Catching the Downward Sprial of Debt before it Catches Up with You
This is a small post dedicated to those who find themselves with a minor amount of credit card debt and who want to get out of debt quickly. Even small amounts of consumer debt can quickly catch up with a family and erode their financial stability. Debt builds on itself quickly and it wasn't without reason that our sages called neshech/bite. For example, a seemingly small amount of credit card debt, say $4000-$5000, can easily cost a family over $100 more a month. If the pattern of increasing debt plus interest is not tackled quickly, a downward spiral is nearly inevitable. But, the good news is that small amounts of debt can be tackled and overcome, relatively quickly.
Below are five "emergency ideas" that I am putting forward to help readers who are mostly living within their means, but have faced unexpected expenses, to get our of the "red" as quickly as possible. Those who are not in debt, but don't have enough in their emergency fund, will hopefully find these ideas useful too. This isn't a post about a total budget overhaul, but more about keeping the day to day and month to month expenses under control.
Just a tip for those whose debt is spread across more than one credit card: pay the credit card with the highest Annual Percentage Rate first, while paying only the minimum on the other credit card(s). Once you have knocked off the balance on one card, apply the new found money to pay off the next card. . . . and repeat!
1. Stop using your credit card and start using cash. There are studies that show consumers spend more when they use their credit card. In short, it is easier to hand over the credit card than to hand over the green stuff. With cash, you know that when you are out, you are out. When you need to be able to serve an entire weeks worth of meals on the amount budgeted, you will have no choice but to compare prices (make sure you have a calculator on hand when you go shopping) and you will be forced to think twice about buying that snack on the way out.
2. Make that dollar stretch by going on a "financial diet: All unnecessary purchases have to wait until you are out of debt and can go back to the drawing table. Prepare menus around stocks of food on hand. Make challah, pizza dough, and pie crusts by hand. Eliminate extra courses. Think of alternatives to your regular fare. Get out your cookbooks (or borrow a friend's cookbooks) and find inexpensive meals to make. Do you have a week's worth of "three dollar" meals up your sleeve? The world of legumes and grains is tasty, healthy, frugal, and hearty. Protein can be found in places besides meat. And as we all know, meat and cheese are the two products that can eat the kosher consumer's budget up alive. Use sparingly.
Turns out lights when you leave the room. Set the heater at a lower temperature and wear a sweater (that one if for my dear husband should he be reading my blog this week!). Arrange your schedule to make trips by car more productive. Walk whenever possible.
3. Review your "Fixed Expenses:" Can you save money by switching your telephone service to basic and using a calling card for only necessary long distance calls? Chances are, your family/friends have unlimited and can call you. Compare your current auto insurance policy to few others and make sure you are not overpaying. Could you possibly go without a cell phone or cleaning help, at least until you get out of debt? If you use childcare, could you cut hours by working a different schedule for a few months?
4. Increase you Income: Can you work overtime? Is there a job you could take after hours or on a Sunday?
5. Get everyone on board: Don't leave the kids out of the loop. It isn't fun to have to cut back. But, if you have kids who can read circulars, cut coupons, plan menus, and wash dishes (eliminate those paper plates!), you can include them and make it more fun. Put a chart on the wall and show them how their efforts have freed up funds.
Add your comments and tips too! (I realize I did not deal with finding lower rate credit cards, taking an interest free loan from family, etc. Those things can all help. But there are no magic solutions and a little hard work can pay off quick. Just remember that as the debt falls, so does the interest and money frees itself up).
27 comments:
I owed about $12,000 so when we finished paying it off in $500-600 monthly installments, I told my wife to keep giving me the $500 that we now had "extra" and we put it into savings.
Home cooked meals are the best and save tons of money.
It will be very satisfying watching that "extra" money grow. Just like debt spirals down, savings can and do spiral up.
Clip coupons! I counted them up one year and they had saved me about $400, including rebates. I am so sorry I can't do this in Israel, not available here.
One of the stupidest things someone ever told me was that it doesn't matter how much you spend, it matters how much you bring in. WRONG! Curb your spending no matter how much you earn. If there is money left over, SAVE IT!!! This particular person is now over 70, has his purchases but has to WORK to support his spending habits and has nothing to give his children. It's hard to find work at this age, to say the least.
So... I love what Jacob wrote and envy his ability to save so much/month. Keep it up!!!
