The Importance of a Buffer

age of money
YNAB ages your dollars, basically it is rate of spending vs. rate of deposit. Read more here.

Are you living paycheck to paycheck? I’d say many people do in an American society of debt overload and over indulgence do. We just weren’t raised to be savers. We look at our grandparents and great grandparents who still cut the bruised parts of fruit out and finish eating the rest and shake our heads. We think, “I will buy you a whole basket of peaches if you’ll just NOT EAT THAT!” We throw out vacuums when the belt breaks, think buying a brand new car on loan is cheaper than fixing the one that’s paid for and go pick up a burger at the local fast food joint when we just don’t want to cook. But saving is important, and over indulgence has entire generations in financial ruin. That’s why it’s important to create a buffer.

A buffer is a category you create in your budget; it’s rule four for my favorite budgeting software, YNAB. It’s different than saving for rainy day expenses, those expenses that only come up annually, or on an as-needed basis, like doctor visits and vet bills (which you should be planning for them as well!) It’s the one to six month’s salary you save so you are no longer living paycheck to paycheck, and you add to it each and every paycheck. It can be a small amount, or it can be large, It’s totally possible and most people can raise a one month’s salary buffer within 6-9 months of budgeting.

The question is, why is it so important? There are many reasons why you want to have a buffer, number one being a little thing called Murphy’s Law, which the financial guru Dave Ramsey suggests always happens where money is concerned. Murphy’s Law is an old adage, “Anything that can go wrong will go wrong”.  What if you get fired, hurt, sick, there’s a death in the family, you have to have hip replacement, your car catches fire, your house catches fire, you hit someone with your car, and so on and so on. There are so many reasons to have that extra money handy, just in case those paychecks stop rolling in.

How much do you want to save in your buffer? Start with one and keep adding to it, you can never have too much “just in case” money. When I started using YNAB, I usually had about $30 on payday, debt, no savings, no investments, nothing. Now, three years later, we are debt free (minus our mortgage), we have an ever-growing, fully funded buffer , a separate emergency fund of $1000 and still manage to save for our 52 week savings plan. We did remove all but about $200 of our investments from Lending Club and Betterment and just put it in to savings and CD ladders. We still have the $200 because they were notes that wouldn’t sell on Lending Club so they’ll just sit there til they pay out, (one of my issues with Lending Club).

Where do you want to keep your buffer? You can keep it right in your checking account, along with your rainy day funds and your every day expenses funds.You can also consider moving it to a savings account, simply to earn a higher interest rate off of it. Either way, you want to have it tangible if you need it. YNABers aren’t usually fans of lots of accounts, it can get messy and confusing, but I am also not a fan of putting all my eggs into one basket, especially in this day with identity theft and debit card thieves out there. Basically, it’s your money, put it where you want it.

BONUS THOUGHT: You know those people who say you shouldn’t save while you still have debt? Well, I think they are wrong, especially in this particular circumstance. You may have a problem come up way before you will be out of debt, and if you need to choose between adding an extra $10 to your credit card payment and adding an extra $10 to your buffer, until it’s funded with at least a month’s worth of wages, I would choose the buffer.

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Discovering You’re Bad at Advice

Recently a family member of mine was struggling financially, she wanted to make a big purchase to the tune of 10 Grand. Because of the same money mistakes we all make, debt, consolidate debt, make more debt, try to consolidate again, keep trying to get more debt to cover the debt we’ve already gotten, etc. this family member was unable to get a loan for the purchase without a $400 a month payment, which who can afford with $300 a month minimum payments on already outstanding credit cards and a mortgage as big as an elephant and a measly job that only covers part of the ever growing debt monster. Then you have banks who literally try to talk you into a second mortgage to pay for a debt consolidation/big purchase loan. No! No! No! No!

Now my answer was simple, just don’t make this big purchase, it’s a want, sort of a need, but a need that could wait.   Well, that wasn’t the answer she wanted to hear. So I suggested she sell some things, cars, boats, golf carts, motorcycles, you know all those toys you just had to have; hell! Sell your house, pay off the mortgage monster, use any extra to pay for braces, pay off your credit cards, whatever. Rent something for a couple of months, then buy a new house later when you’ve learned your lesson. None of that made any sense to her.  I realized then I didn’t know anything about people or how to give them advice.

