A Tale of Two Families

Young Ned and his wife Sally really want a home of their own. Ned has been at the same job for a couple of years and Sally stays home with their 1 year old. They have been reasonably careful with their money. They have an old, but reliable, Honda Ned’s parents gave him when he graduated from college and no credit card debt. Ned makes $50K a year and Sally’s parents have given them $10K to use as the down payment. Ned and Sally go to an online lender to get pre-qualified for a mortgage. Using the lender’s  “Home Affordability Calculator” Ned and Sally are told they can afford a monthly payment of $1,499.76 including taxes and insurance.  Estimating taxes and insurance at $5,500, Ned and Sally start shopping for a $200,000 home.

Not too far away another young couple is dreaming of a home of their own as well. Paul and Janet have a new baby and are finding their tiny apartment rather cramped. Paul makes $50k a year but has 15% of his pay going to his 401K. Paul and Janet never see that money, so they budget as if it doesn’t exist.

Paul and Janet have recently struggled and sacrificed to pay off the credit card debt they ran up when they were in school.

Janet has been reading money management books and knows that they should put at least 10% down on a house and that their mortgage should be no more then 25% of their take-home pay. Using Paul’s take-home pay after taxes and the 401K deductions, Janet calculates a maximum mortgage payment of $764.  She knows they can afford a $100,000 home with a 15 year mortgage.

Before they can go home shopping, they know they must save the down payment and build their emergency fund to equal at least three months of expenses.

Paul takes on as many overtime hours as he can get at work and Janet takes the baby to the neighbors three times a week to watch their 3 year old. With this additional income and cutting their expenses as low as they can go, Paul and Janet are able to save $2000 a month for 8 months.

Ned & Sally end up with a $200,000 home. Their mortgage payment is $1,019 a month and taxes & insurance add another $450 per month. Paul & Janet have found a nice little starter home for $100,000. Financing their home over 15 years gets them a lower interest rate and shortens the term by half. Their mortgage payment is $671 and taxes and insurance add $200 a month.

Ned & Sally                        Paul & Janet

Take Home Pay $3550 $3056
Housing Cost $1469/41% $871/29%
401K After 5 years $0 $43,436
Interest paid on Mortgage after 5 years $45,614 $16,185
Principal Paid after 5 years $15,526 $24,083
Net Worth Increase $25,526 $77,519

Ned & Sally’s budget allows them to live on $2031 after housing costs.  Paul & Janet get just a hundred dollars more but their utilities and maintenance costs are about half of Ned & Sally’s. They have their retirement saving working for them and enough room in their budget to save and pay for a better car.

Paul & Janet were careful, after learning their lesson with credit cards, not to be lead astray by lenders who make more by lending you more. By the time they managed to pay off the old debt, they could not even remember what they had bought. They swore it would not happen again. They vowed to live on less then they make, to save aggressively and to give. We hope Ned & Sally get a wake up call soon.

The Long Haul

I sometimes struggle with consistency in my efforts – and I bet you do to. Making the decision to change your financial future isn’t all that hard; a moment of clear thinking is all that it takes to understand that you can and should be doing more with your money. Setting up a plan to accomplish your new found goals isn’t all that hard either; you know you need to spend less then you make, pay off debt, and save.

The hard part is to follow the plan long term – way past that first month. Why is this so tough?  Because in order to accomplish this, or any other behavior changes long term, you must change the way you think. That’s hard enough by itself; but you also have to maintain this new attitude in the face of incredible pressure from others to go back to your old non-thinking, fun-loving, easy-spending ways. Dang it! How’s somebody supposed to do that?


In our enthusiasm for change, or distaste for the stuff required to accomplish it, we often try to do it all in one night. So, you know that debt it took you 4 years to accumulate? Chances are you are not going to wipe it out tonight. And, if you did by some unexpected windfall have the ability to do so, chances are you would just run it up again. We need to change our thoughts and behaviors and the best way to do that is a little at a time.

Your first spending cuts should not be to expenses that are near and dear to you. Cut things you won’t notice  much or  find lower cost substitutes. In an earlier article, I named my first three cuts; I substituted purchased books for library books; I ironed my own shirts and we changed our phone service.  The phone service never bothered me for a minute; the books took a little effort; but I found that if I kept several unread library books at all times, I could easily talk myself out of the temptation to pick up a paperback when I was out. The shirts were a different story.

