Debt $ense

Aside from an odd look from the bank teller yesterday morning, the $5 bills and pocket box budgeting is going well. I tweaked my initial ratios among the categories and that seems to be helping.

Not only that, but when I pulled it out to get money at the coffee shop while talking to a job candidate today, she asked about it. When I (briefly) explained, she thought it was a cool idea.

For those who didn’t come here from my personal blog, a brief explanation is probably in order:

A few weeks back, I decided to try a new way of handling my money so less of it “disappeared,” as cash has a tendency to do. I get my $100 for two weeks out in $5 bills, and divide them up into six categories: food, vacation, savings, fund, crafts and household. Food gets half the money, and then I divide up the rest. To keep it organized, I spent $1.39 on an index card holder from Target with six section. The bills are the perfect length to fit in and the “box” is only about 1 1/2 inches thick, so it fits in my purse fine.

In case you’re confused, the savings pocket isn’t for my weekly transfers from checking, but a place to stash “extra” money so I can collect it and put it toward an extra CC payment each month. It also holds checks waiting for deposit and deposit slips so I always have those handy.

Now that everybody knows what my “pocket” system is, here’s the rest of the update.

I’m not always keeping my spending exactly from the pockets it’s supposed to come from, but the categories are making me think a lot more about not only what I spend my money on, but also if I even should spend it. This is especially true in the food category because eating out has to come from there and makes me realize what a big impact that has on my cash flow. ($100 for two weeks, not including gas, has to stretch pretty far.)

Purely from making me think and consider my spending, it’s a success. It’s also making it much easier to save smaller amounts from my weekly money, which I hope will translate into paying my credit card off faster. It also has made me think about where money for things like running sneakers will come from, so I’ve started envelopes at home to stash money into from its category so that’s “off-limits” when I’m in a store.

I was checking my various accounts online last night and realized I’m just a few weeks away from getting my CC balance under $8,000. In the grand scheme of things, this is still a lot of debt, but it means I’ve managed to knock about a third of my balance off in the last few months. It’s been a long time since that balance has started with a 7, and I’m looking forward to the day when it does. It will be a day to celebrate.

Why?

Not because it means I’m done, or I’m in good shape. But because it’s a milestone, a point at which I’ve made noticeable progress. Round numbers are good for marking progress because they’re “pretty.” So even though it’s no more progress than any other month, it’s something I can point to. Dropping below $10,000 and staying there was one milestone for me, as was $9,000.

Breaking $5,000 on my 401(k) was a milestone. I’m about to break $8,000 (going to other way) on that account, and I’ll be ready to celebrate that too. Not only will it mean I’ve passed a round number, but also that I will have saved more than I owe.

$7,750 on my CC is another milestone because it means I’m below the 50 percent mark against my CC limit. I’m on track to hit that in early June.

Other milestones I hope to celebrate this year:

mid-July: less than $7K on my CC
late August: more than $9K on my 401(k)
early September: less than $6K on my CC
late November: less than $4K on my CC and more than $10K on my 401(k)
Year-end: My net worth finally becomes positive!

I don’t know what I’m going to do for these milestones to celebrate. It might be as simple as giving myself a free day without work or chores or any responsibility. Maybe a trip to the coffee shop instead of making my own tea. Or maybe a ball of the cool yarn I’ve wanted to try. As long as it doesn’t undo the progress I’m celebrating, the sky’s the limit. All that matters is I reward myself in some small way for taking enough bites to swallow a noticeable portion of that elephant so I remember I’m that much closer to the day I can make that last CC payment and celebrate my freedom from “bad” debt.

Now that will be a milestone worth noting!

