Debtor Nation

America

5 facts that prove Americans are terrible a managing money

1. About 1 in 4 literally have no emergency savings. A survey released Tuesday by Bankrate.com found that 24% don’t have even a single dollar saved for an emergency. And that’s just one of many surveys showing how little we have saved: A survey released in January by Bankrate found that nearly 60% of Americans wouldn’t have enough savings to pay for a $500 expense if it came up unexpectedly. What’s more, more than one in five say they’d slap down their credit card to pay that expense and more than one in would mooch off family to get the cash. Experts recommend that Americans have a least three to six months of income in the bank to pay for unexpected emergencies.
2. We are more worried about paying for our next vacation than about saving enough for retirement. That’s the finding of a study released this week by COUNTRY Financial, in which Americans report being more concerned about affording that vaca vacations (36%) than having adequate retirement savings (32%). That may explain, in part, why more than half of Americans will be broke when we retire, according to a survey from GoBankingRates.com.
3. Millions of us hide money from our spouses and partners. An estimated 12 million Americans confess they have kept a source of money secret from their romantic partners, according to CreditCards.com. That’s typically not smart, experts say: “Any time you get into these kinds of things where you are operating behind the scenes, it usually comes out at some point,” Corey Allan, a marriage and family therapist told Credit Cards.com. “We can’t keep things hidden, especially in today’s technological world. Any spouse who has any kind of suspicion can become a detective and find it.” (Also see: If you have sex with a rich millennial, expect this power dynamic.)
4. We prioritize paying the wrong bills first. When we can’t pay all our bills, we make bad choices about which to pay. “Consumers in financial distress tend to prioritize unsecured personal loans ahead of other credit products such as auto loans, mortgages and credit cards,” according to a study of roughly two million consumers who had all four types of debt out this week from credit monitoring service TransUnion. But experts say that’s a backwards way to handle these bills.
5. We’ve racked up $1 trillion in credit card debt — and that’s just a fraction of what we owe. That’s according to data released this year from the Federal Reserve, which found that U.S. consumers owe $1.0004 trillion on their cards, up 6.2% from a year ago; this is the highest amount owed since January 2009. What’s more, this isn’t the only consumer debt to top $1 trillion. We now also owe more than $1 trillion for our cars, and for our student loans, the data showed.

DYI:  I was taught from day one by my father “never play the banker’s game” of debt servitude.  If you look into the middle section of billionaires – or what I call sarcastically the middle class billionaire – two thirds of them are bankers…need I say more?  Their way of making money is customers paying interest income and encouraging the masses into perpetual debt.  If you are in debt; get out of debt and if you are out of debt; stay out of debt.  You will have to forgo some of the finer things in life at least over the short term until you are debt free and have built a nest egg to financially fight off all of life’s calamities.  It can be done IF you are truly committed.  Dave Ramsey’s baby steps are an excellent starting point and I’ll throw in a few of my ideas as well.

Dave Ramsey’s Baby Steps

Baby Step 1 – $1,000 to start an Emergency Fund

Baby Step 2 – Pay off all debt using the Debt Snowball

Baby Step 3 – 3 to 6 months of expenses in savings

Baby Step 4 – 15% of  income into Roth IRAs and pre-tax retirement

Baby Step 5 – College funding for children

Baby Step 6 – Pay off home early

Baby Step 7 – Build wealth and give!

DYI:  Baby Step 1 – Emergency Fund

An emergency fund is for those unexpected events in life you can't plan for. Whether there's a plumbing issue and everything but the kitchen sink is draining, or your brakes are squealing at every stop sign, you can be ready! 

In this first step, the goal is to save $1,000 as fast as you can. Go through your storage boxes and sell some stuff. Work an extra job. Do whatever it takes to start saving money. Once you have it, open a checking account that is separate from your regular account and put the cash there. When a car battery goes out or a baseball meets a window in your house, you won't have to go into debt to fix it. You don't want to dig a deeper hole while you're trying to work your way out.

Completely agree with Dave.  This is the beginning phase of changing your thinking from debt to paying cash…it is crucial…the cycle of additional debt accumulation must end.    

Baby Step 2 - Pay off all debts except the mortgage

List all debts but the house in order. The smallest balance should be your number one priority. Don't worry about interest rates unless two debts have similar payoffs. If that's the case, then list the higher interest rate debt first. 

This step will make a huge difference in your everyday life. You'll use the debt snowball to knock out your debts one by one, from smallest to largest. Pay off the first one. Then add what you were paying on it to the next debt and start attacking it. When you start knocking off the easier debts, you'll see results and stay motivated to dump your debt. As each debt is paid off, your cash flow will increase and the bigger debts will be gone sooner than you think. Before you know it, you're debt-free!

Start with the smallest debt – continue making minimum payments on the other debts – make the largest payment possible on the smallest debt.  Success breeds success with the rapid pay offs of your first debt providing additional dollars to pay off the new lowest debt.

Here is where I differ from Dave and if you say I’m ruthless then so be it and thank you.  If house payments or rent are greater than 25% of after tax income sell/move to a lessor house/apartment bringing that cost below the 25% threshold.  Plus for those who have a mortgage finance for 15 years and if you can swing the payments a 10 year note is awesome.  The reasons are simple, far greater savings on interest and a significant savings in time before payoff.  

Also if you are making payments on toys such as RV’s, boats, motorcycle etc. sell them all using the proceeds on your debt snowball payment plan.  Move down to basic transportation such as a Honda Civic or a Ford Focus purchasing used over new and stop eating out at restaurants a real cash flow drainer.  This is war and the enemy – bankers – wants you to be in debt forever.  This is no joke!  The Banker’s Association goal is complete debt servitude from cradle to grave maximizing their profits. 

