Monthly Archives: April 2010

5 Simple Debt Reduction Tips

I like to write about an array of personal finance topics, but my true passion is debt reduction.

Tip 1

Send in credit card payments as soon as is possible.  This reduces your average daily balance and total interest charges.

Tip 2 -

Be both analytical and emotional. Debt reduction requires three things – money, a solid plan, and firm dedication.  Create a plan to reduce your debt – and then get a little angry.

Tip 3 -

Stop adding to total debt. Reducing one credit card balance by $500, only to charge $600 on another card doesn’t make sense.

Tip 4 -

Focus on reducing principal.  I know we get fascinated by interest rates – and rightly so – but the quickest way to eliminate debt is to reduce principal.  I like to make my regular payment, early in the payment cycle, and then make an extra payment (or two) throughout the month.  I have checked with my creditors to ensure that I understand how they handle extra payments.

Tip 5 -

Get one month ahead.  This is a new one for me.  In the past, all I had to deal with was consumer debt.  Now, I have a mortgage.  My payment is due on the first of each month.  Instead of scheduling my June 1st payment to be deducted from my checking account on June 1st, I schedule it for May 1st.  In effect, I’ve not only made my payment early, I’ve also given myself a (nearly) two-month cushion.  I have until July 1st to both make the July 1st payment AND make extra payments towards principal.  Now, I will not wait until July 1st to make my next full payment, but I have the cushion, built in, just in case.

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The Revelatory Nature Of The Common Sense Budget

Several years ago, long before No Credit Needed, I actually gave budgeting a shot.  I can’t, for the life of me, remember the name of the budgeting tool that I tried to use, but I do remember that it was very, very complicated.  After a couple of months trying to make the system work – I just gave up.

It wasn’t until some years later, just before starting No Credit Needed, that I read Dave Ramsey’s awesome book – Financial Peace Revisited.  I learned about creating a zero-based budget to plan our monthly spending and using the envelope system to manage our cash.  Divorced from the notion that living on a budget was difficult – I actually found out that living on a budget was rather simple, even enjoyable.

Over the past five years, I’ve modified my budget several times.  I’ve added and removed categories.  I’ve used pen and paper, spreadsheets, and software.  (I now use the awesome products from site-sponsor YouNeedABudget and have for several years.)  While I’m no expert, I have learned a few tips and techniques for making a simple, usable, common sense budget.  Here they are –

Expenses – Have to – Need to – Like to

Instead of breaking down my expenses based on needs and wants, I break them down into three broad categories.

Have to – These are items which, no matter what, have to be paid for, each and every month.  One might also call these essentials.

Need to – These are items which, under normal circumstances, are necessary for functioning.  These are not necessarily essential, but they are very, very important.

Like to – These are items which, while not necessary, add to life’s enjoyment.  These are not essential, nor are they supremely important, but they do add to quality-of-life.

Income – Base Income – Extra Income

We actually create two budgets, one based on our base income (what we know we will bring home each month) and one based on potential extra income (what I might make in self-employment income).

I create a list of expenses, broken down into the broad categories mentioned above.  These expenses are then grouped into budget categories.  For us, we know that our base income can cover our have to and need to expenses, so the monthly variations really take place in the like to categories.  This has not always been true.  There was a time, especially early on, that after listing our have to and need to expense, there was no money left over for like to.  When facing that particular reality, we had to make some difficult choices.  Knowing that we could not (in almost every case) reduce our have to expenses, we really focused on reducing need to expenses – and I focused on increasing income.  We also stopped borrowing money – and forced ourselves to live on what we actually brought home each month.

What This Simple Budget Reveals

Creating a simple budget, even if you don’t plan to use it, will quickly reveal any potential problems with credit that one might have.  If you subtract expenses from income and have a negative number – and you note that credit card balances are steadily increasing and not decreasing – you are moving backwards and not forwards.  That is where we found ourselves, five years ago.  A good budget not only directs future spending, it can also diagnose current issues and areas for improvement. For us, that first budget was like a warning – flashing red – that we were heading in the wrong financial direction.  Making changes and decreasing spending was not easy, but the long-term blessings from such sacrifices were more than worth it.

Conversely, if you create a simple budget and find that you have surplus, you also have a problem.  A good problem, but a problem nonetheless.  Every dollar needs a purpose.  That’s why we have two budgets.  If I make an extra $100 dollars, I already have a purpose for that $100 dollars, even before I make it.  If I save $100, I have a purpose for that $100 dollars, even before I save it.  Why?  Given my history, I’ll just waste any money that is not properly accounted for in our budget.  So, instead of just leaving $100 “sitting around” – I have a plan for it.  (Even if that plan includes spending it on something silly, I still have a plan.)

Just dealing with numbers reveals a lot – about our priorities, about our wants, about our vision for our future.  It’s quite amazing.  Having those concrete numbers, right there, on the paper (or the computer screen) makes us deal with the realities of our financial life.  Creating a budget, the simple act of crunching all that data, actually improves my relationship with my finances.  I honestly don’t know where we would be if we had tried to make all of the changes we’ve made without our trusty, common sense budget.

