Interest Rate Scrutiny

Here's some more interesting output from yesterday's marathon analysis session. Proof that debt is bad and credit cards are evil. In the last four months, 4 of 6 credit cards sneaked interest rate increases:

My non-Stafford student loans got a 75 point kick too!

And, both gas cards raised our credit limits. Shocker.

Inaugural Spending Analysis!

I feel naked.

I'll you what -- never have I looked this carefully at spending. I am again shocked, shocked, to see that as a percentage of total montly spend, TAXES completely dominate the pie chart. At 22% of total expenditure (even in months when I "splurge" on dining) on average the next largest category is RENT and that amounts to only 11% -- half the tax figure! Eeegads.

I won't go line by line in this post -- you can double-click the image and see my comments and observations in the notes section. Here are the changes we're making for the remainder of October:

1) No more separate line items for grocery and dining. You can see the obscene combination of those two categories above. We've added "Allowance" and it amounts to $140 for the week. To get my better half involved and paying attention to The Turnaround, we split the $140 and do our own shopping or eating out. In essence, we're each responsible for feeding our own-selves, be it eating out or groceries. This worked great last week -- I had $25 left over and we used that for a cheap meal out on Thursday night. He had $20 left and we used that for the movies last night (go see Serenity). Because of the surprise surplus, we're going with a $120 allowance next week.

2) No more debit card usage. No quick coffees, snacks, books, magazines on the card. If you want it, it comes out the allowance. Want a magazine? Eat less or eat on a budget.

3) Acute focus on the Bank Charge line item. Make sure it's zero in October. Oversights are too costly!

4) Mandatory 10% deposit to savings account with each paycheck. This is going to be hard for us, since there are a few pressing debts to pay. But we need that buffer in case of emergency and need to get into the discipline of saving.

5) I considered eliminating charity until things are under control. Right now, I'm spending roughly $100 per month to causes, which is about 1/5 of what it should be if I were sticking to the 10% rule so to cut this seems ridulously petty. Instead, I'm going to try to stick to the $100 and actually grow my overall contributions by volunteering actual hours -- I learned on Friday that my employer will donate "matching grants" to charity of my choice based on my volunteer hours worked.

6) No extravagancies. No new electronics or sporting equipment or major gifts. A true test of discipline, my birthday is at the end of this month and I know the hubby is going to want to do something special. I'll have to persuade him that a) I don't want anything expensive (I really don't) and b) he shouldn't feel bad about it (he really shouldn't).

7) Explore the whole tax thing. Other than start up my 401K, I don't know what I can do to lower my payroll taxes. Open to suggestions.

Net Worth is Here!

Alas, here we have it! Again, I can't say it enough -- NAPF is a huge inspiration. I spent the entire day organizing, updating and thoroughly scrutinizing every account balance, interest rate, finance charge, bank fee and transaction over the past three months. The hard work led me to a completely updated Net Worth statement.




The surprise that whooped me right upside the head:

1) Gas card balances have exploded to around $1400! I'm shocked. Shocked. I hadn't been following all the trips to the pump over the past several weeks. But if you've had occassion to read about my traffic woes you'll know our that between us, we travel about 2,400 miles per month, with much of that time wasting fuel in idle traffic. Beyond limiting pleasure treks, I'm not sure there's much I can do about the expense.

Notes to the statement:

1) I'd mentioned earlier that my total consolidated student loans totaled $70K. My statement still shows about $30K listed separately -- I'll move those over when the final paperwork arrives. Interest rate is will be about 4%.

2) Liability accounts still include my better half's student loans, which currently amount to approximately $11K. They have already been through consolidation, but I may look at the possibility of adding them to my existing application (I have 180 days to add more loans) to simplify things.

3) University student account is an outstanding balance owed for my final MBA class. At $2300, this is a priority. I need to take care of this right away.

4) Retirement situaiton is pathetic. Right now, I have an automatic $50 deduction to the Roth IRA. Hubby has nothing, and the traditional IRA is a relic from an old 401K rollover. Steve over at In Cash Flow We Trust suggested I at least contribute 3% to pick up my employer match. I think I will.

5) On a more positive note, at least there are some assets :) Even though we rent the apartment we live in, we own some real estate. The first asset measures our share of equity in a nearby property (we have partners in that deal). The second is our own, a three-acre plot northeast of LA (think urban sprawl). Good piece of land -- area is already subdivided, has roads and people are starting to build. We'll just hang on. Or if things really take a nose dive, at least we can pitch a tent and call it home.

