Kick Debt's Butt

I've canceled lawn service and as of today, have officially started building up my lawn care inventory!

I went to Sears and purchased a McLane motorized reel mower (shown in image to the left). I looked around on Craigslist for quite a while, and actually found a few reel mowers, but felt like I could probably use for a couple of hundred dollars extra, the peace of mind of a 2-year warranty and just the fact that it's a new mower means I should be able to get a decade or more out of this.

In addition, I have a Bermuda grass lawn and frankly, a rotary mower can really chew up the grass...for those of you who don't know, the reel mower is what they use to keep a golf course neat trim.

This purchase has several impactions:
1. I added to my Other Consumer debt column - not a good start I know - but I was able to buy the mower at 12 months same as cash, which means I should realize little to no disruption in my current cash flow cycle, meanwhile I'm owning the mower outright. Here's the new chart:


2. It means I have to also need an edger.

3. Finally, I think my son may actually be able to use this mower to generate some extra cash for himself...particularly once people see the quality of cut it leaves behind.

I spent the greater part of five hours getting organized.

Just as with any business project that I'm engaged, I had to gather data in order to create the As Is picture of my finances.

How do you make gathering data easy? First and foremost, getting organized is key.

By that I mean, going through old paperwork and throwing stuff away, creating files and folders for all of your open accounts, creating archived files for all of your old accounts - especially if you want to ever look at trends - and generally creating a personal finance environment where paperwork, accounts, etc., is readily available.

Over the last month I already had the sinking feeling that we were swimming in debt. I would get the credit card statement each month and the only purchase listed was the periodic finance charge - which by the way was hitting $xx0.00 bucks a month.

Plus my monthly minimum was upwards of $x00, so I knew it was time for a change. I had to get out from under the finance charge so I decided to play Credit Card Roulette and transfer the balance to a couple of 0% APR balance transfer options.

We already have a high credit limit so I couldn't move it to just one card; instead, it's now spread across three but with zero interest through September 2009.

My goal is to pay all of it off before then! Auspicious? yes, doable? also yes.

I will have to wait until I get my first statements before I truly understand the payment requirements, but because I now have moved all my consumer debt to 0% interest payment options, I am going to squeeze everything I can from month to month and pay down one card, while paying just the minimums on the remaining cards.

My long term goal is to leverage this approach, I'll call it the "Snowball Approach", across all of my personal debt categories. I still don't have a complete picture so I'm not sure how long this will take, but I hope to be able to share my entire plan within the next few weeks.

I think the key to playing balance transfer roulette is staying organized and NOT NOT NOT using the cards. Otherwise, you find yourself in a doubly deep hole.

I'm going to spend this next year operating under Memaw's number one rule of personal finance, the rule credit card companies hope you never learn, which is don't buy it if you can't afford it.

I'm getting ready to cancel lawn service. I expect that will free up close to $450 per year.

Taken month to month that doesn't sound like a lot AND I will have to buy my own lawn equipment and invest the time to do it myself, but I've done a quick benefit / cost analysis and decided that lawn service is an easy target.

A couple of other factors that weighed in to my decision:
* I'm healthy and not too mention I have an able bodied teenage son! Isn't mowing the lawn a right of passage for teenagers anyway?
* My lawn isn't huge - it should take me no more than an hour and half once a week during peak growing season.
* I kind of like cutting the grass.

I've provided my quick analysis below for your review:

I’m getting ready to storm the castle, and like Wesley getting ready to take on Prince Humperdink, we need to list our assets and liabilities.

I’m not talking about financial assets and financial liabilities, I’m talking a gut check type of list that says, this is what I’ve got going for me and this is what stands in my way.

Assets:
1. Me – I’m naturally cheap. In fact, the great irony of this mountain of debt I face is that, for years, I was exactly like my mother! I never paid interest, never missed a bill, always had a savings account, and basically lived debt free.

What happened? For me, I know exactly when it happened. I bought a house. Ever since my first house, I’ve surged in to debt and out again as I added window treatments, furniture, basketball goals, and the list goes on and on.

2. Intelligence – I know enough to know that we are in trouble.

3. Business acumen – my job requires me to be on top of client problems like white on rice. I can improve processes, create status reports, understand gap analysis, make recommendations, etc. all day long. It’s high time I turn some of that back on my own business. That is the business of personal finance.

