Archive for January, 2008

Cash vs Credit and budget creep

Published on January 29, 2008 in Debt and Saving Money. 0 Comments

Have you ever noticed that when you look back on products you once thought were awesome, many of them seem not that great anymore? Often times something you covet (or something you bought) is replaced by something better. It’s not that what was there before is bad, it’s just that by comparison it’s not as great. Computers are a prime example, computing power becomes much cheaper every year. But this is true for many things. For cars, a new model with drastically different features or a redesigned engine with more power can quickly change your opinion of the car you recently loved.

Dsc00779I really started to consider this comparison effect today while reading the tech news. I have been thinking about buying a new digital camera for a few months now, and am slowly saving up enough to purchase a fancy new dSLR. I had been eyeing the Nikon D40, Nikon’s entry level dSLR camera which has steadily been coming down in price. But today I read that Nikon would be releasing the D60 as the new entry level camera. This should be great news for anyone looking to buy a D40, as the price will likely come down. But now I find myself thinking about buying the new, and likely more expensive, D60 instead. It’s not that I don’t like the D40 anymore, the D60 just seems to have enough features to justify its higher price.

But this reasoning can quickly and easily lead to an escalation of costs. The next camera in the lineup is only a few hundred higher and has useful features too, so why not buy that one instead? But what stop there when I could spend just a little bit more and get the much better Nikon D200? Or the D300? Many people can see the faulty line of reasoning here, since you simply set a budget and buy what fits. But when you have a huge credit line, it’s easy for that budget line to creep higher and higher.

This is where savings and buying with cash come in. By saving the money to buy the camera I will buy only as much as I can actually afford, instead of justifying a bigger purchase with credit. This is almost always a good plan for buying anything, from a new car (or a used car) to electronics to clothes.

So how do you manage purchasing new tech gadgets? Is it always cheaper to stay one upgrade cycle behind? Or is it ever worth buying the latest and greatest? And how often is it appropriate to upgrade to something better?

Create an Emergency Fund!

Published on January 28, 2008 in Financial Basics, Money Managemenet and Saving Money. 0 Comments

This post is part of the financial basics series.

Dsc02088Once you’ve created your spending plan, the next step is to start an emergency fund. At this point it doesn’t have to be huge. $1000 is a good goal for for most people, but you may want to adjust that amount upwards if you live in a high cost of living area such as New York or the San Francisco Bay Area like your truly.
Creating an emergency fund is important for a few reasons. Number one, it is important for peace of mind. Number two, it helps to keep you from charging up more debt. For most people living paycheck to paycheck, random unexpected expenses like emergency car repairs can break a budget like nothing else. This is where the emergency fund comes in. Not having to put expenses on a credit card is a great feeling. And peace of mind is a feeling that no material possession can truly replicate.

But where should I keep this money?

If you’re thinking about saving that money in an ordinary bank savings account, stop that thought right now. Most banks offer atrociously low interest rates to their savers. A much better solution is to keep the cash under your mattress. Just kidding. The best option for saving money that you need to remain both liquid and risk-free is to open an online savings account somewhere like ING Direct, Emigrant Direct, or HSBC online. The only online bank that I have used is ING Direct, and I highly recommend them for the ease of opening a new account and their reputation. The other banks do offer slightly higher interest rates, so they may be worth looking into as well.

One side note, many banks have incentives, ING Direct for instance has a referral program that gives you $25 if you open an account with $250 (although there’s no minimum if you don’t have $250). So if you know someone that banks with them, ask for a referral link to see if you can get some extra cash in your account for free.

Opening an online account has two large benefits. The first is the boost from the higher interest rate. Although rates are relatively lower now after the fed rate cut, when rates go back up the online banks are quick to increase the savings rate. The second benefit for many people is having an account that is one step removed from your checking account, meaning you will have to wait a few days before you can use the money. This should help to eliminate at least some of the impulse spending, and will make it harder for you to use it in a non emergency.

Funding

Once you have your spending plan created and online account funded, you need to fund it. Any extra money in your budget should go to funding this account while you make the minimum payments on any debt. Then you can proceed with debt payoff, which we will discuss sometime soon.

