A Journey in Personal Finance: part 1

Debt. It is amazing how this one word can start conversations and debates that last forever. There are hundreds of books on the market on personal finance. How to budget, pay off debt, live debt-free, file bankruptcy, gain wealth, become a millionaire by working from home, and the list goes on and on. All of these books and systems are written by smart people. Some are financially educated, there are also the “learn from my mistakes” people, and there are the pure sales and marketing people. The ironic part for me is that all of these books and financial education cost money. So, this industry is making its money on exactly those that don’t have it to spend.


Debt has been around for centuries. But with technology, over the last 30 years in the United States debt has become an epidemic. The two sides of the fence both blame each other. The financial industry argues that personal responsibility should be the focus, where the consumers argue that deceptive lending practices and fees are the cause. As with many topics, there is truth on both sides in addition to false information.

I believe that personal debt is a lifestyle choice. We as people have the choice to go into debt to buy anything, a house, car, education, furniture, vacations, electronics, food, etc. Anything that you can thing of can be purchased on credit. The easy answer to staying out of debt is to only purchase that which you have the cash to pay for. But is that practical or even possible in the United States today?

In order to drive a car on the road as a teen driver in NC, you are required to pass a driver’s education course, a driving test, a sign test, a written test, and prove that you have liability insurance coverage in the event that you cause damage. In order to get a credit card, in some cases you simply need to be 18 years old and be able to sign your name. I like the personal responsibility argument, but I believe that the financial industry does not seem to understand or care that in order to claim personal responsibility, the person needs to have a fundamental understanding of the consequences of their actions.

I have a 3 year old and there are those times as a parent that I have to intervene in order for her to stay safe. If she is running in the driveway and gets too close to the road, I make sure to pull her back. I then try and explain that there are cars in the street and they could hurt her if she got hit. She will now say, “Daddy hold me. There are cars and if we get hit we will get a boo-boo and have to go to the hospital.” Simple, but she gets it. As consumers, why don’t we have the education to know that if we finance something we buy, that there is interest and fees, and interest rate increases if we are late on the payment?

According to jumpstart.org, currently there are only 4 states in the US that require at least one semester in personal finance in order to graduate. These are Utah, Missouri, Tennessee, and Virginia. There are several states that have personal finance worked into other areas or as electives, but there are still 26 states that have no requirement that personal finance is taught as part of the curriculum. Since financial education it not taught in more than half the country’s public schools, how do most people learn about personal finance? Unfortunately so often the case, it is by trail and error.

With no formal unbiased instruction, we as Americans are left to figure out personal finance on our own. Have you ever tried to learn a new sport, craft, or do-it-yourself project without someone to show you the right way to do it? Most of the time you end up developing bad habits or form, or have to complete repairs too early due to poor prep. Our personal finance is the same way. The difference is that a poor golf swing or drywall finishing technique may cost you a few extra hours of labor or strokes. A poor understanding of personal finance can lead to debt collectors, bankruptcy, not being able to retire, foreclosure, divorce, and too often depression and suicide.

The goal in writing this is to provide people with an understanding of how the system works for and against you, and how to live a more informed life. It would be ridiculous to assume that people will stop using credit all together as some famous financial personalities would have you do. The reason is that credit at its core can be good. Think of it as it relates to food. All of the diet fads that have you remove carbs, or fat, or sugar all claim big results. But, nobody ever has long term success because it takes all of these to maintain a healthy nutritional balance. Credit, as part of a healthy financial plan is good.

The first step in this journey is to understand that most people have a motive that does not involve helping you as a individual. If that was their only motivation, either you would not be able to afford their services, or they are doing this on a volunteer basis. The fact is that almost everyone giving out financial advise has someone to answer to. People are accountable to sponsors, producers, corporate quotas, commissions, and their own greed. They are happy to give you advise, but understand they know the hand that feeds them.

Teaching personal finance takes a two sided approach. We need to teach our children and youth about personal finance in order for them to develop good habits and a understanding of the system. In addition, those who already have experience with personal finance need to be educated on what they learned on their own so that bad habits can be corrected.

So, lets get started.

Personal finance at its core is debits (-) and credits (+). Debits being those things that you spend and credit being money you make. To win the game, your goal is to have your credits exceed your debits. The math is the easy part. The hard part is the psychology. When we get the “I wants” we too often find a way for the numbers to “work for us”. This is when we start loosing ground. Lets look at an example.

