Death By Plastic

This is a very timely post for me, since I’ve been sick for over a week now. Luckily I didn’t miss any work this time, but it has happened before. Bad things happen to good people. It’s important that you prepare now.

The most common excuse for carrying credit cards is “What about emergencies!” I’ve already shared my thoughts on this once, but it bears repeating. Your debt is an emergeny and using credit cards only makes it worse.

I think it’s important to first define exactly what an emergency really is. Once you’ve done that it will be easier to find ways to deal with those emergencies without resorting to credit cards.

There are basically only three things that a person needs to survive — health, transportation, and shelter. In other words, you need to be able to work, have a way to get to work, and have a place to go when you get off work. Beyond that, most things are more wants than needs.

A new car is not an emergency. Neither is a new CD or DVD. New clothes or shoes are not emergencies, unless your current clothes are so worn out you can’t wear them to work.

As long as you’re in debt, you need to ask yourself “Will buying this help me pay off my debt?” If the answer is no, then you probably don’t really need it right now and you certainly don’t need to charge it.

Here are a few ways to deal with real emergencies without having to resort to more debt.

Insurance

Problems with your health definitely classify as emergencies. If you don’t already have health insurance, you need to find a way to work it into your expenses as soon as possible.

Next, look into life insurance and disability insurance. Term life insurance is very affordable. Don’t leave behind a lot of bills for your family to take care of if the worst should happen to you.

Disability insurance is needed in case you’re ever unable to work. It will help pay your bills when you’re not able to pay them yourself.

Also, if you’re renting look into renters insurance. It’s usually reasonably affordable and will protect your possesions from things like fire or theft.

No one thinks insurance is very important until they need it.

Savings

You need to have some money in the bank for things that aren’t covered by insurance. If you’re in a car accident, your insurance will pay to have it repaired. If your car just breaks down, you’re out of luck.

Think of this money as a “cushion” between you and the rest of the world. Sometimes you will fall down, but this should be enought to keep you from hurting yourself.

Everyone always wants to know how much they should have in an emergency savings account. The trouble is different people have different needs. Anything is better than nothing. So if you don’t have a savings account, now is a good time to set one up.

I would try to save at least one month’s worth of bills as quickly as possible. This should be enough to keep you going no matter what happens.

I talked a few days ago about my favorite online savings account. Go back and read that post if you need some help setting up an account.

Barter

I saved my favorite way of dealing with emergencies for last. If you have a useful skill to offer someone, then bring it up when it comes time to pay your bill.

I’ve bartered with everyone from accountants to mechanics. They provide a service for me and I return the favor. In my case I work on computers, but I know other people who trade services like carpentry, painting, and even house cleaning.

I’ve also worked on people’s computers in exchange for food. I’ve been paid with everything from fresh vegetables to fresh fish. I’ve also had a few people prepare meals for me.

My family always jokes about washing the dishes at a restaurant to pay the bill. I’ve never actually done that before, but if I was hungry and broke I might ask the owner if that was an option.

The most important thing to remember is this: Now that you’ve committed yourself to getting out of debt, make sure that nothing can stop you. Obstacles will arise so be prepared to overcome them without bringing on more debt. Never charge again.

I paid off a credit card tonight. I didn’t transfer part of the balance to another card and then pay off the rest. I paid it all off. In cash.

I just completed the online bill payment for almost $900 and it felt great. It has taken me months to get the balance down this low, but it was worth it. This means one less bill to pay for the rest of my life.

Once you’re committed to paying off your debt, it’s important to keep the end result in mind. Sometimes it seems like it will never happen, but I can promise you it will.

Think about how long it took to run up the balance on the card. It may take even longer to pay it off since the bank has interest on their side, but you will get it paid off.

As long as you never charge again, you’re in control. As you start paying down the balance, the bank might try to tempt you with things like a higher limit or special interest rates, but don’t give in.

Higher limits only lead to higher payments and special interest rates always end. There’s nothing that any bank can do to change my mind. No matter how enticing they try to make it sound, the only real purpose of a credit card is to make the bank rich.