Creating an automatic withdrawal into your emergency fund is important. This automation is what will help you reach you financial goals. Two options are to either create an auto debit through the bank, or to have part of your paycheck deposited directly into your savings account. I prefer the later approach since it makes keeping a check register that much easier, since the money never actually goes into or out of my checking account. It is also nice because you don’t feel like you’re losing money every month, since you never see it come into your spending account.

Next Steps

Once you have reached your goal amount, it is time to pay off debt. There are differing opinions on whether you should continue to fund the account while you’re trying to pay debt off. Personally I think it’s worthwhile to keep the auto withdrawal going into your savings. Seeing your money grow is a great feeling.

Once you become debt free, the next step is to build up a true emergency fund. This fund is one that could see you through months of no job or cover you in a major financial crisis. A good rule of thumb is 3-6 months salary. This can take a long time, but it is an important step to become free from money. Once you know that you can sustain your living for half a year without a job, the burden of living paycheck to paycheck becomes smaller. If you want to pursue a new, higher paying job, the opportunity is out there.

So what are you waiting for? Opening an online savings account is the first step. Do it now! Then start making whatever contributions you can to it, and before you know if the money will be there.

Protect and backup your music collection

Published on January 27, 2008 in Organization and Software. 0 Comments

CdPart of being frugal isn’t just saving money on the things you buy. You must also spend some time taking care of the things you own. As many people know, CDs are not perfect, and as they get old they can fall prey to CD ‘rot.’ You may notice that older discs will start to show holes through the label, rendering them unreadable. I will not discuss the legalities of ripping music, but if you own the disc you should legally be able to back it up.There are numerous free programs available to manage your music, and I will cover just a few of them here.

What you will need:

1. A ripping program, such as EAC or iTunes.

2. A large hard drive. For lossless formats estimate about 350 MB per disc. Lossy formats will be much smaller.

3. A burning program to make backup copies.

The ripping program

For PC users, the best program for ripping your CDs is Exact Audio Copy (EAC). EAC has two useful modes, secure and burst, that can be used for different situations. For newer discs or scratch free discs, burst mode will quickly back up your discs. But where EAC really shines is secure mode. When ripping damaged discs, such as those with scratches, secure mode will read and reread a small section of the disc until it gets two matching reads. This drastically reduces the number of errors that you hear on ripped albums, such as pops, cracks, or skips. If EAC cannot get a matching read, it will record an error and the location, then move on to the next section. After the rip is complete, you can review the error report, listen to the section where the error occurred, and determine if the error is audible or not. 95% of the time, you will not hear anything wrong. If you do hear a problem, you can try to repair the disc or consider replacement. EAC also comes with accuraterip, which compares the results of your copy with other users, increasing accuracy even further.

If you are using EAC you will also need to download a compression program (more on that later). The FLAC program can be downloaded here. LAME can be used to rip mp3 files, and can be downloaded here. Once you have downloaded and installed the FLAC or LAME encoder, you can point EAC to the program, and it will automatically compress the music files for you. If intend to use FLAC, keep in mind that many music players, such as the iPod and iTunes, do not support FLAC.

iTunes is also available to both PC and Mac users for ripping their music collections. iTunes is far more simple to use than EAC, but the iTunes error correction setting can’t touch EAC’s secure mode on damaged discs. I have not seen an EAC equivalent available for Macs.

What is compression?

A little background into what you’re actually doing. When you rip a CD to your computer, the program will convert the small pits in the CD into a digital file. At first this will come in as an uncompressed WAV file, which is then compressed. A compression program will create a music file that allows you to listen to your music on your computer. There are two types of compression types to look into, lossless and lossy.Consider a deck of cards. Laying each one side-by-side, face up, will allow you to easily read the data on each card. This is the equivalent of music burned to a disc. Each pit of the CD can easily be read by the CD player and then converted to the sound you hear. Now take that same deck of cards, stack each card on top of each other, and then put them into a small box. The same information is available if you need it, but instead of taking up a large amount of space to lay the cards side-by-side, they now occupy the space of only a small card box. This is essentially how a lossless compression format works. All of the data is available, it just needs to be extracted by a player to be read. Think back to the deck of cards, now in a small box. If you start taking cards out, the amount of space used shrinks. But you also start to lose information that may or may not be important. At first you might get rid of the card with game instructions, then the jokers. Then you might start losing more valuable data. This is how a lossy compression format works. It shrinks the music file further than a lossless file, but at the expense of some data. For a music file, a lossy format gets rid of some of the highs and lows of the music that it thinks you won’t notice. The further you compress (with a lower bit-rate) the more information that is taken out. You have probably already heard of the most popular lossy compression format, mp3.

