Monthly Archives: August 2009

Overweight And In Debt: The Correlation Between Weight Gain And Pocket Drain

Posted on by  at  6:00 am
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In the last few weeks I have been practicing what I like to refer to as a “frugal diet.” It really isn’t a diet at all, at least not in the traditional sense. No, this is much more informal. I still eat what I want to for the most part, but do have a couple rules such as not eating anything processed, watching my sodium intake and limiting myself to only a couple “treats” each week. I also stop eating when I have had enough – something that is hard to retrain when you are accustomed to eating until you’re stuffed.

During these last few weeks of experimenting with new eating habits we have also been working to pay off debt at a fever pitch. I quickly discovered something – it is hard to focus on both goals, at least it is for me.

While the correlation between weight gain and the accumulation of debt is fairly obvious (it’s all about excesses) doing battle on both fronts is downright hard to do! Heck, working towards any two large goals simultaneously is difficult, but for some reason losing weight and paying off debt are particularly difficult because they involve changing habits.

Unfortunately, the two goals of weight loss and debt repayment also compete with each other in many ways. For instance, imagine a scale with weight loss on one side and debt repayment on the other. As we begin to do things that are healthy, such as eat more nutritious foods, join a gym, buy walking/running shoes, etc. we tend to increase spending, which lessens the amount of money to use towards debt repayment.

On the other hand, if we focus our attention on debt repayment and start eating cheap, unhealthy food, canceling gym memberships and working extra hours to increase income, our health starts to suffer. You see the dilemma.

So how does one work on losing weight and paying off debt at the same time? There are three basic approaches I have found that work well. One of these might work more for me than for you, or you may find some combination of the three to be most successful. As individuals, we each have a different tolerance for change, various amounts of willpower, resources, etc. So go with the plan that generates the most results for you with the least amount of pain.

The Cold Turkey Approach

Those who go “cold turkey” immediately toss everything bad from their pantry, their refrigerator, and their wallet. They cut up credit cards, immediately convert to a cash envelope budget system, and cancel all forms of entertainment from their spending plan.

Similarly, these same people immediately eliminate everything “bad” from their diets – including all their favorites foods. Rather than practicing moderation, they practice elimination – as in getting rid of anything they believe is off limits.

The problem with this approach is that the new habits are most difficult to maintain. Suddenly removing all fun from your diet and your wallet often creates a feeling of resentment as your body tends to turn on itself with increased cravings for all those things you eliminated.

One or the Other

If you are like me and it seems impossible to pull off successfully losing weight while paying down debts, pick one or the other and stick with it. If you can, simply “tread water” with one plan while focusing your energy on the other. If you decide to try to lose weight, debt repayment may slow as you invest in your health for a period to get a jumpstart on weight loss.

If you decide to pay off your debt first, it may mean that you won’t be ready for the pool by summer, but at least your budget will be lean and mean. At a minimum, try to avoid gaining weight, something many people do when their health is not a top priority – believe me, I am the perfect example of this phenomenon.

Moderation

This is the approach that works best for me. I have found that by simply reducing the bad things I eat, and amount that I spend, I can lose weight and pay down debt balances. Both goals tend to take longer with this approach, but because they are running concurrently I should arrive at my goal weight and debt freedom at just about the same time!

Rather than going cold turkey, or giving preference to one goal over the other, I simply reduce the frequency of one or two bad habits keeping me from achieving both goals. Here are two revised bad habits I had for each goal:

Revised Eating Habits

  • Limit myself to one soda per day (diet). I used to drink two or three sodas a day – sometimes more. By limiting myself to one soda, a diet soda, I am reducing the number of liquid calories while still enjoying a soda with dinner.
  • Late-night snacks must include a protein, and be less than 200 calories. I am a bit of a night owl. The problem with staying up too late is that you get hungry. It wasn’t uncommon to find me parked in front of the computer sipping a cold Coca Cola and munching on a bag chips late at night. Instead, I now eat a small snack properly proportioned with protein and only a few carbs.

Revised Spending Habits

  • Reduce magazine subscriptions/purchases. I have let all but two magazine subscriptions go, and I rarely purchase one at newsstand. Magazines used to be a weakness for me, but now I look forward to the two that arrive by mail, and occasionally I’ll pick up a third one while browsing the bookstore.
  • One meal out per week. This one could really belong in both categories. Eating out less helps your waistline and your wallet, as restaurant food is often unhealthy and overly expensive. For the most part we eat in, but we do make it a point to venture out once a week for a meal out as a family.

The bad news is that there does in fact appear to be a correlation between weight gain and debt accumulation. The good news is that there is a correlation between weight loss and debt reduction. The same shift in habits for one goal also works for the other, but neither goal is necessarily easy to accomplish. However, with proper motivation and discipline, it is possible to make improvements to both your health and your wallet.

Frugal Shame To Frugal Pride, And Back Again

Posted on by  at  2:00 pm
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As the recession drags on I have seen a very subtle shift in the types of web searches that result in visits to Frugal Dad. I’ve always thought watching search trends is a great way to gauge popular opinion – Google must have a field day watching trends considering the data they have available to them.

