Update and dilemma. . . .

Hey there folks!

Long time no blog!  This summer has flown by - I'm still working like a dawg, but I can sense that the end is nigh!

I now owe $29,318 on my student loans!!  Here's a more organized update (and then I'll explain my dilemma):

Here's where things stand now, in early-mid September 2012:

Second Mortgage Debt: $31,400::::$25,176

Student Loan Debt: $61,762::::$29,318

Primary Mortgage Debt: $167,500::::$154,209


Here's what it looked like in late May 2012:

Second Mortgage Debt: $31,400::::$25,442

Student Loan Debt: $61,762::::$39,070

Primary Mortgage Debt: $167,500::::$155,191


That second mortgage really needs to DIE, by the way.  The balance never goes down!

So here's the dilemma:  I find that with the current stock market (which is doing pretty well, all things considered) I could sell ALL of my stock and pay off ALL of my remaining student loan balance.  As in, TODAY (or, end of the week, assuming that kind of thing takes a few days).

I was intending to pay down my loans to $20,000 by January 2013 (totally doable) and then use $20K of the stock to pay the rest of it, thereby retaining about $8K for future use (or if I needed it to pay taxes).  Assuming, of course, that the stock market doesn't tank between now and January.

Psychologically, having a bit of stock left over makes me feel all warm and fuzzy inside, though logically I know that the stock is NOT going to gain 8.25% a month as my student loans do.  Or 8.9% a month as my second mortgage does. So the smart thing to do is pay the student loan off now, and take the tax hit this year  Since it's considered capital gains (I think), it would be 15% on the 'gain' regardless of how much other income I bring in this year (and I'm closing in on $100K this year so my income taxes will be high).  (BUT WAIT:  I just had a thought.  Since my student loan rate is 8.25% and the taxes are 15%, won't I pay more in taxes than I will in interest if I sell up now? ARGH!  Why didn't I major in Accounting or Finance?).

So essentially my logical self is battling with my emotional self about this.  I know what Dave Ramsey would say:  Sell now and get out of debt - then start on the second mortgage.  My new-to-saving self wants a little nest egg, though.

Also, and I don't think I've mentioned this, but I also picked up an auto loan in the last year.  My 15 year old beater finally bit the dust - I'm not worried about the car loan (2.9% interest) mostly because I bought a used, reliable, low-mileage, in-demand car that will keep its value for years should I choose to sell it.  And with my current extra income I can pay off that car loan in about 4 months.  No worries there. 

Anyhoo, here are my options as I see them:

• Sell ~ $28,000 in stock now and pay off all (or almost all) of student loan debt; would then need to spend the rest of the year saving for taxes;
• Sell ~ $20,000 in stock now and pay off almost all of student loan debt, using the rest of the year to pay the rest of it off.  Downside:  have to pay capital gains tax for 2012 when I'm already having to save for extra federal and state taxes;
• Pay down the student loan debt to $20,000 by January 2013 and then sell $20K in stock and pay the capital gains in 2013 when I may be making less money (and therefore won't have to save as much for my 'regular' taxes).

What would you do?

Frugal cash. . . .

In September, I signed up for one of Dave Ramsey's local Financial Peace University courses. Although I feel that I've learned quite a bit on my own and through my regular blog reading, I wanted to go through FPU with a group of like-minded individuals, as a way to jumpstart my motivation to get out of debt. Although our group was small, there were a couple of people there who were just at the beginning of their journey, and a couple who were basically at the end of their journey and thinking about next steps. I fell somewhere in the middle, in that I already have "Baby Step #1" completed ($1,000 emergency fund) and I've been diligently working multiple part time jobs.

Unfortunately, about halfway through the course I had to stop attending, after I picked up an additional job; having "class" one night a week while attempting to TEACH classes for the first time was just too much for me. Although I did drop out early, I got what I wanted out of the class; a new sense of purpose, the knowledge that I am NOT in this alone, and motivation to continue on my path towards a debt-free life.

If you are struggling to correct the financial mistakes of your past and you are not familiar with Dave Ramsey's Total Money Makeover, I highly recommend it. One of the suggestions in the book is to use the 'cash envelope' system in which you budget for various costs (such as groceries, entertainment, gas, etc) and pay for all of those items in cold, hard cash. Since part of my course registration included my very own Dave Ramsey cash envelope system, I started using it in mid-September and I haven't looked back since!


Essentially, I pull several hundred dollars out of my checking account at the beginning of the month for groceries, entertainment, gas, and "miscellaneous" purchases. The theory is that we spend LESS money when we have to part with actual cash (rather than throwing down the debit or - horrors - credit card), and that once the money in the envelope is gone, it's GONE. No spending a little extra on this or that, because the money literally isn't there.

