Monthly Archives: March 2011

What Is Your Personal Debt Ceiling?

Posted on by  at  3:35 pm
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In the coming days politicians will be squabbling over raising our national debt ceiling – the amount we allow ourselves, as a country, to borrow for continuing operations. Or put another way, the legal limit on the amount of bonds the government can issue.

US National Debt Clock by Rafiq Phillips on Flickr

*According the photographer, this picture was taken on January 1, 2009. Since then, we’ve added nearly $2.5 trillion to this figure.

What used to be practically an automatic stamp of Congressional approval (the debt ceiling has been raised 74 times since 1962, 10 of those times since 2001) has now become a line in the sand some conservative politicians have refused to cross.

Experts disagree on the outcome of a failure to increase the debt ceiling, but it seems the worst case could be a default on the debt already owed, resulting in an increase in the cost to borrow future dollars. Repayment of existing debt would be difficult without raising the ceiling because much of the new debt is created to pay interest on debt we already owe.

Imagine asking for limit increases on your credit cards so you can borrow money to pay your other credit cards. Well, multiply that example by a trillion and you can understand the magnitude of the problem.

My Personal Debt Ceiling

Rather than worry too much over things I have little control, I have instead decided to focus my energy on my own personal debt ceiling. My personal “line in the sand,” an amount beyond which I refuse to borrow.

My own debt ceiling has shifted a bit as I’ve matured, financially. I suspect that’s the case for most of us. Some may raise their debt ceiling as they grow older, believing in the idea that having debt is normal – you can’t buy a house or a car without debt.

Others have recognized early on that being in debt stinks, and vow to never go back. We found ourselves in the latter category, and spent a couple years clawing our way out of debt. Our new family motto when it comes to debt – “Never again.”

Debt Creep

When I was young I used to read stories about people being $10,000 in debt. I couldn’t imagine how much that must have weighed down borrowers. These days, it’s nothing to hear of people owing over $100,000 in student loans and credit cards, or $400,000 on a mortgage, or $50,000 for a new car, or $30,000 on credit cards.

The numbers that are tossed around are as mind-boggling as the discussion on the aforementioned national debt – now some 14.2 trillion dollars and counting. Just how much is a trillion dollars anyway? One trillion is the equivalent of one thousand billions, or one million millions. And we owe 14 trillion! See what I mean by mind-boggling?

Much like dieters hitting a 200lb. (or 300lb.) reading on the scale, I assume most of us have a number in mind that we aren’t willing to cross when it comes to borrowing. A debt threshold. A number, that when approached, finally causes us to change our behaviors and consume less.

For many of us recovering spendthrifts that acceptable debt threshold is zero. For others, a couple thousand on a credit card doesn’t seem too bad as long as they are making substantial payments.

Unfortunately, for a large percentage of our population, that number has increased significantly over the years. Consider the following statistics shared in a recent post at Man vs Debt, Upside-Down Nation: How Debt Fueled Our Madness:

Average 1970s One-Income Family:

$32,000 inflation-adjusted income
Saved 11% of their take home pay on average
Paid 1.4% to revolving credit, such as credit cards or lines of credit.

Average 2005 Dual Income Family:

$73,000 average income
Saved nothing (0%). (Actually, U.S. had a negative savings rate overall at this time.)
Paid 15% to revolving credit, such as credit cards or lines of credit.

Sad. So in three or four decades, as a society, we have doubled our average income, saved nothing, and now spend ten times as much on consumer debt as we did 40 years ago. And notice this study initially only included “one-income” families. Many more households today are two-income households. Some by choice, but many out of necessity – to support an inflated lifestyle. For most families, living on one income has become nearly impossible without making very difficult choices.

We live in bigger homes, drive more expensive cars, and pay more for education. We abandoned the idea of a “starter” home when starting out, as recent generations have felt an obligation to keep up with their parents, or the Jones’, or some independently wealthy 26 year-old heiress they saw on television.

