Debit versus Credit

The Worst Years of My (Financial) Life

I have a confession to make. It wasn’t very long ago that I experienced the worst few years of my life, financially speaking. In the latter-half of 2004 I began my adult life full-force, and I hate to admit, but I began it quite poorly. In not very much time at all I managed to get myself in thousands of dollars of credit card debt, which I discovered was a debt that would not easily go away. In my defense I was a full-time college student working part-time jobs to try and pay the bills, but playing the devils advocate it is obvious that I could have done more with the little money I made. I managed my money poorly for a time, but thankfully I’ve been able to learn from those mistakes. I’d like to share just a little bit with you on what I did wrong and, as cliché as it sounds, what I would do differently if I could do it all over again.

It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

It all actually started out pretty ironically. I told one of my friends in early 2004 that I wanted to save $30,000 by the end of the year 2005. In fact I almost did quite the opposite; I do believe by the end of 2005 I had around $15,000 – $20,000 worth of student loans and credit card debt. It happens before you even know what’s going on… one minute you’re sitting on the Titanic, and the next minute you realize the ship is sinking and there’s not a single lifeboat in sight.

Let the reckless spending begin

I started my freshman year of college in August of 2004 and due to certain circumstances I had no money to pay for my tuition. Doing what I figured was absolutely normal I borrowed some money from my brother to pay for my tuition. I started looking for a job at about that time also, realizing the need to repay my brother, but didn’t find anything steady for a few months. At that point I had applied for and received a credit card which I used to pay for my basic living expenses: gas, food and the like. I expected to pay off my credit card and my brother within a few months from the time I got my job, but instead I kept using my credit card and accumulating debt. I hadn’t done any budgeting and figured out how much I could afford to spend a month, and so I did what so many Americans do; I spent more than I made every single month. Within no time at all I had accumulated around $5,000 dollars worth of credit card debt, and I was beginning to feel as if I were drowning in debt. It was at this point that I began looking for a solution, but the solution I found was not a permanent one.

I wanted to cut down my credit card debt and figured I could take out some student loans to pay it off and then I could start fresh. This worked for a few months, but I still had not disciplined myself to live within my means, and when my lack of discipline was combined with the cost of tuition and books my credit card debt quickly climbed back up to its previous levels. This is when I decided to take on more student loans to pay down my credit card debt again, only this time unsubsidized loans with a higher interest rate. After I had racked up credit card debt and taken out student loans to pay it down a few times I finally realized the error of my ways and decided it was time for me get serious about my finances. To my credit I did fairly well with this at first, but eventually I managed to slip up again… and this time for even more than all of my student-loan debts combined.

New cars are great… if you want to throw your money away

I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

Yeah I did it, I bought a new car. Not just any new car though… I bought myself a 2006 Mitsubishi Eclipse back in March of the same year. Even though I had managed to accumulate a significant amount of student-loan debt at this point I had not yet made such a large financial mistake as I did when I purchased this car. Once all was said and done I had a loan in the mid to high 20’s and a car worth barely 20 thousand dollars. Viola! Instant 36% depreciation. I gave up a lot when I signed those papers, but one thing I regret the most is the amount I could have saved if I had kept my previous vehicle and put the difference between its payment and my new car’s payment into a savings or an investment account.

After this mistake I had had enough of my idiocy. I realized how poorly I had been managing my finances for the two prior years and I resolved to shape up. I concentrated on spending less so I could pay down my debts and save a little each month. I paid just a little extra on my car each month to try to get the principal balance down. I married a woman who knew how to save. I am proud to say that other than my student loans and my auto loan I am debt free. My wife and I have also managed to save between our 401(k)’s, a brokerage account and an emergency fund enough to almost completely pay off either my auto loan or my student loans.

If I could do it all over again I would have made myself a budget and stuck to it. I still would have had some student loan debts, but looking back I realize I could have avoided most, if not all, of my credit card debt and I could have my original auto loan almost completely payed off by now, had I not traded it in for a car two and a half times more expensive. I believe I would have been able to save a decent amount during that time. I would not have accomplished my goal of $30,000 in savings, due to my small income, but I would have accumulated some wealth if I had done these things. Mistakes are meant to be learned from, and I do believe that I have learned my lesson from these mistakes in my past.

What about you?

