Tag Archives: Debt

Was it Luck or Good Habits?

Has anyone ever told you that you are lucky?  I don’t share my financial situation with many people.  I do on this blog, but I do so anonymously.  There have been a few times in my life when I broke my code of secrecy.  I share about my financial situation when someone asks me for financial advice.

I am not a financial advisor, so I cannot give advice on a professional level.  I can, however, share my experience with others.  People seem to get more out of a story than from a list of steps to follow.  This is where I started, this is what I did, this is where I am.

When I have shared my relative level of success, it was never to sound braggadocios.  It was always in the spirit of trying to help that person improve their financial situation.  Most of these conversations where started by them asking if I think they should take out a car loan or if they should start buying stocks.

I never share closed-ended answers.  I just share about how I navigated similar situations.  My approach is to let my results be their guide.

Most of these conversations were enlightening discussions for them.  The other person walked away surprised by what was financially possible if they applied some discipline in their life.  They thanked me for sharing my experience with them.  Some said that I was lucky to be in the financial shape that I was in.

That comment made me think.  Was I lucky?  I never thought of myself as unlucky, but I never thought about if luck contributed to my financial situation.

On some levels, I was lucky.  I was born into a stable and loving family who always supported me and would correct me when I needed it.  There have never been any major health issues in my life.  I also have been blessed with the most selfless person who I have ever met for a wife.  Yes, I do count my lucky stars every day for those blessings.

Debt

Debt causes me fear.  At a young age, I took out a small car loan.  The car ended up being a junk and I had a few grand in debt and nothing to show for it.  I swore off debt from then on.  Fortunately, debt spooked me at a young age.

Being afraid to go into debt forced me to work my way through college.  That allowed me to pay cash for my first two years of community college.  The only debt that I had to take was to pay for my second two years.  I came out owing only $18,000 and my student loans were only $156 per month.  Many of my coworkers had student loan payments of over $700 per month.  They lived in dorms, partied, took out the meal plan, and did not hold a job during college.

The same fear carried over when it was time to buy a house.  My wife had bought our house before we were married.  She was able to make payments on her salary alone.  Instead of moving to a bigger house in a new development, we just decided to stay in that house and pay it down quicker.

Savings

Saving money just came naturally for me.  I did not have debt, so I had money in my pocket.  The work that I performed for my first few years of full-time employment was hard manual labor.  It just felt like the right thing to do was to save the money.  It would have depressed me to blow it on what I felt was stupid crap.

My saving rate was always at least 30%.  Saving money was fun.  It was like a game.  How could I find ways to save more?

That mindset became ingrained in me.  As I earned more, I saved more.  Saving money gave me pleasure, so I kept doing it.

Saving is like exercise.  It is hard but addicting.  A hard workout is painful, but also provides pleasure.  There is a sacrifice with saving money, but the sense of accomplishment is more pleasurable to me than the feeling I get when money is wasted.

Investing

I did not want the money that I was working hard to save just sit in an FDIC checking account.  It would not grow fast enough there.  I wanted my money to grow and work for me.

After reading about compound interest, I decided to invest in mutual funds.  They felt like the right fit for me.  Individual stocks seemed to take up too much time with having to research companies.  With mutual funds, an investor can buy a basket of stocks in a single fund.

My approach to investing was based on life-cycle investing.  When I started investing, I did not have much money, so I wanted to maximize returns.  In my 20’s, I was invested 100% in stocks for about ten years.

After I had a nice little nest egg, I took some risk off the table.  I added some bonds to my asset allocation.  They helped reduce the volatility when the economy tanked in 2007-2009.

Ten years later, I reached financial independence and decided to add even more bonds to reduce risk.  The game is not over, but I have a big lead.  It is now time to run the ball and play stingy defense.  For the next ten years, I just need to earn about 6% based on my savings rate to reach my goal of early retirement.

Conclusion

I was lucky to be born with an able mind and body.  Yes, I have caught a few lucky breaks in my life.  However, I feel that I had taken the required actions and developed the right habits to put myself into the position to be successful.

Lottery winners are lucky.  I worked my butt off for everything I have.  I did not go into debt because I did not want to be backed into a corner by creditors.  Saving money seemed logical to me because I did not want to waste all that energy to just blow it.  As an investor, I took a risk and accepted market returns during booms as well as recessions.