We even have television shows celebrating the idea of newlyweds signing over their financial futures in the form of near half-million dollar mortgages.  

Read: My First Place on HGTV: How to Spend Your Next Thirty Years House Poor.

For now, I think I’ll keep my personal debt limit at zero. Sure, I use my credit card here and there throughout the month to pay utilities, etc, but the day that bill arrives it’s back to zero. I recently bought supplies for a DIY home remodel, and the large expense plus our normal monthly bills pushed the balance well over $1,000.

When I opened the bill, my heart beat a little quicker. I could feel the anxiety welling up inside me. I remembered that same feeling when I used to open similar bills from several credit card issuers. And I hated it. I immediately paid off the credit cards with an online transfer. Never again.

Do You Spend Money You’ve Worked for Differently than a Windfall?

Posted on by  at  4:40 pm
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An interesting comment on a recent post caught my attention. In response to my suggestions for things to do with a tax refund, Ross wrote,

“Paying off any high interest debt will save you money in the long run, but it can be pretty tempting to buy something frivolous with the money, especially if you weren’t expecting it.

I feel completely different about the money that I’ve worked really hard for, than something like a refund that I wasn’t counting on. I really want to buy an Ipad, but i’m going to do my best to resist that urge.”

I can relate to Ross’ comment, and wondered if others shared our reservations to frivolously spend money we worked to earn, but feel more temptation to spend money we receive unexpectedly. Of course, one could make the argument that a tax refund is simply a return of money you have already earned and overpaid (assuming you paid taxes at all). In that sense, it is a little different than inheriting money or lottery winnings, etc.

Back to the original idea. Many times financial planning types suggest taking 10% of an inheritance received, or some other type of windfall, and doing something fun with the money. Take a vacation to visit a place you’ve always dreamed of seeing. Buy something of your heart’s desire, even if it isn’t very practical.

I generally think that is good advice, but only if you stop at 10% of the windfall amount. The problem is, many who find themselves on the receiving end of a windfall allow it to change their lifestyle. The expensive, once-in-a-lifetime luxury vacation becomes a once-a-year expense that eventually drains savings accounts and can lead to the accumulation of debt.

It also begs the question: Is it easier to spend money you didn’t have to work for? After all, when you apply a real hourly wage concept to your earnings, it may not be worth X amount of hours worked to pay for that trip to Tahiti.

There are some who would scoff at the very idea of spending any percentage of the money frivolously. I can understand that argument, too. After all, there are plenty of things most households could do with the money to better prepare themselves financially, such as.

In an effort to maintain some balance I would probably do a little of both. I would spend a small portion of the windfall on something I really wanted, but I would lean heavily towards investing the money into something that would continue to provide a return long into the future.

That might mean paying off any consumer debt I owed, or dropping some money into a few quality dividend stocks that would spin off income for years to come. Better yet, it might make sense to eliminate a chunk of our mortgage. That would be like getting an immediate 5% return on the money through saved interest.

One last option would be to do nothing. Just let the money sit in a money market account safely drawing a small amount of interest. We live in an era where people are encouraged to be doing something all the time with their money – actively investing it, monitoring it, counting it, etc. However, often the best move is to simply do nothing.

Tips on Finding Cheap Airline Tickets

Posted on by  at  5:00 am
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Airline ticket prices vary wildly, and airlines have perfected the art of bleeding every last nickel from their customers. If your summer travel plans call for travel by air, try the following tips for finding cheap airline tickets for your vacation.

Leverage the Internet

By now, most people are familiar with sites like Expedia and Travelocity for comparing airfares. But comparing fares doesn’t help much if all of the prices are still out of reach. In order to pinpoint the cheapest fare, try an airfare monitoring site such as Airfarewatchdog.com or Yapta.com.

