Tag Archives: debt

What a Difference Six Months Make

This morning, I called one of my credit card companies to change to my married name.  As you may recall, the last time I called companies, I was trying to lower my interest rate on the cards.  My hands were all sweaty, my heart was pounding, and I hated feeling like I was asking for a speical favor.

Today, just a few days away from the big payoff, I called the company with my zero balance.  Rather than getting kicked around and ignored, I got the royal treatment.  For the first time in my life, they offered up a “gold” option, and I was told that my credit report must be grand because not everyone gets this offer.  Of course, I know they were just buttering me up, but I’ve never been buttered up by them before.  Remember, for most of my twenties, I spent my time dodging calls from creditors.  The “gold” offer was for debt consolidation at a “low” long-term rate.  Once I was transferred and learned the specifics, I realized it wasn’t that great an offer, still 8% for the life of the loan.  The woman asked how much debt I’d like to consolidate, and I happily said “none!  I’m paying my cards off on Friday.”

She quickly countered that I could use the line of credit for anything, such as home renovations.  Now, the husband and I would like to do some serious renovations in a few years, but we plan to save up for it.  It could have been so easy to say, “Sure, we’ll take $30,000” and just jump in.  We’d like to renovate the second floor of our garage into a gym/yoga studio and home office.  We also want a den and extra bedroom in the basement.  While we’re at it, why not toss in new appliances in the kitchen?  Ours work great, but are not all shiny and new.

It just goes to show you how ubiquitous credit is in our culture.  Now that I’ve worked so hard to pay my debt off, I could sink back in the blink of an eye.  It’d be great fun to start on the house.  I have lovely fantasies about a little nook to work in over the garage, with a view of all the pretty, old trees in our neighborhood.  However, I’m not even officially debt-free yet.  I also want to spend a few years wallowing in that feeling!

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My Debt-Reduction “Ah-ha” Moment

If all goes well, I’ll be paying off the last of my credit card debt in two more weeks.  Like lots of people who started college in the ’90s, I got my first card for the infamous “free t-shirt.”  Now, fourteen years later, I’m finally going to stop carrying a balance on my cards!  It’s a really great feeling to have my spending under control after all these years.

I tell my writing students to start with a topic and let it stew for a few days.  If they’re extraverts, talking it out with a few people may help them generate ideas.  Or, if they’re introverts, like me, just letting it process in the back of their minds is best.  I often joke that I do my best thinking in the shower.  I also come up with ideas while on walks or hikes.  Today was no different.  While mulling over debt-reduction in the shower this morning, I realized that I finally “get” why carrying debt on credit cards is such a bad idea.

Credit card maximums are not, and should never be, part of your budget.

As I’ve discussed before, for years I casually treated my cards as a cushion for my budget.  “Sure,” I’d think, “the paperback or dinner out or vacation may not be in my budget, but I’ve still got $3,000 left on my credit card.”  Logically, I knew that the credit-card line was not cash in hand, but emotionally, especially when I wanted something, that amount sure looked like just one more innocent line on my budget.  I’ve even been known to think, “hey, carrying a balance of a thousand or two isn’t so awful.  Look how low my payments are, and I get to have this cool stuff.”

So, now that I’ve lived for six months WITHOUT that kind of logic floating me along, I’ve learned a valuable lesson.  Let’s say that I have an annual budget of $32,400 (which I do).  I actually earn more than that, but after taxes, my 401(k) reduction, and insurance, this is what I have to play with.  Now, what if I treat my credit card maximum of $15,000 as part of my budget, bringing my annual budget to $47,400?  What happens?  Well, for that one year, life is great: dinners out, movies, theater tickets, weekend getaways, shiny new hardback books, and designer clothes.  Perhaps I charge $8,000 (which I did the year I first moved to Ohio).  Hey, I haven’t even maxed out my credit cards; there’s still $7,000 left!

However, since the money that I’ve spent is not real money that I have earned, the next year my budget shrinks.  I’ll have less than $47,400 because I’ve eaten up some of my credit line and every month, I’ll have to pay the minimums plus interest.  For me, that was a hefty 16% to 20%; my payments totalled around $200 to $300 a month.  Now, my actual budget will be something like $28,800 after credit card payments, and I’ll only have around $6,000 left before I max out my cards (thanks to interest).  But, since my brain doesn’t want to believe that I’ve taken the equivalent of a pay cut, and the credit card companies LOVE me and will probably increase my credit line, I’ll probably charge another $8,000.  I’ll be getting less stuff, feeling grumpy, and probably charging as much as I can to cheer myself up.  After two years, I’ll have $16,000 in debt, a smaller annual budget, and some serious anxiety.  Even if I get a raise over those years, it won’t offset my credit-card payments.  As an academic, we usually get barely over cost of living, around 4% to 5%.

Now, comes the even more gruesome part.  Suddenly, I’ve got $16,000 in debt, and need to earn over $20,000 to pay that off.  Remember, what I earn also gets eaten up by taxes, retirement, and insurance, so I now have to earn more to pay off that fake budget line.  For that one year where I had a fake budget thanks to the credit cards, I now would need three or four years to take a cut in my standard of living to pay it all off.