Even though I do not believe that luck has had much to do with what I have achieved, I count my blessing every day.  Life has taught me that it is much better to be practice humility and to always help others.  As the result of all of that, I truly have a thankful and grateful heart.

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Debt: Reaching Step Zero

The first step in correcting a problem is to admit that there is a problem.  Prior to admitting that there is a problem, there is another step.  That is when a person reaches their breaking point and cannot go on living the way that they are living.  That is often referred to as step zero.  Step zero is when a person says to themselves “this crap has to stop”.  It is the breaking point.  It is the point where a person becomes willing to take corrective action.  They become willing to try a different approach of living because of a psychic change.

Have you reached the point where you realized that your way of managing money is not working?  Are you spending more than you earn?  Does all of your earnings go towards paying bills?  Do you have creditors calling you who want to be paid?  Do you have to borrow money when an emergency occurs?  Do you find yourself spending money that you do not have in order to keep up with your friends, neighbors, or relatives?  Do you feel broke even though you work hard and earn a good income?  Do you contribute any money to your retirement savings accounts?

Have you reached step zero? Do you want to change how you manage your finances?  Do you want to take control of your life?  Do you want to break away from the bondage of debt?  Are you at a point where you are totally dissatisfied with how you are living because of debt?

The good news is that there is hope.  It can get better.  It is all up to you.  It is based on your willingness to change.

Now that you have admitted that your way of managing your finances does not work, how should you start the mending process?

Measuring the Damage

Start by measuring the damage that you created.  Before you can move forward, do an analysis of what you owe.  My favorite tool to assess debt is the debt-to-income ratio.

To calculate your Debt-to-Income Ratio, see the formula below:

Debt-to-Income Ratio = Monthly Debt Payments/Monthly Income x 100

Example: $1000 in Monthly Debt Payments/$3000 in Monthly Income x 100 = DTI of 33%

What is considered a bad DTI Ratio?

If your DTI Ratio is higher than 36%, you are in the danger zone.  The higher your DTI Ratio is, the less money you have to cover your living expenses.  A healthy DTI Ratio is less than 16%.

Where to Start

After you know your DTI Ratio, it is time to start paying down that debt.  Start with paying off all of your bad debt.  Pay off all of your payday loans, credit cards, and auto loans.  Next, start to pay down your student loans, mortgage, and business loans if they exist.

Stop the Bleeding

Stop buying stuff you do not need on credit.  Identify what you need and only pay cash for those needs.  A few examples of needs are food, clothing, medical supplies, transportation costs, and housing expenses. Wants are fancy cell phones, cable TV, designer clothes, eating at restaurants, or any other expense that is not required to live.

Income

If you are part of a dual-income household, learn to live off of one salary.  Use the higher of the two salaries to pay for all of the household living expenses.  Use the lower of the two salaries to pay down debt.  After your debt is paid off, you can start to focus on saving money.

Get a second job.  Find a side gig to earn money to pay down debt.  If you spend your free time working, you will be less likely to spend money on stuff you do not need.

Create a budget.  A budget is a plan that allows you to break down where your earnings will be allocated based on a percentage.  For example, 25% for housing, 11% for transportation, 20% to pay off bad debts.  Once you have a budget established, all you need to do is follow it.

Recreation

Even though you have debt, you still have to live your life and have fun.  Find ways to enjoy what your local community has to offer.  Instead of going to high priced movies or amusement parks, go to local parks or free museums.  Instead of going to a high priced gym, exercise outside by walking.  Instead of going on a luxurious vacation, take a staycation.

Guilt & Shame

There is no use in feeling bad about having debt.  You have identified the problem.  Now is the time to move ahead and to make positive changes.  Having ill feelings is not a solution.

Focus on the positive and on everything that is possible once your debt is under control.  Try to take small steps and to monitor your progress.  Don’t strive for perfection.  If you have a slip, don’t beat yourself up.  Pick yourself back up and keep striving for progress.

Conclusion

Debt is similar to hiking.  Once you walk 5 miles into the woods, you have to walk 5 miles to get out.  Now that you have decided that a change is needed, it is up to you.  At this point, there is no use in looking for someone or something to blame for your debt.  You cannot change the past.  You can just pick up what is left and apply a solution.  If you learn from the situation, it was not a waste.  As you move forward, you can also use it to help other people who are struggling with their own financial issues.

