From the depths of debt to a cash based existence

I’ve got a friend who recently took a vacation. She is going through some of the same financial issues I’m going through these days–working to pay down debt, working to make it through her day to day life by paying cash for things instead of incurring even more debt.

When she was telling me about her fun (and affordable) vacation, I convinced her to write me a blog post about it. She’s a great friend and she said yes without any hesitation at all. She’s one of those friends you can always count on to help you out and we discuss our financial situations regularly, because we trust each other. … "Talking vacations and support groups" continues >

Much of the advice available about designing a debt snowball program for your debt payoff plan revolves around only two main factors: interest rates and amount owed. These are excellent pieces of information to have when you’re laying out your plan, but they can’t be the only factors you take into consideration.

Why aren’t interest rates and amounts owed the most important factors?

First, interest rates and amounts owed do exclusively determine the amount of money you’ll ultimately be paying back. Time is a factor, but not in the same sense that interest rates and money owed are. … "Debt snowball payoff order: How to decide?" continues >

I have to say, nothing ever works out the way I plan it. I won’t say I’m unhappy that it didn’t, but I will say I spent more money on the truck than I’d planned. Here’s the rundown.

We traded in my car for $6,500 (which we had the cash to pay off (about $4400)). We got that trade-in credit against a $12,500 used truck that has about 39,000 miles and is in excellent condition. The reason I’m not all up in arms about the truck with my husband is because I can easily see it as something we can keep longer term, not to mention that we traded in my car for it instead of his. … "Bought a used truck" continues >

I’ve put off posting lately, because of the holidays and other financial issues. Like many people, I probably went overboard at Christmas. I had a budget but I went over. There have also been lots of other things going on in debt-land.

Here are the highlights

1. Spent too much at Christmas and used my Discover card which I intended to pay off in full. I’ll still be able to do that, but it took some serious finagling and a stroke to luck.
2. Intended to refinance my home loan to take advantage of lower interest rates and get 10,000 cash out to pay for a truck we need.
3. Refinanced home loan but got no cash out.
4. Put the family truck up for sale because it can’t haul my RV camper long distances.
5. Prepared tax return so I would know what, if any, cash I could expect to get refunded.
6. Looking for a truck and a way to pay for it that won’t put me back in debt up to my eyeballs.

… "Holiday roundup" continues >

I define debt very simply. Debt is an obligation I have,  to pay something to someone.

Following that definition, I just went into debt again after getting out from under my cell phone contract. I say this because when I sign the contract, I’ve just made an obligation for myself to pay a certain amount of money to Verizon for a certain length of time. It’s a debt and there’s really no other way to look at it. Other than death or other dire disaster, I’m probably not going to be able to get out of paying out that contract. … "Is a cell phone contract debt?" continues >

This past month, my in laws spent one weekend looking for a used car. One particular radio advertisement talked about how low the monthly payment would be on a 2007 model car. When people start talking about low monthly payments and no down payment, I know the loan term is going to be the offsetting factor. Sure enough, the loan term on these used cars would be set at 72 months. That’s 6 years—for a used car! The thing that got them though was finding out that the payment advertised was only applicable if they paid the state sales taxes on the car up front, made a down payment, and had near perfect credit.

Although the salesman claimed their credit put them in a perfect position to get a great deal on financing, their inability to pay the taxes (9.25%) and a down payment meant their monthly payment wouldn’t be as low as the advertised price.

Of course, my in-laws aren’t that easily fooled—and they’re on a fixed income. They passed on the vehicle.

Anyone not quite as strong might have let themselves end up with a loan payment larger than what they wanted or needed. These kinds of advertising tactics are meant to reel you in. Once they have your attention, they’re hoping you’ll have trouble taking control of the situation and walking away when your expectations aren’t met.

My mother-in-law was most insulted when the salespeople came back from calculating the monthly payment after she complained about their deceptive advertising and said something along the lines of “I have good news! We got your payment down to $229.” (The advertised monthly payment was $199.) She had a set number in mind, and she didn’t let the salespeople’s fake enthusiasm at getting her a “lower” payment fool her into making a commitment she didn’t want to make when she set out that morning on her car hunt.

No, my in-laws still haven’t found the vehicle they want and can afford, but they’re taking their time and I have confidence that when they do, they won’t be paying more than they’re comfortable paying.

Avoid spending more than you want

1. Set your price before you go.
2. Stick to your price even if the salespeople try to generate a sense of panic by telling you how time sensitive the deal is, or how you’ll never get this good of a deal again.
3. Be prepared to walk away if the salespeople won’t or can’t meet your price.
4. Walk away if you feel panic or nervousness setting in. It’s for your own good. You should only shop when you’re calm and in control.

It actually feels very good to walk away when you aren’t given what you want. The feeling of power and control can become addictive.

Have you ever walked away from a large purchase, or been convinced to buy something you weren’t sure you wanted? How did you deal with the situation?

Winter will be here only a few months before I have one of my first debts paid off. I’ve been working toward paying off a JCPenney bill.

Back in the spring, I bought a couch. I’d like to claim I paid cash for it, but I can’t. I needed a couch quickly and I took the easy way out. I bought the couch on credit.

I did have sense enough to find a store running a “no interest until June 2009″ deal, so I haven’t paid any interest on the couch. However, the special “no payments” part of the deal almost caught me… I put off starting my monthly payments when I should have, and I’ve ended up having to pay higher monthly amounts to get me to paid off before the “no interest, no payments” period runs out.

I’ll make it in just under the wire. I owe $409.13 and have been paying regularly these days. My hope is to have a little extra left over from Christmas bonuses to pay it down faster (if I even get one with all the financial crises going on right now).

