Monthly Archives: January 2014

My Pipes Froze This Morning and Why I Wasn’t (Financially) Scared

I live in the South, and we are not used to freezing weather. With the Great Winter Storm of 2014 passing through, I’m sure many people in the Northern U.S. are laughing at us down in the South.

There have been road closures, school closures, numerous automobile accidents. The major reason, of course, is that we are unprepared for these temperatures and for long-term iciness.

Compared to my friends up North, it’s a completely different story down South where tire stores don’t even sell winter tires, city governments don’t have plans to salt the roads, and truck lovers don’t know what snow plows are.

We’re unprepared for these slightly freezing temperatures.

I, too, have been unprepared to care for my house in these temperatures.

When I woke up this morning, my water pipes were frozen. I didn’t know better. (Actually, I’ve been good about dripping water from my faucets but forgot to yesterday!)

So many things started to race through my head…

I Google’d how to thaw my pipes.

But also, I started to think about the worst case scenario: What if my pipes burst? I could be out several hundreds of dollars for a repair.

Thankfully, I have an emergency fund in place. If something were to happen, financially speaking, I could easily resolve the problem. Also, thankfully, the pipes seemed to have thawed themselves out (temperature rose above freezing and the sun is out?) and water is flowing again.

I’m so glad that I have an emergency fund in place. It reduced a ton of stress and gave me a pretty good feeling through the scare this morning. Although I wasn’t ready for the freezing weather, I am financially ready to handle any issues that the freezing temperatures may bring.

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Are You an Electricity Hog?

Or more specifically, am I an electricity hog?

I read this article yesterday on Bargaineering. I complemented the author on her electricity usage. For her latest bill, she used an incredibly low 4.8 kWh/day. The article got me thinking: “How to I compare with others on electricity usage?”

Some National Averages

According to the United States Energy Information Administration (EIA) (FAQs link):

In 2012, the average annual electricity consumption for a U.S. residential utility customer was 10,837 kWh, an average of 903 kilowatthours (kWh) per month. Louisiana had the highest annual consumption at 15,046 kWh and Maine the lowest at 6,367 kWh.

The EIA also provides monthly electricity updates. In the latest issue, the average monthly residential bill is $107.28 (for 2012).

State-by-state, New Mexico had the lowest average monthly bill in 2012 at $74.62. The highest was Hawaii at $203.15, due to its high cost per kWh, which is roughly three times as much as the typical cost per kWh. The second highest was Alabama at $135.26.

How Does My Household Compare?

For the past 5 years, I have averaged 38.7 kWh/day. This has been fairly typical for the 5 years, with no specific trends upwards or downwards (on 12-month rolling averages). Of course, my usage goes up and down seasonally.

This 38.7 kWh/day average is 14,132 annually. This is 30% higher than the national average.

Although I will say this is lower than the Louisiana number of 15,046 (6% lower). Umm, let’s just say that this is relevant… somehow. 😉

Over the past 12 months, my highest electricity bill was $147.86, and the lowest was $74.43. The average was $107.89. This is almost the exact same as the national average of $107.28.

So, I guess I’m pretty average… 🙂

I’m Not a Statistician

I don’t want to misinterpret the EIA’s data and how they compare to my household’s. But, it appears to be that I am particularly average when it comes to average monthly bills. And given my location, I am also average on my kWh usage.

I suppose that I don’t feel too bad about being an electricity hog, since I seemingly represent a fairly typical residential consumer.

How about you? Are you a hog?

How to Get Rid of Debt… Two Different Debt Repayment Strategies!

Once you’ve admitted that your debt is a problem, you can begin to build a plan to correct it. In this post, I will discuss two popular debt repayment strategies. I will compare them and will make a suggestion for which to use.

My List of Debts (Once Again)

Starting off, you will need to make a list of all of your debts. For the sake of this post and for illustration purposes, we will use my actual debt from a few years ago.

