An Analysis of the Banking Fallout - Article Review

Yesterday Glenn Beck shared a letter he wrote to his sister about how we as a nation came to be in the situation we're in financially. I think he states a lot of it far better than I could hope to, and I appreciate that he did not point the finger at one party, but he did name names when particular individuals had acted or made statements clearly showing they played a role.

In simple terms, though, what he said was greed drove it all. I think he has hit the nail on the head. Politicians greedy for power, bankers greedy for profits, individuals greedy to have things NOW instead of waiting for when the time was appropriate, builders greedy to put up more and more homes while credit terms were so loose... greed greed greed.

It really is sad that such a base, animalistic drive got us here. Regulations were ignored, overlooked, or sequestered. Risk was ignored because it was all being passed on to someone else who didn't care about it. Everything spun out of control.

Fortunately, the economy is still functioning. Rampant inflation (caused at least in part by these slackening credit terms) has not managed to destroy it yet. People are still employed at high percentages, and they go to work and do their job, then come home and purchase goods and services from other people. We have not reached a total fallout, nor will we it would appear thus far. So hope remains. Today may seem dark, but tomorrow - or several hundred tomorrows from now - we can still hope for a brighter day. And maybe, just maybe, that day will bring with it the wisdom learned in the midst of these trials.

-- Robert

The Three Uses of Money

Last night, my wife and I were going over our budget plans, deciding how much we were willing to sacrifice to get out of debt faster. I could tell that what I was suggesting about it was putting a lot of stress on her, and I stopped and said, "Where's the book?" referring to The Total Money Makeover by Dave Ramsey. She told me and I went to get it. I started to read at the passage that explains what the three uses of money are:

1) To have FUN

2) To INVEST

3) To GIVE

I wanted to read that chapter to her because those three uses are very much in line with how I think. I want wealth, but not because I want to be rich. I want to be able to take care of my family without borrowing other people's money, but after that I want to be able to help the world around me. When I was younger, I wanted to write for a living in the hopes of becoming well known and perhaps wealthy so I could actually help people with my knowledge and wealth. My writing skills were not what they needed to be, so that dream went by the wayside, but I still would like to have the ability to help people and organizations that I believe in or care about. I have seen how much my father has done for others in my life, and his influence has changed lives for the better. He has never had to be ruthless or cruel to build wealth, and he has lived as a humble, honest man of integrity. He has given a great deal to his university, to scholarships, and to people down on their luck. I have always wanted to have the same ability, but I have lacked the means. Dave Ramsey has shown me how I can get there - and what he teaches is very much in line with what I already believed on the matter - and given me hope that the day will come when I can honor my father's legacy of goodness.

It is good to enjoy wealth, to a point. If a person has made millions, or even hundreds of thousands, they should be able to enjoy some luxuries now and then. It is good to invest because it helps others build their ventures and allows the investor to grow wealth along with those ventures. Investing is how money begins to work for someone instead of someone having to work for money. The most enjoyable, enriching, positive experience with money, though, in my experience, comes from giving it away. I have felt the joy of receiving generosity from others - I went to college on scholarships and an assistantship in graduate school - and I have had seen the appreciation in the eyes of recipients of scholarships when I got to hand them checks at awards ceremonies. I have seen the tears when I had the privilege of dropping off food and toys to a family who would not have had Christmas without it. I have felt the blessings of service and of giving throughout my life, and I want to have wealth so I can share it.

I want to have a Total Money Makeover because I know that wealth can be tremendously rewarding when it is handled well, and it can be the key to bringing positive change to a world in such desperate need. I recommend that anyone who has doubts about Dave Ramsey's views read the second to last chapter in the book which describes the three uses of money. If tears don't well up... I won't make a character judgment. Truly, though, I believe in what Dave Ramsey teaches because he is not trying to make corporate moguls who crush people who get in their way. He is trying to help good people become wealthy so they can share their goodness. What a wonderful message of hope, but not empty promises, but real hope that tomorrow can be better for all of us. I can think of no better idea of success.

