No Debt Plan

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Jonathan over at Master Your Card recently asked his readers, “Who Wants to Be a Millionaire?“. He gave ten tips on how to achieve becoming a millionaire.

I thought it might be fun to provide the mirror image of those tips. In short, to show you how to not become a millionaire. Here goes!

Ten Steps to Avoid Becoming a Millionaire

1. Accept whatever salary an employer offers. Negotiating is a hard, scary process. Don’t bother with it and just be happy you have a job.
2. Don’t try to improve yourself at work. Stick to the status quo. Act like you’re in a union. Only do what you are told to do. Ignore naysayers or people warning you of an upcoming layoff.
3. Never leave the company you work for. Unless you are fired or laid off, don’t leave your current employer. Remember, they gave you a shot! You owe it to them to stick around for as long as possible.
4. Don’t track how much you earn and spend. Budgeting by far is the most difficult thing to do in personal finance. It takes a lot of time and can expose our true financial selves. That can be painful. Just don’t do it.
5. Spend more than you earn. If the credit card company is willing to let you pay off that plasma TV next year, why shouldn’t you? You’re in your prime! You can save later and catch up. It’ll be easy then. But for now, that Porsche Boxster, 4,000 sq. ft. house for two, and an exercise machine look mighty fine.
6. Ignore work benefits. 401k plan? Sounds kind of funny to me. Why would the company want to give me money? Plus, I’d miss that 3% in every paycheck. Honest. I’m actually going to write an entire post on this soon, so stay tuned.
7. Ignore your tax withholdings. Huge refund checks at the end of the year always save you from financial disaster. Why would you ever want to change that? It’s so much easier to just get the big check after tax season.
8. Don’t open any IRAs. You’re already doing that darn 401k thing — that’s more than enough! 3% of your income already hurts. Plus, doesn’t IRA stand for Independent Righteous Arsenal?
9. Invest sometime later. Remember, you’ve got bills to pay. There isn’t enough money to sit aside for investing. Just wait. You’ll use next year’s raise, or wait until the kids move out of the house. Then you’ll have time and money.
10. Saving is complicated. Those guys on late night TV with the $99 investment programs must have gotten it lucky. Now look at them — making money by sharing their tips with the world. Hold on. I’ll be right back. I need to go order one.

Phew, that was hard. Time to go be a couch potato. Or maybe I’ll keep sitting here…

This is our first spring in our new house. We are getting to learn — and spend — money on landscaping, grass upkeep, etc. I mowed my parents’ yard growing up, and spread fertilizer when they told me to. I never really got into all of the details of what fertilizer to put on, and when.

So we learned our first lesson as clover started to pop up in the yard. It was a small patch toward the street. Unfortunately, I procrastinated. Before I know it, there are ten huge patches in various parts of the yard. It really spread like wildfire!

I went to Lowe’s and bought some general weed and feed to spread on the whole yard. I also saw some Weed-B-Gone on my way out that was marked down extremely cheap. Being uneducated in the fertilizing world, I bought the bottle for $2 or $3. It took me a few extra days before I actually went outside and sprayed the clover patches. It says on the bottle that it should take a few days to really kick in.

Well, a few days went by and the clover looked mostly unchanged. It had changed colors only where the spray had hit. Nothing was dying.

Then it struck me: I bought weed killer on clearance. Never buy weed killer on clearance. It is last year’s batch and will be ineffective on your weeds. It took a lot longer before the weeds started to look a little pitiful, but they definitely weren’t dead. I had to go out there with a spade and pull up the patches myself.

I’ll mark this one up to getting an education in home ownership. For the other homeowners out there, what mistakes have you made along the way out in the yard?

Read some other financial mistakes.

Perhaps you are not a procrastinator like myself. You’ve got your list organized, and you are ready for life to change. You’ve got a budget, you’ve planned ahead, and you are now anxious to see results.

“Why aren’t we out of debt yet?”

“Why can’t we retire yet?”

“Why isn’t anything getting easier for us?”

Perhaps you are being a bit impatient? This is the opposite end of the spectrum from procrastination. You simply can’t wait for something to happen. You’re anxious about progress on your goals. That can be healthy if kept in check. Not kept in check, it can impede your ability to move forward. It may even encourage you to question your past actions. That can end up with you undoing any positive progress thus far.

For example, we recently funded a Roth IRA for the 2007 tax year. We put $4,000 in with Vanguard. 2008 has been a crazy year for the stock market, as I’m sure you’ve noticed. Some time last week I checked the balance on our IRA and it was down 2.5% — within a month of opening the account! That was not a complete shock to me, but it still hurt to look at. If I were impatient and hoping for better results, I might do something rash like move the investments to something currently hot (like commodities) or even pull the money out of the account. Either of those are poor choices, as noted by the account recovering all but a small portion of its value at the end of last week.

