Soldier of Finance (12 page)

Of course, if you aren't burned out and are able to keep making double payments every month, go for it. Be flexible and adjust to the terrain.

Jaime Tardy, who was expecting her first child, had a very simple objective: pay off debt so that she could be a stay-at-home mom. She had two major enemies. The first was a sizable total debt, more than $70,000, including $19,000 owed on her brand-new car, two student loans totaling more than $26,000, and a sizable home equity loan. The second was the fact that her income of $100,000 a year made up 76 percent of her family's household income. She couldn't just quit while the $70,000 hung over them.

Jaime had the tenacity of a true Soldier of Finance. Her desire to be a full-time mom drove her to take on the challenge. Her Battle Buddy, her husband, fully supported her and joined in the effort.

The first objective was to tackle their debt. To do that, Jaime made a huge and difficult decision. She traded in her two-month-old Civic, which she loved. In its place, she got an eight-year-old, reliable SUV. Because the Civic was so new, she was not able to get anywhere near what she paid for it, but that one decision dropped their debt by more than $10,000, a 15 percent reduction in one move. The change also freed up $185 every month that Jaime applied to other debt.

The next phase of the mission was even tougher. They started selling stuff that had cluttered their lives for a long time. Her husband had a Jeep CJ7 with 36-inch tires, and like any Jeep enthusiast, he loved “his baby.” He had spent many hours working on it. But he supported Operation Motherhood as the highest priority, so he sold his Jeep. That knocked another $5,000 off the debt.

Jaime and her husband started selling everything they didn't need, hosting not one, but three yard sales in a single summer, supplemented by a variety of
Craigslist
postings. Out the door went a kayak, a wine rack, a weight bench, and a host of other things. They cleaned out every closet and sold random things on eBay. In the process, they discovered that they had always been wrong when they thought of themselves as “minimalists.” They had way too much stuff they didn't need.

The next step got down to good old-fashioned work. Jaime took on as many extra hours as she could, often traveling away from home. She put in 70 hours a week until her seventh month of pregnancy, when she dropped back to 40 hours. Her husband, a musician by trade, took on graphic design projects that he worked on in the evenings and weekends.

Restaurants became a part of their past as they kept to a strict $300-a-month grocery budget. They canceled their cable television, lowered their cell phone plans, and put themselves on a minimal allowance of $25 each for spending money each month. These were all great sacrifices for them, but the point is that the debt they targeted and the mission goals they set quickly became practical reality. They rapidly paid off the Cherokee SUV and the smaller of the two student loans. Then they took on the huge home equity loan. They often felt they weren't making any headway, but one day that loan was gone. That left only the larger student loan.

At that point, Jaime and her husband reassessed their situation and decided they needed to make a change in their priorities. Since they really didn't know what to expect with the delivery and bringing a new baby home, they decided to delay paying off the last loan while they prepared for any unexpected events. They opened a savings account and started dumping as much money into it as they could, eventually building up a reserve of $23,000.

Just four months after the baby was born, Jaime used much of her “what if” money to pay off the other student loan. At that point, because of their simpler lifestyle and less expensive habits, Jaime was able to quit her job completely and be a full-time stay-at-home mom. Mission accomplished.

You can read more about Jaime on her blog
www.eventualmillionaire.com
.

 

One of the biggest obstacles preventing many Americans from achieving financial independence is contentment, or rather a lack of contentment. Most people are content with high debt, as long as it contributes to their lack of contentment with the luxuries in their lives. Many want to drive a new car, own a big house, wear designer clothes, and have all the latest technological gizmos.

The truth is, most of us don't
need
half of what we go into debt to buy. And all of those comforts ultimately load us down with so much debt that they undermine happiness by adding worry every month about future security and our ability to make payments and keeping us enslaved to debt long into retirement years.

Early in my career, a man came into my office. He had just come into some money and wanted to invest it. Naturally, we discussed possible investment vehicles, but in the typical course of discussion with any new client, I try to find out as much about his financial habits as I can, in order to better handle the account.

My routine questions include these: Do you have a 401(k)? Do you have an IRA? Is there a college fund set up for your kids? Do you have an emergency fund? In answer to those questions, I learned that he had a 401(k) with a balance of about $4,500, and that was it. In his mid-forties, he had no savings, no emergency fund, and no other investments.

When we discussed his cash flow he began listing the monthly payments that he made: a mortgage payment, two car payments (one for himself and the other for his wife), a boat payment, and a payment on a four-wheeler. As he continued with the list, I asked if he had considered paying cash for some of those things. The money saved on interest alone would go a long way toward building up his retirement savings. As it was, he had virtually none. His answer floored me: “I can afford the payments.”

