Uncommon Cents

If you are wondering where the incredible Kyle of Rather-Be-Shopping and his regular feature is today, he’s taking a few days off to enjoy the July 4th holiday and do stuff with his family. He’ll be back next week!

I’m continuing to work on reducing my gasoline use. As you may recall, my goal–5% less gasoline use from my baseline of 10.5 gallons per week–means keeping my consumption at or below 9.98 gallons from Sunday through Saturday. Given the 24.8 miles per gallon that I calculated during my “baseline week”, I estimate that I need to drive 247.7 miles per less each week in order to meet that goal.

This past week my total mileage was 225.7, well (8.9%) below the 247.7 mile goal. My per gallon mileage appeared a bit worse, at 24.27 miles per gallon, so I estimate my total gas used for this week as 9.3 gallons, meaning for the second time in five weeks I’ve been able to meet my goal.

Averaging out the five weeks, I’ve driven 245.1 miles per week, using approximately 9.91 gallons of gas for a calculated 24.74 miles per gallon; that means that while I’ve met my goal only 40% of the weeks I’ve monitored it, my average for all of the weeks is meeting my 5% target.

It’s clear that the only way for me to make even this small dent in my gasoline use is to drive less. All of the other tips–keeping tires inflated properly, not idling for large periods of time, maximizing right turns, finding the most efficient routes, and driving the speed limit–were things I was already doing. So I’m down to the most drastic, but most efficient tactic: just drive less.

We’ll continue to monitor this and see if I can figure out any other ways to get my gasoline use down!

While this is being listed under “Basics”, it may surprise some that the argument between which to do first: save for goals (retirement, a home purchase, college education, or other long term goals) or pay off debt.

The answer I have for this argument is a bit complicated, and includes a little of both, but the short version is: both are important.

When you’re at the point of dealing with this saving vs. debt reduction argument, it’s pretty much a necessity you’ve examined your baseline budget and gotten a handle on your cash flow. If you’ve not done these, do so first! Once you’ve got your cash flow positive from month to month, let’s go ahead and work on what to do with those positive dollars.

First off, start with an emergency fund. Consider a money market or high yield savings account (possibly with ATM card and check writing, like at Capital One Direct) for this money. How large of an emergency fund? We’ve discussed this before, but if you’re considering this choice, I’d suggest having at least $1,000 in there (if, however, you’re at the point that you’ve paid off all of your unsecured debt–basically everything but a mortgage–you’ll want to bump up that emergency fund to something between three and six months of your earnings). So the first part of this answer is, “save–for a $1,000 emergency fund”.

Second, consider your time horizon: if you are less than five years away from retirement, you will want to make saving a priority over debt reduction; however, if you’re on the opposite end of that timeline, debt reduction–and hopefully debt elimination–is certainly a priority.

Third, you are likely to want to do a bit of both at the same time, the question is how much of each you do. If you’ve decided debt reduction is your priority, make a plan and stick to it. Put the majority of your positive cash flow into paying down–and paying off–that debt. Consider the Debt Snowball or some of the other options we’ve written about previously. If you’ve chosen to concentrate on savings, put the majority of your positive cash flow into that (we will discuss some thoughts on how to put your savings dollars to best use at a later date). No matter which you’ve chosen, though, make sure you pay at least the minimums on your debt promptly–late charges and possible hikes in interest fees for paying late or insufficient amounts will make it even harder to overcome these debts.

Finally, keep at it! Persistence and perseverance are the keys to your eventual financial success. There will be many difficult moments along the way, but the sooner you start–and the more diligently you follow your plan–the quicker this will all happen. A journey of 1,000 miles begins with one step–so take the step of figuring out which to work on as your first priority: debt reduction or savings.

One of my fellow personal finance bloggers, LuLuGal over at How I Save Money, is having a drawing for a gas card for bloggers who, among other requirements, blog about how escalating gasoline prices have effected them. Below is my story:

Yes, like lots of other things with rising prices, there’s no question I’ve had to make changes in my life due to the price of gas. Those of you who have been following my quest to use 5% less gasoline have seen how difficult it is to actually do, at least for me. For others who may be speeding, not keeping their tires inflated, or driving in substantial traffic, they may have more opportunities to cut into their gas usage, but since I was already driving pretty conservatively with regularly inflated tires and without much traffic, it was much more difficult for me to make much headroom there (although I did experiment with different routes).