The most popular lossless compression formats are FLAC and Apple Lossless. The most popular lossy compression formats are mp3 and the newer AAC, which is used by the iTunes music store. EAC users will likely use FLAC for lossless copies, and mp3 for lossy. iTunes users will have to use Apple Lossless for CD quality rips, and can easily use either mp3 or AAC for lossy compression.

What format should I choose?

As stated earlier, iTunes users will have to choose Apple Lossless for lossless backup, and EAC users will have an easier time finding the open-source FLAC encoder. Both create the exact same quality file, as lossless is lossless, and no data is lost. For lossy compression formats, mp3 is ubiquitous, and so that is what I use for my portable player. There is some debate that other formats have higher quality per file size, such as AAC or Ogg Vorbis.

The big decision is whether to use a lossy or lossless format. Since the purpose of this is to make an actual CD quality backup, I highly recommend ripping into a lossless format first. Once you have a lossless file, you will never have to re-rip your music collection again. Hard drive space is relatively cheap, especially in comparison to the cost of buying a replacement disc should the one you have get damaged, lost, or stolen.

Since hard drive space is so cheap, I also recommend making a second lossy copy for use with portable players. Using a smaller file in a portable player will allow you to pack more songs into the limited space available, and will increase the battery life. Portable players are often used in noisy environments, and with cheaper headphones, so it’s unlikely you will notice a huge difference in sound quality.

iTunes makes creating two copies extremely easy. Once a CD is ripped as an Apple Lossless file, make a duplicate of that disc to convert. Then simply choose the songs you want to convert, control-click (right click for PC users) on the selections, and choose to convert to mp3 (or AAC or Apple Lossless, depending on your import choice). If apple lossless is the choice, simply open the options panel, choose your new compression format, and reselect the files to convert. Don’t forget to change it back to Apple Lossless before you import your next CD.

For PC users, a useful program for converting FLAC files into mp3 is foobar. This is also a great lightweight program if you want a greatly customizable music player. You will have to download the LAME encoder (for mp3) and then point foobar to the program the same way you did with EAC. Then simply choose the songs you want to convert, select the destination directory, and convert.

Burning a copy

Again, I won’t discuss the legalities of this, but I feel that if I own an original copy of the album I should be free to create a copy for my own use. Backup CDs are great for the car, where they will see more abuse. You also don’t have to worry about losing the original should they be stolen, and you can put them in a CD case while keeping the original at home with the jewel case and liner notes.

If you are on a PC and chose to use FLAC, a great free burning program is Burrrn. iTunes users can burn straight from iTunes.

Further reading:

EAC

This awesome guide covers pretty much everything, including how to set up the FLAC or LAME encoder, and should get you setup correctly.

Here is another overview on EAC drive settings.

Foobar 2000

The Hydrogen Audio forums have a huge thread on resources for setting up and customizing foobar.

iTunes

For Windows users, Apple has an iTunes setup guide. Mac users will likely have iTunes installed already.

Summary

  • iTunes is a convenient all-in-one solution for both PC and Mac users, and is the easiest (but not necessarily best) solution to use
  • EAC is the best solution for creating backups from damaged discs
  • Foobar and Burrrn can be used on the PC as a complement to EAC for playing and burning FLAC files
  • Lossless codecs like FLAC and Apple Lossless are superior for creating CD quality backup files.
  • Lossy codecs like mp3 and AAC are better when you have limited storage
  • An ideal backup would have lossless copies for archiving and a lossy copy for portable use

If anyone has any questions, or finds other useful resources, please feel free to leave a comment.

Friday Linkfest: Fed Rate Cut Edition

Published on January 26, 2008 in Uncategorized. 0 Comments

In case you’ve been in a cave the past week, the Federal Reserve called an emergency meeting on Tuesday and cut the federal funds rate by 75 basis points, the largest cut since 1990. So how does that affect you as a consumer and investor?

What do I think about the cut?

What is my own take on how this affects you? Unfortunately that is a complex topic which even a professional economist might have difficulty explaining in a short amount of time. Basically the Fed Funds rate is the interest rate that banks charge each other to borrow money. From the fed funds rate a bank’s prime rate is indexed, which is then used as a basis for other lending rates at a bank.

