Debt and Savings Update 2007 #3 - 12/31/2007

This is my last financial "snapshot" of 2007.

For me, 2007 is the year I finally got my act together and started my financial makeover. After years of carrying credit card and other consumer debt, I am tired of living paycheck to paycheck, floating through on credit cards, and paying out a full month's worth of expenses annually in finance charges alone.

I am looking forward to 2008, a year to continue my progress towards a brighter picture of personal finance - turn the occasional crisis into a mere inconvenience with emergency savings, lay a better framework for the years to come through investing, and most importantly, reduce the consumer debt so we can stop throwing our money away on interest payments.

So, here is the our Debt and Savings Update for 12/31/2007:

Savings - $890.53

Goal Savings (ING) - $190.53
Short-Term Emergency (Key) - $200.00 (Target: $500.00)
Short-Term Emergency (USAA) - $500.00
Long-Term Emergency (UFB) - $0

The Short-Term Emergency accounts are linked to each of our checking accounts and are there to help in a pinch if we fall short between paychecks. The challenge with these accounts will be their accessibility and the temptation to use them for impulse purchases. The target for the short-term emergency accounts is $500 each, enough to cover most of the little emergencies without putting too much money in a low-yield account.

The Long-Term Emergency account is my priority for the beginning of 2008. The initial goal for the account is $1,000, to cover any minor unexpected expenses, with the ultimate goal being 3-6 months of living expenses. I just opened an account at UFB with 5.10% APY, and plan to start automatic contributions with my next paycheck.

Investments - $2,195.12

Edward Jones - $1,870.12
Prosper - $175.00*
Lending Club - $150.00*

The EJ account will eventually be our house downpayment, and is growing slowly but surely. I opened the two P2P accounts more out of curiosity and boredom, but mathematically the returns seem to be worth the increased risk. I want to see how these first few loans work out. I am going to report the total value of the account, as remaining loan principle plus current account balance, for lack of any better idea how to report the value of the investment.

Debt - $43,545.67

Universal - $8,250.00 (1.99%)
Capital One - $0.00 (15.4%)
Citi - $2,970.00 (10.24%)
USAA - $10,231.07 (11.65%)
Student Loan - $4,424.39 (6.97%)
Toyota Loan - $15,622.64 (7.4%)
Medical Loan - $192.44 (0%)
Medical Debt - $1,855.13 (0%)

I made substantial progress on the medical loan, thanks to my christmas bonus and some other gifts. I will have the full medical loan paid off on February 1. The USAA Credit Card should be the next debt target, but I am contemplating hitting Citi first, since the interest rates are so close and the Citi balance is so much lower - it will be a psychological boost to pay the balance in full, and I think I can do it in a couple of months.

Total Net Worth - $40,460.02 (-)

Comparison:
12/15/2007: $44,616.04 (-)
12/3/2007: $46,230.24 (-)

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An Alarming Look At Our 2007 Spending

I decided just over a month ago to turn our finances around, get out of debt, and start saving for the future. In the long run, changing the way we manage our finances will secure a comfortable future - home ownership, capacity to handle emergencies, and ultimately retirement. In the short-term, so short that it is already starting to happen on the smallest scale, we will have more money for the things that are important to us by prioritizing our spending and applying a little common sense to our budget.

Part of the process to turn our finances around has been carefully analyzing our spending. Luckily, I used Quicken all year and have been vigilant about entering and categorizing every expense. I've been pulling reports from Quicken this month to figure out where our money goes, and it is definitely alarming.

The winner of the unnecessary and wasteful spending is ...

Finance Charges - $2,676.81 - This is the category that we are actively reducing. Carrying $43,000 in various forms of credit adds up quickly. One of our financial priorities is to eliminate debt - and fast.

With the money we paid out in finance charges this year, I could have bought the following items from my Wishlist:

4 Gateway T2080 Dual-Core 1.73GHz 15" Widescreen Laptops ($600 ea)

1 Sony Bravia KDL-46XBR2 46" 1080p Widescreen LCD HDTV ($2000)

5 Envision 32" LCD HDTVs ($500 ea)

17 Harmony 880 Universal Remotes ($145 ea)

Or ...

