So, at the end of April, we made the switch. Thus, at the end of May, I received my last payment from Google – and then received essentially no income during June, July, and August (and much of September, too).

Ouch.

Now, this switch was, in the long run, worthwhile. My monthly income will go up. However, it made for a painful summer. We had to tap strongly into our “opportunity” fund to make this happen – I am very glad that we had such a fund in place to make this transition possible.

But, here we are, at the end of the summer. We now have a depleted “opportunity” fund and we’ve even touched our emergency fund a little bit, but our monthly income is about to return to normal – in fact, perhaps a bit higher than normal.

In other words, this is a perfect time to re-assess our financial goals for the near future.

Over breakfast several days ago, Sarah and I talked about our plans and here’s what we came up with.

By the end of 2009, we intend to replenish our emergency savings and our “opportunity” savings to the balance they held on April 1. Maintaining an “opportunity fund” is something that’s very important to both of us. It allows us to take advantage of opportunities that life throws our way without tapping into our emergency fund, since a great opportunity isn’t really an emergency.

In fact, maintaining our “opportunity fund” was the big reason we elected to finance a Prius early this year instead of paying cash for it. After a lot of thought, we decided that it was better for us over the long term to keep that cash on hand for other opportunities – and it turns out we were right.

However, that leaves us with a strongly depleted opportunity fund – we lived out of it this summer, since we viewed this transition as an opportunity, not an emergency – and even a bit of money taken from the emergency fund, too (to fix a broken-down truck).

Our goal for the rest of the year is to replenish both of these funds to the level they were at prior to this past summer. In terms of our day to day living, it doesn’t mean too much, but it does mean that our excess income will be put directly into savings before anything else. I think it’s very realistic to do this by the end of the year, based on what we expect to bring in over the last four months of 2009.

That brings us back to where we were prior to the “summer of transition,” as I like to call it, but leaves us in better shape than before by far. Our monthly income is higher and even if I chose to shut the site down for some reason, we’d still have three more months’ worth of income already earned to survive off of, which is a much nicer position.

At this point, we’ll turn our attention to our remaining debts.

By the end of 2010, we intend to be debt free except for our mortgage – and that includes replacing our semi-functional truck with a van – while maintaining our fund levels. Sometime in the next year – and it may be sooner rather than later – my truck, which is on the verge of complete breakdown, will be traded in for a late model used minivan and we intend to make up the difference in cash. We’re trying as hard as we can to stretch this out, largely functioning as a one vehicle home at the moment. So, one big priority is making that van purchase happen.

Obviously, my hope is to stretch that purchase out until at least near the end of 2009, at which point paying cash will be relatively easy thanks to our renewed savings.

Once the van is ours and paid for, our only outstanding debts will be our mortgage, the remainder of our Prius (after the down payment and several months’ worth of regular payments), and a single student loan. By the end of 2010, I intend to have the non-mortgage debts paid off, and I’ll celebrate each success right here on The Simple Dollar.

I’m going to essentially use a debt snowball to wipe out these debts, ordering them by interest rate minus any tax benefits. This means the Prius goes first, then the student loan, then…

Yes, the mortgage.

After the other debts are paid off, by the end of 2010 at the latest, I’m going to throw everything I’ve got at the mortgage. We’ve already

The big key is that none of this changes how we live day to day. We’ve basically done the same things day in and day out since 2007 or so. We spend less than we earn (excepting, of course, this summer, where income was quite low by choice). We don’t spend extravagantly. When opportunities present themselves – or we’re faced with emergencies – we just use the cash we already have saved for these purposes.

In short, for us, extra income just means we arrive at our big goals a little quicker. Our dream is to be living in our long-talked-about farmhouse before the kids are finished with grade school – within nine years.

That means daily extravagances keep us from our dreams. Every day we continue to live cheap between now and then is a day we march closer to our goal. Every day we’re able to take advantage of an opportunity that comes our way is a step closer to our goal. Every emergency that doesn’t require us to use plastic means that … well, we’re not closer, but we’re not going back any farther than we have to be.

Frugality underlines everything we do. Sure, we strive to earn more along the way, but if our efforts in that direction mean spending with reckless abandon, we’ll soon find ourselves where we were in 2006 – in a very rough place that takes a long time to climb out of and even longer to reach the things we want. And that’s a scary place to be.

Set goals. Take care of them by living frugally. Get there faster by earning more and taking advantage of opportunities. That’s what it’s all about.

The first game we tried was pretty miserable. Sarah felt lost and the game was slower than molasses. We weren’t even sure we were going to try it again.

So, a few days later, we did try it again. And something clicked. We started playing it all the time.

In fact, Sarah and I had a “weekend getaway” last weekend (while the grandparents watched our children) and what did we do? We took Agricola along and, one evening, we wound up in our hotel room, kicked back with a bottle of wine, moving sheep around, laughing together and telling jokes.

Romance? In its’ own way, it definitely was.

Nevertheless, Agricola is getting heavy play around these parts as of late. It’s pretty complicated – and you should expect the first game or two to be pretty dull – but after that, it gets better. Much better.

Here are some great personal finance articles of the last week.