“Yes, but you have all this stuff. Do you realize how much you have going out each month compared to what you could have going toward retirement?”

A little irritated with me, he replied, “As long as I can afford the payments, I'm in good financial shape.”

I tried to point out to him how much his debt load was eating away at his future. The attrition would eventually leave him retired with almost nothing. He looked at me like a deer in headlights, and it became obvious he didn't hear anything I had said.

Many people seem to believe that they will always have some debt. In answer to that, I ask, “Why?” Who says you have to have any debt? The reality is that debt is an enemy, and if you tolerate it, sooner or later, it will chip away at your security and peace of mind, to say nothing of what it will do to your retirement. Don't kid yourself. If you think you are fine just because you can afford the payments, you are not in control of your financial life. Your creditors are. And they won't care whether you are comfortable or not when you retire. They just want their money back.

The time has come in the process of being a Soldier of Finance to recognize debt as your enemy, analyze it, target it, and blow it up. Choose your ammunition and get started. It doesn't matter which method you use. But you need to use one of them.

Examine your SIT Report and answer the following questions:

1.
Which debts are the largest? _____________________________________________________________

2.
Which debts have the highest interest rates? _______________________________________________

3.
Which debts irritate you the most? ________________________________________________________

 

With this information fresh in mind, determine which type of debt reduction plan best suits your situation and your temperament:

• HI Round (High Interest):
  Start with the debt that has the highest interest rate.
  
• IM Round (Increasing Momentum):
  Start with the smallest debt.
  
• HE Round (High Emotion):
  Start with the most irritating debt.
  
• SB Round (Short Burst):
  Use any of the first three methods to prioritize your debts, then attack the highest priority in short bursts. Make double payments for two months, followed by a single payment for one month.
  

Once you prioritize your debts to determine your first target, fill out an Op Order for it.

Op Order

1.
Mission Name: _________________________________________________________________________

2.
Define the Mission: _____________________________________________________________________

3.
Time for Completion of the Mission: _______________________________________________________

4.
Mission Analysis _______________________________________________________________________

a.
Strengths: ___________________________________________________________________________

b.
Weaknesses: _________________________________________________________________________

5.
Plan of Attack: __________________________________________________________________________

a.
____________________________________________________________________________________

b.
____________________________________________________________________________________

c.
____________________________________________________________________________________

d.
____________________________________________________________________________________

 

Military actions are not that complicated. Strengths are assessed and then used to defeat the enemy's weaknesses. General Nathan Bedford Forrest is quoted for the simplicity of his approach to warfare:
“Get there first with the most men.”
Our training was designed to familiarize us with our resources so that we could defeat any enemy as quickly and as efficiently as possible. Keep it simple and keep it doable.

Defeating debt is not that complicated, either. There are really only two things that have any effect on your financial problems: you can spend less or make more. Any solution is an application of those two concepts. There is nothing else that works.

It really is that simple. Debt strangles your financial security. Eliminating debt results in gaining a handle on your expenses. That means adjusting your cash flow so that you have more coming in than going out. The number one rule of financial stability is to maintain a positive cash flow.

Our problem is that we often ignore the obvious. A woman called one day with some debt issues. I referred her to a friend who is a debt counselor. He chatted with her on the phone, asking questions about her spending habits and jotting down the numbers. After a while, he asked, “You're buying groceries on your credit card, aren't you?”

She was a little taken aback. “How did you know that?” she asked.

“Well,” he replied, “you're telling me all your expenses, and how much you make. But I'm not seeing any food on here. I'm pretty sure you're eating, so the only way I can figure that you could do that is to use your credit card.”

It should be obvious that buying groceries on credit is not helping to produce a positive cash flow. Keep it simple. How much do you bring home after taxes? How much do you spend? If you spend more than you make, then you need to either cut back on your spending or boost your income.

Go / No Go

• Debt is your enemy. The faster you pay it off, the better your life will be.
  
• Targeting debt should be executed deliberately and methodically.
  
• The method used to eliminate debt depends on the type of debt and your personality. You can start with the debt that has the highest interest or begin with the smallest debt and work toward the largest. Another option would be to begin with the debt that most irritates you. Whatever method you use, make extra payments to bring down the principal on one debt while making minimum payments on the others. When one is eliminated, focus on the next.
  
• The Tabata method allows you to make extra payments for two months and then relax a little for one month by making normal payments.
  
• Never become complacent about debt. Persevere until it is gone.
  

Budgeting sucks. I know there are a few people who enjoy it. My wife actually likes keeping track of our expenses, to the penny. If that describes you, I'm happy for you. You probably don't need this chapter.

