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Archive for February, 2014

Planning Ahead

February 26th, 2014 at 11:56 am

Something I am doing right this year is planning ahead for expenses I know are coming throughout the year. The year it's a Federal tax bill, a new air conditioner at the rental house, and property taxes for both our home and the rental. (The property taxes are an annual thing, of course, but I've never really planned for them before, just hoped something would come along to cover them. Got burned on it a few times, too, and ended up borrowing the money to pay them (still paying that back, three years later -- stupid!), or once we paid them a couple of months late, because we knew we'd have a big commission check coming in; that cost about $400 in late fees, but still probably less than the interest on borrowing the money. Still, even paying $400 is stupid for an expense that I've known will come up at the same time every year for 15+ years.)

Anyway -- I've got the money set aside already to cover the tax bill. I just added $500 to the savings, so now the a/c is about 2/3 funded and I won't need to pay that out until I'm guessing June or so. (I don't know, maybe there's value in having it done in April or May? Lower prices, probably less busy? I only have one quote so I'll need to have a couple more people out there to bid on it regardless. I may also see if we can get one more year of recharging it, but apparently the type of freon it takes is hard to come by these days.) Taxes are due the end of August and end of September, so I have lots of time to save, do some side jobs, etc.

Right now I'm at about 52% of where I need to be. Comes out to about $700 a month I need to set aside. I'm get overtime at work for the next six weeks, so that gives me a good opportunity to sock some money away. (Though now are also, of course, our high heating bill months; I know I could go on the budget plan, but honestly it's better for us to pay the high bills during my overtime and the $20-30 bills the rest of the year. Our dryer is gas, too, so we always have some usage.)

I do have $1200 set aside in a separate account, which technically is intended for reimbursements I'll owe some folks, but around $100 at a time and spread out over the next two years or longer. (Half of those might not ever be paid out.) So until I get a few other things set up, I'm considering that as my "emergency fund", mostly so that I'm not as tempted to dip into it. Even if I had to deplete it, it wouldn't be too difficult to come up with $100 here and there for the reimbursements. I'm not really comfortable at having only $1200 as an emergency fund, and will be looking at ways to beef that up without affecting my debt payoff plan.

Overall, I'm pleased with my progress in 2014. Of course it's very early in the year, but this is the first time I've really done a complete assessment of my financial situation. It's not pretty, but I'm confident I can make significant progress in turning it around within a few years. I'm using an Excel spreadsheet to keep track of my progress (as well as to calculate the additional payment I'm making each month); I'll update the monthly balances (based on the card statements) probably over the weekend, but I'm usually pretty close. Unofficially, it looks liked I paid off $2,332 of non-real-estate-backed debt this month. I'll take it!

Trying to Get It Right

February 20th, 2014 at 02:58 pm

Now that I've detailed all the ways I've done it wrong, both getting into and getting out of debt, it's time to talk about what I'm doing now to try to get it right. I'll still be doing some things wrong, because I'm just not willing to make the massive sacrifices I'd need to in order to do it 100% right, but I have a plan, and a goal, and have made a lot of progress already. So, here are some of the things I've done right:

Stayed Current on Payments
Except for a handful of late payments when I just got disorganized and forgot to pay the bill, after the fiasco with my college credit cards I've pretty much always paid at least the minimum, on time or within 30 days of being late. (They don't ding your credit report for being 25 days late! Still get hit with late fees, though.) Of course, two of the three times I was more than 30 days later were on the same card, so that doesn't look so great on my credit report, but those are starting to fall off now, finally.

Negotiated With Credit Card Companies
When hubby was living in another state, I contacted all of my credit card companies and asked for assistance. A couple of them wouldn't do anything since I was paying the minimum. (How strange is that, I call to try to make arrangements to keep paying in good faith and they won't do anything to help me until I've defaulted with them.) The others -- Citi and Chase -- put me on a 'hardship program', which lowered my interest rates, closed the cards, and put me on a 6-year repayment plan. Both offer auto-pay options so that was a one-and-done deal. Interest rates are 7.24% and 6%, down from 19-22%.

Found Ways to Earn Extra Income
I haven't been utilizing it much lately, but I now have a handful of options for some extra income if I need it. It's very dependent on how much time I put in, but at the peak of my production I was bringing in an extra $400-500 a month, while still working full time and enjoying free time on the weekends.