-- Robert

Approaching Debt Freedom (sort of)

I love to listen to calls on Dave Ramsey's show on Friday because that is the day when people call to scream "WE'RE DEBT FREE!" I completely empathize with the sentiment of wanting to make that statement. My only problem with making it, though, is that people make it before they truly are. They don't consider having a mortgage as not being debt free. I definitely consider my mortgage when thinking about debt, because it weighs on me more than any other debt I have ever had. Looking at a payment breakdown and seeing well over half the principal and interest going to interest, and then another chunk going to escrow, it feels like the payments will never end. I hate the idea of being a slave to anyone or anything, and debt makes me feel like a slave. So I want to call and screams "WE ONLY OWE ON THE HOUSE!" in a few weeks, but that doesn't sound nearly as powerful. So, my phone call on debt freedom will just have to wait.

How long will it wait? I now have three timelines outlined for our mortgage payoff. We can live reasonably well, pay a lot extra, and be done with it in just about four years. Eight years to pay off a thirty-year mortgage feels pretty good, and not suffering too badly to do it sounds great. But somehow I didn't feel like we were really getting in the mindset of a Total Money Makeover if we had a lot of nonessential spending still built into our budget, so I examined it again. This time, I came up with a timeline of around three years, which requires us to avoid spending money on a home improvement project we had in mind until we're done, and generally cuts out any excess above necessities, a small entertainment budget, and two vacations. Still, I wanted to see if I could come up with a way to break the three-year barrier. So I reduced the spending to essentials, one inexpensive vacation a year (think, visiting relatives), and all our entertainment budget stripped down to only include one major fun thing a month that we have committed to doing, but not much of anything else.

Two years and three months came back. I checked my inputs, thinking that couldn't really be true. Still, the chart showed two years and three months. Could we live like no one else for two years with the goal being to live like no one else forever after (across the bottom of every page in Dave Ramsey's book it says "live like no one else, so you can live like no one else"). Somehow, I think I could. I have been a college student living on a tight budget twice. My wife has lived on a tight budget much more than I have. Our kids probably wouldn't notice much if we cut a lot of the excess out of our lifestyle for a couple of years, and it would be good for them to see us do it. Children who see their parents pinch pennies learn to do it themselves in many cases. If we teach them why, they certainly have a chance to understand the value of sacrifice, which is a good lesson for anyone to learn.

Can we do it? Can we really pay off our house that fast? My mind says "Just Do It!" like a Nike Ad. My heart worries for my wife and children and the things they'll give up (my own sacrifices are much easier to me than anything I can ask of them). Still, two years compared to fifteen or twenty feels like a wonderfully short time. Can we do it? Here's hoping.

-- Robert

Reasonable or Rationalized

When doing a budget, I find myself constantly pondering this question: is my plan truly reasonable, or am I rationalizing what I want? Am I making reasonable plans for expenditure, saving, and investing that will be what is best, or am I rationalizing how important it is to have certain creature comforts in my budget to actually tolerate living by it? Round and round it goes, what I decide, only I know. Well, my wife and I know, and we decide together. I am sure we have a heavy dose of both reasonable and rationalized.

So today, if anyone is willing (and I am fine with anonymous responses if it promotes honesty without concern of anyone knowing), I would love to know typical spending on food, clothing, and anything else tracked in a family budget (preferably with an explanation of family size and income). I have ideas on what we spend, but I would love to compare it to other people's budgets to establish better guidelines for my own budgets. This post is probably the most vague I have done, so I want to clarify: I am asking anyone willing to share their budgets to do so in the comments section. Any budgeting advice is obviously welcome, too. Anyone else looking for help can find it here, too, if enough people share.

-- Robert

Thoughts from The Total Money Makeover

I am about half way through The Total Money Makeover, and I am thoroughly enjoying this book. I wish, in many ways, I had read it last summer because I think that is when we had our crisis that is as close to rock bottom as I ever want to get again. Right after paying out most of the cash we had in any account to some loan or another, our air conditioner broke. In the dead of summer. In South Georgia. Something also triggered a migraine for the first time in years for my wife, and she needed to go to the doctor. One doctor's visit turned into two MRI's, a MRA, a balance test, and at least one other test whose name escapes me at the moment. She visited a neurologist and another specialist. The concerns ranged from her having an aneurysm to just a small loop of blood vessels in her brain, and it all turned out to be an inner ear imbalance. As the last doctor explained, they have to run all the other tests to rule out the inner ear, and then they can tell it is the inner ear. So, a new A/C unit, several thousand in unexpected doctor bills, and no cash. No expectation of cash any time soon, either. I was certainly worried. I didn't want the stress of that moment to trigger another migraine for Ellie, and I didn't want the lack of air conditioning to drive us nuts.