Remember “Little Shop of Horrors”? Remember how Seymour fed his little plant his blood until he had no more blood, then began to kill people to feed his plant. He would look at it and see a sweet little plant softly saying “Feed me Seymour”, then one day when that plant tried to eat his girlfriend, he realized he loved her more than that stupid monster of a plant and stopped feeding it. Well, everyone has a monster they feed money until they have to sacrifice themselves and eventually others to feed it and no matter how many times you beg them to stop feeding it and while they still love that little monster, you are wasting your breath giving them advice on how to feed their monster.

The real advice you should give them is the need to evaluate which relationship is more important, the “no more debt, spend less than you make” plant that needs watered twice a year and doesn’t cost you a thing, or the money monster plant that is debt, debt and more debt to get what you want right now and pay with blood, sweat and sacrifice later. Allow them to see the money monster for what it is, an unhealthy, selfish monster that will eventually force sacrifice of something on you like relationships, homes, and even big purchases for your kids. Because eventually you’ll run out of bodies to feed to it (in this case bankers, loan officers, friends, family will stop giving you money) and you’ll have nothing left to give it.

So now I hope I know a little bit of something about advice and I hope I can give it better. But for now, that family member is still feeding her money monster to the tune of an extra $300 a month, so I guess when she runs out of bodies, she will be forced to switch to the no more debt plant. I guess it’s a lesson we must all learn at some point.

Beware Deferment Ploys

How many of you pay extra on your home or car payments? There is a little trick you can do to make your principal go down, pay every two weeks. You will need to check with your loan company and make sure they do not penalize you for this (if they do, consider refinancing with another company, its your loan, pay it when you want and how much you want).  If you are paid on a bi-weekly basis, you can pay half your payment every two weeks. Because you will get paid two to three extra paychecks a year, you will get ahead on your payments. Your interest rate will go down and, if you are in a crunch, you can pay a little less for one month. But because these companies make their profit off your interest rate, they will try a scheme to get you back on track, the deferment plan.

A deferment plan is when you can skip a payment for one month. The catch is, they don’t skip the payment, they just tack it on to the end of your account, so it’s just like pushing it back. They do this also because they don’t want you paying extra. If it saves you money, it costs them money. Instead, if you are low and your payment allows you, only pay a portion of what is due. This may sound confusing.

Right now, my car payment is $324 dollars a month. (I know, that’s high!) I pay $200 every 2 weeks, which means I am paying $400 a month. Which means my interest rate is covered, and my principal is going down fast. (This still works if I split my required payment in half and did not pay the extra $76 dollars a month.) Because of the extra payments, the loan company’s computer calculates my next payment due three months from now to get me back on track with their original pay schedule. Because of this, they keep sending me deferral notices so that I don’t pay for a month and I get closer to their pay schedule and they can still get the interest payment that will accrue because my principal payment will remain the same instead of going down. If I am a little short on money, I can afford to pay $100 every 2 weeks for a month. That will leave me $200 that month to use. I am still paying on the principal on my loan, just not as much as I usually do. But because I am so far ahead, it doesn’t hurt me in the long run. This isn’t something I could continue to do, but if I was in a crunch, it is manageable. Also, if something really bad happened, I could not pay until the next due date, three months from now. I would get to defer my payments, without them reaping any benefits.

If I continue to pay like I do, and I do not get into a crunch (because I have budgeted and because I have an emergency fund), I can pay my car off a year earlier than scheduled, and save myself hundreds to thousands in interest. This can work the same way with your mortgage.

No matter your situation, whether you are in a money crunch, or whether you are smooth sailing, it is always best to avoid deferments. It looks better on your credit, and you will be done with your debt sooner without them. With extra payments, you allow yourself the buffer you may need without hurting your credit.

Where Were the Watchdogs?

it would have continued to be a sure thing except one thing, people stopped paying their mortgages

Economic crisis -Isn’t this the understatement of the century. Going from a time of economic boom to giving soup-kitchen hand-outs to big name business, the World’s economy hangs on a ledge of little hope. Where were the watchdogs when the American stock-market became its own worst enemy?

CNBC depicted it perfectly in its story, House of Cards,  when they showed that the governmental standards weren’t up to par to prevent a crisis such as this. At one time, not so long ago, the American housing market was at an all-time high, and everyone was cashing in. From Lebanese businessmen, to pizza delivery guys, everyone had a mortgage to sell, and everyone wanted a home.

