How to Make it Financially in Today's Debt Ridden World

There are three rules, among thousands of rules we live with everyday, that we need to follow if we want to make it financially. The first you've probably heard before. It is this; pay yourself first. Some will quantify this by saying you should save 10% of your gross salary. Some will qualify this by saying you should do this only when you have no debt. I say do this no matter what, but use the money to pay off debt if you have it, make it work for you if you are debt free.

We can't start over. We can't turn back the clock. If we have debt then we have it, and must target it while saying ourself first. If you have debt, STOP SPENDING. If you are, like my daughter, just starting out then you can and should pay yourself first.

How much should you save, there can be no concrete answer to this. It depends on many things such as age, amount of debt, whether that debt is secured or unsecured, if you have children, and how many, and many other reasons, just remember you have to take some amount of money each pay period and pay it to yourself.

The next rule was already alluded to; put your money to work for you. This is the rule that helps you figure out where to put the money you pay yourself first. If in debt, STOP SPENDING, this money must work to get rid of that debt. If you have no debt this money must be invested so that it works for you.

Debt is a downward spiral, investing is an upward one. If you have debt, STOP SPENDING, the only thing you can do is pay it off. If you don't have debt you must invest in some way that makes more than and rate of inflation. I shoot for 5% or more with my "must not loose" money, and a minimum of 8% for most of the rest.

Then there is the speculative money, I buy individual stocks with this money.

The third rule answers the question that some people have at this point, where do I get the money for all this? The rule is; live frugal, the counter to this rule is; not cheap. Live frugal, not cheap. You can be frugal, and very generous, just don't be cheap. The difference is great. Frugal means minding your money, cheap means wasting energy on schemes to avoid minding your money. Another way to put this rule is live beneath your means. Here is a laundry list of things to do so that you can free up some money to pay yourself first.

STOP SPENDING. Buy in bulk. Pay off high interest rate credit cards (that's what all this is really about isn't it). Shop for low airfares, hotels, and rental cars. Buy a three year old car, not a new one. Sell your six year old, or older car yourself, don't trade it in. Don't lease a car. If you must finance a car, use a home equity loan. Shop around for insurance. Auto, Home, and Life. Raise your deductibles on auto and home insurances. Know what things cost by doing research on line. www.pricegrabber.com is one sight I recommend. Use compact florescent light bulbs. Shop at a discount super store. Work out on your own, walk, crunch, jog, etc. drop the expensive gym membership. Get and use TiVo. Try Netflix. Don't gamble. Quit Smoking. Drink water not diet soda. Buy generic when there is a choice. Get your news on line, not on paper. Improve your credit score (more on this later).

Now for a story. I live in the mountains and I enjoy skiing, mountain biking, and hiking. When I go out to enjoy one of these activities, I start by gathering my equipment. Say I decide to go on a hike. I start with a sturdy pair of hiking boots. These form the foundation of my trip. The next thing I do is make sure I have some supporting equipment. Good thick socks. Abrasion resistant hiking shorts. Breathable shirt, and a back pack with other items, some essential, some that I might need if things change on my trip, and some that may be considered frivolous. I enjoy the sunshine and back off if it rains. I follow this same example with my financial planning.

I start with a good foundation, and add support. The foundation should be strong. Most experts say three to seven months net salary in a liquid account. I use the money market fund offered by PayPal. It pays 5.04% right now, and has been rated very high in the financial press. For support I have a savings account at ING Direct. I use automatic transfers from my checking account to these accounts. Other portions of my foundation and support are my 401K, a Roth IRA, and an interest bearing checking account.

Now that you have a good foundation and support system let's talk about your current situation. The important question to ask yourself is; do I have any debt, and if so what kind? You should be able to answer the first part of this question easily. If you have any loans or credit card balances you have debt. As for what kind of debt you have, I break it down into only two types, secured and unsecured. Secured debt is debt backed up by ownership of something material. Your mortgage, and or second mortgage, including a home equity line of credit, your car loan, and loans from a bank used to buy some other big ticket item. This does not include store credit to buy a big ticket item. Unsecured debt is anything else, personal loans, store or gas cards, and the dreaded credit card.