In the end, what using less gas came down to was driving less, and given that I live in a location that’s a mile from the bus line (which for me is impractical for work given my two jobs), it’s really come down to making changes in my weekend and holiday activities. I clearly have to choose what social or family events I can go to in order to make much headway on gasoline consumption. I’m doing more than that, but I think the effect of those efforts are minimal: planning ahead to group together what would be separate trips to eliminate unnecessary driving–I will commonly park in a central place and walk to the various points I need to reach from there (for instance, I will park at a shopping center near me and go to the Long’s and First Hawaiian Bank in that shopping center, go across the street to the larger mall for their 99 cent store, and cross another street to reach the post office where I would previously have driven across at least one of those streets previously). I’m also keeping very close track of my mileage, the same way I have with my spending for years–writing down where I go on what day and how many miles I’ve traveled. Finally, I’m researching which gas stations seem to have lower prices without going out of my way and trying to maximize my use of my 5% reward on gasoline purchase credit cards to try to get any discount possible. In fact, that maximizing is going on in a way today; I typically fill up on Sunday, even though the tank’s close to 1/2 full; this week I’m waiting until Tuesday. Why? My credit card statement closes on Wednesday, and the gas station I go to regularly typically takes two days to process my charge and have it end up on my statement, so I’ll be able to avoid coming up with the cash to pay for that gas for another month!

So while I’ve at best been able to make a rather minor dent in my gasoline use and bill with these steps, I’ve managed to make some progress–but more clearly, the gasoline price hikes have definitely had an effect on me and my behavior.

Speculation is a way of choosing rather high risk investments to try to make a profit from a projected positive price movement. Speculation is different from investment in that speculators acquire much more risk and hope to realize their gains in short periods of time. Speculation is sometimes successful and sometimes unsuccessful; both outcomes can be seen in real estate over the last few years. Those who entered the real estate market in the year 2001 and sold within the next two to four years likely did exceedingly well; those who entered the real estate market in 2005 hoping to make a substantial amount of money by selling their properties today are likely facing substantial losses.

Some speculators hedge their positions to try to protect against substantial losses; in addition, some speculators will use leverage to try to maximize their profits in their investments. For instance, if I believe that oil will continue to go up in price, I may sell my current investments and take out a home equity loan and buy oil with those funds. As you can likely derive from that example, a combination of leverage and an incorrect speculative investment can lead to financial disaster. Some speculators make tremendous amounts of money; others lose the same. Be very careful when considering an investment that’s speculative!

No one, including me, is immune to temptation.

I have wanted a GPS for some time. Recently I learned of this offer via a blog post at Frugal Shopping With Julie. No, I didn’t need a third Discover card (I have a regular one I’ve used forever and a day and the Discover Open Road for 5% back on gas), but I figured one more wouldn’t hurt, so I applied and got the card.

In order to qualify for the GPS offer, I actually had to use the card! This doesn’t surprise me, but I had to read the fine print to figure that out; of course, at the same time I noticed the 0% balance transfer offers (with 3% fee, so much for 0%) and 0% interest on purchases for a few months.

All of this while I’m trying to figure out what to buy to activate the GPS promotion. What to buy with the card?

The best answer: something I would normally be charging anyway, like groceries at the store this week.

The answer running through my head: something I really want, like a Cradlepoint router or an Apple Airport Extreme or a Nikon D40. Something I don’t have the money to pay for right away.

Stop. Breathe. Think.

Buying stuff that I can’t yet pay for with offers like, “0% interest for the next year!” is exactly the kind of thing that got me into financial straits years ago. The way to stay out of those kinds of straits is to avoid going down that same trap. I’ve been fooled once; I’m not going to be fooled again.

That doesn’t mean I am not tempted. The difference between now and then, however, is I can manage that temptation without giving in to it.

In the meantime, I got some organic peanut butter and crackers at the store the other night, and used that new Discover card then. I’m hoping that I get a new GPS in the mail soon, but what I definitely won’t get is into debt, zero percent or not.

Let’s review: I am continuing to try to get my gasoline usage pared to 5% less than what I established as a baseline a few weeks back. In order to do so, I determined I need to try to keep my weekly mileage at 247.7 miles or below; 247.7 miles would use about 9.98 gallons of gas. Last week I had my first success in meeting the 5% goal. How did things go this week?

Not quite as well.

For the week ending on Saturday, June 21, 2008, my statistics were 265.6 miles driven, approximately 24.80 miles per gallon, and about 10.71 gallons used this week–all over my goal. This time the culprit was a funeral on Saturday night that was a considerable distance from home–almost 38 miles round trip. Without that trip, I would have met my goal for the week. That is, unfortunately, three out of four weeks I’ve failed to meet my goal of using 5% less gas.

However, if you combine the total mileage and gas used of the four weeks, the result is interesting: 999.8 miles driven and 40.23 gallons used. Divide that by four weeks and your result is 249.95 miles driven–just 2.25 miles above the target–and 10.0575 gallons used–only 0.0775 gallons more than the goal. I’m right there, just a little above where I want to be overall. My guess is that if one day every two to three weeks becomes a “no drive” or at least a “no driving outside my little town” day, I’ll meet my goal overall just fine and dandy.

