No Debt Plan

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I was planning on talking about buying a scooter to save on gas costs today, but I got an interesting comment yesterday that I felt warranted discussion.

The comment was left on my post about earning more than $400 in free cash back using my credit card. I said in the post that I think Dave Ramsey is flat out wrong for his anti-credit stance. Here’s the comment:

Nice try trashing Dave Ramsey for no reasons. I sincerely request to think twice before you trash him again. He is not preaching to cut plastic or get out of debt for normal people like me and you who manage debt prudently. His target audience is way over the head in credit card debt and their finance charges for one month is greater than your annual cash back from Amex Blue. For people like these it makes perfect sense to not use credit card. Think about it before you cash in your rebate check next time - Amex/Discover charge about 3% for gas station operator, you are paid 5% rebate for charge the gas expense to their card - guess what - the rest of 2% is paid to you from the 29% interest rate and insane finance charges and cruel penalties these credit card companies charge to people who are already in deep trouble. Pick up the documentary “In debt we trust” from the local library and open your eyes.

For starters, I’m glad this person commented on the blog. It opens up the discussion, and heck, I love getting opinions that challenge my own. So I am not writing about this to just rip this person’s argument apart or anything. I just disagree.

Dave Ramsey is a big name author and radio personality in the personal finance world. He went through very hard financial times in the 1980’s and has bounced back to make millions of dollars. He has written several popular books, and always tells his listener’s to stick with his “Baby Steps” to financial freedom.

Here are those baby steps:

1. $1,000 to start an emergency fund
2. Pay off all debt using the debt snowball
3. Save up 3-6 months of expenses
4. Invest 15% of your income into Roth IRAs and other pre-tax retirement vehicles
5. College funding for children
6. Pay off home early
7. Build wealth and give; invest in mutual funds and real estate

Now that all seems well and good on the surface. And I agree with the commentor’s point — Ramsey’s system is not designed to be used by me. I have a handle on our finances. His system is the life buoy thrown from the coast guard ship to the people on the sinking vessel who don’t know how to get out of their situation. I buy that.

And I am also not arguing against the point that his system gets people out of debt. It does. But, like any system, it has flaws and could be improved. I have three major beefs with his system.

First, Dave wants you to pay off all of your debt with the debt snowball. For those that are not familiar this is where he tells you to pay the minimum payments on all of your debt, and any extra money you earn or find gets applied to the debt with the lowest balance first. He claims that finance is 80% psychology, 20% money or something like that. Paying off a few small bills give you a psychological boost to tackle the big debt.

While that may be true, it is mathematically flawed and ends up costing you money. A simple example: you have two credit cards with balances of $1,000 and 3,000. Card A ($1,000) has an interest rate of 9.99% and Card B ($3,000) has an interest 23%. Dave wants me to keep paying 23% interest while I knock out the first card. That makes absolutely no sense and is costing me money along the way.

My second beef with Ramsey is that he wants you to do steps 5 and 6 before step 7. This isn’t a major concern of mine, but I don’t think children’s education should come before retirement. For some people, saving 15% will set them up for life when they retire. For others, not so much. You can’t borrow for your retirement. You can borrow for your kid’s education. Remember that.

The third concern I have with Ramsey is his anti-credit card stance. This is my largest issue with the Dave Ramsey system.

I understand that there are people out there in the world that simply cannot manage a credit card safely. For those folks, I have no problem saying you should use cash and debit cards for the rest of your life.

However, I don’t understand why Dave’s system starts with getting out of debt and stopping the use of credit, and ends with building wealth… but continues the theme of not using credit. If his system was there to truly rehabilitate people, he would train them how to safely use credit.

This may seem minor to some people. So you’re missing out on $400 of free money per year. Big whoop, I can deal with that. But there are many extra benefits to using credit cards and if the person following his system is truly following it to a T, then it applies just as well to credit cards as it does to cash and debit cards.