My boss has a saying about big tasks: Eat the elephant one bite at a time. In other words, break big tasks down into little ones. It sounds a little goofy, but I’ve found it works.
It’s a good way to handle saving for big items. Just put a little money aside each week and you’ll be able to pay cash, not add to your plastic. Now that I’m running again, I know I’ll need to replace my shoes in a few months, so I took $10 from this week’s paycheck and put it in an envelope. If I do that each paycheck, I’ll be able to save about half the money from my weekly budget and only need to take half from my “pinch-point” savings account. (That’s the one that handles irregular expenses like car insurance.)
It’s also a good way to think about paying down debt. If I think “I have to pay $8,500 to my credit card company,” it seems overwhelming. But when I break it down and say “I’ll pay $137 each week,” it suddenly becomes much less so. It also makes me more vigilant in searching for places I can take another “bite” out of the debt because I know smaller amounts will make a difference. $4 here and $10 there has gotten me $77 in the last week for an extra payment. An extra morsel like that each month will make for a nice debt-free dessert this time next year.

Two conversations with co-workers this week have me musing on what I call selective indulgence.
Basically, it means building in a little splurge to make the tight budget required to pay down debt palatable. And when I say little, I mean little. For my co-worker buried under student loan debt, it’s coffee from the coffee shop instead of his kitchen once a week. One friend vowed that once she finished grad school, she would only drink real diet Coke, even if it meant cutting expenses other places. For me, it’s my collection of Republic of Tea flavors instead of generic black or green tea.
Now, while those all revolve around caffeine, your splurge doesn’t have to. It can be almost anything inexpensive that makes you happy. The key, it seems, is choosing something that lets you say, “Hey, I can handle brown-bagging it while everybody else goes to the Mexican place for lunch.” It seems that by giving yourself permission to not scrimp and save in one area, it makes the other sacrifices easier to bear, which means you’re less likely to splurge on something that really will bust the budget. And that means a lot more money saved in the long run.

Sooner or later, everybody in debt realizes they need to cut back on expenses to find money to pay down the debt. During the last two years, I’ve made several lifestyle changes to free up money for debt repayment. My goal is to keep several of those changes once the debt’s paid off so that I continue to live below my means and end up in better financial shape than your average journalist. (If you’re not one, assume that reporters at your local paper make less than a public school teacher with similar experience. If it’s a small paper, assume it’s at least a few thousand less. This is not a profession anybody picks for the money.)

But I digress.

To not only live on a journalist’s salary, but repay all the debt I racked up when I was trying to live beyond my means, I needed to get serious about finding money. Some of these are things you might be able to adapt to your own situation; others are only feasible because of my particular situation.

1. Move to less-expensive apartment. I still have a two-bedroom, and have resisted moving to a one-bedroom because of all my books, but I now pay $100 a month less.

2. Cut utility costs. Moving to the apartment cut my utility costs from about $100 a month to about $40 a month right off the top. I also keep the apartment at 56 degrees in the winter (sweaters and heavy socks are good) and resist turning on the AC as late as possible in the summer. Since I live in Virginia and have a low tolerance for heat when I sleep, the AC is still something I spend more on than I would like. I’m trying a new arrangement for my fan this year and hoping I can leave the AC off most of the summer. We shall see… I also keep my desktop computer off most of the time. My next step is to unplug the VCR, DVD player and TV, since I use them so rarely. That will save a small amount of electricity, and won’t be much hassle.

3. Look for extras. I used to belong to the Y, which is a good deal because work pays almost half my monthly membership. But since I’m a runner and prefer road running to track work, I usually run in the park. I have a hard time finding yoga classes that fit my schedule, so I usually practice at home. So I dropped the membership. I miss having access to the weight room, but I couldn’t justify the cost just for that. (I’ll probably add it back in when my debt’s gone.)
I also dropped cable earlier this month after realizing I’d only turned the TV on twice in the previous two months. I can buy one or two seasons of a TV show for a month of cable, plus skip the commercials. Since I’m at work when most sports are on, it didn’t seem to be a big sacrifice. (This is one of those cuts that’s possible because of my peculiar situation, and may not be palatable for everyone.)