Businesses such as the company Quick Loan Funding  and other Internet based banks were selling mortgages to unqualified buyers like candy. No qualifications or standards were required for these mortgages. As long as someone on wall street would buy these mortgages, they were selling and profiting. Quick Loan Funding was basically an infomercial, “As seen on TV” type mortgage company. People who bought these mortgages usually were refinancing with the low APR’s they were offering. A new beginning to the buyer, a quick cash scheme for the sellers.

There were other types of mortgages that were available such as “Interest Only” loans and ridiculous mortgages that allowed the buyer to pay a percentage of their payment, in some cases, raising their mortgage principals instead of decreasing them. Anything was game, and wall street bought into it all.

Wall Street also bought into the dreaded CDO’s. CDO’s were mortgage packages, so to speak, these were grouped mortgages, such as entire subdivisions, that complicatedly grouped together and sold to mostly European and Asian governments and municipalities to gain revenue for their area. They were told this was a solid, AAA investment. This was the problem.

Rating agencies, such as Standard and Poor, were to rate an investment as a AAA or a BBB. The AAA’s were less risky, solid investments and the BBB, of course, meant more risk. With everyone cashing in and putting pressure on these rating agencies essentially lowered the AAA standard. Possibly because, if other rating agencies were lowering their standards, and your agency did not, you lost business. Therefore, the greed of Wall Street drove them as well. 

This is why that the economy nearly world wide is poor. A big percentage of Wall Street investors are other countries. Investing in American businesses has almost always been a sure thing, and it would have continued to be a sure thing except one thing, people stopped paying their mortgages. These investments were based on the future revenue of mortgage payments and interests. That required that mortgages be paid to pay out on the investment. Americans began to refinance their homes, taking out home equity loans to pay off their credit cards, using the equity in their home as an ATM machine. Once they paid off their debts, they charged them all up again. The greed of the banks and wall street drove them to never say “enough is enough”. No one ever told the buyer you are over extending yourself. The banks were driven by the competition as well. If the banks said stop, the consumer took their business to another bank. After three mortgages and $50,000 dollars of credit kept families from eating, Americans just stopped paying, thus spiraling our economy into the mess it is now.

So where were the watchdogs during this? The voice of reason from our government stepping up and saying, “there must be better standards.” America’s government has committees and bureaus that watch these kinds of things and they turned a blind eye to it. Perhaps they were cashing in too. Greed was driving everyone all over the world, perhaps the pressure was too great to put a stop to it. Who knows. What is known is that now, when it is too late, they want to scoop in and try to dig us out of the cavern of debt by using spoons. It is not going to happen by handing out big bucks that WE DON”T HAVE to companies that just didn’t know what they were getting into, or the ones that just didn’t care.

So now we all sit and wait, watching the disaster unfold in front of our eyes and think there is nothing we can do to change it. The truth is, I haven’t the answer. All I can do is take care of what is mine. Pay my bills and my mortgage, and clip and save, and hold onto what is more precious than money. Perhaps if we all do the same, we will find a way out of this Economic crisis.

How to Take Extreme Measures Against Debt

Debt is a cancer-cut it off.

Declare War on Debt
Declare War on Debt

Taking extreme measures against debt is one of the keys to financial success. Without debt, you can save and invest for sinking funds, college savings, retirement, or just that once in a lifetime vacation that you could not afford otherwise.

The first measure is to declare that debt is not a tool. Debt is not going to bring you riches beyond your wildest dreams. The person who says you have to spend money to make money has money to spend. The every day individual with a car payment, ten to twenty five thousand dollars in debt, and a mortgage cannot afford to use debt as a tool.

Next, pay what you can plus a little more. Get debt out from under you. If you can comfortably pay $300 a month on your debt but have an extra $150 a month that you blow on frivolous things, put it toward your debt. The faster you get away from debt the better off you are. It only takes one extra loan to wipe you out financially for the next ten years. Really consider what you can afford and don’t think that just because you pay on time that you are at the top of the game.

Since the new credit card bill came into effect just this month, credit card companies are already starting to penalize the ritual payees. The companies have been restricted to penalties and fees of late payers and over chargers. If you are a ritual payee, who pays every month on time, more than minimum payments, who never goes over the limit, you are no longer going to reap the benefits. Companies are going to have to make up these payment losses. Annual fees, loss of rewards, and high interest rates are already on the rise. The faster you declare war on the credit card companies, the better off you will be. Pay everything you can, sell stuff on eBay or amazon, have garage sales, and maybe get a part time job. Every cent you have to spare needs to go to paying these companies off.