Update: For some reason this image is scaled to 60% making it hard to read. If you click on the statement, and then click again, it will blow up to 100%. I'll have to figure out how to make it more legible within the body of my posts. Oh well.

Irrational Attachment?

Uh-oh. I was wondering how long into my turnaround project it would be before I ran head-on into this as one possible explanation for my embarassing situation:

Consider the irrational attachment to New York City that would prompt a family of four to live in a one-bedroom apartment, for example. We left reluctantly, viewed it as a sacrifice for the kids, and predicted living in the suburbs would make us unhappy. Strangely, it turned out to be quite the opposite.

(Courtesy of FMF).

It's not like I hadn't thought of this before. I do wonder if I'm spending too much of life's energy to live here in LA because of the fear that "other places" will make me unhappy. I wonder if simplifying will lead to a stronger, more secure existence. I've already touched on big gaping hole that sits between Los Angeles wages and Los Angeles cost of living. And I'm well aware that I could take a job in St. Louis and quadruple my standard of living. So why am I still here? The quick answer is that frankly, suburbs scare the living daylights out of me.

Societal Design Problem

That's my take. This morning over at CC, Flexo highlights an article discussing an economist's solution to dealing with traffic congestion. The solution? Price discovery, of course.

SoCal traffic problems are worse than anybody imagines. The last 5 years, I've personally experienced the following changes:

LA San Diego on Saturday morning:

• Was 1.5 hours
• Is 5 hours

LA to Santa Barbara on Friday night:

• Was 2 hours
• Is 4 hours

Santa Barbara to LA on Sunday afternoon:

• Was 2.5 hours
• Is 5 hours

This morning, my husband left the house at 5:30 am to drive 19 miles up the 405 to work in Santa Monica. If he leaves at any later than that, it's a 1.5 hour drive. No joke. My commute is just as bad, and as I sit in traffic each day I often wonder how the Mayor goes to sleep at night. How does a person leading a city, sleep at night when this life -- a life of sitting in traffic -- is the reality of the citizenry? It just seems weird.

Then I remembered the 1984 Olympics. They were here in LA, if you're old enough to remember. There was a guy -- his name's Peter Ueberroth -- in charge of the organization effort. I didn't live here then, but when I talk to locals, they all seem to remember "how great it was during the Olympics." Evidently, Mr. U didn't want traffic problems snarling up the Olympic schedule.

What'd he do? He talked all major employers into a staggerred work schedule. Simple. Yet here we are, 20 years later and still going to work at a time when telecommuting could easily eliminate 20% of the traffic out there today. Why? The age-old-corporate-ladder-climbing-metric known as face-time. Or as I like to refer to it, seat-warming. When I talk later about Your Money or Your Life, there's some interesting math behind this idoitic phenomenon.

Anyway, back to the economist and price discovery. Lane #1 on I5 at 4:30 = $7, Lane #5 on 805 at 10:30 = $3. Seems to me this idea needs a little more fleshing out. Lots of markets have price discovery mechanisms, yet still manage to fail. The stock market fails the individual investor when some people know what others don't. That's the problem known as imperfect information. The stock market fails the institutional investor when news of a large trade causes the value to take a nose dive in front of the trade. That's a problem called market impact. Where the stock market does a good job, is in the area of transparency -- it's easy to know what the prices are right now, and what they were last week, last month, last year. In theory, this helps market participants make decisions.

So the way I see it, for this to function as a true market system:
1) Drivers will need to know when and where everyone else is driving. Firms will undertake research, make forecasts, publish reports and charge you $50 for the trouble. Or, you can risk it. Be a maverick. Obtain hot tips from neighbors. Or friends. Or the guy on the corner with a sister who knows someone with a friend at the city transportation department.
2) Drivers will want to know ahead of time when a bizarre event such as unusually light traffic is about to occur, thereby driving down the price of their lane, potentially causing them to take advantage of the situation and make a trip that was heretofore unplanned.
3) Drivers, armed with solid pricing history of all traffic in all lanes and freeways at all times, will run regression and create predictive models enabling them to optimize their traffic spend through hearty quantitative analysis.

Just think, we'll all be saved by choosing when! And where! And at what time to drive!

This of course assumes, people can choose when and where and at what time to drive.

UPDATE: Someone shares my position on relationship between societal design and transporation.

ANOTHER: Of course! Who can ever beat this guy to the punch! I honestly believe our friend Mr. Reynolds somehow ported my grey matter overnight.

