Debt Watch

Inspired by Tatsuya’s Sinfest “Futility Watch”, I’ve added a “Debt Watch” to my blog sidebar, showing how many debts we’ve paid off since this March. (We’ve paid off other debts before, and we’ve even paid off other debts since we started our Money Makeover. The significance of starting with March 2006 is that it corresponds to both my annual bonus and our tax refund — it’s when we were able to kick off our debt snowball with some attitude.)

Debts paid off as of yesterday evening: 4. I sat down tonight with a sheet of blank paper, drew a big semi-artistic “4” on it, and posted it on the fridge.

I had forgotten that we paid another one off by phone today. So I had to make another number. Then we sat down with some updated balances from other creditors, did some number-munging and general spreadsheeting, and wrote some checks.

Debts paid off as of this evening: 8.

I have to go make more numbers now. In fact, we decided we’d make a sheet with each of the numbers 1 through 8. We’ll put the 1 through 7 side-by-side on the living room wall. The latest and greatest — 8 as of now — goes on the refrigerator, where we’ll see it all the time. Also on the fridge, we’re going to put the next bill we’re hammering on, with a big target drawn on it.

I think I’ll finish the display with the “Bummer of a birthmark, Hal” cartoon.

Can you rent a car without a credit card?

It’s interesting how often I run into the idea that you need a credit card to rent a car. It’s particularly interesting because it isn’t particularly true.

Relevant quote:

“Be sure you check ahead in advance, but I fly all over America and rent cars every week, virtually, I am appearing somewhere, speaking somewhere, doing something. I simply reach into my pocket, pull out one of my two Visa debit cards, on my personal account or on my business, and I can rent a car anywhere except a couple of the majors, and I don’t don’t do business with them anyway — they are too expensive.” — Dave Ramsey, in the “Dumping Debt” session of Financial Peace University

I can vouch for this, too. I’ve rented one car from Rent-A-Wreck and several cars from Enterprise using Visa check cards (aka debit cards).

So the money comes straight out of my checking account, with none of that “I promise I’ll pay it later” nonsense.

Warning, though: I was talking to someone a couple weeks ago who said their car died in the middle of nowhere, and they tried to rent a car from the local Enterprise office, which wouldn’t take their check card. So it may be a regional thing. Be sure to call ahead and check.

Also from my personal experience, when I tried to rent from Budget Rent-A-Car a few years ago, they said they didn’t accept check cards. Which kind of sucked, because they didn’t bother to tell me this when I placed my reservation; I didn’t find out until I got to the counter to pick up the car, with all my other travel arrangements already booked and non-refundable. I wasn’t too happy that day.

Moral: do be sure to specifically ask, ahead of time (this is important), whether the rental agency accepts the Visa check card. But I’ve rented cars on several occasions with non-debt-bearing plastic. Check with the rental agencies in your town; chances are, you’ll find one less reason to keep a credit card.

Agile Cash

Credit has an interesting problem that people usually don’t think about: it destroys your ability to adapt to change.

I was radio-surfing in the car this morning, and I happened to hear an ad for “no interest, no payments until January” or some such. And it occurred to me that there were parallels to the XP idea of constant shippability.

Let’s go back to Alistair Cockburn’s example of packing a house. If I’m going to be moving in a month, and I need to pack my entire life into little boxes, how can I know how long it will take? How can I be sure I’ll be done in time? Cockburn answers this scenario by packing an entire room at a time – and when you pack it, you pack it completely: so that “not even a sock” is left behind.

This has two big benefits. #1, you find out how long it takes you to completely pack one room (and you know how many rooms you have; the rest you learned in elementary school). #2, that one room is now done. Ron Jeffries, the last time he was in our office, explained it along the lines of “the very best way to make sure Feature X is done before we release is to do Feature X first.”

Now let’s apply that idea to money. My bank account should be constantly primed. I should always be able to pay for the things I know are coming.

When I pay cash (assuming I live on a budget), that is indeed the case. When I buy something for cash, it’s done. That’s it. I’m done buying it, and I know exactly where my money stands. Item X is now 100% mine. There’s nothing more to worry about.

When I buy something on credit, though, that dynamic changes. I’m not done buying it. I’ve made a commitment to pay, but I haven’t yet followed through. I’m left in a dangerous in-between state where I’m legally obligated to spend money I don’t yet, and may not, have.

