Debt And Money Management
Copyright 2009 by Morris Rosenthal - - contact info
Copyright 2009 by Morris Rosenthal
All Rights Reserved
Start A Budget For Home Finances And Reduce Living Expenses
Expense greater than income? A good starting point for taking control of your personal finances is an honest look at whether you are spending more than you are making. Money management is like dieting, in that the first step is to stop lying to yourself about how much you spend. Living within your income is not the same things as staying out of debt, you may have started with money in the bank or an inheritance that you are spending down just to keep up with the bills. Well, taking money out of the bank and spending it isn't income, it's just another expense. And unless you have your mortality figured out to the day of your death and you know the money will hold out, it will lead to debt in the end. Your income, what you are making, refers to your income after taxes. If you are self employed, or have your employer take out the minimum allowed by law, you may be balancing your checkbook every month and still end up thousands of dollars in the hole at the end of the year.
You don't need a computer spreadsheet or some fancy financial planning software. Just write your income on one half of a piece of paper and list all of your expenses on the other half. Now you can start assigning expenses to your income, and that's what a budget. Expenses must all be counted, you can't ignore money you need to pay out just because you see it as being untouchable in your financial planning. Examples here could be a mortgage, medical insurance, alternative medical treatments or children's school bills. These are all still expenses, even if you would sell yourself into slavery to see that they get paid. Putting them all down on paper will help you understand how much flexibility you have, if any. It's also important to note that keeping up with credit card bills, while better than missing payments and paying penalties, is nothing to be proud of. All debt is bad debt, even a home mortgage, but some of it is necessary for the average family to settle down and live. Credit card debt doesn't make the cut.
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Mortgage debt only? If the only debt you have outstanding is mortgage debt, than odds are you don't have a spending problem and you are doing a decent job managing your budget. That doesn't mean you didn't make a mistake and buy more house than you could afford during the bubble, you may even be underwater on the value of the house as you read this, but there's no use beating yourself up over a single mistake in life. The "advantage" of mortgage debt and home equity debt up to certain limits is they can be tax deductible. This turns out to mean very little to the average American family who's income is in the 10% or 15% tax bracket, because you don't even "save" that 10% or 15% of the interest paid. Everybody forgets that the mortgage interest tax break comes at the expense of being able to take the standard deduction, so unless you have other Schedule A deductions that exceed the standard deduction amount (state and local taxes, charity, some medical expenses), the deduction will often come to naught, and you'd be better off taking the standard deduction. Don't get confused by mortgage debt. If it allows you to live in a house for what you would have been paying in rent, you should come out ahead of the game, but it also ties you to the house and market conditions.
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Loan debt (car, student loan) only? If in addition to mortgage debt, you have car and student loan debts, you are still in the mainstream of American life. The student loan debt you can't do much about, there's no way to return your education even if you didn't complete a degree. But the car loan is not a lifetime commitment. In some cases, if you made a large down payment, you may be able to sell the car for more than the outstanding loan. Rarely works that way though, so if your car payment is driving you broke, you may need to leave money on the table to get out from under it. The key, of course, is making sure you have reliable alternative transportation lined up so you don't go right back into debt. One of the hidden savings of getting rid of a car loan and buying a bike or driving a clunker is you can drop those parts of the car insurance that covered collision, fire and theft, which the finance company insisted on. So even a straight trade that's let you pay of the car financing and drive something else in similar condition may help the home budget.
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High living expenses. Do you simply find yourself spending more on day to day living expenses than you can really afford? Examples would be groceries, eating out, movies, fueling the car, etc. We aren't talking about buying expensive toys, simply spending your money faster than it's coming in. Well, this is about the best financial problem you can have, because all you have to do is STOP! Nobody really needs to eat out. Just imagine for a minute that you are one of the unfortunate people saddled with myriad food allergies, gluten intolerance, anything like that, which effectively prevents them from ever eating out. Now you try being unfortunate for a month and see how your finances fair.
Do you know the prices of the items you buy in the supermarket? If you don't, you aren't competent to shop for them. Yet most people seem to assume that food costs what it costs and there's nothing to be done about it. That's naive and dumb. There are cheap places to shop for food, expensive places to shop for food, and everything in between. How often do you splurge on something because you feel you deserve it? Once a year? Once a month? Once a week? I have a friend who buys a new car or a motorcycle every couple years just because he he thinks it would be cool, and every time around he loses thousands of dollars he can't afford to lose. If you want to cut down on your living expenses, the first challenge is to grow up.