The first thing I did after all this sudden money crunch was to make sure I paid my tithing. I know a lot of people would consider it crazy to do such a thing in the midst of a money crisis, but I knew I needed the peace and all the blessings I could muster at a time like that. My mind was very much unburdened after I paid it, and I know I was blessed to come out of troubled times because of it, but I will leave my testimony of tithing at that for now.

Then, I did what this book would tell me not to do: I borrowed on my credit card. I had run through all the 0% balance transfer offers over time, and the one I had was for 1.99% for nine months. I borrowed enough to make sure I could pay them out of the funds, pay the bills we were suddenly hit with, and have a reserve in case something else came up. The exact amount is a little too embarassing to publish here, but I never plan to borrow short-term like that again. I actually never plan to truly borrow again, as The Total Money Makeover suggests. Dave Ramsey would describe last summer as the time "Murphy moved in" (Murphy from Murphy's Law that whatever can go wrong will go wrong).

This month, we will pay off all our debts other than our house, and we have no reason to expect to incur any new debts any time soon (read: never). I did not follow the plan Dave Ramsey would have suggested for my debt elimination, but I came close. I still paid into my retirement, paid of all my other credit cards as they came due (though I still used them), paid extra on my home loan each month, and then put any extra I could justify into the credit card debt. I certainly would've paid it faster if I had followed the Debt Snowball and put all the extra onto the debt, but I am thankful it never came to needing to. For anyone familiar with the Baby Steps, we are somewhere between steps three and four, but we're actually not far from moving towards six. We will have most of our necessary emergency fund built up by the end of the month, and I already invest 10% into my 401(k) each month, but we will plan to invest the remaining 5% into our Roth IRA later in the summer. The college accounts are already funded at this point, so we're planning to work on paying off our house as quickly as we can muster from now on. We've only owned our home four years, but we already own nearly half of the equity, and by year end we hope to have paid nearly half our original loan on it. Then we plan to refinance to a 15-year fixed rate loan on the remaining balance.

A couple of things will slow us down this year, but I consider them necessary to continuing our progress. We need to replace our stove to avoid a potentially dangerous situation, and our dishwasher will probably need to be replaced soon, too. We may also invest in a new closet design for our master bedroom because it would improve our ability to manage our space dramatically, which would in turn make it easier to be home more. Being home more comes with the territory of spending less, since we eat out less, go to movies less, and so forth. Our current plan is to spend the next several months really planning the closet and get it from Ikea. We've already paid for a trip to California in May for Todd's wedding, but most of the rest of our summer will be spent at home afterward.

I hope this post does not sound gloomy. I am really excited to become completely debt free. I feel less stress about money today than I have in ages, and I feel like I have a plan now to take control of my income, as Dave says to "Tell [my] money where to go instead of wondering where it went." I will probably write more about this book in the future since this blog is all about success and I think we will be successful. I haven't decided to make it a regular day of the week entry, but I might, just to keep myself on track and motivated. Here's hoping we're completely debt free in a couple of years.

-- Robert

P.S.: For anyone wondering, my wife was able to get her balance straight and has not had another full on migraine since. Her post on the balance issues is here.

Commitment to a Plan

Last night, Ellie and I bough a book we have planned to buy for a week or more, and that we've had an interest in for several months, The Total Money Makeover by Dave Ramsey, which teaches basic principles to get personal finances in order. This month, we will actually be completely out of debt except for our home, but we've gone about debt elimination in a fairly unfocused manner. We want to stay out of debt, so we've decided to implement a plan, probably based on Dave Ramsey's Baby Steps. We will be effectively starting on step three beginning now. The most important element of any financial plan is a budget. The second most important element is adherence to the budget. I, for one, believe in building budgets that offer the flexibility not to become unlivable. If I have to live every day (or even week or month) to the penny, then I know I can't do it. If, instead, I have some "slop" in the system, then I can definitely handle it.

I love this line from the introduction to this book: "What I have discovered is that some of the most profound and life-changing truths you will ever discover are very simple." Indeed, in today's culture, we celebrate complexity as "sophistication" but often the best ways to live are extremely simple to the point of being boring. Boring does not make headlines, boring does not make it onto reality television, and boring definitely does not light the average person's fire. Unfortunately, life is seldom lived the way it is depicted in magazines or on The Real World, and so most people prefer to live life on the edge. "Buy now, pay later" is the modern-day mantra. The latest furniture sale I've heard is now three-years no interest (I can't recall if it was also no payments). Most appliances can be purchased with no payments for twelve months. Consumerism has overtaken our lives. We've gone well past keeping up with the Jones. Now many people have trouble keeping up with minimum payments. Listening to Dave Ramsey's show brings me great peace because I realize I have never gone as far into debt as many of his callers, few of whom have less than $10,000 in credit card debt (and most of them are behind on several payments).

I have been able to live my life floating on the sea of cash flow for years. I am ready to trim my sails toward financial freedom, though. Dave Ramsey can be the wind I trim them to, but I still have to captain the ship, and my family has to be on board. Here's hoping we're not bailing water again anytime soon.

-- Robert

Emergency Preparedness

On Sunday, we had a wonderful lesson about the importance of financial independence and preparedness for hard times. While some might think such lessons sound too much like doomsday paranoia, I believe in the message. Looking at the economy as a whole, it is possible that it will be harder to secure credit in the near future, making it harder for many people to buy homes or automobiles. When more has to be purchased with cash, it means more savings and preparedness comes into play. Dave Ramsey does a radio show weeknights helping people figure out how to deal with certain debts they have incurred, how to manage their cash flow, and (once they are debt free) what to do to save and invest for the future. He regularly talks about having a six-month emergency fund in the event of the unexpected. The lesson on Sunday also discussed such a plan, explaining various ways to manage such funds. Some cash should be immediately available (emergencies often mean banks are not available), as well as a 72-hour kits of food, water, and clothing (the link is just one example kit, but it is easy to prepare one without buying it ready-made). A good guideline is to have cases of bottled water, food that does not require microwave preparation (and if any heat is required, it's a good idea to have a pot and pan, as well as some means of making a fire), and clothes that are regularly updated to fit children as they grow. It never hurts to have some fuel around, as long as you have a safe means of storing it away from pets and children.

One of the best things to do for general emergency preparedness - losing a job, new illnesses, unexpected pregnancies, car accidents or maintenance problems, home repairs, extreme weather - is to get out of debt and stay out as soon as possible. Avoiding new debt can be hard with so many "get it now, pay later" sales out there, but it's better to plan for purchases by saving up instead. Debt avoidance can reduce the effect of any emergency on an individual or a family.

Three years ago, four major hurricanes hit Florida after none had come in several years. The next year, one of the most terrible hurricanes in recorded history hit Mississippi and Louisiana. I saw first hand at the sites of all those hurricanes (thanks to relief efforts through my church) how quickly a world can change. Tornadoes have destroyed homes across the nation for the past several years - even in places that almost never get them. Wildfires and mudslides have plagued the West in various places over the past few years.

Planning for such calamity might sound extreme, until it happens. Right now, many families wish they had planned their spending better as adjustable rate mortgages go up, as the economy slow-down means lower wages or lost jobs, and as inflation has caused everything to cost more today than yesterday. One of the best resources around for preparedness is Provident Living. It offers resources for budgeting, food storage, and various other areas.

One thing I personally agree with that Dave Ramsey teaches with his financial planning is including tithing (giving a tenth of one's increase to the church) and offerings (excess giving beyond ten percent). By planning that outlay, it helps begin the process of budgeting, and it blesses the giver. Even if someone does not follow a particular religion, giving to charitable organizations can be an uplifting way to share wealth. Tithing and charitable givings are also tax deductible, but it would be good to do regardless, in my opinion. I can certainly see how giving has blessed my own life, and the results of others' givings have blessed many.