4. Be a grocery cheapskate. Discovering the dented bin at Kroger was the biggest money-saver. I don’t remember the last time I paid more than $1.50 for cereal. Canned fruit? I’ve got plenty. Same with soup stock and other staples. I also discovered that the cereal most often is on sale the weeks it ends up in the bin, which means even bigger savings. I also have a list of staples that I watch for sales on. When they’re on sale, I buy as much as possible. I almost always buy store brands, and only buy produce on sale. Oh, and those staples I buy? I use them to make soups or other freezable meals I can grab on the way out the door, saving me time when life gets crazy, not to mention the money from skipping takeout.

5. Skip the land line. This probably isn’t a great idea if you have children or a health condition that makes access to 911 important, since emergencies do happen. But if neither of those is true, you can save a bundle by skipping the landline. I pay $43 a month for cell service, which covers all my local calling, long-distance calls to my family and calling outside the area. I need a cell given my job, so dropping that’s not an option. Just a basic land line would set me back about $30, without even considering long-distance. All of a sudden, that $43 sounds pretty reasonable. And it comes with plenty of minutes. I figured out a few months ago that my late-night, two-hour phone calls with my sweetie would have to happen every night for the entire month for me to use up my night and weekend minutes.

6. Drive smart. I don’t go faster than 65 on the highway, less if I’m going over the mountain. When I have errands to run, I plan them so I won’t need to make multiple trips. And where I used to hit the grocery store three or four times a week after work, now I only go once or twice every two weeks. That’s all gas saved, which really adds up at $2.83 a gallon. If you can, try public transit or a bike. I don’t use either for my two-mile commute, since our city’s trolley bus only runs until 6 p.m. and I work until after midnight. The late hours also make riding a bike not a great idea. Once gas gets to $3.50 a gallon, I might reconsider. Until then, I’ll be driving.

Other suggestions? One I would love to try is shopping at Goodwill or one of the many thrift stores in town, but trying to find clothes in my size is almost impossible. I’m hoping my running will make that more feasible in a few months. (Hey, maybe that will offset the cost of replacing my running sneakers three times a year!)

In light of Aleta’s comment below, I figured I’d break down how my 401(k) is arranged.

Since I get my company match in company stock, but don’t invest any of my own money into said stock, my existing balance mix is always a bit different than my future contributions.

That said, I make my contributions to 30 percent each international, large-cap and mid-cap stock funds and 10 percent balanced. I don’t contribute anything regularly to a pre-mixed fund, but I am moving half my company stock into that fund, with the other half in the balanced fund.

That means my actual balance now is: 6 percent company stock, 28 percent mid-cap, 26 percent international, 34 percent large-cap and 3 percent each balanced and pre-mixed.

In July, when I get my annual raise, I’ll also do my annual rebalancing to transfer money from the funds with a greater percentage than my plan to ones with a lower percentage. For example, some of the large-cap money will move to international and mid-caps, and my company stock will move to balanced and pre-mixed. It’s a good rule of thumb to do this once a year or so to make sure your overall investments don’t get out of whack. If a fund’s actual balance is way off your future contributions, then your risks and returns will be different than what you actually want (assuming your contributions reflect how you want your money distributed).

Depending on what the raise looks like, I might increase the contribution by a point or two. More likely, I’ll keep it at the minimum to get the full company match and increase my debt repayment. I should be able to add $15-$25 a week to the payment, which means another $60-$100 a month on top of the $580 I’ll already be paying. (Once my cable bill is adjusted to reflect the fact I now only have internet, I’ll be able to pay $8 more a week.) That will help me pay down debt faster, which means I can increase my contribution to about 15 percent by this time next year.

I’ve been getting a lot of questions from co-workers about 401(k)s lately, and I’m kind of surprised at how little people understand about them. I guess my parents did me more of a favor than they thought when they got me that Zillions subscription as a kid.

Jennie’s rules for 401(k) contributions

1. Don’t put your own money into company stock. If the company match is in company stock, regularly transfer it to other funds. You already have too much of your future tied up in your company’s financial success, especially if your have stock options or a pension. Don’t put your 401(k) in their hands too.