Although I don't follow all of the "rules" in that I often borrow money from one envelope (usually entertainment) to fund purchases in another category (usually miscellaneous, which is the bane of my existence), the system has worked well for me. Although I love the convenience of using my debit card at the grocery store, Walgreens, Target, and any of the other businesses I frequent, I never lose track of how much I've spent anymore. If I have $25 left in my entertainment envelope, then I know exactly how much I've spent that month, and what's more, I know how much I have remaining to spend. That's pretty huge for me, as pre-frugal-living I frequently lost track of both my income and my spending.

This is definitely not an 'easy' system to use or to get used to. I'm still figuring how the best plan of attack, and have had to adjust my habits to include actual change! I haven't carried nickels, dimes and quarters around in my purse in years! On the bright side, my change jar has never been more full! Although I'm using Dave Ramsey's "system", this is something you could pick up at the local Target or Office Depot store; get a little expanding file folder (I believe they come in 'check' size, which would be perfect for cash) and you're set!

Does anyone else use the cash envelope system, or anything like it? Do you have any tips to share? If so, please comment!

P.S. If I'm not mistaken, this is Finally Frugal's 300th post! I wonder how many there will be when I can finally announce that I'm debt free? (-:

The other side of the coin. . . .

I'm doing very well with my frugal budgeting; I no longer splurge on nonessential items, and I question each purchase I make. I just started using the Dave Ramsey Cash Envelope system, which I'll write about in a future post.


Anyway, once I began feeling comfortable with my level of frugality, I determined that it was time to attend to the other side of the debt repayment coin: increasing my income.

Last summer, I set a goal for myself to double my take-home income by the end of 2011. At the time, I was bringing home around $2,200 from my full time job (after sending 10% to a retirement plan). I usually bring home about $600 from my long-term part time job, which makes a total of $2,800, which doubled equals an astounding (to me) $5,600!

When I first made this goal for myself, the pessimist in me immediately started thinking: "there is NO way you can do that. Impossible!" In spite of this annoying little voice, I decided to stick with the objective of doubling my take-home pay; after all, why not aim high, right? Since making the goal, I've picked up two additional jobs; although I've not worked long enough at one of them to really have an idea of how much I could make on a monthly basis, I recently created an 'ideal' budget which shows what I could potentially make each month with all of my jobs combined (assuming that part-time job number two works out the way I want it to). Here it is, for your viewing pleasure:

Note that even with Part-Time Job #2 at its maximum, I'm a little short of doubling my take-home pay. But, the good news is that with this budget, I can throw an additional $2,400 at my second mortgage, while continuing to pay $600 toward my student loan each month (which takes care of all the interest and a bit of principle). So for now, I'm happy with this. After all, I did give myself until the end of 2011 to make this happen, and part-time jobs don't just grow on trees; the ones I have took persistence, additional education, and luck to find. I'm still looking, but for now am content with what I've managed to do.

A blast from the past. . .

My current flash drive is full, so I'm moving some school stuff over to another drive that I own, and discovered an Excel spreadsheet showing my credit debt in 2005 (see below). As you can see, I owed almost $25,000 total; and I made less than $40,000 a year. I paid all of this off when I sold my first house (back in the days when homes had equity - sigh).

Of course, I immediately started running up NEW credit card debt after moving and buying another house. But it's interesting to see just how much I owed - for STUPID stuff. I have no idea what I bought at Mervyns (which doesn't even exist anymore) or the Gap (I owed over $1,000!!!! That is INSANE).

By the time I finally came to my senses a few years ago, I think I owed almost $5,000 again - these days if I run higher than $300 or $400 on my credit card from month to month I start getting antsy.

I guess the lesson to me in finding this old accounting of my credit debt is really that I have little to nothing to show for all of that debt. I have my car, which accounted for $4,000 of the $25,000, and a computer which is outdated and rife with computer viruses (and therefore unusable). And that's about it. So the next time I 'have' to have that little item, or those shoes, or that t-shirt, I hope I'll consider all the money I've already wasted in my lifetime on frivolous items. Maybe when I've paid off my student loans and at least my second mortgage (waaaaaay in the future) I can do some frivolous shopping (with cash), but until then I've got to get 'gazelle intense', as Dave Ramsey would say.

A new chapter. . . .

School's out! Meaning, I've finished my graduate program and am now weighing my options (which are somewhat limited in this anemic economy). I will continue my previous job (now at part-time status) as well as my night job, and am trying to pick up teaching gigs on the side. It's tough, since I have little experience; I've really had to promote myself, which is not a 'natural' for me!

I'm so impatient to begin the next chapter of my financial life, yet am finding that the opportunities aren't just dropping into my lap as I'd hoped, so I'm having to learn a little patience and humility (as my many job applications are either ignored or denied). Baby steps!