When the economy started to head south I noticed many people became quite proud of their frugality. Those who were once quietly going about their simple lives were suddenly very happy to share how they saved money, reduced their utilities, rejected new cars and new clothes, etc. Frugal people were suddenly very popular. Just months before, they were laughed at and mocked by those who thought frugal people were alarmists, or too conservative, or somehow less intelligent or sophisticated than wealthy people.

On the opposite extreme there were plenty of people still doing quite well, and living in a bit of denial that we were headed towards a recession. To prove their solvency to the world they continued to spend shamelessly buying fancy cars, high-end clothing and big homes. And in an instant, the roles were reversed.

Stories began appearing about people being ashamed of their affluent spending habits. Designer stores were putting purchases in non-descript bags so patrons wouldn’t stand out. No longer was it “cool” to show off a designer label, or a high-end store bag, in public. Sales at most retailers plummeted, except those stores offering extreme discounts to customers such as Wal-mart and Dollar General.

A few months into the recession the media started to slowly turn on us frugalists. Were we responsible for the lack of recovery? Were we to blame for the lack of sales, and the avoidance of debt? Many of us, myself included, refused to accept that excessive spending and running household deficits was a reflection of our patriotism. In fact, it was quite the opposite. We felt it was time for everyone to reign in the wild spending of the last several years.

As a result, some started to feel ashamed over their frugality. And that trend continues today, as many land here at Frugal Dad while searching terms related to “ashamed to be frugal.” Funny how two extremes with the same line of thinking can take vastly different approaches. At least half the “extremely frugal” people I meet proudly proclaim their thrift, eager to tell how much they paid for everything, and how much you could have saved if you asked them before buying. The other half seem almost afraid to admit they shop at the thrift store, or drive a beat up car.

I believe the struggle is compounded by the media, who often go to great lengths to project people leading a simple life as weird, or extremists, while building up the idea that everyone is rich, no one has to work, and 16 year-olds deserve $10,000 birthday parties and new cars. That is simply not reality, but it is certainly the perception of some who believe everything they see on television. And it is this perception that causes people to reject a natural tendency towards simplicity, and instead pile on as many goodies and gadgets they can while accumulating more and more debt.

So do not be ashamed to be frugal. Wear your frugality as a badge. Be proud of driving a clunker, and wearing everyday clothing, and living in a modest home.

Teen Credit Cards: What’s Your Take?

Posted on by  at  6:00 am
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Just hearing the words “teen credit cards” creates a visceral reaction in many people, one way or the other. It sparks debate faster than the classic question of whether or not to pay kids an allowance. I have a strong opinion on the subject (imagine that), and I’ll share it with you below. But I’m really interested to get your take on the issue of credit cards for teens.

Should You Give Your Teenager a Credit Card?

My short answer is no. I do not think teens should have a credit card, but not because they cannot be trusted, or because it encourages the use of plastic. I don’t think anyone should have a credit card if they do not have the means to pay it back themselves. Now if I could be convinced that my kids earned a steady income of $300 a month at their part time job and their limit would never increase beyond $300, then theoretically they would not accumulate debt. We all know that is not the way it works.

Credit cards companies give thousands of dollars in available credit to college students every day, even those with no income and no ability to repay. I know because I signed up for one my freshman year in school, and the first thing I charged was a Sony PlayStation video game system. After all, I could pay it back over the next couple months thanks to my part time job.

Over those next couple months I had two small emergencies that wiped out my part time earnings, and a third that I had to charge on the new credit card. So began the minimum payment game I would play for years to come.

Proponents of teen credit cards point out that allowing kids to have a credit card will help them learn to use credit responsibly as an adult. Good thing those same people don’t feel the same way about alcohol.

No, there are some things that young teenagers should not have to contend with, and one of those is the pull of available credit. Using cash hurts, and the lack of transactional pain missing when spending with a credit card will warp their spending habits. In fact, it has been shown to warp even adult’s spending habits – you just simply tend to spend more with plastic than with cash.

But It Will Help Their Credit History!

Maybe, but there will be opportunities to prove a history of creditworthiness later when they are finished with school, have their own jobs and are ready to buy a home. I tend to believe credit scores are overrated. Sure, some employers are now using them to screen employees, and other companies are using them to set rates for insurance, etc, but for the most part there is little incentive for a teenager to have an 800 FICO score. What can they do with it besides get into more debt?

As the Readers: What do you think about credit cards for teenagers? Bad idea, or good introduction to credit? Feel free to agree or disagree in the comments below.

Car Replacement Fund Underway

Posted on by  at  2:00 pm
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Over the weekend I took some time to complete a few finance tasks that have been stacking up on my to-do list for weeks. One of those tasks was to officially establish a car replacement fund.

Now that we have paid off our car, we recognize that it won’t last forever, so we might as well continue making “payments” to ourselves so we can pay cash for the next one. Since we have been in car debt our entire marriage up to this point, we are used to living without that $300-$400 we were sending to banks and finance companies over the last decade. Continuing to make a “car payment” to savings shouldn’t be that painful.