I could have purchased a Gateway T2080 Laptop ($600), an Envision 42" LCD HDTV ($700), and a Harmony 880 Remote ($145) and still had $1,155 left in savings.

Yet another addition for the long list of reasons to dig out of debt.

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Changing the way that I calculate my Net Worth

Until now, I have been reporting my Net Worth by taking the sum of the checking and savings account balances and subtracting all of the debt:

My Checking
Her Checking
Billpay Checking
ING Savings
Investments
Credit Cards
Medical Debt

I was not including the auto loan, since the value of the car more or less negates it. However, in looking at the auto loan this way, I realize that I've been tricking myself into thinking I have less debt than I do.

In addition, I have been including the Checking balances, and usually recalculating Net Worth early in the pay cycle when our checking balances are up, further inflating the Net Worth calculation.

To provide a figure that is more valuable to me as a reflection of our current financial situation, I will be using the following values to calculate Net Worth:

Savings - $670.94:
Short-Term Savings (USAA) - $400.41
Short-Term Savings (Key) - $100.00
Goal Savings (ING) - $170.53
Emergency Fund (ING) - $0.00

Investments - $1804.34:
Edward Jones - $1654.34
Prosper - $150.00

Debt - $47,092.32:
Universal - $8,250.00 (1.99%)
Capital One - $0.00 (15.4%)
Citi - $2970.00 (10.24%)
USAA - $10,300.00 (11.65%)
Student Loan - $4,462.21 (6.97%)
Toyota Loan - $15,622.64 (7.4%)
Medical Loan - $3,361.34 (0%)
Medical Debt - $1,855.13 (0%)

Total Net Worth - $44,616.04 (-)

This is the calculation for Net Worth that I will report in my Debt and Savings Updates. The NetWorthIQ value will still include all assetts, i.e. checking and auto value. However, I think by excluding those when I look at the numbers, it will give me a far more accurate idea of our progress.

Using these new values, here are the Net Worth recalculations for the previous Debt and Savings Updates:

Debt and Savings Update #2 - 12/14/2007 - $44,616.04 (-)
Debt and Savings Update #1 - 12/3/2007 - $46,230.24 (-)

Debt and Savings Update 2007 #2

Debt and Savings Update 2007 #2 - 12/14/2007

Checking - $1,483.31

Savings - $670.94

• Short-Term Savings (USAA) - $400.41 - I am within $100 of fully funding my short term savings account at USAA. The goal for this account is $500, to use as a personal "line of credit" in the event of unexpected expenses to float until the next paycheck.
• Short-Term Savings (Key) - $100 - I just opened this account today and plan to use it just as I use the USAA Savings account, as a short-term "credit" line to cover unexpected expenses until the next paycheck.
• Goal Oriented Savings (ING) - $170.53 - The first of my biweekly $20 contributions went through today. Still no specific goals for this account, though I'd like to step up the contributions for the account and use this for our vacation this year.
• Long-Term Savings (ING) - $0 - I still haven't started the emergency fund account yet, but this is going to be a priority for 2008.

Investments - $1,826.69

• Primary Investments (Edward Jones) - $1,676.69 - I started $50 monthly contributions in November and will make the second monthly contribution on the 20th. I am also sending $150 on Monday, to bring the cash balance in the account to $250, the minimum to jumpstart my new fund. Progressing towards the downpayment for the house.
• Prosper - I moved $150 to Prosper, the peer-to-peer lending service. I have my concerns about investing in personal loans for two reasons - the risk of default is small but nevertheless present, and Prosper does not currently offer any means of selling loans if I need cash in a hurry. However, the returns are promising and the default rate is only 3%.

Credit Cards - $21,520.00

• Universal - $8,250.00 (1.99%) - Paid $125.22 today
• Capital One - $0 !!!!!!!!!!!!!! Paid $577.67 today
• Citi - $2,970.00 (10.24%) - Paid $56.24 today
• USAA - $10,300 (11.65%) - This is the next debt to attack.