As far as my financial life, what's on my mind now is the $60,000 in student loan debt that I'm carrying (and which is growing, growing, growing as that interest accrues!) I've been listening to Dave Ramsey's show on my morning MAX commute, which is helping inspire me, but to be entirely honest, the prospect of paying off that much debt is just . . . . daunting! I vacillate between: "I can DO this!" and "There is NO WAY I can do this!" If I could sell my house for what I owe, life would be much, much less complicated (I'm sure many Americans are in the same bind). I literally fantasize about selling my house and living in a cheap apartment, constantly running the numbers in my head, calculating how much extra I'd have each month to pay down that student loan debt.

So that's my current dilemma: how to pay off $60,000 in the shortest possible time on about a $45,000 year salary (including the second job), with about 55% of my take-home pay going towards my mortgage. Yikes! And I've already whittled my budget down as much as I can. Should I bite the bullet and try to find a roommate? I love my privacy, but having an extra $400 or so a month would be bliss!

Frugal shame. . .

The other night, I was watching TV with some friends (friends with cable are a wonderful thing!) and a commercial for a new car lease came on. For only $2,500 down and $199 a month, I could be driving a brand new car!!! Ironically, the brand of car that was being advertised is the same brand as the 14 year old beater I drive now. For free. As in, no car payments.

As I was silently contemplating this, and also feeling a little bit ashamed at the way my car looks (it's not shiny, someone stole a hubcap a few months ago, and the electronic locks no longer work, among other failures) my friend turned to me and said: "When are YOU going to get a new car"? I looked around the room and realized that with one exception, the friends I was hanging out with all drove newer cars.

I laughed it off by saying: "I'll drive a new car in about 15 years, when my student loans are paid off". The subject soon changed, but my mind stayed with the topic of cars. Three of the people in that room are living on student loans and part-time work, and the fourth is a stay-at-home mom whose husband makes a healthy salary.

Although one of my friends paid cash for her car, that $15,000 of her now-depleted savings could have been used to live on while she's finishing school, rather than taking out more student loans! Sure, I'd love to have a beautiful car. But if I had the choice between taking out student loans to help make my car payment, or driving a beater to avoid the debt, I'd choose the latter, every time. That doesn't help with the shame I sometimes feel at my old, beat up car, or the fantasies I have about walking onto an car lot and picking out the prettiest car there.

Luckily, my friend Dave Ramsey has a wonderful video on his website that deals with the very issue I struggle with: wanting (and not being able to afford) a new car. He calls it Drive Free. Retire Rich. I highly recommend it if you need a pick-me-up and some additional motivation after watching TV commercials that pressure you to get into a lease or to finance a new car. . .

I think I might be a 'Saver'. . . .

I know it's really too soon to say for sure, but in looking at my expense-to-income chart and my ING Direct account balances, I think I might be turning into something I never thought possible: a Saver. Never in my wildest dreams did I believe that I could afford to save, let alone find the motivation and determination to actually do it.

In spite of my skepticism, my bank account tells a different story. Over the past two months, I've been able to place almost $800 in my 'internship year' savings account (which I'll use to 'bridge the gap' next year when I'll be forced to work part-time). That's in addition to the roughly $250 I place in other savings accounts each month to cover future school costs, utilities, and bi-annual car insurance payments. In the month of January, I managed to sock away $458, which represents almost 17% of my take-home pay! In February, I'm shooting for a total savings of $675---a definite challenge, but one that I look forward to. Just two years ago, I would have declared this goal 'impossible'.

"Big deal", you might be saying to yourself, finger on the mouse button that will take you away from this page. But to me, it IS a Big Deal (with a capital B, and a capital D). What does this really mean to me? It means that I have it in me to save money. It means I can be a Saver. For someone who grew up in a household in which extra money was spent before it was ever earned, and who lived off credit for 20 years, that's a HUGE deal. It means that when I finally conquer my student loan debt and have my mortgage under control, I can save the money to: buy a "new" used car; replace my computer; take a vacation; make home improvements. I can pay cash for these things, rather than throwing the credit card down at the checkout counter with the never-to-be realized intention of paying it off by the time that 0% introductory interest rate goes the way of the dodo bird.

According to a recent article at ABC News, I'm not alone. Due to decreasing income and the threat of layoffs, Americans have increased their savings rate during the past year from 0.4% in 2005 to 1.7% in 2008. This 2008 average includes a savings rate of 3.6% in December alone. Also driving that higher number is the May 2008 stimulus check---in that month, Americans saved their after-tax income at an astonishing 4.8% (meanwhile citizens in countries like China save closer to 30% on a yearly basis)! Nothing like a recession and the threat of unemployment to send Americans scurrying to the bank at last.

Of course, my own metamorphosis from a credit-dependent spender to a live-within-my-means Saver began not with the recession, but with a little book called Your Money or Your Life. Perhaps it was mere coincidence that I read this life-changing tome just a year and a half before the economy tanked. Or maybe it was some sort of supernatural prescience, who knows. What I do know is that it jump-started my journey into 'un-debtedness', rather than 'in-debtedness". That I rode the waves of the recession last fall while sending my very last payment to my credit card is due in no small part to YMOYL as well as to Dave Ramsey's The Total Money Makeover.