I’m Losing 50 Bucks to Be Happy, and I’m not Crazy A person who used to spend a lot of time doing balance transfers and other such games to maximize every penny of interest realizes that it’s a losing game – you’re not making much for the time invested unless you have a HUGE bankroll – in which case, this isn’t the game you should be in. (@ money ning)

Outwardly Simple and Inwardly Rich How rich is your internal life? Many people focus on the wealth present in their external lives – their money, their career, their stuff, and so on – but it’s your internal wealth that you’re left with when you go to sleep at night. Why not focus on maximizing that internal wealth instead of always focusing on the bucks? (@ millionaire money next door)

12 Tricks for Optimizing Your Freelance Career Here’s the thing: we’re ALL freelancers today. This is great advice for ANYONE who is doing creative work, whether they’re employed or not. You’ve GOT to get yourself out there or else you’ll find it much more difficult to move on when your situation changes. (@ freelance switch)

How to Make a Decision Like Ben Franklin This is a VERY good way to make a difficult decision. Almost always, with a difficult decision, it pays to face it head-on with a clear decision-making process. This one, inspired heavily by Benjamin Franklin’s writing on the idea, is pretty close to the one I already use. (@ art of manliness)

Why the stock market is still unsafe for the small investor A great essay on the dangers of stock investing for the small investor by Eliot Spitzer. I still maintain that the only real solution for a small non-obsessed investor is a broadly based index fund with low costs. Anything else is a fool’s game, in my opinion. (@ slate)

My Grandmothers and the Cost of a Funeral The last thing I want to do is burden my descendants with the cost of a funeral. I don’t want to make them have to pay to put me in the ground. Is that an argument for life insurance? I think it is when you’re young, but if you’re older and have a healthy net worth, I don’t see the purpose. The whole thought process pushes me further down the road towards term life insurance. (@ consumerism commentary)

Timebanking: What Is It? Timebanking basically means giving an hour of your own time in exchange for someone else’s hour. Here’s how it works – you visit a local time bank and take on a task that someone has listed – let’s say it’s three hours of painting. You go do that, then you get three hours of credit to use on the site. You can then use that credit to post a job that you want done – three hours of, say, garden work. This seems like a good idea on one level, but you have to find people that are willing to say one hour of their specific type of work is worth an hour of another type of work. (@ christian pf)

Odds Are for Suckers Whenever you try to do something exceptional, the odds are against you. If you let yourself be controlled by those odds, you’ve already decided not to succeed. Instead, ignore the odds. I agree wholeheartedly with the idea here – as long as you have a safety net when you fall, the odds of success should be the furthest thing from your mind. Instead, chase the dream. (@ awake at the wheel)

Uncluttering your personal time Time attracts clutter just as much as space does. In each case, it’s really the same problem – you find yourself gradually filling your time and space with things that are unimportant to you. To declutter, start cutting out the things that are unimportant! It takes some time and reflection, but the rewards are tremendous. (@ unclutterer)

Harnessing Your Competitve Spirit to Spur Your Goals Many people thrive on competition and a desire of “beating” other people. Pick the Brain offers some great advice on how to channel the need for competition into achieving one’s personal goals. I know that in my own life, this works well – I use Nike+ to “keep score” on my goals for getting into shape, for example. (@ pick the brain)

Sarah and I were looking for a very simple “How Low Can You Go” recipe that we could actually use for a picnic at the park. It had to be quite simple, something that could be mostly prepared at home with only minimal prep at the park, and it had to be easy to transport.

We were intrigued by the flavor in Kenzie Crosley’s vegetarian burrito bowl submission to the “How Low Can You Go” contest, but we didn’t want to use the amount of prepared food suggested. Here’s Kenzie’s recipe:

1 box Archer Farms(find at Target) Cilantro and Lime Rice
2 Cans Black Beans
Guacamole
Sour Cream
black olives
Queso (Rotel and Velveeta)

Prepare rice as directed on box. Boil black beans in a small pot. Melt 1 can rotel and velveeta in a small dish in the microwave. If family of 4, bring 4 bowls out to serve individually and lawyer as follows. Rice at the bottom, black beans, queso, quacomole, sour cream, olives on top.

These are all things I love-so I just threw them all together for a yummy and easy meal for my husband and I. We have lots of leftovers!

Velveeta? An Archer Farms boxed meal? Hmm… why don’t we just do it from scratch? So that’s what we did.

Here are our ingredients:

Our guacamole spice packet is just a mix of various herbs that’s really tasty and pretty much everything else is from base ingredients.

You’ll notice no black beans are present – that’s because we boiled up some dried beans:

The guacamole was simple to make. Simply peel and core the avocado, then add some spices – salt, a bit of black pepper, garlic, cumin, and/or cilantro. We just used a packet that had this stuff already in it that we had in the cupboard:

Since our daughter is a little iron-deficient, we chose to add a little bit of ground beef that we had in the refrigerator to give her a little extra iron. Not a requirement at all, just something we keep an eye on.

Anyway, we packed up everything into two reusable bags, with reusable bowls and containers:

Once there, we assembled the bowls. Here’s Sarah (who handled most of the prep work for this meal), scooping beans into each of four bowls:

And here’s my finished bowl, enjoyed with a bottle of Dos Equis XX:

The best part about a picnic at the park is that it can immediately be followed by fun on the playground equipment.

Everyone loved it. The bowls were devoured with only a bit of leftovers. It helps that my children love black olives, which made the overall meal seem better than it otherwise would have been.

Our cost for this was about $9, without many leftovers. All we wound up with was leftover black beans, which we intended to use in another recipe later on. So, the cost per bowl was about $2.25 – a little high, but it was very easy to prepare, pretty healthy (aside from the sour cream), and portable enough that it could be eaten at a park.

Changes I Would Make
Obviously, we weren’t strong fans of the prepackaged original meal, so we modified it big time. Here’s what we did instead, which turned out really well.