The bottom line for me is just because I have a credit card, I don’t have to use it to buy things on credit. Technically, yes, I do. But I have the money sitting in my bank account waiting to pay the bill. So use your credit card like a debit card or a wad of cash. It’s all the same. It’s a representation of money. Again, I’m not saying every person on his plan could handle it. Obviously many can’t in our country. However, I think one of the final steps should be to reintroduce people to credit in a safe manner.

There are so many benefits to credit cards it just seems silly. I’ve talked about them in the past. It helps automate our finances. I pay most of our normal bills with the credit card (electronically), and pay one bill to the credit card company (electronically) at the end of the month. I’m not sending ten envelopes with checks to various companies, trying to time them correctly so I don’t overdraw my checking account. I get security when I travel or buy things online. If my card is stolen, no big deal. American Express steps up to the plate and takes care of me. If I’m on my honeymoon in Mexico and someone steals all of my cash… well, that’s a different story.

Dave Ramsey is a Great Guy

Let me finish by saying I like Dave Ramsey. He’s a Christian influence in the personal finance world. He’s a huge Tennessee Vols fan. We have a lot in common. But I do think that his system — like any system! — has it’s flaws.

What do you think? Is Ramsey a nut case, financial genius, or something in between?

We talk about balancing our personal budgets all the time. The federal budget is a huge beast that currently is running significant deficits. I think this is wrong and based off of dumb decisions by our Congress. I wish I could have my shot at fixing the budget.

Thanks to NPR’s Marketplace (one of the best radio shows around), you can take your shot at balancing the federal budget.

When you start, debt is 37.7% of GDP. Government is 20% of GDP. There is a $343 billion deficit. Here’s what I made changes to (numbers are savings over 10 years as stated by the game):

• Cut military spending by 10% (Save $541 billion). I don’t buy the fact that cutting 10% is going to endanger us to a list of perils. Nevermind the fact that terrorists typically are not fought with aircraft carriers and submarines… more like M-16s and men on the ground. Oh, and diplomacy.
• Bring troops home soon (Save $391 billion). I bet that is a conservative estimate on what we would save. We shouldn’t have gone in the first place, many of them don’t want us there. I’m all for peacing out.
• Cut foreign aid (Save $218 billion). May make me seem like a heartless jerk, but we have yet to solve poverty issues by throwing money at the problem. I’ve also read reports that in some parts of Africa, they don’t want our aid.
• Increase funding for arts in schools (Additional cost of $0.53 billion). The arts have consistently been cut. This is more of a state issue for me, but I am definitely pro-arts. My wife is a music teacher, and I sang all throughout my schooling.
• Increase EPA budget by 50% (Additional cost $38 billion). I think the reasoning involving this card is solid. The agency is had additional responsibilities thrown on it, and funding has remained flat for a decade.
• Clean up nuclear waste sites (Additional cost $16 billion). $16 billion is small peas and would have a significant environmental impact.
• Reform and duce farm subsidies (Save $10 billion). My family might not like this one, my grandparents were farmers. However, a significant chunk of farm subsidies goes to mega corporations that don’t really need them. I would be all for reforming the system to truly help out the family farmer.
• Double funds for wildlife refuges (Add’l cost $5 billion). Again, $5 billion is small potatoes and is a pro-environment move.
• Protect more endangered species (Add’l cost $1 billion). Small potatoes, significant impact.
• Cut discretionary spending by all government agencies 5% (Save $265 billion). I am aiming for a small government. Cut the fat.
• Eliminate pork barrel projects completely (Save $242 billion). This one really burns me up. We didn’t elect Congress to make a specific Congressman’s state better. Not a federal issue — get rid of it all.
• Increase mass transit funding (Add’l cost $33 billion). Our transit systems suck for a majority of the United States. Enormous cities have decent systems, but nothing near what many Europeans enjoy. Imagine not having to own a car…
• Simplify and raise Medicare fees (Save $31 billion). Might not be popular, but simplification might help reduce costs further down the line (fewer people needed to answer the phone to answer questions, etc.). Healthcare is one of the biggest issues and I don’t claim to be an expert.
• Repeal Bush tax cuts and tax the rich (Save $2,954 billion). That’s huge! I believe in everyone being taxed the same — no caps, etc. — and this is as close as I could come.
• Link AMT to inflation (Add’l cost $1,323 billion). AMT was originally designed to target the super rich and is now hitting some of the upper middle class. It should have been indexed to inflation from the beginning. Suck it up, lose the tax revenue today.
• Cap and limit greenhouse gases (Add’l revenue of $1,990 billion). Environmental move and additional tax revenue? Gravy.
• Increase social security taxes for the wealthy (Add’l revenue of $536 billion). One of the things that really annoys me is that social security tax is only taken out of the first $102,000 worth of earnings. So for the people out there earnings millions of dollars a year, they are taxed as much as the guy earning $102,000 per year. That’s ridiculous. The plan in the game raises it to $180,000… if it were up to me, I’d remove the cap completely.
• Raise tobacco prices (Add’l revenue of $54 billion). Smoking is stupid and increases health care costs.
• Tax private equity and hedge fund managers (Add’l revenue $26 billion). As far as I am concerned this is just closing a tax loop hole. These guys earn millions of dollars as income, but qualify it as a “dividends” so it is taxed at a lower rate.
• End breaks for big oil (Add’l revenue $14 billion). Tell me again why huge oil companies earning billions of dollars a year in profit should get tax breaks? Sounds like they don’t need it to me.

