Monthly Archives: December 2009

Our Credit Card Journey: Swipers To Shredders

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This post is from Frugal Dad staff writer Chris. You can find more of his writing at Your Money Relationship.

One of the most difficult parts of getting out of debt is transitioning from a spender to a saver. I’ll be honest with you. My wife and I loved to spend money. I loved it so much that I racked up over $16,000 in credit card debt over a period of a few years. That $16,000 doesn’t even include all of the other things that I bought on my credit card that I paid off at some point. For my wife and me, going from spenders to savers has been a little more difficult than you would think.

Our Spending Years

My wife and I have been working since an early age. I started working odd jobs in the neighborhood when I was about 12. I would mow peoples lawns, clean out their garages, etc. It earned me a few bucks to play around with. Sure, I saved some money here and there, but as soon as those savings hit a threshold, I spent it. Due to my spending, things began to pile up in my room. I had new video games, a cell phone, CDs, and all the new electronics. Life was good and I had plenty of things to show for it.

As the years went on, I got real jobs that paid me a little more than the neighbor down the street. That money helped me get a car, pay for gas, and take my future wife out on dates. Then came college and the dreaded first credit card. Man did I love that piece of plastic. I mean, they only gave me a $500 credit limit. What could go wrong? Well, as you can guess, I got more cards and higher credit limits. I was buying new computers, clothes and every new cell phone that came out (can you tell I like electronics?). Oh the days of spending…..

My wife started working at 15. I can still remember picking her up at the local fast food joint smelling like deep fried goodness. She spent her money on clothes and loved doing it in the process. It was her weakness and she knew it. Being the first born child, she didn’t get the hand-me-down clothes like her sister (who made out like a bandit if you ask me). My wife wanted to look good and she spent her money on clothes to do it. She never really racked up any major credit card debt (she mostly used cash). The most credit card debt she had was a few thousand dollars worth and it was all school supplies (she was in a major that required additional things). She loved knowing that her money was hers and she could do what she wanted with it. Oh the days of spending…..

Time to Shred the Cards

Even before we said “I do”, we knew financial trouble was on the horizon if we didn’t do something. We sat down, came up with a game plan, and wrote down our goals. The first thing to go was our credit cards. Let me tell you something, shredding something that has been in your life for almost 7 years is tough. Knowing that we couldn’t buy anything on a whim was even tougher. Here are a few things that we did to help ease the pain:

1. We Wrote Down Our Goals and Came Up With a Game Plan

Like I mentioned above, we sat down and had a deep discussion about our financial future. We talked about what we wanted out of life and how we were going to achieve that while not adding to our debt. It was a difficult night, but we came out of it stronger financially and as a couple.

2. We Set Up a Budget

This was one of the harder things in the process. Before we got married we were free spenders. Sure we made sure we didn’t overdraft our accounts, but we spent our money on what we wanted. In the budget, we spent every dollar on paper and stuck to it. Sure there are times when we veer of the path somewhat, but we correct it and move on.

3. We Didn’t Cut Out Everything

When most people think about budgeting, they think about cutting everything down to the bare minimum. Well, we just couldn’t do that. We would go crazy and knew it would end up hurting us in the long run (by causing us to revert back to our old ways). So in our written plan, we budget for things such as eating out once or twice a month. I mean, sometimes you just need to get out of the house and interact with people or spend some romantic time with your spouse. We also budget about $50 a month to spend on clothes. The budget actually helps my wife think long and hard about what she is buying. Before, she just bought what she wanted when she wanted it. Having the budget changes that.

Well, there you have it. That’s how we transitioned from spenders to savers. Let me just say that it was hard and still continues to be today.

How did you handle your transition? Was it easy, hard?

Weekly Roundup: Twitter Chat Edition

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Last night I participated in a Personal Finance Twitter chat on the subject of holiday savings co-hosted by Craig of BudgetPulse.com, along with the folks from Wisebread.com. It was a lot of fun, and something that I suspect will remain popular going forward.

Basically, participants follow along using a Twitter hashtag which identifies all tweets related to the chat (some of last night’s transcript may even be accessible by searching on “#bp” or viewing here). I’ll try to get the word out ahead of time next week via Twitter and Facebook, and hope you’ll join in the discussion.

