Monday, September 29, 2008

Look, the Sell-Out is coming, so it's time to get ready

Congress will pass the Sell-Out plan, and we're moving into the phase of life when placing the blame for the mess or arguing about how much (and what kind of) regulation is needed become secondary to....

How is this all going to affect you or your family?

I started with this a couple days ago, and kavips has an important post up today.

But those are first glimmerings. The reality for most people has yet to set in. Commercials on TV are still offering great values. Soccer games are still occurring. Movie openings are still pulling in millions of bucks every weekend.

A lot of this is going to change, and perhaps I can give you a preview.

I should probably sub-title this More than I want you to know; less than you need to know.

For the past several years, we've struggled as a family and got into far more debt than was healthy. No, we weren't splurging on kitchen makeovers or Hummers, but medical bills, school expenses, and just a pattern of less than optional decision-making in short- and intermediate-term finances had left us on the verge of serious trouble.

So, six months ago we started the serious move to get out of debt and get back to living within our means.

First things first: it was tough and it was painful. There are basically three things you have to do in order to get your financial house in order, and they have all become more critical in the past three weeks than ever: (1) you have to cut spending until you are back within your means; (2) you have to turn and face your debt, creating a reasonable plan for repaying it; and (3) you have to burn your bridges behind you, so that you can't go back.

Cut spending. In our case it took a good two months to seriously confront our overspending large and small. It takes that long to realize what you're actually spending. We kept a spending diary for three weeks that tracked every dollar. I discovered that my addiction to Mountain Dew was costing us $45/month because I was buying the individual 20-ounce bottles for $1.29 each, instead of the two-liter bottles at $1.09 each. We looked at how much cereal was spoiling on the pantry shelves. We groaned when we examined how much we were spending on books, DVDs, and too much conversation on our cell phones.

And we started cutting back. You know what we found? We found out that we could cut 25%--I'll say it again, 25%--from our grocery budget each month. Most of those cuts came from eliminating snack and convenience foods, and from watching non-food expenses (cleaners, paper products) like a hawk. We now actually eat better, hard as it is to believe. But eating out is now take-out Chinese or take-out pizza, and twice a month out for Mom and Dad (who deserve it!).

We reduced our cell phones minutes. We eliminated our lawn service and bought the chemicals we needed ourselves. We cut the pest people back to on-call status (I'd rather pay $99/visit when I need them twice a year than $75/quarter for the privilege of free visits at my beck and call; savings equal $100/year). Our kids got two weeks at a really good summer camp rather than the usual six. I learned how to change my own oil in the cars (wasn't that fun?). We let a car sit in the driveway and not move for four days because we needed to wait for payday to get it fixed rather than run up a bill.

We turned off the air conditioner and learned that sweating wouldn't kill us.

I started driving a hell of a lot slower.

None of this is easy, but when we figured out what we were making, subtracted fixed costs (mortgage, car, electricity, etc.) and realized that Oh shit, there's not enough left to live on!. Something had to be done.

In our case it also involved me managing to find a second job, primarily (I hate to admit it) to pay off debt so that we actually had our regular income to live on.

Turn and face your debt. We eliminated our credit cards--all of them. Maybe we wouldn't have, but that was the buy-in cost for restructuring our debt with credit counseling. Hi, I'm Steve, and I went into credit counseling. Consumer Credit Counseling Services of Maryland and Delaware (we picked that one because Jack Markell recommends it on the State Treasurer's website). We went on a payment plan to eliminate our debt completely in five years. It hurt my pride and it hurts my wallet--but in five years we will be completely out of debt and we will not have run up anything new.

If you are in consumer debt of more than $5,000, you need to do this now, while the options are still open.

One of the things you can expect is that negotiating with your credit card companies is going to become more difficult, and their practices of harvesting money from you via late fees and usurious interest are only going to get worse (thanks, Joe Biden, for all the help with that--NOT).

You are running out of time to make this kind of decision, or the government and your creditors will make them for you.

(I have a good friend who knows he needs to do this, but each month there is a new emergency for which he needs just a few thousand bucks more credit. There will always be such an emergency. You need to start learning new ways to deal with them.)

Burn your bridges. I'm serious here. There will be difficult days ahead, and if you have the means you will convince yourself that this is an emergency and justifies more borrowing. But if you can't borrow, you will find other ways to deal with each crisis. We closed accounts that CCCS did not require us to close. We changed our last line of emergency credit (a home equity line of credit) into a type of account that would require at least 72 hours to access. It's still there, but now both of us have to go down to the bank and fill out papers to use it. That puts some emergencies into perspective.

Likewise we committed ourselves to three very lean months up front, where every optional expense was eliminated in favor of clearing the decks of as many back bills as possible. We spent a lot of time at the Y pool this summer, rather than taking the usual vacation, and--you know what?--that period is now over and there is light at the end of our personal tunnel.

We've now actually got savings that are building, so that when we need a new van (the old one is going to have to last until it falls apart), we'll have at least $6-8,000 to put down on it (although it may well end up being a pre-owned vehicle this time around).

I have far less fear of the future--even with the coming credit collapse--than I used to. Yeah, shit happens, and it will probably happen to us. My second job might go under. More medical bills might crop up. But every day that we don't spend more than we make (we're trying to save 10% of our take-home income; not there yet, but we've gotten up to 5%), we get a little further ahead.

Here are three things I've learned:

1) None of this will traumatize your kids.

2) There's nothing to be embarrassed about in actually taking the necessary steps to deal with your problems like an adult.

3) It feels good to start reclaiming your life from your creditors.

But here's the bad news:

Over the next year it is going to get progressively harder to do what we did, so you better start now.


Brian Shields said...

Some very much needed advise in a time when it will be sorely needed. Thanks for sharing.

I went through CCCS about 8 years ago and they are the only consumer credit counseling I would recommend. I do regret thinking I could do it myself and withdrawing from the system. They did a really good job at making me face my debt and slapping me with reality. As a 20 year old E-2 in the Air Force with 8 credit cards, a car payment, and personal loans... I was easily well over my head.

I would suggest for those who would like some sound financial advise to check out Dave Ramsey at He has a debt-related radio show, and a television show on Fox Business. He also has a free one hour podcast of his show (which is about 40 minutes without commercials and downloadable in MP3 format to listen on your computer or on iTunes) where he helps out callers. Worth a listen if you have no idea where to turn and have no idea what to do. His show deals with people who are shell shocked with their debt and have nowhere to turn.

Again, your mileage may vary.

kavips said...

If historians ever trace back this far to determine the moment of crystallization when Americans began to realize that running out of money dwarfed all other bullshit philosophies, I wanted to make it clear that I got my inspiration from your post...

As you well know.... historians like to argue these things, and for once, this time, I just wanted to put a stop to it before they got going too far.... lol.