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I Used to Be Drowning in Debt July 21, 2006

I used to be drowning in debt and paid hundreds and hundres of dollars (who knows, maybe a thousand?) a year on credit card interest rates. Until one day, it just dawned on me that unless I changed my lifestyle, I would not only be treading in debt but the credit cards would slowly pull me under, until one day, I’ll drown and not be able to come up to gasp for air. I’m not sure what it was, it was just a sudden decision to not spend anymore, not worry about what other people thought of me, not worry about labels on clothing. When you’re young (16-25), what matters to most is what other people think of you and being accepted…and I’m a pretty self confident guy. Now that I’m in my early 30s, I don’t think about how other people look on the surface, but who they are. I hate the idea of “keeping up with the Joneses” because that’s essentially what I was doing when I was young. I tried to keep up with the rich kids who had trust funds and bought expensive meals, went on weekend trips to Vegas, and had supposed high profile jobs.

I spend every extra dollar on credit card payments and it didn’t seem like I was making much progress. When I realized that I was paying down a $1000 on cc payments but just treading, it was time to change. Paying down $1000 and not spending anything got me back and after years and years of almost drowning, I finally was on dry land.

For many Americans who are drowning in debt who are trying to keep up with everyone else around you, stop thinking about how other people judge you. Because the you’re the most important judge of yourself, not the dude who has a BMW 650i with the 18″ rims or the 16 year old whose parents throw their child a $100,000 sweet 16 party who thinks you’re lame because you don’t wear True Religions or own the latest Botkier Bag.

My Story on Getting to $0 Credit Card Debt and Staying There June 30, 2006

On my continued quest to the next income bracket, I am grateful for not having any more credit card balance. Since college I had a credit card balance in the thousands and got pretty good at managing the servicing of my debt by taking advantage of 0% balance transfers, limited time low balance offers, and credit card issued checks. I had up to 7 credit cards and at one time had $4,000 of credit card debt in college and $13,000 debt post-college. The interest rates on those cards were between 15% and 23%. I wasn’t financially saavy and didn’t consider negotiating rates, calling to ask to cancel that occassional late fee, or taking it seriously. It wasn’t easy, but it took some dedication, education, and a commitment to myself that I will change my lifestyle to erase that debt. Now, I only have 2 credit cards and $0 balance on both. It’s been more than a year that I’ve had a $0 balance, so like a successful diet, I’ve removed my debt and kept it off. Once you pay off debt, the race isn’t over. You still have to work hard at keeping it at $0. I’ve used the money I would have used to pay off the credit card and saved up for a home and put in $15,000 per year in my 401k retirement fund. There’s so much freedom in having the choice to direct your earned money to YOU.

For those of you who have credit card debt, you can achieve financial freedom. Read up on all those great PF blogs out there and take the debt and shove it out of your life. There’s so much collective wisdom that everyone has to offer from sites such as PFblogs.org (a great collective personal finance site, by the way), and I wish I had that back in college. Anything is possible if you decide that you don’t want to be a slave to money and work hard at keeping the debt out of your life. Once you get there, imagine your life with that extra money and the relieved feeling you’ll have. This is the best step you can take to improve your life and get to the next income bracket to give you choices.

PS: ING Direct Savings Account just increased their savings rate to 4.35% today. I’ve parked my money there since I don’t need to put all my extra money into Visa or Mastercard. :P

Debt to Income Ratio - My Example June 8, 2006

Because of our recent move, I haven’t been able to post as much in the past few weeks. But I finanlly had some time to look at my housing costs and provide you a real world example of my debt to income ratio.

You know that debt to income ratio is a comparison of gross income to housing and non-housing expenses. According to the FHA, the monthly mortgage payment should be no more than 29% of monthly gross income (before taxes) and the mortgage payment combined with non-housing debts should not exceed 41% of income. (aka “29/41 qualifying ratio”)

Calculating the Debt to Income Ratio

To calculate your debt to income ratio first calculate your income before taxes. Next calculate your fixed debt payments like credit cards, auto loans, and school loans. Don’t include living expenses such as grocery, utility bills, or phone bills.

Example:
Gross monthly household income: $5,000
Fixed monthly expenses: $1,200

Debt-to-income ratio calculation:
$1,200 / $5,000 = 24.0%

Generally a ratio of 36% is considered high and creditors prefer people with lower ratios somewhere around 20%.