The Frugal Roundup

Debt Update: November 2009. Chris, our new contributor, updated his debt totals for the end of November and paid off a credit card. Head over and send some love! (@Your Money Relationship)

7 Free Toys Your Kids Will Love More Than Expensive Gifts. These really do work. I mean, what kid doesn’t like an empty box? (@ My Super-Charged Life)

Financial Pet Peeves. The first one hits the nail on the head. (@ Million Dollar Journey)

Eating Less to Be Lighter. Simple advice that most of us can’t seem to follow. (@ mnmlist)

Dining Out vs Groceries. A basic analysis with an obvious outcome. Why do so many people eat at restaurants more than once a month? (@ Debt Free Adventure)

Best of the Rest

The Tightwad’s Guide to Charitable Giving

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This is a post from David over at Adventures of a Barefoot Geek. David writes about life-topics such as peace of mind, simplicity and technology. Be sure to subscribe to his posts in a reader or by email.
Giving to charity is often a friction-filled process. We like the idea of giving to those in need, and we have the means to do so, but there’s that slight hesitation from the uncertainty to the unfamiliar phenomena of handing over money and not receiving anything tangible in return – it defies how we’ve been raised to approach money.

But it doesn’t have to be that way, and although I’m no philanthropist I have been working on being charitable on a more regular basis, with higher amounts each time, and have been using the following tactics to make the process not only frictionless, without hesitation but also 100% fulfilling from start to finish.

Make your donation go further. This is a common objection. If you don’t have much to donate it’s easy to feel like giving to charity simply isn’t worth it, like you shouldn’t bother. When this thought comes to mind I like to read and remember the following quote from Guatama Buddha:

“If you have little, give little; if you own a middling amount, give a middling amount; if you have much, give much. It is not fitting not to give at all…Tread the path of the noble ones. One who eats alone eats not happily.”

But for a more practical approach, consider to donating to loan-based charities such as Kiva. Charities such as Kiva work by taking your donations directly to the people in need, and then within a year or so, if they have the means to do so, the receiver will actually pay the money back.

Now, you could just cash your money out at this time, but I prefer the idea of putting $25-$100 into the system occasionally and then repeatedly re-donating it. After a few years you could easily have thousands of dollars constantly being donated again, and again, and again.

Reach a common goal. One thing I love about Twitter is that it’s an amazing fundraising tool. I remember back in Thanksgiving 2008, the Tweetsgiving fundraiser was going on (and once again in 2009). It’s a fantastic event where Twitter and other social communities on the web band together to give towards a common goal.

These events promote frictionless giving because the causes are easy to be swept up in – you see the press, you see where your money is going and there’s even a bit of a competitiveness as to how much you donate and promote the cause. I never try to actively seek out these causes (they usually find their way to me) but if you want to make sure they’re front and center then you may want to follow the largest charities on Twitter.

And of course, reaching a common goal isn’t strictly limited to Twitter, it’s just perhaps the easier and most accessible option available at the moment. The lo-tech approach would be to simply find local fundraising events and contribute to those – it’s even more motivational if you’re collaborating with people in the real world.

Push your comfort zone each time. If you’re a tightwad, or still feel hesitant when giving to charity start simple: find an amount your comfortable with, say $10, and then donate it. Too easy. But next time you donate, push beyond that boundary slightly and donate $13. And then make a smaller leap and donate $15.

As time moves on progressively increase the amount of each donation. In this way each step will seem far easier, but within a few months, or a year, or two, your donations will be much more impactful no matter what your starting point was.

Connect with the cause. This is perhaps the most important point: you really have to care about where your money is going. One thing that drew me to Kiva is that the money is sent to entrepreneurs around the world who then buy supplies to further their business (and then hopefully grow larger and maybe even hire people in the local community). This connected with me because I’m in business – there’s a common ground that makes donating feel so “right.”

Think about who you are and what you appreciate most out of life. Once you understand those two points seek out charities that overlap in terms of your personality and the lack of what you appreciate.

For example, if you were a highly sociable person and appreciated your family most in the world, you might feel a special connection for an orphanage in need of donations. That’s a more clear cut example, but if you search hard enough everyone has a certain cause that hits home and feels congruent with who you are.

67 And Bankrupt: Are The Kids To Blame?

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The following post is from Neal of WealthPilgrim.com. After reading the article, be sure to sign up for free at Wealth Pilgrim to receive more from Neal. Also, be sure to check out Neal’s free “Holidays Without the Headaches” program for families. Great stuff!

Larry and Abby are in their late 60’s.  They are broke, about to lose their home and there is nothing they can do about it.

But it didn’t have to be this way.

10 years ago, they had over $500,000 saved on top of the two rental units they inherited when Larry’s mother passed away.  At the time, Abby owned a successful small business and had a comfortable income.  Everything looked like peaches and cream.

So what happened?

Patrick happened.

