Debt, Credit Card & Consolidation Current News Digest

This article is by staff writer Adam Baker, who recently released an 83-page guide entitled Unautomate Your Finances.

Courtney and I are big fans of what we call “mental filters”. These are simple little tips and tricks that we can use to increase our financial awareness. (J.D. likes to call these tips and tricks money hacks.)

For example, I’ve talked before about how we taped a picture of our daughter to our credit cards while we were paying down our debt. Many people I know use some sort of 30-day rule to curb their impulse desires, especially those which contribute to clutter.

Both of these techniques are examples of deliberately installing a barrier between yourself and a routine action. Many of us do this in various aspects of our lives to help raise consciousness, but this technique can be particularly powerful in our finances.

Today, I want to share a mental filter (or money hack, if you prefer) that Courtney and I used while passionately attacking our debt. But first, let me share a quick story:

The $6.25 foot-long
Once upon a time, I was approached by a close friend with a question about his credit card statement. He knew one of his rates was out of control, but didn’t know how to go about asking for a reduction (or even where to find the details on his statement).

Always the good friend, I offered to look over the statement for him. As my eyes drifted down the page I saw a frightening sight: 24.99% APR!

Yikes! The amazing thing was that he’d been paying consistently and timely for well over 18 months at this rate! He’d been paying the minimum payment, and occasionally making a small charge here and there. Because the interest was 90% of his minimum payment, his balance was simply treading water.

Trying to help him brainstorm options (and trying to light a little fire under his butt), I turned to him and asked, “Do you realize that, until we get this fixed, every purchase you make is actually costing you 25% more?”

My friend thought for a second and replied, “I guess you mean because I could use the money to pay down the card. I never really thought of it that way.”

To be completely honest, neither had I before that very moment. I pondered the concept for a second and then shoved it into the back of my brain as we piled in the car to search out something to eat. As we drove through town we came upon the very difficult choice every person has to make at some point in their life: Subway or Taco Bell?

My friend paused and then said, “I’m definitely going to Subway. You just can’t beat the $5 dollar foot-longs!”

I tried to fight the urge, but I couldn’t resist: “More like a $6.25 Foot-loooooooooong!”

Realizing I’d just sucker-punched him, my friend snapped back, “You know, maybe you should change the name of your blog to Man vs. Fun!” Ouch!

The hidden cost of being in debt…
While my friend ended up getting the best of me in the story, I did revisit my side of the conversation a couple of days later. At the time, our highest interest rate on a debt was about 14.5%.

I realized that mentally tacking on an additional 15% (or so) to my purchases might help ensure that I only spent on items that were specifically budgeted for or that were absolutely essential.

From that moment on, I tried to think of any non-essential expense as if it was marked up by a 15% premium.

You know what? It worked. It didn’t really affect the small purchases as much — I wasn’t phased by an additional $0.25 or $0.50 tacked on — but when it came to purchases of $50, $100, or $150, I started to feel the effects.

Psychologically, nobody likes to pay a premium. Even if it’s still a fantastic deal, none of us enjoy paying what we think is a 15% premium.

The only downside I can see to this mental filter is if it were taken to an extreme. There’s no need (and certainly no benefit) in examining every single purchase through a tiny microscope. For us, we never felt pressured on expenses that were truly needs. I didn’t feel pinched to buy a loaf of bread because I had 15% credit-card debt.

This wasn’t necessarily a life-changing tactic that we employed, but a combination of these small mental filters did play a huge role in our financial turnaround. Each one helped raise our overall awareness!

J.D.’s note: I remain a huge fan of money hacks. Money hacks are identical to what Baker is calling a money filter; they’re little tricks you can use to make yourself spend less and save more. There are tons of money hacks in the GRS archives.

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Related Articles at Get Rich Slowly:

• The Hidden Fee Economy
• links for 2006-11-13
• Super-Sizing Your Meal Costs More Than You Think
• The Best of Get Rich Slowly: November 2007
• Best of November, and How to Subscribe to GRS

This post is from new staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com. Last week, J.D. wrote about Stuff; today, Sierra shares her thoughts on the costs of clutter.

Do you have piles of papers lurking on your desk? Mountains of laundry looming beside your bed? Shelves double-stacked with knick-knacks? I have a bit of a clutter problem myself. The other day, I spent an hour looking for the vacuum cleaner, which eventually turned up buried under a pile of laundry almost as tall as I am.

All that clutter isn’t just annoying. It’s expensive. That’s right: Excess Stuff can keep costing you money even after it’s been bought and paid for.

How expensive is your Stuff? Professional organizer Jen Hunter of Find Your Floor in Boston says clutter can cost us real money in a lot of ways:

• Buying replacement Stuff: Somewhere in your closet is that pair of running shoes you bought last year. Probably next to the ones you bought the spring before that. Clutter costs us dollars and time when we have to buy duplicates of stuff we know we own but just can’t find.
• Damage to your Stuff: When you have more Stuff than space, storage can become a problem. Things can get stepped on, stored improperly and broken, water-damaged or just so buried they can’t be retrieved when needed.
• Missing deadlines: When your Stuff is disorganized, you wind up paying hundreds of dollars a year in bank fees, late charges, library fines, overdue fees and tax penalties. Trust me on this one. I speak from years of painful experience.
• Renting storage space: Almost 10% of U.S. families rent storage space for belongings that don’t fit in their homes. That’s a lot of dollars going to serve your Stuff instead of your life. Even those that don’t rent space may choose larger homes than they need so that they can store more Stuff.
• Health costs: Out of control clutter can pose health risks from falling, and encourage the growth of allergens like dust and mold. Treatments for those can get expensive. Clutter can also affect your mental health. Writer Ariel Gore saw a therapist until she realized that what she really wanted was a clean home. So she hired a housekeeper for less than she paid the therapist and lived happily ever after.

To Hunter, the biggest cost is an intangible. “It’s the impediment that it presents to people’s lives,” she says.