My Budget Results:

• Debt reduces to just 6.4% of GDP.
• $743 billion budget surplus, an overall swing of $1,086 billion.
• Government size reduced to 17.8% of GDP.
• I delayed the budget going bust from 2033 to 2068.

What happened with your budget?

Christine recently commented on one of my posts with a question about The Concept That Changed Our Financial Life.

I am trying to wrap my head around this concept but can’t. Can you possibly explain it to me in a little more detail? Is this an emergency fund or is it in addition to an emergency fund and how do you not use the money?

I’ll be glad to try and explain it better. Sometimes I’m not the best with examples.

To answer the question, no this is not a use of the emergency fund. It could be, but we prefer the “safety” of having additional funds set aside in case of emergency.

Below I contrast how the average Joe earns, spends, and saves money to what we do. Average Joe is living paycheck to paycheck. Money comes in on payday and lasts the next two weeks — just in time for that next paycheck.

Joe finds it hard to plan or save any money because he is constantly worried about paying his current bills. If he lost his job, he would be in quite the pickle because more bills would be do soon.

We do things a little bit differently. We saved up a monthly “buffer” in our checking account. That buffer is equal to the amount of money you spend consistently each month. If your rent, utilities, food, etc. is budgeted to cost you $2,000 per month then you’ve got $2,000 sitting in your checking account. So on Day 1 of the month, you’ve already got that money sitting in your account ready to be deployed for this month’s expenses.

Throughout the month when you get paid, you don’t spend that extra money. You keep it in the account, but it’s as if you’ve put it into an envelope that says “Next Month” on it. You can’t open the envelope until the first of the next month. Any additional income you earn over your monthly expenses goes into your savings. Any money that you don’t spend on your expenses (say your utilities cost $17 less than you expected) also goes into savings.

How about another visual?

Step 1: The Beginning of the Month

You’ve got your $2,000 in the account ready to be spend on your expenses. The expenses are listed below, sort of like an envelope system. If you write a check on April 2nd for your electric bill, you lower the amount in the “utility” row. If you buy groceries on April 7th and April 21st, on those days you would lower the “Food” row by whatever amount you spent at the grocery store.

As you earn income throughout the month, it is “deposited” into the “Deposits for April” row. Remember, you’re not spending that money. You’re spending the $2,000 you already had saved. And you don’t have anything in the savings row yet either. That comes at the end of month.

