No Debt Plan

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An article on CNN’s website for Fortune makes me a bit nervous. It is titled Buffett: Don’t Bank on Big Returns. He points out that during the last century, the DOW went from 66 to 11,497. This averages out to 5.3% per year. If the market maintained that average until 2100 the DOW would be worth nearly 2 million. He thinks this is highly unlikely.

I’m not too sure to think… if the markets (and inflation) continue to grow, you think it would be as he describes. I think I need an economist’s opinion.

There was a discussion over at the GRS forums that made me want to write this. What do you do with all of those bank and credit card statements that come to your house? Throwing them in the trash is asking for trouble. Identity thieves could steal your information and then you’ve got a whole new set of problems to deal with.

I recommend buying your own paper shredder. But is a shredder really worth it?

The likelihood of someone stealing your garbage that just happens to contain a piece of paper with your social security or account number on it is slim. Still, identify theft does happen and it is a major pain to get cleared up. How would you like to not only have to completely start over with your financial life, but when you start you are further back in the race than you were when you started originally? It must be very frustrating. Varying reports have said it can take more than 60 hours to recover from identity theft. Thankfully (knock on wood), I have never experienced it.

A lot of personal finance is changing habits. Buying a shredder is just another way to change your behavior ever so slightly for a positive result. You want to completely destroy anything with your social security number, account number, or other sensitive information (brokerage statements, what’s left of your checkbook after the last check, etc.). I even shred the return portion of credit card offers. Every day we go through the mail and sort it into various piles. There’s an action pile, a throw away pile, and a shred pile. A very simple system. It takes maybe an additional minute to shred the extra documents rather than just throwing them away. I feel the effort and cost are definitely worth it.

Types of Shredding

There are several different types of shredders. Money magazine did a test a while back for home use (the website says the article is from 2005 and I have to think there was another best since then, but I can’t find it). What we use is a 8 sheet cross-cut shredder. A cross-cut does exactly what you might think it does — it shreds sheets in both diagonal directions. This results in small diamond shaped confetti. I guess if someone was really determined they might be able to piece all of the small pieces back together, but this works for us.

In the discussion at the GetRichSlowly forums (linked above), someone mentioned there are different levels of shredding quality. I found a website, ABC Office, that discusses the various types of security.

Our shredder cost $50 at Office Depot. You should be able to find one for a similar price point, maybe even less. If you use FatWallet, you could probably earn some cash back. It is a bit of an investment, but it gives us peace of mind.

Several years ago I started tracking my gasoline expenses in a paper logbook that I keep in my glove box. I got the tip from a car enthusiast forum as a way to keep a heads up for car issues. I fill it out every time I fill up my gas tank.The logbook tracks:

• The date
• Total miles on odometer
• Total miles on the previous tank of gas
• Price (per gallon)
• Total cost
• Number of gallons

Pretty basic, but it holds a lot of data. If you’ve been reading this blog for a while you know I love spreadsheets. So, you guessed it, I put the data into a spreadsheet. The idea is you can calculate your miles per gallon for the previous tank of gas. If your miles per gallon drops significantly (and your driving habits don’t change), you have a car issue of some kind. It’s a simple tool to help you catch something before it becomes a big problem (maybe your fuel filter needs to be swapped out).

I now have data for the past six years — since 2002. There are some interesting trends within the data. Of course, gas prices have risen dramatically. The lowest recorded gas price per gallon I have is from February 2002 at $1.06. Ugh. Gas in our area is now at $3.09 and with oil above $100 barrel may hit $4 this summer.

From 2002 to present, I have averaged 26.255 miles per gallon. Not too shabby. You can tell where I am doing a lot of city driving versus going on long trips with hours on the highway. Sometime in the future I’ll throw up some of the charts that go along with the data.

Do you track your gas mileage in any way?

I’m not above cutting coupons to save some money. I haven’t discovered many consistently good coupon sites. One I have enjoyed is Coupons.com. You have to install their special coupon printer software (no big deal), and off you go. I recently printed off 6 different coupons for things we use on a regular basis.