Other Debt - $9.948.68

• Student Loan - $4,462.21 (6.97%)
• Medical Debt - $5,486.47 (0%)

Net Worth - $27,629.07 (-)

Comparison:

12/3/07 - $27,994.99 (-)

10/1/07 - $30,175.92 (-)

Until Next Time,

Jonathan

Debt and Savings Update 2007 #1

I am trying to decide what format is best for providing financial updates. Between my wife and I, we have three checking accounts, two savings accounts, an investment account, four credit cards, one student loan, one healthcare loan, one miscellaneous debt account, and one car loan. To post the entire list every couple of weeks would take a great deal of time and, frankly, nobody really cares about the specifics.

I thought about posting every detail about our recurring monthly expenses, but instead I will only post information about those if there is a change from the norm. As for balances, I will only post the balances that have changed.

So, here is Debt and Savings Update 2007 #1 - 12/3/2007

Checking - $2,120.99

My Checking (USAA) - $87.45 - Usually right after pay day I have about $100-150 remaining for two weeks worth of personal expenses. I drove to Mass. this past weekend for military training, and with the price of gas it hit hard. I need to drive to CT this coming weekend for more training, and may have to dip into the short-term savings to pay for the gas. I will pick up a couple extra days of pay for the training, so it will not be hard to refund the savings account.

Her Checking (KeyBank) - $89.99 - Again, right after pay day Jen should have $100-200 remaining for the two weeks. However, her friend had a baby shower over the weekend that Jen contributed to both the planning and financing of, which took its toll on the balance. She also bought cat food over the weekend, which actually comes out of the grocery budget, so I'll end up transferring that money back to her checking account once we're done with the grocery shopping. If she is careful with the next two weeks, though, she should be able to make it through.

Billpay Checking (USAA) - $1,943.55 - This is right about where it should be. After all of the scheduled payments, there is about $47 extra in the account. Once I am certain that money is clear, it will go towards the credit cards.

Savings - $450.94

Short Term Savings (USAA) - $300.41 - I moved $50 from the last paycheck into the Short Term Savings account, the low yield account destined to bail us out when we underestimate our expenses between paychecks. The goal is to reach $500, which should be right after the first of the year.

Goal Oriented Savings (ING) - $150.53 - The high yield account will start its automatic funding on 12/14, at $20 per paycheck. Any extra money after expenses will be split between debt snowflakes and goal oriented savings. We still don't have any goals established for this money, but I'm leaning towards a few days of R&R this spring.

Investments - $1,770.12

I have had one investment account, we'll call it "Primary," since my grandmother started it as my graduation present. She continues to add to it for birthdays and gifts for other occasions -- probably the best gift anyone has given me. Starting in November, $50 each month will automatically transfer, to start to build the account so that, one day, it will fund the downpayment on a house. I haven't done the math yet, but $50 per month over five years is $3000 invested, and the fund's 5-year average return is 15.33%. It won't be the entire downpayment, unless I can up the $50/month contribution substantially, but it should take care of some of it.

I recently opened a second investment account at Sharebuilder, and I was planning on using it to diversify my investments a little. There is $100 sitting in their money market account waiting to be invested, but I've been second guessing that move. I think it would make more sense just to send the money from Sharebuilder to the other investment account. Still working on this one.

Credit Cards - $22,297.03

Broken down, it is:
Universal - $8,360.00 @ 1.99% - Paid $136.52 today.
Capital One - $435.00 @ 15.40%
CitiSimplicity - $3,000.00 @ 10.24% - Paid $185.98 today.
USAA - $10,502.03 @ 11.65%

This week, $202.03 is posting to the USAA account, bringing it down to $10,300.00. The balance on the cards continues to drop, though not as fast as I would like it to.

Other Debt - $10,098.68

Student Loan - $4,462.21 (6.97%) - Making the standard payments. ($70.00)

Medical Debt - $5,636.47 (0%) - This is actually a composite of several major accounts, one healthcare finance account and a collection of what started as six medical bills that we are making payments on.