4. Support – my mom and grandparents are fantastic role models for debt free living. I know I can turn to them for advice.

5. Technology – I am computer literate, have laptops, desktops, internet access, etc. and the ability to figure out how to use these tools in my favor. You’re reading a perfect example of how I plan to make access to technology an asset in my debt battle.

Liabilities:
1. Sports – first let me qualify. I love love love the fact my kids are involved in sport. By itself it’s not necessarily a liability, but the reality is, having a family is expensive. I have soccer and cross country dues, uniforms, balls, tournament fees, etc. Basically a whole set of variable costs that make budgeting that much more complicated.

2. My sweet wife – right now my wife doesn’t work. Right now, my wife likes to occasionally engage in what she calls, “retail therapy.” This means that sometimes, when she may have a bit of the blues, she’ll hit Target or Costco and load up on CDs, DVDs, or other superfluous purchases which zap our reserves’ or push our credit card debt that much further out. This is what lands her in the liabilities column.

The flip side is that if my wife got a part time job, she would have less time to fret, feel more engaged and productive, and could become a part of the Kick Debt’s Butt solution rather than adding to the problem.

I know that until she is 100% on board, this effort will fail. And as soon as that happens, she gets moved to the assets column.

I've collected some of the words of wisdom from my frugal family to share with you here. My dear grandmother, affectionately known as Memaw, never went to high school and worked hard her whole life. And with my grandfather, who also never finished high school, they worked hourly, low-wage jobs, retired early, and have a net worth in the millions!

"after you've paid everything, you should have money left over. This is called living below your means."

"don't buy it if you can't pay for it"

This is the proposal I'm bringing to the family as a way to free up immediate cash:

Natural Gas $171.04
Electricity $213.00
Water $82.52
Telephone $28.53 - flag this for later, may be able to save
Cable TV / Internet $55.10 - I need this for my job so I can't cut here
My Cell Phone $141.00 - flag this for later, may be able to save
Wife's Cell Phone $family plan
Son's Cell Phone $family plan
Car 1 Car Ins. $53.00 - flag this for later, may be able to save
Car 1 Car Gas $190.14 - flag this for later, may be able to save
Car 2 Car Ins. $36.58 - flag this for later, may be able to save
Car 2 Car Gas $24.08
Car Tags $85.01
Homeowner Dues $100.00
House Cleaners $295.56
Landscaping $50.33
House Stuff $93.33 - get specific about what we need
Grocery's $186.94
Restaurant's $598.52 - flag this for later, will definietly find savings here
Retail Clothes $195.00 - flag this for later, will definietly find savings here
Entertainment $155.56 - flag this for later, will definietly find savings here
Medical $40.74
VetBills $22.00
DryCleaning $27.22
Nail Salon $64.40
Hair $73.67 - flag this for later, will definietly find savings here
Baby Sitting $527.22
ORIGINAL TOTAL $3,705.49
NEW TOTAL $2,767.98

SAVINGS OF $937.51

What is cash flow? It's actually very simple. You understand how much money comes in and how much money goes out.

You've heard the old saying, "living paycheck to paycheck?" This saying actually describes the situation that arises from having a zero net cash flow. In other words, you spend everything you make, leaving you with nothing left over.

Ideally, you want a positive cash flow. Meaning that after you've paid everything, you have money left over. This is what Memaw calls, "living below your means."

Well, after taking a hard look at my expenses list, I see that we are actually doing a thing far worse than living paycheck to paycheck. We are coming up short from paycheck to paycheck! We have a negative cash flow. This means we are borrowing to maintain our current standard of living. Bad Bad and Bad.

By putting a lot of expenses, such as restaurants and gas on credit cards, we are actually financing our expenses plus interest no less!

As I'm still gathering the As-Is picture by collecting credit card statements, I'm not quite ready to figure out the family budget, but I am going to look at the expenses I can eliminate today before I go any further...I'm looking for any positive movement at this point.

This is the start of my monthly budget. These are real dollars lined up against real expense items. What I've done is collect some past data and averaged out my expenses per category.

Some costs are fixed while others are variable depending largely upon the season. The other big BIG variable expense this summer has been gasoline. Fortunately, we haven't driven that much, so we haven't taken a huge hit like most regular commuters.