Trent’s Vegetarian Burrito Bowls

1 cup dry black beans
1 1/2 cups dry rice
1/2 cup lemon juice
1/2 teaspoon cilantro
1 avocado
1/2 teaspoon salt
1 clove garlic, crushed
1/8 teaspoon black pepper
1/2 cup black olives
2 cups shredded Monterey Jack cheese
sour cream to taste

Cook the black beans according to recipe. Cook the rice according to recipe, replacing half a cup of water with half a cup of lime juice and the cilantro. Cut up the avocado, add the salt, garlic, and black pepper, and blend into a paste to make guacamole. Assemble the bowls, starting with rice, then beans, then cheese, then guacamole, then sour cream, then black olives on top. Enjoy!

This is a stage that I see us approaching as time goes on. We’re not quite there yet, but we’re close. Right now, I’m trying to knock out my final student loan (it’s a doozy), and then start focusing on my home mortgage.

Our home mortgage payment is just shy of $1,100 – that doesn’t include homeowners’ insurance and taxes, so when we get the house paid off, we now have $1,100 more a month to spend on whatever we choose.

I, for one, would roll that extra amount directly into savings. I’d simply change the automatic payment to be an automatic transfer into a savings account of some sort – perhaps an index fund. Then I just keep living life as normal until one day that account is full of cash for something great. For us, that “something great” is our long-dreamed-of house in the country, with a small barn out back, a big garden, and a chicken coop.

Is It A Crazy Goal?
My parents recently finished off their home mortgage after paying on it for thirty years. They’re pretty much debt free at this point for the first time in their marriage. So, for me, I have a great example in front of me that you can get rid of all of your debt. However, many people don’t have that example and it seems like an impossible goal. On page 186:

Anytime I speak about paying off mortgages, people give me that special look. They think I’m crazy for two reasons. One, most people have lost their hope, and they don’t really believe there is any chance for them. Two, most people believe all the mortgage myths that have been spread.

The “hope” factor is something I see popping up over and over again whenever I talk to people about money. Many people I talk to view their mortgage as simply a fact of life. If they were ever in a position that their mortgage became really easy to pay, it wouldn’t be time to double-up on the payments – no, no, it would be time to upgrade their homes.

I think this points to a prevalent mindset out there when it comes to debt. Many people simply view debt as a way to leverage the lifestyle they want now. It comes from a lack of patience – people don’t want to live in a small apartment watching their savings grow slowly when they could just get this loan and be in that house now – even if it costs them hundreds of thousands of dollars.

I think patience is one of the biggest tools a young professional can have when it comes to his/her money. Just wait for a while – you’ll be way better off over the long run.

The Tax Deduction Myth
Owning a mortgage just to get a tax deduction is something of a fool’s game, as outlined on page 187:

If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would, in fact, lose the tax deduction, so they myth says to keep your home mortgaged because of tax advantages. [...] If you do not have a $10,000 tax deduction and you are in a 30 percent tax bracket, you will have to pay $3,000 in taxes [...] According to the myth, we should send $10,000 in interest to the bank so that we don’t have to send $3,000 in taxes to the IRS.

All the tax deduction does is lower the effective interest rate you’re paying on your home loan a little bit.

In fact, Dave doesn’t even make the case as well as he could. If you’re using your mortgage interest on your tax return, that means you’re foregoing your standard deductions because you have other things to deduct. So, take our situation – we have two adults in our home. Our standard deduction in 2009 is $11,400. If we choose to itemize our taxes (which we’d have to do to deduct our home interest), we have to have more than $11,400 in interest on our home mortgage (or other deductible expenses) to beat what we would already get.

So, if your only significant deductible expense is your home mortgage – and your mortgage isn’t gigantic – you’re not actually gaining much of anything at all in terms of taxes.

The Risk of Having a Mortgage
Another disadvantage of holding on to a mortgage is the risk – if something goes wrong in your life, it’s a lot better to not have a mortgage payment than it is to have one. On page 189:

If I own the home next to you and have no debt, and you (because of your investment adviser guy) borrowed $100,000 on your home, who has taken more risk? When the economy moves south, when there is war or rumors of war, when you get sick or have a car wreck or are downsized, you will run into major problems with a $100,000 mortgage that I will never have. So debt causes risk to increase.

I think this is a vital, overlooked point. Having a mortgage – or any debt – is a type of risk. You’re gambling that your future will be stable, no different than putting cash down at the roulette wheel. With a mortgage, your life is simply more at risk than it was before.

I have two young children at home. Risk stares me in the face every day. I encourage our children to push their limits a little, but I still stand very close by when my three year old grabs onto playground gymnastics rings and hangs there. Having a mortgage is something like telling my three year old to grab the rings for the first time while I stand far away. Sure, he might hold the rings for a while and then drop without a problem, but my distance increases the chance of a hurt elbow or a broken arm.

The risk of owning a fat mortgage is much like the risk of putting your child on a bike for the first time and shoving them down the sidewalk. Sure, they might ride like the wind, but they might also fall flat on the pavement. Instead, it’s better to do a bit of planning (like saving for a home) and then let go when they’re ready (like when you have enough saved up for a house). No broken bones, no broken lives.

Thirty Years Versus Fifteen Years
Many people advised me to get a thirty year mortgage instead of a fifteen year mortgage, arguing that I could make an extra payment each month and get the same speed benefit of a fifteen year without the risk of the larger minimum payments. That’s a bad idea because something will often come up, as is spelled out on page 190:

A big part of being strong financially is that you know where you are weak and take action to make sure you don’t fall prey to the weakness. And we ALL are weak. Sick children, bad transmissions, prom dresses, high heat bills, and dog vaccinations come up, and you won’t make the extra payment. Then we extend the lie by saying, “Oh, I will next month.”

A higher minimum payment is actually a good idea, because it forces us to work with what we have left over. A lower minimum payment means that we just have more to work with – if that extra payment isn’t required, it’s easier to argue that something else is more important for the moment.

