I started this blog because of my interest in personal finance and financial freedom.  Gosh, that phrase financial freedom is sooooo trite.  I started blogging just before it became clear there was going to be a financial meltdown.  I’ve been wondering exactly what my role in the overall economy is.  I make money, I save money, I invest money and I spend it.  But lately, it seems as though we are in a free-for all economy.  Everyone is worried and out to get theirs.

It seems to be okay that some thrive while others suffer.  Some intimate that the thriving of one group causes the suffering of another.  (Certainly the financial meltdown has shown that a few thrivers have caused many to suffer) but are we really going to fall into a society so polarized that we argue that the thrivers must pay their fair share to ameliorate the suffering of others?

We live in a civil society…everyone must pay.  To extend the tax cuts for everyone will cost roughly 4 trillion dollars.  Extending them for the wealthiest 2% of Americans will make up $700 billion of that total.  That means that the lion’s share of the tax cuts belong to the middle class.  The grand total being roughly 3.7 trillion dollars.  It seems silly therefore that we talk about budget deficits without considering the totality of tax cuts.  We cannot target one group against the other and appear to be an intelligent nation.

I’ve been looking at the US budget since 2004.  The US income statement is so easy to find.  I discussed the budget in 3 previous posts : IOU America, IOU America Part 2 and Robin Hood.

In my previous posts I used a hypothetical college student as a micro example of the US Budget.  Now I am going to use something more personal, me.

It is not a state secret I had major debt troubles; 30 years ago I got my first credit card, my debt increased gradually through the years until I had 16K a month revolving credit card debt.  I had a house, a car, expenses and deferred student loan debt.  My expense situation could be divided into immediate needs + short term debt.  Lurking down the pike was the Ghost of Christmas future:  long term debt + immediate needs + short term debt.

My short-term debt payments + immediate expenses were about 90% of income. I made up any short falls by borrowing, i.e., using credit cards.  I knew that I had long term debt obligations that I would have to begin paying, but I was so busy being a rat on a wheel, I didn’t know how I was going to make that happen.  Something snapped…I saw the light.

I adopted an austerity program.  But I adopted a program that made sense.  First I eliminated every expenditure that I didn’t absolutely need, that meant canceling credit cards, pre-paid calling cards, meals out.  I only spent a dollar if it put food in my belly, kept clothes on my back, or put a roof over my head.  I prioritized purchases, everything that didn’t fit the above categories went on a list.  I needed some major help in the financial literacy department so I allowed myself to buy books on that topic…4 per month.  One thing that I did do was develop a spending plan.  I had to get to and from work and take call so I maintained my car.  I also continued routine maintenance on my home to make sure the roof was okay and the cooling and heating systems worked.  The spending plan helped me save and take care of the priorities around my home while I paid off my debts.  It is important to mention that my total debt was 123% of my annual take home pay. Ouch!

It is important to understand that even while I was digging myself out of my hole, I had to continue to spend. I had to spend on housing, I had to spend on food, I had to spend on clothing, I had to spend on maintenance.   When our lawmakers talk about all spending as a bad thing they are  really blowing smoke. What they really should be saying is that we know we are going to continue to spend during this recession, but we only want to spend on the things we want to spend on.  And there is the ideological rub.

There are the billions spent on unemployment insurance on the one hand or the trillions spent  to make tax cuts permanent.  The expenditure for unemployment insurance will stop at some point as the economy improves and the unemployment rate falls.  The 4 trillion dollars in lost revenue through a permanent tax cut extension is, well, permanent.  This debate is not about the budget it is about ideology.  We have two 800 pound gorillas in the wings, the dual apes of Social Security and Medicare.  The economy has forced us to talk about them at least a decade sooner than we’d like. We can’t kick the can down the road and everyone must be prepared to give something up.

I am tired of hearing that earmarks amount to a rounding error in the budget.  At one end of an earmark is a Congressman or Senator who lobbied for their district, at the other end is a consituency who benefited.  Everyone must pay, earmarks must stop.

