During my twenties, I accumulated nearly $25,000 in consumer debt. I had a spending problem. With time, I was able to get my spending under control (mostly), but I still owned overwhelming debt. How could I get rid of it?
The personal finance books all suggested the same approach:
- Order your debts from highest interest rate to lowest interest rate.
- Designate a certain amount of money to pay toward debts each month.
- Pay the minimum payment on all debts except the one with the highest interest rate.
- Throw every other penny at the debt with the highest interest rate.
- When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-highest interest rate.
This made perfect sense. By doing this, I would be paying the minimum amount in interest over the long term. The trouble was, my highest-interest rate debt was also my debt with the biggest balance (a fully-maxed $12,000 credit card at 19.8% interest). I'd plug away at this debt for several months at a time, but then give up because it felt like I was never getting anywhere.
I struggled with debt for years. I couldn't get a handle on where my money went. I made a decent wage, but I was always broke! Where did I spend it all? Then I read Your Money or Your Life and heeded the book's advice to "keep track of every cent that comes into or goes out of your life". The results were startling.
What does it mean to keep track of every penny you earn? Your Money or Your Life recommends that you keep a Daily Money Log. This log can take any form.
- a pocket-sized memo book
- an index card (or the hipster PDA)
- an actual PDA
- an appointment book
- a computer text file
- a checkbook register
- personal finance software
- a spreadsheet
The most important thing is to use the log. Every time you get money -- whether it's from a paycheck or a garage sale or picking up change from the ground -- write it down. Every time you spend money — whether it's paying bills or buying coffee or paying bus fare — write it down. Keep track of every penny that enters or leaves your life.
I am not a financial expert. I'm just an average guy who wants to improve his personal finances while helping others to improve theirs. I feel comfortable giving general advice, but sometimes people write with specific questions that can only be answered by a qualified financial professional. Some questions are best answered by a lawyer, an accountant, or a financial planner.
What do I mean by that? How does one find professional help?
To find an answer, I polled three CPAs: my own accountant, my wife's aunt Jenefer, and fellow blogger Brian Brown. The all said the same thing: The best way to find an accountant is by referrals. Don't pick someone blindly from a search engine or via the phonebook. Ask your family and friends for recommendations.
I find used vehicles for sale, often times through Cars.com, and I price them using KBB.com. When I find one that I know is in more demand, with a motivated seller at or below private party pricing, I go look at it and sometimes buy it. Then I drive it for a while for free, and sell it when I'm ready, for more than I bought it for. Then I roll that money into the next vehicle, or sometimes keep a bit for myself.
According to the article, the steps to flipping a car are:
I'm sometimes asked, "Which do you think is more important: saving money or making money?" They're both important, equal factors in the wealth equation:
[WEALTH] = [WHAT YOU EARN] - [WHAT YOU SPEND]
Which is most important to you depends on your current financial situation.
Your job is one of your most important assets. It gives you earning power. It can bring you personal fulfillment. But what happens when you're stuck in a job you hate? Here's the true story of the worst job I ever had.
Unlimited Income Potential
I made some poor choices at the end of my college career; as a result, I graduated without a prospect for work. No matter -- I lived off my credit cards for a few months, basking in the glow of adulthood. Eventually I realized that I needed to find a job.
My father, a life-long salesman, and always a sucker for other salesmen, set me up to meet with an insurance guy who had tried to sell him a policy. We met in a Denny's on the far side of Portland early on a Saturday morning. The guy gave me long, slick pitch, touting the job's "unlimited income potential". He needn't have bothered. I needed work and was dumb enough to think that this was a perfect. I signed up.
I underwent two weeks of training, during which I learned how to sell crappy insurance (though I didn't know it was crappy insurance at the time). I spent two days learning why this was the most marvelous insurance product in the world. I spent another two days role-playing the door-to-door sales technique: I'd pretend to be the salesman and the 55-year-old chainsmoker seated next to me would be the customer. It was so easy! I sold him a policy every time.
I spent a couple more days learning "rebuttals", the magic scripts that would turn a prospect's objections against himself. Our goal was to sell the customer whether he needed the insurance or not. We were to create the need.
Awakening the Giant Within
This training period was life-changing. I had awakened the giant within. I was a new man. I began to cast aside the skin of my existing life and take on that of another:
- I broke up with my fiancee.
- I bought a brand new car. (A car that I could not afford, obviously.)
- I bought a new wardrobe, paying full price at trendy stores.
- I ate out every morning, every noon, and every night.
- I bought a brand-new Super Nintendo and a Gameboy.
