.” If the only thing you say babble is “Lawyerlawyerlawyerlawyerlawyerlawyer”, you’re probably not going to do too badly.
In your car, the dynamic changes a bit, but the principles don’t. When a cop pulls you over, don’t argue. You can’t win an argument with a cop on the side of the road. Be nice, be polite, and as soon as possible, pull into a parking lot and take as many notes about the encounter as you can. If you are planning to fight whatever he pulled you over for, don’t give him any reason to remember you or spin his official report to make you look bad. Again, shut up. Catching a theme?
Gambling With Your Future
If you are being investigated by the police, your future–or some part of it–is on the line. While you are gambling with your criminal record and your freedom, don’t forget that you are an amateur in this arena. The police, the prosecutor, and your attorney are the professionals and the stakes can be huge. Keep your mouth shut, call your attorney, and thank me later.
Budget Lesson, Part 1
budget” width=”300″ height=”185″ />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.