We’ll keep looking at this as I struggle with this goal over the next few weeks.

In our series on basics, we’ve looked at cash flow, the wealth equation, and baseline budgeting; this time we’ll look at debt reduction.

With saving, it’s clear that even if you don’t do anything else, as long as you put money away regularly, you’ll likely do reasonably well with your money. With debt payoff, it’s much more insidious. If you have serious amounts of debt (or even if you don’t but you want to make efficient use of your dollars when paying off debt), you need a plan. Where to start?

~ Assessment: When considering debt reduction, it’s important to consider all of your debt, and if not all facets, the most important ones. Who do you owe? How much? What kind of debt is it (mortgage, student loan, credit cards, auto loan)? What’s the interest rate? Is the interest tax deductible? What’s the minimum due every month? You may also want to consider any special circumstances, like if the interest rate is variable and may change soon.

Once you’ve determined all of these, you may want to add up your monthly obligations to see how much you owe every month at the minimum. If it scares you, then it scares me too.

~ Planning: All of your debts require the minimum payment; you will likely want to concentrate on one of your debts at a time. How to choose? The Debt Snowball, made famous by Dave Ramsey, suggests paying the minimum on all of your debts except for one: the one with the smallest total. Put all of the money you can toward reducing your smallest total debt, ignoring interest rates, and when that is paid off, switch your efforts to the next smallest total debt. While this flies in the face of mathematics, many have used the Debt Snowball effectively. It seems to me that the primary advantage of the Debt Snowball is psychological–there’s a sense of accomplishment in seeing one debt shrink every month, sometimes dramatically, and eventually paying it off, which would happen relatively quickly with the Debt Snowball.

Your other option is to pay off debt by order of interest rate, paying off the debt with the highest rate first. This is much more mathematically sound than the Debt Snowball, but may lack the psychological advantages of that method. Given that getting into debt is often psychological, paying it off may be just as psychological, and you could use every bit of help you can get!

Two things that may affect your decision on which debt to concentrate on are if your interest rates are going to change soon (such as in the case of an expiring low rate balance transfer offer on a credit card or an adjustable rate mortgage) and if your interest is tax deductible (basically a mortgage or a student loan). If you have an interest rate that might change soon (almost always to a higher rate) you may want to make that debt more of a priority; if you have a loan with tax deductible interest you may want to lower that on your priority list.

~ Execution: Once you have a plan, make sure you stick to it! Whether you choose to use the Debt Snowball or pay your debt off in interest rate order, do it. Make sure you pay in a timely manner, because late fees will make paying your debt off even more difficult. If you cannot make a payment on time, contact the creditor immediately and plead your case; they may not be able to do anything for you, but they might–like waiving a late fee. Use online payment options to make sure that your efforts are not felled by the USPS running late. Put the dates of payment in your calendar and make sure you pay on time. Pay something, even if you can’t make the minimums (although I certainly hope you can). Just keep up with those payments!

~ Hacks: You may want to try one or more of these to help reduce your interest rates further or just improve your overall financial situation.

Call and ask for a better rate: In particular, credit cards are often willing to do this. Be persistent, don’t give up, and don’t be afraid to call multiple times or ask for a supervisor or manager.

Zero percent (or at least lower) balance transfer offers: Credit cards often do this for new customers and almost as often for existing–offer a reduced rate (sometimes zero) on balance transfers. Just be wary of fees (A 3% fee with a minimum of about $10 and maximum amount of $75 per transfer is common) and time limits (the rate may be good only for a few months). I would not suggest applying for a ton of cards just for this purpose but there may be times when doing just that is useful.

Debt consolidation: A debt consolidation loan combines several (if not all) of your debts into one loan. If the loan has a low rate, that can make paying it off easier than the multiple loans that it replaced, and if the interest happens to be tax deductible (as could be the case with a home equity loan or a refinanced mortgage), all the better. However, be very, very careful with these kinds of loans! If you consolidate your debts and then go right back to racking them up–like clearing your credit cards and then running up high balances again–you end up in an even worse position than you were before. Also, be careful using your house as a piggy bank–the last thing you want is to lose that!

Paying off your debt is clearly one of the most important pieces of your personal financial puzzle. You absolutely must get a handle on your debt early on while working on your finances. Coming up with a strategy and sticking to it are absolutely essential to tackling your debt; you can use some of the hacks above to try to reduce your interest rates or otherwise improve your financial situation. Go, go, go on debt payoff!

Many of us know that snowflaking–the art of accumulating small amounts of money that happen to come your way to make a “snowball”, whether used to pay off debt or reach a savings goal–can be a powerful technique in your personal financial picture.