Of the three cuts, eliminating the laundering of my shirts offered the least significant savings, but it may have been the most important in terms of behavior change. Every Sunday, I spend 45 minutes ironing my shirts for the upcoming workweek. Sometimes I really do not want to iron those shirts, but once I get started, it’s not so bad. This active participation serves to remind me what our financial goals are and what we are willing to do to achieve them. If I spend four hours a month saving $35, I am much less likely to go over budget for something unnecessary. If you don’t have shirts to iron, what can you do that you used to pay someone to do? Find a way to be happy accomplishing the task and remind yourself about the mission you are on.

When you are comfortable with the first round of cuts, you can start round two. Don’t be in a hurry, deeply cutting an expense that you really care about can led to rejecting the whole plan.


Work has always been important in our house. Much of our fun has been working together on projects. We can even find enjoyment in everyday chores of cleaning or yard work as long as everyone participates. In our house, you won’t find anyone kicked up in the lazy boy while the vacuum is running.

The same goes for financial goals, we are all pulling in the same direction. Change is so much easier when you surround yourself with others on the same path. Seek out friends and family that can understand and support your efforts. It’s imperative that your spouse or significant other is on board; fighting their reluctance while trying to change is like waging war on two fronts. Put your whole plan on hold and get on the same page. You might have to go slower than you want in order to walk together – but it will be worth it.


Keep your plan simple. Do one thing at a time. It’s really easy to get sucked into trying to accomplish a whole lot at one time. It won’t work. Diluting your effort across a whole bunch of goals means nothing gets accomplished quickly. We need some quick wins to stay motivated. Focus with laser intensity on one small goal at a time and get it done.

I Can’t Pay

If you are currently in the very uncomfortable position of not being able to pay all your bills on time, here’s how  to get through this valley with the least amount of pain and scarring,

Do not allow the current situation to redefine who you are.

You are a person of integrity. Your word means something; you take care of your family; you honor your commitments. This doesn’t mean that you never stumble or lose your way. It does mean that when you do fall short of your own expectations you change course and re-commit.

Protect your relationships and rely on your faith during this rough spot.

Take Responsibility

If they hadn’t cut your bonus, eliminated your job, if housing prices hadn’t crashed, if you mother hadn’t gotten ill…. you would not be here. But it happened and you are – so start right here today with where you are. You made a promise you cannot keep and now you need to get to control over the situation.

Make a Realistic Plan


Winning the lotto, scoring a new job that pays twice what the old one does, or selling your car for twice what it’s worth, are examples of events that are not likely to happen.

You need to create a Crisis Spending Plan based on your actual income.

Develop your plan starting with basic food – no restaurants, no fast food, no steaks, no beer, just beans & rice, mac & cheese, PB&J; cut the budget to the bone.

Next you need to pay your utilities, water, electric, gas, not cable not internet. If the utilities are behind, catch them up before doing anything else.

Shelter is our next priority. Pay your rent or your mortgage.

Finally, secure your transportation. Make your car payment; get your bus pass; set your gas money aside.

Now that you have your four walls (food, utilities, shelter, and transportation) in place, you can start your battle against your debt.

Who Gets Paid?


Make a list of all of those you owe; how much you owe them and how far behind you are.

If you can’t make the minimum payments on all your debts, you may choose to pay them each their pro-rated share of the money you do have available.

List each debt. Divide each debt by the total debt to get the debts percentage of the total. Multiply each percent by amount of money you have available to pay debt. This will give you your new payment. Send a copy of your worksheet with each payment.

Like this:

Contact your Creditors


Some creditors will be much more willing to work with you if you can state your hardship case and your plan for overcoming it. Some won’t. Typically credit card companies, big banks and Sallie Mae don’t care about your problems and will treat you in whatever way they think is most likely to get them a payment. They may appear to be warm and understanding today and then become belligerent and abusive tomorrow.

If you owe money to local businesses or individuals, you may be able to negotiate a payment plan.

As much for yourself as for the creditor, always communicate honestly with the creditor. Calmly tell them why you haven’t paid, when you expect to send them some money and how much it will be. Send them a copy of your pro rata worksheet with any payment that is less than the minimum.