But the relationship between all lending rates isn’t that easy. A bank’s mortgage lending rates are typically tied to longer term rates, like the 10 year treasury rate. Why? Banks rarely keep mortgage loans on their books, choosing instead to sell them off to investors. The average life of a loan is around 10 years due to refinancing and the way that the mortgage backed bonds are created. Furthermore rates may be set based on other index rates, such as LIBOR, or public rates set in the swap market.

What does all of that actually mean?

For the most part, I doubt you are going to see a huge change in interest rates. The big risk for you is to let any salesmen convince you otherwise. Be wary of what interest rates were before and what you’re being offered now.

There is a lot of fear in the market right now (rightfully so, I think), so you will unlikely see a huge change in mortgage rates. This investors who actually own the mortgages are now expecting higher spreads than ever, which translates to higher rates.

If you have an online savings account, you have already seen a jump down in your interest rate. If you still have debt, the gap between what you pay in interest and what you earn from savings is going to grow. So it might be a good idea to focus on paying down any debt now.

Furthermore, the Fed didn’t just cut rates randomly. They called an EMERGENCY meeting, ahead of schedule, and cut their rates a huge amount. This means they are very worried about the state of the economy, and you should be too. Now is not the time to buy a new Lexus because you think interest rates are a tad lower. Keep an eye on your investment portfolios, they are likely to take a big hit in the coming months, if they haven’t already. And now, as always, is a great time to work on putting yourself into a better financial situation by paying off debt and controlling your spending.

Here are a few other posts I found regarding the rate cut:

Trent at The Simple Dollar suggests that there will be a widespread fall in interest rates, both on consumer loans and in savings rates. I have already seen the interest rate on my ING Direct savings account go down. I was happy when rates were going up, but I’m not so happy on the way down. I’m not so sure I agree with the rest of his analysis.

Blueprint for Financial Prosperity considers the refinancing into a 15 year fixed mortgage to save a ton on total interest paid, at the cost of a higher payment.

Wisebread gives a few ideas for taking advantage of the rate cut. Most of the advice involves taking advantage of lower lending rates. As I mentioned before, please be sure you compare rates before you make any big financial decisions.

Further reading:

I have already included a few links regarding the federal funds rate, the prime rate, LIBOR, and the swap market .

If you’re interested Wikipedia has a great (and long) entry on the history of the Federal Reserve system.

If you want to compare interest rates, Bankrate.com is a great resource for following both consumer loan rates as well as savings account and CD rates.

All of that should keep you busy for a while. If you want more, you should seriously consider studying economics!

Taking the first step: Create a spending plan

Published on January 24, 2008 in Financial Basics and Money Managemenet. 0 Comments

This post is part of the Financial Basics series.

To be Free From Money you must be in control of your money

The first step on the road to financial freedom is taking a look at your spending versus your income. If you are spending more than you make, you will be a slave to debt for the rest of your life. Most people hate the word budget, so I’ll use the term “spending plan” instead.

The first step to creating a realistic spending plan is to know where your money is going. Start tracking your expenses for a month or two. Make a list of everything you spend your money on, and then sum up each category for any given month. Spreadsheets are a very useful tool for for tracking spending and then summing up the total. You will probably want to use a few general categories, like groceries or gas for the car. I think it’s a good idea to create a separate category for non-essential spending like dining out so you can start to see how expensive these habits can be. Make a list of your average utility bills like water, electricity, and gas. Find out the MINIMUM payments due on each of your debts and list those individually. Also be sure to think about your average entertainment expenses. If you go clothes shopping every weekend, include it in the budget spending plan. Like to play golf on the weekends? Make sure you figure out the average cost, including green fees, lunches, or the cost to practice at the driving range. Keep going through your spending to get an idea of where your money goes and create whatever groups you need for your spending plan. When you are just starting out this should be a monthly routine until you refine your spending plan to the point of automation.

Now, sum up everything you spend money on, and compare it to your after-tax income. You’re going to fall into one of two camps: either your income is greater than your expenses, or your expenses are greater than your income.