It was wrong for Krugman to rail against the freeze in Federal pay.  Federal employees have the most generous benefits packages around and have been receiving COLAs when others have been receiving pay cuts.  Federal employee pay may be a rounding error in the budget but everyone must pay.  By the way, VA and Federal employee retirement benefits were a 4 trillion unmet obligation in the Federal budget.  A two-year COLA freeze will save money because it will affect retirement pay.  The freeze should be extended to the military not on active duty.

I realized long before Mr. Obama was elected that my taxes were going to go up.  Honestly, I’m really surprised they haven’t yet.  My taxes should go up, but living in a civil society isn’t free. They should go up for everybody.  We shouldn’t be discussing saving 700 billion, we should be discussing saving 4 trillion.  Everyone should pay.  To take the sting out of the tax increase, there should be a payroll tax holiday and reform of the tax code as Bowles and Simpson have proposed.  Everyone will benefit from that.

We are in a recession, but there are still necessary expenditures.   Just as I had to maintain my car and home when I was in my personal recession, we have to maintain our infrastructure and doing that requires spending money, a jobs bank requires spending money.  Just as my mechanic and my plumber benefited from my maintenance plan, our citizenry will benefit from a jobs bank and infrastructure projects.

Please comment.

Okay so like I’m middle aged.  I think middle aged people tend to conduct their affairs in pretty much the same way.  Middle aged people tend to reflect on their lives and decide ultimately that people, more than things, are important.  I know that is true for me and I think is the reason why the fastest growing demographic on Facebook are people in middle age.  We are trying to recover those connections that we lost on the road to getting somewhere.  Middle aged people have acquired all the things they want or have adjusted their wants not to want so much and start to clear the clutter from their lives.  A few years ago my home flooded.  I was racing about the house trying to save things that were doing their best to die a water-logged death.  I realized then that I had way too many things.  A friend remarked as she viewed my personal possessions strewn about the back yard to dry, that my yard looked like the Sanford and Son junk yard. I began to de-clutter then out of necessity, but clutter is the natural state of our lives and de-cluttering requires conscious living and constant vigilence. Middle aged people also tend to become more frugal.  Retirement is just around the corner and we have to think about that.  A friend of mine recently told me about a trip out with his wife.  She wanted to go out for a burger.  He checked the fridge to see if they had the ingredients to make a burger at home.  They did not. Realizing that they would have to eat out, my friend grabbed a slice of American Cheese and put it in his breast pocket. He wanted to save the cost of the cheese for the cheeseburger.  My same friend enjoys a glass of wine with dinner.  The problem is that drinks with a meal can increase the tab by 30% to 50% and the mark up on beverages is routinely 300%.  So his solution is to bring his own wine and have a glass in the parking lot before going into the restaurant. While I don’t port my own cheese and wine, there are things that I do to save money.  All of my friends enjoy life,  time with their families,and  sharing the occasional meal out and traveling, what we all have in common is the desire to plug the crazy money leaks that can keep us from doing those very things.  I use online banking to save both time and money.  If you use online banking the customer service division at your bank is at your disposal should a payment go missing. Years ago I would have to wait for a check to clear then obtain a copy of that check to prove that I made a payment  No so with online banking, they have an electronic trail and they will make contact with your “payees” should your payment go missing.  I recently had an experience in which my bank caught one of my service providers holding a payment until it generated a late fee before crediting my account.  I ditched that service provider and got a cheaper plan with a competitor. I canceled my cable/dish subscription.  Most households spend over a thousand bucks a year on those subscription services.  You would have to become a zombie in front of the TV in order to get enough “value” to justify that cost.  I watch TV on the Internet instead.  Fewer commercials, less time to watch each show and I only watch what I want to watch when I want to watch it.  I reuse ziploc bags and aluminum foil.  As a result I only buy those items once a year.  I buy Amway SA8 laundry detergent.  It is super concentrated, eco-friendly, hypoallergenic, dissolves completely in the wash, gets my clothes clean and I only have to buy it once a year. Even though rates of return for savings are ghastly at all banks, I use virtual banks for my savings.  They offer higher rates and are FDIC insured.  I use a frequent flier credit card for charges I would make anyway, utilities, groceries and gas, and redeem the points for flights.   Since 2005 I have saved $1000 per year in air fare.  I negotiate big ticket items.  My money is very patient, I don’t have to spend it right away and, as a result, before making a purchase I ask, “can you do any better?” If I am shopping online and find an item I like, I always Google that item to see if I can find it cheaper. I almost always can.  I keep a “most wanted” list to curb impulse buying.  I am storing my DVDs and CDs in iTunes so that I can donate the hard copies and continue to de-clutter my life.  We have a garden and eat at home.  We go out maybe 4 times a month.  I don’t slavishly shop at Wal-Mart assuming I am getting the best quality for the deal.   I shop at Wal-Mart, Safeway and the local food co-op.  I had an electrician install a digital, programmable thermostat.  It has saved 20% on my heating costs.  I hire professionals to do work that I have either no business doing or work that isn’t in my best interest to do.  I am a big “do it your selfer”. But being a DIYer can put you in a time and financial hole as deep and as wide as the Grand Canyon (okay that is hyperbole but you get the point).  The trick is to figure out the tasks I should do and the ones I should not do.  Let’s go back to the thermostat.  I had it for 6 months before it was finally installed.  The instructions and the wiring that went with it were very complicated and carried dire warnings that a wiring mistake could result in furnace damage.  I added the installation onto a planned project that required an electrician, the thermostat got installed and I am saving money which wouldn’t have been the case if I had clung to my DIY tendencies.