Debt Type Amount Owed Interest Rate Minimum Payment
Credit Card #1 $6,000 Variable (~18%) Varied (~$150)
Credit Card #2 $4,000 Variable (~12%) Varied (~80)
Jared Credit $7,000 0% (interest free for 6 months) $197
Student Loan #1 $3,058 Variable (2.48%-7.22%) Varied (~$32)
Student Loan #2 $565 Variable (2.48%-7.22%) Varied (~$6)
Student Loan #3 $1,683 6.8% fixed $20

The General Idea

To start off, I will say this: the debt repayment strategies I will discuss involve you paying off your debt. If you’re like me, you’ll have to pay off all $22,000 (plus interest!). Every last dollar and every last penny. These strategies are not schemes where you pay out less than you actually owe.

Back to my story…

When I started my debt repayment, I thought I was being smart. Both of my credit cards were harassing me, and they were the ones that irritated me the most.

Here is my “smart” strategy: Every month, I came up with a complicated mathematical formula to pay down both credit cards.

During the first month of my repayment plan, I had $1,000 to put towards debt. So, I paid the minimums, then paid an extra $300 to Credit Card #1 and an extra $200 to Credit Card #2.

Makes sense, right? I was being equitable to both. I was keeping both relatively happy, right?

Wrong.

There are several debt repayment strategies out there. None of them works as I have described.

Generally speaking, here is how you should pay off your debt.

  1. Of course, you need to come up with a list of all of your debts.
  2. Depending on the strategy, you may want to include or exclude your mortgage.
  3. Next, you’ll prioritize the debts. That is, which one will put your focus on?
  4. Every month, pay the minimum payments to all of your debts.
  5. Any extra money you have, pay more to the first debt on your list.
  6. When you pay off your first debt, you’ll take its minimum payment and any extra money you have, and you pay it on your second debt.
  7. And so on as you pay off your debts down the list.

I wasn’t doing it right because I was trying to be equitable. I paid my minimums. But all of the extra money I had left over, I split it between two different credit cards. I needed to focus on one (and only one) of them.

Although there are several debt repayment strategies out there, two are extremely popular.

Strategy #1: Pay the Highest Interest Rate First

When it comes debt repayment, pretty much all of them agree on the general method. But they disagree on how to prioritize which debt to pay first.

With Strategy #1, you prioritize based on interest rates. You’ll pay the highest one off first because it makes the most mathematical sense. When you’ve paid all of your debts off, this strategy will save you the most interest.

Strategy #2: Pay the Smallest Balances First

This strategy was popularized by Dave Ramsey and is often called the “Debt Snowball” in the personal finance world. By paying off your debt based on the balances, you gain victories quicker. That is, you will pay off your first debt earlier using this method compared to Strategy #1.

While Strategy #1 focuses on the mathematics behind debt repayment, Strategy #2 focuses on the psychology. By knocking out the first debt quickly, you get motivated and are more likely to continue with the process.

My List of Debts (Re-Prioritized)

Let’s apply these strategies to my own (past) debt. Strategy #1 is to pay off the highest interest rate first. So my list of debts becomes:

Debt Type Amount Owed Interest Rate Minimum Payment
Jared Credit $7,000 20% $197
Credit Card #1 $6,000 18% $150
Credit Card #2 $4,000 12% $80
Student Loan #3 $1,683 6.8% $20
Student Loan #1 $565 4% $6
Student Loan #2 $3,058 4% $32

Note that I replaced variable rates with fixed ones for simpler calculations. Same for the varied monthly minimum payments. Also, note that the Jared store credit card was 0% for 6 months, but 20% after. I ignored the intro rate for simplicity.

By using Strategy #2, I would place my debts in order of their balances.

Debt Type Amount Owed Interest Rate Minimum Payment
Student Loan #1 $565 4% $6
Student Loan #3 $1,683 6.8% $20
Student Loan #2 $3,058 4% $32
Credit Card #2 $4,000 12% $80
Credit Card #1 $6,000 18% $150
Jared Credit $7,000 20% $197

Of course, how your debts are ordered are dependent on your personal situation. In my situation, the two strategies prioritize the list almost in reverse order.

But what does this mean? Is one strategy better than the other?

Comparing the Two Strategies

To analyze the two strategies, you will need to know how aggressively you will pay off your debts. That is, how much will you pay above and beyond the minimum payments?

I used an online calculator to come up with the following results based on my debts.

The results are based on paying the minimum payments ($485) plus an additional $970.