Suppose I go out and buy a $1,200 washer and dryer, “no interest and no payments for 90 days”. And over the next three months, I’m saving up the money so I can send them a check before the 90 days is up. So far, so good, right?

But one day the car won’t start, and it needs $750 worth of repairs. Now what? Well, I have to fix the car – otherwise I can’t get to work, and I definitely won’t be able to pay for the washer and dryer if I’m unemployed!

And at the end of the ninety days, I can’t pay off the washer and dryer, because I spent $750 of the money I was going to pay it with. And they sock it to me with rip-off interest rates, possibly even back-dated to the original date of purchase.

Or maybe I go ahead and pay off the debt, by skipping a month on some of my other payments. Oops. Not much better.

Debt is risk. When you do “90 days same as cash”, or when you put stuff on your credit card but swear you’ll pay it off every month, you get stuck in that “in-between” state between buying and paying. You’re essentially betting that nothing will go wrong between now and when you pay. And in any form of gambling, in the long run, the house always wins. The finance company wouldn’t have loaned you the money if the odds weren’t in their favor.

What if I had decided to pay cash for that washer and dryer? Well, if I didn’t have the money, I would’ve had to save up for it. I would set money aside each month – kind of like making payments on a debt, but without the interest expense, and without the risk. If I start saving for something, and two months later I have to pay for car repairs, I just stop saving for as long as I have to. I can stop saving without suddenly having to pay interest, or late charges, or getting a nasty letter added to my credit file.

Savings is very easy to stop. Credit is not. Savings lets you stay flexible in the face of change. Credit does not.

And then, when I’ve saved up everything I need, I can just go out and buy the thing, and then I own it. The transaction is done. No unfinished business, nothing left behind.

Not even a sock.

What’s (no longer) in your wallet?

Well, okay, we never actually carried it in our wallets. And we shredded the actual card years ago. But we just wrote the check to pay off our Capital One credit-card balance. And there was much rejoicing.

By the time all is said and done, we will have paid off eight creditors this month. That’s going to free up almost $200 a month that we can start using to pay down other debts. Whee! Combine that with the fact that we got a ridiculously large tax refund (which is a large part of why we’re paying off eight creditors this month), so I’m going to decrease my withholding, which will further increase our available cash for paying off debt every month… and things are looking very nice indeed.

According to my debt-snowball calculator, we’ll have all of our current credit-card debt paid off by December of 2008. And that’s assuming no raises, no tax refunds, no bonuses, no Christmas checks, no nothin’. (Then we’ll be able to move on to the car payment, the student loans, and the house. But hey, you gotta start somewhere, right?)

Unnamed youth finance class: Debt session 1

We’ve done three sessions of our teen personal-finance class so far:

  • Introduction;
  • Emergency Fund; and
  • Debt (part 1).

“Introduction and Emergency Fund” was originally supposed to be a single session, as was “Debt”. So either I’m lousy at lesson planning, or we’ve got a really lively group. Or both. (It’s both.)

Here’s some highlights from the first half of the Debt session.

I wanted to use Dave’s statistic of $1.5 trillion of credit card debt, but then I found out it wasn’t true, and $800 billion just doesn’t have the same ring to it. So I decided to use the real number for total consumer debt (both revolving and installment). And I decided to write it out before I said the number aloud.

That worked. They were already voicing disbelief before I was halfway through writing the number. $2,100,000,000,000 in consumer debt. Got their attention.

In an example on how interest calculations work, I gave the example of a 6% APR, and mentioned that that was the interest rate I’d gotten on loans from friends and family. A couple of the youth were shocked that my family would charge me interest. Two lessons learned from that. #1, I need to be able to explain the reasons behind interest, and why they apply to family too. And #2, some of the other youth had some answers to that question. I should have done a better job of letting them help give the answer.