These are averages over six months, so they are pretty close to representing what I'll need each month to cover the cost:

Natural Gas $171.04
Electricity $213.00
Water $82.52
Telephone $28.53
Cable TV $55.10
My Cell Phone $141.00
Wife's Cell Phone $family plan
Son's Cell Phone $family plan
Car 1 Car Ins. $53.00
Car 1 Car Gas $190.14
Car 2 Car Ins. $36.58
Car 2 Car Gas $24.08
Car Tags $85.01
Homeowner Dues $100.00
House Cleaners $295.56
Landscaping $50.33
House Stuff $93.33
Grocery's $186.94
Restaurant's $598.52
Retail Clothes $195.00
Entertainment $155.56
Medical $40.74
VetBills $22.00
DryCleaning $27.22
Nail Salon $64.40
Hair $73.67
Baby Sitting $527.22
TOTAL $3,705.49

One of the biggest problems I'm having is figuring out where our money goes from month to month. Here is a list of my monthly expenses. It's huge!

My next step is to put all of these expenses in to a spreadsheet and start tracking!

My mom - the most responsible financially minded person I know - doesn't believe in budgets. But she has the luxury of not being in the bottom of a financial well. I have to know what we are spending on what. I need to know what I can get rid of altogether. I'm putting the cart a bit before the horse by suggesting a look at what to cut, but at the rate we're bleeding money, a first pass can't hurt. At any rate, this is the start of my budgeting process.

Monthly Expenses List
Natural Gas
Electricity
Water
Telephone
Cable TV
Wife's Cell Phone
My Cell Phone
Son's Cell Phone
Wife's Car Ins.
Wife's Car Gas
My's Car Ins.
My's Car Gas
Wife's Car Tag
My Car Tag
Wife's Car Gas
My Car Gas
Homeowners Dues
House Cleaners
Landscaping
Misc. House Stuff
Groceries
Restaurants
Retail Clothes
Entertainment
Medical
Vet Bills
Dry Cleaning
Nail Salon
Family Hair
Baby Sitting

So far I've talked about the house and the car. These are arguably the two most excusable debt items we should carry. In fact, as far as non income producing debt is concerned, these are the only two debt items we would be excused to carry.

Now I'm moving on to a very painful subject for me. Credit card debt. I have about $xx,000 in high interest credit card debt. This is the debt that is sucking the life out of our family finances.

My grandparents grew up in the Great Depression. They've never owned a credit card in their lives. They never earned a lot of money. They paid case for their house, their cars, and still write checks or pay cash for everything they buy.

My mom grew up as a young adult in the seventies. She has always owned a credit card, but has never paid a penny in interest to a bank. She too has never earned a lot of money. Her house is paid for. Her and her husband's cars are paid for (eight in all - they collect them). She will be able to retire at age a very young 60 on three acres with money to spare. She too writes a check or pays cash for everything she buys.

I grew up as a young adult in the nineties. I too have always owned at least one credit card, and I have paid tens of thousands of dollars in interest. I make more money than either my Mom or Grandparents have ever considered. I am the only one in my family with a college degree. My job takes me all over the world. I use sophisticated tools like online banking, buy things on interest free credit deals, and usually stumble in to more credit card debt and as such I have a negative net worth with no end in sight.

A large reason for this situation is my inability to handle our consumer debt.

At least once every four years or so I get inspired. I'll spend about a week, creating a spreadsheet to track everything, get a spending plan in place, and start to attack the debt.

And at least once every four years, I look back over the previous four years and wonder, "how in the heck did we get this far underwater?!"

My take on it at this point is that we lack discipline. We bankroll our lifestyle through credit rather than through means.

I've talked with my grandmother and my mom about this fact and I will share with you a bit of what I'll call Memaw's wisdom. As is often the case with family finances the answers are quite simple.

Memaw says, "don't buy it, if you can't pay for it"

Time to get the spreadsheet out and figure out what I owe to whom and when it's all due.

Our car situation is a bit silly.

My wife has a nice car...a very nice car...with a very not so nice car note. $xx5.90

I have a car...a not so very nice car...with a very nice car note. $0

My car is old, has relatively high miles, but is paid for. Her car is new, has relatively low miles, and we still owe about $xx,000 on it.

To make matters worse, her car is an SUV. To make matters even worse than that, it requires premium gasoline and costs a fortune to maintain.

As these first few posts are simply an accounting of where we are at, I'll leave it at that.

I am the sole earner for the family and I make, but most standards I believe, good money. Low six figures.