The only thing about all coupons is they are going to be for name brand items. Sometimes the retail price of the item minus the coupon is still more than an equivalent generic or house brand. If the house brand is just as good, why not use that?

Also, I know there are a ton of manufacturer’s coupons floating around out there. I haven’t found one site that works to print them all. Coupons.com usually has about 6-8 pages of coupons, each with probably 6-8 per page.

I did find GroceryCoupons.net the other day, but can’t get the site to work. I can view all of the coupons, but it says you have to login to checkout. Well, I’d love to login, but I can’t find how to register. I think I would have found it by now, but if you successfully use the site please let me know!

And if you know of any other large sites that don’t charge for sending you coupons, let me know.

This is the fourth post in a series: The No Debt Plan.

I have been afraid of writing this post for some time. Out of anything I will ever write on this blog, this is by far near the top of the list of the most important topics. To succeed in your financial life, to run your No Debt Plan, to really understand what is going on… you must be able to budget. There is no alternative. Call it a spending or savings plan if you like, when it comes down to it they are all the same — a budget.

Definition

From Webster’s Dictionary:

4 a: a statement of the financial position of an administration for a definite period of time based on estimates of expenditures during the period and proposals for financing them; b: a plan for the coordination of resources and expenditures; c: the amount of money that is available for, required for, or assigned to a particular purpose

Whew! Quite the mouthful.

I define slightly differently. A budget is a tool that

• lets you see where your money is coming from, and
• lets you tell it where to go

I think that last little bit is especially important. A budget doesn’t tell you where your money went. Your money shouldn’t be going anywhere without you knowing about it. It does show you were you told it to go.

The Pieces of a Budget

Your budget will have three main pieces - income, expenses, and free cash flow. Hopefully income is greater than expenses. This leads to free cash flow. I’ll talk more on understanding free cash flow in the future, but essentially it is what is left after expenses are deducted from income. If everything is going well, it is a positive number. If you are spending more than you are earning, it is a negative number.

Income is simply any money you bring in during the month. We typically only count income from jobs in this category. We use gifts, rebates, or money made selling personal possessions differently. Expenses are the things you spend your money on. Rent, utilities, food, gasoline, debt minimum payments, and car payments are all examples of an expense.

Where to Start

The budgeting process can be very eye opening. If you are sitting at your computer reading this and you have no idea where your money goes each month, a budget will solve that very quickly. Again, the goal is not where to see where your money is going, but for you to tell it where to go. But! If you don’t even know where it is going, a budget will do that too.

So, where do you start? Let’s just start at the top of the list above: income. Where is your money coming in from, when does it go in your account, and how much is it. For most people this should be pretty simple with just one job. Total the amount of money you expect to bring in every month, especially this month. Precise numbers are better than generalities, but anything will do at this point.

Next up are your expenses. This can be where the headache starts, so try not to get discouraged. A lot of data is involved because you aren’t normally spending all of your money in one location (unlike income, which is usually just one or two sources). To get this data, look at your bank accounts and credit card activity statements. This should cover most everything. The bank accounts will cover cash withdrawals as well as debit card use. Credit cards will show you each location you are spending money. Figure out what category each purchase is in. Sometimes you just have to pick one category if it is mixed.

Now compare the two categories. If your income is $3,000 after taxes, and your expenses are $3,400… you are in the hole. If expenses are $2,900 you have some breathing room. Either way, you now know where you stand. Now what?

Tell Your Money Where To Go

Line up all of your expenses and determine how much you should be spending on them. Make a list of expense categories. Put what you normally spend next to the category name. Now, determine where you can cut back. This is where you are telling your money where to go. Commit to spend only $300 on groceries this month and don’t allow yourself to eat out. Call your cable company to reduce your cable package. Cancel that gym membership.

Once you make your adjustments, look at the bottom line. How much extra money could you save if you implemented your changes? This is money that can be applied to debt (and later in the process, for savings). Remember, you don’t necessarily need to earn extra income if you can commit to just cutting back.