  Strategy #1 Strategy #2
Total Interest Paid $2,016 $3,015
When 1st Debt Will Be Paid Off Month 7 Month 1
When 2nd Debt Will Be Paid Off Month 11 Month 3
When 3rd Debt Will Be Paid Off Month 14 Month 6
When 4th Debt Will Be Paid Off Month 15 Month 9
When 5th Debt Will Be Paid Off Month 15 Month 14
When Last Debt Will Be Paid Off Month 17 Month 18

By paying minimums plus an extra $970, you’ll pay $1,000 more in interest by using Debt Snowball method (Strategy #2).

Overall, the Debt Snowball would take 1 extra month to pay off. But remember that the Debt Snowball’s strength is its ability to provide quick wins.

You’ll pay off your first debt in the first month. That is a very quick victory.

In fact, at Month 7, you will have paid off 3 debts and about 1/3 of your 4th debt using the Debt Snowball. You will have only paid off 1 debt using Strategy #1.

So, Which One is Better?

The answer, really, is “It depends.” I hate when people say that, but it really does depend.

Based on my very specific list of debts, the disadvantage of Strategy #2 (Debt Snowball) is that it will cost me an extra $1,000 in interest and 1 month. Given my overall situation, that’s really not much more money or much more time.

The benefit is that I will have paid off 3 debts in 6 months. That is a HUGE motivating factor, and one that I could not ignore! If I’m looking at a mountain of debt, I would be glad to know that half of them are gone so quickly.

My personal preference is for the Debt Snowball. Dave Ramsey says, and I agree, that your lack of math knowledge got you into debt, so don’t expect it to get you out. Ignore the math, and focus on the psychological boosts.

Final Comments

Remember that if you want to get out of debt, you need to be very intentional about how you do it. Acknowledge that you have debt and that it’s a problem. Build a plan. Pick your strategy. Generally, I like the Debt Snowball. I think it will help motivate you.

Also, remember that you need to be aggressive about how quickly you pay off your debt. In my example, I chose to pay off my debts at 3 times the minimum payment.

If I chose to be lazy about it and just make minimum payments, it would take 5 1/2 years to pay off the debt. I recognized my debt problem in mid-2008. If I paid just minimum payments, I would have just recently paid off all of my debts. That’s a scary thought, given what I’ve gone through in the last 5 1/2 years…

How to Get Rid of Debt… The Right Way!

A few years back, I found myself $10,000 in credit card debt, $7,000 in Jared store credit debt, and $5,000 in student loan debt.

Actually, here is a more detailed breakdown.

Debt Type Amount Owed Interest Rate Minimum Payment
Credit Card #1 $6,000 Variable (~18%)  Varied (~$150)
Credit Card #2 $4,000 Variable (~12%)  Varied (~80)
Jared Credit $7,000 0% (interest free for 6 months)  $197
Student Loan #1 $3,058 Variable (2.48%-7.22%) Varied (~$32)
Student Loan #2 $565 Variable (2.48%-7.22%) Varied (~$6)
Student Loan #3 $1,683 6.8% fixed $20

Where Did I Go Wrong?

In the post title, I allude to the fact that I feel there is a right way to get out of debt. Before I get there, I want to write about what I did wrong.

When I graduated from college, I was a reasonably (financially) smart kid. I had $5,000 in student loans, primarily because I went to college for 4 1/2 years. During that extra semester, my scholarships and grant money dried up. I was able to pay for most of it, but I did pull $5,000 to attend my final semester.

So, not too bad.

Not more than a year out of college, I was staring at $22,000 in debt. And I was scared.

I figured I had 0% on the Jared store card, so I slow played it. I paid the minimum payments to get by. For the student loans, I did what the typical person does. I paid the minimum payments on them as well, expecting to finish them 10 or 20 years down the line, like most normal people.

But the credit cards, on the other hand, were the problem. I got myself into a cycle of paying a little down and then charging stuff on them again. Pay them down, then buy stuff. At the beginning of the month, I had $10,000 on them. When I got my paycheck, I would pay $1,000 towards them (about $500 per card). But at the end of the month, they would mysteriously still have $10,000 on them.

That happened for two or three months.

I was stuck.