I had no idea when I started living more frugally and paying down my credit balance that I would one day have an emergency fund, that I would learn to keep track of every cent that leaves my fingers, and that I would have the financial fortitude to place money in a savings account long enough for it to actually earn interest. Since I was raised with the unspoken understanding that 'money comes, and money goes (and where it goes, nobody knows)', the psychological benefit of learning that I have control over both my spending and my savings is profound.

As I write this post, it occurs to me that it may sound overly self-congratulatory. It's not meant to be read in that way (although I do feel a certain amount of pride in my ongoing efforts to change my habits). With over $56,000 in student loan debt looming, I've quite a ways to go before I'm truly financially secure. No, what I hope to communicate is that if a person like me, with an average salary---especially when compared to my ridiculously large mortgage payments---can manage to pay off credit card debt and increase savings, so can any of the other folks suffering through this current (though, I'm convinced, temporary) economic recession. It's not easy, and it's not instantaneous. It's a process, a journey, a challenge. But when you reach the point where you can ever-so-tentatively label yourself a Saver, it's worth every moment spent noting expenditures, creating and updating budgets, determining spending priorities, and reading personal finance books (and blogs!)

Finally Frugal one year anniversary!

One year ago today, I published my first blog post! My financial life was pretty different at that point. Although I had decided in November, 2007 that I needed to begin living within my means, it was a slow process. Not using my credit card was painful, and in January 2008 I still owed about $4,500 to various credit companies. I still craved new shoes and clothes every day (I continue to struggle with this), and paid little attention to the money that was leaving my life in dribs and drabs each day.

In that first blog post, I discussed the book that changed my attitude---Your Money or Your Life, by Joe Dominguez and Vicki Robin. I purchased that book in late 2007, and in 2008 I ended up purchasing a CD (used, on Ebay) that featured a workshop given by Joe before his death in 1997, to help jumpstart my motivation. A year later, I still believe that this book (as well as Dave Ramsey's The Total Money Makeover) has been instrumental in helping me begin getting my financial life in order. If any of you are struggling with your finances, either of these books make great investments.

After reading many, many books about debt, financial independence, and rampant consumerism during those first months of 2008, I eventually began taking a close look at all of my 'variable' expenses, such as cable, cell phone, gym membership, and auto insurance, and either made money-saving changes or canceled those services altogether. I began tracking each penny that left my life, and started using the zero-based budget, which I still use to this day.

All of you regular readers will know that I have a long way to go. I owe over $56,000 in student loans, and I don't yet have a plan to begin repayment of this. I own a house with two mortgages, and the combined monthly mortgage payments equal about 40% of my gross monthly income--not a great percentage for someone who also wants to increase savings and investments. I work two jobs, at 50 hours a week on average, just to keep my head above water. I also go to school on a part time basis, and I am contemplating, with some trepidation, the 2009/2010 academic year in which I'll be obligated to work less than full time in order to make time for a required internship.

Many challenges and seeming obstacles lie in my way on the road to financial independence. In reading other personal finance blogs, the one thing that I keep reminding myself is that the path to meeting my financial goals is a long one---I can't expect success overnight, as much as I might wish it.

In spite of the challenges, I also remind myself of my small successes over the past year: I've paid off my credit cards; I've learned about my spending habits by keeping an eye on each expenditure; I've begun the process of getting a handle on my bad spending 'vices', such as clothing and shoes; I've learned that I'm actually a pretty good cook, and that I can be satisfied with a .10 cent cup of home brewed coffee instead of craving a daily $3.40 mocha.

Most importantly, I've 'met' so many other people who are also on their own, similar but unique financial journeys. Just knowing that there are others out there in the blogosphere who are either just beginning, are well on their way, or have met with success, helps me to stay on track and believe that I, too, can find my way to financial independence.

Frugal economy. . . .

The more I read about our collapsing economy (I'm an internet news addict, these days), the more I thank my lucky stars that I began paying off debt and saving money almost 12 months ago. One of my bank accounts (no longer used for anything other than ATM withdrawals) is at Washington Mutual, which, as I'm sure you've heard, 'failed', was taken over by the government, and is subsequently being sold to J.P. Morgan Chase. Incidentally, I heard this news late last week; by today, my ING Account showed not 'WAMU' as a linked account, but in fact 'J.P. Morgan'! They certainly didn't waste any time!

Last week (or, geez, was it only a few days ago?), I wrote about my upcoming lump sum payment for a retroactive pay increase. I intend to send this money to my credit card, paying off about $1,000 in debt in one fell swoop! I also contemplated using some of my emergency fund (of which I have $1,600) to pay off the rest of my credit balance. Several commenters thought I should keep the emergency fund as it is, 'just in case'.