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Air Conditioner Spring Cleaning

Our new house has two air conditioning units, one for upstairs and one for downstairs.  One of the things that we knew the house needed, when we bought it, was an additional return for the downstairs unit.  (Technically, we have an HVAC, which provides air conditioning and air heating, but we just call it the air conditioner.)

While he was here adding the return, I asked the technician to give both units a good spring cleaning.  It was amazing – and a bit scary – to see just how much stuff had built up in the units over time.  Even though relatively new, they had still managed to accumulate quite a bit of dust and debris.  The tech was at the house for just a few hours, cleaning out the system, getting it ready for our hot Georgia summers, adding the return, and checking to see if the units were functioning properly.

I signed up for a twice-annual cleaning.  The tech will come back in the fall.  The total cost was just a few hundred dollars – and I think that both the service and the peace-of-mind, knowing that the air conditioning units will be clean, were well worth it.

Since the cleaning, the units run less and seem to be – though it might be my imagination – a bit quieter.  Also – and this could be my imagination, too – the air seems to smell better.  The whole house just feels cleaner.  One of the things that I think we forget, especially those of us who like to pinch-our-pennies, is the value of maintenance.  Sure, it cost a few extra dollars to have the units cleaned, but I feel like I am prolonging the life of the units, increasing their efficiency, and creating a cleaner home-environment, all at the same time.

What about you guys?  Do you have your air conditioning units serviced regularly?  Also, have any of you tried to do this yourselves?  Is it hard?  I’d love to hear from you, here in the comments, or over at at Twitter.  Rock on.

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Murphy – NCN, NCN – Murphy

Anything that can go wrong will go wrong.

- Murphy’s Law

It’s been a very interesting couple of weeks around No Credit Needed land.  As many will recall, we recently purchased our first home.  The first month in the new house was awesome.  The second month? – filled with challenges!

Three weeks ago, just as we were getting good and settled in, every member of our family got the stomach flu.  I’ll spare you the details, but suffice to say, two adults, two kids, and a baby – all getting sick at the same time – does not make for an enjoyable experience.  I told my wife, I felt like we lost an entire week, poof, just gone.

Just as we were getting over our sickness, our washing machine, old faithful, decided to give up the ghost.  Oh, and we also found that it had been leaking for much of the time in the new house, damaging a portion of a wall in the laundry room.  We replaced the washing machine – this time going with a front-loading high efficiency model – and we also bought a new dryer.  The old one was on its last legs and could never have kept up with the newer dryer.  We knew the day was coming when we’d have to buy a new set – we just didn’t think it’d be so soon after the new home purchase.

Last week, as I started working out in the yard for the first time, my weed trimmer stopped working.  It just stopped – dead.  I had a buddy look at it, and he assured me that it could be fixed – but that fixing it would cost more than simply replacing it!  So, I bought a new one – and I skipped the gasoline powered trimmers and went straight for a lightweight model, which uses rechargeable batteries.  Our yard is relatively small, and there are only a few areas where I actually need the trimmer, so the loss of power isn’t that big of a deal, especially now that I get the convenience of the battery-powered machine.

Now, to the final visit (hopefully) from Mr. Murphy.  Last night, as I was going to town, I had a flat tire.  Thankfully, I was in a well-lit area and was able to pull over and put on the spare.  I took the car into the shop this morning – and you guessed it – not only did I have to replace the destroyed tire, I also needed three new tires as well.  (The need for the new tires was confirmed by a good friend who is a mechanic, as well as a couple of guys from our church.)  Usually, I’m good about keeping newer tires on our automobiles, but I actually got a couple of dates confused.  I honestly thought that the tires on my car only had about 30,000 miles on them – and it turns out that it was more like 60,000.  I looked back in my records, just to make sure,  I just had the wrong date-of-purchase in my head.

Oh, I almost forgot!  There was a problem with our air conditioning unit – it stopped cooling the upstairs.  Turns out, there wasn’t anything wrong with the unit, but a section of insulation was blocking the air from correctly flowing from the unit to the upstairs vents.  The fix only took a few minutes, thankfully, but it was just another in a series of Murphy Moments.

Obviously, I’m not writing this post so that folks will feel sorry for me.  Heck, my issues are minor, especially in comparison to some of the real financial struggles that some folks are facing.  The point I want to make is this:  These visits from Mr. Murphy were just hassles – issues to be dealt with - issues we could deal with – because we have an emergency fund and we live on a budget.  We have money set aside for replacing our appliances, for buying new tires, for fixing the air conditioner, and for replacing the weed trimmer.  We planned ahead.  So, even though Mr. Murphy has been busy, he has not defeated us!

That’s what the emergency fund does – it doesn’t eliminate the issues, but it eliminates the fear and the worry associated with issues.  Back in the days when we had big-time credit card debt, I would have worried about buying a set of tires or purchasing a new washing machine.  Now, I just go out and make the purchase, and I move on with my life.  That’s the power of planning and living debt free.

Obviously, there is a limit to the protection that an emergency fund can provide.  Heaven forbid, we could face much more difficult (and actual) problems in the future.  However, just because it can’t provide total, unequivocal protection doesn’t mean that the emergency fund isn’t important!  Shoot, if all it does is provide even a temporary buffer between difficult times and very difficult times, having one is more than worth it!  For us, life is better with an emergency fund.  Time and again, having a little extra has meant the difference between paying cash – and borrowing money.

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