2009 is officially the Year of the Garden (2010 is the Year of the Laying Hen, but that’s for another day).
Of all the plants we set to nurture and grow, the ones I looked forward to the most were the tomato plants.
Had I known that I would start the Tomato Journey the weekend after Mother’s Day, and only a few weeks ago actually enjoy the fruit (or vegetable? it’s debated often) of my labors…I may have never started in the first place. It is inevitably harder to do something where the fruits can’t be enjoyed for some time.
Like getting out of debt.
Or saving for retirement.
Or even growing tomatoes.
The key is to find joy in the journey.
I distinctly remember being very excited about different Victory Stages in the tomato plants’ life:
- Growth. I could see they were growing taller.
- Suckers. I had something to prune, and that was very satisfying.
- Blossoms. This was HUGE. Where there’s a blossom, there will soon be a tomato.
- Tiny tomatoes. Very tiny. But I was still ecstatic.
- Larger green tomatoes. Now it was just a matter of waiting for the color to change.
- Tomato goodness for dinner.
What kind of joy can you find in your journey to pay off your debt? What smaller goals or stages can you point to and feel victorious?
I’m thankful Julie and I don’t have any consumer debt, but I have to be honest that I can’t stand having a mortgage. We’re paying it down as aggressively as we possibly can, and I’ve mentally broken it down into Victory Stages:
< 250,000
< 200,000
< 150,000
< 100,000
< 50,000
< 25,000
< 10,000
< 1,000
= 0
Mentally, I see each of those milestones as significant, in one way or another. Especially the last one.
Your Victory Stages for paying off your debt may look something like this:
- No more Capital One
- < $5,000 on the Visa
- < $1,000 on the Visa
- Visa gone!
- Truck paid off
- < $20,000 on the student loan
Growing tomatoes is easy when compared to some of these other longer journeys that must be taken.
Our tomato season will probably last about four months.
How long will your journey of debt reduction last? One year? Three years? That type of long haul requires that you find joy in the journey.
The most arduous journey of all is setting aside funds for retirement. The process begins (hopefully) when we’re in our twenties and doesn’t end until we retire!
What types of smaller, bite-sized goals can you achieve in regards to your retirement? What points along the way will bring you satisfaction?
These long hauls are tough, that goes without saying. But you can make it if you choose to enjoy the victories, small and large, along the way.
Today is Porter’s 4th Birthday. For two years he’s asked me why I have to go to work. For two years I’ve told him the same thing:
To earn money, so we can buy food and have a place to live.
When he was really little he actually started to leave money out of the picture. I’d say I’m going to work and he’d respond, “to buy food?” And that, my friends, is how the world works. His first exposure to money and he just forgot about it. Food was the important part.
Last year for Christmas he was given a wallet with a five-dollar bill inside. I was amazed, but he actually kept that money in his wallet for the most part. A few times I found it among the toys in their toy box and I’d bring it to him and tell him how important it was that he keep track of his money (you can’t start ‘em too early). His aunt came and visited a few months ago and we headed off to Target because Porter had decided to assign those five dollars a job: buy a toy light saber.
Julie and I went off to do some other Target-errands while Porter and his aunt headed to the toy section. When it came time to checkout I was keenly aware of the entire process. This was his first transaction and I wanted it to hurt when he spent that five dollars. (The total was actually $7.50 and I made up the difference – a moment of weakness perhaps).
I made sure Porter handed the cashier the five dollars, and waited with baited breath to see his signs of hesitation, perhaps a furrowed brow and a longing look at his wilted piece of currency.
Nope. He handed it to her so fast and didn’t blink an eye. Money was a means to an end (end = light saber).
I used my new found knowledge a few weeks later when I came home from gathering food and was told that the basement apartment below us was now dealing with a broken window, compliments of Porter’s (awesome) ability to huck anything he can heft further than kids twice his age.
I didn’t so much care about the broken window, or even really about the money it would cost. I did want to teach Porter a lesson about what this loss would mean. I sat him down and told him that because it was going to cost money to replace the window, we wouldn’t be able to buy a Wii. His eyes got big and he got the lesson. The Mecham Pie is finite buddy, and you just ate a slice.
[We still haven't purchased a Wii even though I still really want one for, you know, Dad-Son bonding time and things like that. Porter still mentions the fact that we don't have a Wii because he broke the window. The lesson that just keeps on teaching!]