Step Two: The End of the Month

At the end of the month your Excel spreadsheet might look like this:

1. You’ve earned more than you spent on the month — a good sign. You earned $2,500 this month, but your budget from last month’s money was $2,000.

2. Some of your costs were lower than expected. You saved $38.63 on a combination of spending less on food, utilities, and whatever else you had in your budget.

3. Note you still haven’t spent a dime of the money you earned in April. That $2,500 is sitting up in “Deposits for April” ready to be turned into next month’s budget.

Step Three: Re-fill the Budget Categories

Now all you have to do is distribute the money you earned in April for May’s budget, as seen to the right.

1. Note that the total amount of money in your checking account hasn’t moved. You are just moving it from one place to another on a spreadsheet.

2. You’ve taken $2,000 out of your April deposit money (originally $2,500) and distributed it throughout your budget. $800 here, $300 there, etc. This leaves you with $500 left over from the previous month — a healthy amount.

3. You’ve also dropped that extra money you didn’t spend in April — $38.63 — to the To Be Saved line. You would add the $500 income left over as well to this amount, and apply it towards your savings goals.

And that’s that. You just went through a whole months worth of budgeting.

The hardest part of this whole concept is getting a month’s worth of expenses saved up. It could take a while to save $2,000. In the example above, it would take 4 months if you consistently earned $2,500 per month. Once you’ve got the money saved up, keep it in your checking account (we use ING’s Electric Orange, so we earn interest on it). As money comes in, it doesn’t touch the budget until the next month.

Following this concept will also make your life a lot more simple, at least in my humble opinion. We no longer have to time our bill payments based on when our paychecks will hit the bank account. We just pay the bill out of this month’s budget.

Christine, I hope this makes it a bit clearer to you. To use this concept, you’ve got to have a budget. You’ve got to know how much you can spend each month (the budget is the monthly maximum). Of course, if you spend less money, all the better. It drops to savings.

Readers, let me know if you have any questions. I’ll be glad to answer them via e-mail or, with your permission, use them on the site.

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

You just set up your budget. Let’s take a look at it. Where do you currently stand? Do you have money left at the end of the month, or are you going deeper in debt?

This concept is called free cash flow. If your cash flow at the end of the month is negative, you are just digging a deeper debt hole. If your cash flow is positive at the end of the month, then you are accumulating savings or cash. I found two business related visuals that go with this, but I don’t have the rights to them. Instead, here are links to business examples of positive cash flow and negative cash flow. And yes, you might consider running your life like a business. The concepts work exactly the same in this case.

We call it free cash flow because cash ‘flows’ from the top (income) down through expenses and hopefully into your pocket. Even $1 of positive free cash flow is something to be celebrated.

If You Have Positive Cash Flow…

Even if it only that measly little dollar, positive cash flow is where you want to be. If this is your current situation, congratulations. You are well on your way. Even if you are deep in debt, your positive cash flow can begin to chip away at the debt. For starters, you need to build up an emergency fund. We’ll talk about that next time.

Again, positive free cash flow means that you have cash left at the end of the month. You can put that cash to work in whatever way is necessary — savings, debt repayment, or investment. Strive to continue having this each month.

If You Have Negative Cash Flow…

Simply put this means you have no money left over at the end of the month, plus some additional debt. You have somehow found a way not to default on your debt, but you had to borrow more money to make it through the month.

I have some bad news for you. If you don’t do something to change the situation, you will eventually end up bankrupt. That is simply mathematical fact — after a certain period of time, you won’t be able to borrow your way out of debt. It will end somewhere.