But, I think most people agree with me—doing a budget is about as exciting as crawling through a muddy field in the rain. I used to balance my checkbook by checking the available balance printed on my ATM receipt; as long as it showed I had money, regardless of whether or not there were outstanding checks, I felt I was good to go. I know many people who balance their checkbooks each month by looking at the closing balance on their statement and copying it into their check register.

What these methods have in common is that you have no idea where your money goes. Unfortunately, one of the most crucial steps in mastering your finances is getting a grip on your cash flow. Inevitably, this means keeping track of what money comes in and what money goes out. You guessed it—that means the nasty “budget” word.

If you hate budgeting as much as I do, stay with me; we are going to explore ways to overcome your repulsion and make budgeting at least tolerable, if not enjoyable.

You will learn the importance and benefits of budgeting, and, as you begin to see positive results, you will find the process easier. It's not unlike working out: I can't say that I enjoy exercise, either, but I love feeling healthy and having energy for the rest of the day.

You don't have to budget all the time. You can take a break from time to time and get away from it; I call it Tactical Budgeting. Your budget becomes part of a specific plan to accomplish a specific mission. Instead of trying to use a detailed budget every day of your life, incorporate it as part of the planning for something that excites you. That shifts the focus from the budget and shines it on your goals.

Similar to the approach to any military campaign, I incorporate a budget into my planning and utilize it partly as a means of setting and accomplishing specific goals and partly to test our financial situation to make sure we can easily handle changes in income.

For example, when we decided to build a house, we had to rearrange our finances. Setting aside money for a down payment and building up a reserve for unexpected expenses, we also planned for furnishings and interior design, along with property taxes and other expenses associated with owning a home. For a time, every penny counted.

Creating a budget to help us accomplish that goal—a line-byline appraisal of our income and expenses—gave us an accurate picture of our cash flow. It helped us pinpoint unnecessary expenses that could be trimmed, and gave us the vital information we needed to reach our goal.

When the house was finished, we settled back into a routine for our expenditures, and once we knew we had a positive cash flow in our new lifestyle, the budget became superfluous.

Another time we budgeted was when we were preparing for our third son. My wife hated her job and wanted to quit anyway. Due to a company restructure, we knew that when she took maternity leave, it would not be paid, so we decided to use the two-month leave as a test of whether or not we needed that income.

We felt that we were in a financial position to handle the change, but by budgeting and carefully tracking our expenses through that time, we knew with certainty. After our little guy was born, she went back to work for a short time and then quit. The budget not only gave us confidence that we would have no unexpected difficulties, but it helped us make whatever changes were necessary in our spending. Once we settled into the new routine, the budget was no longer necessary.

Don't make a budget your primary mission. Tactical Budgeting is part of planning for a mission. Determine the mission and then create the budget. If your immediate goal is to eliminate debt, then a budget is in order. You need to complete an inventory of your financial life in order to plan effectively. The budget gives you a clear picture of your cash flow situation and what you need to alter in order to take the next step forward in your campaign to overcome debt and achieve wealth.

As a squad leader, one of my most important responsibilities was to ensure that my squad was ready for action at a moment's notice. Along with my promotion to staff sergeant (E-6) came certain other responsibilities: I had to know where my nine soldiers were at all times, and I had to keep track of any injuries or sickness that might impair their ability to fulfill their duties. In addition, I had to ascertain that all of our equipment worked at all times, and that each man had a minimum of essential gear including weapons, ammunition, water, night vision goggles, and medical supplies. I also had to know where those items were at all times.

We often received orders to be in our Humvees and out the gate in as little as fifteen minutes. In spite of the challenge of keeping everything straight, we never once failed to hit our SP (Starting Point) on time.

The reason we were so successful was the system we had in place to check our equipment on a regular basis—some things weekly, others daily. Called a Sensitive Items Report, it provided a checklist of things to keep up with. The report verified that each man had a weapon, and not just any weapon, but the correct one, right down to the serial number. We checked that we had the correct and required amount of each type of ammunition. We accounted for grenades and flares. Even our Humvees were considered a sensitive item, and we confirmed their serial numbers to be sure we had the right vehicles.

As a regular drill, our drivers carried out a PMCS (Preventive Maintenance Check and Services) to catch potential mechanical problems. We tested radios and checked the .50-caliber machine guns and M249 SAWs (Squad Automatic Weapons). Ammo was examined daily to be certain we had the required amounts and to clean out any sand, which potentially could cause problems.