If you are on the verge of financial despair, even more extreme measures may be needed. There are prioritized payments you will have to make. Dave Ramsey calls it the “four walls”. This means mortgage, utilities such as power and water, food, clothes. These need to be paid first. You should never let your mortgage go to pay for your car or your credit cards. You cannot live in a plastic card. Prioritize these items and send IN WRITING to your credit companies the following: a letter stating your plan,( i.e., I will pay you this much every month an only this much, I will talk to you on Tuesdays at 5:30 every week and will take no other phone calls from your company, etc.), Send them a “Pro-Rata” sheet, This is a written plan showing your debts, the payoff the percentage of your money they are getting, disposable income and how much you can afford to pay them afterwards. You can find a sheet like this at www.daveramsey.com. Stick to this plan. Do not be harassed everyday by these companies. If they call when not stated in your letter, hang up. Show these companies you are in control, they may moan and groan, but you are doing what you can.

 Side Note: Should you consider bankruptcy?  It is never something to be recommended just to pay off your debts. It is not the answer and the rules have changed. There are still debts to be paid with bankruptcy. Consult a financial planner before you consider this. Let them help you find your way back.

The last measure is to declare that you will never fall back into debt again. Declare to yourself that you will no longer be a victim of your own stupidity. Begin sinking funds, allocating cash in hand to emergency funds and repairs. Never again declare Christmas as an emergency to be put on credit cards again. Save during the year for Christmas or buy gifts throughout the year and put them back. Never again say to yourself it is OK to use the card if you pay the balance off next month. Never again even put the card in your wallet. Cut them up, freeze them, put them in a safety deposit box, whatever you must do to not use them. Buy cheaper cars that you can pay cash for or sell your car and take the bus. Scream out loud that you will do the most extreme and outrageous things to never again be close to foreclosure vs. starvation.

So, how do you get out of debt? Pay, pay, pay. Do what must be done! Declare war on the creditors; declare war on debt. Stop using credit as a tool.  It is a growth, a virus – a cancer; cut it off.

Read more about eliminating debt at http://www.daveramsey.com

The Penny: An Underestimated Currency

Pennies are an important piece of American history and are not meant to be stepped over in the street

In today’s market, many underestimate the value of a penny. Perhaps it is because of the “take a penny, leave a penny” mentality that they are not worth anything.  This could not be farther from the truth.

There have been efforts made to eliminate the use of the penny all-together in the United States. What a shame that would be. Pennies minted in the 1940’s, namely 1942 and 1943 “wheat pennies” can be worth up to $40 by a collector.  My collection of 100 wheat pennies are worth at total of $40 (forty) dollars to collectors,  $1 dollar if I spend them in circulation. What makes these coins valuable is the copper content of the coin. Today, the copper content is a fraction of what it once was at 98% zinc with only copper plating. This will change with the collectors edition coin minted with the copper content of pennies minted in 1909, which is 95% copper (1). Although it is illegal to have pennies and nickels melted down for their value, these are still worth collecting. Interestingly enough, there are about ten pennies in circulation that are illegal and subject to confiscation by the secret service. These pennies were a makeup of aluminum and bronze that were a prototype and never mass circulated for different reasons (1).

What are other reasons to pick up a penny on the street, even if it is on tails? Savings.  If you look back on your lifetime and think about how many pennies you have walked by in your life time you could probably come up with enough money for a pizza at least. Perhaps you never pass a penny up, saved pennies can add up to hundreds of dollars a year. I have paid for entire vacations on pennies saved. As a child I recall reading a story about a family who found pennies hidden in the walls of their father’s home when he died. Those pennies added up to nearly $7,000 (seven thousand) dollars.

Pennies are also good for “debt snowballs.” Financial Peace University guru Dave Ramsey teaches a theory for helping pay down your debt. Each month, you save and scrounge all you can to help pay down your debt by selling, trading, picking up pennies, whatever you must do to pay a “snowflake” on your debt. Pennies from your daily change is a good way to add to your monthly snowflake. 