The healthcare finance account was going to pay for Jen to get braces, before she decided that she really didn't need/want them. The balance remains for now, but the orthodontist is supposed to be refunding the money to the creditor soon.

We started with six medical bills last year, totalling $3,995.00, and we've knocked it down to three bills remaining for $2,005.13. We are scheduled to pay $150 monthly, but I usually try to put in a little extra.

12/3/2007 Net Worth - $27,994.99 (-)

Comparison:
10/2007 Net Worth - $30,175.92 (-)


That's my update for now - I'm still working on the format and the "right" amount of information to put with each update.

Until next time,
Jonathan

The Plan: Debt Reduction

The Problem

I have always been a math and science person. In elementary school, I participated in a special program for math and science that exposed us to lessons two to three grade levels beyond our class. In high school, I participated in every extra-curricular activity geared towards math and science, including robotics competitions, math clubs, engineering clubs -- ok, I was a geek. My degree is in Biomedical Engineering with a concentration in mechanics and a minor in Psychology, with a huge number of complicated sounding math and science courses under my belt.

With all of that math and science background, and what tends to be a very analytical mind, why, then, would I dig myself in to debt like I did, knowing fully the extent of the debt versus my income and the effects of compounding interest?

I started with my first credit card my freshman year of college. I did well with the card for the first year or so, before I carried my first balance. It got worse from there, and through the next three years or so I consistently carried a balance. Some time later, I got serious about the debt and paid it down. Then I ran it up again. Then I paid it down. Then up. Then I opened a second credit card account, and ran that up too. Eventually, I ran the debt up to where I felt uncomfortable, so I took out a personal line of credit to consolidate both cards under a more structured payment plan. Then I ran the credit cards up again.

Hindsight being what it is, I think I had a problem with impuse buying. Two or three years ago, I realized that I was stuck in a cycle that I had to break before I dug myself deeper. I can attribute most of that epiphany to meeting my wife, growing up a little, and looking forward in my life's timeline at the bleak picture of my financial future that I was painting.

The Solution

Spend Less Than We Earn

The first step in the resolution of my credit card problem is to stop making more debt. I mentioned in a previous post that we have been doing much better for the last year - our overall income exceeds our overall expenses and we've made some progress towards the debt. Even so, there were many times where we underestimate our expenses between paychecks and had to resort to the plastic to hold us over. We've been good about using the credit cards only for "needs," but typically the only reason we had to resort to the card was because we spent too much on "wants. I still consider it an unnecesary use of the credit card.

Avoid Temptation

To counter the temptation to break out the plastic in the face of every "irrestible" deal, special, sale, or bargain, I destroyed my two high-balance cards and froze my low-balance card in the freezer. My wife still has her card in her wallet, but I'm trying to convince her to freeze hers too. For those unfamiliar with the strategy of freezing the card in a block of ice, I still have access to the card in case of an emergency, but in order to use it I have to anticipate it, take it out of the freezer, and set it out to thaw. If I am about to make an impulse purchase, the hope is that by the time the card thaws, the impulse will have passed.

Reduce The Debt

Putting the breaks on adding to the debt is half the battle to reducing it. The second weapon in the war on debt is to make payments. There are many schools of thought on how to pay off credit card debt. Mathematically, to spend the least on interest while reducing the balance the fastest, the best strategy is to pay the minimum payment on all debts and maximize the payment on the highest interest card first. Psychologically, making the same payment to the card with the smallest balance is more noticable and satisfying. I decided on a plan somewhere in the middle.

The Plan

I think I have a touch of OCD when it comes to the card payments, and I like to make payments that leave the balance as a nice round number. For example, if the balance is $10,502.03, and the minimum payment is $180, I will pay $202.03. That being said, the plan is to pay higher interest rates any excess funds, and pay the "minimum" payment as described above. I won't be able to work out how much I will be paying every month, though, until I figure out what impact the 401(k) contributions, automatic savings, and changing health insurance will have on my take-home pay.

So, once I work it out, I'll post more details of the plan.
Until then,
Jonathan