Repetitive and often redundant, these constant checks were more annoying than I can tell you. They were the military version of budgeting, and they sucked. But the first time we came under fire, I was grateful for those annoying checks; everything worked. The last thing you want to discover in the middle of a firefight is that you didn't bring the ammunition.

You would be amazed at how little you really need to get by. In the military, I had four uniforms, four sets of PTs, running shoes, socks, boots, toothbrush, razor, notepad, a Bible, and some stamps—the bare essentials. With three meals a day, we were able to make it work. And the truth is, our training prepared us to do with even less if necessary.

The reality for most people is that they spend money on things they don't really need, yet if you ask them, they are sure they can't do without any of it. An important step in getting your finances under control is to understand where your money goes. Your initial budget should be a Basic Training Budget, giving you a clear snapshot of how much you spend unnecessarily.

If you are completely clueless about where your money goes, the place to start is simple record keeping. Gather the facts and analyze your records: your bank statements, receipts, and your credit report. You might also want to keep a record of all your expenditures. Carry a small notebook around with you and write down every penny you spend. You probably will be shocked when you see where your money goes. You can also use a simple spreadsheet with multiple categories to record your spending.

Once you have all the facts, setting up a budget can be as easy as doodling on a napkin. There are budget forms available at office supply stores, or you can choose from a variety of computer programs ranging from Excel spreadsheets to bookkeeping software like QuickBooks. If you're uncomfortable with those, simply use a piece of paper and a pencil. Whichever system you will take the time to use is the one that's best for you.

My wife and I started by breaking down our planned spending into categories. This can be as simple or as complex as you want to make it. A simple budget could have a few categories like “Mortgage,” “Utilities,” “Food,” and “Car.” Or you can break it down further with categories such as “Electricity,” “Internet,” “Cell Phone,” and “Water.”

Next, collect your most recent pay stubs. If you have a job that regularly pays out a bonus, include that amount. Using this information, project the amount of money that will come in for the next month. Allocate the available money for the categories of expenses. A sample budget might include:

• Rent/Mortgage
  
• Utilities
  
• Insurance
  
• Property Tax
  
• Contributions
  
• Phone
  
• Car Payment(s)
  
• Satellite/Cable Bill
  
• Loan Payments
  

Don't forget to include variable expenses such as:

• Babysitting
  
• Gifts
  
• Groceries
  
• Eating Out
  
• Fun
  
• Gas
  

Include your planned debt reduction efforts in your budget. The purpose of this budget is to accomplish a specific mission, such as paying off a credit card or putting money aside to buy a house. This budget item might be a single entry such as:

• Extra Payment on VISA Card
  

(For an extensive budget form, with many more categories and specifics, refer to the budgeting form at
www.soldieroffinance.com
.)

Congratulations! You now have a budget for the next month. The final step is to subtract your projected expenses from your projected income. If the number is less than zero, you have a negative cash flow, and will need to make some adjustments, such as allocating less to eating out, or canceling your cable, or trading in your car for something less expensive. Be creative, but get to a positive cash flow that moves you toward fulfilling your goals. The sooner you achieve the mission objective, the sooner you can stop budgeting for a while.

At first, a budget will feel constrictive, but the truth is you will be liberated by this exercise. Instead of wasting your income on things that don't move you forward, you will redirect your efforts toward your dreams and your goals. With a budget, you can finally gain traction with your money.

A host of online resources are available to help you master budgeting—many of them free. My favorite is
www.mint.com
. In my opinion, it has become the premier personal finance tool on the web.
Kiplinger's
magazine called it the “Best Budgeting Site,” and it was rated a “Top Pick” by
Money
magazine. With
www.mint.com
you have the ability to upload your account data from your banks, credit unions, credit card companies, lenders, and investments. Having your financial life all in one place helps give you a bird's-eye view of what's going on. Did I mention that it's free?

Look around and find the budgeting tools that work for you. The method you use is not as important as the fact that you are proactively planning a way to get your life under control and making forward progress toward your goals. Whatever type of budget gets the job done is a good budget.

1.
Identify a goal that budgeting will help you accomplish and write it down.

2.
Set a time for the budget to start and to end.

3.
During that period, keep a daily ledger to track all of your expenses so that you can see where your money goes.

4.
Revise your budget to reflect areas where you need to cut spending. Follow the revised version for the period of time necessary to accomplish your goal.

 

Jim Wang is the creator and editor of the popular personal finance blog “Bargaineering” (
www.bargaineering.com
). Often quoted in financial publications and on business broadcasts, he still calls himself “a normal guy.” When he launched the blog, he knew nothing about handling money, but has since become one of the most respected advisors in the nation. Part of his success is budgeting, as he explains: