Thoughts on Financial Strategies and Debt Reduction

Introduction

This is the first post I’ve done in a few weeks due to being out of town for Thanksgiving and then again for a week in the Northern Virginia / DC area for work. I figured I would write on a topic that has been evolving for the last few years and is something that is critically important and not so sexy of a subject as new garden things or food recipes. One of the financial things I have been following quite closely now, is the bubble in the student loan industry. Here is an article to get you up to speed if you don’t know too much about the subject Federal Student Loans Surpass 1 Trillion. One reason why I follow it so strongly is that I am definitely one of those people who was sucked into taking massive debts for a college degree, that has effectively provided me with nothing. (Unless you count a job that just pays back the debt something).

After graduating and getting married to Christine, I knew that tackling debt was one of the most important things that we needed to work on. As I begin to do different things in my life and continue to explore new ideas and skills, I realize now just how damning it is to have debts, especially long term ones. I come from a family that I would easily say has not had much financial planning or fiscal restraint and I have firmly recognized that I share these traits and have been attempting to root them out since 2010 (once I left college). This was also the year that I built my first budget and looked at how I would do savings (something unbelievably paramount). This was the first place that I started.

Budget

Having or outlining a budget is probably the single most important thing anybody can do. The first step in building a budget, I feel, is just looking at what you spend normally. If you haven’t paid any attention to these sorts of things, except when your bank account balance starts to get low, then this is a pretty important step. Start with writing down the knowns/constants and then start to fill in with rough estimates of variable cost things. (Note: The most important fundamental step one can do when doing any sort of analysis, is looking at the knowns vs unknowns. Generally when you’re doing an analysis and prediction there are things that you just don’t know that are important towards you make decisions, so having anchors to tie down to and eliminate sections you might think about makes this process a lot easier.) Fill in things like rent/mortgage, phone, car insurance, minimum debt repayments etc. Then make guesstimates, or use the last bills that you had for things like water, trash, etc. The tough one starting out is food, but if you can add up food (fast food, groceries, etc) for a month that is a good starting place.

Ok, so after all of that its time to actually make a budget. Open up excel and the first thing to put in is how much income there is each month. Then make a section for expenses and put in all constant expenses, followed by the variable ones (that are guaranteed, like food, water and power), but don’t put in anything yet for discretionary items. For me, I then built a small framework for calculating the maximum I might spend on food in a month. As of right now I calculate that I will have a 3 dollar breakfast, 5 dollar lunch, and 7 dollar dinner. I can assure you I don’t eat remotely that high in a month everyday, but I put in the calculation like that, so the cheaper days will balance out the expensive days. With these items in, the next step is looking at how much is left over and deciding how much will go towards savings. (I’ll get into savings a bit deeper in a bit). After this you have the purely discretionary income that can be used for other things. Without a budget, one has no direction or control over discretionary spending.

Knowing How Much You Spend

Knowing how much we spend is one of the most critical things, especially in a marriage. We keep every receipt and enter them into the free accounting software GNU Cash. It didn’t take very long to learn the software and the fact that it is free (as in freedom AND cost) is quite nice. Putting in receipts definitely requires you to be on top of that on a regular basis. My aunt says she does this process every night. That is a system we need to get into. I just did ours last night for the first time in almost 2 weeks and not only did it take forever, but weeding out where discrepancies exist between an account and a banking account, is a seriously irritating process. Less receipts = less mistakes.

After having logged all receipts for a month we run a report of all income minus expenses during the month and compare it with our budget to see how we do. This has worked very well and even mid-month looks we can change some of our habits, or look at coming expenses so we dont’ go over budget. (If you go over budget, generally you should come in under budget the next month to make it up, and thats MUCH easier said than done). This leads me to…..

Carving Your Money Up

This was an idea that my aunt gave to me that has already worked EXTREMELY well. I would consider her a master budgetor. The idea was that each week you hold a certain amount of cash that you’re allowed to spend that week on something (the best example is groceries). All food purchased (fast food or groceries) comes out of that pool of money. Even if you don’t itemize your receipts this makes staying in a budget a snap. Take your monthly food budget, multiply by 12 (for months) then divide by 52, in order to get the amount per week that you can use for food. Choose a day (we chose just before the farmers market here) to take out your cash, and every single week you take out the same amount. What is very important is not to mix this cash with anything else, so if you do this technique with other things (perhaps a shopping budget) DO NOT MIX THESE. This is very important, not to mention to have a little personal discipline. One idea is to put them in separate envelopes (if you’re a girl and carry a purse).