Baby Step 3 – 3 to 6 months of expenses in savings

This step is all about building a full emergency fund. It's time to kick debt for good, with 3–6 months' worth of emergency savings. Sit down and calculate how much you need to live on for 3–6 months (for most, that's between $10,000 and $15,000), and start saving to protect yourself against life's bigger surprises. You'll never be in debt again—no matter what comes your way. 

Most people lose momentum after Baby Step 2 and don't push to complete their emergency fund. This pile of cash will make sure you aren't caught off guard by a job layoff or a leaky roof. Keep your emergency fund in a simple checking account or money market account with check-writing privileges. That way, you can pay the doctor or wrecker service on the spot.

3 to 6 months?  One year minimum; preferably two year’s savings as the U.S. economy has massive imbalances foretelling a very possible nasty downturn.  Remember you are debt free (except rent or mortgage payments) housing costs are below 25% with much lower maintenance vehicles pushing the savings to one or two years is now very doable.
   

Why so much higher?  This economy between outsourcing and technological displacement of jobs a worker today is almost guaranteed of at least one if not two lay offs.  Driverless vehicles, as an example, arriving faster than a speeding bullet will displace over one million transportation drivers over the next 20 years. Or.  20% to 25% Bricks and mortar retail shopping malls are slated to close over the next 5 years according to CreditSuisse.  Hammered between Boomer’s entering senior years with a SIGNIFICANT DROP in spending AND with Millennials purchasing via on line someone is going to be laid off.  Oh it’s always the other guy.  No – plan and prepare, it will be you. 

Baby Step 4 – 15% of income Roth IRAs and pre-tax retirement plans

Sorry Dave here is where we part at least temporally; my game plan has been from day one is to be completely debt free and build cash flow payable to me through stocks, bonds, and debt free real estate. To explain the same procedure differently it is the conversion of earned income into interest, dividends and rents.

The fifty – fifty plan.  Your new found savings [living below your means and debt free (except mortgage)] just as you suspect one half makes additional mortgage payments and the other half is for purchasing income producing investment.

Once the mortgage is retired then you can avail yourself to the multitude of retirement plans and invest for current cash flow.

 Baby Step 5 – College funding for children

By Step 5, you've paid off all debts but the house, and you've started your retirement savings. Now it's time to save for your kids' college expenses. College tuitions and housing expenses continue to rise. Don't let college sneak up on you. Saving now will put you ahead of the game when your kids graduate from high school. 

Two smart ways to save for your kids' college are 529 college savings funds or Coverdell ESAs (Education Savings Accounts). These are both tax-advantaged savings vehicles that let you save money for your kids' education expenses. As with retirement, you can also spread the money across the four types of mutual funds: growth, aggressive growth, growth and income, and international. 

Both 529 plans and ESAs allow you to save money in an individual investment account. But do your homework first! Depending on your income and what state you live in, a 529 might be better than an ESA. All that's left then is to get started!

Many parents will make the mistake and don’t get me wrong, with the best of intentions, by saving enormous amounts for their children’s education and once they do go to college spend even more plus taking out a second mortgage so Johnny or Suzy hopefully graduates only to have time inverted between parent and child.  The parents are most likely 45 to 55 years of age with very little time to save for retirement along with a 1^st and 2^nd mortgage yet to be retired.  However Johnny or Suzy has a lifetime ahead of them with the ability to pay for their own advance schooling.  Hence time to achieve both goals has now been inverted.

Yes there are ways to lower the cost of college education.  Such as the College Level Examination Program (CLEP); if scored high enough can achieve two years of schooling for a few hundred bucks.  As a side note but of importance, if your child or perspective student scores poorly on entrance exams and CLEP it is time to brush aside college and look into a possible trade.  By the way there is nothing wrong with the trades as many companies are having shortages and it is not possible to outsource the employment as it is with many white collar careers. 

Baby Step 6 – Pay off home early

There's only one more debt standing in the way of freedom from all debt—paying off the mortgage. Baby Step 6 is the big one! Can you imagine life with no house payment? 

Any extra money you can put toward the mortgage will result in tens of thousands of dollars of interest saved and months (or even years) of not having a payment hanging over your head. If you currently have an adjustable rate mortgage, interest only, or even a 30-year mortgage, consider refinancing to a 15-year fixed-rate mortgage and pay off your home faster. It takes the average family five to seven years to pay their home off early. This journey to debt freedom is a marathon. Stay focused and intense, and keep a steady pace. And don't forget to celebrate each little victory along the way.

The only disagreement is that I’m advocating paying off the home far earlier than Dave Ramsey projects in order to secure serious cash flow into income producing investments

Baby Step 7 – Build wealth and give!

This is the last step and, by far, the most fun. It's time to live and give like no one else! Build wealth, become insanely generous, and leave an inheritance for future generations. You know what people with no debt and no payments can do? Anything they want! And it's all because you had discipline for a few years. Now that's leaving a legacy. 

It took perseverance and good habits to get you here. Keep setting goals and budgeting every month. Stay intense and have fun along the way! You started investing 15% on Baby Step 4. Now you can max out your 401k and IRA so you can continue to live and give like no one else in retirement.

I believe my plan will get you there faster.  But what do I know I’m not Dave Ramsey.  Whether Dave’s plan or mine by being debt free, living below your means, saving and investing the difference your financial life will be free of self made financial hardships.  Cheers!

DYI