This is a huge step and it does require some work. You aren’t going to find yourself debt-free in the future without doing some work. Later on in the process I’ll share some tools you can use to help set up a budget.

MyPoints is a marketing website designed to encourage users to visit sponsoring retailers to buy stuff. If you buy stuff at Circuit City through MyPoints, you get 4 MyPoints for every dollar you spend. Later on you can swap out your MyPoints for gift cards to other retailers.

I can’t remember which personal finance blog I saw it on, but I was skeptical at first. Anything where I have to spend money to get money makes me nervous. However, this sounded a bit like FatWallet, which I have discussed in the past. If I am already planning on spending money on something, I have no problem in getting a little bit extra reward for doing so.

There is a slight difference with MyPoints. You don’t necessarily have to spend money to accrue points. Every day they send out at least one e-mail to you with an offer, survey, or reminder of some sort. Just by clicking the link within the offer you usually earn 5 points. Do this enough times and you’ll earn your gift card. It may take a while, but it is free nonetheless.

Here’s how I setup my MyPoints system:

1. Opened a new Gmail account specifically for offers. This way if I end up getting any spam, it doesn’t affect my normal e-mail.
2. Signed up for MyPoints. I can send you a referral e-mail if you want, but I’m not too worried about it.
3. Fill out your MP profile — adding more detail earns you more points. I think you can earn up to 60 points total just for doing this.
4. Fill out the little surveys on the MyPoints front page. These are worth 5 points each. I recommend if it asks you something along the lines of, “Would saving hundreds on your car insurance be nice?” you generally want to say “No”. Saying yes will send you to an advertisement.
5. Every few days check the e-mail you signed up with. Click on all of the links within the MyPoints e-mails.
6. Rinse and repeat.

I am currently up to 415 points. What will that get me? Not much. I put all of the sponsors, points amounts, and gift cards you can earn into a spreadsheet. I wanted to see where I could get the most bang for my point. Here’s what I found:

• Restaurant.com offers the best points per dollar ratio. 1,250 points will get you $25 at restaurant.com. That’s a ratio of only 50 points per dollar.
• Many of your big name retailers offer the worst points per dollar ratio. WalMart, Walgreens, Target, iTunes, KMart and several others are at 150 points per dollar. However, that is at the lowest points amount offered by those companies. Most of them give you a discount if you save up and use more points. For example, at KMart you can get:
  • $10 for 1,500 points (150 p/$)
  • $25 for 3,500 points (140 p/$)
  • $50 for 6,750 points (135 p/$)
• The average points per dollar ratio is 132.

The Bottom Line

The bottom line is the more points you acquire, and thus the longer you wait, the more value you can get for those points. We’ll give it a shot and I’ll probably end up getting a gift card to Old Navy or Cracker Barrel.

You can check out the Excel spreadsheet I used as well.

Update:

• MyDollarPlan and Paid Twice use MyPoints, too!

I have to admit I am quite jealous of some of my fellow financial bloggers out there.

• Trent at The Simple Dollar quit his day job. Well, turned in his resignation… but nonetheless. That’s awesome — way to go Trent!
• JD at Get Rich Slowly is currently transitioning into full time blogging.
• Flexo at Consumerism Commentary is considering it, too.

It has been incredible over the last year or so to see these sites really take off. I used to read TheSimpleDollar and GetRichSlowly every day. I remember when they only had 5,000 RSS feed subscribers. Trent is now up in the 20,000+ range, and JD is almost to 50,000.

True inspiration, guys. Congrats on the success. I hope to join you someday!

BrokeGradStudent has posted the latest edition of the Carnival of Personal Finance. It’s title The College Years. BGS did a great job with the theme, I really enjoyed it. And thanks to BrokeGradStudent for including my post The Savings Snowball.