The only real “no hassle” credit card is one with a zero balance. It makes me very happy to know that Capital One will never be able to hassle me again.

Now if you’ll excuse me, I’m going to go celebrate…

I almost broke my own first rule of debt elimination last weekend. It happened at the Apple Store. A shiny new MacBook was just screaming “Buy Me!”

I went through all of my usual excuses:

• “I’m getting a raise soon that will cover the increased payment.” … maybe.
• “I’ll be using it to make money.” … like I’m doing with my current computer.
• “I’ll sell my old computer to cover some of the cost.” … but not all of it.

I was actually there for new speakers. I could afford to pay cash for the speakers, but obviously not the MacBook. But it was just so shiny and the screen was so wide, I couldn’t resist.

I kept looking at the MacBooks while the store employee was getting my speakers from the back. Just as they were bringing out the speakers, I convinced myself to get the MacBook. I walked up to the employee and said: “I’ve changed my mind. I want the MacBook.”

He smiled and said: “Oh, we’re out of MacBooks right now. We should get more in sometime this week. Would you like me to put your name on the list?”

Thankfully that was the jolt that I needed to get my brain to start working again. I declined his list, paid cash for my speakers, and left the store.

Once you decide to never charge again, you need to be very careful about placing yourself in dangerous situations. Everything is perfect in the Apple Store — the lighting, the music, the atmosphere. Everything is designed to make you buy a new computer.

I’m sure I would’ve loved the computer, but every month when I looked at my credit card statement I would’ve been disappointed with myself for buying it. It’s so much better to save up the money and buy things guilt free.

I will buy a MacBook, but it won’t be on a credit card. If you’re willing to live with an increased monthly credit card payment, why not just put that much extra in a savings account every month instead? Then when you’ve saved enough, buy the item guilt free.

Beware of places where you are likely to charge. If you have to go to one of these places, make sure you leave your credit card at home. Better yet, don’t take your credit card anywhere. “Don’t leave home without it” is for suckers.

This is the math part of the plan. It seems like everybody hates math these days. To make matters worse, we’re going to be dealing with some scary numbers.

Luckily, it won’t take long to do this math and when you’re done you should have a much better understanding of your present and future financial situation. Here are the two numbers that you need to know:

1. Your monthly income
2. Your monthly expenses

These two numbers can usually tell you everything you need to know about your money. As long as your expenses are greater than income you have problems.

Income

How much money do you bring home in one month? This number can sometimes be a little tricky to calculate.

I only get paid once a month so it’s easy for me. If you’re also only paid once a month, then just make a note of your net pay and you’re done with this part.

The first problem has to do with the number of paydays in a month. If you get paid once a week, you might find that some months have five paydays while others only have four.

If you get paid every week, multiply your paycheck by 52 and then divide the result by 12. If you get paid every two weeks, multiply your paycheck by 26 and then divide the result by 12.

The other problem with calculating your monthly income only shows up if you get paid different amounts from month to month. For example, my wife is paid a monthly commision based on her sales.

If your paychecks vary from month to month, you’ll need to average them out. If you’re making the same this year as you did last year, divide last year’s net salary by 12. Otherwise, make an educated guess and adjust the number as needed.

Expenses

Now for the scary part. What is the total of your monthly expenses?

We know how much you bring in every month, now we’ll figure out where it goes. Include everything that you can think of here.

Start with the minimum payments on your credit card bills, then your living expenses like rent, car payments, utilities, gas, and food. Separate how much you spend on groceries from how much you spend eating out. Don’t forget other expenses like club memberships, dry cleaning, and leisure activities.

You’ll surely forget a few things, but that’s OK. As you go through the next month, try to think about this list every time you spend money. If you forgot something just update the list.

Now think about these two numbers carefully. You need to do everything in your power to increase your income and reduce your expenses. This might mean a pretty significant lifestyle change.

Spend less than you earn or you’ll never get out of debt. Just be sure you don’t cut out all of your leisure activities. If you take all of the pleasure out of your life, you won’t be able to live with this plan.

Chances are you’ve already done what you can to reduce expenses. With that in mind, the final step of this plan will deal with a few ways to increase your income.