The last major point I got to was to show four different types of credit-card customer:

  • People who pay on time but carry a balance
  • People who pay late
  • People who pay off every month (bank loses money on these)
  • People who go bankrupt because of credit card debt

I walked through each of those groups, and talked about whether the bank made or lost money on each. I saved the bankrupt group for last, because I had found a great quote about them:

Bankruptcy experts say that too often, by the time an individual has filed for bankruptcy or is hauled into court by creditors, he or she has repaid an amount equal to their original credit card debt plus double-digit interest, but still owes hundreds or thousands of dollars because of penalties. — http://www.washingtonpost.com/wp-dyn/articles/A10361-2005Mar5.html

But as it turned out, I think I would’ve been better off swapping the last two, so that “people who pay off every month” — the only group of the four that the banks actually lose money on — were last. I want to get across the idea that banks want you to move out of the “they lose money on you” group and into one of the “they make money on you” groups (just look at any credit-card advertisements), and I think that would’ve flowed much better with the “lose money” group last. As it was, the point I was trying to drive toward — credit-card companies are not your friends — kind of got lost.

Live and learn. We’ll tackle the topic again this coming Wednesday, and see if we can’t do a little better this time.

DaveWatch: paycheck-to-paycheck statistics

I was just listening to the Dave Ramsey show from this past Thursday. About fifteen minutes into the third hour, he said, “AC Nielsen just did a survey. It was in USA Today just the other day. 78% of Americans are living paycheck-to-paycheck.”

This is looking like another shady statistic on Dave’s part. I couldn’t find any reference to this study on the USA Today Web site (if anyone can find it, please let me know). There are statistics on AC Nielsen’s Web site, but what it actually says is that 22% of Americans have “no spare cash” (January 24, 2006). The way I read it, that means that 78% are not living paycheck-to-paycheck.

I’m a little surprised; I would’ve thought the paycheck-to-paycheck number would be higher than that. But I’m really starting to wonder who does Dave’s research.

Unnamed youth finance class: Emergency Fund session

We had planned for the first class session to be both an introduction, and a “why you need an emergency fund”. We got to the introduction, and then covered emergency funds a week later.

Here are some of the things that stood out in my mind from the emergency-fund session:

  • Jim McKeeth and his wife suggested some great questions for this session. A couple of the best, in terms of how well they got the youths’ attention, were “How would you feel if you moved out, established your independence, and then had to call your parents to ask for money?” and “How would it feel to know you would never have to ask your parents for money again?” The second got an even stronger response than the first. If you’re talking to teens about money, these are great questions to ask.
  • The visual aids (two Hot Wheels cars: a Mazda Miata and a beat-up hatchback) were a big hit. Especially the Miata — one youth spent most of the class playing with it (but still listening, amazingly enough).
  • When I gave background on the imaginary owners of the two cars (a lawyer and a single parent), and said one was broke and the other was rich, most of them initially figured it was probably the lawyer who was broke, because he spent all his money on a fancy car. (Good answer!)
  • When I brought up the scenario of $800 worth of unexpected car repairs, a couple of them said it sounded like time to buy a new car.
  • As soon as I brought up the idea of the emergency fund, they wanted to know how much money should be in it. The first part of the answer (starter emergency fund is $500, since they don’t have full-time jobs yet) didn’t get nearly as much of a reaction as the second part (ideal emergency fund is 3 to 6 months of expenses, or $10,000-$15,000 for most people).

I gotta admit, I’m with them on that last one; it’s pretty daunting. We’ve just barely managed our starter ($1,000 for us) emergency fund, and we’ve been doing this thing since September.

We got off topic a lot, but we covered most of what I hoped to cover, and they stayed pretty interested through the whole thing. Very cool.

Unnamed youth finance class: what they want

We’ve had three sessions of our youth finance class now, and I’ve barely blogged about it. Partly that’s because there’s been some crap going on that’s really stressing me out, that I’m not sure if I’m ready to blog about yet.

But there’s a lot of good stuff to be gleaned from teaching youth about money, and blogging about it is a good way to sort it out in my mind, as well as maybe helping other people out. So I’m going to try to blog about it more regularly from here on in.

At the first session, we asked what everyone hoped to learn during this class. Here’s the list:

  • Bankruptcy
  • How to manage money better
  • Retirement, CDs, etc.
  • Social Security
  • Financial lingo
  • Opening bank accounts
  • How to deal with money in college
  • Getting an apartment
  • How not to live paycheck to paycheck
  • How to live on a cash-only diet
  • How to do taxes
  • Everything about taxes
  • H&R Block
  • Forms for work (W-2, etc.)
  • Buying a house / car
  • Credit
  • Investing