When Sears calls about the past due payment on your credit card, your side of the conversation could sound like this:

Yes, I’m aware that the payment is late. My hours have been cut at work and we are unable to pay all our bills. When I am paid next Friday, we will be sending you $21.06.

No matter what they say, you stay calm and repeat that’s all your able to do. Keep your four walls in place and do not put your family in jeopardy because of some collectors ranting. Never give them electronic access to your accounts.

Once you have a written plan in place – follow it.

Evil Credit Cards & Brownies

If your progress toward your money objective has slowed, stopped or even reversed, maybe you need to examine your goal and re-commit.

We all struggle from time to time with focus. I know I’m struggling right now with some extra pounds. I can rationalize the why in 10 seconds flat – you know the holidays, the windy colder weather that doesn’t invite a good ride, been too busy to eat right, blah blah blah. The real reason I’ve put on these pounds is that I lost sight of my goal.

Losing weight and paying off debt are both about changing our behavior. If our old behavior did not include overeating and/or under exercising we probably don’t need to lose weight. If we had not over spent in the past, we wouldn’t have the debt. When we get tired or anxious or somebody bakes delicious brownies, it becomes very easy to fall back into our old behaviors of overeating or overspending.

Step 1 – Awareness.

Ok, my knees hurt, my pants don’t fit and the scale is registering numbers I haven’t seen in quite a while.

You pull those credit card bills out of the mailbox and tally them up.

Are you now painfully aware? I know I am.

Step 2 – Give a hoot.

Do I care that my knees hurt and my clothes don’t fit? Yep, I do.

How about you? Do you care that you’ve backslid from your goal?

Step 3 – Give enough of a hoot to do something about it.

This is the hard one. Do we care enough to make the difficult choices to give up something we want right now in order to get something we want later?

It depends on what the later is. You and I both need to clearly define that long-term goal. You gotta make it something worth struggling for.

My long-term goal is to be fit enough to hike the Grand Canyon down and back with my grandchildren. Since I don’t have grandchildren and I don’t have any say in the when; I’ll have to choose an intermediate goal that I can attach a date to.

Here it is. On or before May 1, I will ride my bike on a single trip for 100 miles in less than 8 hours. OK, so maybe this doesn’t sound like a weight loss goal; but it is. There is no way I could do a century carrying extra weight without my knees (and maybe my lungs) exploding. So, to achieve this goal I need to: a) ride a lot in the coming 100 days and b) eat carefully. If I do those two things the weight should take care of itself.

As shorter-term goals I’ll do a 50 mile ride on or before March 5th in under 3 1/2 hours and a 75 mile ride on or before April 2 in under 6 hours.

OK, that was scary; now it’s your turn. What goal are you working on?

What can you do in the next 100 days that will firmly put you back on track to your goal?  What will you accomplish by March 5? And by April 2?

In the coming days every time we feel the urge to backslide, we need to visualize that long term goal. Are we really willing to jeopardize that goal for this immediate want?

OK, now that we’ve got our new goals in place, we need to commit to them. One way to do this is to tell somebody. I think I’ve got that covered; how about you? You could just leave it here in the form of a comment- that would work. Get your friends to log on and do the same. Let’s do this together.

How to Say No

One of the fundamental principles taught to lifeguards is to protect their own life and health. This same principle is vitally important when a loved one asks you for financial assistance.

Rule 1: Protect yourself – you are no help to anyone if your drowning loved one pulls you under.

One important way to protect yourself is never to co-sign a loan for a friend or family member. This is very easy in theory but surprisingly hard in practice.  When someone you care about comes to you and makes their case about how things will be so much better for them if they could just get this loan; it is very difficult to tell them no. Saying no feels like a vote of no confidence from you to them. As unsure as we are of exactly what our loved one needs, we can be certain they need someone to believe in them.

But, there is a reason they cannot get the loan without a co-signer; the cold hard statistical facts predict that they will default on this loan. Co-signing puts you fully on the hook for the debt and places your relationship in serious jeopardy.

Loaning money to our friend or family member in crisis is likely to have the same consequences as co-signing. They may not be willing or able to re-pay the loan; placing you in the uncomfortable position of playing debt collector to someone you care about. This is not likely to end well.

