Saturday, October 09, 2004

The right strategy...

My Jeep payment of $1008 cleared earlier this week, and I did get my $100 check in the mail, so I'm laying low for the weekend, trying not to spend too much. I did shell out $30 for a bottle of Scotch for a friend of mine. I think I'll be able to make it to Wednesday without dipping into the savings at all. Check that, I had already transferred $50 over in the middle of the week. I'll return that next Wednesday when I put at least $150 back in the savings.

I've started getting comments on my postings here, all of which are interesting and much appreciated. I'm new to the financial world, having spent many years mis-managing money, so I'm just starting to get into good habits here. In the comments, I've gotten two very different bits of financial advice. One person said:

Better, I think to pay the minimum and save as much as possible. Cash is king not available credit. Factor the minimum on your bills as a fixed recurring expense in your budget then forget it. Do not fixate on the interest charges. Instead focus on the positive: the growing balance in your savings account!

That's an interesting theory. I hadn't really heard it before, most of the advice you hear from everyone is to pay off those credit cards and other debts as soon as possible. Two other people checked in with comments and basically rebutted the above argument, one person saying:

If your interest rates are what I expect, you should immediately use up as much of your assets as would leave you with the least amount you can get by with, putting them towards your debts, highest interest rate first

That person also stated that I should be taking the money I have in savings and Money Market to pay off the credit card and also put as much of it towards my Jeep.

I guess what I'm doing is trying to strike a balance. I need to have cash in savings in case of emergency...don't a lot of "experts" tell us that we need to have an emergency fund? I may also be invited to take part in some schooling, which would take 2 months, and during that time I would still need to pay my bills. In addition, after the first of the year, it's not going to be as easy to save money as it is now. I will be paying rent, utilities and all those things which my current situation allows me to avoid. I want to have some savings already, knowing that my ability to pay ahead and create savings is likely going to do down in 2005.

I'm interested in hearing what people have to say.


Anonymous said...

Hi, my name is Ron. I was the one who posted about paying the minimum on credit cards so you can fund a savings program.

Getting out of debt is always smart but what is smarter is not getting into debt, in the first place. But here you are and what you do from now will determine your success towards your goals of no debt and getting by on part-time work.

There are couple of ways to shorten the path to those goals: One is to reduce expenses and one is to produce passive income.

Passive income is any income you don't trade for labor. Usually it is in the form of return on savings or investments. So, let's say that your bills and expenses come to $2000 a month. If all you have is earned income, you will need to gross about 125% of that or $2500 a month to have a net spendable income sufficient to meet your needs.

That is $30,000 a year or about $15 an hour for a forty hour week.

But if you have $100,000 in savings at 5% after tax income, you would earn $5,000 in passive income and could cut back on working by 15%.

But, if you could reduce your income requirements by one-half, you could immediately get by by earning one-half as much, as well. It is a much torugher row to hoe to save $100,000 than it is to be able to live on $12,000 a year.

Most people spend about 25% of their income on housing, 15% on transportation, and 15% on taxes. And we tend to waste about 10% and working costs about 10% of what we earn. That is 75%. The trick is to rein in those costs.

Take a look at your own percentages and attack the low-hanging fruit. For you it looks to be transportation costs. Right now your housing costs are nil but eventually you will need to accommodate them in your budget.

It all depends on where you live whether or not you will be able to buy a house right now but it makes sense to do so as soon as possible to fix those costs. Variable costs are what make it so hard to plan.

If you buy, I recommend a two to four unit building, this way you have income that in time can cover your own housing costs and you have an appreciating asset. Also, you can put your savings into paying off the mortgage ASAP and have even more income--maybe enough to pay the bills.

If you can do that, create a low cost lifestyle and turn your need for housing into an investment, you might achieve financial independence sooner than you ever dreamed possible.


Anonymous said...

I agree with Ron on his first statement that "[g]etting out of debt is always smart but what is smarter is not getting into debt, in the first place." However, given your high interest rate (18% on car and 12% on credit card), you should try to pay off the loans first before considering any opportunity for "passive income." 12% and 18% return is a high order to fill no matter you want to be a landlord to start a new business.

You do recognize you have a short term liquidity problem. I suggest you run the math and see at the current spending rate, whether/how much you and keep after the two month training period, and whether your current savings are enough (if not more). Anything leftover after two months is up for you to decide between emergency fund and loan repayment.

Also, do you have a chance to get your credit score? Is there a possibility you can refinance your 18% car loan and get a cheaper rate?

BTW, what's the $12,000 in TIAA-Cref? Any way to tap into the money?

MM at PFBlog

Scott said...

I'm rooting for you buddy! Congratulations on all you've accomplished. If your system is working, stick with it.