But a couple of years ago, I didn't make quite that much and my wife found a great job with a real estate company. We decided to refinance our second mortgage and replace that interest only loan with a traditional mortgage.

*Admission* - I don't even know our interest rate on that loan!

We were carrying a lot of credit card debt at the time and thought - hey, we are smart and disciplined enough to cash in equity (which we had at that time...in fact we had about $xx,000 in equity), that we can pay off our credit card debt AND do some nice things to the house.

Now fast forward to today. We paid off our that old debt and kept some extra money in the bank. But now our monthly house note is $xx00 dollars. And this is the death trap - we've accumulated another xx,000 plus dollars in credit card debt! So instead of using any extra money to pay down the new mortgage, we got right back in to our old free spending routine and landed ourselves in a much more dire situation. In fact, the interest alone on our credit card debt could be hammering away at the second mortgage.

We are in what I call the "Equity to Credit Card Death Spiral."

Our second mistake:
We increased our housing debt burden and rather than take measures to pay that down, we increased our credit card debt again!

We own our house. Rather, we co-own our house with a couple of different lenders.

Well here we are, a few years down the road, and the bottom has fallen out of the real estate market. Many of our friends in the neighborhood have already bailed out and we are one big event, a job change or major medical problem, away from following suit.

So our first mistake:
We ignored those old tried and true front-end and back-end housing debt-to-income and total debt-to-income ratios that responsible mortgage lenders have used for decades.

I am a management consultant for one of the most prestigious management consulting firms in the world. I have helped some of the largest companies and organizations on the planet solve some their most complex problems.

I am a classic case of "physician, heal thyself." With that admission, I'm going to begin managing this project; the "Kick Debt's Butt" project, like one of the projects I get paid good money to manage.

The start of any good process improvement exercise is an assessment of the current situation. In consulting parlance, we call it determining the "As Is" situation.

To get out of debt, you must first create a clear picture of where you are at, before you can possibly determine how far you have to get there and what steps you need to take.

I will be spending the next few days or weeks; however long it takes, determining where we are at in terms of debt and income.

So this is it. The battle begins here. And frankly, I'm looking at this like a battle. This blog is me forcing me to deal with me! I'm a master at delusion and finally have decided that enough is enough.

I realized today, when I heard the postal truck's diesel engine grind toward our mailbox and felt an emptiness in my stomach at the thought of more bills that I can not pay, that I have to act now before it's too late. In fact, I'm not exactly sure, but it may already be too late.

This post is the starting point and I think in the spirit of waging the war on Kicking Debt's Butt and getting down to business, I will not spend any more time soliloquizing.

I will do my best to answer your inquiry within the week! Meanwhile, please feel free to share our quest with other like minded or like walleted ;-) families.

We can do this!

It's important to document where we are at as we begin this fight.

Here's what we know:
We have a house. We have two mortgages. We have two cars. We have one car note. We have two kids. We have huge expenses. We have huge credit card debt. We have one income...mine. We are smart people. We are in trouble.

Here's what we don't know:
How much we owe on either mortgage. How much we owe on the car. How much we spend each day, week, month, or year on anything.

Here's where we want to be:
First, we want to be free of all consumer debt. Next, we want to be free of all non income producing debt. Finally, we want to be financially independent, with the freedom to invest wisely and enjoy life free from financial anxiety.

ABOUT ME

Hi! As I write this introduction, it's August 2008.

I'm a husband and father in charge of running the family's finances.

I am finally able to admit that I have been failing at that task.

From the outside, things look great. We live in an awesome neighborhood - a country club no less- we drive nice cars (or at least my wife does;-), and we do a lot of fun stuff. But our books are in shambles and our financial health, like so many others, is balancing on a razor's edge.

One slip and we would lose it all. So I decided, enough is enough!

We have mortgaged ourselves to the gills, carry enormous monthly expenses by my standards, and have got to get out from under this dark cloud of financial anxiety and uncertainty.

ABOUT KICK DEBT'S BUTT

Sure it's aggressive, but I think about debt as a threat, and I don't just pay it down, I attack it with whatever money I can. This blog will help me to track what is working, to vent, to share ideas, and hopefully to find support from others in similar situations. Stay diligent and disciplined and Kick Debt's Butt once and for all!

By the way, I'm not a financial professional so this is grandmotherly advice, not professional advice, and should be treated as such.