No Debt Plan

No Debt Plan is a blog about living a debt-free life. If you're new here, you may want to subscribe to my RSS feed (e-mail subscription also available). Learn more about me, or some of my most popular posts. Thanks for visiting!

One of my good buddies, Michael, asked me a question online the other day. He mentioned he really enjoyed the “Only Buy Appreciating Assets on Credit” and “Credit Cards and Depreciating Assets Don’t Mix” posts. To summarize these posts I said a major problem with credit cards is people use them to buy assets that are worth less the day after they buy them, rather than worth more. An example is buying a plasma TV that you pay $1,800 for and 6 months later it is worth $1,200. That’s just silly.

However, he did have a question that will help me clarify the issue.

I loved your appreciating assets post. However, I had a question about using credit cards. If I use my credit card to buy groceries and gasoline, but pay it off at the end of every month, is that okay?

I have long been a proponent of using credit cards to simplify your financial life (one payment vs. several) and to earn cash back (or other rewards) for every day spending.

I did not make that clear in the two posts referenced above.

So, to clarify. When I say don’t buy depreciating assets on credit what I mean is don’t finance depreciating assets on credit. I define financing as carrying the balance on the credit card and paying interest/finance charges for the item. If you pay off your balance at the end of every month — and thus enjoy rewards without penalties — then go for it.

I recently received a comment on my post 10 Steps to Avoid Becoming a Millionaire.

Why is it that some people seem to think money just falls out of the sky. I take 3% for my 401K and it’s magic! Another 3% materializes out of thin air and the electric bill still gets paid.

I have news for you. Sometimes the salary you get covers things like rent, food, electric, water, clothes, groceries, medical bills, etc etc and sometimes there really isn’t 3% left over at the end of the month. Sometimes there isn’t even 1%.

Now I would really like to espouse that old “pay yourself first” thing I’ve heard, but there is something interesting there. What’s interesting is that I don’t send myself a cutoff if I miss the electric bill, I don’t send myself an eviction notice if I don’t pay myself the rent.

Some of us don’t have a pot to piss in or a window to throw it out of and whether you believe it or not, it can really not be from lack of trying or failure to relocate or some other cockamammy reason that’s always given for being poor. So cut us some slack, OK? Not everyone can “afford” to save or invest and we’re getting damn tired of other people acting like that’s a moral failure!

Now, for my response.

Kelly, I am sorry to see you have taken offense to the article. I’m open to discussion and appreciate you stopping by.

The simple fact that sometimes there isn’t 3% or 1% left over at the end of the month indicates to me that that person is not spending less than they earn. If your expenses are right up next to your income, you’ve got a problem. You probably know this, but maybe don’t know how to fix the situation.

You have two choices in this situation — spend less money, or earn more income. Spending less money is usually easiest as most Americans live a life of relative luxury compared to other countries and to previous generations.

That may sound ridiculous and over the top and that’s okay. Some of you will disagree with it and there are exceptions to every rule. But do you have a cell phone? Home internet? What cable plan are you on? These are three quick hits to cutting down on your budget that could save you at least $100-150 each month depending on your service levels. If “But I can’t live without a cell phone or TV!” is your response, well there’s the problem and why you have no money left at the end of the month.

Starting with those monthly plans is a great way to cut money. I’m not saying it will be pleasant by any means. Life without a cell phone or internet at home would not be enjoyable for me. Those communication devices are awesome. However, if you are just treading water with your finances — or worse, you are under water — it might be a necessary step.

Budgeting is another key factor to controlling your money (rather than it controlling you). It absolutely changed our financial life. It’s step one of my No Debt Plan. Sitting down and figuring out where you have spent your money each month for the last month or two can very eye opening (what do you mean we spent $300 eating out!).

And if you haven’t been inspired enough, Get Rich Slowly tells us the story of Crissy Thompson, “The Coupon Queen.” She pays around $10/month for groceries for a family of five. Legally. By using coupons. It takes a ton of work, but if you could save $200 per month on groceries that’s a huge impact!

As I mentioned, there is another way. Perhaps you have cut your budget to the bone. There is no wiggle room left. Your only other option is to make more money. Get a second job. Work on the weekend. Find ways to earn alternative income. In the past month and a week, I’ve earned over $400 blogging online (not on this site, on others). That’s not going to pay off the mortgage tomorrow, but it isn’t exactly chump change either. If I were in a desperate situation I would find a way to work at least 10 hours on the weekend, even if it was at $7/hour. That’s an extra $52.50 each week after taxes (assuming a 25% tax bracket). For a four week month that would be an extra $210 to apply to debt, build up savings, or to invest. It might not be much, but it could keep your head above water.

Obviously my original post about how to not become a millionaire took a reverse look at things. Saving 3% of your income may be a big milestone to you, so make it a goal and strive for it. Take some of the steps above, and see where you land in a few months.

I received a comment recently on the article where I asked How Much House Do You Buy Each Month? Nuggie asked,

How does escrow fit in, and does it ever make sense to prepay escrow?

Here’s a brief overview of escrow in relation to a home mortgage. (You can also get the general idea from Lending Tree’s information on escrow. The following is just my opinion.)

A quick explanation of escrow

Escrow is an account that the mortgage company opens up for you to hold onto different monies. Your homeowners insurance and property taxes are the most common uses for escrow. Part of your monthly payment includes your escrow monies. That means the mortgage company is holding onto your money to insure that you pay your property taxes and homeowners insurance. In fact, they pay them for you.

Why does the bank hold onto escrow for me?

The bank has a vested interest in the house. They require you to have insurance so that if it burns down, you can pay back the money they lent you. They require you to pay your property taxes so that your state/local government can’t take the house from you. That makes sense from a business perspective. I’m not going to lend a few hundred thousand dollars out to someone if I can’t be reasonably sure I will either get the money back or get the asset into my ownership.

Should I ever prepay escrow?

There are not many situations I can dream up where you would want to prepay your escrow. I do know that our mortgage holder, Suntrust Mortgage, gives us the option to apply any additional payment to escrow. As we discussed, escrow payments are based off of your insurance and property tax costs. This should stay fairly consistent year to year. However, a new tax assessment or perhaps upping the coverage on your house could increase either of the underlying costs behind escrow payments.

Your bank may also only make adjustments once per year. Our taxes should be lower than what we are paying into escrow because we were able to homestead our home here in Alabama. But Suntrust told us they only adjust the escrow payment for taxes once per year. If you were going the opposite direction — higher costs — then you might want to start paying extra each month so you don’t end up owing a large amount to your escrow account at the end of the year.

(Photo: Mill Street by Paul Keleher)

Have a question? Don’t be afraid to ask! I love to help clear up concepts or issues for readers. Or feel free to bash me. Whatever feels right. Drop me a line, or leave a comment on a post.