I'm definitely leaning in that direction, folks, not only because of the points my commenters brought up, but also because of this financial article, reminding readers what to do in an economy like ours. Basically, the author suggests that we should act as if we were preparing to lose our jobs! In short, this means:

• Decreasing contributions to a 401(k) or 403(b). I already did this last spring, when I became determined to pad my emergency fund (something the author recommends) and pay down my credit when a labor strike seemed imminent.
  
• Eliminate unnecessary payroll deductions. The author uses charitable donations as an example, which seems sad. However, I suppose in the long run a strategy like this would work better for charities anyway; keeping oneself healthy financially in the short term would allow one to increase donations in the future.
• Reduce income tax withholdings. Or, put another way, decrease the money that you'll receive as a refund later and increase take-home pay now.
• If you're still brave enough to be investing in the stock market, diversify. Personally, I don't have the stomach to even look at my tax deferred investment account, let alone play with the contributions.
• Pay off any 401(k) loans. Hopefully none of us have taken a loan on our retirement!
  
• Research life and health insurance options, in the event of a layoff. Find out how long you're covered and for how much; if you're lucky enough to have a spouse or partner who has coverage, consider switching to their plan.

So there you have it. Luckily, I'm already doing all of these things and more, although I'm still nervous, of course. My job is secure---for now. But it's nice to have even a smallish emergency fund to back me up in the event of a financial meltdown.

In other news, Dave Ramsey's coming to town on November 1st, and I can't decide if I want to shell out the $36 it would cost to see him in person. I know it would be a great motivator and reminder---Dave's book, The Total Money Makeover, is one of the first financial books I read that catapulted me into my frugal lifestyle. I'll have to see how much money is left in my checking account after I've sent my mega-payment to the credit card company later this week!

A frugal increase. . . . .

My union negotiated a small increase for us in July, and we are now seeing our retroactive pay (the raise was negotiated to start as of January 2008). I received my electronic paystub yesterday, and it appears that my January-August pay increase amounts to about $1,000, after taxes!! Although my monthly income will increase by less than $130, anything is better than nothing in this precarious economy.

As for that $1,000, what do you think I'll be doing with it? Buying new clothes? Downpayment on a new car? A trip to California? Nope, nope and nope. I'm going to send all of it straight to my credit card debt, meaning that by the end of next week, my credit card balance will finally amount to less than $1,000---in fact, it will be just over $500!!! This means that by the end of November at the latest, I should finally have my credit card paid off.

Now, here's my dilemma: remember when my union was considering a strike, and I decided to send more money to my emergency fund, "just in case"? Well, I now have a bit over $1,600 in my EF. Dave Ramsey says I should have $1,000 stashed away for emergencies, until my debt is paid off. I'm considering using $300-$400 of the funds in my EF to pay my credit card debt down even further, which would allow me to be credit card debt-free by the end of October!

What do you think? Unless a huge emergency occurs in the next two or three months, I should be covered---I'll be able to start building my EF up even higher after the credit card is paid off, and have no credit debt would be phenomenal!

A frugal sale. . . .

Well, that was more work than I've ever done for $60! My yard sale, that is. The day (Saturday) dawned overcast and chilly, so my visitors were few and far between. Interestingly, I had my 'rushes' early on and then at the very end, as I was packing up. Although I didn't 'make a killing' as they say, there was at least one benefit to the hours and hours I spent going through boxes and decluttering my house and garage: I took everything that remained straight to the Goodwill. Meaning that my house and closets look much cleaner and emptier! So, all in all, it was definitely worth the work.

On a side note, as I was checking Craigslist to check out my 'yard sale competition', I noticed a posting that was titled: "The Dave Ramsey Sale". This guy was taking Dave's advice and getting out of debt by selling extraneous items (he had lots of sports equipment listed for sale). I thought that was wonderful! I hope he made tons of cash, and sent it all to his creditors. By the way, if you're new to getting out of debt, be sure to read The Total Money Makeover, by Dave Ramsey. This book, along with Your Money or Your Life, jump-started my motivation level and almost a year later, I'm still committed to getting out of debt (and I'm almost there---in terms of my credit card debt, that is!) Note: borrow them from the library first, before deciding to buy.

Now, if you've made it this far, I just have a little 'vacation' announcement to make. My family is here visiting from California, and we're off to the Oregon coast for a little rest and relaxation---and it's supposed to be beautiful weather there this week! So, I won't be posting until next week! We're hitting Cannon Beach (note to Marci: we unfortunately won't make it as far south as your town), and my goal is to try not to get back into my old shopping habits while with my mom, with whom I used to shop when I lived in California. In fact, the first thing she said when I announced I was moving to Oregon was "But who will I go shopping with"? Cannon Beach is a cute little town with loads of shops and boutiques, so it will be a bit of a challenge. I'll check in a week from today to let you know how it went!