You don’t want that. I don’t want that for you. So how do change your situation? I can’t do it for you, but here are suggestions:

• Cut everything you are spending money on out of your life. Of course you can’t cut literally everything, but this is what psychologists tell us the average human needs: shelter, food, water. That’s it. The basic necessities.
  • Shelter doesn’t mean…
    • A $500,000 house on a $50,000 income. Sell, and rent an apartment.
    • Keeping the thermostat at 77 degrees in the winter and 65 degrees in the summer. Lower the temperature in the winter, raise it in the summer.
    • A house, apartment, or condo full of nice things. Sell your HDTV, cancel your cable.
    • Cut everything that costs you a monthly fee unless it is absolutely necessary.
  • Food doesn’t mean…
    • Filet mignon at the fancy restaurants every weekend. It doesn’t mean elaborate meals at home every week. Cut your lifestyle, eat simple. Bread, peanut butter, jelly and some fruit should work just fine.
  • Water doesn’t mean…
    • Beer, soda, or even orange juice in the fridge. Water comes from the tap, you can filter it if you must. It is extremely cheap. Don’t buy expensive bottled water, either.
• Alternatively, you can earn more income.
  • Do anything you can to earn more money as long as it is legal. There are millions of ideas out there, so I won’t go into them here. Even if you had to bag groceries at a grocery store, or sweep floors at a factory, it is worth it. Remember, you have to get to positive free cash flow as soon as possible.

This may seem extreme, but I hope it opens your eyes. You cannot maintain negative cash flow indefinitely. It is only a matter of time before you can’t pay any of your bills. Make a change today. Get on the road to financial freedom. Cut some expenses. Get a part-time job. Get going!

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.

I received a reader comment/question on The Savings Snowball. Instead of answering within the comments, I thought I would share it here and flesh it out a bit. Here’s the question.

But how do you separate what you’re saving for?

My bank lets me put the money into a savings plan (banking in Israel is different - we don’t have “savings accounts”, just savings plans).

What financial management system do you use to separate out what you’ve saved into various blocks?

Let me clarify how our savings work. We only have one savings account with ING Direct. All of our “saved” money goes into this account. (ING does give you the option to open up multiple mini-accounts to save for specific purposes, but we don’t use it.)

Instead I use Microsoft Excel to track what is in the account. We have a Excel Workbook for our finances, and each worksheet within it tracks one account (savings, checking, etc.). So there is a worksheet for the ING savings account. We then break down and track each category within the spreadsheet.

An example that is similar to what we use is shown to the right. The top 5 rows are what is currently in the account. The first line shows the total of the four categories below it. All of the money is in the one savings account, but we track it individually with the spreadsheet.

Below that, if we transfer money into the account, it goes towards a specific category. If we were depositing $400, it might be broken up as shown.

The grouping on the bottom is the new total… simply the first group plus the deposit group to give the new totals in each category. I then copy the numbers from the bottom row to the top row to complete the update.

That’s how we track everything. Excel is a very powerful tool if you can learn how to use it. Most of what we do is just addition and subtraction, so your average user should be able to handle it.

I received an e-mail from a reader with a question. I told him I would answer on here to open up the discussion to anyone else that wanted to bring in some input. This post is rather long, but hopefully there are some advice that is useful to you.

I have been following your blog and I have a question about one particular item that I have not seen you discuss.

How do you and your wife prepare for major purchases that you know are unavoidable?

Obviously you have an emergency fund for things that come up that you do not expect. But what are you currently doing for the things that you do expect?

The main item in question for me is cars. I know that my vehicle will not last forever, and I know what my plan is for replacing them someday. But I am just curious what your plan for that is. I will share my plan. It is Dave Ramsey’s idea, but I think it is a good one. Basically you invest the equivalent of a car payment into a good mutual fund for 5 years.

After that first 5 years there is enough money in that fund to pay cash for a good slightly used car, plus enough money left in there that will continue to accrue enough interest that you will never have to put any more money in it. Meaning that every 5-7 years the fund will have earned enough interest to pay again for a good used car. The only modification I plan to make is to put the money I get from selling my current car back into the fund. I believe this will allow me to upgrade every 5-7 years as well.

All this is to ask:

1. Do you think this is a good plan?
2. Do you currently have a plan in place?
3. And if you don’t think this is a good plan what would you recommend?