Took Advantage of Lower Interest Rate Offers
For some reason, credit card companies still wanted to give me money, so I've done a handful of balance transfers to lower interest rate cards (including the transfer fee in the calculation -- an interest rate decrease of 2% when there's a 3% balance transfer fee doesn't always make sense!). We also got an unsecured personal loan from Discover that knocked out some higher rate cards (that has since been paid off with one of the 401(k) loans, for 1/3 the interest and 1/3 the monthly payment), and I recently got a personal loan from Lending Club that, if I use the full amount of time to pay it (I plan on paying it off earlier), will save me three years of payments and about $12,000 in interest.

Started Snowballing Debt Payments
Once I rearranged all my debt, my payments decreased quite a bit. While I'd like to say I'm putting all of that decrease toward paying off the debt, the reality is that a significant portion of it is going toward our monthly expenses. The upside is that I can afford our monthly expenses now! I have dedicated a specific dollar amount per month to credit card debt, and a nifty Excel spreadsheet to keep track of it. (Seriously, if I could get paid for the time I've spend making Excel spreadsheets for my various budgeting/financial uses, I could retire now!) I subtract all my minimum payments from that amount, and whatever is left over goes as an additional payment to my highest interest rate card. Once that's paid off (right now on track for January 2015) I will snowball to the next card, etc. I'm also increasing the dedicated amount by $200 per month each year, assuming COLA increases at work (or additional side jobs, if need be).

Faced My Financial Reality
I finally sat down and calculated my total assets, liabilities, and net worth. It was pretty sobering. On paper it doesn't look all that bad, really -- we have a positive net worth, at any rate, and it's over $50K. That's not including the family loans, though -- add those in and we're very negative in net worth! Granted, if we don't get these family loans paid off -- and we are paying on them every month, with interest -- it will eventually come out of my inheritance, but part of owning up to what I owe includes even those debts that no one other than my family and I will ever know about.

Created a Realistic Plan With an End Date
One of the reasons I'm starting this blog is that I've finally got a plan to get out of debt, and it's sooner than I honestly thought it would be. There is a light at the end of the tunnel, but I want to be sure to keep on track and be accountable to someone, even if it's only faceless strangers on the Interwebs. (I can't admit to my family how in debt we are. Even hubby only has a vague idea, mostly because he tends to over-react and get all doom and gloom about things. He knows we have a lot of debt, and he knows we're working toward paying it off and what the basic timeline is; the details are a little fuzzy, but we talk about big spending and how we're going to afford things.)

Left Commissions (Mostly) Out of the Budget
One of the biggest mistakes I made at first was counting on hubby's commissions as part of our income. That was great until he changed to a job that didn't pay commissions! Now that he's getting commissions again, I'm only counting on a portion of them as income. I took the average monthly commission he's made over the last four years, not including his year-end bonus (which has ranged from $0 to almost a full year's salary), and figured we could safely count on half that amount as part of our budgeted income. (That amount is also not completely beyond the realm of my ability to make up with side jobs, if need be.)

Finally, the biggest thing I've done right is...

Stopped Using Credit Cards
Well, sort of. I do use my Kohl's charge for the discounts, and sometimes Bill Me Later for the six-month interest-free financing, but those are amounts that I plan for and know I can pay off when the bill comes due. Other than that, we pay for just about everything on our Chase Freedom card, which is a rewards card. Technically I "carry a balance" on the card, but it's always new debt -- I'm not paying in March for the gas I put in my car in January. I pay a chunk on it every week or two, and there aren't any interest charges, because I pay off the statement balance throughout month. (For example, if the February statement closing balance was $2300, I'd be sure to pay at least $2300 on the card before the March closing date. I generally pay well more than that, because I want to keep the balance manageable and at a level where I could pay it off entirely, if I needed to.) Meanwhile we average about $75-150 in rewards every month; we've used those in the past for a new vacuum cleaner (sorely needed), TV (total want), movie tickets ($100 gift card should last a year or so, we don't go to the movies often), our anniversary dinner, etc., but this year I might let the rewards build up and use them for birthday and Christmas gifts instead.

I am happy to say that, other than the exceptions above, I haven't used a credit card in well over a year. That is a huge improvement for me! I was a little leery of the Freedom card, given my past history with building up credit balances, but I've made a real effort to keep it paid off and it's working.