With expenses like prom dresses, heat bills, bad transmissions, and dog vaccinations, you can always find ways to make it work. If you have a decent emergency fund, it shouldn’t be too tough at all.

What do you get in exchange for these little sacrifices? Your mortgage goes away in half the time. You find yourself free of that load much, much faster. Plus, the interest rate on a fifteen year loan is lower, meaning your payments won’t actually be anywhere close to double what they would be for a thirty year mortgage.

Home Equity Loans Make Poor Emergency Funds
One common question I get from readers is whether or not they should take out a home equity loan to deal with some problem in their lives. My feeling is that if you’re in that situation, you need to rethink about your emergency fund. Sure, the home equity loan might be the right solution for right now, but if you’re living your life in such a way that it has to be used, you might want to rethink how you’re managing your money.

On page 197, Dave dips his toes into this idea:

Even a conservative person who doesn’t have credit card debt and pays cash for vacations can make the mistake of the HEL by setting up a loan or a “line of credit” just for emergencies. That seems reasonable until you have walked through an emergency or two, and you realize very plainly that an emergency is the last time you need to be borrowing money. If you have a car wreck or lose your job and then borrow $30,000 against your home to live in while you make a comeback, you will likely lose your home. Most HELs are renewable annually, meaning they requalify you for the loan once a year.

Think of it this way. You’re using your home equity loan as an emergency fund. You lose your job, so you take out $30,000 to live on – it’s fine, since you have tons of equity in your home, right? Well, the end of the year comes and you still don’t have a job. The bank says, “Sorry, we’re not renewing your loan,” and they call in the $30,000. You don’t have it. They repossess your house. Any equity you built up is gone.

An emergency fund needs to be cash, period. If it’s not liquid or it puts you at risk to get it, then it’s not an emergency fund.

Our local credit union has hinted to us that we should have a home equity line of credit. I have torn up every single offer they have sent to us. I’m not interested in that kind of risk.

Paying Cash for a Home Is Impossible
I agree with Dave that it is indeed possible to pay for your home with cash. So why don’t people ever do it? It’s not easy. It’s a lot harder to go this way than it is to just go get a mortgage. On page 198:

Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

I think the problem is that many people view their home as more than just living quarters. They view it as a status symbol – they need a house they can show off to family and friends. It’s more impressive to live in a house than an apartment, isn’t it? So, if you back up and think about it, you pay hundreds of thousands of dollars in interest, home maintenance, and other costs – not to mention time – in order to impress others.

Again, the only people impressed with such things are people that you never speak to, who don’t matter in your life. They look at you and admire your home, but they don’t build a relationship with you. The people you build lasting relationships with like you, not your house.

We chose to buy a home with a mortgage. I don’t regret it, but if I had to do it all over again, I would have looked intensely for a great rental situation instead (since we originally lived in an apartment too small for two toddlers and two adults – we had to move) and kept saving.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the twelfth chapter – Build Wealth Like Crazy.

I’m a big believer in the unpredictability of life (in fact, this unpredictability is a major theme in my upcoming book). Life deals you things you don’t expect all the time, from small (like an unexpected wet diaper on your way out the door) to big (a sudden death of a close relative) and from good (finding a $100 bill in a parking lot) to bad (breaking your big toe after dropping something heavy on it).

Yet, even given that hugely unpredictable nature in life, most people do not have an emergency fund. Many of those who do only have a tiny fund. What happens to them if they lose their job and can’t get another one for a year? What happens if their child is invited to go to a very prestigious music school? What happens if one of them falls down a flight of stairs and has to spend six months in a wheelchair?

The solution to all of these things is a big, fat emergency fund. A big healthy wad of cash in the bank makes all of these problems easily bearable. For Ramsey, this is the next step after your debt snowball is done and all you’re left with is a mortgage – get a big chunk of change in the bank for those rainy days.

How Big?
One big point of contention about emergency funds is how big they should be. Dave offers his opinion on page 133:

A fully funded emergency fund covers three to six months of expense. What would it take for you to live three to six months if you lost your income?

I think it’s key here to point out that by “you,” the quote most likely refers to the full spending of a household – if it doesn’t, then you might be building an emergency fund that’s too small.

Three to six months? Think about how much you spend each month, then multiply that by, say, five. That’s quite a serious chunk of change. For us, it would probably be somewhere in the ballpark of $20,000, with almost half of that being our mortgage and homeowners’ insurance.

Is it enough? I think you have to look at it from the perspective that no amount will cover every possibility that could happen. Instead, you should be seeking an amount that’s large enough to cover every doomsday scenario you can reasonably think of. Consider the people around you and their most desperate moments. How much would they have needed in those situations?

Easy to Access
Dave basically argues for a savings account on page 137:

Keep your emergency fund in something that is liquid. Liquid is a money term that means easy to get into with no penalties. If you would hesitate to use the fund because of the penalties you’ll incur to get it, you have it in the wrong place.

That basically means a savings account. It’s accessible at any time without penalty and it doesn’t fluctuate in value.

Obviously, you want it to be as safe as possible. This eliminates stocks – they’re inherently risky and fluctuate too much. The value of bonds can fluctuate, too, though not nearly as strongly. You don’t want to lose your balance once it’s invested.

At the same time, you want to be able to get at it without a penalty of any kind. Dave argues that this is a black mark against certificates of deposits. I disagree with that. With some careful planning, you can use certificates of deposit in a “ladder” system and never have to crack one. I like this idea because it helps you get a better rate of return and it’s a psychological barrier that keeps you from digging into it.