*sigh* I feel so hip, so relevant, so in-the-know, so "plugged in." Faith Popcorn, watch out.

Relief In Sight?

I feel a tiny step closer to the American Dream tonight.

A few months ago, I sat down with a close relative from another part of the country to try and explain the SoCal housing market. I used the following example to illustrate the absurdity of what is happening here:

• One bedroom, one bath
• 900 square feet
• Build in the 1940’s
• Listed for $839,000

She said to me, “Why would a rich person buy that house?” I said, “They don't."

Then I went and found solace and inspiration here.

On an unrelated point, I listened to the new Sheryl Crow CD this weekend. Two good songs: "Good is Good" and "I Know Why". The rest is so dreary that after listening to the album in its entirely I was in a depressive state so serious that even Depeche Mode could have rescued me. Don't say I didn't warn you.

Quick and Dirty Analysis: Subscriptions

After my earlier post proclaiming this as my first post-MBA turnaround project, I thought I’d roll up my sleeves this afternoon to see what I could do right away to stimulate the reversal of fortune that serves as the purpose of this blog.

Fortunately I already use Quicken to track expenses, so it wasn’t hard to get a handle on where my funds are going. Uh, I have a lot of subscriptions – automatic monthly deductions from my checking account, most of which fly under my radar since I have nothing to do with paying the bill. I'm sure that's no accident.

Anyway, so I sat there for two hours staring at the table of expenses, committing to cancel then un-committing, scratching out, erasing and moving around the various subscriptions between “Don’t Take Away or I’ll Die” and “Into the Dumpster” lists. Ugh-gad, this was not easy.

Into the Dumpster

1) Premium Cable. I’m not a fan of monopolies, so this one was easy.
My rationale goes something like this: I have more important things to do than watch 500 channels. Don’t get me wrong – I love television. Some of Hollywood’s best work is on cable TV right now. I’ll resume my love affair when my affairs are in order. I feel so brave.
Savings = $30

2) Tivo. This hurts. It hurts less than it might have one month ago, though.
Rationale: Tivo is starting to sell-out anyway; more evidence here. Despite my MBA moniker, I'm a hippie-at-heart and companies that forget what made them in the first place deserve to be deserted.
Savings = $13

3) Xdrive account. I keep my files backed up here in case of emergency.
Rationale: The user interface is clunky to begin with and I often times can’t log in due to technical problems on their end (which they never admit to). I hear AOL has bought them out, even more reason to jump ship. I’ll write my files to CD-ROM and put them in the fire safe I was planning on buying anyway.
Savings = $10

Don’t Take Away or I’ll Die

1) Audible.com. I have a membership plan that allows me to download one audio book + 1 periodical subscription (I get WSJ every morning) each month.
Rationale: I’m already hopelessly addicted to my iPod, which at this point probably stores as many books and periodicals as music. I used to get WSJ in print, but the papers just collected unread in a large pile in the corner of the room. Strange phenomenon. Anyway, I spend 2-3 hours in LA traffic each day, and Audible helps me make good use of that time.

2) Netflix. No late fees. Ever. No having to leave the house. Ever.
Rationale: My plans for a reversal of fortune will no longer permit a $20 expense at a movie house. I won’t be eating out much anymore either, so watching DVDs at home is likely to be the best (only?) entertainment we’ll have for a while.

3) Gym membership.
Rationale: Heart disease and stroke run in the family. No brainer. At $59 per month, I could look for a less expensive option, no?

So there you have it, in a matter of hours I've come up with monthly savings of $53!

Glass half-full: "Why, if I invest that amount an earn the average annual stock market return of 12%, that amounts to $14K over the course of 20 years! I'm on my way!"

How I really feel: "Woo-wee, what an accomplishment. Life just got more boring but at least I can afford to pay cash for my gas."

The Turnaround Plan

One way to look at this situation is to approach it the same way a management consultant deals with a turnaround case – detached and analytical, not personal. It’s difficult to face up to failures in decision-making or admit to a 4-year laissez-faire attitude toward personal financial management. *sigh*

In the great spirit of moving onward, I consider this to be my first post-MBA turnaround project. Somehow, I’m going to find ways to move those big numbers from the right side of the balance sheet to the left, while at the same time keep the daily practice of beating my head against the wall to a minimum.

Consultant Hat:
In looking at my case, I’ve found a few pieces of good news:

• I’m cash flow positive. Barely.
  
• Over 70% of my total debt is kept on excellent terms (4% or less).
  
• I have investments in real estate.
  