When faced with saying no to a loved one’s request for money, try one of these strategies:

  • Make your refusal to co-sign or loan money part of your personal code of conduct. This takes some of the sting out of your refusal. You are not refusing to co-sign this loan, you refuse to ever co-sign any loan. Stating this part of your personal code occasionally when the opportunity arises may save you from ever being asked in the first place.
  • Blame it on your financial advisor. No sane advisor has ever recommended co-signing a loan for a friend or family member.
  • Offer something you can do that will help resolve their issue “No I cannot so-sign that car loan, but I could give you a ride to work for a month”.

Your goals need to be to protect yourself, protect the relationship and to leave a door open in case they really need help – not just a quick solution. There is nothing wrong with giving money to someone in need as long as: a) you can afford it; b) you are fairly certain that giving will not just enable continuing their bad money behavior.

If you’re the kind that feels bad for saying no, stop! Chances are you did this person a great favor; a few more no‘s and they might just starting looking inward for the solutions to their problems.

It’s all about what you want

Finally, we get around to your favorite subject. Personal Finance is very personal. What you want and what I want may be quite different.

Winning with money is about using your  earnings to get what you want from life.

As long as you are progressing toward your goals at a pace you are happy with, there is no need to feel guilty about lattes, dinners out or your fancy car. You should spend money in ways that make you happy.  Just don’t make the two fundamental errors that will prevent you from winning.

Fundamental Error #1: Failing to set Personal Financial Goals

This was me, and I bet it is you too. To count, a goal has to be clearly defined, measurable and have a completion date attached.

I want to retire comfortable someday is not a goal; it is a Dream.

I want to retire with a monthly income of $2500 in six years. That’s a Goal.

I want to get out of debt – another Dream.

I want to be completely out of debt, excluding the house, within 36 months. –  Goal.

I want to buy a house – Dream.

I want to save $20K for a down payment on a house by this time next yearGoal.

Ok, you’ve got it. Now take some of your dreams including your “great-big-won’t-happen-for-a-long-time-dreams” and turn them into goals.

Fundamental Error #2: Failing to have a plan

When people make error #2, their behavior does not align with their goal. It is not that they lack self discipline; it’s that they have no plan.

If your goal was, I want to save $20K for a down payment on a house by this time next year, how are you going to do this?

How much a month do you need to save? Do you need to cut back expenses to get there? Can you increase you income? How?

Break your goal down into the little actions required to get there; draw yourself a map. Put in on paper and then tell someone about it. Check back on your progress frequently.

Whether you are on baby step 1 or 7, you need to have a goal if you’re going to win.

The Whole Truth

Do you ever watch the TV program House? You know how he never believes anything a patient tells him?

“Everybody lies”, is House’s line. If people think they are telling the truth, is it really a lie?

In the world of personal finance, everyone is overly optimistic. If you ask almost anyone how much debt they have, unless they have none, chances are their estimate will be significantly lower than the actual number.

Awareness is the first step in initiating any change. Before we can solve a problem (if there is one) we must clearly define it.

Two numbers you should know, that is really know, not guess, are your Debt and your Net Worth.

To determine your net worth draw a line down the center of a piece of paper (or use excel). In the left hand column, we are going to list your assets in the right hand column your liabilities (debt).

Assets-What you own Liabilities-What you owe
Checking Credit Card #1
Savings Account Credit Card #2
401K Credit Card #3
Stocks Student Loan
Home Value (www.zillow.com) Mortgage
Car Value (Kbb.com) Car Loan
Other Owed to friends or Family
Total Total

Now the trick here is to really do it. We are looking for the real truth here, not some optimistic interpretation of the truth.

Look up your balances, estimate your car value using Kelly Blue Book. Don’t go crazy trying to determine your home value just pick either Zillow or use your tax appraiser’s estimate.

Go to Annualcreditreport.com to get a free credit report, did you miss any debts?

Net Worth = Assets – Liabilities

Is you number positive (good) or negative (not so good)?

Either way your number is not you, it’s just a number that’s going to allow us to track your progress towards financial fitness.

The sum of you debt (liabilities) is the other number you want to track every month. As you use your income to pay off debt, your liabilities number will go down and your net worth will go up.

Write down these two numbers: Net Worth and Total Debt, along with today’s date and post them somewhere you can see them. Set yourself a reminder to do this exercise again next month.