I hope that your spending is less than what you earn. If it’s not, you need to start evaluating your spending habits and think about where you can cut expenses. Play golf once a month instead of once a week. Shop less. Skip the manicure and pedicure every month, or learn to do it at home. Cancel the cable bill. There are numerous resources on the internet to get ideas for cutting expenses, so I won’t go over other ideas in depth here. But reducing the amount of money you spend is the number one thing you must learn to do if you are going to be successful in creating wealth.

Hopefully your spending plan tells you that you are making more money than you spend. If you are at this point, then you are starting on the right foot. Subtract your spending from your after-tax income to get the extra money you have each month. This amount will be the key to financial independence. This is the amount you will use to start your emergency fund. This will be the amount you use to payoff each of your debts one by one. This will be the money you save for yourself to become free from money. If you can, take a look at your spending and see where you can make cuts. The larger the gap between your spending and income the more you will have to keep for yourself and the better off you will be.

Creating a spending plan is not a one-time thing that you do in the beginning and forget about. It will take continuous refinement as you start to get a grip on where your money goes every month. Every time you pay off a debt you will take the minimum payment out of the plan and add it to the free amount. This free amount will in turn grow larger, allowing you to pay off other debts quicker or reach savings goals faster. You also need to remember to follow your spending plan! Of course this sounds obvious, but so many people who create a plan never actually follow it. And whatever you do, please do not fall into the trap of putting “just one thing” on your credit card every month. You might be surprised at how often you actually put stuff on every month. I stopped using credit cards altogether for just this reason, but you may prefer to keep one around for peace of mind only.

So I encourage you to start keeping tabs on where your money goes. It will be an enlightening experience I’m sure, even if you think you know exactly how much you spend every month. Good luck!

Starting the Financial Basics Series

Published on January 22, 2008 in Financial Basics. 0 Comments

finbasics Starting this week I will begin a series called “Financial Basics.” These will be the ideas and habits that I feel are essential to becoming free from money. These will eventually culminate in my Free From Money Blueprint, the basic outline to controlling your money and reaching financial independence. I will try to publish one of these a week, so be on the lookout!

Friday Linkfest

Published on January 18, 2008 in Uncategorized. 0 Comments

Here’s a few of my favorite posts from the week.

In the personal finance sphere:

First up is The Consumerist, with a great article on expensive wine. Apparently increasing the price of a bottle is an easy way to actually make the wine taste better.

2 Million discusses retirement savings with his wife. Earlier in the week they did a values circle together.

No Credit Needed says to quit waiting and get to work on personal finance. There is always going to be obstacles in your way, you need to learn to prepare and roll with the punches as they say.

Free Money Finance gives some suggestions for making extra money. I have been selling stuff we don’t use anymore online, and I think it’s a great idea.
Five Cent Nickel has another reason to use a credit card over a debit card. I want to heed this advice, but I am afraid of getting into trouble again with a credit card.

Lazy Man and Money debates an expensive trip.

Wise Bread reviews Artisan Bread. I’m thinking about picking this book up, I would love to learn some good bread recipes.

Get Rich Slowly compares doing your own taxes vs using a professional.

Blueprint for Financial Prosperity thinks the stimulus package is a bad idea. I know any tax refund (I hope) I receive will either be used to payoff debt or saved for school.

Last up is one of my favorites. My Two Dollars outlines the financial risk of being without health insurance.

In the productivity realm:

Zen Habits quit his day job and will now work from home as a writer.

Lifehacker suggests using Babbel to help learn a foreign language.

Mac OS X Hints tells how to change your spaces in Leopard to better suit you. I haven’t upgraded yet, but I will try this out when I do. Speaking of Leopard, Lifehacker has a few tips as well for editing the hidden settings.

Ode to Apple details switching to NetNewsWire for RSS feeds. I just moved to Google Reader, but I might look into this source as well.

And my favorite blogging/writing tips:

Problogger gives 6 tips for more creative blogging. Another post was 14 OS X applications for bloggers.

Daily Blog Tips has suggestions for marketing with social media sites.

Performancing contrasts the old models of public relations versus the new model of blogging

Understanding compound interest: what they don’t teach you in school.

Published on January 15, 2008 in Debt. 0 Comments

A Wall Street Journal blogger mentions that bad math can lead to costly money mistakes. The mistake is not taking into account the effects of compound interest. 