Pat is their son.  He borrowed money from his parents seven years ago to open his auto repair business.  Pat was a great mechanic but a horrible business person.

Larry and Abby just wanted to help their boy.  They convinced themselves that the money their were forking over was just a loan.  They were sure Patrick would pay them back some day.

But as the days passed, the likelihood of seeing that money again grew smaller and smaller.

He slowly drove the business into the ground.

But each time he feel deeper into the hole, Larry and Abby were there to bail him out.  They were sure that all Pat needed was a little more working capital.

Of course, this enabled Pat to amass even greater debt.  Within three years he exhausted all his parent’s savings.  They had to sell all the real estate they inherited and they refinanced their home as well. Even after going through all that, Pat was left with debts of over $300,000 including $150,000 to the IRS.

He was much too proud to close the business.  He was determined to make it successful – even if it meant spending every last dime his parents had.

So was Patrick to blame for Abby and Larry’s financial destruction?

Not in my opinion.

Abby and Larry volunteered to become an ATM machine for Patrick.  Nobody put a gun to their heads. But that wasn’t really the root problem.

You see, the reason they wrote blank checks to Pat was because they didn’t take the time to think about what impact their decisions would have on their own financial future.

They were very mindful about their spending – except when it came to supporting their kids.

Pat needed money.

They wrote him a check.

It was automatic – and it was ridiculous.

Abby and Larry put their heads in the sand. They didn’t pay attention to their own financial plan. In fact, they didn’t have one.

Sure they had assets and income. But even though their estate was worth over $2.5 million at the high point, it didn’t last long once they started writing checks for $50,000 every other month to keep their kid in business.

I know this is an extreme example.  You might not be sending huge amounts to your children….but the amounts don’t matter.  And it also doesn’t matter how your kids spend the money you give them.  I don’t care if they use your money to open a successful business or go to Harvard.  If you can’t afford it then you can’t afford it.  Period.

How do you know you can afford the support you give to your kids? Have you ever said “no” to your kids when they asked for financial help?  How did that impact your relationship?

If you are on the receiving end of this, do you have an obligation to your parents to discuss the ramifications of their support?

Taxable Investing: Where To Get Started?

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One of the benefits of writing a blog, and attracting an audience, is that I get to learn from others much smarter than me on a variety of subjects. This is one such opportunity! I am interested in doing some taxable investing because we have maximized contributions to the various retirement accounts for which we are eligible.

Most of you are probably aware that I have an interest in reaching financial independence early, and “retiring” from the traditional nine-to-five grind to pursue other things. To accomplish this goal I recognize that I need to invest outside of retirement accounts to have access to “retirement” income before reaching typical retirement age.

My problem is I’m a bit overwhelmed by all the investment choices, and their various implications for things like risk, taxes, etc. I’m a fairly conservative person, by nature, so the idea of taking a lot of risk does not appeal to me. This is especially true of money outside of retirement accounts, because I recognize these funds will have a shorter lifespan than those socked away in retirement accounts.

To guarantee, strike that – guarantee is a bad word when talking investing. To improve my chances of securing pre-retirement income from some of this money, I’m aware of several techniques and investment vehicles:

  • Dividend investing
  • CDs and high-yield savings accounts
  • Treasuries
  • Bonds
  • Equities
  • Paid-for real estate
  • Some combination of all of the above

Obviously, things like taxes are one of the primary concerns when investing outside of retirement accounts. However, before I start comparing mutual fund turnover ratios at Morningstar, I need to settle on a basic strategy. Do I invest and reinvest dividends and earnings with the goal of creating the largest pile of money possible? Or, do I start to build a working capital fund that spins off dividends now that I use to supplement our lifestyle until they are large enough to live off without paid employment?

In the book Your Money or Your Life the authors advocate creating a working “cache” of money that spins off interest and dividends. Of course, this was easier to do in the 1990′s, when the book was first published, through the use of Treasuries. At the time they were yielding around 6.5%.

Unfortunately, this is no longer true, so someone seeking financial independence has to look elsewhere for higher rates (the revised edition of the book points to a couple LifeStrategy funds at Vanguard as potential candidates to house this cache of working capital).

I generally like this approach. I like the idea of knowing how much my investments are earning, and how much more we’ll need to cover our basic expenses. I do recognize, however, that by not reinvesting dividends I’m missing out on the opportunity to grow this savings balance even faster.

I’m interested to hear from others taking a similar approach to taxable investing, or planning to reach financial independence before the traditional retirement age. How are you investing your money? Do you reinvest dividends, or cash out now to supplement income? Anyone using rental income from real estate to help reach financial independence?