These sites will track your desired itinerary and send you an email alert when the fare dips. Always select the “flexible dates” option to find the combination of departure and arrival dates that results in the lowest fare. Yapta presents the information in a grid which makes it easy to see how fares fluctuate from day to day.

Let’s Hear It for Wednesday

According to Farecompare.com, Wednesday is historically the cheapest day to travel domestically. The next best choices are Tuesdays and Saturdays. We all dread those early morning departures, but leaving on the first flight of the day (or on a red-eye, if available) will also keep your costs down.

Be Flexible

Be flexible not only in your travel dates and times, but also in your destination itself. Airfarewatchdog.com has a function that allows you to find all low fares from your starting point to a variety of domestic or international locations. $455 RT from Philly to London anyone? Using this function is a great way to liven up your travel planning—you might start off expecting Orlando and wind up in Barbados.

Book a Package

Many online travel sites offer superb deals when you book your hotel along with your room. On a trip to Thailand, I got three super-cheap nights in a swank Mandarin Oriental plus airport transfers that I used on arrival and departure. It was convenient, inexpensive, and gave me the chance to stay in a hotel that normally would have been out of my price range.

Sacrifice Convenience

If there are multiple airports in your area, check fares from all airports. Sometimes you can save a bundle by driving an hour or two out of your way (for example opting for MDW instead of ORD or BWI instead of DCA). You can also sometimes save by choosing an itinerary with multiple stops instead of a direct flight.

You will lose some convenience with both choices, but the airfare savings may be too good to pass up. These tips and more can be found on the U.S. Department of Transportation’s Aviation Consumer Protection and Enforcement’s website.

Stay on the Case

Did you know that if you book your tickets and the price of the same itinerary drops after your purchase, that in many cases you can obtain a refund? It’s not a myth! After I purchased tickets for a coast-to-coast trip, I continued to monitor the airline ticket price and found that it dropped by almost $100. I called the airline directly and they honored the lower fare.

Some airlines only grant refunds if the price drop is over a certain threshold ($75, $100, or $150, depending on the airline), but some airlines such as Alaska Airlines and JetBlue offer refunds for any fare reduction. Yapta.com now offers a free automated service that will send you an alert if the price of your airline tickets falls after you book.

Travel Light

My family has no-checked-bags policy. Whether we are traveling for three days or three weeks, we travel with one suitcase and one carry-on bag each. Not only do we avoid the misery of lost bags, pilfered items, and wasted time at the baggage carousel, we also avoid the hefty bag-check fees that some airlines charge.

If you must check a bag, then check the airline’s luggage weight policy online before you pack your bag. Many airlines have brutal surcharges ($50-100) for over-weight bags. Weigh your bag at home before you leave to avoid a nasty surprise at the check-in counter.

Be Prepared

Know ahead of time if a meal will be served on your flight and don’t get caught without snacks, unless you enjoy paying upwards of $3 for a few potato chips or a cookie. On-board adult beverages are also a rip-off—normally costing $6-7.

Insider Tip

When you are searching the Internet for the best fare and filling in your search criteria, you will be asked how many seats you are trying to book. Even if you are booking for the whole family, always start by indicating that you are booking for a single traveler.

Here’s the deal: if there are two seats left at a lower price, and you enter “four passengers” in the search criteria, the system will automatically assign all four travelers the same higher-priced seats, rather than giving you two cheap seats and two at the higher rate. It will take you longer to make the reservation, but if there are cheap seats still available on your flight, this technique will help you snag them.

The Unexpected

Planning a vacation in advance is one thing, but sometimes an emergency arises that makes advance travel planning impossible. If you are traveling due to a death or serious illness, you may qualify for a bereavement fare or an emergency illness fare.

Not all carriers offer these fares, but it is a good idea to inquire, especially since last-minute bookings incur some of the highest fares. Some form of documentation (such as a death certificate or medical records) may be required in order to qualify for the reduced rate.

This article was written by contributing author Laurel Gray.