2. No matter how broke you are, always invest at least enough to get the company match. As Suze Orman points out in “Young, Fabulous and Broke,” where else can you get 50 percent or more return on your money? It’s basically free money.

3. Start a 401(k) as soon as you can. The earlier you start, the more you have of your greatest assest - time. One guy I know who’s several years older than me has about 10 times what I do in his account. But if we both stopped investing today, I’ll be way better off when I retire in 35 years than when he retires in 20 because the balance keeps compounding.

4. Don’t cash out your 401(k) when you leave a job. Count this as a lesson I learned the hard way. I started one when I was 21 and working my first job after college. I built up a decent amount, maybe $3,500 in three years. When I left, instead of being smart and rolling it over, I cashed it out to pay down my credit card. But I wasn’t committed to killing my debt yet, so the balance went back up, I had to pay all the lovely tax penalties and I lost out on all the money I would have earned over the next 40 years.

5. Be wary of taking out a loan from your 401(k). Maybe things will be fine and you’ll be able to pay it back. But what if you lose your job? What if you leave your job? What if you decide you hate your job but can’t leave because you can’t afford to pay back the loan? Taking a loan really restricts your options and shouldn’t be used if you have another alternative.

6. Know what your portfolio should look like for your stage in life. If you invest too conservatively early on, you won’t make enough money to retire on. If you keep an aggressive portfolio too long, you risk a stock market crash or major downturn just as you’re getting ready to join the ranks of the retired. Start out aggressive, and tweak your portfolio over time to be more conservative.

7. Resist the urge to fiddle. This is a long-term investment. Adjusting your contribution rate and portfolio once a year is good. Changing it every other week is not. Also, don’t panic over blips in the stock market, epecially if you’re a 20-something like me. The point of this is long-term investing, not making a quick profit. There are going to be weeks or months that things aren’t doing so well. Keep investing - you’ll pick up more shares because they’re cheaper and be in better shape when the stock market picks up again.

8. That said, when you do move money out of a fund, do it over time. If you have a third of your 401(k) in company stock and you just realized that’s not a smart move, don’t go in tomorrow and move it all out. Figure out how long a time frame you’re comfortable with and divide the balance by that amount, then transfer that amount each week. (My company match amount is fairly small, so I’ve been moving $100 a week, and will be done in June.) This evens out the cost of the stock so you’re less likely to have one of those wonderful moments where you sell off big and the stock shoots up the following week.

Any other suggestions for smart 401(k) investing?

My car - a 1998 Hyundai - is getting to the point where it will need to be replaced. Not nearing as in “pieces are falling off,” but I expect within the next two years I’ll trade it in for a newer car.

Not a new car, mind you. New cars lose about 20 percent of their value once you drive them off the lot, which makes them a pretty bad proposition unless you qualify for massive dealer incentives. (My dad used to qualify for military discounts, so he actually did OK with new cars.)

Used cars, especially “gently used” cars from leases are a much better bet than they were when I was a kid. The rise in certified pre-owned programs, and the general improvment in quality makes a used car much less risky than before. My car now is gently used; I bought it in 1999 with 12,000 miles on it for $8,500. At the time, I had to finance it for five years because I was a reporter at a weekly that paid peanuts, but it’s held up amazingly well.

My reasons for replacing the car in two years are that by then it will be 10 years old, and likely have about 135,000 miles, which is good service from a car that cost about $11K new. It’s a little car - the Accent - and doesn’t have cruise control or AWD/4WD, but it does get about 40 miles to the gallon on the highway. It was fine when I was doing lots of driving in traffic for work and had family members with minivans and SUVs nearby to help haul stuff. But now that I live in a rural area filled with hills, the lack of AWD/4WD is problematic, especially since I work more when we have bad weather. (Driving 40 miles to our back-up print site during a hurricane in order to get the paper out is interesting in a tiny car.) Not having cruise control means I waste more fuel than necessary driving to my parents and friends who live a couple hundred miles away. Not having room to carry anything longer than 4 feet is a pain in the neck, and will only become more so when I buy a house.