So, a lot to tackle here. Let’s break it down.

For expenses that are unknown, the reader is right. We have an emergency fund for unexpected costs (water heater exploding, flat tire, car/house insurance deductibles, etc.).

For anticipated expenses that are down the road, we try to budget it out as reasonably as possible. Are we currently saving for our next cars? No, but they are on the list. Here’s some examples:

• Saving for a ‘new’ used car - we would like to get to the point that we are consistently saving for this, even if it were $100 per month. Every little bit counts. Saving a full car payment depends on what your idea of a car payment is.
• Saving for new tires for our cars - I think it would be a bit overboard to save up a specific amount each month for new tires right when you buy a new pair. If our monthly cash flow is healthy, I may just eat the cost of tires in the month it happens. If not, we may spread the cost out over a couple of months. If I see the tires are wearing down and I can plan for it, I would share the cost over several months.

In regards to Dave Ramsey’s plan, this is how I understood it. Assume you have a car payment of $350. You pay off the car this month. This should leave you $350 next month to do as you please. Dave’s advice is to continue to save that amount every month, just like you had a constant car payment. When the time comes to sell your car, you’ll have enough cash on hand to purchase a new used one… and restart the cycle. That’s the plan I’ve heard.

As to the plan that was mentioned by the reader, I am a bit skeptical. Let’s run the math (link to Excel sheet I created). If you pay $350 per month to yourself and earn 0.67% growth per month after fees and taxes (8% per year / 12 months = 0.67%). Pay the $350 for 60 months, and you should have $25,888.35. Let’s take out $15,000 for a used car, leaving you with $10,888.35. (Of course, you would add the selling price of your previous car to that $15k as well, so you might not need the full $15k.) That principle is going to have to grow over the next five years to not only pay for the next used car, but also keep funding itself to buy the car after that. Running the math, the likelihood of that happening looks slim to none. It would work to buy the first and second car, though.

If you bump it out to seven years of payments and seven years between cars, the math is a lot more promising. It looks like you could pull it off. Really, in the end, if you have enough in an account that earns a consistent return, you would be able to estimate what your ‘income’ off of the fund would be. If that amount over your specific period of time is greater than the cost of a new used vehicle, then you’re golden.

However, you can only crunch numbers for so long before it starts getting really complex. You can’t factor in for issues like investment loss (or lower growth), inflation, taxes, or the value of the car you would sell. Well, you could, but it would be complex!

I would always be cautious in putting money into an account that I am going to need within a short time frame. I think five years is a relatively short period of time compared to retirement. Imagine putting your money into the mutual fund in 1999 and watching it lose a large amount of its value over the next few years. If you had to buy a car in 2001, you would be in some pain. If the money was in a more safe vehicle (bonds or a high yield savings account), I would be more comfortable, but then you are giving up possible investment growth (difference between what it could have grown and the yield on the account).

To answer the questions above:

1. Do you think this is a good plan? - I think it can work. It might be a little too risky for my blood. I would prefer a savings account for liquidity purposes. As JD at GetRichSlowly likes to say, “Do what works for you.”
2. Do you currently have a plan in place? - Actually, no. (Gasp!) Saving for a new car is on our savings snowball list (more on that later), but we are focusing on funding our NYC trip, emergency fund, MBA debt in deferral, and Roth IRAs currently.
3. And if you don’t think this is a good plan what would you recommend? Again, do what works for you. I don’t think it is necessarily a bad plan. It really depends on the cost of the ‘new’ vehicle, how much your investments really return, and a ton of other factors. The bottom line is awareness is a big step forward in this arena. Simply knowing that a car is going to be need to be replaced ahead of time puts you a step ahead in the game.

We are planning a trip to New York City in December of this year. We are consistently saving up for it with an end goal of having $3,000 by the end of August. We’re putting away $200 per month for it, and are right on target to wrap up saving in August.