A 2.5% loss within a month isn’t great, but as far as I know it was better than the market had accomplished that far. A loss of that little is virtually meaningless over the next 40 years. Imagine I had closed the account, or never put additional money in. The long term loss caused by that poor decision would be massive — more than 2 million dollars by my calculations.

So to answer the above questions, why aren’t you out of debt or able to retire just yet? Perhaps you just got started, or recently had a setback. Give it some time, and continue to make smart moves. Doing something is better than doing nothing. Just don’t expect results today. Take your debt reduction and wealth building steps one at a time.

Debt Kid is giving up his Nintendo DS Lite to listen to some dumb purchase stories. I’ve seen it on several other PF blogs, so what the heck here’s mine. Also check out Debt Kid’s blog in general. An interesting story that is going to be an uphill climb. Best of luck, Debt Kid.

My first car was a 1995 BMW 318is with an automatic transmission and a sunroof. My parents originally told me to save up my money and buy my own car. I targeted a 1990-1992 Mitsubishi Eclipse. They were easy to work on, and could go fast. It turns out they are also death traps according to insurance companies. That idea was quickly shot down. My parents then decided they would rather have me in a safe vehicle that cost a bit more than have me die in a wreck. Fair enough. Long story short, I ended up with this BMW and purchased it with 127,800 miles on it.

Surprisingly enough, this is not my dumbest purchase ever. It was an expensive car, but it was fun and safe.

No, my dumbest purchase is something I bought for the car. Lowering shocks/struts/springs. I did a lot of research over at BimmerForums.com (cars = bimmer, motorcycle = beamer; get it right). I ended up purchasing a $1,200 lowering kit that included 4 Koni shocks/struts and H&R Sport Springs. I also threw in some reinforcement stuff for the rear shocks because the sheet metal around the shock housings can be weakened.

All in all, this wasn’t a terrible decision. I saved up my money, paid for it on a credit card, and paid the credit card off at the end of the month. Yet this was something I didn’t need. This was definitely a want.

On top of that, a friend and I installed them ourselves in my parents’ garage. Professional installation would have been around $400! That’s a lot of money. Aw heck, we can do it ourselves…

Needless to say about a year later the front shocks were completely blown out. We had installed something wrong and they were ruined. The car rode very rough, but how was I to know that it shouldn’t ride that rough? I had to buy replacements, another $600. I also ended up not getting an alignment after we installed them, a horrible rookie mistake. Also about a year later I discovered my rear tires had worn through to the metal underneath. When your tires look like that, it is serious business. I could have experienced a blowout on the interstate that could have killed me. Tires were of course another couple hundred dollars, plus the alignment.

Photo by Joe Pemberton - this is what a tire worn down to the metal looks like. Now imagine this on a car tire, and in a much larger area.

This was one of those things that I chalked up to experience. Live and learn. But it really cost me some serious money not just once, but a few times over with having to replace things.

I don’t regret it, but do wish I could go back and smack the younger me. I might even still buy the lowering equipment, but I would get it installed correctly!

1. Change car air filters.
2. Put up window film next to front door (frosted look so you can’t see straight into the house.)
3. Finish wills and powers of attorney.
4. Open Roth IRA.
5. Call home builder re: 2nd bathroom fixes.
6. Work on parents’ investments.
7. Put wedding video on CD.
8. Buy weed killer and weed & feed, put on grass.
9. Send up wife’s disability insurance application.

This is a list of some things I have needed to get done for the past month or so. Until this past weekend, I had done absolutely none of this (bolded items are now incomplete). Why? Procrastination.

Why do we let it affect us? If I had an answer, I wouldn’t be writing this. I think awareness is part of it. We don’t find a way to constantly remind ourselves of what we need to get done.

I think the biggest part is we don’t see the long term consequences of inaction. Let’s look at my list above and come up with some possible consequences.

1. (Minor) Poorer car performance.
2. (Minor) Not feeling as safe; people could see into our living room.
3. (Major) Our estate is not in order. If we were killed in a car accident, it would be a legal mess.
4. (Major) Retiring later than we want, retiring with less money, missing an investment opportunity with the markets being down so much right now.
5. (Minor) Continue to be annoyed by minor issues that need fixing in our 2nd bathroom.
6. (Major) Possible loss of large sums of money for my parents.
7. (Major to us) We could lose the camcorder tapes (or they could deteriorate or become damaged) and lose our wedding video forever.
8. (Minor) Clover will continue to grow in our yard.
9. (Major) If my wife were to become disabled for a long period of time, we would be in financial straits.

Looking at that list, 55% of the items are major to us. Major meaning we would really be wishing we had taken care of them before something happened. I still need to do four of the five as well — not good!

This weekend and the first two days of this week, we completed the non-bolded items from above. It feels good to mark off the items that have been on the list more than a month. As I write this, I can still see we have some major holes to close up. The simple exercise of writing this post has shown me we really need to get our act together.

Procrastination can take small issues and turn them into major problems if you let them sit. (For example, I bought weed and feed fertilizer, as well as a targeted weed killer. I haven’t applied the fertilizer, but I have applied the weed killer. If I went ahead and put the weed & feed on the grass, it might help prevent clover from growing in other areas.)