Compound interest is one of the most powerful ways in which saving and investing can help you reach financial independence. In short, compound interest is interest on interest. Compound interest is when your money works for you, instead of you working for money.Here’s an example of how compound interest works. Suppose you have a $1000 emergency fund in an ING high-yield savings account earning 4% interest annually. After one year you would earn $40 in interest. Easy right? Now suppose you leave it in there for another year, how much interest would your account earn? If you said $41.60 you are correct. You see, the $40 that you earned last year was working for you, and enabled you to gain an additional $1.60. I know it doesn’t sound like much, but suppose you paid off all of your debt and managed to save $100,000. Now your interest will net you $160. And that’s only the second year. Every year you keep that money in there, the amount of compound interest will go up. Also keep in mind that most banks compound interest daily, so you will earn slightly more interest than simple annual interest.

Of course compound interest can work in reverse. If you don’t pay your interest charges in full that amount will be tacked onto the balance, which will lead to higher interest charges and corresponding higher payments. Unfortunately nasty products like negative amortization mortgages make it easy to pay reduced payments and allow interest to accumulate on your loan. Never take one of these loans out, it’s only good for one person, and that’s the one getting paid the extra interest.

One of my biggest questions is why topics like this are not covered more in depth during high school? I know trigonometry is important, as is reading Beowulf and learning geography. But this is practical knowledge that kids will need to know for the rest of their lives. How much more might new workers save for retirement if they knew that their money would make them even more money with no additional work? The author of the study remarks that people don’t ask tough questions because they don’t want to seem naive. I would argue that many people have no clue about how compound interest works and wouldn’t even think to ask about it. But if you’re reading this you now know a little bit more about what compound interest is and how it works. 

 

If you’re interested in the math behind compound interest, check out the Wikipedia entry. Or, if you want a simple calculator to give you an idea of how much an initial lump sum can grow, take a look at MoneyChimp.com’s Compound Interest Calculator. And as always, if you have any questions feel free to contact me at my email Rich@FreeFromMoney.net.

Book Review: The Richest Man In Babylon

Published on January 14, 2008 in Books and Reviews. 0 Comments

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“Gold is reserved for those who know its laws and abide by them.”

 

The Richest Man in Babylon is an older book written by George Clason around 1926.  To give you a real idea of the age of the book, its author served in the Spanish-American War (that was in 1898 for those of you wondering).  The book is not written as one constant story; instead it is a collection of parables the author wrote over a period of time, all assembled into one collection.  Each parable has a theme to it, such as seven cures for a lean purse and the five laws of gold.

The writing style is unique.  Most of the story is told through character dialogue, in a language that I can only describe as Shakespeare without the rhyme.  You will see the words “thou” and “thy” frequently throughout the book.  It took me a few pages to get used to the style, but after that I hardly noticed it.

What I like most about this book is the length.  My copy is only 155 pages, but those pages cover most of the major personal finance lessons with easy to understand stories that still manage to get the message across.

 The Seven Cures for a Lean Purse is the first lesson.  The 7 steps to accumulating money (in my own words):

1.   Pay yourself first

2.   Spend less than you make

3.   Take advantage of compound interest

4.   Exercise risk management and don’t lose money

5.   Own your own home

6.   Create passive income so eventually you can stop working

7.   Improve your ability to earn more money 

The rest of book continues to build on these 7 ideas, as well as add a few new ones.  

 

Recommendation:

If you are looking for a short but great lesson on personal finance this is the book to go too.  The lessons in this book are timeless, and since it’s such a quick read it’s definitely worth a look.  If you’re just getting started on learning the basics of personal finance this is a great place to start.  

The Richest Man in Babylon is available for purchase from Amazon.com 

Death by a thousand cuts. How did we get so far into debt?

Published on January 12, 2008 in Debt, Goals and Personal Growth. 0 Comments

“Those who cannot learn from history are doomed to repeat it”

Before we can really begin to plan where we’re going, I think it’s important to reflect on where we came from.  I have been working on this post for about a week now, and while I would love to tell you a long elaborate story about how my wife and I got into so much debt, the truth is neither of us really knows exactly where the money went.  I think most people who are in debt feel the same way.  Except for a few expensive things that we’ve bought like a plasma TV and an expensive mattress, it’s the nickel and dimes of life that are thrown on the credit card that add up over time.  It’s those nickels and dimes that turn into thousands of dollars when only the minimum payments  are made on the balance every month. 