My plan is to take that $50 monthly amount I’m paying and put it toward my car payment. This will effectively start my debt snowball.

Technically, spring is probably when my debt payments are first going to snowball, but I’m thinking of it as having already started. I’ve packing my snowball and I’m getting ready to let it loose down the hill. As soon as that first payment is applied to something else, it will have officially begun to pick up speed.

I have my list of debts, in the order I want to pay them off.

Although many experts suggest either paying off higher interest debts first or debts with the lowest payments, I’ve come up with my own schedule, for my own reasons. For this to be successful, that’s what we all have to do—find something that works for each of us, giving us the most motivation. If you find that you’re more motivated by the thought of saving money you would have ended up paying as interest, by all means, you would want to list your debts in order of highest interest rate to lowest.

My choice of debt payoff order

1. JCPenney (couch) – 0% interest, but raises dramatically if the debt goes past a certain date
2. Auto Loan – 6.9%
3. Camper – 8.25%
4. American Express – 3.9%
5. Student Loan – 3.25%

I chose this schedule because it will get the snowball going the fastest. I already feel tons of motivation at the idea of paying off my car and knowing that payment amount will go toward paying off the camper. It’s exciting to dream about the day when I can actually make it happen.

Do you have a debt payoff schedule? How did you chose to rank your debts? I would love to know.

I got my statement for my 401k balance and the value has gone down enough that my net worth was lower at the end of October than it was the previous month even after paying additional on my debts in October. Since I’ve made that adjustment as of October, my net worth should increase at least two of the next three months. The third month, of course, is when my next 401k statement comes. With the economy like it is, I think it’s likely to go down again—although I sincerely hope not!

If you want to see my Net Worth just look to the right hand column for the NetworthIQ box. It sums up all my debt and assets.

What is net worth?

Net worth is the difference between what you have and what you owe. Doesn’t matter if it’s money or some other thing. I’ll admit, I’m simplifying enormously here, but for the purposes of this blog, that simplification is more than adequate. If you want to get technical, net worth is your total assets minus your total liabilities, and it’s a value determined at a specific point in time. Today’s net worth isn’t likely to be the same as tomorrow’s net worth or next week’s.

Real progress is in the details

Net worth isn’t my preferred way to keep an eye on my financial health. It might be okay for someone who needs to be heavily leveraged to generate income, but with my goal of becoming debt free and living on cash, my net worth isn’t going to be the best way to gauge my progress. I have to keep an eyes on the details.

If I were to have $400,000 in assets and owe $300,000 at the end of November, my net worth would be better than it is today. However, I think I would be farther from my goal than ever because right now, I’m only $183,393 from being debt free but in November I would be $300,000 from being debt free.

How important do you think net worth is and why? I would love to know your opinion.

Just a few months ago, I wouldn’t have had the money to pay for a refrigerator repair of $389.24. Tuesday night, I had to fork over the cash to have the repair done, or I would have been short one refrigerator come Thanksgiving. Not that I’ll be doing a lot of cooking, but I certainly want somewhere to keep the leftovers I’ll be bringing home.

I don’t actually have the money to pay for the repair set aside in cash. I haven’t got that far in my emergency fund. However, I did have money set aside for the taxes and insurance on my home and since they’re not due until January and February, I was able to borrow from myself instead of a credit card company.

I can’t explain how much stress I didn’t have to deal with for that simple fact. I’ll have to spread my repayment to myself out over the next two months, but at least I had the money and I didn’t have to worry about a lack of funds on top of worrying when the repairman was finally going to arrive.

Even though I don’t have everything I needed stashed away, just having some of it stashed away has given me options I wouldn’t have had in this situation otherwise. An emergency fund is about having cash available to tap when you need it.

Sure, it would be ideal to have tons of money put back for every conceivable cash crunch me and my family could ever have to face, but for most of us, that isn’t always feasible.

Just having enough is enough to take away the worries.

I could say I’m changing my ways and will start to save more for my emergency fund before I continue working to pay down my debt, but I won’t lie to you. At the moment, even after having a totally unexpected expense crop up**, I don’t plan to change my ways.

Right now, debt payoff is more important to me.

I think about it like this: every dollar I save in interest is a dollar I can put into my emergency fund later. If I wait to pay off my debt after I’ve saved some more money, I’ll end up spending more on interest and that’s money out of my pocket. I’m willing to take the risk that I’ll have an unexpected expense larger than I can cover with what I’m saving for other expenses.

Increasing my emergency fund is important to me, but it’ll have to wait until I’ve paid off a few more debts first.

**My refrigerator is less than two years old, and I certainly wasn’t expecting it to die on me quite this soon—but I should have known. It’s GE. Bad, bad, decision and I knew better, but the price and features tempted me against my better judgment. GE has never been a reliable brand for me. In the past, I’ve had a dishwasher kill over just after the warranty expired, followed by trouble with a GE range. Now my refrigerator’s main control board went out after only 20 months of use. See the track record there?

I asked the repairman for advice on which brands had the fewest repair calls and his answer was simple, if a bit of a sidestep of the original question. Buy the model with the fewest electronic add-ons. They’ll get you every time, he said. If you do buy an appliance with a lot of special features, either be prepared for expensive repairs or buy the extended warranty or service contract.

Good advice, but it came a little too late for me.

I mentioned last week that I would tell you how I created my cash budget. I created the simplest budget I could possibly create, because I wanted something that would work for not only me but my husband. I’ll outline it here. … "Cash budgeting with a simple cash budget" continues >