Stacy J. Kaplan of Clutter Away in San Diego agrees. “You can’t function at your optimum level if you’re disorganized,” Kaplan says. “You wouldn’t run a business without a business plan. If you’re not organized your business will fail. A house is a small business in a way. It’s the operating structure behind what your family is doing.”

Clutter stops us from working as effectively as we otherwise might. At its most basic level, time spent looking for your car keys is time you’re not spending working, playing or relaxing.

It also costs us time because all that Stuff demands attention. While clutter might be a sign of neglect, it requires us to spend time working around it to accomplish basic household tasks like paying bills or preparing a meal. Those extra hours of housework are a drain on time and energy that could go into creative side projects, education or any number of other productive pursuits.

We can become prisoners of our Stuff. J.D. has written a lot here about how Stuff ties up our money. We can inadvertently tie up a lot of our earnings in rarely used sports equipment, video games, and other pricey toys. Selling that unused Stuff frees up not only your cash but your energy. When there’s too much Stuff around you, you’re like a plant in a too-small pot. It’s hard to grow or thrive when hemmed in by clutter.

Of course, the answer isn’t to move to a bigger place. There are families who live happily in 100-square-foot apartments. They just have less Stuff than we do.

The solution is to put your space on a diet. Some basic steps to get started:

• Consider adopting The Compact, an agreement to buy nothing new for one year. This should cut the flow of Stuff coming in down to a trickle.
• To deal with the Stuff you have, go through one small area at a time. Don’t try to do the whole house at once. Choose a room, a closet, a desk, or even just a kitchen drawer.
• A good rule of thumb: Get rid of anything you don’t use or love.

A habit of clutter can be hard to give up. If you’re used to having a lot of Stuff around you, a pared-down space can feel too spare and empty. Before you rush to fill that void, try sitting with it for awhile and really setting an intention for you want to replace your clutter with. It might be original art, new bookcases, workshop space or just more breathing room.

Whatever you choose to do with your space, you can use the same techniques you used to clear it to keep it clean. Don’t keep Stuff you don’t use or need. Don’t buy Stuff you don’t want or need. Spend a little time each day keeping your space organized.

Here are the top three clutter-busting tips from GRS Twitter followers:

• “Throw clutter in bags, put them in the attic. As you need something, take it from the bag. After 6mo, donate bags.” — @jacobmlee
• “For clutter: I’m using @gretchenrubin’s rules: Make your bed and the 1-min rule: if you can do it in 1 min, do it now!” — @jc_losangeles
• “My fave declutter advice: Spend 15 Mins a day!” — @BudgetsAreSexy

I know we just talked about Stuff last week, but how do you combat clutter? What tips and tricks can you share with readers?

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Related Articles at Get Rich Slowly:

• Clutter’s Last Stand: The Cost of Buying Things You Will Not Use
• Simplify Your Life with a Stuff Replacement Fund
• Daily Links: Frugal Tips Edition
• Guarding Against the Invasion of Stuff
• The Official GRS Referral Swapping Thread

This article is by staff writer Adam Baker, whose own blog featured the hit post 42 Ways to Radically Simplify Your Financial Life.

When I was 14 years old, I opened my very first checking account at Bank One. That’s where my Dad banked and so that’s where he drove me when I asked to open an account. Over the years, I continued to give them my business.

By 16, I had opened another checking account (don’t ask me why) and a new savings account, too. At 20, I started my journey into credit cards with… yep, a brand new Chase credit card. (Note: Chase ate Bank One in 2004.)

At 21, I opened my first Chase business checking account and, at 22, I funded $1000 into my new Chase investment account. When my wife and I married the following year, we canceled her National City account to combine our finances with… Chase.

You get the point. While this may not seem too out of the ordinary, there’s only one problem: Neither of us really likes Chase Bank.

In fact, I’ve never really liked them that much. I’ve wanted to switch to a local credit union for years, but just haven’t done it. I’ve been eyeballing USAA ever since they opened their checking and savings accounts up to civilians. Mentally, I want to change…but physically I’m still a Chase customer.

What does it take to make you switch banks?
There are plenty of reasons why someone might switch banks. A couple factors that come to mind:

• Higher rates. This not only applies to rate chasing, but any form of benefits offered. Maybe there’s a 0.5% better savings rate at the bank across the street. Maybe another is offering a free $100 when you open a new account. These are all situations where the bottom line may be the primary influence.

• Customer service. I love great customer service and I’m willing to pay more for it. In banking, this now includes both in-person and online customer service features. While I abhor having to call Chase (try it someday, it’s terrible),I love a couple of the people at my local branch. I know the branch manager and business banker well, and they always greet me by name. In addition, I have specific online banking features set-up that I’ve been using for years. Their online services aren’t perfect, but they’re above average.

• Length of history. As I outlined above, I’ve had a Chase account for over a decade now (and I’m only 25). In this day and age, customers will longer histories at a single bank are more rare. Anytime I have an issue on the phone, I immediately have them look up my history. While I’m not a big fish to them in terms of money, my account history tab shows dozens of accounts over nearly a dozen years!

• Principle. The longer I’m involved in personal finance, the more I prioritize this category. I’m not a huge fan of big banking. I’m not a conspiracy theorist and I won’t be picketing in Washington, but I like the idea of giving my business to a local bank. “Principle” is a major reason Courtney and I reject credit cards, and many people point to this reason giving their business to credit unions.

• Accessibility. Years ago, the only factor I cared about was how close my bank was to my house. Here in the Midwest, no one does that better than Chase. It’s almost as bad as McDonald’s (almost…)! With the rise of online banks, the walls of this one are coming down. For some, however, it remains a huge factor in choosing a bank.

So, will I walk the walk? I’m not sure whether Courtney and I will switch our bank. We want to, but we aren’t compelled to…at least not yet.