The Car Replacement Fund

As usual, I turned to ING Direct (read my ING Direct review) to handle my car replacement fund. I could get a slightly better rate with other banks, but the convenience of creating additional “sub-accounts” at ING, and seeing all my targeted savings accounts in one view, is key to my motivation.

We labeled the new account “Car Replacement” and scheduled a monthly transfer from checking for the exact amount of our most recent car payment (roughly $300). In just one year we should have around $3,600, plus a little interest. In two years we should be up around $7,500 – well within the range of replacing our car.

When the time comes we will sell the car via private sale, and put the proceeds with the cash in the car replacement fund. Based on an a depreciation estimate for our current vehicle, and the projected savings balance in two years, that should give us a solid $15,000 to look for a newer, used vehicle.

Over time we will continue this trend of upgrading every few years, but always doing it with cash. The schedule isn’t that much different than someone financing a new car, paying it off over 60 months and then financing a new one. Well, except we won’t be financing it from a bank – we’ll be using our savings.

I’m lucky; I’m not a “car guy.” I don’t drool over showroom models, and with only one exception, I’ve never really cared what I drove (there was that whole Isuzu Rodeo leasing saga). To me a car represents four tires and sheet metal with an engine to get you from point A to point B. It says nothing about who I am, my status, or my personality. Fortunately, my wife feels the same way.

Thanks to this utilitarian approach to car ownership, we simply look for the best value, not the sexiest design. Give me a beat up exterior with a solid engine and low miles any day. And driving that car without dragging a payment makes it just that much sweeter.

How To Conduct A Financial Fire Drill

Posted on by  at  6:00 am
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Do you know how long you could survive if you or a spouse lost your job? What if you are like me and are the lone income provider – how long could your family live on savings alone? If you are not sure about the answers to these questions it is probably a good idea to conduct a financial fire drill.

The concept of a financial fire drill is based on the idea behind a real fire drill. It allows you to run through a real emergency before you have to act with smoke and flames. In the case of a financial fire drill, this means you will simulate a “what if” scenario so you’ll know what to do, and what things need to improve, before a real life financial emergency strikes.

Steps to Planning a Financial “Fire Drill”

1. Include the entire family. My family has a pretty good emergency plan. We all know where to meet in case a fire separates us in the middle of the night. We have a rendezvous point established for larger-scale emergencies, and even the kids are aware of actions to take based on various types of disasters. Similarly, the entire family should also be involved with a financial fire drill.

2. Gather a list of necessary expenses. These expenses are absolute necessities, so things like mortgage payments or rent, basic utilities like water, power, etc. (cable and Netflix memberships don’t count), and other basic expenses related to food, shelter, prescriptions, etc. Nothing else matters at this point.

3. Determine how much is in your “extended emergency fund.” A basic emergency fund is a pile of cash stored in an online savings account or local credit union. A typical goal for emergency funds is to save six months of household expenses just for emergencies. However, in a large emergency such as a job layoff or medical disability, you could likely tap other resources. Be sure to include any stocks or mutual funds not held in retirement, CDs (even if you had to pay a penalty), bonds and any other assets that could be converted to cash quickly. This total amount will represent your “extended emergency fund.”

4. Determine your maximum survivability (in months). Divide the amount of your extended emergency fund by the total expenses identified in step 2. This number represents the months you could survive without an income. For instance, let’s assume an average family of four needs about $2,000 a month to cover their mortgage, basic utility payments and food. If the same family has a $17,000 extended emergency fund, they could expect to make it about 8.5 months on savings.

5. Adjust for increased expenses. Unfortunately, expenses don’t always go down in an emergency. In fact, they rarely do go down, despite your best efforts to cut expenses to the bone. Things like continued health insurance premiums under COBRA, or other medical expenses, can cause spikes in spending categories otherwise in check. Make adjustments to your prediction based on these estimates. To show how much impact these “surprise expenses” can have, in our example above the same family could only survive five months or so with a $1,000 COBRA premium added to their $2,000 in household expenses.

6. Conduct a financial fire drill regularly. Armed with all the facts and figures required, it’s time to pull the alarm and practice getting out safely. Since laying yourself off is not exactly a smart idea, it is sufficient to simply pretend you just received your last paycheck. What expenses would you immediately target to be cut? Write them down, along with customer service phone numbers and terms. Repeat this exercise once a quarter or so and update your list accordingly.

The day you are laid off you may grab your list and make phone calls to the newspaper subscription department, your gym, your lawn service guy, Netflix, and the cable company. These moves alone could save you a couple hundred dollars a month in expenses not necessary to your survival, preserving precious emergency funds. Keep this list handy, and only break it in an emergency.

None of these steps will happen on their own. You must be proactive. Force yourself to sit down and run the numbers. If you don’t know how much COBRA might cost, find out. If you don’t know how much your health insurance plan’s deductible is under a major medical event, find out. Don’t wait until your exit interview to discover these new costs. Doing so would be like waiting until smelling smoke to map out an escape route.

This article appeared in the Frugal Living Blog Carnival on 9/4/2009