Here are some posts I especially enjoyed:

• MyTwoDollars tells us about his sources of alternative income. Some of them are specific to MTD, but there are a few in there you can try.
• The Financial Blogger shares The Trap of Working Harder. Makes an excellent point. We work harder to buy more stuff, and we usually buy it with debt which makes us have to work even harder after that. We end up exhausted with nothing but a house full of stuff to show for it.
• Two Wise Acres talks about remodeling a kitchen on a $4,000 budget. Obviously someone is investing in real estate. I’ll definitely be back to see this one as that is something I am personally interested in.
• Money Crashers advises everyone that is renting to get renters insurance. I had coverage in college for a whopping $12 per month. I could have purchased everything I owned one and a half times over on the coverage, too.
• A Penny Closer donated $728 worth of stuff. Less clutter is great. I got excited about a link to something called It’s Deductible that tells you how much your stuff is worth (and of course if it is deductible). Unfortunately it looks to be a TurboTax customer thing. Oh well.
• The Digerati Life asks us how we got involved in personal finance. My parents gave me a subscription to Money magazine in college. I saw the numbers and said to myself, “Wow, I need to learn more about this.” The rest is history. Thanks Mom and Dad!
• Badlady talks about entering a lot of sweepstakes. If you are careful and don’t mind giving out some personal information, it can turn out well.
• MoneyCrashers talks about budgeting on an irregular income. The first step listed is crucial, and we do it too. I am on base plus commission.

That’s it for now. Check out the Carnival for all of the posts.

Lynnea at BeingFrugal has posted up her edition of the Carnival of Debt Reduction. Be sure to check it out — my post explaining Pre-Step #3 to the No Debt Plan was included.

Two carnivals in a week. A lot of good reading!

Well I just finished up our taxes on Saturday afternoon. The damage isn’t too bad as far we are concerned. We owe the federal government just over $500, and Alabama owes us about $375. Don’t ask me how it got that way, but that’s what TaxAct came to. Net result: we owe $125. Thankfully, we had socked away $1,500 “just in case” for taxes.

We had several life changes in 2007 that affected our taxes considerably:

• We got married in January.
• We bought our first house in September.
• My wife graduated in May and started her teaching job in August.

I told my wife to work her W-4 so as little tax as possible was withheld, within reason. I would rather owe $100 than get $1,000 back. She told the HR department this and they said they would take care of it. Result? We don’t know what exemptions they put down and she is being under withheld greatly. A simple mistake that can cost you big at tax time. Thankfully, it is a simple fix. We will make an adjustment to that this coming week so we don’t owe more next year. Owing too much can result in penalties and nobody wants that!

Are you ending up with a massive refund this year? The same in years past? Stop loaning the government money interest free. You can make withholding adjustments at any time during the year. Plus it increases your take home pay! As long as your diligent with the money, you end up better off. Granted, some folks know themselves well and decide not to do this. They fear they will blow the extra money. That’s understandable. However, here is what I would do if I got a huge refund two years in a row.

1. Print off a new W-4 form (PDF) and make adjustments to my withholdings so more tax is taken out each week.
2. Take my large refund amount and divide it by 52 weeks. This tells me how much money I should save each month to get the same result. Example: A $1,000 refund would be $19.23 per week.
3. Open up an ING Direct savings account and set up automatic weekly withdrawals of $19.23.
4. End up with $1,000 plus all of the interest earned over the year (of course, minus income taxes on that interest as well).

Alternatively, you could look at your next paycheck and see what the difference in take home pay before and after comes out to. Take that difference and save it.

Especially if you are in debt, increasing your take home pay can be huge. Sure you can apply your refund to the debt, but the entire last year you would be paying interest on the debt while also giving out money for free to the government. That is some seriously bad math. An increase of take home pay of just $12.50 per week would be a plus — that’s another $50 towards debt. You could save a ton of money in interest.

I would also monitor my withholding with the IRS’ Withholding Calculator. I was impressed with this tool from the government. You input data from your pay stubs, the previous year’s tax return, etc. and it tells you if your current withholdings on your paycheck are on track. If they are seriously out of alignment, positive or negative, you get a heads up that something needs to change. Notice a problem in March and you’ve got a lot of time to make changes. Notice it when you are doing your taxes next year and you are out of luck.

In short, taxes are part of life. Refunds don’t have to be.