Fix your Finances

Back in 2009, my finances were in pretty rough shape. They had actually been in bad shape for a few years, but for about 3 years from 2005 to late 2007, I ignored them and just kept telling myself that I couldnt pay down my debt because I didnt have income from a full time job. In 2008 (while I was wrapping up grad school), I realized that my debt was a serious issue and would only get worse once my student loans got out of deferment. At that time, I had about 5k in credit card debt, and about 23k in student loans that I wouldnt have to start paying until 6 months after I graduated. All of this debt was on about 12k in yearly income, which was about to go up once I finished up and got a job. My situation was dire, but thankfully not hopeless.

What I did to Pay off My Debt

One of the first things that I did to pay off debt was to keep living like a starving college kid (because I was). Aside from gas and food, I hardly spent any money anywhere else. I knew that nothing was too small for me to focus on – any little bit of cash I could save could go to my debt. I knew my balances on my student loans before I left school (and like everyone I had 6 months of grace period), and immediately went after my credit cards.

Focus on the Big Things First

I was reading a lot of financial blogs at that point, which gave me great advice. I decided that I needed to focus on the big expenses first. This included things that made up a large portion of my budget like rent, and also monthly recurring expenses like the cable tv bill and car insurance. We can start with rent first.

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Lowering your Housing Expenses

Lowering your rent or mortgage payment isn’t easy, but it can free up a huge amount of cash for you to use to tackle your debt. When I moved from my grad school apartment ($290/mo) I actually ended up moving to a bigger, more expensive city but kept my share of the rent (I lived with my then-girlfriend, now wife) to $375 per month. We lived in a small house (750 sqft) that was within walking distance of the downtown area and not too far from parks. Instead of living in a house to myself, which would have cost about 800/mo, I spent less than half that on rent and used the rest to pay down debt.

Of course, this isnt as easy if you’ve got a mortgage. To lower your housing payment if you own your home you have two options: move or refinance. Lets say that you dont want to move because you like your house, it’s in a good school district, your kids have great friends or whatever – that’s OK. If this is the case for you, look at refinancing the remaining balance of your home loan to a longer term. For instance, if you are 11 years into a 30 year mortgage, you can refinance to a lower monthly payment and extend your note out to 20 (or even 30) years. Of course, this move wont actually reduce your total debt, but it will increase your cash flow (which you can then use your extra cash to pay off higher interest debt, like credit cards, student loans or vehicles). You will pay a bit more interest through the life of the loan if you extend the time period, but interest rates on things like home mortgages are in the 4% area right now, and you’ll be far better served paying a bit more in interest on your house over the long term than you will be paying 17-22% interest on your credit card. You can easily free up a few hundred dollars every month by extending the term of your note which will help you pay down other debts faster. When you’re finished paying down your consumer debts, you can attack your home mortgage with all the payments you used to be making on your debts and bring the balance down fast.

Lets say that you are able to/want to move. Doing this can be a great way to lower a lot of your expenses quite a bit. Before you start, think about what you like to do most and where you spend most of your time during the day. If you’re like most of the population, you spend a fair amount of time every day at work, or going to and from work in your car. Figure out what things you would like to live near when looking for a new place. Do you want to live near a park, or an urban area with shops and restaurants? Do you like to spend your free time outside? When you’re looking for a new place, try and figure out how much you will need to spend on gas and other auto expenses (or if you want to sell your car), and factor that into your costs. You may end up paying a bit more in rent, but you will not be spending near as much money on gas, so you’ll end up with more money to throw at your debt. You may also have the added benefit of exercising more because you can now walk or ride a bike to work.

Action Step: Look into refinancing (call around to banks in your area or search online) your home loan to free up cash, or consider moving to lower your rent or commuting expenses. 

Once you take care of the housing costs, you should start looking to lower your other fixed monthly costs. These are things that you pay every month that can vary but don’t have to. This includes: gas/electricity bill, water/sewer/trash bill (mine are combined), insurance (car, life, renters), phone(s) cell/landline/both, internet/DSL, cable TV, Netflix, credit cards, car payment(s), and any other bills that you pay every month. All of these added together make up your “monthly nut” or the minimum amount you need to pay all your bills. There are a lot of bills here, so we will break them out step by step.

First: Credit Cards.
These are the most harmful to your situation and they need to be taken care of first. Think of paying off your credit cards as an investment with a surefire rate of return (because it is) of whatever your interest rate is. Don’t worry about the balance on them – you already spent the money and it’s gone. You can’t take it back so don’t worry about it. What you need to do is start getting more of the money you’re sending them to count towards your balance. Right now you’re probably paying a high interest rate, and it probably seems like no matter how much money you send them, the balance hardly goes down. This is because most of your payments are going to interest on your balance and not to paying down your balance. There are a few ways to change this.