Barring any catastrophe, I was on track to have all of my credit cards and the Lenders Club loan paid off by May 2016 ($50K) and the 401(k) loans paid off by August 2017 ($56K). The family loans should be paid off by June 2020 ($135K). Then I could knock out my mortgage by February 2024 (19 years early!). That's also assuming only COLA increases; I'm actually looking at a possible large bonus and salary increase this year, which could accelerate things exponentially, but I don't want to count on that until/unless it actually happens.

However, that was before I realized (last night) that the HELOC on our main home will be coming due in a year and a half. (I'm glad I thought to check the paperwork -- the whole balloon payment thing was not made clear to me on closing!) So I will need to make some adjustments and/or shift that loan to somewhere else if possible. (Hubs has good credit and most of the cards we've paid off were in his name, so he could probably get a loan from Prosper or Lending Club if we need to go that route. I had the HELOC scheduled for payoff in April 2018, but it will be due in full in October 2015.) A new loan will probably have a higher interest rate, but we'll be able to throw lots of extra at it within the first year, so it should be paid off fairly quickly.

Mistake In The Making?
Remember in my last entry when I said a potential mistake might be coming up that will end up better for us in the long run? There's a home up for sale that my husband is itching to buy -- it's where we're planning to retire, and it's right next door to his cousin. It's a bank-owned property, so from the looks of things is listed at 3/4 to 1/2 of its market value. Of course we'd get an appraisal first, and an inspection, before we even seriously consider it. Taking on more debt is one of the last things we need to do, honestly, but it is a pretty good opportunity. What's more, my mom has been wanting a 'vacation home' and we have talked about getting a family home in this area. The ideal -- though I'm not sure how on-board my mom will be about it -- would be for her to pay cash for the home (easier to get the offer accepted, I've heard, with a bank-owned property when you pay cash), and then we would finance it, taking some additional (assuming it appraises high enough and there's some equity there) to pay off the credit cards and HELOC. The monthly payment would come out of the currently assigned credit card payment, and the rest of that would go to the Lender's Club loan (paid off July 2015). That would let us pay off the 401(k) loans in February 2017 and the family loans by November 2019. Then we'd tackle the 'vacation home' loan, paying that off by July 2022, and our primary mortgage paid by October 2025. While it's an extra 18 months on the primary mortgage, it's also an additional $125K (or more, by that time) in assets with the vacation home. (This is all assuming hubs and I take on the entire cost of the vacation home; mom might offer to pay 1/4 of it herself, since she'd be free to use it whenever she wanted.)

Again, more debt is the last thing we need, but the long run is looking more and more attractive. I know you're not supposed to tie up unsecured debt in your home -- and I've made that mistake many times in the past! -- but the interest rate is still considerably lower and again, we'll have a nice increase in assets when all is said and done. The home undoubtedly needs some work (paint job, new floors, I'd like to add a bathroom at some point since there's only one), but since it will be a vacation home for the next 10 years or so, at least, it's not anything that we'll have to do right away. With a cousin next door to keep an eye on the place (a cousin who, I might add, is very motivated to get us to move down there!), and lots of "kinfolk" in the area to help with any projects -- and a new roof in the last year or two -- on the surface it seems like a reasonable fixer-upper over time. (It will all depend on the appraisal and inspection, really.) While we'll still ideally buy a larger piece of land and build our ideal retirement home someday, this will give us a vacation home in the mean time, a place to stay when we do first retire and are building, and ideally an appreciable asset (that we can live in for two years before we finally sell it and avoid capital gains taxes). Hubs is down in that area every year, as well, for family reunions and his 'fun stuff time', so having a place for him to stay will ease the burden on family and hotel room fees! (Oh -- and the property taxes? $400 a year. Not even a consideration, really.)