Because I was really being lazy about paying it off.

And because I really didn’t know what to do.

And because I didn’t really want to get out of debt. Well, okay. I’m sure I wanted to get out of debt. But I wasn’t convinced yet that the debt was a problem.

So, How Did I Get It Right?

Well, for a few months, I would start off with $10,000 on both credit cards. Then, I would throw $1,000 at them. Not too shabby. At that rate, I would pay them off in a year, right? Well, no. As I mentioned before, something mysterious was happening, and I would have $10,000 at the end of the month, and the end of the next month, and…

It finally occurred to me that I wasn’t committed to paying off the debt. I wasn’t aggressive enough. I wasn’t intentional enough.

And I think that was the biggest key for me to get out of debt.

What Next?

I want to keep my blog post short and digestible. In this post, I point out that the only “right way” to get rid of debt is to be intentional and to be aggressive about it. In my next post, I will discuss debt repayment strategies.

The Incredible Power of Compound Interest

Albert Einstein is quoted as saying any one of the following about compound interest:

  • Compound interest is the greatest mathematical discovery of all time.
  • Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it.
  • The most powerful force in the universe is compound interest.
  • Compound interest is the human race’s greatest invention.
  • It is more complicated than relativity theory.
  • Compound interest is sexier than your wife.

Well, okay. I made up the last one. And actually, digging into it, I had difficulties finding solid sources for any of these quotes.

But the fact that Albert Einstein’s name comes up when discussing compound interest implies that Al knew of compound interest’s power and respected it (again, no sources here; just me putting two and two together).

What is Compound Interest?

Suppose you invested $1,000 today in the market-based mutual funds (don’t worry, I’ll let you know what these are in a later post). The stock market has an annualized return of 10% over the last several decades.

At the end of the first year, the interest you earned would be $100 (10% of $1,000). Adding in the original $1,000, you would have $1,100 invested in the stock market. Invest for another year, and you will have $1,210.

Some of you may be thinking: “Why isn’t it $1,200? Where did the extra $10 come from?” That is compound interest. Your first year interest of $100 earns its own interest, which is $10. So the interest you earn, if reinvested, earns it own interest… It “compounds” on itself!

Leave the $1,000 invested in the stock market for 10 years, and you will have $2,594. Your interest ($1,594) is more than the original $1,000 you put in! Incredible, indeed!

Don’t believe me? Google “compound interest rate calculator” and try it out yourself! Or build an Excel spreadsheet. Or type it into a calculator. I just did it on my Android. Type in $1,000. Multiple by 1.1. And click enter 10 times (for 10 years worth of investment). You’ll get $2,594.

Why You Should Be Excited!

As Albert Einstein may have kinda, sorta said “he who understands it, earns it… he who doesn’t, pays it.” This one quote is the basis of most personal finance topics.

The “he who understands it, earns it” part references the power of investments and savings. Things like Roth IRA and 401(k) accounts are retirement savings and benefit from compound interest.

Instead of a single $1,000, suppose that you put $1,000 in every year for 10 years. At 10%, you will have $15,937! (Remember: You only put in $10,000.)

Suppose that you have 30 years, your yearly investments becomes $164,494. Again, remember that you only put in $30,000.

If you have 40 years, you put in $40,000, but your investments are $442,593! Wow!

The Flip Side

But don’t forget Big Al. He also said “he who doesn’t [understand compound interest], pays it.”

Credit card debts, mortgages, student loan debts… all debts in general fall into this group. And it’s bad! When it comes to debt, all of that compounding interest is what you are paying, not what you’re earning!

If you have a $40,000 student loan, at 6.8% over 20 years, you will have paid $73,279. $33,279 more than the original amount!

If you had a credit card with $40,000 and only paid the minimum payments, at 18%, it would take you nearly 70 years to pay off the credit card. You would have paid $157,000 total ($117,000 in interest alone!)

Where Do You Go From Here?

That is precisely what this blog is all about! I will show you how to get out of debt so that the compound interest doesn’t kill you.

And I will show you how to invest, so that compound interest will make you rich!

The Inevitable Post: Part Deux

As I mentioned in Part 1 of my story, I graduated in December 2007. Surprisingly, I was a reasonably responsible college student. Granted, I had few assets (how many college students have real assets?)… but I also had little debt.