For Porter, the End was the Wii and we didn’t have the Means because he had broken a window.
As an adult with these little dependents running all around me, my Ends are different. Or at least they should be. And I suppose that is where the lesson lies.
This list is not exclusive, but as an adult, your Ends should include:
An Emergency Fund – Guys, give your wife a break and let her have a bit of breathing room! She’ll thank you for it.
Savings for Retirement – Don’t depend on anyone for your retirement except your own ingenuity, creativity, and sweat.
Minimal (or no) Debt Load – Pay off all of your debt as fast as you can and reclaim all of the time, sweat, thought, stress, and tears that create that precious income.
A kid gets bright-eyed with the prospect of spending $5 on a light saber. A guy gets bright-eyed with the prospect of spending $500 on a “modest” gas grill (the one that really caught my eye yesterday was over $900 though – yeah right!). Does the same guy get excited about throwing $500 toward unsecured debt? Or stashing $300 in his emergency fund?
At some point, the earlier the better, your Ends have to change. You’re no longer a kid. For Porter, Money equals things. For you, an adult, Money should equal Security and Peace.
My father is also a financial advisor. About 12 years ago he had a couple in their early thirties come into his office. They owned a business and were now at the point where they wanted to start saving and planning for their future. They were in the process of finding a financial advisor that they felt good about and had interviewed several before they came to my dad.
They spent a fair amount of time interviewing my father and he, in turn, found out as much as he could about them. At the end of the meeting, as they were about to leave, the wife asked my dad one last question: “Are we crazy?”
My father asked what she meant and she replied with something like the following: We are in our early thirties. We own a successful business and make a great income. We have every indication that that income will only improve. And yet, we don’t have a lot to show for it. Our friends are about the same age and make the same amount of money, or even less. And yet so many of them look like they are doing so much better. They have bigger houses, drive nicer cars, and go on nice vacations. They look at us and wonder why we don’t do the same. But we know that they are going into debt for all of this stuff and we don’t want to. We are debt free and saving, but sometimes it is hard to see all of the stuff that we are missing. My dad smiled and only said, “Ask me that question again in ten years.”
About two years ago this same couple came into our office to review their financial plan and investments. At the end of the meeting my dad reminded her of their conversation the first time that they met and of her question. Then he said, “So, are you crazy?” They smiled big and laughed. They were probably still smiling as they drove off in their Corvette.
You see, they had just reviewed their portfolio of well over $1 million in assets (in their early 40’s), not including the business. They still had no debt and had all of the disposable income that they needed. At the same time, their friends were in about the same circumstances that they had been in 10 years earlier. I guess it all depends on how you define crazy. If “crazy” means seeing the world differently and acting differently than the average person then I would say that they definitely are crazy, by that definition. Oh that the rest of the world were crazy too!
Soon after this meeting the housing crunch was becoming a real issue. This couple’s business is building spec. homes and selling them. When the Real Estate market came to a screeching halt, so did their income from home sales. However, even in their business they had not used debt. So, while their homes sat on the market and didn’t sell, they also had no payments to make on those homes as they would have if they had used debt. In their personal lives they had no debt as well. This meant that their necessary monthly expenses were minimal, and their supply of cash to get them through this hard time was plentiful. All of this while many of their competitors are going out of business or getting night jobs to stay afloat.
So, who is crazy? In this case the definition, in my mind, changes: Almost everyone in the world is crazy except a select few. Getting out of debt is the only sane thing to do!
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
Now I’m not setting out here to write this little bit and make anyone feel dumb. Well, not really. This is really more of a confession because man did I do a bunch of dumb things during this past week. In order to save at least a little bit of face, I’ll just highlight a few. Hopefully though, my point will be driven home.
If you haven’t yet read about our recent moving drama, that can give you a sense into what exactly happened — the original bit of snow for my Dumb Snowball.
You’ve probably also heard of the debt snowball by now, where you pay only the minimums on everything but your target debt. When the target debt is paid off, you apply its minimums and any extra you were applying toward target debt number two. You repeat that “snowballing” process until all of your debts are paid off. The secret, of course, is intensity.
Well, this last week I discovered the “Dumb” Snowball. Basically, one thing happens to knock you financially off-balance, and the snowball effect kicks in where you proceed to do one dumb thing after another.