In fact, a penny saved is more than a penny earned, for the earned penny is taxed. Thus if I earn an additional $1000 a year, the actual income addition is diminished by $300 to $400. But saving $1000 (as a result of cost-cutting measures) is keeping the full amount.
Trying to save money cost me--time and rest. Working full time, I decided to continue baking, clipping coupons and never buying take-out. After a couple of months I felt I was drowning.
We cut out meat all week and only eat it on Shabbos.
We cut out soda and junk food and only have them on Yom Tov. H
ome baked cakes are for Shabbos.
Fruit juice is only consumed on Shabbos.
This has saved money and also enhanced our health and life.
We joined a family "Y" and participate in many free or nearly free activities.
Tamiri-I've been getting better with coupons, but would love a guest post from someone more experienced!
Ariella-True, true. And the higher the tax bracket, the higher the savings.
Anonymous-All of the tips are time consuming and the habits might or might not stick. After a family is out of debt and gets another chance to put together a budget, they can see what new habits stay and what doesn't.
WRITE IT DOWN. That is the best advice I can give to anyone trying to hang on to their money. Write down cash, credit card and check purchases IMMEDIATELY. Take off credit card purchases from your checking account balance as if they are cash purchases. On Quicken, I have my credit cards linked to my checking. As the credit card monthly amount growns (because of that month's purchases), my bank account shrinks. There are no surprises this way, you know EXACTLY what is going to happen when your salary comes in, what portion is for CC purchases. I have never charged something on my card which I can't pay off that month. I use it as a delayed-payment debit card in the States (1 month free loan from the CC company while my checking gains interest), and in Israel where the whole amount comes out of your bank account automatically (card and account are linked here), it's a no-brainer.
I have about 10K in credit card debt (all on a no interest card). I earn about $150,000 a year, but after taxes, mortgage, yeshiva tuition (1 kid) babysitting (another kid) and basic necessities I find I never have enough left to pay off the debt. I have about $90k in savings and another 60K in retirement money but I shiver over my savings incase business slows down (I work on commission) as it has and I need to draw down on it. Although the credit card debt is not exactly killing me (costs me about $300 a month to pay off) but after taxes adding all of my expenses in I am breaking even and this does not seem normal given how much I earn.
Anonymous, may I ask how much your mortgage is?
Anon-Try to get a copy of "Smart Money" magazine with the front cover 7 or 8 Mistakes Smart People Make. One mistake is to have debt when the savings are their to pay it off. In your case, your savings are 9 times your debt and you might be making a mistake that could really hurt you in the future.
I have to run, but go to www.smartmoney.com and search the archives if you can't get to the library.
Tamiri my monthly mtg payments including property tax are about $3100. We lease a van and I own the second car outright. I find our biggest expense as far as daily living expenses is concerned is our grocery bill. We use coupons and shop on sale but it still seems to be costing over $1000 after food diapers, and the such. Wife is in school so no fall back $. Tolls and gas to get to work are also about $1000 a month (can't write them off b/c they are the cost of travel). Adding up my revolving expenses (not including credit card) I get to about $8,000 a month, not including incidentals- net net at $150,000 taxed at 35% I break even (If I'm lucky) Just as a side note yeshiva costs me $1,000 a month and babysitting (which will be rolled into Yeshiva Tuition next year) is about another $750.
One thing that's helping me with groceries is hotcouponworld.com --- learning how to stack sales with coupons (DOUBLE coupons). LEarning to trade coupons I don't need for coupons I do, participating in coupon trains to get coupons I need, and basically buying nothing except for meats and other kosher market necessities without a coupon. Taking advantage of free stuff at CVS too (after sales, ECBS, and coupons). But I'm not one to talk about overall debt-- read my comment on the above post. Only take my advice as far as groceries go. :)
PS, $3100 a month is a HECK of a mortgage--- are you in NY or LA? Here in Cleveland we rent a 4 bedroom home with a basement and garage for $1200 a month. Mortgage would be less than that, but we have nothing to put down. (Again, see my comment on the above post).
I live in nj and only 1950 is mortgage, the rest are taxes (which have almost doubled since I bought my house 2 years ago).
Anonymous-You should be able to get that grocery bill down! I will try to speed up my posts on shopping and cooking in hopes of helping.
I'm feeling pretty good right now because I just bought got 8 boxes of cereal for $6 this week. In addition, as soon as the toothpaste that is on sale gets restocked, I should be able to turn in my raincheck and coupons for 4 free tubes.