Here’s my ratio:

Old: 15%
New: 30%

We doubled our ratio, but because we no longer have any other debt, this ratio used to be approximately 25%. We felt that because of our age and financial ability, we made the move. At 30%, it’s on the higher end of the ratio, but our financial advisor thinks it’s ok. We don’t have any car payments, no gas to purchase, no school loans. Also, in NYC, it’s tough not to own property and be in the lower end of the debt to income ratio. For older people, it’s important to lower their debt to income ratio so that they can live a debt free life in their old age. Younger couples tend to have a higher ratio and probably should decrease this by 1% each year (more on this for a future post).

Minimum Wage vs “Maximum Wage” in the USA May 26, 2006

During his presidency, Bill Clinton gave states the power to set their minimum wages above the federal level. Since then, 18 states have raised the minimum wage above the federal level of $5.15. On Tuesday, January 17th, 2006, Maryland became the 18th state in the nation to enact a law that will make Maryland’s minimum wage higher than the federal. Santa Fe’s $9.50-per-hour minimum wage is the highest in the nation, and there are plans to increase this wage to $10.50 in 2008.

$5.15 x 40 hours = $206/week x 4 = $824/month x 12 = $9,888 per year.
$5.15 x 60 hours = $309/week x 4 = $1,236/month x 12 = $14,832 per year.

$9.50 x 40 hours = $380/week x 4 = $1,520/month x 12 = $18,240 per year.
$9.50 x 60 hours = $570/week x 4 = $2,280/month x 12 = $27,360 per year.

For comparison, let’s compare that with a first year lawyer associates at a law firm or a physician who makes $150,000 (assume a typical 60 hour work week):

$52 x 60 hours = $3,125/week x 4 = $12,500/month x 12 = $150,000 per year.

And let’s compare that with a Fortune 100 CEO median compensation of $17.9 million (”maximum wage”):

$6,215 x 60 hours = $372,916/week x 4 = $1,491,666/month x 12 = $17,900,000 per year.

That’s over 1200 times more than someone making minimum wage working a 60 hour week and 120 times more than a lawyer or doctor making $150,000/year!

Ref:
- Wikipedia, US State minimum wages
- CEO pay soars in 2005 as a select group break the $100 million mark, USA Today

You’d Think This Person Could’ve Lived Off of His Royalties Forever May 19, 2006

Imagine this scenario:

Assets:
A) $15million per year revenue from royalty fees ($300 million total royalty fees (from a $47.5 million purchase of asset (nice return!))
B) $20million per year revenue from business ($400 million total revenue)

Liabilities:
1) $300 million bank loan (to pay off spending sprees that includes upkeep for a California home) - $4.5million monthly payments

Expenses:
- Spend $9000 per night at hotels in Dubai
- $20million lawsuit settlement
- $8million annually on plane charters, artwork, hotel, and travel expenses.
- $4million on home upkeep
- had to sell a 50% stake in asset A for $100 million to pay debt burden.

“If you want to take a trip to London, that’s one thing. If you want to continue that trip and have your entourage of 15 or 20 people go with you, it gets expensive.”

He “became fixated on obtaining expensive possessions and feeding his ego by listening to the advice of hucksters and imposters.” If he read any of our personal finance blogs (or pfblogs.org), he might not be in this situation. But then again, who’d think he would be on the brink of bankrupcy? Who am I talking about? It’s…Michael Jackson. I feel bad for him, but do you think he could cut down on the hotel and travel bills? Maybe he could sell some real estate? He can save on phone bills too if he signed up for Vonage like I did. He can even call Europe unlimited minutes! Or he can cut down on charter flights to Europe and use Kayak.com to compare flights. Ha, I’m being facetious, but I’m sure there’s a lot of cash flowing out where he can save. Live below your means and you won’t have these problems! What else do you think Michael Jackson could’ve done to prevent his financial situation?

Source:
What Happened to the Fortune Michael Jackson Made?
By TIMOTHY L. O’BRIEN, NY Times
Published: May 14, 2006

Lazy Spendthrift Generation Y? But Who Spends All of the Gov’t Revenue? May 15, 2006

A day after Hillary Clinton lashed out on Generation Y’s work ethic, her daughter, Chelsea, called to complain. Clinton apologized and didn’t mean to convey the impression that they don’t work hard.

Backing away from her assertion that the current generation is lazy, Senator Hillary Rodham Clinton said on Sunday that she simply wanted to “set the bar high” when she told an audience last week that young people today “think work is a four-letter word.”