I’d enjoy supporting a local credit union or a testing out a bank with a reputation like USAA. I’m not much of a rate chaser and accessibility isn’t a huge priority. I much would prefer a bank I feel good about supporting and that offers me fantastic customer service.

At this point, Chase seems to be just doing enough to keep us around. But after writing this, we’ll see how long that lasts!

Have you recently switched banks? What was your motivation? Any suggestions for me?

J.D.’s note: I stuck with a lousy bank for a l-o-n-g time. Ultimately, I moved my accounts to a local credit union, and I love it. I’ve since added an online bank to the mix (ING Direct). Neither of these banks is perfect, but they both provide excellent customer service and above-average deals, so I’m pleased to stay with them.

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Related Articles at Get Rich Slowly:

• From Bank to Credit Union
• My $300 Morning
• Ask the Readers: Should I Chase Higher Interest Rates?
• Fix Your Own Printer and Save Money
• A Cheaper Cup of Coffee

This post is from new staff writer Sierra Black. Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com.

The recession has hit families where they live. For many, it’s forced a change of address. Think about all those foreclosed homes and urban deserts: One in every 400 homes received a foreclosure notice last year. Unemployment is approaching 10%. Some families no longer have a place to call home at all.

That’s the situation for Jamie Alden (not her real name), a single mom of four kids who found herself caught up in a series of recession nightmares that have left her homeless and jobless, but not hopeless. She’s chronicling her adventures on The Boxcar Kids, where she writes with painful frankness about trying to find a job, help her kids thrive at school and keep her family together while living in a small travel trailer with her children.

The Boxcar Kids
Alden is a far cry from the stereotypical homeless person. A professional with a master’s degree in anthropology, Alden had a career for over a decade in environmental science. She relocated to California after a doctor recommended the warmer, drier climate would help one of her children, who has a chronic illness.

Like a lot of relocating families, Alden accepted a job in her new city before she’d sold her house. So she rented it out, and rented a place near her new job.

Then the economy tanked. Her renters defaulted, and she used most of her savings going through expensive legal ordeals to evict them. She was left with a damaged home that she could not find new tenants for. Unable to make the mortgage payments and pay rent on her new home, she lost the house to foreclosure.

Meanwhile, her company started layoffs. “California has a little budget problem,” she says sardonically. “We couldn’t work on any of our contracts.” She survived the first two rounds, but eventually her lack of seniority put her under the axe. As soon as he found out she’d lost her job, her landlord asked her to move out. “He knew I wouldn’t be able to pay the rent,” she says.

Throughout the summer, Alden and her kids found themselves living in state parks in second-hand tents. She used free hotel stays she’d accumulated over years of business travel to buy them an occasional night of warm beds and hot showers.

Now they have a 26-foot RV they call home. The school district considers them homeless, but Alden doesn’t. Homeless, she says, was when they lived in a tent and had to move every week. This is comparative luxury.

Alden named her blog after a series of popular early 20th century children’s books about four kids who live a scrappy, happy life in a boxcar after their parents die, until they are rescued by a kindly, rich grandparent. There’s no rich grandparent to rescue Alden and her kids from their boxcar. Instead, Alden is learning to navigate a maze of social services and getting creative about frugality in ways most of us have never considered.

She’s not alone. Many formerly middle-class families have found themselves at least temporarily without a home to call their own. Foreclosures were filed against 2.8 million properties in 2009, while apartment vacancies are also at a 30-year high water mark. A lot of people are just not living in houses these days.

Where are they going? Many are staying with family or friends. Some are in shelters. Others are what Alden calls “alternatively housed” in RVs, camper vans, anything with a roof.

The best defense is a good offense
Alden’s story, and the many others like it are a scary wake-up call for me. My own family is not so far from the precipice these folks fell off of.

We own a home, but don’t have a lot of equity in it. We have a small emergency fund, but not enough to get us through even one month of normal living expenses. I’ve been putting all our money into debt repayment, not building up capital. We have some retirement funds that are still pretty hung over from the financial collapse in 2008.

In other words, we’re a lot like many middle-class families: comfortable enough day-to-day, but not secure enough to withstand a major disaster. Time to make an emergency plan: Not just an emergency fund, but a plan that goes beyond bank accounts. Here’s what I came up with:

• Be prepared.This means building up more of an emergency fund. Experts argue over how many months expenses you should put by, but no one seems to think less than 3 months is safe.
• Be frugal. Living simply now means having fewer adjustments to make in the event of a financial catastrophe. Not only can you pay off debts and build up savings faster, but you’re already living below your means. If the means suddenly shrink, you have a smaller gap to cover to make ends meet.
• Be organized. Know your net worth, and keep tabs on all your accounts. When we were moving last year, I discovered a stock fund I’d forgotten I had. Those forgotten assets matter if your income dries out.
• Protect your credit. Keep credit accounts open and in good standing. In general, running up credit card bills is Bad Plan Theater. If your plastic is what’s standing between you and homelessness, reconsider your position. If you expect to be able to resolve your financial crisis within six months, charging some expenses might be a better plan than tapping retirement accounts.
• Know your options. Do you have friends and family you could stay with in a housing crisis? Another career you could transition into if you had to? Valuable Stuff you could sell?
• Be ready to learn. If you find yourself in a financial crisis, you’ll be running a maze of social services at a time when you’re likely to be exhausted and stressed. Being on top of the organizational and financial strategies I mentioned above will not only make you less likely to need these services, it’ll make you better prepared if you do.

If you’re partnered, it’s probably a good idea to talk over a family disaster plan with your better half. You know, before you’re living in an actual disaster. These conversations always go better when they’re hypothetical.

Making an emergency plan was a bit like making a will; we had to think about what would happen to our kids, our stuff and our estate should we suddenly be unable to care for it. It was no fun, I hope to never need it, but I’m glad to have done it. For more tips on emergency planning, check out Philip Brewer’s article on Wise Bread.

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Related Articles at Get Rich Slowly:

• Healthy Food on an Unhealthy Budget
• links for 2007-05-11
• Could You Eat Healthfully on One Dollar a Day?
• A Treatise of True Things About Whole Foods Market
• Fighting Food-Budget Killers

This article is by staff writer Adam Baker, whose own blog paid homage to the movie, Fight Club, with the post Tyler Durden’s Guide to Personal Finance.

While I generally check my credit report every 4 months or so, the last time I checked my credit score was November 2008. At that time, it was right at 740. Earlier this week, I checked my credit score again. I was pleasantly surprised to find out it was 730+!

Why would I be pleasantly surprised that my credit score has dropped between 5-10 points over the last 16 months? Because that’s when we stopped playing the credit game.

In early November 2008, Courtney and I not only canceled our credit cards, but also paid off our only non-student installment loan. The following month, we decided to take it a step further and close our final remaining credit card.

For the last 15 months, we’ve lived free of credit cards, other revolving credit, and traditional installment loans. (We still have student loans). While this has had an overwhelming positive affect on our financial life, it was supposed to have a dramatically negative affect on our credit scores.

After all, the following graphic is from myFICO’s “What’s in your FICO Score?”:

According to the graph and the information on the site, we have several strikes against us:

• The length of our active accounts would obviously be affected. Several of our credit cards were 4-5 years old. Canceling them reset the length of our active revolving loans back to zero.
• The type of credit used would be less diverse. We didn’t have a mortgage and now didn’t have any active revolving credit, either. I’ve read that FICO likes to see an installment loan that isn’t a student loan (for example, an auto, jewelry, or personal loan). We’re now lacking that, as well.
• Our overall credit limits were all but eliminated. Previously, we had close to $15,000 in credit card limits. This was obviously reduced to $0 by closing the accounts.

To be fair, we did have several factors working for us:

• Canceling our credit cards didn’t increase our utilization rate (the percentage of our limits we actually use). When you don’t have a balance, the utilization rate will always be zero, whether your limits are $10k or $0.
• My payment history has no negative marks. It’s certainly possible that my punishment for canceling my accounts may have been augmented had my history shown several negative marks. A clean payment history may help counteract the downside of canceling the accounts.
• We have no dings from new forms of credit. In addition to closing our accounts, we also chose to place a credit report freeze on both of our reports. As a result, we’ve had very few (if any) checks on our credit and certainly no newly opened accounts.

Could my credit score be even higher?
It’s very possible that even though my credit score hasn’t tanked, it could be much higher. Had I not canceled my credit cards, maybe my score would be 750+ or 760+! There’s no way to know for sure, but canceling my credit cards may have caused my score to stagnate.

Another possibility is that FICO’s algorithm may still need more time before it begins to punish my “negative” behavior. I find this theory less likely, as it’s been well over a year. Over time, maybe the score will slip more dramatically.

On that note, if we keep up our current pace, we’ll eventually cease to have a credit score at all! It can be argued whether this is good or bad, however you’ll be hard pressed to convince me that executing our current plan for another 5 years will put us in a bad position financially.

So what does this all mean for you?
It’s important not to draw any sweeping conclusions from a single example. I fully expected my credit score to drop more than a mere 5-10 points, based on the information I’ve been reading for the past two years. It would be irresponsible to assume canceling your own credit cards would yield a decrease or an increase in your score based on my results.

At the same time, my sample case study has caused me to reevaluate just how much we know about the algorithm used for calculating your credit score. After all, no one knows the exact formula. All we have are graphs and lists of potentials factors that may be taken into consideration.

The only universal lesson that can be extracted from this is to ensure that an estimated change in your credit score isn’t the primary influence on your major financial decisions.

Of course, you should have any and all information you can. I’m not suggesting we should all ignore the information that is available about the make-up of credit scores. You should absolutely consider it. Just be wary of letting it dictate any major financial decisions on its own.

A week ago, I considered myself fairly savvy on the topic of credit scores. Today, I’m not so sure anymore!

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Related Articles at Get Rich Slowly:

• Credit Card Companies Are Closing Unused Accounts
• National Credit Score Index
• Ask the Readers: How Will My Family’s Credit History Affect My Own?
• How and When to Cancel a Credit Card
• Sallie Mae’s Screw-Up May Cost YOU Money

This article is by staff writer Adam Baker, whose own blog featured a real life negotiation example in the huge post Negotiation Tips for Beginners.

Each of us have specific items or activities for which we are more than willing to pay a premium. In fact, deciding what we are and aren’t willing to spend money on is one of the core issues in personal finance.

A willingness to pay extra for everything would quickly bury most of us in debt. At the same time, willingness to pay for nothing will burn out even the most frugal among us. When allocating our spending, we will likely each have a couple of financial vices that surface.

What is a “financial vice”?
Wikipedia defines a vice as “a practice or a habit considered immoral, depraved, and/or degrading in the associated society.” This definition may be a little intense for our own purposes. However, if we equate the “associated society” with the personal finance community, an interesting concept emerges.

My definition of financial vice is, therefore, “any regular expense we willing include in our budgets that may appear extreme, bizarre, or down-right ignorant to many members in the personal finance community.” Most of us have one or two financial vices that are inconsistent with the other patterns in our budget. These are the expenses that would make our friends and family cry, “What in the world are you thinking?”

Sometimes these are healthy vices — expenses that we passionately choose and that bring benefit into our lives. Other times, our friends and family may be onto something: Unhealthy financial vices have the potential to do some serious damage (often to more than just our budgets).

I won’t speak for J.D., but he’s written about several of his own financial vices both when he was fumbling in the dark and since entering the third phase of his personal finance journey. I will, however, speak for myself. [J.D.'s note: Comic books have historically been my biggest financial vice. You all know that, right?]

My primary financial vice

There are several financial vices that tend to consistently surface in my own budget. The primary one in my life right now would have to be Brazilian jiu-jitsu training.

I love training in martial arts. I’m far from a professional — just the opposite. I’m unmistakably new to the sport. Nevertheless, I love how I feel when consistently training. I love the physical workout, the mental benefits, and the instructors/students.

There’s a gym close to me that offers Brazilian jiu-jitsu (with an authentic teacher), Muay Thai, and Boxing classes six days a week. It’s close, it’s convenient, and it’s fun. The price I pay? $168 per month! Outrageous? Understandable?

To put it in perspective, Courtney and I share one car to save money. Just yesterday we had a 30-minute conversation about whether or not to spend an extra $15/month to get a DVR with our cable/internet package. The furniture we need for our temporary rental is coming from a combination of Goodwill and 4th-level family hand-me-downs.

Despite the efforts we go through to save money in some areas of our life, we are both okay with this oddball expense. Why? Because it passes the ground rules we’ve established for managing the financial vices in our own life.

4 questions to help control your financial vices
Here in the Baker family, we try to ask ourselves four questions when face to face with an expense of this nature:

1. Is it impulsive? Courtney and I usually act as each other’s impulse alert. If one of us comes up with a wacky, impulsive idea, it’s the others responsibility to sound the alarm. In the martial arts example, it’s been a consistent desire of mine for 2-3 years now. I trained before our recent overseas trip and even spent a couple months training while we were in New Zealand.
2. Is it consistent with our other goals? This is tough because many of these expenses will work against our financial goals by nature. However, we try to consider any ancillary benefits that are generated from the financial vice. Martial arts helps my fitness goals, provides me with a fun community of people, and helps me to stay mentally calm while under intense pressure (trust me).
3. Can we control it? This rule is primarily focused at me. I have an extremely addictive personality, so I struggle consistently to maintain balance and control. In general, I try to avoid anything even remotely related to “collectible” or “massively multiplayer online” (long story). We both try to avoid expenses that are destructively addictive by nature, such as gambling, alcohol, and tobacco. (Note: I’m a proud coffee drinker!)
4. Are we both on-board? For us, the last condition is that both parties are fully supportive of the expense. Even though the training expenses is for only me, I have Courtney’s full support. Without this type of support from a spouse or significant other, vices of this nature can stir up a ton of resentment.

If an expense seems to be of an excessive amount, we run it through these four questions. Most of the time, it fails to pass one of the questions. In rare cases, we find ourselves with a true financial vice that emerges.

Limiting your financial vices
Allowing yourself a financial vice can be a huge blessing (even directly to your finances). However, if you aren’t careful, over time your definition of vice may expand to be synonymous with anything I want. To help control this, Courtney and I try to limit ourselves to only one major vice at any time.

Courtney supports my martial arts training and I do everything I can to support her journey to improve her photography skills (her primary financial vice). If we choose to pursue something else, it means either eliminated or drastically reducing our current vice. Of course, sticking to only one financial vice each is easy for us…we can’t afford any more!

Joking aside, I’m interested in hearing your own insight into this issue. Have you found your own way of keeping your vices in check? Share your financial vices in the comments below!

J.D.’s note: I’d argue that what Baker has described isn’t a vice; it’s too controlled. I’d say it’s more of an indulgence. Conscious spending like this is great because it can lead to improved happiness. A true vice is something that you can’t control, and isn’t really conscious. Right? Tune in tomorrow when my wife reveals one of our household’s financial indulgences! Photo by dlcampos.

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Related Articles at Get Rich Slowly:

• Ask the Readers: How Do You Manage Your Money?
• 10 Reasons You Aren’t Rich
• Taking Care of Business
• Daily Links: Personal Bailout Edition
• A Short Break

This post is from new staff writer Sierra Black. Sierra has provided several great guest posts over the last few months, so I asked her to come aboard as a semi-regular staff writer. Good thing, too. I’m swamped with final book preparations, so my post for this morning wasn’t ready to go! Sierra writes about frugality, sustainable living, and getting her kids to eat kale at Childwild.com.

The most important trick to managing your finances — and maybe the hardest — is just getting started. My household finances were like an impenetrable jungle of budget formulas and investment accounts and bank policies and tax codes; not knowing where to start kept me broke and confused for years.

There are as many systems of thought for tackling spending as there are people managing their finances. Some people are avid fans of budgets while others swear they never work. Some will tell you to save up an emergency fund first while others zero in on debt reduction at all costs.

Finding a starting point can be a challenge. The trick is to begin where you are: Find something you’re already good at and apply it to your financial life.

Getting started
To find your path through the financial forest, look for something that is:

• A small step. You’re not going to completely remake your financial life in one day. Choose something bite-sized that you can do with relatively little effort or expense.
• Self-contained. “Get out of debt” isn’t a first step to managing your money. Tracking your spending can be. Calculating your net worth might be. Reading a personal finance book or taking a community education class are good choices. Choose a single step that will help you work toward a larger goal.
• Comfortable. The skill you use to make the first step should be a familiar one. Now’s not the time to learn how to create an Excel spreadsheet or read a stock ticker. Start with what you already know.
• Pleasurable. Ideally, start with something you enjoy doing. You’re more likely to persist with your new financial strategy if you’re doing something you enjoy and are good at.

For me, the first useful step after years of false starts was joining a Your Money or Your Life study group. I’m a big nerd at heart. Sitting in a class taking notes on a textbook and doing homework was something I knew how to do well. Using those skills to do a class about managing my personal finances let me get a grip on the information in a way no other format had.

By starting with what I already knew, I was able to sidestep my fear about money. Those voices in my head that told me I wasn’t able to understand my finances and I’d never be any good at it fell silent when I put my “student brain” in gear. I basically tricked myself into learning how to manage my finances by focusing on a skill set I had long mastered: being a good student.