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Be Intentional

I recently attended a leadership training seminar at a local college.  This seminar was about managing the multi-generational workforce.  The facilitator covered many topics and I am not going to get into any of those details in this post.  He said many interesting things, but the one statement that made me think was that he said that we should always be intentional.

Everything we do should be with intent.  Our actions should have an intended outcome.  Our words should have an intended message.  Even our thoughts should be focused and have a purpose.

The purpose of this training was meant for workforce development.  The message can easily be applied into everyday life.  It is ideal for managing money.

Too many people just coast in life.  They walk around making noise and bumping into things.  By not having a plan, they will just land at a random destination.  What could possibly go wrong with that approach?

To be successful in all your affairs, practice being more intentional.  A great place to start is with how you manage your personal finances.  You should know the why behind everything that you do.

Savings

Do you know what your savings rate is?  You should be able to answer this question without giving it any thought.  Is it 10%, 20%, or more than 30%?  Your savings rate is the most important factor that will determine if you will reach financial independence or not.  It is also one of the rare aspects that you have control over.  Nobody can control what the S&P 500 will return this year, what direction interest rates are headed, or if there will be a spike inflation.  Everyone, however, can control what their saving rate is.

Spending

Your savings rate is directly impacted by your spending.  Do you just spend money without thinking?  Do you go to the mall, outlets, or online and buy things that you do not need?  If you want to change this trend, become intentional with your spending.  Before you buy something, ask yourself if you need it or truly want it?  If you must spend the money, did you shop around for the best price?  Is there a low-cost alternative to making the purchase?  Even if there isn’t a better alternative, at least you did your due diligence and gave thought to the purchase.

Debt

Does your credit card bill arrive, and you cringe when you look at your balance due?  Do you make late payments or just pay the minimum balance on your credit cards?  Do you know what your credit score is?  Do you know what your debt-to-income ratio is and what a healthy ratio should be?  Do you know how to calculate your debt-to-income ratio?  If you want to improve how you manage debt, take a more intentional approach.  Learn what your credit score is, identify if you have too much debt for what your income is, and ultimately establish a plan to get out of debt.

Earnings

I bet you know what your annual salary or hourly wage is?  You get a paycheck every week or bi-weekly, so you are reminded frequently about that rate.  Do you feel that you are underpaid?  Doesn’t everyone?  Maybe you are underpaid or maybe you are overpaid.  Before you ask for a meeting with your supervisor demanding a raise, you should do your homework.  Be intentional and research what the market rate for your position is based on your location and level of experience.  If you are under market rate, you might have a case.  If you are over market rate, but not satisfied, you might need to develop more skills or ask for a more challenging assignment.

Investing

If someone asked you what type of investor you are, could you answer them?  Are you a market timer?  Do you buy and hold equities?  Are you a passive investor who invests in a few different mutual funds?  Do you simply try to capture what the market returns with a total stock market fund?  Do you use value tilts?  Do you buy dividend stocks?  Are you trying to get rich by investing in Bitcoin?  You are free to decide how you invest your money, but you should know the why behind your plan.  Your approach to investing should be intentional.  Nobody knows what the future market returns will be, but you should at least know what you are intending to accomplish with your asset allocation.

Financial Independence

Do you know how much money you need to have in savings to reach financial independence?  To declare financial independence, the general rule is to have 25 years worth of living expenses in savings.  That is based on a 4% withdrawal rate that most financial professionals consider to be acceptable.  Do you know if you have obtained this milestone or how close you are?  Most people who reach financial independence do not get there by accident.  They live intentionally for many years.

Early Retirement

Do you have a target-date as to when you want to retire?  It might be next week, or it might be in 10 years.  If you have an established early retirement date, what are you doing to make that goal a reality?  Are you doing everything you can to maximize your salary and taking on side gigs?  Are you saving until it hurts?  Do you have the right mix of investments to both reach your goal and sleep comfortably at night?  If you do, you are acting in an intentional way.

Conclusion

The nice thing about being intentional is that you can start this process now.  Start by reviewing your current financial situation.  Can you answer why for all your financial decisions?

If you have a financial plan, use it as a guide.  If you do not have a written plan, write one.  That is a good starting point if you want to become intentional.  Review your plan for areas of your financial situation that might need to be amended.