Marketing promotions involving pennies have become the rage as of late. CiCi’s Pizza is laying out one million pennies all over their restaurants and if you find one, you may get a free buffet. There is a commercial where a man raised millions of pennies to help sick children.

Pennies are an important piece of American history and are not meant to be stepped over in the street. Save your pennies or give them to someone who could use them. Collect them and trade them; give them to your children. Just remember, that they still hold value in American Culture and should not be underestimated.

(1) www.wikepedia.com

The New Credit Card Rule

the best advice is to avoid the credit card all-together

Several months ago, just before Obama went in to the white house, there was a  bill proposed, making new rules on credit card companies, to better help Americans pay off their debt.   I was once a victim of my own stupidity and the credit cards profited off of it. Once I came to my financial senses, they continued to profit off of my past stupidity and so when this bill came my way in an email, I felt I had to try to make my tiny voice reach out for once and mine and many others voices succeeded all these months later; unfortunately, it was not the answer I so desperately hoped for.

Wisebread.com listed the changes as follows:

  • Credit card companies will be required to mail a bill 21 days before it is due.
  •  Universal default will no longer be allowed.  This means that borrowers who are late or default on one card would not have their rates raised by another lender as long as the second lender is being paid on time.
  •  Rates may not be raised on borrowers until they are 60 days past due.  As long as the borrower becomes current and pays on time for 6 months after they were delinquent the rates have to be lowered to its original amount.
  •  Extra fees for paying over the phone or on-line will be disallowed.
  •  Issuers have to notify customers of rate changes 45 days before the change.
  •  Late fees cannot be assessed if the issuer delayed crediting the payment.
  •  Rates cannot be increased in the first year and promotional rates have to last at least six months.
  •  Penalty fees for going over the credit limit is disallowed unless the cardholder agrees to it.  If the cardholder does not agree to transactions over the limit then the transaction would be rejected.
  • Issuers must disclose the time and total interest costs it would take for consumers to pay off a balance if only minimum payments are made.
  •  Consumers under the age of 21 must have a co-signer who is willing to take on the responsibility of the debt.  Most likely a parent has to co-sign.
  •  There are good points and bad points to this bill. I will say that the good outweighs the bad.  Perhaps most people dislike the fact that consumers under 21 must have a co-signer. Many would think a restricted credit limit is good enough for first time card owners; or a restriction on how many credit cards a person under that age can own. But at that age, you will not have enough credit to get a larger credit limit and that is no different than before. Considering that credit card companies practically camp out on college campuses and give away free tshirts for a filled out application, there must be some way of helping teach young america to be fiscally responsible and perhaps having a co-signer is one method; however, I do foresee a issue when that co-signer wants to be released of this obligation. 

    Another issue I forsee is that credit card companies will begin to attempt to make up their money by re-applying annual fees or hidden charges but I believe this will be their downfall. One of the many incentives for having a credit card is no annual fee and rewards. Perhaps credit card holders should be more restricted on their credit limits instead, making the credit card companies less greedy and more fiscally sound. 

    Our society has become handicapped when it comes to making sound financial decisions and credit cards are one of the reasons. I also believe that this is teaching a very poor lesson to the consumer, that lesson being they do not have to be responsible. By that, I mean they don’t have to pay their bill on time and they aren’t responsible enough to make their own decisions.  

    Anyone who reads this blog knows by now I do not like credit cards and prefer to use cash. But this was not always the case and I still have debt I am paying off. Unfortunately, none of these changes and restrictions will affect my debt because I pay on time, I do not pay over the phone, my credit score is high enough I don’t have to worry about universal default, and I am over the age of 21. One part of the proposal that they took out before it was passed is the ceiling limit on annual percentage rates these companies can charge which could have truly helped the consumer. At this time, I am paying on a card that they just raised the  APR to thirty percent although my FICO score is in the very high 700s, with no late payments or penalties, and no new credit. Now tell me that is deserved. If they would have left this APR limit in the bill, consumers would not be subjected to such blatent appropriation. Lita Epstein writes in Credit Card Industry to Sock it to Good Payers that those who pay loyally and on time may soon feel the affects of this new bill. Perhaps that is why my APR has already gone up.

    All of these new restrictions in this bill have their own pros and cons but perhaps the best advice is to avoid the credit card all-together and avoid whether this will affect you one way or another.  Just know that, even by being a good payer, you may suffer the consequenses.