Anyway, that's where we are at this moment in time. I am working on building up an emergency fund -- I had $4700 but then we ended up owing $2800 to the IRS (bad planning, but it shouldn't happen again this year). We will have property taxes due in the fall, about $3700 between the two houses (home and rental), and the rental will probably need a new air conditioner this year ($3500) -- it's losing freon, and apparently the new units don't use that type of freon so it's hard to find these days. (Still, I'm going to see if I can get it recharged one more time to get another year out of it, but if I can't I'm saving up for that expense now.) I'm allocating the rest of the $4700 as $1000 in an 'emergency fund' and $900 for the a/c, but honestly in an emergency I could probably use the Freedom card and with commission/side jobs pick up the $1000 during the 25-day grace period. Still, by the end of this year I'd like to have at least $5000 stashed away until I get the debts paid off, and then work toward increasing it to 6 months of expenses. Hubby's commissions and any 'leftover' from the checking account at the end of each pay period will go toward all of that -- a/c, taxes, and emergency fund. We'll get there, I know it!

Doing It All Wrong

February 20th, 2014 at 09:24 am

As my username/blog title suggests, this blog will be a lesson in how *not* to budget, manage credit cards, pay off debt, etc. That old adage, "Do as I say, and not as I do" applies quite well here. I know exactly how to effectively and responsibly use credit cards, I know how to budget and scrimp and save and pay off debt, I know how to snowball and consolidate and all of the things you do when you want to get out of debt. Actually doing those things, however, somehow manages to escape me. It's a lack of willpower (which pervades all areas of my life, not just finances!) and the knowledge that I have a safety net (family) if things really get bad (a blessing and a curse!).

I laugh when I read that the average US household has $6,000-8,000 in credit card/unsecured debt. I have more than 10x that amount, not including loans from family (which is itself about 15x that amount). You would think I'd be panicked, depressed, stressed, *something*, but I'm not, most days. Debt is a fact of life, something I've pretty much always had to deal with, like grocery shopping or laundry. Clearly, I need an attitude adjustment! I do have a plan, which I will get to momentarily, but even then, I'm doing it all wrong.

First, how did I get into the situation I'm in, with around $250,000 in unsecured debt? Well, it took a little time, but very little effort.

What I Couldn't Really Help

A significant portion of my debt is due to factors mostly outside of my control. I most certainly could have managed the situations differently, but the situations themselves just happened.

First, my husband and I moved into a family-owned house. For the first few years, it wasn't a bad deal -- we paid the bills and taxes, but no rent and the house was paid for. We tried selling the other house but not aggressively, so we were carrying two "homesteads", although only one mortgage. After a few years, we had to settle up on the inheritance, which meant we took out a mortgage on the house and paid off the family on their portion of its inherited value. So now we had two mortgages, plus two HELOCs.

Then, my husband lost his job, and got a new one in a different state. Since it was a short-term stay (and then we'd be relocated), and since I had a job and family and critters that would have been a major hassle to move, I stayed. So now we had three homesteads and rent.

Fortunately, the relocation fell through and hubby got a job back here. Meanwhile I'd found a renter for the other home, with a 'rent to buy' plan for five years out. The rent money went to paying some of the family loans (which were used to buy that house in the first place) so we still had two homesteads, two mortgages, two HELOCs. Then the economy crashed and the renters, while still paying the rent, are not in a position to buy, probably for several more years. They're like family and it's fine, really, because technically once we sell that house, the family loans come due, but it's still two homesteads, two mortgages, and two HELOCs. (The renters do pay all the utilities except water, so that helps a bit.)

Over the next five years, we've had four surgeries, all in different years, of course (so medical deductibles/co-pays of around $6,000 per year), two funerals that we ended up paying half and all of (around $15,000 total), and a handful of non-routine critter-related medical expenses that total about $15,000. Some of that went on cards; some of that we took IRA withdrawals to pay (and, of course, paid the 10% penalties to do so).

Since we were essentially living paycheck to paycheck for most of that time (and practically still are, really), most of that debt went on credit cards. Plus when we were first living together I was the sole earner, not earning much, so many months the only way we could eat was by putting food on the credit cards. (I read a blog recently where the overwhelming majority felt it was much easier to spend cash, or to lose track of cash spending, than it was to buy things on credit. I am exactly the opposite. I can take $40 out of the bank and still have $30 left at the end of two weeks, because I hate to part with my cash, but credit? No problem, that's not 'real money', right? Again, pretty clear I need to change the way I think about money and debt!)

What I Did Wrong

Oh, so many things! First and foremost, I went to college (not a bad thing, really) and got tons of offers for credit cards, which I of course accepted (bad, bad, bad idea) and of course used (even worse idea) and then of course couldn't pay off. I ended up settling those debts after graduation.