I would love to know about those cheap things you do!

Please comment.

Yesterday I Tweeted an article that I found on the NY Times site:  Placing the Blame as Students are Buried in Debt the article is shocking.  A couple of weeks ago I asked, should parents pay for their child’s education? The post generated a number of comments.  The NY Times article has generated over 400 comments mostly laying blame on the student and her family for amassing $100K in debt so that the student, Courtney Munna, could get an undergraduate degree in women’s studies and religion.  She now works as a photographer’s assistant in San Francisco.

I believe we miss the point when we blame the Munna’s and people like them who accrue debts they cannot repay.  Blame does not help and it certainly does not get the debts re-payed.  It is scary that the Munna’s are in the position they are in.  It is scarier that they are not alone and it scarier still that unsecured student loan debt is being securitized and sold as bonds similar to subprime mortgage loans.  I have spoken to people who bought homes during the last boom.  Mortgage payments are 40 and 50% of gross income.  When I share that the age old rule in mortgage finance, that mortgage debt should not be more than 28% of gross income and total debt no more than 33% of gross income, I usually get incredulous looks back.

The problem is the lack of financial education and financial literacy.  Back in 2001 my mother gave a series of lectures for the Georgia Consortium of Financial Literacy.  Her topic, the growing debt burden of undergraduate students.

In the mid 1990s Robert Kiyosaki self-published Rich Dad, Poor Dad.  He made three bold claims that have gotten him labeled as a heretic or a lunatic:

1)  that the nature of the economy has changed from a manufacturing base with old age pension ideas to an information base with workers responsible for their retirements.

2) that because of the lack of financial education that many average Americans were destined to lose fortunes in the stock market.

3) that a home is not an asset.

Financial literacy refers to an individual’s ability to make informed judgements and effective decisions about the use and management of their money (from Wikipedia).  The United States is one of four nations who have nation wide, government- sponsored financial literacy programs and offers a free 162 page financial literacy document: Taking Ownership of the Future. The national website dedicated to financial literacy is mymoney.gov.  April is financial literacy month.