Option 1. The first (and best) option is to get a balance transfer card with 0% interest for a specified term (usually its a year or 18 months). Transfer as much of your balance there as possible and keep making the same payment. Without interest, your balance will go down by the amount you sent in, instead of the small amount that it was going down before. Typically these will come with a fee that is 3% of the balance, that’s OK, it will save you a lot of money in the long run.

Option 2: Call and ask for a lower interest rate. This is a good strategy as well, and ramit has a great script that you can use when calling the credit card company. Follow that script and save piles of cash.

Option 3: Peer to peer lending
This is also a good option, but I would not do this until you’ve tried all the other means mentioned here. You don’t know what interest rate will be, and could be worse than a reduced rate from the bank. The two main companies that you can do this through ate lending club and prosper.

This credit card debt is an emergency and it needs to be dealt with as early as possible. It’s almost impossible to get in good financial shape if you have credit card debt. It was so much easier once I paid off all my credit card debt to make progress with my finances and it was a huge weight lifted from my shoulders. All the savings other bills should be applied to your credit cards until they are paid off. Let’s get to those.

First, we will talk about bills you will most likely always have to pay in some form (there are ways to get rid of them but that’s talk for another day). These bills are related to your house and you can only lower them with investment. This is the bread and butter of Sustainable life blog, so let’s get to it!

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Freebies from Mother Nature

Electric/Gas bill. I lump these two together because that’s how I pay mine and how I think it is for most people. Here are some good ways to lower this bill.

Option 1: Insulation. This one is huge, and even more so for people in cold climates (or hot). If you have no insulation in your house like my wife and I did all the money that you are paying to heat and cool the house is flowing out of your house and heating up the cold outside air – we don’t want that at all. Its basically throwing money into the air and watching it blow away. You would not do that with a handful of five dollar bills, so why do it here?

The best part about this is that since it’s such a huge waste of energy, your power company usually offers to pay for all (or part) of the expense!

Acton item 1: peek around in your attic to see if there is any insulation up there. If there is, go to the next step. If there is not, continue to action item 2.

Action item 2: Research your options with the local utility. Usually (almost always) they offer some sort of subsidy for insulation. If they do, figure out what you need to do to get the subsidy.

This will take either a call to your utility or a few minutes on their website. You’ll need to an about any current rebates they have for energy efficiency, and what you need to do to qualify for them. My wife and I had to do this for our house, and you can see the steps we took here.

Once the energy audit was done, we went through the list of things they suggested and prioritized them by cost and anticipated savings. First on that list was insulation, because of the huge energy savings. After that but expense we moved to lightbulbs which were much lower cost but also had a lower return. We didn’t go out and buy a whole houses worth of bulbs either (that probably would have cost over $300) but just began replacing CFLs and incandescent bulbs when they burned out. This process will take a while but I’d rather not waste the bulbs we already purchased by tossing them out when they are still good.

Action item: replace your light bulbs with more efficient ones (I recommend LED’s and have been using this one)  as old ones burn out.

One of the other things that was put on our radar was the heat source. Our furnace is fairly efficient but I’d getting old. At some point, it will need to be replaced with a more efficient heat source. If you’re in this situation and need a new heater know that getting the most efficient one possible now will do more to save you money every month than replacing every lightbulb in your house will. The heating unit is on too often and uses so much that you can’t ignore it.

Your other major energy using “boring” appliance is the water heater. Of you’re like most people, you don’t think about your water heater ever. If you’re a nerd like me, you think about it fairly often. The one time that I know that everyone thinks about their water heater is when it’s not working right, and usually that’s right before you learn that you need a new one. Unfortunately this puts you in a poor position: you need a new water heater asap and you haven’t got any time to search around for an efficient unit that is in your price range so you do what many people will do in this situation: pick a unit based on cost alone. You will end up with a cheaper up front cost but will most certainly pay more in fuel costs over the lifetime of the unit. Even though it will be uncomfortable for a few days , I strongly recommend that you take some time when shopping for a new water heater. You’ll end up saving a bunch of money over the long term.

In Part Two, We will talk about the appliances that are always on, like your refrigerator, deep freezer and others.

Image Credits: a) Photo by Bob Jagendorf, Flick’r, b) Twelve Apostles by Fraser Mummery.

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2 thoughts on “Fix your Finances

  1. Keeping the cost of housing down is probably the biggest factor in being able to pay down debt and/or save a ton of money. I live in an expensive housing area and 40% of my income goes towards housing (including utilities). It’s just insane. Though I intend to purchase a house in this crazy expensive area in the next year or so, I do intend to sell it in 10-12 years and move to a less expensive area with cheaper housing. That will allow me to retire much earlier than planned and open up my options.

    • I have been thinking about that too, but right now we are just fine where we are at (though we admittedly have 2x more space than we need). We probably cant move to a much cheaper area, but we can certainly lower our housing costs.

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