Dave points towards money market accounts, another little hint that this book was written prior to 2008. Money market accounts might have great returns sometimes, but they’re not as safe as FDIC-insured savings account. Even better, if you hunt around, you can find FDIC-insured savings accounts that have a nicer return than pretty much any money market account and come with the insurance.

Three Months? Six Months? In the Middle?
The entire point of an emergency fund is to absorb risk, and some families are simply more at risk than others. On page 139:

For example, if you earn straight commission or are self-employed, you should use the six months rule. If you are single or you are a one-income married household, you should use the six-month rule because a job loss in your situation is a 100 percent cut in household income. If your job situation is unstable or there are chronic medical problems in the family, you, too, should lean toward the six month rule.

Personally, I feel as though children are a significant risk addition to one’s life. An adult can go out there and get a job. A three year old can’t do the same – they’re wholly dependent on the adult. Thus, if you have kids, I’d lean strongly towards a bigger fund.

I also think that six months isn’t necessarily the maximum. If all of your household income comes from freelancing, you have three kids, and there may be health issues in your future, six months probably isn’t enough. I’d have more than that – a year’s worth, perhaps?

We have about ten months’ worth of purely liquid cash sitting there for emergency purposes right now. That’s an amount that feels right for us, with the majority of our household income coming from freelancing and two children under the age of four.

Is Everybody on Board?
One issue I see readers writing to me about time and time again is the question of what to do when their partner isn’t on board with the financial changes they want to make. Dave hits on this a bit on page 142:

I don’t suggest you clean out your savings [down to $1,000 in order to pay off debt] if everyone isn’t having a Total Money Makeover.

I go further than that: if you’re in a relationship and your partner is not on board with making financial change, you’re wasting your time with it. Their actions will undermine everything you do and you’ll find yourself constantly at odds and angry with each other without making a drop of additional progress. That’s a dangerous recipe, right there.

If your partner is not on board with making some real financial changes, your focus shouldn’t be on charging full steam ahead without your partner. Instead, your focus should be on talking through your situation with your partner. You’ve got to understand where they’re coming from. Just pushing what you want won’t cut the mustard here – they’ll just see you as pushy and you’ll make negative progress, or you’ll get an act that makes it look like they’re on board when they’re really not.

Talk about your money. You’ve got to, or none of this will work.

Women and Men?
Are women more suited to have emergency funds than men? On page 144:

God wired ladies better on this subject than He did us. Their nature causes them to gravitate toward the emergency fund. Somewhere down inside the typical lady is a “security gland,” and when financial stress enters the scene, that gland will spasm.

The argument here is that by their very nature, women are more likely to see the value in an emergency fund than men. Men tend to be task-oriented, while women tend to be process- and security-oriented.

I think there’s actually something to this. I’m all in favor of gender equality, but different does not mean unequal. Different means that each side has traits that are beneficial. Guys are better at focusing in, at breaking down barriers. Women are better at planning and cooperation, at building fortresses of safety. Different attitudes are useful in different situations.

I see this in my own marriage. I’m far better with specific objectives with my children. I thrive on having a series of tasks to do or a game to play or something like that. My wife, on the other hand, seems to thrive more on nurturing. She holds them and is patient when they’re hurt, where I’m much more likely to look for how to solve the problem. When Joe bumps his knee, my wife is more likely to hold him while I go searching for a Band-Aid.

The emergency fund is definitely in her court, not mine. I see the value of it and I contribute to it, but it’s clearly more a part of her elemental nature.

Why Do All This?
If the future is so unpredictable, why waste our lives right now putting so much effort into scrimping and saving and planning for that future? On page 146:

What used to be a huge, life-altering event will become a mere inconvenience. When you are debt-free and aggressively investing to become wealthy, taking a few months off from investing will put a new engine in a car. When I say the emergency fund is Murphy-repellent, that is only partially correct. The reality is that Murphy doesn’t visit as much, but when he does we hardly notice his presence.

A big emergency fund means that the bad events in that unpredictable future don’t wipe away all of the good things you have in your life.

Without an emergency fund, a job loss means panic. It means scrambling madly for work – any work. It means you might lose your home or your car. It’s scary.

With an emergency fund, you can roll with the punches. You can patiently dig for the right job. You can even give your dreams of freelancing a shot right now – after all, you’ve got time.

Without an emergency fund, a dead car means panic. It means you have to throw yourself further in debt, with even more monthly payments than before.

With an emergency fund, you just make the call and fix the problem. No big debts. No monthly payments. Just smooth sailing.

You’re left with unexpected events – but only the good kind.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Saturday, we’ll tackle the ninth chapter – Maximize Retirement Investing.

But should you close it? This is an interesting debate that often comes up in personal finance circles. I think there are benefits and drawbacks no matter which you choose and the “best” answer isn’t absolute in all cases.

So let’s dig in.

If you keep the card…
If you decide to keep the card, there are a few things you should think about.

First, simply having the card is a small identity theft risk. If you’re no longer actively using the card, the risk is pretty small, and you can make the risk even smaller by taking action.

Second, not closing the card opens the door to spending temptation. Obviously, if you have the strength of character to pay off all of that debt, you’re able to keep the temptation in check.

There are two big steps you can take to reduce the two risks above even more, chopping them down to an incredibly tiny sliver.

For one, destroy the physical card. Cut it up so that there’s no risk of losing it or having it stolen. I tend to actually melt used credit cards over an open fire (seriously – I’ll toss them into campfires).

For another, remove your credit card information from any online retailers that may still have it. Check your Amazon account or any other retailers you might use and make sure your zero balance card isn’t listed there. Just get the information completely out of the system.

If you cancel the card…
Let’s say you decide to cancel the card. What are the drawbacks of canceling it?