Fortunately, I came to my senses before things got too bad, but you can see how easily it all happens.  The minute you treat that credit line like it’s “real” money is the minute you are suddenly on a very slippery slope.  It’s sustainable for a year or two, perhaps even four or five, but it will quickly get very ugly.  The only way I was able to do it for so many years was because of a steady infusion of student loans.  Of course, taking on more debt to pay off the old debt is about the worst thing you can do!

Next week, I’ll share my new approach to my budget; I think it will lead to a much healthier financial life.  While debt-reduction was difficult, I now plan to stick with my new frugal lifestyle to build up savings.  So long credit-card maximums, hello real money in the bank!

A Tale of Two Budgets

To budget or not to budget, that is the question. hee hee hee. As a few readers here already know, I teach literature and spent far too long being an English major. I promise that most of my literary allusions will be more sophisticated, but I couldn’t resist the title or the opening line.

I have been budgeting since I moved into my first apartment in 1996. Back then, my take-home salary as a teaching assistant was $525 a month and rent was $210 for a one-bedroom apartment. That right there shows you how easy it was to fall prey to the student loan temptations! My budget was on a piece of scrap paper taped up to my refrigerator. Since then, I have always kept the handwritten budgets, complete with grand schemes to pay down my credit cards. Now, since you know that I have over $8,000 in credit card debt, you must be thinking that I’m going to say the “new me” is abandoning her budget.

Alas dear reader, I can not. I’ve kept a budget for so long that I would be terrified to abandon it. So what am I doing differently this time? Since 1996, the student loans enabled me to really run TWO budgets: the strict paper version and the very flexible plastic version. I ran up my credit card debt, paid it off each semester with loans, and vowed to stick only to my paper budget the next semester. However, my salary was always so low (I maxed out as a T.A. at $17,000 a year) and debt was always so convenient that the cycle continued. It even got one last gasp when I cashed out my 401k to move to Ohio. Again, the intention was to use the $6000 (I had only worked at a job with a 401k for one year) to cover moving expenses and clear my credit cards. When I got to Ohio, I found out that I needed to cover one extra month of expenses before my new paycheck would kick in, so that left me with some debt on the credit cards. In the past year and a half, that debt has mushroomed, clearly because I’m still mentally running two budgets: one on paper and one on plastic.

So here’s the change: inspired by what I’ve learned about Dave Ramsey’s methods, my savings accounts are now going to function as my “plastic budget.” I used my tax rebate to open an ING savings account with $700 to start the baby emergency fund. Ramsey recommends $1000, which I hope to get to after the wedding. My bank savings account is now my “fun” money for travel and clothes (my two big luxuries). Each month, $200 goes into the fun account, plus any leftover money from my monthly budget. This money can then be spent on any indulgence I would have put on a credit card. The gigantic difference is that it is money I actually have rather than money I am borrowing. Granted, I’ve only tried this method for six weeks, but it has been the first six weeks in as long as I can remember where I’ve truly spent less than I earned. For example, I bought a plane ticket to visit my parents in Missouri next month. I found a pretty good flight for $228, so I used $210 in my savings account plus $18 out of my monthly budget. Before, if I had just charged the ticket, I would have jumped on the $60 upgrade for extra leg room thinking that I deserved it. This time, since I was spending my real money, I passed on the upgrade. Hooray for small victories!

Now, you may ask why I’m giving myself a rather generous fun account, especially when I have to budget for a pretty big fun expense, our wedding. Basically, I have failed so many times in breaking the “two budget” psychology, that I know I have to cut myself some slack. Many bloggers have commented on the comparisons between dieting and budgeting, and I have to agree it’s really true. I’ve done my share of fad diets. They work for about three months, but are so restrictive that I always gain the weight back after those three months. I did Weight Watchers online several years ago and have been in my happy weight range ever since. I think their plan works because of the emphasis on overall health and the flex points. Every week, you get a few extra points for small indulgences. My “fun” savings is functioning like flex points. If I went completely Spartan and cut out all clothes and travel, I would fail in a matter of months (I know this from past experience). So, my financial “flex points” can help keep me on track.

Next up, I’m goint to create a page for my actual monthly budget, warts (like a gym membership I never use) and all! That way, you can check my spending against my budget and help keep me on track! Like I said before, this blog is all about accountability.

Debt Stories

As I mentioned in my first post, I’ve really been inspired by all the great blogs about money that women are writing these days. I always walk right by the Personal Finance section in a bookstore and rarely read any financial page in a newspaper. However, when someone puts herself out there with a compelling personal narrative, I’m hooked.

Now that I’ve started this blog, I feel like I should tell my debt story, but first I want to give you three stories that really inspired me. First, Banker Girl gave me hope with a student loan story that resonates with mine. She tells her story in a great series: “How to Create a Financial Disaster.”

Another blog that has helped me is Blogging away Debt. Tricia tells her story in the post “Where My Debt Came From.” Tricia and her husband have made serious progress on their debt. I can’t wait until I can post similar numbers!

Finally, I adore Antishay Ventenne. Her blog is inspiring, especially because she was able to turn things around at a relatively young age! In my early twenties, I was binging on books from Barnes and Noble and charging trips to Europe. I’m really impressed with how strong she is, but she still can have fun. Her story starts with “My Debt Story.”

Well dear reader, I hope you enjoy these as much as I did. I’ll be back with my own debt saga soon!