What financial mistakes have you made that you are not proud of, and what have you done to learn from them and/or correct them? I’d love to hear what you have to say!

October 26, 2007
My 33% Savings Plan
One of the most difficult things that I’ve ever had to do when it comes to my finances is to set a budget and actually stick to it. I have found that when it comes to personal budgeting that less is more, and what I mean by this is that the less you have to nitpick and scrutinize the happier you are and the easier budgeting and more importantly saving seems to come. The easiest method that I’ve found to budget is the percent-based method. I’ve been budgeting this way for 6+ months and I absolutely love it. Let me list some of the reasons why I find this method of budgeting the most superior that I’ve ever tried.

flexible with earnings increases

easy to set up automatic savings

percentages easier to remember than dollar amounts

So what exactly is this percent-based method of budgeting, or as I call it “My 33% Savings Plan?” It’s quite simple really. I’ll make up some numbers as an example (and to avoid complicating things I’ll pretend this is a perfect world and there is no such thing as taxes or health insurance). Let’s say that I just graduated from ASU and got a job at Apple working for their finance department. My starting salary is going to be $50,000 a year (again I’ll be keeping things simple, so my net salary will be the same as my gross salary). I decide that I’d like to save 33% of my salary, and the rest can go towards living expenses and be my mad money. So $50,000 x 33% = $16,500 a year or $1,375 a month. This leaves $33,500 (or $2,792 a month) a year to go towards a mortgage (or rent), food, utilities, insurance, a car payment and spending money.

I told you it’s easy, didn’t I? I really like this method because of the flexibility it offers. For example let’s say that I get a $5,000 bonus from Apple during my first year of employment. Technically this whole amount could go towards savings, but what’s the point of having money if you never use it? Assuming that I have no debt other than my mortgage (because of course if I did I’d probably want to apply a large chunk of this bonus to my debt), why not just save 33% of the bonus, or $1,650 and spend the rest? Maybe I could buy some new furniture, or invest in some exercise equipment or buy a new laptop computer. Of course this same principle could be applied to a raise or an annual increase. The more money you make the more you can save and the more you can spend!

…just because I choose to save 33% of my take-home income, doesn’t mean for any reason that you should feel the need to do so. Feel free to adjust the percentage amount that you’ll be saving to most fit your needs.

Of course just because this method of budgeting sounds easy on paper (or on the screen really) doesn’t mean that it doesn’t require discipline. If your current spending habits don’t allow for you to save at the very least 10% of your income you’ll have to keep track of your spending for a few months and see where you can cut back on expenses. By saying this I also mean that just because I choose to save 33% of my take-home income, doesn’t mean for any reason that you should feel the need to do so. I have large financial goals I’m shooting for and I feel that 33% will help me accomplish them much more quickly. Feel free to adjust the percentage amount that you’ll be saving to most fit your needs.

One last thing I recommend is setting up an automatic savings plan. One easy way is to set up your direct deposit to automatically deposit your chosen savings percentage into a savings account or money market of your choice. Another way would be to have all of your income deposited into a funnel account and then funneling all of your savings into a designated account (or accounts). I personally prefer to funnel my money into different accounts once it’s deposited into my main checking. I think that I will cover my funneling techniques in a later article for all of my loyal readers.

Not all student credit cards can be considered low interest credit cards and hence when applying for a creditcard, ask for the secured credit cards only.
October 23, 2007
Greed, Poor Management.. or Both?

If you try to keep up on business news like I do, then by now you have read about Intel and their third-quarter record sales. These record sales can be attributed to strong demand for laptop and notebook computers (on a side note, I do wonder how much of this can be attributed to the strong sales of Apple’s Macbook and Macbook Pro line of notebooks). The company reported third-quarter sales of $10.09 billion, which is 15% higher than their third-quarter sales in 2006. Their net income for the quarter was reported as $1.86 billion, which is 43% higher than their third-quarter of 2006 net income of $1.30 billion dollars. Their short-term debt is down from their second-quarter reports, their long-term debt is at about the same level and their cash and cash-equivalents (this means any short-term investments and cash – anything which can be accessed as cash within a years time) are up about $1.8 billion dollars.