The big one is that canceling a card results in a negative bump on your credit score. This negative bump goes away after roughly a year, but during that year, your lower credit score can have some short-term negative implications. It can cause your insurance rates to go up. It can reduce your chances for getting work.

The big one, though, is that it can also hurt you if you’re attempting to get a mortgage. A lower credit rating right at the time when you’re attempting to secure a home mortgage is not a good choice.

So what should I do?
From my perspective, the answer is simple. Before you do anything, ask yourself if you’re going to be changing jobs or getting a mortgage or a car loan in the next year.

If you’re looking forward to a major move like this in the short term, don’t cancel the card. The risk of the short term drop in your credit rating is higher than the risk of just cutting up the card and forgetting about it.

Instead, cut up the card, but hold onto the account until you’re past that hump that you’re facing in the short term. When you’ve made it, then make the call and cancel that credit card.

On the other hand, if you don’t see a major move in your future, cancel that card. Doing so eliminates the temptation and eliminates the (small) chance of identity theft.

You’ve got a big pile of debts in front of you. They’re scary. The totals of all of the debts takes your breath away when you think about it. You don’t know where to start. You need a plan.

Dave Ramsey calls his plan the “debt snowball,” and it’s based on psychology, not math. If you’re going for pure math, the best way to pay off your debts would be to start with the one with the highest interest rate, since that will save you the most interest per dollar that you pay back.

Dave’s plan is different – he encourages people to pay back their debts from smallest balance to largest balance. The smallest balance debt gives you a “win” as early as possible in your debt repayment – which is a huge psychological boost.

Do I buy it? I played with the numbers a while back and my conclusion was that the difference between the plans – unless you’re talking about enormous debt loads with huge disparities in interest rate – doesn’t save you enough to not try the debt snowball method.

Identify the Enemy
On page 109, Dave makes a worthwhile point about figuring out what you’re working against:

The bottom line is that it is easy to become wealthy if you don’t have any payments. You may get sick of hearing it, but the key to winning any battle is to identify the enemy. The reason I am so passionate about getting rid of debt is that I have seen how many people make huge strides toward being a millionaire in the short time after they get rid of their payments.

I agree with this to a large extent, but I don’t think Ramsey really spells it out fully here or even later in the passage. If your goal is financial freedom, the enemy is unnecessary spending, not the debt. Debt is merely a symptom of that problem.

Let’s say you spend $100 more a month than you bring in without anything in the bank. This behavior means that you’re building up debt. Make a handful of spending changes and now you’re spending $100 less than you bring in. Put that extra $100 towards the debt and it goes away. Then you can start saving that $100 (and probably more, since you don’t have those debt payments to cover) towards a big goal.

It all comes back to getting your spending under control. If you can’t get your spending under control on a consistent basis, all of the debt planning in the world won’t do a thing.

Debt Repayment Is Hard
Ramsey argues that repaying your debts is hard on page 111:

This is the toughest of all the Baby Steps to your Total Money Makeover. It is so hard, but it is so worth it. This step requires the most effort, the most sacrifice, and is where all your broke friends and relatives will make fun of you (or join you).

Is it that hard? I think it’s hard in the sense that when you’re standing there at the starting line of a marathon, the finish line looks impossibly far away. Then you start running and you’re caught up in the race. You get into a rhythm, you’re gliding along, and before you know it, the finish line is there.

Lao-Tzu was absolutely right. “A journey of a thousand miles begins with a single step.”

That first step is the hardest part.

It definitely was the hardest part for me. I knew for a long time that “someday” I’d have to fix my debt problems, but that “someday” was always put off into the future.

Then, finally, I was forced into taking that first step. The fear of not taking a step grew greater than the fear of getting started.

But once I took that first step, the second one was easier, the third one was easier, and before you know it, I’m well along the path and it’s like a slow train coming around the bend, clickety clack.

Math Versus Behavior
The idea of psychology versus numbers comes to a head on page 111:

We have discussed that personal finance is 80 percent behavior and 20 percent head knowledge. The Debt Snowball is designed the way it is because we are more concerned with modifying behavior than correct mathematics. [...] Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work, but sometimes motivation is more important than math. This is one of these times.

As I mentioned earlier, I ran the math myself, comparing the “optimum” strategy (which means you repay your debts in order of interest rate, highest to lowest) to the “debt snowball” strategy (which means you repay your debts in order of balance, lowest to highest). What I found is that the math difference isn’t that big of a deal if you’re really hitting those debts with a strong force.

At the same time, it’s easy to see situations where the psychological difference is enormous. Let’s say that your smallest debt is your lowest interest debt and your highest interest debt is much bigger. If you throw the kitchen sink at the smaller debt, it goes poof pretty quickly – and that feels good. If you throw the kitchen sink at the bigger debt, it takes a long time for that debt to go poof. It’s a real slog – a painful one.

Some people get irritated if they think they’re doing things in a way that’s even slightly suboptimal and are also self-motivated enough to push through. Frankly, there aren’t too many of those people – those that are out there are probably not considering the “debt snowball.”

So, I think Dave’s plan works quite well.

How It Works In Detail
He lays out the plan in a single paragraph on page 114:

The Debt Snowball method requires you to list all your debts in order of smallest playoff balance to largest. List all your debts except your home; we will get to it in another step. List all of your debts – even loans from Mom and Dad or medical debts that have zero interest. I don’t care if there is interest or not. I don’t care if some have 24 percent interest and others 4 percent. List the debts smallest to largest!

This is a very good first step, but I don’t think it’s quite the final step.