Learning new skills
Once you’ve started down the path and are making some progress, you’ll want to stretch and learn new skills. The new skills you’re reaching for should:

• Build on what you know and are doing well. Once you get into the flow of it, it will be easier to see what new skills you’ll need to learn. Then you can build on what you’re doing, instead of starting from scratch with a brand-new skillset.
• Apply directly to the work you’re doing. Don’t distract yourself learning to make that Excel spreadsheet if it’s not going to solve a problem for you. Stay on task and pick up the knowledge you need to reach your goals.
• Be steady and repeatable. At this stage of the game, do something small, slow and steady that you can keep doing over time. Focus your energy on the daily habits that will help you reach your goals. That kind of personal change is powerful stuff.

For me, the new skills that fostered personal change came at the end of the YMoYL group, when I was out on my own doing this stuff in the boring, workaday world. There was no teacher to show off for anymore. I just had to do it.

The new skill I picked up was the relatively basic one of tracking my finances. I’d tried it many times and floundered. This time it stuck, because I was building off of what I’d learned in the class. I started a cash notebook, using the same type of small pocket notebook I’d carried for years to jot down creative ideas.

Things started going pretty well for me, financially. My money was getting organized. I was saving more, spending less, and paying down our debts. So far so good. I wondered what else I could be doing with the new tricks I’d learned. Then things got really exciting.

Cross-training your skills
Once you’ve mastered your new money skills, you can apply them to other areas of your life. I was never able to keep a daily record of activities before I began tracking every cent that passed through my household. Now I know how to do it.

Since mastering that skill, I’ve used the same tracking system to keep a log of freelance writing submissions and contracts. That’s been a huge boon to my career. I’ve also used it to keep a food journal that helped me radically change my diet. I am now starting an exercise log using the same set of skills.

No matter what you want to change about your financial life, you already have some of the tools you’ll need to do it. This is true whether you’re staring down a mountain of debt or starting to pile up some investments.

Look around at your life now: What’s working well? What are you really good at? How can you apply that to the financial problems you’re trying to solve? Success breeds success: Beginning with what you know lets you start by succeeding, and makes it easier to continue doing so.

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Related Articles at Get Rich Slowly:

• Ask the Readers: How Can I Get My Wife to Talk About Money?
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• Welcome to 2007
• Ask the Readers: How Do You Keep from Losing Control?

This article is by staff writer Adam Baker, whose own blog recently featured a must-see graphic on credit card transactions around the world. This is part two of a three-part series on how he stumbled into real estate investing at age 23. Be sure to read part one here.

When we last left off, I’d just walked away from my first real estate closing with an eight-unit apartment building and $1000 cash in my hand. I was riding high. Unfortunately, the reality of the situation hadn’t sunk in. Over the next year, my low-income, eight-unit apartment building was going to take me on the most wild roller coaster ride of my life.

Instead of providing a chronological list of events (which may be entertaining, but of little use), I want to share the mistakes I made and the biggest lessons I learned throughout the process. In this second installment, I’ll share the first two mistakes (of what could be dozens). Neither of these first took long for me to realize.

Mistake #1: I bought a negative cash flow property without an emergency fund
Yes, it was purchased at a great price. Yes, it did have an amazing amount of potential. But all the potential in the world didn’t change the facts:

• 7 of the 8 units had people living there.
• Only 3 of them were paying tenants.
• I needed at least 5.5 tenants paying to break even.
• All of the units, even the vacant one, needed repairs before they could be rented.

In theory, I knew all this before I bought the property.  I had a detailed plan on how I would attack these issues quickly. I would file evictions the next day on those tenants that had gone months without paying. I would immediately hire people to get the vacant unit up to minimal renting standards.

In theory, it was all going to work perfectly. But then it came time to actually execute the plan.

Coordinating quotes for repairs took longer than expected. Eviction filing took money up front and the courts were running an extra week behind (4-5 weeks instead of 3-4 weeks). Tenants became optimistic about the management change and wanted to work out repayment plans.

In the first two weeks, a storm broke a large front window, and a back door was kicked in (probably by the tenant who lived there, although I had no proof).  While insurance would eventually cover the window, both had to be fixed immediately, as it was winter and both were security concerns.

Repairs and maintenance were both accounted for in my number crunching, but the emergency fund that could smooth out an early spike in the averages was nowhere to be found. I didn’t have a penny to my name and the $1000 check at closing went much faster than anticipated. The lack of the emergency fund compounded into several other problems in those first few months.

Mistake #2:  I got emotionally involved
Back in part one of this story, I outlined my previous success in building up a property management business. With my client’s properties, I was cool and calculated. I treated management as a business. The property owners were clients. The tenants were…just tenants.

When I signed the dotted line on my own property, the idea was to simply plug it into our property management system. It was going to be “just another set of units.” We’d coordinate repairs, screen tenants, and handle issues in the same ways as we had set-up for our clients. I was incredibly naive.

Without an emergency fund, we needed money. Sure, we had plenty of clients who had also needed money at one time or another. It was my job to set expectations and to advise them on the best course of action. I sought to remove emotions from the equation and ensure that they didn’t make a rushed decision.

I was good at this part of my job and we made nearly no exceptions. If a client had a monetary circumstance where they had to make what we thought was a bad decision, they’d usually cease to be our client. It was that simple.

It’s amazing how quickly exceptions are made when you are the one that needs money.

It happened slowly at first. One tenant, whom seemed genuine, wanted to set up a payment plan to get back on track. It was a weekly payment plan, something we would have never agreed to with our normal clients (too much time commitment). We had two choices in our situation. First, we could head through evictions (2-5 weeks), coordinate repairs (1 week minimum), and re-rent (1-4 weeks minimum). Or alternatively, we could try to squeeze money out of the existing tenants.

The former was the smart, long-term, and business-oriented option.  It was the only one we would have offered to our clients. I could have listed at least two dozen reasons why it was the best option. Of course, we chose the latter.