Let's take an average situation. You make $6,000.00 per month. You have two children, a house, and two cars. A gas card, two credit cards, a charge card, two department store cards, and a home equity line of credit. Let's take a look at each of these and find out some basic information on each one. Note: all amounts are monthly.

Income $6,000.00 gross $4,200.00 net. Mortgage of $140,000.00, payment $827.00, interest rate 6%, secured loan. Home equity line of credit $15,000.00, balance $6,000.00, payment $120.00, interest rate 6.5%, secured loan. Her car, two years old, $22,500.00, payment $421.00, interest rate 4.9%, secured loan. His car, 10 years old, $6,000.00, payment $0.00, paid in full. A gas company card paid off every month, but if a balance is carried the interest rate is 16.9%. Credit card one $5,000.00, balance $3,700.00, payment $74.00, interest rate 9.9%, unsecured debt. Credit card two $10,000.00, balance $8,000.00, payment $160.00, interest rate 19.9% (because you had two late payments in a row), unsecured debt. The charge card, you have to pay this off every month so you do if you use it, but you have not been able to use it for fear that you couldn't make the payment. Department store card one, $2,700.00 balance, payment $54.00, interest rate 14.9%, unsecured debt. Department store card two. $1,800.00 balance, payment $36.00, interest rate 14.9%, unsecured debt. Two children...$200,000.00. Start saving. You are currently putting $150.00 per child away.

You have a roof over your head, and are able to put food on the table. Beyond this you are living paycheck to paycheck, let's see why. $4,200.00 (your net monthly income) -$827.00 -$120.00- $421.00- $74.00- $160.00- $54.00- $36.00- $300.00= $2,208.00, quite a bit of money left over.

Now for living expenses:

Utilities $300.00 (gas, electric, water, phone). Cell phones for two people $105.00. Groceries and household supplies $550.00. Disability and life insurance from the union you belong to $138.00. Auto and home owners insurance $255.00. DSL line $45.00. Gas $180.00. Clothes, gifts, coffee, lunches at work, dinners out, books and magazines, cable TV $375.00. Long term health care for your mother $100.00. (you and your siblings bought a policy for her). Doctors and dentists $159.00. Hobbies $100.00. Vacation $40.00. Storage $52.00.

Total living expenses $2,399.00. Now you see you are living beyond your means, breaking rule three. Every month you are increasing your debt by $191.00!

Part of the information that we gathered was whether each item was secured or unsecured debt. We see in this example that there is unsecured debt in the amount of 3,700.00+$8,000.00+$2,700.00+$1,800.00=$16,200.00 and going up by $191.00 per month. This is the debt we must attack. The secured debt is still debt but I consider it second in our plan because every one should own their home, and we all need a car to get through life. Few of us can buy these things outright so the debt we incur to obtain these items is not as bad as the unsecured debt. We will be paying these loans off sooner then the bank would have us pay them, but we must take care of the unsecured debt first.

We first must come up with $191.00 each month. Have a garage sale. Cut back on cable TV. Consider dropping your cell phones. Go out to dinner less often. Stop buying coffee out. Cut back on what you put away for the children. With some or all of these, plus all the changes you make from that laundry list we talked about earlier, you should have more than 191.00 per month to work with. Let's say you are able to make up the $191.00, and end up with $274.00 per month left over.

Back to our plan. Once we have this information, we can prioritize our debt to make the most of our rule three frugality. Put all your unsecured debt in order of interest rate, if two or more debts have the same interest rate put the one with the lowest balance first. Then add in your secured debt, putting your mortgage last on the list, even if it has a higher interest rate than some of the other secured debt. Finally add the children's savings to the end of this list.

Credit card two. Department store two. Department Store one. Credit card one. Home equity line of credit. Car loan. Mortgage. Children's savings.