Sounds like you are drowning in expenses because of the commute and taxes.
TwinsMommy-I'll check out the website. I'm always learning new things from the commenters (and friends :).
anonymous, I asked the ? about the mortgage because I think that is today's biggest pitfall: buying too much house. You did not ask for comments on that decision, but you know yourself that it's a LOT of money for a house. I lived in NJ up until 4 years ago and spent about $1000/month on groceries too... for a family of SIX which included 2 teens....
My view of having money is: save it in the bank, not for public view. Buy the most house you need for the least amount of money (emphasize need, not want), drive old cars (make the most sense even given repair issues) and save on groceries. It's really nice to see a chunk of money in the bank, rather than on your hips or under you on four wheels.
Problem is, neighbors will think you are poor. And that's a good thing.
A word of advice: don't buy major purchases (home, cars) based on projected earnings because it can backfire, as I have seen happen to people. Don't charge what you can afford to pay for NOW. What you can't afford NOW, don't buy. Save up for it.
Oops: one more thing about a mortgage: we are tricked into thinking that paying a mortgage makes the house ours. Not so. The house belongs to the bank for as long as it takes you to pay back that mortgage. If you take a look at the numbers and see how much you are paying the bank for use of their home (it's called interest) and that your 300K home is actually costing you 500K (please SL, what would it come to in actualy numbers), you may rethink your need for such a home and perhaps figure out that renting while saving for a home YOU CAN AFFORD may not be such a bad idea. And you save on the property tax.
The $3100 mortgage quoted is probably a bit less than that if you take into account the tax allowance. So, even more money is floating around in space which the poster can't put his finger on.
A word of caution: if you are having trouble balancing the books at the $150K level with no tuition burden, it's going to be much harder later on when Jewish reality smacks you in the face. Make adjustments now, while there is time. Just a suggestion.
Tamiri- thank you for your advise. As I mentioned, by the time tuition kicks in my wife will be finished with school and working. About the house and mortgage. I am well aware of the pitfalls of purchasing a house that is too expensive, got a very good rate on my mortgage and put down a large down payment. the house is not large by any means but it is affordable. One of the major issues I have is that I work on commission, as such my paychecks are annualized and I end up paying unclesam lots of money upfront only to get it back in April (personal decision to overpay taxes based on my own budgeting). When we bought our house we realized it would be a bit of a stuggle, which we gladly accepted, however our taxes have gone up by almost $5K since buying the house. Generally break even at the end of the month which seems strange considering...
anon, dont feel too bad - we make over $200k combined, and also hope to break even each month. i was able to do the coupon thing when i was on maternity leave once, and was very cost concsious, etc. and really reduced spending by about $200/month. that was when i had more time though, with a full time + work schedule for both of us, thats gone out the window, and its nearly impossible to be that careful about each $ spent
I have tried everything I can think of to lower my monthly expeneses and it seems that everytime I am successful I get hit with a new expense that takes the place of the one I just eliminated. Basic living costs in for a frum family in Metro Ny just seem to be crazy.
If you live in New Jersey - you never own your house cause even after you pay off the mortgage - the real estate taxes can be $20,000 a year and by the time the house is paid off - they will be .......
That is why one out of eight residents left the state in the past ten years
Okay, so you are saying tha $200K is the new "poor"? Try and distance yourself from your environment for a moment, I know that's not easy to do, but try. Now tell me: is this INSANE or what???? My 22 year old son, who just finished the army and is starting Hebrew U (IY"H there should be no strike) next week, thinks he would like to move back to the U.S. at some point. It's "easier" per him, to make money. I suggested to him that making money is overrated - see the stress his fellow Jews are under that. I told him that what he sees in the Orthodox Jewish community of NY/NJ is not NORMAL U.S living, it's different than the rest of the population. It's a killer to try and live as the Jews do. To reiterate my point, when we were speaking with a fellow student, goy from San Antonio, I asked the guy (my son was with me) how much he would view as a fabulous income for a family of 4. This guy, who is around 25 years old, can barely fathom an 80K income. He said that would be his dream. Puts things in perspective, doesn't it? Our children know that they are going to have to be hauling in that much BEFORE they have kids, and pref before they are even married. Talk about pressure to perfofm. There is something inherantly wrong, and I do not agree that it's totally tuition. I am sorry but an objective observer sees so much disposable income being thrown away (houses, cars, clothing). Tuition should come first, before the expensive house (a bargain is only a bargain if you can pay for it) and before the new/er cars. If tuition came first, we would see a big change in the spending habits of those with generous salaries. Taxes are too high? Make a statement and MOVE to somewhere more affordable, where your quality of life will likely be higher as well. Anonymous who is relying on his wife to generate extra income: isn't that sad that at your income level she's going to have to go out and slave? And don't you think that once you have that extra income, your expenses will suddenly rise to match the occasion?