With all of these efforts what happened?  Subprime lending accelerated in the 1990s.  The US government put in place financial literacy programs in 2003 and you can’t swing a dead cat in a bookstore without hitting a personal finance book. So what has happened?  I suppose I could launch into the fact that wages have actually decreased for middle income Americans over the past decade.  I could decry the availability of easy credit.  I could decry the apparent widening gulf between rich and poor in America or that CEO incomes, traditionally about 50 times median household income are now about 500 times median household income.  But that is not it either.  I got my first credit card when I was 22 and had no job, that was over 20 years ago.  Unsecured credit has been easy to come by.  No, somewhere in the last 30 years we seem to have lost the ability to say to ourselves that we don’t have the funds to pay for that trip.  Or that item X is something we should save for.  It has become unfashionable to save and this has occurred at every level from our government on down.  I cannot tell you the number of books published in the last two years that discuss ways to trick people into saving.  Our national consciousness has simply shifted away from saving and toward spending and now it needs to shift back.  Recognizing that it is important to start somewhere, Bank of America has a keep the change program in which they round your debit purchases to the nearest dollar and transfer the change to a no-fee savings account.  Considering that I began saving as an adult by saving the resultant change whenever I broke a dollar into my home piggy bank, Bank of America’s program is probably a good idea.  The B of A program is based on a two simple premises, that people in general don’t value their change which is why it ends up under the cushions on the couch or under the floor mats in the car and that saving must be easy in order for people to do it.  There is a whole school of thought that saving has to be automatic in order for people to do it.  I don’t know that I believe that.  My savings plans are automatic now, but they did not start out that way. Once I got into the habit of saving, I took pleasure in manually moving the money from my checking into my savings account.  For me, I got into the saving habit because I could no longer tolerate the crushing burden of debt.  Surely more Americans feel that way.  So what will it take for us to return to a culture of saving.?

Please comment.

Master, don’t take it to him
He wants the precious.
Always he is looking for it.
And the precious is wanting to go back to him…
But we mustn’t let him have it
Gollum

It’s a livin’ thing
It’s a terrible thing to lose
It’s a given thing
It’s a terrible thing to lose
Electric Light Orchestra

The importance of money
flows from it being a link between
the present and the future.
John Maynard Keynes

Money is a living thing. That it seems to have a mind of its own is why so many of us seem to have such poor control over it. The hot stock tip that crashes, the totaled car that you still owe on, the feeling that when you get ahead just a little bit, someone steps up to claim your surplus. Money like the ring of lore truly seems to come and go where it pleases providing the link in our lives between planning for today and planning for the future. Who plans for the future without consideration of money? Money seems to hang out with some people and flee the company of others. The presence of money can create poverty in the lives of those who have it and the absence of money can create wealth in the lives of those who know how to live richly. What is money then, is it want and desire does it feel or is money simply neutral responding to the feelings and emotions of those who handle it?. In my post The Money Shot I talk about an amusing and fun exercise that I did to forge a conscious relationship with my money. The truth is that until my Walmart epiphany I had engaged in behaviors that told money that I had no respect for it. I spent what I did not have on things that I ultimately did not remember buying. Many of the items that I did buy were consumed, given away unused or damaged beyond repair when my home flooded. I had lost the connection, if I ever had it, between me, my work product, the money that work product created and the items that money could buy. I never asked myself, while I was going crazy, if the items I bought were worthy of my work. I finally figured out that money hangs out with people who have the following characteristics. 1) generosity of spirit (by this I don’t mean giving money to constantly broke relatives or to people who have proven that they cannot handle money. I mean giving money to situations and charities in which you know the money will be used in line with your priorities). If feeding the poor is important to you then generosity of spirit may mean that you donate your time and money to the local soup kitchen. 2) a purpose for money. Money has specific goals in their lives 3) respect for money. You know where your money is going and why 4) value for money. By this I don’t mean that people understand that money is valuable. What I mean that people who create and hang onto money understand that money follows value. See it is not just enough to pay off debt. Once the debt is gone, or better yet while you are paying off the debt, you have to develop a clear philosophy with respect to money or the same financial challenges that led to the debt will manifest in a new form. I have been out of short term debt and on solid financial footing for a over a decade now, but like the alcoholic who is one drink away from falling off the wagon, I am occasionally afraid that I will overspend. I simply have to trust that the financial habits and philosophies that I have developed over the past 13 years and my on-going financial education will see me through as I forge my link from now to the future.