Have a wonderful week, everyone!

Finally Frugal's zero-based budget approach. . . .

A commenter asked about the mechanics behind the zero-based budget, which has changed my life since I started using this system in February.

"Hi- could you explain a bit more about how to develop/follow a zero based budget? I don't quite understand! Thanks and I enjoy your blog!"

I learned about this type of budget from reading Dave Ramsey’s Total Money Makeover (TMM). According to Dave (we’re on a first name basis), the theory behind this type of budget is this:

"Every single dollar of your income should be allocated to some category on this form. When you’re done, your total income minus expenses should equal zero. If it doesn’t, then you need to adjust some categories (such as debt reduction, giving, or saving) so that it does equal zero. Use some common sense here, too. Do not leave things like clothes, car repairs, or home improvements off this list. If you don’t plan for these things, then you’re only setting yourself up for failure later."

I began keeping track of my expenditures in November of 2007. This was incredibly helpful to me---I finally had a clear picture of where my money was going each month! And it was surprising---I had no idea how much I was spending at places like Target and Banana Republic. Meanwhile, my credit card balances were continuing to grow.

After reading The Total Money Makeover, it finally dawned on me that my monthly expenditure budget (which I still use) was only the first step to gaining control over my finances. It was very well and good to know where my money was going, after it was gone--but that wasn't enough. The next step in reducing my expenditures was to actually tell my money where to go, before it went anywhere.

That’s where my simplified version of Dave’s rather complicated ‘Cash Flow' budget comes in. I created an Excel spreadsheet with three columns: Expenditures (mortgage, utilities, savings, etc); Estimated Income and Estimated Expenditures (where I estimated how much I would bring in as well as how much I would and should spend in certain areas); and Actual Income and Expenditures (to be updated throughout the month as pay and bills arrive).

A few days before the beginning of every month, I enter the amounts I think I’ll spend on my mortgage, utilities, groceries, and so on. My Excel document includes formulas in the ‘Remaining’ rows that show how much money I’ll have left after each expenditure. When I enter $1556 for my total mortgage payment, that is automatically deducted from my total Estimated Income for that month---my Excel formula does it for me. I simply go down the line of Estimated Expenditures and enter the guesstimate of how much I’ll spend.

Some are easy: for example, I know exactly how much I’ll spend on my mortgage, usually. Some are more difficult: my utilities vary from month to month. I logged onto my electric and gas accounts online and was able to view bills going back 13 months. This allowed me to estimate how much I would probably spend on my utilities for the month of May, based on last year and the fact that I’m trying to conserve energy. Others are more like limits. Under ‘fun money’, I don’t want to go over a certain amount (I’ve not once succeeded in this area, however). That’s usually the last row I fill in, after everything else---including money sent to savings and credit reduction---has been entered.

At the end, the number at the very bottom should be equal to zero. That means each and every dollar of your estimated income has been given a home. When you have an unexpected expense, you’ll need to go back to the budget and see where you can decrease another amount (usually fun money, unfortunately) so the new payment can be entered.

It’s helpful to have a couple of months of record keeping detailing your expenses---like my monthly expenditures spreadsheet---so you are familiar with regular expenses, including quarterly expenses like auto insurance, trash pickup, or water and sewer payments.

If you’re already a good record keeper, you can just go back to your online checking/savings account (or a check register---does anyone use these anymore?) and see where your money went for the last two or three months, whether it was a regular expenditure, or whether it can be averaged out over the year or quarter so you can start a savings account to cover it.

Note to my commenter and anyone else reading this: I'd be happy to send you an email 'vanilla' version of my Excel budget sheet, with the formulas included, so you can play around with it.

Zero based budget: May 2008 . . .

Voilà! Here is my zero based budget for the month of May! Before you scroll down, let me tell you how wonderful this budgeting system has been for me. I learned about it from Dave Ramsey's The Total Money Makeover book, and it has changed my life.

Before I started creating a zero-based budget, I saved exactly ZERO dollars each month. Although I religiously kept track of my expenditures, I wasn't 'telling' my money where to go---and accordingly, it just went! Here's the difference in savings between January (no budget) and May (projected) as far as the amount of money being diverted into savings:

January: $0 to savings
February: $181 to savings
March: $213 to savings
April: $263 to savings
May (projected): $901 to savings

Now, keep in mind that in May I'm receiving my tax rebate, 100% of which is going into my emergency fund---that's why my savings rate will (hopefully) be so high this month. But to go from $0 saved in January to $263 for April is phenomenal, and I couldn't have done it without the zero-based budget system (this is a system where you give each dollar a 'home' before payday, resulting with a remainder of $0---every dollar is told where to go before you have a chance to fritter it away).

Also, keep in mind that my income didn't increase substantially in February, March or April. In fact, in March, it was lower than usual, because I went on vacation and didn't work my second job for a whole week.