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Rent main expense? If rent is your main expense and you can't keep up with your bills, it's time to look for a new place to live. This might mean getting out of an apartment and taking a house sharing or roommates situation, or in might mean taking in a boarder yourself. Taking in boarders has become more common since the debt crisis, I have a friend with a single family home who currently boards three different individuals. Of course, he's also had to go to housing court a few times in recent years, and been forced to take our a restraining order against crazy boarders (twice). The problem with renting rooms to adults is that there's a good chance they aren't stable - otherwise they would have their own place.
If you really aren't tied to the area, you might think about picking up and moving somewhere with better job opportunities and cheaper rent. I'm the last person to tell anybody they should leave a job behind for a pig in the poke, so you need to be very careful about moving cross-country just in hopes of finding something better. Use the Internet to research jobs and housing in other areas, and if at all possible, line up a new job before you actually move. You may even be able to take a substantial pay cut and come out ahead if you end up reducing your rent from $2000/month to $800/month for equivalent housing, which is entirely possible in a move between cities. And keep in mind that rent is after-tax dollars, with only tiny rental tax deductions available on state returns in some states.
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Medical expense large? Well that's a dumb question, if you have medical expenses, they almost certainly are large. The majority of Americans declaring bankruptcy cite medical expenses as a prime factor, with no difference in the percentage between those who have medical insurance and those who don't. Countless Americans have been bankrupted by co-pays and procedures that aren't covered by their medical insurance, and the least fortunate people with serious medical problems simply exceed their lifetime benefit and find that the insurance has run out.
Since stopping medical treatments isn't an option for most people, bankruptcy is often the ultimate answer. If you have the flexibility to move to a state with a health care policy that fits your needs, it's would be crazy not to look into it. I've lived in Massachusetts for most of my life, and I currently pay over $1000 a year just for the "privilege" of not buying private health insurance - it's a tax penalty. But if you have a chronic condition or even a terminal disease that makes you uninsurable in most states, you should be able to purchase health insurance in Massachusetts at the same inflated rate as everybody else. Insurers can't refuse policies for pre-existing conditions, and there's a state run plan as well, so if you can't really afford to pay at all, they'll send you pretend bills for a few dollars a month and you can maintain a little dignity.
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Gambling, drugs, vice? It seems odd to put vice on an expenses list, but if you're debts are the result of gambling, drug addiction, paying for sex, at least you don't have a structural debt problem, you just have to regain control of your life. Since that's not an easy thing to do for most people, try professional counselling or a support group, like AA, NA, and whatever they have for sex addicts. A serious issue with illegal vice is that there's a good chance you owe money criminals who aren't going to let you off the hook if you declare bankruptcy. You might get some good advice from a local lawyer who knows the town, but you'll also have to pay upfront - lawyers aren't suckers. Gambling, drugs and vice are not legitimate living expenses, so if they appear in your budget, it's your life that needs better management, not your money.
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Too much shopping? There are plenty of shopping addicts in America, people who spend their free time at malls buying things they don't need and barely use, and even shut-ins who watch television shopping channels and run up credit card debt buying junk they never even take out of the box. The first step is to get rid of your credit cards, all of them, so you no longer have the means to buy junk on impulse. If you have a debit card associated with your bank account that allows you to use it like a credit card, you may have to get rid of it as well and just live with the old method of cash and checks. The same goes for store credit. In the end, the goal of all creditors is to get you into debt, there's just nothing good about it.
If you've never done a budget for your home finances on paper, it's time to try. First, make up a list from memory of the expenses you think are eating your income, along with how much you think each expense is. Next, put it aside, and for a month, keep a pen and paper handy and write down an accounting of every dime you spend, every time you put your hand in your pocket for your wallet, write a check, pay a bill online, etc. Many people will find that they are spending hundreds of dollars a month in dribs and drabs of two dollars here and three dollars there on coffee, candy bars, even fresh fruit bought one piece at a time. If you were rich enough to do that, you wouldn't be reading this, so cut it out!
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Credit card debt? There is no good reason to carry credit card debt. Are you moving your balance from card to card for zero percent introductory rates, using the checks from one card to pay another? It's not smart, it's stupid. You will lose in the end. Do you carry credit card debt while putting money into the stock market, figuring that those gains are more than the interest you pay? Stupid. It's just gambling, and it's a gamble you will usually lose. Otherwise, the investors funding the credit card debt would buy stock themselves, instead of loaning you their money. There is no such thing as manageable credit card debt, if you have it, you've already lost control. The only intelligent way to deal with credit cards is to pay the balance off every month, if you can't do that, you better cut up the credit cards.