If you really did the exercise – “WOO HOO! YEA YOU! CONGRATULATIONS!”; you’ve taken the first step towards financial freedom.

Who is this Dave Guy?

For those of you that do not know, Dave Ramsey is a New York Times bestselling author, a radio host and the guy behind my enthusiasm for this new debt free life.

You can download his radio show as a podcast at itunes. Give it a listen; this guy is a hoot.

I’ve read lots of financial management books, because I read a lot and because I’ve always been involved in small business and money. By far, Dave’s is the simplest most straightforward advice out there. He doesn’t just tell you the theory, he has a very definite step by step plan and he motivates his readers to actually follow the plan.

After I read his book, The Total Money Makeover, we attended the 13-week class, Financial Peace University that many churches host. Still not having enough of Dave, I attended his week long, very intense counselor training.

The average family, while going through Financial Peace University, pays off $5,300 in debt and increases their savings by $2,700!

The foundation of Dave’s plan are the seven baby steps:

STEP 1 – $1,000 to start an Emergency Fund

Making a commitment not to borrow money requires that you have some other method to pay for life’s little emergencies like the busted water heater or the bad alternator on your car.

STEP 2 – Pay off all debt using the Debt Snowball

List all your debts, except for the house mortgage, smallest to largest. Pay minimums on everything except the smallest and attack it with everything you’ve got. When the first debt is paid off, take what you were paying on it; add it to the minimum on the second and work like crazy to pay it off. Keep that snowball rolling until all of the debt is gone.

STEP 3 – Build an emergency fund of 3 to 6 months of expenses in savings

$1000 is not enough money to handle a real emergency. Loss of job, prolonged illness or a death in the family may require much more. Almost universally, money experts recommend 3-6 months of expenses.

STEP 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement

If you were in debt when you started the program, Dave recommends stopping all retirement, college and other saving temporarily until you reach this step. Now it’s time to re-start your retirement savings.

Step 5 – College funding for children

While maintaining your 15% retirement savings, start saving for the kids college.

STEP 6 – Pay off home early

Now put all you can into paying off the house.

STEP 7 – Build wealth and give!

You have no payments. No car payments, no credit card payments and no house payment. You can really afford to build wealth and give.

Bad Dog

Quick, you’re in a dark alley in an unfamiliar part of town. Which would you rather meet up with, five yapping Chihuahuas or one big, mean pit bull?

Me? I know I can deal with the yappers. They definitely can aggravate with their incessant barking and they might even nip; but they can’t eat me.

Welcome to debt consolidation. This is where you take all your little aggravating debts and create one big monster. You might even put the big vicious thing on steroids by consolidating all your debts into your home equity line.


This is what people do when they can’t stand to listen to the yappers one more second. If you’re here, unplug the phone and find a way to get a quiet moment to think.

You cannot borrow your way out of debt. No way, no how, it will not happen. If a consolidation lowers your monthly payment, it does it by stretching out the term. You will be in debt LONGER and it will cost you MORE- even if the interest rate is lower.

I have read many articles by so-called money experts that advise taking out a home equity loan to pay off credit card debt. YIKES! This advice is so bad I have to believe they are getting kickbacks from the credit card companies. Thankfully, these loans have become much harder to get. Can you think of anything more stupid than to risk your home for the shoes, TV, or dinners that you bought with your Visa?

If you are so sick and tired of carrying your debt; that the late-night TV promises of the debt consolidators are starting to sound tempting, what should you do?

1.       Know you are not alone. I can’t say it was smart to get into this position but at least you are in good company.

2.       STOP borrowing. Cut up the cards; freeze them in a block of ice; do NOT carry them in your wallet under any circumstances.

3.       Make a rational and reasonable plan to live on less than you make and start paying off the debt.

You knew all along that it would take discipline, commitment and hard work to get out of debt. It was only when you were tired and alone and ashamed that you wanted to believe the to0-good-to-be-true promises of the debt consolidators.

5 Ways to use your Money to Ruin your Relationships

  1. Hide spending, income or debt from your significant other
  2. Give the kids everything they want or might want someday
  3. Co-sign a loan for anyone you care about
  4. Loan money to someone you love
  5. Wait to be happy until– (you’re out of debt, you’ve saved enough, you make more etc.)