This is the order that you will pay these items off. So every month you should take the $274.00, and add it to the $160.00 payment you make to credit card two. Soon you will see progress toward getting this balance down. Once credit card two is paid off (YOU HAVEN'T BEEN USING IT HAVE YOU?) start to work on department store card two. It's payment will increase not only by $274.00 but also by $160.00 (the amount you used to pay to credit card two) for a total payment every month of $470.00. Follow this plan until you have all of your unsecured debt paid off.

When you get to the secured debt, change tactics somewhat. Pay $100.00 per month extra on your mortgage. Go back to the full $150.00 per month for each child. Then put the rest toward your home equity line of credit. Get that paid off then work on your car payment. Once the car is paid off (if it is less than six years old, or you want to keep it longer) put the original payment amount, in this case $421.00 in a savings account while you drive two paid for cars. Once the car is six years old, or if you drove it longer, you then add this money to the money you get from selling one of your cars yourself, and the money you take from your home equity line of credit, and buy a new (three year old) car.

You can now walk around saying to all that you are debt free. Well you have a house payment, and if you bought a car, and financed it with your home equity line of credit (along with the money from the savings account, and the sale of your old car) then some home equity line of credit debt, but this is the better form of debt and you should be proud.

Now what. You have $318.00 left over every month. That's $3,816.00 per year. This is the money that you pay yourself first with. Look to the rules to find out what you should do. Make this money work for you. You already have a plan, start funding that plan. Use $300.00 a month to get money into a safe, liquid account, ING direct or a money market fund. Put the $18.00 in your pocket and spend it, have fun, do what you want with it.

Say you want five months of living expenses, $3,882.00 (your new cost of living) times 5 equals $19,410.00 in a savings account, build that up, then max out your 401K plan, if your place of employment has one. Next buy and fund a Roth IRA. That will cost $2,000.00 per year. Do this each and every year. Next look to www.treasurydirect.com to build a T-note ladder. What the heck is a T-note ladder? I'll tell you. Buy one each of a two, three, four, and five year Treasury Note at the same time, These are sold in $1000.00 increments so in the beginning you will need $4000.00. To "climb the ladder," you buy a five year T-note when the two year note matures, buy another five year note when the three year note matures, buy another five year note when the four year note matures, and buy another five year note when the first five year note matures. Do this every year when the next five year note matures, mark it on your calendar, and do it every year.

Now you have over $19,000.00 in the bank. You have a car fund that grows every month by $421.00. You have maxed out your 401K. You have a Roth IRA, and put $2000.00 in it every year. You have a t-note ladder that you spend $1,000.00 per year on (or more if your numbers are different).

Now you can look to mutual funds. I started with a balanced fund, and then bought one each of all the index funds that I felt good about. Once these are purchased, set up an automatic investment into each one every month.

If your income is higher, or you can increase your disposable income more by living beneath your means you can put some of that money, no more than you can safely loose, into the stock market by buying individual stocks. This is a whole other article, in fact books have been written on this subject. Let's just say use a deep discount broker, or on line treading service, and do the research to buy value stocks and hold them. It is not market timing, it is time in the market.

So what if you have less, are in financial trouble, can't seem to get ahead. Have been beaten down by the proverbial rainy day. You look at your FICO score and shudder. The banks don't even send you credit card offers any more (wait that's a good thing isn't it?). OK you have to get your FICO score up. Here is a simple way to do it. If you haven't cut up all your credit cards pick the best of the bunch. If you have cut up all your credit cards then just follow your plan and you will be able to get one fairly soon. Here is the way to use it. Buy an item in the first month you start this plan. When the bill comes in the mail, pay it off entirely. Don't buy anything with that credit card (or any other) in the second month. Now when the third month rolls around, buy something again and wait for the bill to come so you can pay it off completely. Do this for two years and do not mess it up. Buy a $20.00 to $30.00 item, or take your spouse on a date, then pay it entirely when the bill comes. After two years you will not have to worry about your FICO score.

Sell investments for three reasons, a house, college, and retirement. Sleep easy every night and as Mr. Spock says, "live long and prosper."