My photo gallery is the group of rotating photos that appears on the right side of this blog. One of those photos is a money shot. A shot of me palming some cash. $10,000 to be exact. Worried what people would think, I was reluctant to include the photo in my gallery. But there is a story there. One worthy of a blog exploring the realm of personal finance. The year was 2003. I had already retired about $80,000 in debt and had begun saving money. My money, your money, my debt, your debt are nothing but numbers on a piece of paper. I do not believe this is an accident. Financial institutions and popular media exist to separate us from the reality of our money. Witness the Visa card commercial popular at Christmas. The toy store is humming with purchases, the cash register ringing, when someone has the audacity to present to the register with cash rather than plastic. Immediately the festive atmosphere in the store grinds to a halt as someone is forced to make change. The customer actually apologizes for paying in cash. Good riddance to that customer and the store is abuzz again as people swipe their cards. The value of the transactions is never shown, people just mindlessly swipe their cards. Of course the hangover that inevitably follows that level of frenetic spending is never shown, just happy people swiping their cards. In 2003, I had retired some serious debt and, for the first time in my life, was saving money. I never wanted to go back to the debt nightmare that it had taken years to get in and out of. I knew I had to get a hold, literally of some of my money. To touch it, to feel it. Then it would be real and I’d have a visual when I sought to spend it. So I called my bank manager, Tom, and asked for some time in the vault. Tom used to work in an outpatient mental health facility and he told me he was willing to do anything within reason to help me feel comfortable with my money. But why the vault? Tom was a bit concerned. I told him that I wanted some time in the vault because that was where my money was. Tom agreed and we agreed on a date and a time. I went to the bank at the designated time, Tom met me with a withdrawal slip, and asked me to fill in the amount of $9500 dollars in order to avoid triggering a Patriot Act alert. I got the remaining $500 dollars from the ATM. I then sat in a private room just outside the vault and played with my money. I threw it in the air (so that it was raining money). I spread it around the floor (so that I was sitting in money). I waived it under my nose (so that I could smell the money). I took pictures. I never knew who was on the $100 dollar bill until that afternoon at the bank. Now I will never forget. When I finally emerged from the room, I ran into Tom. Literally. He was about to knock, apparently I concerned several people and they thought Tom should look for me. It was just me and Benjamen in a closed room. What could go wrong? The town that I live in is very dependent on a cash economy. It is not uncommon for Tom to see cash deposits of 5 and 6 figures. Many people here are connected with their cash. When it runs out, their lives stop. Through years of financial mis-education, I was utterly disconnected from my money. The ones followed by zeroes on my credit card statement that just kept multiplying until I was left with the hang over. Now I have a visual, the plastic that comes out of my wallet corresponds to a set amount in my bank account which in turn corresponds to the wad of cash I held in my hand that day. That exercise one summer day in 2003 may have seemed silly to those who watched me, it certainly was fun and it lead to a level of consciousness I have about my money. I now spend consciously. Conscious spending, isn’t that really the beginning of freedom and a healthy relationship with money?

It was 1997, June, and I had just come to the realization that I was drowning in debt.  I had a pretty morbid thought when I was driving home one day after work, that I was better off dead.  At least the life insurance I had would be enough to cover my debts, there would have been little left for my loved ones but my debts would be handled. In June 1997, I decided to get my financial house in order.  I sat down with myself, pulled out the credit statements and started to figure out what it would take to tackle that debt.
I realized that I had to cancel some cards, renegotiate rates and renegotiate some services in order to free up an amount of money I could reliably apply to my debt.  Getting a raise in the short term was not possible,  I had to work with what I had.  Some of my debt, I had deferred allowing interest to capitalize, meaning that I owed more on some debt than the original borrowed amount so I had to call various lenders to see what I could do to address the capitalized interest.  This was my plan: cancel all but 2 cards, consolidate the consumer debt between those two cards, park one card carry the other for emergencies, then commit a set amount to apply against the parked card. I could not use the card that I continued to carry except for an emergency.  So my first money rule was that if I did not have the cash to make a purchase, I could not make the purchase.  I then contacted my student loan company.  The only way to address the capitalized interest was to pay it.  I think in pictures so putting the debt into a spread sheet was of no help to me.  Instead I drew four lines of different lengths on a piece of paper.  Each line had a dollar value assigned to it.  Two lines were devoted to the cards, one line to the student loan and the other line to the car. I had decided to go luxury as befitted my station.  Silly me, the car payment was basically a mortgage payment.  At one end of the line was the date I was to start making debt payments at the other end was the projected date the loan would be paid. My lines looked like this:

Start Date————————————————————-End Date

Start Date————————————————————End Date

Start Date———————————————————–End Date

Start Date———————————————————-End Date

So where does WalMart come in?  Any plan will face a challenge not long after implementation.  My challenge came in the WalMart camera department.  My partner and I had a habit of taking pictures everywhere we went.  Both of our cameras went dead leaving us to buy box cameras every time we traveled.  I decided to buy a new camera while I was in WalMart.  The camera cost $320 dollars.  Because of money rule number 1, I couldn’t put the camera on a card and I didn’t have the cash in my account to pay for it.  I remember standing in the camera department when the realization that I made a six-figure income and could not afford a &$%#@!$ camera dawned on me.  I realized that I was broke.  That image of me standing in the camera department unable to make a desired purchase and that feeling of failure and helplessness have sustained me over the last decade as I vastly improved my financial outlook.  The epiphany in WalMart lead to money rule number 2: that anyone can be broke at any income level.  Eight months into my debt elimination plan, I decided to begin saving.  I saved $50 dollars every two weeks.  There was a time when I would have thought that $50 dollars was too little to save.  Now I realize that no amount is too small.  Money rule number 3:  Any amount of money can become the basis to start a savings plan.  I was able to gradually increase my bi-weekly savings until I had saved $5000 dollars.  I was tempted to use all of that money to pay off one of my credit cards.  By this point, my credit card debt had been reduced in half.  Applying the 5K toward that debt would not have retired the debt but it would have knocked the remaining balance down significantly.  I called a friend who was an investment banker at the time and she asked me how often I had come across lump sums of money.  I had to admit not very often.  She then asked me how long it would take to retire the credit card debt if I did not apply the funds.  If I stayed on pace, the credit card debt would have been paid within 18 months.  We decided that I should hold on to my savings and stick with my payment schedule.  From this I derived money rule number 4:  That there is an opportunity cost associated with each expenditure of a lump sum of capital therefore lump sums should be tapped for emergencies only or invested so that their value grows.  With these 4 money rules, I retired $80,000 dollars in debt between June 1997 and April 2001.   With my debts driving me, I was forever going to personnel and my supervisors seeking a raise.  When I began to feel better about my financial situation, raises found me.  Over the years I have thought often of that evening spent in WalMart, the personal humiliation that I felt and the desire never to feel that way again.

What are your debt reduction story and your money rules? please comment.

Guest Post by Jonny Pean

Debt reduction can give you financial relief and can help you to save thousand of dollars. As long as you are in debt, there is little you can save. This is because major part of your paycheck goes towards making payment for your monthly financial obligations. It may include payments for your car loan, student loan, mortgage, credit card debts etc. However, if you are able to get rid of your debts, you can keep aside the amount you currently pay for your debt payments for building an emergency fund. Payment for mortgage may continue for a period of 15 to 30 years but the other debts can be wrapped up faster.

In order to do away with your debts, there are few measures you need to take. If you want your finances to get organized, you have to bring in some changes in the way you handle your money.

• Budget your finances and curb unnecessary expenses
The most important factor is identifying the cause that is making you fall behind on payments. If you find that there are few expenses that can be deferred for a later period, put it off for now. Try to prioritize your expenses. You will be able to save a lot of cash.

• Use cash and not credit cards
Excessive use of credit cards can land you in serious trouble. If you are using credit cards frequently, you may not be aware of the changing payment policies and credit limits and continue using it randomly. This may cause a lot of confusion as a small change in the payment policy can affect your payments to a great extent. So, if you are using plastic money, use it less frequently and be well informed about the changes that are taking place in the terms of service.

• Talk to creditors
There are many debt reduction programs you can enroll for if you are planning to get out of debt. You can enroll for the different debt relief programs that are offered by the debt help companies. You can either take professional help in dealing with your creditors or approach creditors on your own. It has been observed that following recession, there are many creditors that are ready to reduce the total amount you owe, reduce interest rates and monthly payments or work out a plan that will enable you to manage debts better.