Please don't read my posts as judgemental or in anything but a kind tone. I lived the life there and could not understand how people "did it" and am still trying to figure it out. It's more easy to be objective once you are out of the rat race. My own red line was when we could no longer afford tuition on one salary, which thankfully coincided with our Aliya.
I agree that tuition should (and in our case) does come first. However the knee jerk response from a lot of people of "well move out of town, things are cheaper there" although true a just not practical. Most everyone realizes that the cost of living in most Metro NY frum communities is totally out of control and the tuition issue is merely the frosting on the cake. (A bit off topic but here goes) The most troubling part of the whole tuition debacle is that there are no major organizations in NY that are doing anything TACHLIS to help out. The OU has a task force or 3 but that was a few years ago and we seem to be continuing down the wrong path. Tuition is a problem that needs to be addressed on a local level first and then on a broader regional and national level. I think that local schools need to consolidate resources, and purchasing and it will reduce overhead by upwards of 20%. Levels of administration need to be reduced. BH we live in very fast growing communities but the cost of tuition has more often than not outpaced inflation by 10 times (most schools have a 10-20% annual increase while earnings have increases 3-4%.) Rabbonim in communities need to get together and speak to their mispallilim about priorities in Tzedakah. Millions of dollars flow out of the local MO communities to other, very worthwhile organizations while our yeshivos are hurting. The needs to be an overhaul of the Tzekah system with rabbonim setting up communal priorities with oversight.
Anonymous NJ: I would have a hard time giving money for tuition to the young MO families I see who live in too expensive houses, drive too new cars, wear too expensive clothes etc. I would rather see them living it up a lot less and them being able to afford more tuition. It feels much better giving money to those who can't make enough to feed themselves.
While schools should be a community project, you can't rely on the bubbies and zeidies who just got out of paying because their kids grew up, to start all over again.
Is this another "lets throw money at it" solution?
I am not advocating giving money to anyone; I am advocating fixing a broken system. Chances are the guy who drives two luxury cars are giving money to various tzadakos outside of the community and that is money that should be going to schools. I do not think grandparents should pay tuition, but I do think that they should be very sensitive to the needs of the community and their children and grandchildren when making their donations. The system needs to be fixed for everyone, the guy making $400,000 and the guy making $50,000. Community rabbonim need to be sensitive to how much of their discretionary money is going out of the community and how much is going back in to the school system, which chances are have some of their mispalelim on scholarship. The broken system needs to be fixed and fixed today.
Anon nj wrote: "Community rabbonim need to be sensitive to how much of their discretionary money is going out...". Um... what is discretionary? A $400k home? Two leased cars? A $2600 sheitel? A $500 hat? Matching yom tov clothes in a family where income is low?
That would not be an objective measure.
The only objective measure would be to have each family put their maaser towards tuition. 10% for everyone.
Yah, right!
"I am advocating fixing a broken system". The system is not broken at all. It's just unsustainable. Even if you have philanthropists supported a particular school, you may still be in trouble. Internal politics and a volatile financial market have some philans in and out of their original plans for support.
tamiri - for years i have said id love to make aliya. unfortunately my husband is not on that same page (yet!). that said - i know it is absurd to be "struggling" at $200k just to stay out of debt, but with several kids tuitions, and living in a frum neighborhood, that is our reality.
first off, taxes take a big bite out of that gross - then there is tuition and healthcare (including insurance, copays, deductibles, etc) so without living frivouslously (no vacations - much to my kids dismay, no fancy dinners out, hand downs to the younger kids, etc.) there really isnt much left over at the end of the day. my staff drives nicer cars then me (as has been the case for the past 10 years) and ive had people at work comment on how based on how i live, we are probably accumulating significant wealth - NOT! if only they knew what it costs to be frum.
along with that though, i am thankful every day that Hashem has blessed us with what we have, and know that although we dont live in the lap of luxury, there are families who struggle just to put food on the table, and make far more difficult choices than not taking their family on vacation, so i do see how blessed we are and am very thankful for that.
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