It seems that all is well at Intel; profits are up, income is up, debt appears to be decreasing and costs are down when comparing the past three quarters to the same period in 2006. This is fantastic news for Intel when one considers the shocking revelation they received last year; they had their first revenue shortfall in 3 years and were losing market share to their considerably smaller competitor Advanced Micro Devices, otherwise known as AMD. Upon realization of their shortcomings they launched a major restructuring and dropped money-losing businesses, cut 10,000 jobs and pushed new products to the market. At first glance it seems that things are looking up for Intel, in fact one might even say they are going very well. However it seems that there is something they’re not telling us.

The Arizona Republic reported on October 17 that Intel sales hit a third-quarter record. In this same article they reported that Intel announced it would be cutting 2,000 jobs in the fourth quarter of 2007. It should be noted that this is on top of the 10,000 jobs that they have already cut. Nothing seems to add up with this announcement. Their profits are high, their expenses are down and their sales are up, and yet they announce new job cuts? Are they just being greedy and cutting jobs for the sake of further increasing profits and inflating their stock’s value? Is this due to poor management? Playing the devils advocate I’ll ask if maybe these jobs are being cut to make way for new jobs? Or is there something else that we don’t know, something that hasn’t been found on the books and that hasn’t been reported?

What do you think? I’d like to get an active discussion going on this topic if possible, so please leave your comments.

October 20, 2007
Welcome to Debit versus Credit

With the launch of Debit versus Credit I thought it would be a good idea to introduce not only myself, and my motivation for creating this web destination, but also the idea behind Debit versus Credit; the credo or mission statement, if you will.

My name is Joseph McClellan. I am a Global Business major with an emphasis in Finance, at the School of Global Management and Leadership at Arizona State University. I have developed a strong interest in finance over the past few years and have begun disciplining myself in order to achieve the financial goals that I have set for myself. I want what any other person in this world wants: financial security; food; shelter; a few toys here and there. I also have a strong desire to help others with not only my knowledge and drive, but also my financial independence. Don’t misunderstand me – I have not reached self-actualization, but I believe I am well on my way to achieving my dreams, and I want to help others do the same. This is the primary motivation for my creating Debit versus Credit.

Debit versus Credit is about more than just investing, more than just budgeting, more even than just business; it is about life experiences and how different ideas and financial strategies can be applied to ones own life. Our mission here at Debit versus Credit is to inform, educate, motivate and entertain you, our readers, on matters of financial (and practical) importance. Let us help you achieve your financial goals, one step at a time. Welcome to Debit versus Credit!

October 12, 2007
Are You Ignoring Free Money?

Do you have any rich relatives or friends? If one of them were to call you up and tell you that if you invest your money in a mutual fund that they would match dollar-for-dollar up to 5% of your investment amount, would you turn them down? I would hope not. Unfortunately this is exactly the sort of thing that I see my friends and associates doing quite frequently. Of course I’m not referring to my best friends rich Uncle, but rather his employers’ 401(k) retirement program, and their matching funds policy!

So let me ask you again, are you ignoring free money? If you are contributing to your 401k plan and taking advantage of the full employer match, then good for you! However if you are like my friend and haven’t bothered to sign up for your 401k for whatever reason, then I’m going to strongly recommend that you quit procrastinating and (as Nike loves to say) just do it! Don’t try to convince yourself that it’s not that important right now with one of your lame excuses… just get it done! When you next go into work send a quick e-mail to your boss, your manager, your HR rep; whoever you need to contact to ask them what you need to do to start contributing to your 401k.

What is a 401(k) and how does it work?

A 401k is an employer-sponsored retirement plan and is named after section 401(k) in the IRS tax code. When you sign up to contribute to your 401k you elect a certain percentage of your gross (meaning before taxes and other withdrawals) income to be contributed to your 401k plan. The percentage that you choose will then be withdrawn from each of your paychecks, and put into your 401k account. These funds are then used to purchase mutual funds or other securities (such as your employers stock).

Pretty simple eh? There is one more benefit I’d like to mention: the tax advantages of a traditional 401k. Any monies which you contribute to your 401k are not taxable (this would not apply to the Roth 401k)! In other words if you make $30k a year and contribute 10% of your pay to your 401k your taxable income will only be $27k instead of the $30k which you actually earned! At a 20% tax rate this comes out to a tax savings of $600 dollars!

October 12, 2007