Savings

There is obviously a million different ways and strategies that one could go into when it comes to savings. I will not get into long term savings strategies, particularly because I’d rather hone in on things like not putting money in a 401k, or “saving for your kids college” using a 529 plan. However, I will talk roughly about how to budget savings, and perhaps some things you could do savings for. Once you have your amount that you’re going to save each month, one should seriously stick to it. I use a percentage rather than a specific number. If we make more money, hey that’s more savings! I believe the first and foremost thing people need for savings is physical cash. If you can’t pay your bills for at least 3 months in cash you really do not have enough cash on hand. Cash is the most liquid “asset” you can possibly have and is quite possibly the most important one. It is also important that you have plenty of denominations for making exact change. After Katrina here in St Tammany parish, cash was the only thing accepted and in many places exact change only. Yikes!

The way that we currently attack savings is that each month we decide what we want to get with our savings budget. It could be put in cash, it could be put in a bank account (I wouldn’t put it in a savings account because there is actually negative incentives to doing that over a checking), it could be banked for long term things such as precious metals or anything tangible with long lasting value. I really think that savings for the future has to be a diversified strategy that has to be taken seriously. If you need to pay for something in the future you should have different avenues to convert things of value to what you need. It’s quite clear that we are living (globally) in very uncertain times and as a globe are heading into very very murky water where its quite clear there will eventually be economic consequences. With that in mind, diversification and liquidity are your friends. If what you’re focused on tanks, or if you’re unable to convert what you have into what you need, you’re effectively powerless. This is one reason why I don’t believe land is NECESSARILY the best “investment” or “savings” somebody could have. I will say that after covering many of the immediate and intermediate basis, more complex asset purchases such as land certainly do make sense. I heard recently that historically 3 things elites have purchased during turmoil times to get their generational wealth through to the otherside. Gold, Fine Art, and Land. I should note all of these are going through the roof (although gold has flattened out in the last 2 years).

Debt Reduction

I think people saying “you should be debt free” has to be about the most trite statement of all time. But The reason it keeps sticking around is because it’s true. Historically the elites stayed “elite” by having limited debts, and empires crumbled to the ground over debts. I mean we have the saying for prisoners that they need to “pay their debts to society”. Yikes, so in otherwords if you have debts, you’re probably a prisoner, and it turns out that is true. Having debt restricts your freedom and impartiality to doing actions and choosing where you should spend your time and efforts. Having debts, particularly large ones, will make you live a life unfit for living with the belief there is “light at the end of the tunnel”. I think the only light at the end of the tunnel is paying off debts as soon as possible. After getting into permaculture and hearing stories about people who have gone the no-debt path, its amazing what one can do, and how creative you can be without those shackles. More importantly you can divert all that money that goes normally towards debt to something more enjoyable (or save it).

Our current strategy to pay debt is VERY simple. “As fast as humanly possible”. Turns out it works pretty well actually. Since the wife works a very solid job, we can afford to direct the majority of my income to paying off all of our debts and I’m proud to say that other than the mortgage we’ll be debt sorta-free by the end of next year, and if we keep on we’d be able to pay off the mortgage within 3-4 years! Apparently the technique is called debt snowballing. The idea is that whatever you can afford to pay down on debts you do that first, starting with the highest interest rate. Once that debt has been paid off you KEEP paying the same amount on your debts, to the next one, and so on and so on. This makes it so that you don’t pay any more or any less in debt, but you’re paying it off at an increasingly faster rate. Its quite stupid simple. Like I said all things being equal starting with the highest interest rate is generally best but that isn’t necessarily ALWAYS the case. Depending on the debts and the nature of them will change that. Example: Student loans cannot be shed in bankruptcy, so in my book they are VERY high on the list, especially since I don’t want to give these assholes any extra money in interest that I can. Also variable interest rates are ticking time bombs ESPECIALLY in today’s environment. If I had to choose between renting and a variable rate interest rate mortgage, I’d choose to rent in this environment.

Conclusion

Well hopefully that gives you some ideas/structure the way you think about your personal finances. There are other things that go into play as well such as goals, but I figured that you would come up with those goals yourself. Without tackling the above subjects you really can’t get into larger plans or coming up with secure ways for paying for things in the future, if you need assistance. It’s quite clear to me nowadays how much more savings we need that many people just aren’t doing. It consistently put off to long term programs that we don’t manage and we’re putting so much faith in those institutions to provide for us when we’re the most vulnerable. Typically you’re vulnerably because times are tough. What I think some people fail to realize is that bureaucratic and bloated agencies whether government or otherwise, are the last capable of dealing with the lack of systems of support. Generally by their very nature, organizations grow until they’re too big to manage and implode from within.

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