Some fixes are quick, and others require time to implement change.  Moving forward, wherever money is concerned, ask yourself why before you make a final decision.  If you cannot answer why you are doing something, give it some thought and find out what your true intentions are.

This is just another example of how to improve your financial situation.  It provides a pause before you act.  Sometimes giving a decision an additional few seconds of thought can turn a bad decision into a good decision or a good decision into a better decision.

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Financial Unmanageability Transcends Money

I believe that financial unmanageability transcends money.  When it comes to finding ways to better manage your finances, there are unlimited resources.  There are many great books, blogs, forums, websites, and apps.  There is not a shortage of information, tools, or even professional services.  If a person wants to make improvements when it comes to spending less, paying down debt, saving more of their earnings, or learning to invest, they could find out how to do it in a matter of minutes by doing a few simple online searches.

If the solution to finding ways to improve your financial situation is so readily available, why are so many people struggling?  Yes, we can blame the marketers for always trying to sell the newest gadget.  That excuse, however, only carries so much weight.  Consumers are more educated than ever and many tune ads out.

What if the problem is more pervasive?  What if the problem is beyond simple behavior modification? What if the problem is based on unmanageability?  Yes, the inability to have mastery over your life.

If the problem is based in unmanageability, there is not a blog or app to solve the problem.  If your life is truly unmanageable, trying to get a better handle on your financial shortcomings is just treating a symptom.  To gain control of your life, it will take a little more than spending less and saving more.

Denial

Nobody truly wants to admit their life is unmanageable.  Just like nobody wants to admit they drink, spend, eat, or gamble too much.  It is natural for many people to think, I don’t have an issue with my finances and then go spend more money.  It is common behavior for people who have addiction problems or a spiritual malady to deny what the problem is.  The thought process is like a broken record that skips the same verse over and over.  I do not have a problem with my finances – go spend more money.

Resentment

To resent is to keep going back to a negative feeling.  Instead of feeling and processing those bad or negative feelings, you spend money.  Resentment is not always based on harboring ill feeling towards someone who you believe wronged you in some way.  Resentment can also be rooted in harboring ill feelings towards someone who did exactly what you expected them to do.  The problem was that you were still not satisfied.  They were unable to fill that void that exists within you.  To find temporary relief, you continue to spend and try to fill that void with an external fix.  Unfortunately, it does not last.  After you exhale out and feel relief, you almost immediately inhale the resentment back in.

It is All About You

When you live an unmanageable life, there will always be a conflict with self.  It is all about you.  You cannot be of real use to others.  Sure, you might be physically present in their life, but are you truly living in the moment?  Or are you just physically there, but mentally bound to your troubles?  When your self-centered thoughts and feelings are the focus of your existence, it is difficult to make meaningful connections with others.

Anxiety 

You are not a bad person.  You might even do nice things for others.  You believe that you are thoughtful and caring.  You spend money on the people you care about and on those who you want to care about you. Externally that all might be true, but aren’t you just doing all those things to find more relief and to feel better about your current state of unmanageability?

Do you live in fear?  Do you spend more than you earn and panic when the bills arrive?  Do you lay awake at night and worry that you will never be able to get out from under all the debt you are in?  Do you see retirement as a possible option for others, but something that you would never be able to afford?  Do you obsess over your finances in one thought, but follow it up with more spending that pushes you further away from having healthy finances?  Do you feel hopeless?

Is this fear leading to other health concerns?  Is it leading to weight gain or panic attacks?  Have you gone to see your doctor because you feel overwhelmed?  Did your doctor put you on meds to take the edge off and to help you cope?

There is a Solution

Yes, getting your finances in order is great, but you first need to get your mind right.  I am not a therapist.  I am just a guy with a personal finance blog.  If you are honesty suffering from the symptoms that I listed above, you should seek outside help.  Find out if your health insurance covers visits to a psychologist without a referral from your primary care doctor.  If not, ask your doctor for a referral to one that they recommend.  You might have to pay a low co-pay, but it will be worth it.

There are also 12-step programs.  As I stated earlier, your spending might be just a symptom of a larger issue.  There are 12-step programs for spending, gambling, drinking, and just about any other type of obsessive disease.  It is up to you to dig deeper and decide if you think a 12-step solution would be a good fit for you.