This ushered in a four-month period of various weekly payment plans with not just the one tenant, but with 3-4 other tenants as well. It did help bring in the immediate cash we needed, but we paid a hefty price. Juggling these weekly re-payment plans with tenants who had already proven they weren’t reliable:

• Took additional time.
• Added large amounts of stress.
• Caused problems with repairs (easier to fix up a vacant unit).
• Fostered a “but you made an exception with him” mentality among all of the tenants.
• Lowered the value of the property (a fresh, consistent tenant would have increased value).

It was a horrible pattern, one that I knew far better than to fall into. I assumed there would be no emotional difference on how I would handle the property…and I was wrong.

These first two major mistakes arose in the first few weeks and months. We haven’t even touched on the issues that came up when we replaced three furnaces and four water heaters. Nor have we revisited the most bizarre moment of the entire year, which involved a split-personality tenant, no less than three fire trucks, and fraudulent accusations of animal cruelty.

For that, you’ll have to wait until next week!

J.D.’s note: Adam doesn’t realize it (because he’s a young pup), but this post makes a New Wave geek like me think of this Culture Club song…

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Related Articles at Get Rich Slowly:

• links for 2007-06-12
• Daily Links: Great Lessons Edition
• What Happens When You Try to Get Rich Quickly
• The Hardest Thing to do in Investing
• Missing Money

This article is by staff writer Adam Baker. Baker recently outlined his ambitious 2010 goals for his blogging, business, and life.

When I was 23, I bought an eight-unit apartment building with no money down. And I walked away with $1,000 cash at closing! Sounds pretty fancy, right? Wrong.

It was one of the dumbest (and riskiest) moves I’ve made in my young life.

I escaped without a scratch, but it was due to an over-sized dose of sweat, tears, and luck. None of it was due to savvy investing skills.

The sound and the fury
I was 23 years old and had just earned my real-estate license the previous year. My first couple of months were spent buying and selling a few upper-end units for individual homeowners. The commissions were decent, but as a new Realtor my split with my company was high. To complicate the problem, I had financed my association, training, and union fees to get started. (This was before I had decided to cancel my credit cards.)

After several months, I began to work more in the booming foreclosure and short-sale markets that were plaguing central Indiana. Out-of-state lawyers, doctors, and other high-income earners (mostly from the West Coast) were swarming our local market.

They were buying up $30,000, $40,000, and $50,000 houses like they were toys — albeit over-priced, over-financed, and only half-functioning toys at best. With rents ranging from $400-$1000, they simply couldn’t resist what their spreadsheets were telling them the return would be. They bought many of the homes site unseen and used the first real-estate company that would sell to them.

We represented a lot of the banks that had no idea about the local market prices, nor the current condition of their properties (even after we told them several times). Well over half the deals fell through. Either the banks were too unrealistic to negotiate, or a closing would be interrupted by the discovery of a mystery lien, a second mortgage no one knew about, or some other problem with the title that we didn’t even know was possible!

It was harder work for lower commission, but there were hundreds upon hundreds of properties, which helped even out the paychecks from month to month.

Property management comes calling
After most of the out-of-town investors closed on their new rentals, they began searching for a company to manage/rent them. After several dozen requests for an affordable and trustworthy property management company (and no clear-cut option), we decided to start offering the service ourselves.

I joined forces with a broker who spent his time focusing on acquiring more leads for buying/selling. I set about figuring out how to actively manage and rent the vacant units (which almost always needed repairs first).

Since many of our clients were repeat customers already, they were ecstatic to have the option of having their properties managed by us in-house. Within just six months or so we had over 125 units under management.

I was working countless hours and answering the most bizarre phone calls you can imagine at all hours of the night. Overall, though, we were turning a profit and looking for ways to scale our system over the next couple of quarters.

A perfect storm
As part of our networking and lead-generation work, we regularly attended private meetings where local brokers would pitch each other their current clients wants and needs. In one particular meeting, another broker was pitching one of his own properties for sale. It was two side-by-side four-plexes (eight units total) with each unit being one bedroom. It was in a low-income part of town, but he was only asking $125,000 for both properties.

“$125,000 for eight units?”, I thought. “There has to be a catch.”

There was. Seven of the eight units had tenants, but only three had any history of paying on time. Even after kicking out any non-paying tenants, each unit would need a couple thousand dollars of work to get anything decent in rent. In addition, there were four furnaces in total all of which were probably made in the 40s or 50s.

In other words, it was a project by anyone’s terms. It would require some up-front repairs, several months of eviction filings, court visiting, and re-showing the units, but… “$125,000 for eight units!”

If only someone would loan me the money…
I dug deeper and deeper into the numbers. I was already managing property, coordinating repairs, negotiating prices on materials, and renting units for dozens of other clients. It made sense that if I could get a loan, I could plug a property right into this current system I was running.

That was a big glaring issue, though. Neither my partner nor I was credit-worthy in any sense of the word. The chance of me getting approved for a mortgage was zilch (let alone a non-owner occupied, low-income commercial loan). With regret, I pushed the property to the back of my mind and continued about the process of building the management business.

At our next networking meeting, though, we caught wind of some additional news on the properties. The broker who owned them was in serious trouble on about a dozen different pieces of real estate. He owed $76,000 on both the buildings, which were financed through a popular investor/hard-money lender.

The private lender was getting scared that the investor would soon default (giving the lender a property he wanted nothing to do with) and the owner was only looking to get out of the property, so he could focus his energy on his salvaging his other properties.

Without much thinking, we pulled the trigger.

A bold offer
We called up the private lender (an individual) who was currently financing the properties and pitched him the idea of us taking over the loan and purchasing the property from the current desperate owner. We offered to both sign onto the loan, giving the investor two names opposed to the one he currently had and showed how we would remedy the situation, evict all the tenants, and plug it into our management system.

Neither of us had a penny to our names, so we even had the guts to require that the private lender actually invest more money into the property. In order for us to take it over he’d have to loan us an additional $15,000 to replace the furnaces and repair two of the units after evictions.