We want this trip to be memorable, of course. On the other hand, we want to be as “travel frugal” as possible to get the most bang for our buck. We’re not going to be cheap about it because this is probably the only time we’ll ever go to NYC. We’re not afraid to drop some money on something really special, but we’re not here to see how quickly we can blow through the money. We are planning on staying 5 or 6 nights, if possible.

Some ideas we had. Do you know how much some of these activities might cost?

• Statue of Liberty
• Grand Central Station
• Rockefeller Center
• Broadway
• Central Park (we want to go ice skating :))
• Empire State Building
• Metropolitan Museum of Art and the Guggenheim
• Times Square
• WTC Site
• Radio City Music Hall
• Wall Street
• China Town
• seeing The New York Philharmonic
• shopping in general
• great, unique restaurants
• Maybe we’ll get lucky and see the Cash Cab…

We have no idea where we might stay. So I’m asking you — if you were going to New York City, where you would you stay, what would you do, and how much it would cost you?

Many times in the personal finance world, we focus on the small things. Cutting coupons, getting 1% better rates on savings accounts, or using index funds to cut investment fees (and thus raise long term returns). This is all well and good; heck, you will see me saying the same things. The little things really do add up to become big things.

Ah, yes. Those bigs things.

Before you start focusing on the little things, focus on those giant, elephant in the room issues. Adding up many little things may add up to one big issue, but if you’ve got ten big issues to tackle then you are not helping yourself.

How about an example? It’s full of detail for a reason, so pay attention…

Jack brings home $2,700 per month after taxes. He lives downtown close to work, and rent on his one bedroom studio apartment runs $1,000 per month. His cable/internet bill is $150 because he just loves those movie channels. He usually spends $300 on groceries, and his cell phone is $100 each month (he just had to have the data plan for his Blackberry). Utilities usually run $150 each month as well.

Since Jack lives downtown, he walks to work every day. Yet he pays for a parking spot in his apartment’s deck, and keeps his commuter car there. His total car costs run him $500 per month.

Jack is a recent graduate with a heavy student loan load on his shoulders. His loan payments cost him another $200 per month. While in college he racked up some expensive credit card debt. He pays his minimums of $50 per month.

So it seems that Jack’s total expenses run $2,450 per month. His income is $2,700. Not bad, right? Jack is cash flow positive with $250 left at the end of every month. A little bit to save, a little bit to put toward retirement, or hey — pay down that debt!

Jack is a lucky guy. He seems to have discovered this new personal finance website called No Debt Plan. He reads it daily and has decided he wants to make some changes. Jack decides to definitely start cutting back in some areas and makes the following changes:

• He only puts regular gas in his car, and only drives if he absolutely has to. Otherwise he walks or takes public transportation. This saves him $10/month.
• He really goes after the sales at the grocery store . He tries to buy in bulk and make large meals so he has leftovers. This saves him $18/month.
• He cuts the heat down a few degrees, saving him $8/month.
• He calls his credit card company and successfully wins a reduction in his rate, saving him $5/month on his minimums.

He sits back, turns on the TV, and feels pretty happy with himself. He’s saved himself $41 each month just by these extra efforts.

But wait. Let’s look again. Jack has missed several big ways he could save…

• Cut his cable/internet package back. Get rid of the movie channels, and all the other extras. He could cut his monthly cost down to at least $100, probably $75. Savings: $50-75.
• Reduce the cell phone plan - get rid of the data plan unless work pays for it. Possible savings: $30.
• Jack probably does not need a car. If he stays in the city most of the time he can walk or take public transportation. If he needs to go out of town, he can always rent a car. This is an enormous savings of $500 per month.

The total savings from these ranges would be at least $580. Jack’s original $41 savings doesn’t sound that great in comparison. His focus on the little things has made him feel great about finances. Yet if he could make some serious changes (namely, getting rid of the car expenses), he could make some serious progress.

The bottom line: tackle the big issues in your personal finance life before you really focus on the small ones. It might even save you some effort from all that coupon cutting!