Casting off the shackles

Posted by & filed under Musings.

  • On February 1st, I got my W-2’s.
  • On February 2nd, I filed our family’s taxes.
  • On February 12th, I got our refund.

On that day, for the first time in 10 years, I became completely liquid-debt free. What a glorious day.

Freeing up the $200-300 / month I was paying (well over the minimum, I was making aggressive payments to pay it off) has allowed us to finally start doing some planning for the future.

For starters, since we no longer have monthly credit card payments, we can now feasibly start saving money. Not specifically for retirement or a down payment or any particular purpose, but just for the sake of developing our family’s capital to give us more options down the road.

I felt the tried and true “10% self-tax” was a good place to start with that. The plan is to take 10% of all incoming money (retroactively applying that to the tax refund) including my salary, any outside consulting work, and any gifts, rebates, and whatevers. If it is an inflow of cash, it gets taxes. Flat out.

The second thing I wanted to do was start imposing some allowances on Mel and I. Since I’m the breadwinner, she felt a little disempowered since she had to ask for money; I felt apprehensive about having a bottomless wallet. (To be fair, her spending has never been problematic, I just have a tendency to seek generalized solutions). I decided a 5% self-tax for each of us (2.5% / paycheck) was reasonable. This money covers any expenditures we make selfishly (including books, fast-food, movies, coffee, etc.), and is no-questions-asked. We’re just now finishing the first 4-week period of doing this, and we both feel it’s been very helpful.

(Mel will also occasionally make some money from her business, HoneybeeHill, but that’s her to do with as she wishes. It typically gets piped right back into the business.)

Another thing I wanted to do was start putting some money into Sullivan’s savings account. He’s got some cash and some savings bonds from when he was born (gifts from the family), but I thought it would be smart to continuously add more money into it (his savings account’s interest rate is pretty pathetic. I’m exploring some guaranteed-return investments such as CDs or money market accounts.) So he gets 5% too. (there’s an error in the graph above — it’s actually 2 x 5%. Oops!) This too has been retroactively applied all the way back to the tax refund.

So at this point, 20% of our income is being piped directly into growing our capital, and 10% is allotted for personal expenditure.

Our mortgage is about 20% of the monthly expenses, which includes an extra $30 / month into the capital. (Paying $30 directly into the capital every month will reduce a 30 year mortgage to 20 years. Seriously, do the math.) There’s an interesting story about our mortgage, but I’ll get back to that later.

Utilities, which covers all the basic utilities (Power, Water, Internet, Cell Phones) are 16%. The remainder of the bills are apportioned to reasonable amounts (based on an realistic idealization of our historic consumption. I have a rather meticulous budgeting system and have tracked every expense for the past 5 or 6 years.)

In the past, before the credit card was paid off, our bank account would typically have a very cyclical balance — we would practically zero it out every month. Fortunately, the reason for that was because of my aggressive credit payments (usually — there were a few car repairs in there). I’m trying to get us into the habit of not seeing our bank balance as “how much we have left to spend this month” — I’m hoping the monthly allowance system will do that.

We have an Amazon Chase card that gives us reward points for purchases. We buy a lot of stuff from Amazon, so it makes sense. We just pay it off immediately after using it so we never accumulate a balance (and so never pay any interest.) Every $250 we spend nets us a $25 gift card. (Purchases on Amazon count as $3 for every $1 spent).

I think we’re pretty fortunate. We have a manageable mortgage and a stable income. I hear on NPR all the time about the situation many other people in this country are in and it’s just plain scary!

Ok, so here’s my mortgage story:

When Melissa and I were house-shopping, I was still working for the municipal government. I was part time and I made roughly half what I make now.  The bank approved me for a small mortgage based on that income and my credit score (I have pretty good credit. 🙂 ), provided I put 3% down. If you do the math though, half my current salary would double the portion that the mortgage takes up — that jumps it from 20 to 40% of our monthly take-home! I was fortunate enough to land my current job a month or two after we closed on the house; If we had to pay our modest mortgage on my old salary, there’s a good chance that we’d be in the same trouble many other people are in.

Side note: Our mortgage is through US Bank. I do a lot of business with them. Our mortgage rep, Jim Backmeyer, was NOT the type of mortgage rep that you read about from those scandalous companies like CountryWide.  US Bank was very clear about how much money they were willing to approve me for and while Jim said he might be able to fudge it a little bit if I put more down, he was very realistic and didn’t want to sell me a mortgage doomed to fail.  So thank you Jim, and Richmond US Bank, for being ethical about your mortgage sales.

I’m doing some pro bono consulting for a few friends who need some help with financial planning. Both are having trouble with collectors! One of them has had collectors call as late as 2am, and even sent fictitious legal summons. My friend called the Wayne County Courthouse and they knew nothing about it.

There is a program on Nightline (ABC, I think) with Chris Hansen (of “To Catch a Predator” fame) coming up in a few days about Debt Collection and the unethical practices some companies will do to try and scare people into paying. I encourage everyone to watch that and also check out a movie called “Maxed Out“, which deals with similar stuff. Some debt collectors are the scum of the earth, and it’s really important to spread the word about the FDCPA (Fair Debt Collection Practices Act). I’ve written about that before, though.

If you’re having trouble dealing with collectors, I might be able to answer some questions (unofficially, as I am neither a lawyer nor a financier — more of a “counter-collections hobbyist”).  Shoot me a message.