Once you have that list, it’s worthwhile to call up each of your creditors and negotiate a bit. The big move is to ask for a lower rate on each of your credit cards. Some people get paranoid with this, asking things like “What if they cancel my card?” Well, what if they do? If you’re committed to reducing your debt, that shouldn’t be a real problem.

Another step you should take is stopping by your local credit union and seeing what they can do to help you consolidate some of those debts. You might be able to drastically reduce some of the interest rates via a personal loan or some other vehicle. Don’t get involved with a “debt reduction” company – use your local credit union.

Once you’ve tried those things, your list will be different – and easier. Cross off those debts that you consolidated – they’re done! At that point, rewrite your list, again with the debt with the lowest balance on top.

Then comes the hard work – paying them off.

The Big Payoff
Dave explains why it’s a snowball on page 117:

After you list the debts smallest to largest, pay the minimum payment to stay current on all the debts except the smallest. Every dollar you can find from anywhere in your budget goes toward the smallest debt until it is paid. Once the smallest is paid, the payment from that debt, plus any extra “found” money, is added to the next smallest debt. (Trust me, once you get going, you will find money.) Then, when debt number two is paid off, you take the money that you used to pay on number one and number two and you pay it, plus any found money, on number three.

It’s like a snowball rolling down the hill. Your extra payments on that first debt are small, but it’s rolling along. Eventually, it’s paid off, and your extra payment picks up the minimum payment of the first debt. The snowball gets bigger as it rolls. Your next debt is done, and the snowball gets even bigger, picking up another minimum payment.

The part I found interesting here is this one: Trust me, once you get going, you will find money.

This is absolutely true, but it’s something people can scarcely believe when they first start. Once the debt starts slipping away, you start to really get into it. I know I certainly did. Watching the debt getting smaller and smaller is really exciting, and you want next month to be even more awesome. So you start looking for ways to save. You start looking for things to do differently.

And you find them.

After all, you wouldn’t be in debt trouble to begin with if you were spending your money in an optimal fashion.

There’s Not Enough Money To Get Started!
There usually is if you do things the right way. On page 124, after a story about a logjam on a river:

When the dynamite blew, logs and pieces of logs would fly into the air. After working so hard to cut the trees, some of them were a total loss. They had to blow up some of the timber to get the rest of the crop to market. That’s the sacrifice the situation required. Sometimes that is what you have to do with the stopped-up budget. You have to dynamite it. You have to get radical to get the money flowing again.

Radical usually gets people uncomfortable. I know this from experience – people don’t mind frugal tips as long as they’re easy, but I start getting flamed if I suggest something personally challenging. Cancel the cable? You’ll pry the remote from my cold, dead hands. Sell your car? Get a rope.

Here’s the thing, though. When you sit down and rationally consider getting rid of something you consider beyond question, quite often you find that it’s not really a bad move at all to get rid of it. Getting rid of cable is completely unthinkable to many people until they think about it. What are they getting from the cable that isn’t fulfilled by other avenues, like Hulu.com or over-the-air television or a $1 DVD rental once a week?

What about selling a car? I can’t stand the loss of freedom! What freedom? How often do you use the car in a way that isn’t served by the metro or a short walk or a bit more careful planning? Is it really worth the insurance cost to keep it around?

Look at something big. Ditch your house and move into an apartment. Rent out a room. Give up all beverages but water. Sell your television. The impact of a truly big move will be like a tidal wave over your debt – or any other big financial goals you have.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the eighth chapter – Finish the Emergency Fund.

One thing that Ramsey excels at is urgency. His entire persona, from his written words in the book to the things he says on the radio, practically demand urgency. “You have to do this now.”

He’s right, though. If you’ve found yourself in a personal finance situation where everything falls apart if you lose your job tomorrow, fixing the problem is urgent. You’re being utterly held hostage by your job and by Lady Luck. Too many people find themselves in this situation and view it as normal.

If you lost your job tomorrow and had the engine fall out of your car the day after that, could you survive for three months without work and still hit all of your bills and get that car on the road? If the answer’s no, it is urgent. You’ve got to change something.

Baby Steps?
Dave lays out the importance of baby steps for pretty much any major life initiative, on page 93:

They way you eat an elephant is one bite at a time. Find something to do and do that with vigor until it is complete; then and only then do you move to the next step. If you try to do everything at once, you will fail. If you woke up this morning and realized you needed to lose 100 pounds, build your cardiovascular system, and tone your muscles, what would you do? If on the first day of your new plan you quit eating, run three miles, and lift all the weight you can lift with every muscle group, you will collapse. If you don’t collapse the first day, wait forty-eight hours for the muscle groups to lock up and the cardio to go crazy, and you will be bingeing on food shortly thereafter.

I’ve written about this phenomenon on my personal blog, where I sometimes write about the challenges I face getting in shape. It’s absolutely true: you’re far better off taking steps that are too small than steps that are too big, because those giant steps are the ones that are likely to make you trip and fall.

This basic idea applies to anything you want to do in life. Want to be a writer? If you get up and start in on a schedule of pumping out 4,000 words a day, you’re going to burn out quickly. Instead, just practice the craft and write short things. My writing practice, to tell the truth, is often on Twitter – can I get across an interesting idea in 140 characters? Doing so improves me as a writer.

Want to be a golfer? If you start playing 72 holes a day, you’re going to get sick of it fast (and probably tear something). Instead, just focus on smaller tasks – go to the driving range for two buckets. Build your skills slowly and don’t burn out.

It’s true over and over again: baby steps work. I think the big reason people don’t do this is that they want results now and then they way overdo it, undoing any good they might have done.