So what have you been waiting to do? Opening that investment account? Do it. Creating your budget to get out of debt? Do it!

What are you waiting for?

The original title of this post was going to be “The Story of the Gas Bill and the Bounced Check.” That seemed a bit long, but we’ll get to those details shortly.

Everyone Does It

Everyone makes finance mistakes. Seriously! Every person out there at one point in time has done something boneheaded, something stupid that affects their finances. All of the bloggers, celebrities, and pundits you read from have done it. Dave Ramsey? Lost millions in his twenties and filed for bankruptcy:

(Source: Wikipedia) At the age of 26, through his brokerage firm, Ramsey Investments, Inc., he had built a rental real estate portfolio worth more than $4 million. He became one of Tennessee’s youngest brokers to be admitted to the Graduate Realtors Institute.

Ramsey’s debt-fueled success soon came to an end as the Tax Reform Act of 1986 began to negatively impact the real estate business. One of Ramsey’s largest investors was sold to a larger bank, who began to take a harder look at Ramsey’s borrowing habits. The bank demanded he pay $1.2 million worth of short-term notes within 90 days, forcing him to file bankruptcy.

Ramsey made an enormous mistake that cost him millions of dollars. The fact that you made a mistake is not what ruins you. The real kicker is how you react to the mistake. Do you learn from it or ignore it? Dave Ramsey filed bankruptcy, rebuilt his life, started talking to couples in his church about finance, and now has millions of dollars. There was a lot of hard work in between, but you can tell he learned from his mistake.

Our Mistakes

I want anyone to read this blog to understand I am not an untouchable, perfect person. I make mistakes just like you do. In fact, I made two large mistakes in the last week.

We moved into our new house the last weekend of September. We got a bill from our gas utility company for service through October 22. We paid the bill and went on our way. With all of the chaos going on in our lives — new house, wife with her first teaching job, me starting my MBA — I failed to notice that we had not received a gas bill since then.

I called the gas company at the beginning of January. I was assured my account was in good standing. There were no flags on my account, and we were current. Yet we hadn’t received a bill in three months. The customer service representative assured me a new bill would be coming out in the next few weeks.

This weekend we received the e-bill notification from the gas company. The bill is a whopping $340+! Ouch. Note that is spread over 2.5 months, but that still comes out to $130+ per month. That seems high to us, but since we didn’t know what our usage was costing us we could not change our habits. Needless to say, we’ve turned the thermostat down to try and cut back on the cost.

The second mistake I made angered me more than the first. As I mentioned previously, we use our paper checking account only for checks to church or other places that we cannot use a credit card. We keep a $250 buffer in the account to cover those small checks. If I have an expense coming up such as a power bill, I transfer the money from our ING account and then write the check.

Our homeowner’s association sent us the annual bill (which we had saved monthly to cover) for $440. During a busy morning I decided to write the check just to get the bill into the shredder and off of our office desk. I would transfer the money later — it would take a couple of days for the check to be deposited regardless.

You can see where this is going, right? I never transferred the money. I neglected to check our account online. Again, this weekend, I received a notice in the mail that we were in the red on our checking account. We don’t have overdraft protection, either. I figured we were in for a hurting. Yet, the notice said they had waived the fees to keep our business. When I login to the online account management, it says we are over $100 into the negative. The transfer from ING should come in on Tuesday. I’m skeptical that they won’t take out additional fees, but I guess we’ll see.

So what have we learned?

• Awareness is key. If we had realized our gas bill hadn’t been coming before we did, it is likely we would have received a bill in between. We could then react by lowering our thermostat.
• Discipline is needed. We had more than enough money to pay the homeowners association fee. A simple mistake could have cost of a lot of money in needless fees. I should have transferred the money immediately. On the positive side, this is the first time we have “bounced” a check. Our discipline in the past has paid off up to this point.
• Our emergency fund can help. We have an emergency fund saved up that should only be dipped into for actual emergencies. However, a “surprise” bill like our gas bill might put you over the edge for the month. We don’t need to go this far, but if we did, we could pull from the emergency fund.
• Is isn’t the end of the world. I have a temper, and stupid mistakes like these really get under my skin. A mistake isn’t the end of the world unless you make it so. Instead, learn from it and move forward. I’m going to be extra careful in the future with writing paper checks. I still won’t get overdraft protection; I’d rather save on the charge.
• Learn from your mistakes. Again, take your lumps and move on. Don’t forget the mistake, but don’t dwell on it. Fund managers of Selected American Funds (disclosure: I am invested with Selected American Funds - SLASX) Christopher Davis and Kenneth Feinberg frame and hang their worst investment decisions on a “wall of shame”. This reminds them of the past and to not repeat it. You’ll notice this post is filed in a new category titled Mistakes. I plan to do the same thing here.

So, what mistakes have you made?