• I am 9 months away from satisfying 1 auto loan, which will free up $600 in cash every month.

On the flip side, there are some major problem areas:

• Zero contribution to company 401k plan. I am not getting the tax benefit and I’m forgoing company matching.
  
• Servicing a second auto loan at 12%, way above market rates.
  
• Old debt weighing down FICO, preventing the ability to secure favorable financing terms.
  
• No emergency savings account.
  
• Carrying credit card balances.

My Hat:
The obvious advice from folks like Suze Orman and all the indistinguishable columnists on X-Y-Z-financial-web site goes something like this: Pay down high interest debt first! Build 6 months worth of livings expenses in a savings account! Then, begin to invest! Living Trusts! Index funds! Lawyers! Financial planners!

Others like Robert T. Kiyosaki seem to think real estate is the way out, and becoming a Rich Dad is easily doable.

Steven Pollan and Mark Levine have more radical ideas about what to do, opting for a plan that allows you to Die Broke.

Joe Dominguez and Vicki Robin are philosophical, threatening Your Money or Your Life in dealing with matters of personal finance.

At some point or another, I’ve browsed these authors’ books, but fell short of fully integrating any of one of their ideas for one reason or another. I’ll have to get at the root of that issue on my own time. For now, I’ll brush off the dusty covers on all of these texts as a measure of my own due diligence. Looks for updates in future posts.

Here Is The Embarrassing Situation...

Status: Married
Ages: No way
My income: $84,000
Other half income: $18,500 (he’s in grad school)
Own outright: Dog
Debt: $140,000
401K: $0
IRA: $2,500
Savings: $1000
Stocks: $200
Bonds: $1000
Real Estate: We rent, but also invested in 2 properties, I’ll talk more about this later.
Kids: Ha. Ha, ha. Ha, ha, ha, ha, ha, stop making me laugh – my stomach hurts!

Since the only thing we own outright is the dog, no need to go into any further detail on financial assets. Here is a breakdown on the $140K debt:

Straight Debt:

• $70K in newly consolidated graduate school student loans @ 3.5% (consolidation interest rates are a weighted average of the old debt).
  
• $30K in already consolidated undergraduate school student loans @ 4%.
  
• $2K in installment agreement for an expensive vet procedure @ 22.98% – and, the dog didn’t make it.
  

Debt Associated with an Asset:

• $18K in to Chrysler Financial @ 12% (don’t ask, I was in no position to negotiate on that particular day). I am way upside down on this deal.
  
• $6K remaining to Ford Motor Credit @ 5.9%. Blue book on this vehicle is $11K. Right side up.
  
• $6K remaining on land contract. This was a good move. More on this later.

Evil Debt:

• $2K in current credit card debt at varying levels of interest ranging from 14.98% to 22.98%.
  
• $5K in 4-year old delinquent credit card debt, a relic of the disaster that befell us when the dot-com bubble burst.
  

So there you have it, a pretty picture of major indebtedness, challenged credit, with virtually no retirement assets and no reserves. You wish you were me, don't you? Admit it! You wish you were me!

The Journey To Prosperity Begins!

Today marks exactly three weeks since graduation -- I've finally earned my ridiculously expensive MBA degree. My fellow financial bloggers will be pleased to know that I conscientiously reduced the overall cost of attending by continuing to work full-time while pursuing the degree. It brought many a smile to my face (or maybe it was a smirk) to quietly listen to my peers discuss the student loan situation and their burden having taken out the maximum possible debt: "At 3% interest, the money is practically free! I'll take it out and use the excess for the down payment on my new Volvo."

Sigh. Even at 3%, it still has to be paid back.

My frugal sensibility doesn't resonate too well around these parts. I live in Los Angeles, where the average home price is well, unspeakable. And the pressure to live like a credit card millionaire is so pervasive, even my fellow students of business embarass themselves by falling victim to the $20 martini, the Mercedes lease, the interest-only-mortgage-re-fi-cash-out, the $200 haircut -- as if anyone with two brain cells to rub together can't figure out this stuff is way beyond their means. If there's one thing everyone should know about LA, it's that the disparity between wages and the cost of living is vast. WYSInotWYG.

But back to the subject of me :) This blog will serve as my gut check -- now that school is over, I'm facing a mountain of debt (both current and old) coupled with insane pressure to do idiotic things with my money. ETF or Prada? Sallie Mae or Stags Leap? Money market fund or same-as-cash until 24.98% APR?

With the help of the blogosphere, I plan to stay accountable...and prosper!