Another thing that's unusual about this particular budget is that I'm receiving three checks in the month of May, from my second job---that's just the way the calendar worked out, and I'm ecstatic about it! With an extra check from the night job and the tax rebate check, I am able to both pay down my credit card, AND pad my emergency fund, instead of choosing one or the other. June won't be quite as terrific in terms of income, so I'm just going to enjoy it for now!

Frugal strike. . . .

It's entirely possible that within the next two months, my labor union will choose to go on strike. We don't know when, and we don't know for how long; all we know is that contract negotiations between the university and the faculty union have been cool at best and downright nasty at worst.

Six months ago, our upper management received salary increases in the 10-25% range. We are being offered 7% over two years, and that isn't even retroactive to last summer, when our contract expired. 7% would probably about cover the anticipated increase in cost of living over the next two years---there are no additional funds for merit increases or any other recognition of outstanding work.

A year ago, this news would have struck fear into my heart---I was living paycheck to paycheck, covering the gap between my expenses and my income with credit cards.

Today, I have a small emergency fund ($1,000), enough to cover a short period if I were to go on strike. I'm feeling somewhat uncertain about the future, but I'm confident that I can survive this. My emergency fund and my new frugal lifestyle has given me the freedom to support my union and my colleagues, if it should come to that.

What new behaviors can I thank for this newfound confidence?

Working a second job in the evenings. Last May, I was lucky enough to be offered an online job that I could do from home. I only make $13 dollars an hour, but it's about 25% more than the other moonlighting jobs I considered last year, and the extra earnings are allowing me to pay my credit card off twice as fast.

Canceling cable. I work two jobs, and I go to school part time. Who has time for anything other than local TV?

Downgrading my cellphone plan. I am NOT a 'phone talker'. I don't spend hours on the telephone---I prefer speaking to people face to face, or via email. My cellphone is primarily used to make plans with people (i.e. "when/where are we meeting"?) when I'm away from the house. I switched to an unadvertised 'low minute' rate, and saved $10 a month. Soon, I'll do away with Verizon altogether, and transfer to a pay-as-you-go plan.

Using tuition benefits to go back to school. My first master's degree cost over $30,000. This one will leave me in debt to the tune of $0. That's an amazing thing.

Saving money on utilities. I kept my thermostat at 58 degrees this winter. I was diligent about turning off lights and unplugging appliances when not in use. I'm saving about 30% on each of my gas and electric bills, when compared to last year.

Paying myself first. This really works! The first thing I do when I get my paycheck is transfer funds to each of my savings accounts. Not having the money in my checking account means that I truly don't spend it.

Zero-based budgets. Dave Ramsey's book, Total Money Makeover, was an eye-opener. I recommend it to anyone struggling with debt and under-earning. I created my first zero-based budget in February, and although I'm continually tweaking throughout the month, this type of budget has changed my life. I'm now planning ahead for things (like my quarterly water bill) that used to send me into a tizzy each month, wondering where the money was going to come from.

Note: here are links to my February, March, and April zero-based budget posts.

These are some of the most important factors in my continuing education toward a frugal lifestyle. There are more, and I'm sure I'll be learning some new tricks over the next year. I hope I don't have to go on strike; but my finances are secure enough that I think I can do it if I need to.

Life or Debt. . . .

This weekend, I picked up a book by Stacy Johnson (of TV’s Money Talks fame. . .), called Life or Debt. Although the book was published in 2002, it somehow seems dated (perhaps because Stacy mentions VCR’s and Walkmans). Despite the impression that the book was written in the early 90’s, Johnson does outline a fairly common-sense plan to get out of debt. In fact, there were a few times when I wondered if he had taken some of his idea straight out of my all time favorite, Your Money or Your Life.

Here are the steps to debt freedom, according to Stacy Johnson:

Step One: Compute your average hour after-tax, after-work-related-expenses wage. Just as YMOYL suggests, we need to find out how much we really make on an hourly basis, after taking commuting costs, food expenses, and clothing costs into account. Johnson includes his own instructions for doing this:
· Write down your annual salary
· Multiply this number by .7 (to account for taxes)
· Add up all the expenses (gas, food, clothing) associated with your job every year; subtract this total from the number in line two.
· Divide this new number by 2,000, the average number of hours a person gets paid to work every year. This is your true hourly wage.

Step Two: Inventory your possessions---everything, from the contents of the garage, to the attic, to the pots and pans in the kitchen. Write it all down.

Step Three: Go through the inventory, and make a mark by those things you purchased but didn’t really need or didn’t use. Do you really need two cars, three cell phones, two lawnmowers? Tally the total cost of the things you bought but didn’t really need. Multiply this number by 6.7, which will tell you the opportunity cost of these items. The opportunity cost represents the amount that you would have gained had you invested that money for 20 years at 10%. So, a $250 lawnmower you rarely used because you borrow your neighbor’s riding mower instead would have been worth after 20 years.