Last Monday our trusty Chevy Prizm died. And thus began my series of dumb mistakes. Being somewhat worried, having my wife and two little boys on the side of the road, I failed to remember that we have roadside service. We pay for that just in case things like this happen. Well, the tow truck cost $200. We can probably get that reimbursed through our insurance, but until we do, we’re out $200.
We rented our car from the airport where they have huge fees. There was one rental company that would let me do a long-distance drive with a car not from the airport but they were a few dollars more expensive. I chose the airport location at a rate of $80 a day. That wasn’t so bad. The mistake came when we failed to switch that car for a cheaper one for several days. That mistake alone probably cost us $150.
I forgot to fill up the $80/day rental before returning it. That cost us $40.
To add insult to injury, there is a gas station literally 30 seconds from the rental drop-off location.
Because I chose to save a few dollars and went with an airport rental I (1) had a harder time getting to the DFW airport to make the switch to a cheaper car and (2) still had to rent from the airport again (with their huge taxes) once I did get the cheaper car. That meant I was paying more and had to drive back to the airport to finally drop it off.
I guess this is more than just a few of my mistakes (but certainly not all of them). These all took place in less than a week.
There are two things that really scare me about the position we were in. I wasn’t worried about us financially because of our emergency fund (for just these types of situations) but I was worried about these two other things:
Being in these situations is scary though! Psychologically, you feel as if your financial house is tumbling down around you. Little do you realize that the large bulk of that feeling is purely a figment of your imagination, that things will work out, and that you’ll come out smarter and more savvy. A bit more ready for the next crises.
In the thick of an emergency event? Take a few deep breaths. Go for a run. Lift a few weights. And above all, don’t succumb to the Dumb Snowball. It’s a costly ride!
We’ll be in the market for our first home in the next year or so. For that reason, my mind has been on credit scores quite a bit lately. I don’t want to pay more than I have to for our mortgage (planning on a 15-year fixed, if you were wondering).
I found this article on MSN direct, and pretty informative and thought I’d pass on a summary of it to YNAB readers.
There are a few things one can easily do to optimize a credit score. However, as I’ve mentioned before, we shouldn’t obsess about it. Time may be better spent reading and learning more, networking, starting a side business, etc.
I found the breakdown of variables in the credit score extremely useful:
| Variable | Weight |
| Payment History | 35% |
| Length of Credit History | 15% |
| New Credit | 10% |
| Types of Credit Used | 10% |
| Debt | 30% |
As mentioned in the article, it doesn’t matter how much income you make. (Though the amount of credit you’re given does, to an extent, depend on your income. A higher credit limit will lower your utilization and thus, raise your credit score).
It’s smart to monitor your credit score every four months from one of the three bureaus (Equifax, Experian, and Transunion). When you stagger checking your credit report and score, you get to see what it’s looking like over the course of a year, instead of just at one time. This will help protect you further from identity theft, mistakes, etc. You can see the scores that lenders most likely see by going to myfico.
And finally, from the article, a couple of (fairly obvious) things you can do to make sure your credit score is maximized:
Keep in mind that you should probably not be using credit cards if you can’t answer yes to my six requirements before using a credit card.
Please no.
Wayne is asking whether he and his wife should put their 7-year old son on their credit card account as an authorized user…
No…
Dr. Don (who has a slew of letters after his name) does get to the right answer, but does it in a very roundabout way.
The take-away from the answer is here:
The pervasive use of personal credit histories to make inferences on employment, renting and insurance decisions makes managing your credit score an important aspect of financial management, but it’s easy to get too wrapped up in managing your credit score
It’s tough that it can now determine so many things – so you want to make sure it’s solid – but what else could you maybe focus on? Are there things that just might pay higher dividends in the future (and are knowns verses the unknown aspect of ‘managing’ the answer to some equation to which you don’t have access)? These are in no particular order.
That’s just a list off the top of my head. But let’s all admit it that it just doesn’t make sense to obsess over your credit score. Sure, get a free credit report every year to make sure everything’s okay, but don’t get too stressed about it. And certainly don’t worry about 7-year old Junior’s credit score.
Sheesh. How’s his t-ball team doing?