But what is the opposite of snowflaking?

The opposite of snowflaking is when you have small amounts of money fall out of your possession on a consistent basis. This is done, in my experience, primarily two ways:

1) Little “convenience” expenses that add up to one huge inconvenient bill (like buying lunch at work every day or stopping by the convenience store for a cup of coffee in the morning);

or

2) Small monthly fees that add up to one huge headache (like the $5 more a month for the 100 text messages you only use five of on your $10 more a month for twice as many minutes that you don’t use a third of cell phone bill, or the $10 cable television package upgrade so you can get 20 more channels you don’t watch).

Just as snowflaking is a powerful way of meeting your savings or debt reduction goals, the opposite of snowflaking is a powerful way of assuring your goals get met later. It’s a way to make sure that you don’t pay debt down nearly as quickly as you could, because a bunch of snowflakes escaping from your budget could easily mean a couple of hundred dollars a month!

Keeping close track of your spending–a spending log, a weekly review of your expenses, a baseline budget, and a goal budget–can help you figure out if you have any reverse snowflaking going on, and how to stop it. Remember: every dollar spent is a dollar that goes to keeping you in debt longer or keeping you away from your goals. Make the snowflakes work for you, not against you!

In week three of my plan to cut my gasoline usage by 5%, I finally had success. As you may recall, in my first week of this attempt, I cut my mileage almost 5%, but my fuel usage went down only about 2.5%. In the second week, I was able to increase my miles per gallon, but I drove more miles and used more gas.

In week three, finally, some success–and the reason why I was successful included.

My total mileage for the week was considerably less than in previous weeks: just 217 miles. My calculations after filling up on Sunday morning estimated my miles per gallon at 24.98, and total gas used at 8.69 gallons, beating my 5% goal handily. In fact, I used 17.3% less gas than my baseline!

How did I do it? I continued what I was already doing–using the efficient routes to and from work I had already found, keeping my tires properly inflated, driving the speed limit–as well as what really had to be done to reduce use:

Drive less.

I designated one day this week as a “no drive” day; I cheated and drove, but only in my little town of Kane’ohe, because I needed to pick up some groceries that I couldn’t reasonably do with my bike or walking. However, that is about 30 miles less than driving into the main part of Honolulu.

The coming week will be challenging as far as continuing to meet this goal. I have a social event (yet another bon dance) this coming week that will have me driving more than my baseline; in fact, it’s likely to be farther than the week before. I have turned down a few other social events (graduation parties) due to the driving distances, so yes, I will admit that I’m having to make choices I may not be thrilled about to drive less, but the alternatives are in many ways worse.

We’ll review things next week to see how I do with trying to meet my 5% goal even though it’s a definite I’ll have to drive more than I did this week!

Once you’ve established your spending log and used it for awhile, you can take a look at your overall budget. Your baseline budget is the one that you’re currently using (you can take a look at my baseline gas use for an example of what a baseline means).

In addition to your spending log, you’ll need your income; for this I would include any earned income (from your job, for instance) but not unearned income (dividends, capital gains, or interest) unless you actually use it for your monthly expenses. If, like me, this income is reinvested, I wouldn’t use it in my budget. If you have other types of income such as welfare or Social Security, or income which is not cash but can be used like cash in some aspects (WIC or food stamps) you would want to consider that income for this exercise as well.

You’ll want to take a look at your spending log and create some categories; what they’ll be may depend somewhat upon your own situation, but in general things like “food”, “rent/mortgage”, “electricity”, “gasoline”, “toiletries”, and “entertainment” would be included. Depending on your situation, you may want to break things down further–you may want to subdivide “food” into “groceries” and “eating out”, and “eating out” may even warrant further division such as “McDonalds” and “fine dining” and “Starbucks”.

Once you’re done with laying that out, add up your net (not gross, at least not at this point) income as well as all of your expenses, and use the cash flow equation we talked about earlier to see where you’re standing.

When people do this exercise, they are sometimes surprised by their number. Sometimes they have a very large positive number that doesn’t seem at all accurate; sometimes they have negative numbers that don’t seem to make sense. Take a few minutes and make sure your math is correct.

When you have the baseline budget established, it’s time to take a hard look. Where are you spending more money than you want? What areas can you cut back on? Maybe have a specific goal, like, “I will spend 10% less on eating out this month,” or, “I will reduce my Starbucks visits from five a week to one a week over the next three weeks.” Are there ways to work on the other end of the equation and increase your income? Once you have your baseline established, it becomes much more concrete to work on financial goals because you know where you stand and you know where your money is going–and what areas it might be possible to make changes in. That will lead to your goal budget, which we’ll look at in our next installment of Basics.