Flexo of Consumerism Commentary mentioned that Chelsea is a Gen Y’er that worked hard for that money, just like every other child of super-popular people. Maybe not the super-popular (Paris and Nicole come to mind), but there seem to be plenty of Generation Y of the super-rich that work hard. Both Bill Gates and Warren Buffett (number 1 and 2 richest people in the world) vow that their children will not receive an inheritance to encourage them to make their own way in the world as are Gen Y’ers like Chelsea Clinton, Jamie Johnson and Nicole Buffett. It’s good to see that there are rich people who want to raise hard working, responsible citizens of the world.

‘IRA’ of Inchoate Random Abstractions, also posted about Gen Y’ers working hard. Although some Gen Y’ers have a sense of entitlement, but I have to agree that we (Gen X and Y) will have to pay for the boomer genration’s over-spending habits. Who’s going to end up paying for the $9trillion National Debt?

Source:
Chided by Daughter, Clinton Says Youth Are Not Lazy
By ANNE E. KORNBLUT and RAYMOND HERNANDEZ, NY Times

Rich People Love Mortgages May 9, 2006


You’ve seen all the media attention about how mortgage rates are rising and homeowners are either locking in rates before they go up or refinancing mortgages from adjustible to a fixed rate. A quick check of mortgages shows that a standard 30 year fixed rate is only 8 basis points (0.08%) higher than last month’s rate.

But with mortgage rates around 6.19%, someone in the top 35% tax bracket would be paying closer to 4% on the borrowed money. The very rich are more comfortable with debt and they seek out loans for things they could pay for outright. Interest Only loans used to be for wealthy clients who will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money and beat the 4% they pay on the mortgage.

The reasons for taking on more debt range from buying artwork, yachts, airplanes, or investing in funds. A very rich person may easily be able to pay $20million cash for art but the opportunity cost of selling something else and paying tax on it is far higher than borrowing money from their private banker. As for mortgages, with the tax deductions they can take up to the $1million cap, the wealthy can make up the interest rate they pay by investing in taxable securities by leverage their real estate holdings.

Sources:
(mortgage chart courtesy of Bankrate.com, as of 5/9/06)

China’s Savings Rate vs. USA’s Savings Rate..are we (USA) doomed? March 9, 2006

From a CNN Money article:

Last year China saved about half of its gross domestic product, or some $1.1 trillion. At the same time, the U.S. saved only 13% of its national income, or $1.6 trillion. That’s right, the U.S., whose economy is six times the size of China’s, can’t manage to save twice as much money.

And that’s just looking at national averages that include saving by consumers, businesses, and governments. The contrast is even starker at the household level — a personal saving rate in China of about 30% of household income, compared with a U.S. rate that dipped into negative territory last year (–0.4% of after-tax household income).

Savvy Saver had an entry about some bloggers who say that we may be saving too much. Within the personal finance community, that may be true to an extent, but America as a whole is not saving enough for retirement. If we continue to use our homes as a source of spending money, we’re doomed.
Source:
The U.S. and China’s savings problem
By Stephen Roach
March 8, 2006

America’s Debt Diet on Oprah summary February 19, 2006

My wife showed me Oprah’s show on Friday titled America’s Debt Diet. Oprah is teaming up with Jean Chatzky, David Bach and Glinda Bridgforth, three of the nation’s top financial experts to create a step-by-step action plan that may help get you out of debt. I think it’s great that she is bringing attention to America’s personal debt problem. There are three families that are sharing their money problems with Oprah’s audience (i.e. half of the women in America). Watching this made me cringe. Here’s each family’s summary:

The Bradleys:

The Egglestons:

The Widlunds:

I noticed while watching the show that each family says that they are “horrible with money”, but it’s not the lack of income or hardships, rather it’s more about their relationship with money and maybe it’s a way to escape their personal problems. From the outside these families are happy and successful, but on the inside, the money problems are tearing the couple (and families) apart. As Oprah noted, eliminating debt is about financial and spiritual freedom. I can’t imagine how much stress and anxiety that these families (and others) have about the amount of debt. Makes me wonder, do I know anyone like them?

Craigslist Money Forum…useful or not? February 15, 2006

Occasionally, I look on Craigslist’s money forum to look at trends in the topics of discussion. I’ve noticed that there are lots of questions about how to save more money. It seems like a lot of people are struggling with debt payments and increases in living costs, so saving more is not an option for some people. CL is a good place to start, but sometimes you get some BS posts, but that’s anywhere on the net.

A couple of threads about budgeting and managing loans:

Do you think CL is useful for money information?

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