20 Things to Do With a Tax Refund

Posted on by  at  1:40 pm
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Tax refunds are sort of a forced savings account for many people. While it makes sense to adjust witholdings to minize a tax refund, there are a number of useful things to do with one besides blow it on a new television.

Newly planted tree, Annapolis by chesbayprogram on Flickr

Smart Things to Do With a Tax Refund

1. Pay off high-interest credit-card debt. Eliminating credit card debt is one of the smartest ways to spend any windfall. The higher the interest rate on your debt, the bigger the payoff. Think about it; where else can you get a guaranteed return of 22% on your money?

2. Rebuild your emergency fund. Thanks to unemployment, underwater mortgages, and a general economic funk, many households have had to turn to emergency funds to weather the storm. It makes sense to allocate some or all of your tax refund towards covering future emergencies.

3. Create your own “car insurance savings account.” If you currently have a $250 or $500 deductible on your car insurance policy, consider raising it to $1,000 and parking $1,000 of your tax refund in a dedicated savings account. You’ll enjoy a permanent way to save money on car insurance premiums, and earn a little interest on your savings account.

4. Boost your retirement savings. If your debts are paid, and you have plenty of money saved for emergencies, the next biggest bang for your refund buck is to invest in your retirement. Maybe that means funding a Roth IRA, if you are eligible. If not, drop the money in a savings account, increase contributions from your paycheck to your 401k plan, and use the savings to offset the difference.

5. Purchase a gym membership. Many gyms offer significant breaks for those that opt to pay one year in advance. My gym offered two free months and waived the registration fee if I agreed to pay for the full year, effectively shaving $90 off my annual gym costs. Be sure to check out the gym’s refund/cancellation policy before agreeing to such a long commitment.

6. Invest in a DRIP. Consider dropping some money in a dividend reinvestment plan, or DRIP, or using a low-fee broker such as ShareBuilder or ScottTrade to start a position in a company with a long track record of increasing dividends.

7. Build your college savings. It’s tough to carve out retirement savings, college savings, and put a roof over your family’s head and food on the table. After all, there are only so many dollars to go around. Boost your kids’ college savings by opening a 529 college savings plan (here’s a look at the best 529 plans).

8. Help your kid save for the future. If you are the parent of a teenager that earns an income, did you know you can help them open a Roth IRA? No kidding. The only requirement is that your teen files a tax return. He or she can invest in a Roth IRA up to their earnings, or the maximum yearly contribution, whichever is smaller. So, if your daughter earned $1,800 last year babysitting, kept meticulous records and files a tax return, you could gift her $1,800 to invest in a Roth IRA. She’ll be well on her way to becoming a millionaire.

9. Start a side hustle. Ah, the infamous side hustle. Many of the world’s most successful entrepreneurial efforts were started on less than $1,000 (I started Frugal Dad on less than $50!). Use your tax refund to seed a business you’ve always dreamed of running.

10. Invest in a home improvement project. Lean towards projects that improve your home’s efficiency long term. Consider installing a programmable thermostat, or a hot water heater insulating cover.

11. Open a “Car Replacement Fund.” Let’s face it; the car you are driving now will eventually die. Why not divert a little tax refund money to start a car replacement fund. If your current car is paid for, save what amounts to be a car payment in this account and when the time comes you can pay cash for your next car.

12. Build a square foot garden in your backyard. Use a couple hundred dollars of your tax refund to purchase gardening supplies, soil, and seeds. Now’s a great time to plant, and soon you’ll be enjoying tomatoes right off the vine, instead of those shipped across the country in your grocer’s produce section.

13. Give it away. If you’ve been considering giving money to a charity, now is a great time. Donating your tax refund to a worthy cause can even help on next year’s taxes, as most charitable contributions are tax deductible. With a down economy, and recent large scale disasters such as the tsunami in Japan, relief organizations could use the help.