I got a $60,000 job, and thought I could afford a bunch of stuff. So, I went out and bought… well, stuff. About a year-and-a-half out of school, my wife and I found ourselves $100,000 or so in debt.

The “straw that broke the camel’s back” was when I borrowed $5,000 from the bank to help pay for a part of our wedding. Not more than a month later, I wrote a $5,000 (plus interest) check to the bank to pay off this loan.

This really was stupidity at its best. Borrow some money, pay interest, then pay it back.

The $5,000 bank loan is the memory that I feel is most idiotic. But, gradually, I started to feel that all the debt I carried was idiotic. Borrow some money, pay interest, then pay it back.

So, I Google’d how to get out of debt, found some fantastic personal finance blogs, and began my financial journey.

Along the way, my wife and I made two more stupid decisions. We bought a house that we shouldn’t have. (We still live in it today.) And we bought an SUV that we didn’t truly need. That was in April of 2011 (buying the SUV, that is). We ended up paying the $27,000 SUV off in 1 year and 5 months.

And my memories from the $5,000 bank loan came back. If we saved up for a year and a half… if we waited to buy, we could have bought the SUV outright, not paid the interest, and maybe even paid less by using cash.

When we paid off the SUV, it was our last debt (not including the house). And we vowed never to go back into debt again. So far, so good.

Since paying off our debt in September 2012, we put together a $30,000 emergency fund and have boosted our retirement savings to nearly $100,000. (To be fair, we have always saved a little toward retirement throughout the years. But we made significant progress over the last year and 3 or so months.)

I mentioned in my Part 1 post, that my daughter was born in December 2009. My son was born a couple of years later in November 2011. With an emergency fund in place and our retirement savings well underway, we finally began saving for college for our two kids.

And soon enough, we will pay off our house. And most likely, move back to our hometown closer to family.

We’ve journeyed a long way so far. This blog will provide some general advice about how we’ve come as far as we have. And it will be a journal for the rest of our journey.

The Inevitable Post

Ah, so this post is an inevitable one. I just didn’t imagine that I would be writing it as my second blog post. Like all great blogs before this, I am writing an “About Me” post…

I graduated from college in December 2007. I was one of the lucky people who didn’t have tons and tons of student loan debt. (I had about $5,000, if memory serves.) I had a minimal amount of credit card debt. I owned a car and some furniture.

Then, I got a job paying nearly $60,000, and things started to go downhill.

Well, not because of the job… per se.

I moved out-of-state to take the job. I took my car and the little bit of furniture that I owned with me. In my new town, I lived in a pretty nice, 2-bedroom apartment. With so much space and a decent income, I (falsely) thought that I could buy a bunch of nice things. I “needed” a bed set ($4,000), a new TV ($2,000), a new laptop ($1,500), a home office (not sure what the bill was here), and kitchen/cookware/other miscellaneous things.

Before I knew it, I was $10,000 in credit card debt.

Because I was being stupid.

Because I had a job paying $60,000. And I thought I could afford everything.

But my stupidity didn’t stop there. My then-girlfriend, now-wife was set to graduate in May 2008 (a semester after I did). She wanted to move in with me in this new town, and I wanted to show my commitment to her by asking her to marry me.

So I did. (Okay, okay. That wasn’t the stupid part. But this is…)

“He went to Jared.” I sure did, and charged her engagement ring ($7,000) while I was there.

My soon-to-be wife didn’t help the matter. She was just as much as spender as I was. And she brought about $50,000 of student loan debt with her.

In the couple of years that followed, we paid for our own wedding ($20,000 I think; we were terrible bookkeepers back in the day), we bought a house together (in December 2008), and we bought her car from her mom/took over her mom’s car loan ($4,000).

We then brought our first bundle of joy (my daughter) into the world (in December 2009). Of course then, we “needed” a new (third) vehicle. So, we bought a used $27,000 SUV in the summer of 2011.

If you’ve read this far, then congrats! We do end up turning this story around. I’ve/We’ve spent the last few years turning this mess around. Thankfully, today, we are in a much better financial position.

Part 2 to follow…