Step Four: Find items on your inventory list that truly meant something to you. Johnson’s example is an old backpack that took him through many countries. This exercise is meant to help you refocus on what is really important in your life.

Note: steps one, two, three and four are almost identical to information presented in YMOYL.

Step Five: Determine your 'Debt Destroyer'. Multiply your annual income by .10, then divide by 12. This is the amount that you will use each month to pay down your debt (in addition to your minimum payments).

Step Six: Finding that 10%. To figure out how you’re going to find that 10% for debt repayment, Johnson suggests writing down every penny that leaves your hands. Once you know how you’re spending your money, you’ll have an easier time finding ways to save (this is the ‘Latte Factor’ in action).

Step Seven: Begin eliminating debt, by:
· Not creating any more debt
· Ranking debts in order of fastest possible payoff (divide total amount owed by minimum payment; the lowest number is the first debt to repay)
· Build a ‘Debt Destroyer’---this is your extra 10% payment from step five.
· Pay off your debts, using the Debt Destroyer.
· When all debts are paid off, invest the Debt Destroyer plus the total of all of your old monthly payments.

I would characterize Life or Debt as a combination of ideas from Your Money or Your Life and Dave Ramsey’s Total Money Makeover, without the radicalism or the religious undertones. It’s a good book for someone who hasn’t read much else about debt reduction, and who is highly motivated. Personally, YMOYL and TMM both inspired and motivated me more than this book did, and I would recommend those over Life or Debt.

Do you know someone who might benefit from this post? Email it to them, by clicking on the link below.

Mexico bound. . . .

I may not be able to post regularly for the next week or so, but don’t despair! I’ll be back!

I am off tomorrow morning for a week in a seaside village in Mexico! “WHAT?”, you say? “What right do you have going off to Mexico when you’ve got credit card debt to pay off? Who do you think you are, anyway”?

Well, here’s how I’m doing it---and I’m paying CASH!

1. My airline ticket was purchased by a family member, as a combined birthday/Christmas present.
2. We are renting a house in a small town, my portion of which will come to $500, or less than $75 per night.
3. Food: It’s Mexico. Can you say fish tacos and cheap beer?
4. Entertainment: beach (i.e. free)

And here’s how I came up with the cash for the house rental, food, and entertainment costs. About three years ago, I opened an ING Online savings account, and had $50 automatically transferred from my checking account each month. When I moved to Portland, I froze the automatic payments, until I was more familiar with my new salary and living costs. Then I promptly forgot about the account.

Last summer, I happened to be doing some personal finance reading, and suddenly remembered my ING account. Since I had completely forgotten my login ID and password, I contacted ING by phone and they were kind enough to restore my access to the site.

To my delight, I found that I had almost $800 amassed in the account! So that money, along with $300 from my hefty tax refund will completely fund my weeklong vacation in Mexico! I know, I know, Dave Ramsey would not approve, most likely. I'm okay with that. I'm taking a vacation that won't get me any closer to financial freedom, but since I'm committed to NOT using credit while I'm away, at least I won't be moving backward in my debt reduction journey.

'Preacher' Dave on dumping debt. . . . .

Since I've been sick for, oh, going on a week now, I've had a chance to catch up on some reading and CD's that have been languishing by the side of my bed.

Yesterday, I listened to Dave Ramsey's 'Dumping Debt plus Cash Flow Planning' CD. The first two CD's (in the three CD program) dealt with getting out of debt, and the last CD discussed budgeting.

After having read The Total Money Makeover and Financial Peace (both reviewed by Trent at The Simple Dollar), I was curious to hear what Dave sounded like 'in person'. Well, he sounds like a preacher, complete with the pregnant pauses, the dramatic enunciation, and southern accent!

The preacher aspect bugged me for a total of about 15 seconds, and then I started becoming inspired (all over again) to beat my debt, increase my savings, pay off my mortgage, and finally find financial peace! I could listen to these CD's over and over again, if only to remind me that IT (meaning financial independence) CAN be done.

The drawback of these CD's is that you really need to have read at least the Total Money Makeover before listening----Dave refers to his 'baby steps' and to other principles that are laid out beautifully in the Total Money Makeover, but he doesn't expand on them in the CD's. I almost felt like the CD's were created as a sort of advertisement, to entice listeners to sign up for the several hundred dollar Financial Peace University, which bothered me a bit. However, if you've gone to the local library and checked out his books, then I don't think there's a need to spend hard earned money hearing the same principles at your local church.

If you have a choice, read the Total Money Makeover, and then listen to this 3-CD lecture (probably both are available at the local library---although I had a good month's wait for the CD's). I would skip the book entitled Financial Peace, since it's just what Trent at The Simple Dollar calls a 'first draft' of Total Money Makeover.

And the best news? I'm starting to feel better!