When I bought my first home, I was gifted money from my family for the downpayment, which because of the way the loan was set up I actually ended up using to pay off the credit card debt and car loan I'd acquired since settling the other debts. Of course, then I just built those credit card debts back up.

About five years after I bought that house, I got talked into refinancing it. Which, of course, also involved paying off credit card debt I'd racked up and the loan on the new car I'd bought in the mean time. This was at the height of the mortgage lending frenzy, so I ended up financing 100% of the home's equity, between the mortgage and the HELOC. I paid off higher-interest debt, sure, but increased what I owed on the house by about $30K. (Then, of course, the housing bubble burst and the home's value decreased by more than half.)

Two years later we had to take out the mortgage on the house we were living in. This time we only financed about 90% of the home's value, but again used a big chunk to pay off credit card debt (seeing a trend, here?) and student loan debt. Mortgage and HELOC, of course. Housing bubble burst, house is just starting to be worth the mortgage amount (the HELOC is something else entirely!)

Mistake #1
The biggest mistake, of course, is that I paid off my credit card debt three times, and kept using the credit cards. You'd think I would have learned after the first time!

Mistake #2
I used IRA funds to pay off debts. Truth be told, though, I probably did end up saving money in the long run. Most of that happened shortly before the economy (and markets) crashed, and I lost about 38% in my 401(k) at the time. So even with the 10% penalty and the 15% income tax, I eliminated some bills at 29-32% interest and avoided a 38% loss in the IRA. Still, it's not the way you're supposed to do things!

Then, I didn't fully understand the terms of the HELOCs. They had a 10-year draw period (not a concern, since we maxed them out from the start), interest-only payments (again, not a big concern, I thought we'd have the first house sold by then), and -- the part I missed -- a balloon due at the end of the 10 years. Typically those are just converted to a 30-year fixed, P&I payment loan, apparently, but since the first house is no longer my primary residence, they wouldn't do anything for me. Which led to...

Mistake #3
Taking a 401(k) loan to pay off debt. Two, actually, one from hubby's and one from mine. Again, though, I think we'll come out ahead on this. Unlike the IRA withdrawals, there's no penalty or tax on the 401(k) loans. We're paying ourselves back with interest, which is only slightly lower than the average return on S&P500 investments, and we knocked out some higher-interest debt (25-29% on some credit cards -- we took the one 401(k) loan before we knew about the HELOC coming due). Yes, the interest we're paying in is after-tax money, and will be taxed again when we withdraw it -- but it still adds up to less than the credit card interest rate.

We've made other mistakes, too, along the way, Such as:

Mistake #4
Used large bonuses to buy "stuff" rather than pay down debt. Sometimes this was necessary stuff -- a water heater, or new siding on the rental property that just (fortunately) happened to coincide with a big commission month. (Hubby works on salary, but with commission that varies wildly.) The worst was a bonus that was almost a full year's salary, half of which we spent on a 'toy' for hubby. Granted, he uses the thing almost daily and will have gotten more than its worth out of it, but in the long run we would have been much better off using that money to pay off debts. I admittedly feel guilty, however, telling he he can't buy things he wants with his own money, especially since I don't tend to curtail my own spending that much. Which ties in nicely to...

Mistake #5
We have not remotely adjusted our lifestyle in an effort to pay off our debt. As I said, I know I should. I could drop the home phone, eliminate the movie channels, stop drinking pop, bring lunch from home every day, shop more at Costco, and so on and so on. Lots of fat we could trim from our budget. And we might, at some point, especially now that we're talking about it and setting goals. On the other hand, I don't want to deprive myself. I want to enjoy my life, within reason, while also working on getting rid of this debt. If hubs or I die tomorrow, life insurance will take care of the debt -- what's the point of living a miserable life in the meantime? (I know, that's rationalization. I get it. Part of it is rebellion, too, from my childhood when my mom did have to scrimp and save and budget to put food on the table. Still, I'm not at the point where knowing what to do and knowing why I don't want to do it is enough to actually persuade me to do it!).

Whew! This has gotten far longer than I'd intended, so I'm going to end it here. I'll be back for another entry about the few things I'm doing right, and the plan for the future. (Though there's another mistake on the horizon that, if it pans out, might just end up saving us in the long run.)