It was a bold offer. We’d give nothing but a management plan and our signatures on a $91,000 private mortgage (at 12%) for eight units and a $16,000 cash loan. The lender must have known even more about the current owner’s dire circumstances then we did, because he took our offer. The current owner was happy to get out for what was owed, and within the week we sat down to close.

After the paperwork was signed on my first-ever real estate purchase I was handed a $1000 check (for prorated rents/deposits for the month). I gave nothing tangible, just my worthless signature, and walked to the bank to deposit the money.

“So this is how real estate works”, I gloated. “I could get used to this.”

I had no idea what was in store…

To be continued…

J.D.’s note: This is a glimpse into a world I’ve always wondered about. Though Kris keeps trying to dissuade me, I have a fascination with rental properties. I look forward to reading part two of this story. And although GRS is not about to be come a real-estate blog, this Sunday’s reader story is actually about how one of you folks decided to take the plunge by buying a rental property, so we’re going to have a mini-theme here for a week or so…

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Related Articles at Get Rich Slowly:

• Grocery Store Mysteries: Cheap Milk
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• Selling Your Existing Home While Buying a New One
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• Save More by Eating Less

This article is by staff writer Adam Baker. Baker is a founding member of Untemplater.com, a new multi-author blog focusing on personal finance, entrepreneurship, and life design for people in their 20’s and 30’s.

Few concepts have had as great an impact on my family’s financial decision-making as learning how to calculate our real hourly wage. The concept was introduced by (or at least popularized by) the amazing book, Your Money or Your Life. This book has had a dramatic influence over our financial turn-around (just as it did for J.D.).

The authors focus early in the book on ensuring that readers are aware of the true costs associated with their jobs and incomes — including accounting for the time we spend on activities that are often forgotten.

When Courtney and I first sat down to figure out just how many different expenses were associated with our income opportunities, it was an eye-opening experience. It unveiled a new layer of consciousness towards both our work and our spending. In one case we shifted from, “I make $42,000 per year” to “That really only results in $22,000 net after all expenses are considered.”

The hardest part of figuring your real hourly wage is accounting for those sneaky costs (in both time and money) that eat away at your income streams. Your Money or Your Life does a great job of listing sample expenses, from which we adapted a customized list that I still keep updated to compare opportunities.

Here are the adjusted categories we use to figure our own real hourly wages:

• Time - Alright, so this seems like a generic way to kick things off, but stay with me. For each of the other categories on this list we immediately asked ourselves, “What’s the extra time associated with this?” While this isn’t a monetary cost itself, putting Time at the top of our list was a reminder to remember to always take this into consideration.
• Taxes - Taxes come next on our list because they’re easy to remember. It’s common for people to think of “take-home pay” or “how much after tax” when thinking about income. If you’re an employee in the U.S., this usually means federal, state, and local (in some places) income taxes, as well as social security and medicare. These numbers are easy to find on paystubs.
• Foundation expenses - This was what Courtney and I called anything that wasn’t complete tangible (as in the later categories), but that was required for our work. Courtney had her teaching license fees, union dues, and education conferences. I had my share of real-estate certifications, union dues, broker fees, and sales training. We also included childcare expenses, and more recent visa fees in this category.
• Commuting/Transportation - This was the next most tangible category for us to consider. The key is to estimate what percentage of vehicle use is for commuting purposes. You can then apply this to gas, oil, maintenance, insurance, parking, and tolls. Your Money or Your Life also suggests counting traffic tickets, vehicle depreciation, and lease/interest payments. Even if you don’t drive, you’ll likely have some public or alternative transportation costs in here.
• Tangible work materials - These were usually physical items that we had to buy and maintain. Out of college, I worked in a factory where I had to purchase ear-plugs and safety glasses (although I was given hardhat). Some people have to provide their own tools, office supplies,  or teaching materials. This also includes our fancy cell phones that we justify as “for work,” briefcases, laptops, and other gear/gadgets.
• Clothing - We broke this into two sub-categories.  First, there are jobs that require uniforms, special shoes, and/or a certain type of specific non-uniform dress (like the Italian restaurant I where I waited tables). On the other hand are the jobs where we buy professional clothes out of a desire to meet a social standard. Think suits and ties, fancy blouses, and trips to the dry cleaners. If you wouldn’t regularly wear it on your days off, it should be included.
• Grooming - We used this to include products like make-up, fancy cologne, special haircuts, and jewelry/accessories. Again, it’s important to only include that which you don’t use or wear regularly outside work.
• Food/Drink - This is self-explanatory, but contains eating out, snacks throughout the day, and even food purchased after work hours if it’s because you “had too hard of a day at work” to cook dinner. I noticed a lot of my increase in food costs was from eating out for “business” meetings and every Friday when the whole office would go out together. Work-related coffee habits can wrack up some damage fast, too (trust me I know).
• Stress - As we began the list, we end it with a general category. The authors of Your Money or Your Life spend a lot of time covering the idea that any time/money that is invested as part of a release, escape, or an unwinding from work should be counted against your income. Some people release through video games or television, while others end up splurging on larger items like spontaneous vacations or larger toys to get away from work. The book even suggests counting increased sick time as a result of stress-related illness!

Look, I know this is a lot to think about. But this exercise isn’t meant to discourage. Just the opposite! Remember, there are usually other benefits to your income, as well. This post only features one side of the coin.

However, figuring your real hourly wage is an awesome tool when trying to compare two income opportunities that aren’t similar to begin with. It may help encourage you to start a part-time business or may simply remind you of just how beneficial your current employment really is.

If you haven’t ran your own numbers, I’d strongly recommend it.  It worked wonders for us!

What sneaky expenses have you caught eating away at your income?

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Related Articles at Get Rich Slowly:

• Daily Links: Personal Bailout Edition
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• An Introduction to the Crossover Point
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• Financial Calculators

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