Read the entire article here (may require a WSJ membership)
The title of this article in the Wall Street Journal is extremely misleading. You have to love hearing from the creditors’ perspective though. Apparently, in the past when “interest rates crept up…fewer cardholders could afford to pay down balances.” Richard Srednicki, who runs the CC business at J.P. Morgan Chase & Co. had this to say (you’ll love this):
“It is a tougher business if payment rates continue to stay up and consumers continue to pay off more. It’s something we’ve got to understand and work at.” (emphasis added)
You’ve got to love that huh? Straight from the snakes mouth. They need to work on extracting more money from you.
Here’s the disconcerting part about the article though. Consumers aren’t really paying off their balances. They’re just shuffling them:
“Although consumers are using plastic for more of their daily purchases, they are giving card issuers fits by juggling their debts more shrewdly…and in recent years, as real-estate values soared and mortgage rates fell sharply, more consumers wiped out credit-card debts altogether by borrowing against their homes.”
Wonderful. Let’s all just cross our fingers, knock on wood, and pray that those who did consolidate credit card debt with home equity vowed they would never use credit cards irresponsibly again.
The Journal does redeem itself a bit further in the article to give us the real dismal picture of the American consumer’s situation:
“American consumers have not curbed their appetites for borrowing. During the fourth quarter, 13.86% of disposable personal income of Americans was consumed by debt payments of all kinds, up from 12.77% five years earlier.”
If you’ve read much over here at YouNeedABudget.com you’ve realized that I hate credit card debt. Do I hate credit cards? Those inanimate plastic things? No. Do I hate the marketing tactics used by the credit card companies? Yeah. Do I use a credit card? Yep. But only because I follow all five of these rules:
So how does a snake cope with falling balances (falling profits)?
“[The Snakes] are trying to replace lost interest revenue by increasing late-payment fees and raising interest rates for customers unable to pay their bills in full.“
Now doesn’t that just make you feel all warm and fuzzy inside? If you’re a customer that’s maybe gotten in over your head, the Snakes are going to raise the interest rate they charge you to make up for the lost interest revenue experienced with other cardholders.
What’s in your wallet? A backstabbing snake.
There was a man who was looking for a stagecoach driver that could transfer his belongings quite a distance. The man had three drivers approach him for the job. He asked only one question of each of the drivers:
“How close can you drive your stagecoach to the edge of a ravine without going over?”
The first man answered confidently, “I can bring the wagon wheel within one foot of the edge, and you will be safe.”
The man let the second driver in.
“How close can you drive your stagecoach to the edge of a ravine without going over?”
The second driver answered confidently, “I can bring the wagon wheel within six inches of the edge, and you will be safe.”
The man let the third driver in.
“How close can you drive your stagecoach to the edge of a ravine without going over?”
The third driver answered confidently, “I don’t know. Whenever I drive a stagecoach, I stay as far from the edge as possible.”
And so it is with…DEBT. Yes, show your sophistication and prowess you man of wit and leverage. Show us how you can maximize your return on equity through sophisticated and complicated borrowings. Show us how to get real estate with no money down. Show us how to get the home of our dreams far before we can truly afford it. Please, show us your wisdom, oh Icon of Interest.
Please don’t.
Be that third driver when it comes to your finances. These are your family finances we’re talking about here. When you take risks, take calculated risks with money you can afford to lose. Sure, be a (calculated) risk-taker, a go-getter, a visionary, but do it with prudence, wisdom, and patience when it comes to the state of your personal finances.
There’s been lots of debate about the best way to pay off your debt. You want to reduce your debt, so you embark on a journey to find the best way to do it. What you find is a bunch of people talking about all of these different approaches to lining up your debts before you begin killing the bloodsuckers off.
The agreed upon method is called the debt snowball by most. You pay your minimums on every debt. On the ‘first’ debt you pay any extra you can. Once the ‘first’ is paid off, it drops off the list and a new ‘first’ is born (a firstborn? no…). You take all of the money you were paying on the first first, and pay it on the second first (this includes the minimum and the extra). Once the second first is paid off, you have a new first, which is the third first, replacing the second first, and first first (twice removed). Your third first is now getting the first and second firsts’ minimums and the extra. Basically it’s getting first3 type treatment. Your third first is picking up steam. Not to be outdone, once your third first is paid off, you apply its extra, along with the first first and second first, to the fourth first. You repeat this process untili your last first is paid off.
Not only have you paid off your debt, you’ve also brought to pass a biblical prophesy:
And the last shall be first, and the first shall be last.