So instead of a giving you a long, drawn out story to read, which probably wouldn’t be that interesting anyways, I thought I would list a few of the pivotal points in the past few years that got us into the debt we’re in now. 

 The beginning

My wife and I haven’t always been in debt.  After high school I spent four years in the Marine Corps, and was pretty conservative with money, mostly because I never had any.  At the time I only had a single credit card with a low $1,000 limit, and I almost never carried a balance.  My wife went through school with a small shopping addiction, but nothing too crazy.  She graduated school with one fairly low student loan. 

Going back to college is when my own debt really started to build up.  I received money from the GI Bill every month, but that was just enough to pay rent and buy food.  This was also around the time my wife and I started dating, so of course going out on dates was a regular thing then too.  Dating and fixed income don’t really mix too well, and I still spent money like I was receiving a monthly salary.  

Buying a new car

About a year after my wife started her first job, her 1990 Honda Civic called it quits.  But not in a cheap fashion, instead it would randomly die on the freeway, and then start up again as she tried to coast to the side of the road, giving everyone in the car a good scare.  The mechanics couldn’t determine what caused the problem, so our only choice was to pay a few hundred dollars at a time to try and fix what may or may not have been the problem.  Instead she decided it was best to buy a new car.  But not just any car, a car that cost about 100% of her annual salary (the car we’re currently working to pay off).  She financed it for 6 years, which reduced the payments, but meant she would end up paying more in interest over the loan’s life.  Being able to afford such an expensive car meant paying everyday expenses with the credit cards, always with the good intention to pay them off at the end of the month.  This is when my wife’s debt really began to add up.  

Hitting the tipping point

I would guess that near the peak of our debt, my wife and I had over $40,000 in debt, which included credit cards, an auto loan, and student loans.  The sad part is that other than a few big luxury items we shouldn’t have bought, we really don’t have much to show for all of that spending.   We used our credit cards the way you would use a debit card for every day purchases.  It was the little things that really added up - $60 to eat out one night, $60 on groceries another.  We bought nice clothes to look good for work, after all if you want to get promoted you should dress the part. We didn’t live an extravagant life, but we didn’t live cheaply either.  Shopping was a popular past time for both of us.  She frequented the malls, while I regularly went to the bookstores and electronics stores.

The tipping point for us was our wedding this past June.  We didn’t have a choice about starting our new married life together in debt or not, but we did have the choice about which direction we were going to go.  We have decided to take the road to freedom from our debt.  And so now, a few months after the wedding, is where you enter the story and we begin our journey together. 

Small Victories

Even though our current debt situation is less than ideal, we like to look back at the good choices we made in the past, choices that would have qualified as extremely dumb moves in this story. 

The biggest decision we’re glad we made was to not buy a condo in San Diego, where both of us went to school.  For one it would have been a terrible financial decision.  We would have bought near the peak and surely would have been upside down now that the housing market has begun to plummet.  Making the monthly payments would have been tough, and it’s likely we would have continued to put living expenses like groceries on our credit cards.  Add to that the interest adjustment we would have been facing, and our financial picture could have been looking very different right now.

Buying the condo would also have prevented us from moving to the Bay Area this past year, a move that has brought an enormous amount of happiness to our lives.  Both of our families live up here, as well as many of our long time friends.  We both agreed that we feel more at home here than we ever did living in San Diego. 

Another good decision was not buying another new car this year.  I totaled my car almost 12 months ago, and almost bought a new Honda Pilot.  That choice would have put our debt levels up another $30,000.  It also would have reduced the extra money we have available monthly to pay down existing debt.  Factoring in gas, insurance, and maintenance, and we would probably still be making minimum payments on all of our debt, if we could have made them at all. 

Where we’re at now

After the wedding we worked hard to pay off our joint credit card.  This card had both the lowest balance and the highest interest rate.  We paid that off at the end of November, and next up is the car.  We will continue to use the debt snowball method to pay off our credit cards and student loans until we are completely debt free.  It’s going to take a few years, but our long-term goal is to be debt free by 2010. 

 You can take a look at a past post I wrote about fulfilling the requirements to get out of debt to get a better idea of what we’re doing to work towards our goals.  

I hope if you’ve read this far you’ll stick around until then to see if the dream of becoming debt free becomes a reality.  You can subscribe to the FreeFromMoney.net feed, found at the top right corner of the page, either through RSS or email.