John starts his first job at Save-A-Lot in the management training program making $25,000 gross. He is single and has a roommate that he can split the rent with. John has no credit established as he does not have a credit card and his car is an older model that his parents bought him in high school. This is what John’s monthly financial statement looks like:

Gross Income: $2,083.33
Taxes: $624.99
Insurance: $150.00
401k $104.16

Net Income: $1,204.18

Expenses:

Rent & utilities:$450.00
Food: $120.00
Gas: $150.00
Savings: $180.00
Personal Hygiene $50.00
Car Insurance: $75.00
Entertainment $100.00
Cell Phone $50.00
Misc. expenses: $29.18

John has a good plan. He is starting to build a savings balance that will serve first as an emergency fund in the event that a large expense comes up or he loses his job. The fund should be 3-6 months worth of expenses. In John’s case his emergency fund needs to be between $3,522.54 and $6,7,045.08. How did I get this number? I used John’s net income of $1,204.18 subtracted his monthly savings and added back his health insurance. If John lost his job, he would still need basic insurance but he would not need to worry about putting money into savings.

Does John need credit? Answer: not yet. Some would say that this is a good time to establish credit with a small credit card. That way when it comes time for a newer car, John will have a good credit score and will be able to get a good rate. The reality is that we tend to buy much earlier than is needed.

The Trap:

John has a good job, is making money, and thinks; “you know, this car has a lot of miles on it and I do not have enough in savings for a big repair if that comes. And besides, the dealership is running some great year end deals with 72 month 0% financing. A new car would have a warranty, so if something went wrong, I would be covered.” So, off to the dealership John goes. The sales person is very nice and makes John feel great that he has a good job that will have an increasing salary since he will be management soon. The sale person shows John a few models and points out all the “new” features. John is amazed because his current car still has an 8 track and towels as seat covers. The salesman then explains that if John buys today that he can get the car with no money down. This is great! John has only been savings for 4 months so he would rather keep his savings of $720.00 in the bank. The finance officer has John fill in the credit application after John has already been drooling over the car for the last hour. The officer then explains that since John does not have any credit he will not qualify for the 0% financing. John is devastated. He has already texted his roommate bragging about his new ride and posted a picture on facebook. The financial officer explains that he can “help John out” and get him financing at for his new car for 72 months at $362 per month on the $19,000 price tag. The payment is a lot higher than John was thinking, but he is expecting a raise in 8 months and the new car gets better gas mileage so he will just cut some things back a little to make it work. So, John signs the paperwork and smiles on the way home with his new car. (I wonder if John noticed the 10.99% rate?)

John soon realizes that 30 mpg vs. his old 17 mpg car only makes a difference of $72 per month in gas. So, John has cut all savings from his budget and he is still $110 short. John decides since he was able to get a car, maybe he should mail in the credit card offer he got in the mail in order to fill the gap until his promotion. The credit card application is approved at 23% interest, and John decides to only put his gas cost on it.

As expected, John’s raise comes in 8 months. John’s salary has increased to $35,000 with his new title of Jr. Manager. John decides to evaluate his budget.

John’s monthly financial statement looks like:

Gross Income: $2,916.66
Taxes: $874.99
Insurance: $150.00
401k $145.83

Net Income: $1,745.84

Expenses:
Rent & utilities:$450.00
Food: $120.00
Gas: $80.00
Car: $362.00
Credit card $30.00 ($20 over the minimum)
Savings: $200.00
Personal Hygiene $50.00
Car Insurance: $75.00
Entertainment $200.00
Cell Phone $50.00
Misc. expenses: $128.84

John decided that it was time to restart his savings after draining it down to help cover expenses after buying the car. John’s balance sheet now looks like this:

Assets:
Car: $16,875 (800 miles per month for 8 months: 6,400 total miles)
Savings: $200.00 (after this months payment)

Total: $17,075

Debts:
Credit Card: $620 (making the minimum payment for the last 8 months, which only paid the interest a little of principal)
Car Loan: $17,450

Net worth: -$995

John is not happy, but he knows that things will start looking up now that he is paying more on the credit card balance. One week later, John gets some great news! His roommate got engaged and the bachelor weekend is going to be in Vegas! John quickly books his fly and hotel on the credit card because he can’t miss his roommate’s party. The credit card that had a limit of $2,000 is now at $1,500 with the addition of the trip. John is concerned that he may go over his limit on the trip, so he calls the bank and since John has been making his minimum payments for the last 8 months, they gladly up the limit to $5,000. John knows that will be more than enough.