In one training session, we were required to cut up magazines to make a collage depicting our goals. I cut out a big photo of a log cabin in the woods and declared, "I'm going to retire a millionaire when I'm thirty." The older folks in the class -- they were all older, and all over thirty -- stared with vacant, hollow eyes as I made my presentation.
That night I went out for a fancy dinner.
After training, I spent a week shadowing my manager (the man who had hired me), watching how door-to-door insurance sales worked in the real world. We drove to rural Oregon (Enterprise, in the far northeastern corner) and set up shop in a motel. That Monday morning, we met for breakfast in a local coffee shop. I bought my manager eggs and coffee. We drove out and began knocking on doors.
At every house, we'd introduce ourselves: "Hi. I'm J.D., and I believe this will interest you also. For only fifty-eight cents a week, should any accident whatsoever require hospital confinement..." and so on. My manager was slick. He signed up three people that first day. He'd made $120!
The next day, it was my turn to try. And suddenly my enthusiasm ran smack into the reality.
I made a trip to Costco to buy business supplies last week. While browsing the software, I spotted the latest version of Quicken. I picked up the box and looked at the list of new features. I felt that urge creep upon me — the urge to spend. "Maybe the Mac version is out, too," I thought. "I should stop by Fry's to check."
Then I thought of the $50 it would cost to upgrade. I thought how Quicken 2004 has served me well for three years. I began to have doubts. "I'll use the 30-day rule," I told myself. "If I still want this next month, I'll buy it."
Get Rich Slowly is the final entrant in JLP's Question-of-the-Day Marathon. There have been many thought-provoking questions over the past month; I hope you've had a chance to contribute at some of the participating sites. My question is:
What Does Money Mean to You?
When I was a boy, my family was poor. Money then meant necessities to me. It was the key to obtaining essentials, especially food and clothing. Sometimes it opened other doors, too: candy, comic books, movies. But mostly it was a means to obtain the things we needed to survive.
When I was a young adult, however, my attitude changed. My father had a successful business venture, so we had more money when I was in high school. I went to a college where I was surrounded by kids from wealthy and successful families. I began to view money as the means whereby I could acquire the luxuries my peers seemed to already have. I acquired a lot of luxuries. I bought anything I wanted: books, computers, video games, gadgets, etc. I bought things even if I didn't have the money.
School's back in session, and with it come life-lessons in money management for students. But personal finance can be easy, even if you're just starting out. You just have to know how it works. All of the following are concepts I wish I had known before heading to college.
Now that you're on your own, you might be tempted to spend money on all the things your parents wouldn't let you have before. Go slow. If you play it smart, you can avoid the sort of money troubles that plague many young adults.
- Join a credit union. Don't just sign up for a random bank giving away t-shirts or frisbees at registration. Track down a credit union in town, or do some research into online banks.
- Don't get a credit card unless you absolutely need one. Don't be a sucker. Those guys sitting behind the sign-up table are not there to help you. They're there to make money.
- Avoid non-academic debt. It might seem like a good idea to put that Xbox on a credit card, but it's not. Focus on developing good money skills with cash. Worry about credit later.
- Save and then splurge. If you decide you must have that Xbox, then save for it. Wait until you can pay cash.
- Pay your bills on time. Basic advice, but it's surprising how many people lose track of things. If you pay your bills as they arrive, you won't have to worry about forgetting them.
Organization and Planning
Some minimal organization will keep your finances in order. Each of these is an important adult financial skill.
Thrift, frugality, and investing are pursuits that cross political, religious, and social boundaries. Regardless of your ideology, sound personal finance habits can help you live a better life.
There seem to be three distinct classes of personal finance books:
- Those with an overt religious-based foundation for thrift. Dave Ramsey bases the ideas in The Total Money Makeover on his Christian faith. Miserly Moms takes its cues from Christianity, too.
- Those espousing a "reactionary" back-to-the-earth philosophy. I'm currently reading Living Simply with Children, which is a great book, but clearly written from a more "liberal" perspective.
- Those that fall somewhere between, or which straddle both camps. This group comprises the bulk of personal finance books. Some, like Your Money or Your Life, manage to simultaneously promote Christian beliefs and a sort of "New Age" philosophy. Others studiously avoid any sort of dogma.
There's nothing wrong with any of these perspectives. They're all good. And they allow authors to bring new ideas and new techniques to the realm of personal finance. In Living Simply with Children, for example, Marie Sherlock talks about raising children with no concept of Christmas. But in Miserly Moms, the Joni McCoy argues that there's a Biblical basis for mothers staying home with their children.