But I know you have a burning question inside. How do I know what the first first is? Well, that’s the debate I mentioned above. How do you order it so you’re out of debt as fast as possible?
Well, silly, of course you take the smallest balance and make it first. Wait – no. Take the highest rate as the first, with the lowest rate being the last to be first. Mathematically that makes perfect sense. Some people have a much more effective (read: complicated) method (whatever works for you works for you) to help them reduce their debt.
Oh, wait. I forgot another method:
this approach is based on the ratio of the outstanding balance to the minimum amount due. Divide the latter into the former, and concentrate your payments on the debt with the lowest resulting value.
The first first is determed by a ratio that gives you full guidance into the most effective debt reduction strategy.
Feel like declaring bankruptcy yet?
The YNAB plan for debt reduction:
(1) Make a plan.
(2) Follow the plan (see #1) with I N T E N S I T Y
If you don’t manage #2, it doesn’t matter how effective #1 is, you’ll never get anywhere.
In the investing world there is a number known as “beta”. Investopedia defines beta as follows:
A measure of a security’s or portfolio’s volatility, or systematic risk, in comparison to the market as a whole. Also known as “beta coefficient.”
Beta is calculated using regression analysis, and you can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta less than 1 means that the security will be less volatile than the market. A beta greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2 it’s theoretically 20% more volatile than the market. (emphasis added)
The other day I was studying something entirely unrelated to personal finance when the concept of beta jumped into my head. Only this time, I wasn’t thinking of beta as relating to a stock, I was thinking of beta as it relates to how to manage your money.
I’m not talking about a fund manager asking himself how to manage your money. I’m talking about you asking yourself that question.
Notice the bolded part of the quote above: “you can think of beta as the tendency of a security’s returns to respond to swings in the market”. Let’s replace a few words and restate it:
You can think of beta as the tendency of your finances to respond to swings in life..
What’s your personal beta?
Nobody (well, almost nobody), wants a personal beta that deviates far from one. It causes stress on the job, at home, in your marriage, family, and other relationships. It can possibly keep you in a job you don’t want, doing something you don’t like, for people who treat you lousy.
The best way to move your personal beta toward one is to set up a personal budget. A budget reduces risk in your personal finances. It smoothes your income and expenses, and decreases the height of the crest and depth of the trough in the financial waves that may bear down upon you.
A budget is a benevolent dictator when it comes to how to manage your money. It is firm when it feels its power being taken from it, but it will also give you some slack – when asked politely.
Did you notice the term “systematic risk” in the definition above? Let’s go into that a bit deeper with another definition:
The risk inherent to the entire market or entire market segment. Also known as “un-diversifiable risk” or “market risk.”
In order to apply this to your personal finance situation, we’ll alter the definition again slightly:
The risk inherent to your finances or entire life. Also known as “un-budgetable risk” or “uncontrollable risk.”
This is a fancy way of saying its the risk of living day to day. It’s the risk that will always be there no matter what you do. You’ll notice as you learn how to manage your money better and better that your personal beta does go down – it gets pretty darn close to one if you really work on it. You’ll notice an improvement from your former, volatile self. This is the unsystematic risk that has declined. It is also sometimes called “specific risk”. And it’s something particular to you, that can be taken care of if you learn how to manage your money a little better – bring things in a little tighter – pay a bit of heed to that benevolent dictator.
However, even the best money managers cannot get rid of risk entirely. No matter how you manage your money, you will still be subjected to the systematic risk of life. You cannot reduce it. You cannot ignore it.
Before you get down on yourself, or maybe even feel a bit depressed about this supposed risky situation that you live in, let me assure you of one thing: Unsystematic risk makes up the large, large, bulk of the stress you may feel when you’ve slacked on your money management. The systematic risk inherent in life is small – tiny – minute. When your personal beta is one, you are feeling good! Life is good! The grass is green! The sky is blue! On your side of the fence!
The budget will show you how to manage your money. It will show you how to reduce your unsystematic risk to nothing. It will get your personal beta down to one. It is the solution to money management stress and worry.
What’s your personal beta?
This is The Wallet. My name is Jesse Mecham, founder of YNAB. Here I focus on the YNAB methodology, software, personal finance, and more.
Take the Tour or download the trial to see what YNAB's all about.