Your top financial priority should be eliminating your credit card debt, but you have to beware of consolidation loans. There are many services who claim they are consolidating your credit card debt at a lower rate, but who are really tagging you with an introductory rate, just like the credit card loans themselves. And to move from a 20% or 25% APR to a 18% or a 15% APR is no big gain. Perhaps the worst trap awaiting you is if you clear your credit card debt with a loan, such as home equity, and then you go right back into debt again. Money problems may still be the leading cause of divorce, it's just very difficult for people to get along in tough circumstances if they have completely different value systems. Buying stuff on sale doesn't mean you are saving money, it means you are taking money out of your pocket. Take a long vacation from spending on anything other than groceries and bills and see where you come out.
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Pay day loans? The only thing worse than pay day loans are illegal cash loans from organized crime figures, and the interest rates aren't all that different. Whatever it is you believe you need the money for, wait a week or sell your TV, it's bad for the brain in any case. Once you fall to the level of pay day loans, assuming you have a job, you have lost total control over your home finances, and should seek professional help in the community. If you have family memebers nagging you to take a pay day loan to help them, harden your heart like the Pharoh
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Debt free? If your income exceeds your expenses and you don't have any debt, it means you are saving money. There's a difference between saving and investing, each of which I'll give a chart in this series. The main difference is that saving money is focused, by definition, on not losing money. Unfortunately, in modern times, saving almost always means slowly losing value to inflation. Investing is about putting your money to work to earn returns higher than inflation, but there is ALWAYS risk involved. There is no such thing as a safe investment, there are only investments that work out and investments that don't.
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Paying down debt? If you have debt, but your income is sufficient to pay all of your current bills and to pay against the debt principal (as opposed to making minimum credit card payments), it's a question of what makes you comfortable. If you can avoid taking on any further debt and maintain a pre-payment schedule that will result in all of the debt being paid off in a time frame that makes you happy, just stay with it. But if you look at your budget and see yourself paying down debt for years and decades into the future, well decades may as well be forever. The one way to reduce your future debt payments is to pay the debt off early, something I've always done myself. For a strange reason, some people treat debt as a positive thing, as if their ability to use credit to accrue more debt was an asset, something they earned. Don't get caught up in thinking your credit rating is an asset, they only people who think that way are debtors. Trust me on this, people who live within their means don't even know what their credit rating is, and don't care.
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Expenses vital for future? We come to the core of the debt vs delay argument, whether it's always right to defer gratification and not purchase anything on credit, or whether there are instances where taking on some debt today will help you to a better future. One example where debt is a sane choice, if not entirely desirable, is a home mortgage. Another example is a student loan, if there really is a future in the course of study and the student has the ability and desire to complete the degree. But America wasn't built on credit, it was built by people who saved their money, or at most, borrowed from family and friends for purposes that the community recognized as constructive. Credit is not necessary to start a business, you are far better off saving enough money to start a business debt free. Most of that debt home equity or credit card debt since banks won't hand out unsecured start-up funding for business.
If you can't manage your personal finances, you're going to have a tough time managing business finances. Spending money rarely achieves anything in business, in fact, the time and wasted energy that goes into attempting to buy your way into business may prevent your from ever creating a viable business model. So don't kid yourself about why you'd rather invest in something than pay down debt, it's because investing is fun and exciting while paying down debt is just a drag. The debt didn't come out for nowhere, it's a result of mistakes you made in the past. Paying it down should teach you a lesson about never going into debt again, but you may not learn that lesson until your age crosses 40 or so, and it finally sinks in that your life is going by with you as a financial loser.
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Special location critical? Maybe you are renting a place that's near to family for whom you are providing care, or who are providing care for you. Maybe your children have special educational needs that require you to live in a particular school district, otherwise you'd have to foot the bill for private schooling. Maybe you don't drive, have a great job, and need to walk to work because there's no public transportation. Those are all legitimate reasons to pay a higher rent than you can find elsewhere. But being close to the downtown night life, the university, or a park, those are simply luxuries. If you can't afford your rent on your budget and it's not critical to your family, you should move somewhere cheaper.
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Light at the end of the tunnel? One thing that amazes me in talking to people with crippling debt is how they live from day to day with no light at the end of the tunnel. Many are blindly convinced that one day their ship will come in and somebody will die and leave them money, or they'll get a job that pays twice as much, or marry somebody with deep pockets or better credit. If you can work out your budget on paper so there's a light at the end of the tunnel where you can start paying down your debt and be debt free (mortgage excluded) within five years or so, you have a tough grind ahead but at least it's a plan. But if there's no light at the end of the tunnel, if you are looking out ten years or more for when you might get a grip on your finances, you're just being a fool. Nobody can see that far into the future, and the debt that you have isn't a rational thing. It's a giant mistake that came of loose consumer credit in the U.S., and one that our children will be paying for on the national debt for a long time into the future.
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