I researched cars, and the little Hyundai SUV, the Tucson, seems to fit my bill. It has great safety features, gets good gas milage (my friend Kyrie’s gets about 30 mpg), has a great warranty and will be on the market long enough that there should be a fair number of gently used ones available in 2008.

My other car goal? To pay cash. I might be able to do that with a used one; I’d have to get really lucky to do so with a new car. And if I’m close in spring 2008 and my car’s holding up well, I might wait a bit longer so I don’t have to finance at all. Not only will I save interest charges, I’ll know that from Day 1 it’s completely mine and I won’t have to write out a check (or set up an electronic debit) every month.

How, you ask, is a journalist going to pay cash for a reasonably new car? Well, I’m planning on putting all the money I now pay for debt into high-yield savings once the credit card is paid off, likely between $750 and $800 a month. Conservatively, that’s about 24 months to save. And that’s over and above the amount I’m saving now, which likely will increase slightly once the CC debt is gone. That will let me build up my emergency savings so all the debt money can go to replacing my car, and then later toward buying a house.
(The car’s actually a bigger priority than the house right now for reasons I won’t go into. Basically, there are some possibilities at work and in my personal life that could drastically alter the house equation, so I’m giving those time to evolve. The car needs won’t.)

The rest of my state tax refund arrived yesterday - $41.66. I also rolled $10 in quarters, $5 in dimes and another $1 in pennies. That brings my “found money” stash to $62.16, and I have until the last week in May to continue to add to that. I’m hoping to get at least $100 for an extra payment on my card. If nothing else, it will cover the interest for the month so all my weekly payments can go to paying off the balance. I’m toying with the idea of making a deposit this week of that money so I can get it on my card sooner, rather than waiting the few weeks and making a larger deposit. Thoughts?
I’m also waiting to hear back from my parks and rec contact about my class to see if I’ll get an extra payment from that. That probably wouldn’t come until early June, though.
I’m also looking for suggestions on ways to “find” money for extra payments. Not recurring sources, like dropping cable (did that two weeks ago), but the dollar-here, dollar-there type. If you have any useful tips to share, leave them in comments so we all can benefit.

I was reading a post from this week’s Carnival of Debt Reduction about motivation, and I figured I’d mention a few ways I manage to stay motivated.

1. I like seeing progress. When I log into my credit card account online each week and see a lower balance, it reminds me how great I’m going to feel once I’m not putting almost half my salary toward paying off debt.

2. To take advantage of that, I have an Excel spreadsheet set up that has each week’s payments, plus interest charges, new balance and weeks to pay it off. I spend a little time each week considering how I can increase the weekly payment, then running the number to see how much earlier I can pay the balance down. That also helped me decide that eliminating my United Way donation next year isn’t worth it - I’ll be fairly close to paying it off, so the extra $10 a week only cuts a week or two off - but that getting rid of internet at home might be, depending on how a couple things develop at work, including my annual evaluation/raise.

3. I pick up the free real estate section we publish every two weeks and look at houses. Planning to buy a house is ultimately what pushed me to get serious about paying off debt, and window shopping reminds me how good it will feel when I can finally pick up a copy and plan to buy one of the houses inside it. A new(er) car also is on my list, so I try and plan at least one route a week past the dealer.

4. I try and build in little indulgences that make the bigger sacrifices not so painful. For example, my cereal comes out of the dented bin at Kroger (89 cents a box last week!), but I splurge on Republic of Tea for my office tea collection so I’m not tempted to run out to one of the many downtown coffee shops.

5. My 401(k) balance is available online, and when it finally got higher than my student loan balance, I celebrated. It should be higher than my credit card balance by the end of next month, which is another benchmark to celebrate. And I’m looking forward to the end of the year, when my net worth should finally be positive.

6. I blog about my progress and keep one friend up to date. Knowing I have to publicly own up to backsliding makes me much less likely to do it.