Conclusion

Don’t beat yourself up.  Don’t wallow in guilt, shame, remorse, or any other negative feeling.  The past is the past.  It is time to move on.  Pick up the pieces.  You are not a bad person.  You might have made poor decisions and you might suffer from the disease of addiction.  After you put your own house back in order, you can make amends to those you feel you might have harmed including yourself.

There is hope.  There is also help available.  It is now up to you to find the right help that will be a catalyst for positive change.

Once you get your mind right, great things will start to happen in your life.  Not only will your financial situation improve, but every area of your life will get better.  How could it not, you will be moving away from the problem and in the solution.

You will be able to better accept people and situations as they are.  You will be able to let go of the past. You will better assimilate into the mainstream of life.  You will become more useful to the people around you.  You will finally find the peace that you have been searching for all along.

As a bonus, you should be able to better budget and save money.  Your whole life will become more manageable.  Having a few more bucks in the bank will just make life more enjoyable.

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Should Millennials Contribute to a 401K?

Should Millennials contribute to a 401K? No, that is not a rhetorical question.  I was having lunch the other day with my co-worker Jill.  Jill is an exceptional young woman.  Jill’s parents divorced when she was young, so she grew up in a broken home.  That did not stand in the way of her excelling in school.  She went on to earn a BA in Psychology from one of the best state universities in the country.  She is also considering going back to graduate school for a Master’s Degree in Public Administration.

Jill and I have worked together for almost one year.  Jill was lucky because she was hired just a few months after she graduated from college.  She is a great employee, person, and is highly ambitious.

She told me that she developed her work ethic as a young teenager.  She said that growing up without a dad around, she had to work to help her mom pay the bills.  Jill started working at age 14 and has always had a job during high school and while in college.

When we were talking, she told me that when her parents divorced they had an agreement to give each child $40,000 towards their college education.  Her brother went to Notre Dame and the money he received from his parents covered about one year of his education.  Jill opted for a state university that was only a 2-hour drive away from her Mother.

Jill’s education cost her parents $30,000.  Her parents tried to be fair about the dollar amount.  After graduating college, her parents also bought her a used car for $10,000.  Even though she did not get to watch the Fighting Irish play football in South Bend, she still made out well.

During our lunch, she told me that she feels bad for her current roommates.  Most come from families that are more affluent than her family. However, they all have student loan payments that cost $700 or more every month.

She asked me my opinion about her situation.  Should she feel bad?  What should she do with the extra money she has compared to what her roommates have?  She said that she did not grow up with much and does not want to waste it.

I told her that she is in a fortunate situation.  She has a unique opportunity to save a great amount of money since she does not have any debt and her only large bill is her monthly rent.  I suggested that she pretends that she has as much student loan debt as her roommates and to contribute $700 per month to our employer’s retirement plan.

She asked me “Should Millennials contribute to a 401K”?

I told her that millennials should absolutely contribute to a 401K.  I said that she especially should because she does not have any debt to pay back or major bills.  These are the reasons why she should start contributing:

  • She is 22 years old and by starting at that age, she can be well on her way toward financial independence (FI) in 15 years or less
  • Our plan offers low-cost index funds
  • Our employer matches 100% up to the first 5% an employee contributes
  • The contributions lower her taxable income
  • The money grows tax-free and is not taxed until she withdraws it at retirement
  • She can take advantage of dollar-cost-averaging
  • She can enjoy the benefit of compound interest
  • If she gets a different job, she can take the money with her and roll it over into an IRA
  • Even though I would advise against it, she can borrow against her account if need be

I explained to her that time goes by very quickly and she has a golden opportunity to build some serious wealth for herself.  Unless she lands a government job, she will not have a pension.  She will need this money to support herself in the future.

Jill has a unique situation.  She is a young millennial without any debt.  What makes her even more unique is that she is a new college graduate without any student loan debt.

If you have student loans, you should still contribute to your employers 401K account.  Even if it is just enough to get the match.  After you pay down your debt, take the dollar amount that you were paying towards your loans and direct it to your 401K.

You might not get to Financial Independence as quickly as Jill does.  You will, however, get there if you take a few steps.  If you have debt, pay off your debt and don’t create new debt.  Save as much as possible.  Sign up for your employers 401K plan as soon as you are eligible.

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Note: This post was originally published as a guest post.  The post was moved here because it was not available to be read on dollardiligence.com. That site is no longer active.