John returns from Vegas with a credit card balance of $2,400. He is very glad he had the limit increased. As John is making a plan as to how to begin paying the balance down, it hits him; “If my roommate is getting married, I will need to find a new roommate or my rent will be going up.” John thinks, “I am not in college any more and I don’t want a stranger living with me.” John decides to pay to rent by himself. Now John’s budget looks like this:

Net Income: $1,745.84
Expenses:
Rent & utilities:$900.00
Food: $120.00
Gas: $80.00
Car: $362.00
Credit card $50.00 ( the new minimum payment, balance of $2,400)
Savings: $0.00 (total savings balance $200.00)
Personal Hygiene $50.00
Car Insurance: $75.00
Entertainment $50.00
Cell Phone $50.00
Misc. expenses: $8.84

After one year on the job, John is on the same road as many Americans. Living month to month with little to no savings, credit card balances, an upside down car loan, and stress trying to keep up.

Let’s now look at John’s twin brother Jimmy. Jimmy also being in the management training program driving a 1993 Chevy Corsica has a lot in common with John. Jimmy decided that he was going to live by himself early on due to most people not understanding his hobby of collecting porcelain cats. Jimmy found a small one bedroom apartment in a safe but older area from $500 a month. Jimmy budget looks like this:

Gross Income: $2,083.33
Taxes: $624.99
Insurance: $150.00
401k $104.16

Net Income: $1,204.18

Expenses:
Rent & utilities:$500.00
Food: $120.00
Gas: $150.00
Savings: $125.00
Personal Hygiene $50.00
Car Insurance: $75.00
Cat collection $100.00
Cell Phone $50.00
Misc. expenses: $34.18

Jimmy hears John talk about his new car after they have both been working for 4 months. Jimmy knows that his car is a piece of junk and no ladies will ride in it, but he also understands that based on his current income, his money is best put in savings. As the year goes by, Jimmy continues to save and get mocked in the parking lot by John and John’s roommate from John’s new car for the P.O.S. that Jimmy is driving. Jimmy quickly fires back that if they don’t stop the porcelain “witch” cat that he just got off of craigslist will cast a spell on him.

John decides to make peace with Jimmy after they both get promoted to Jr. Manager by inviting Jimmy to Vegas. Jimmy thanks him for the offer and looks at his financials.

Net Income: $1,745.84 (after raise

Expenses:
Rent & utilities:$500.00
Food: $120.00
Gas: $150.00
Savings: $500.00
Personal Hygiene $50.00
Car Insurance: $75.00
Cat Collection: $100.00
Cell Phone $50.00
Misc. expenses: $200.84

Assets:
Car: $1 (basically worthless)
Savings: $2,000.00 (after this months payment)

Total: $2,001.00

Debts:
Zero

Net worth: $2,001.00

Jimmy knows that his beloved 1993 Chevy will not make it much longer, so he decides to stay at home. This was a hard decision as Jimmy was glad to feel included, but he knew he did not need to spend the money.
………………………………………………………………….

What will happen next to John and Jimmy? Find out with the next post.

August, where did you come from?

I have not posted in a little over one month. The summer can get busy. It really is amazing how fast this summer has gone by! I would say that it has been one of our best summers yet. We have spent a lot of time at the beach and on the boat, we have been to the water park, taken a few day trips, visited family, and completed a few races.
I have two more triathlons on my calender for 2012 that are fast approaching. These are the Wilmington YMCA Tri @ Wrightsville Beach in September and the Beach-to-Battleship half ironman in October.

Last weekend I completed my first Olympic distance triathlon. This was a 1500 meter open water swim, 27 mile bike, and a 10k run. Completing this was a big accomplishment for me. Up until about the 30 minutes before the race start, I had a major case of self-doubt. Prior to this race, my longest open water swim was 375 meters. The thoughts of "what if I get half way and panic, or get a cramp, or this, or that", were all that was in my head. The voice of reason, which is always Linds, finally got past the noise and said, "you are ready, just do it or I will kick your butt!" Nothing but love!! But, that is exactly what I needed. The race went well. It was not my fastest time, but that was not the goal of the day. Making the distance and enjoying the race was the goal, and I did both. My biggest take away from this race is to aways believe in yourself and what you are capable of. Trust me, I know how cheesy that sounds, but it is true.

So often we avoid our weaknesses not because we wouldn't like to do those things, but because of fear. If you have a dream to do something, whether it is running a marathon, learning a new language or how to play an instrument, writing a book, or starting a business, you should give it a try! What is the worse that will happen? If it doesn't work, you are still far beyond all of those that never tried.

What's on your bucket list? It is time to start working on checking some of those off.