In the end, the main reason to get out of debt and manage finances is to find peace and security. When a long-term savings plan is in place, it becomes easier to face good times and bad. By living on less, it becomes easier to save for retirement, plan for children's schooling, and manage day to day life. Too many in today's world live in the now, or really live on future earnings they cannot guarantee they will produce. We could all stand to learn to manage our finances better.

-- Robert

Amortization Chart, For Anyone Who Wants It

I have uploaded a generic interest calculator. There are some amounts already input for interest, loan balance, and escrow payment, but by changing those in the base cells, anyone can use these to determine what a different payment could do to change how fast a loan can be paid off.

To get the file, click on this link and the page will offer a chance to download the file. If this does not work, please let me know.

-- Robert

Amortization

To most people, the amortization chart of a loan is like reading Greek, in other words, it is completely foreign. Pick a given period and it tells you how the interest and principal of the loan are broken up and applied. It is always front-loaded with interest (more of the interest is paid up front instead of spread over time) to insure that banks make their money off the loan. What I bet most people do not know, though, is they can reproduce an entire amortization chart for a loan as long as they know the period of the loan, the interest rate, and the amount the total loan is for. By putting those three items into an Excel workbook with the financial formulas of "ipmt" and "ppmt", each of which also require the reference of which period (that is, which month is being calculated), an amortization chart can be generated. Listing out the entire 360 months of a loan might seem time consuming, but it is quite easy as long as a person understands how to make the cells copy and paste while still reference the necessary information (the ipmt and ppmt would need to follow the number of the period, for instance). I know all of that explanation sounds extremely complicated, especially to someone unfamiliar with Excel. So why would I share how to create an amortization chart in this space? By having a complete amortization chart, a person can know what an additional payment to principal will do to reduce the interest of a loan going forward. What do I mean? Here is an example:

If I have always paid only the required payment, but now want to pay an extra $100 a month, I can tell how much benefit I get from that extra $100 by looking down the amortization column for "principal payment" below my current period to where $100 more gets me. In other words, the extra money is somewhat like "skipping ahead" in my loan amortization - which is what people mean when they say they have knocked a certain number of months or years off their loan by paying extra.

I have built a very helpful Excel workbook that has a lot of these amortization charts in it that allow me to determine what an increased amount of interest will do to my payment, or what an increased amount of payment will do to move me forward in my loan. Using these charts has helped me plan my extra payments and understand what I am accomplishing with an extra payment or two a year.

-- Robert

Paying off Debt

In this day and age, debt seems as ever-present in our lives as taxes, and can be just as stress inducing as many illnesses. I regularly listen to Dave Ramsey's call in show and hear people describe how they are working to pay off large credit card debts, car payments, foreclosures, and others. In every case of someone calling who is still dealing with a problem, I can recognize a lot of anxiety and even guilt over the situation. In every case where people are calling to scream "We're debt free!" (he has a part of his Friday show dedicated to these calls) I can distinctly hear the relief in their voices. In short, debt weighs on my soul as much as it does on the bank account.

I have not personally read Dave Ramsey's books, nor have I taken one of his courses. I do know from observing friends and associates who have used his program that it works when it is followed. What his program entails, basically, is paying only minimum payments on everything while putting all the extra payments on the smallest amount of debt owed until it is paid off, then the next, and the next until the largest amount is paid off (or all that is left is a house payment). He calls this the Debt Snowball. Another strategy that makes sense to me is to focus on the highest interest debt until it is paid off, then the next highest interest, and so forth, the logic being that reducing the amount of interest owed faster will increase the amount of money going to principal and thereby to paying off the debt faster.

What does debt reduction have to do with "Making That Money"? By getting interest charges out of my life, I increase the amount of money I bring home to save, invest, or spend, which helps me make more of "that money". I also increase the emotional and spiritual capital in my life dramatically by getting the debt out of my life. Very soon my wife and I will only owe on our home, and I cannot begin to describe how good it feels to be looking forward to being rid of short-term debts. I personally dislike debt. I hate owing anyone anything. We'd also love to pay off our house as fast as possible and be trule debt free for that reason. Then I won't have to worry about a rebate check or a government bailout plan to feel secure in the knowledge that what is mine is truly mine, and I do not have to surrender it to anyone.

-- Robert