Whenever I tell anyone that I have liquidated our savings to pay off debt I get the same response: why? I mean, in a risky recessionary environment why would you take accumulated savings and pay down unsecured debt? To become debt free, that's why.
In April, I publicly declared that my financial goal was to become debt free this year, and wipe away the debt that we accumulated when my wife went back to get her second degree and thousands of dollars worth of diagnostic medical tests (only to find out that I am entirely 100% healthy).
On the plus side, after the X-rays, being shot up with radioactive iodine, and fed into a spinning, clacking CT scanner, I've decided that I will never set foot into a hospital again, unless it is to watch my child being born.
So here I am, three months later, our medical debt is entirely paid off, we now own our vehicles free-and-clear, and I'm down to two credit cards. And not a moment too soon.
Crazy, huh? Even financial guru Suze Orman has shifted her financial advice to do exactly opposite of what I am trying to accomplish -- her advice now is to pay the minimum payments on all your credit cards and pile up cash, because of the uncertain future. But soon people who follow her advice will be facing loan-shark interest rates, enhanced fees, and higher minimum payments.
This week, I have received not one, but three letters from financial companies informing me that for a variety of reasons, my credit card rates are being increased. Rate-jacking is now rampant and even "good" customers are getting slammed with arbitrary fees.
Two of my business cards were preemptively closed by their issuers; one was never activated and the other was my OfficeMax corporate card (HSBC closed them all). I received a $15 coupon (off $50 purchase) from OfficeMax as a consolidation prize.
Personally, I have bank fee fatigue; I have developed a permanent aversion to credit. I'm in the process of closing every charge and credit card I can. Credit score be damned. Never again.
Baby Steps
So, I'm three months into the process and our first ever budget was a disaster. This was expected. It takes a few months to get enough practice to make a decent budget.
Check. Before the recession, I had been shopping for a Cessna 172 and got pre-approved for a loan. Now, I will have to save up enough to pay cash. Someday...
- Step 1: build up a $1,000 cash emergency reserve fund.
Check. This was easy since we already had some savings.
- Step 2: Aggressively pay off debt with the "debt snowball" method.
Step 2 involves listing your (non-mortgage) debts from smallest to largest, and aggressively paying each debt off in order. I hate to admit it, but I was stunned when I added up all of our debts -- out of sight, out of mind as they say.
- I paid off and canceled my American Express ONE card and closed the attached savings account.
- I had one card because it offered the best foreign currency conversion rate (not any more, now they are charging a conversion fee plus a 3%). They are also now charging foreign currency conversion fees on transactions handled in U.S. currency and in the United States for foreign companies. Paid off and canceled.
- Another gave two frequent flier miles per dollar. Now the rate is 1 mile per dollar and they refused to waive the $85 annual fee. I canceled my personal and business cards.
The goal is the pay off your debt as fast as possible:
- If you have stocks or savings, liquidate them and use that money to pay off the debt; and
- If you are making contributions for IRAs, 401ks, 529s, or other savings, you stop and use that money to pay off debt; and
- Find additional streams of income to help pay off the debts.
The first smallest debt gets paid first and all other debts get the minimum payment.
- Step 3: build up a 3-6 month emergency fund.
This would be next.
Miscellaneous Financial Tips
- Quicken Online (free) sucks. It is without a doubt one of the worst financial web sites ever created. It is a feature limited service (probably) designed to get you to purchase Intuit's other products. However, after a few days it would not interface with my bank. Now all the transactions are duplicated. The balance appears right but the transactions below are all duplicated. Void checks disappear from the system. Seriously, use mint if you are looking for a free online service (and have no problems with divulging your intimate personal details to a company).
- My wife and I now share a single checkbook. We used to have separate checkbooks, but not any longer. It makes reconciling the accounts so much easier.
- No more online statements. Financial companies save tons of money by not sending you statements in the mail, but pass none of those savings on to you. In fact, if you are anything like me, I'm willing to bet that you've lost one or more of those precious emails saying "your statement is ready," and have gotten hit with a late charge. I guess that is your bonus for "helping the environment." Been there, done that, got the T-shirt. Not anymore, I always request a paper statement.
- I now pay bills the old fashioned way -- with a pen, checks, envelopes and stamps, usually on a Saturday morning. It forces us to go over the bills deliberately and it is a painful enough that it helps renew our commitment to being debt (and bill) free as soon as possible.
Labels: Personal Finance