14. Pay extra on your mortgage balance. We personally plan to pay off our mortgage early. Why? Because we value the freedom a debt-free lifestyle affords. Some will argue that we are missing a tax break (you know, getting to deduct $3,000 from our income for sending $10,000 to the bank in mortgage payments), but living mortgage-debt free provides a lot of options.

15. Get your will done. My wife and I recently updated our wills after a death in the family. Identifying guardians for your children, and disposition of your stuff in the event of your death is not fun, but it is absolutely necessary. If you have kids and do not have a will, stop everything, financially, until you have enough saved to visit an attorney and have one drawn up. It is that important.

16. Take a class. It doesn’t have to be an academic class, but it could be. Maybe you’d like to learn more about cooking, or self-defense, or real estate. Investing a little tax refund money in yourself can go a long way.

17. Go on a “paid-for” vacation. My family recently enjoyed our first cash vacation, and it was awesome! I didn’t have any bills to dread on the ride back home.

18. Hire a chef for the week. No, not so you can experience the life of the rich and famous. Hire a chef to cook in your home for one week and teach you various ways to cook healthy meals for your family. When the week is up, apply the new techniques and ingredients to make meals for your own family.

19. Plant a tree, or two. Not only will planting a tree add value to your property’s curb appeal, but in a few years the shade will help lower utility costs in the summer.

20. Create a checking account buffer. Leave the refund in your checking account, but pretend your account is really zero. For example, if your refund is $500, leave that money in your checking account, but do not include it your register balance. The extra buffer will help you avoid fees associated with going below zero.

Gas Prices, Interest Rates, and the Things We Find Intolerable

Posted on by  at  12:18 pm
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In the lull between news stories about Charlie Sheen, the devastating tsunami in Japan, and now the war in Libya, the media occasionally likes to remind us that gas prices are on the rise. As if we didn’t already notice when we filled our cars, or paid more for groceries.

Naturally, there is justifiable frustration, even downright anger, over these higher gas prices. We don’t just feel the increase at the pump, but we feel it as the increased costs to transport virtually every consumable product are passed on to consumers.

Some argue higher gas prices are a good thing – that they force us to consume less and seek out “alternative energies” that we might not turn to otherwise. Putting the politically-charged arguments aside for now, one thing I find interesting is the things we are willing to, and not willing to, tolerate in our society.

According to the AAA Daily Fuel Guage Report, at the time of this writing the average cost of regular unleaded is $3.55 a gallon. One year ago it was $2.82 a gallon. That’s a 25% increase in the cost to fill your car’s tank over last year’s prices.

Then I read this from a study on store credit cards published the end of last year:

Among the 35 store cards surveyed, the average store credit card rate is 23.83%.

I recognize not everyone signing up for a store card pays interest, but many do, and for them it is acceptable for a store card to take 25% more of their money in the form of tacked-on interest. I wonder how many people screaming about high gas prices also pay considerable amounts of interest to credit card companies and retail stores?

Some use this opportunity to point out that if you are living so close to the edge that a 25% increase in gas prices sends you over, then you are failing at personal finance.

Well, that may be, but the fact is there are a lot of people just that close to the edge. Some are there because they made bad decisions: bought too much house, or too much car, or too many goodies. But many are there because of bad circumstances: layoffs, illnesses, etc. Yes, bad things happen to good people.

Those good people may already be living frugally, and they may have already cut all frivolous expenses from their budget. They are struggling to keep their heads above water as the water levels continue to rise. So for these folks, higher gas and food prices are not a good thing.

This all leads me back to my idea of a serentity prayer for finances. I cannot single-handedly control the price of gas. I can control the amount of interest I pay. I can complain about both, but complaining about something over which I have little control seems futile. I need the wisdom to know the difference.

Instead, I can focus my energy on managing my household’s finances so that I don’t have to borrow money and pay those interest rates. I can focus my energy on inspiring others to take the same approach.