The Power of Clear, Written Goals
Written goals are vital at every stage and in every aspect in life. From page 98:

Brian Tracy, motivational speaker, says, “What does it take to succeed on a big scale? A tremendous God-given talent? Inherited wealth? A decade of postgraduate education? Connections? Fortunately for most of us, what it takes is something very simple and accessible: clear, written goals.” According to Brian Tracy, a study of Harvard graduates found that after two years, the 3 percent who had written goals achieved more financially than the other 97 percent combined!

Writing down your goals makes them real – and makes them powerful.

I’m going to admit something here, something fairly goofy. I usually have somewhere between five and ten personal goals going at any one time. Each of them are very action-specific: “I am going to run a 5K by the end of the year.” “I’m going to write a truly great book.” … and so on.

Each day, I write down each of those goals, pen on paper. Seriously. Doing this every day hammers those goals into my mind and I see those goals in every action I do. Three of my goals are health-related right now and I can’t help but see them when I make a decision about what to eat or what to drink. I look in the fridge, the goals float through my mind, and I choose a spinach salad for lunch instead of a grease-filed choice.

It works. Without this, I wouldn’t have made The Simple Dollar work. I wouldn’t have written a book last year, and I wouldn’t have been well into writing another book this year. I wouldn’t be able to read two challenging books a week. I wouldn’t be a good father – or at least not as involved as I am.

Get Current
There’s a big baby step before you dive in on the $1,000. On page 101:

Before we get to Baby Step One, you will have to do one other thing. You will have to be current with all your creditors. If you are behind on payments, the first goal will be to become current. If you are far behind, do necessities first, which are basic food, shelter, utilities, clothing, and transportation.

If you’re behind on your bills, you have to get caught up before doing anything else. Doing anything else puts the cart completely before the horse.

Many people think it’s “impossible” to get current once they reach a certain disastrous level. That’s usually not true, but you’ve got to be proactive. Call up the people you owe that you’re late with and start negotiating. They’re going to listen because it’s in their best interest to listen – if they don’t, they’re not going to get anything out of the money they owe you if you run away or declare bankruptcy.

No situation is impossible, particularly if you’re willing to step up to the plate and try to take things on head first.

Baby Step One: Save $1,000 Cash As a Starter Emergency Fund
Why $1,000? Why not dive into paying off debts? Dave makes a good case for emergency funds on page 102:

It is going to rain. You need a rainy-day fund. You need an umbrella. Money magazine says that 78% of us will have a major negative event in a given ten-year period of time. The job is downsized, rightsized, reorganized, or you just plain get fired. There’s an unexpected pregnancy [...] Car blows up. Transmission goes out. You bury a loved one. Grown kids move home again. Life happens, so be ready. [...] Now, obviously, $1,000 isn’t going to catch all these big things, but it will catch the little ones until the emergency fund is fully funded.

One of the most frequent things I hear from readers is that they don’t see any reason to not use their credit card as an emergency fund. “I have tons of credit left, so that’s my emergency fund,” they’ll say.

Here’s the problem with that: credit is not cash. Your credit line is completely at the mercy of the credit card company. Sometimes they slash credit limits. Sometimes they outright cancel cards. These things often happen right at the moment when you’re in trouble and most “need” that limit.

On the other hand, cash is constant. A big company can’t take your savings away from you on a numerical whim. If everything goes bad, your credit cards can go poof – but if you’ve saved up an emergency fund, it’s there for you.

What Isn’t an Emergency?
Another “problem” is that people substitute irregular bills for emergencies. On page 104:

Most of America uses credit cards to catch all of life’s “emergencies.” Some of these so-called emergencies are events like Christmas. Christmas is not an emergency; it doesn’t sneak up on you. [...] Your car will need repairs, and your kids will outgrow their clothes. These are not emergencies; they are items that belong in your budget. If you don’t budget for them, they will feel like emergencies.

An expense that you know is coming isn’t an emergency. You know that your car will need maintenance, so an oil change or a minor repair isn’t an emergency. You know your father’s birthday is coming up, so a gift isn’t an emergency.

The real problem here is information management. I think many people wind up treating expected things as emergencies because they simply lose track of that information. They forget that their father’s birthday is coming up, so they don’t put aside cash for it. They forget that their car needs regular maintenance.

What’s the solution to that? Dave points to a budget, but I don’t think that’s really enough for many people. I suggest using a calendar – if an irregular bill is coming up, write it on the calendar. Even better, write a reminder a few weeks ahead of it on the calendar, too. This way, you can see that irregular expense coming and can plan for it instead of going “OH NO!” on the day of the event and just throwing plastic at it.

Get It Fast
On page 105:

Twist and wring out the budget, work extra hours, sell something, or have a garage sale, but quickly get your $1,000. Most of you should hit this step in less than a month. If it looks as though it’s going to take longer, do something radical. Deliver pizzas, work part time, or sell something else. Get crazy. You are way too close to the edge of falling over a major money cliff here.

You’ve got to get hardcore, in other words. I think this works well for a short-term burst – like getting that $1,000 – but it’s not sustainable because to do it you have to upset the apple cart on a lot of behaviors and routines in your life – and that runs completely contrary to the idea of taking little steps.

For me, selling things worked well for this step. I had a big, fat DVD collection full of movies that I rarely watched, so I sold most of them off. I had a ton of video games that I either didn’t enjoy or had already defeated, so I sold them all off. I had a lot of CDs that I knew I’d never listen to again – off they went!

Those moves not only gave me that emergency fund, but it also kicked out some of the debt that was floating around. Even better, it freed up a lot of room in our tiny apartment – eliminating a bunch of non-decorative stuff that just caught dust did wonders for things!

On Saturday, we’ll tackle the seventh chapter – The Debt Snowball.

The first five chapters of The Total Money Makeover don’t actually address Ramsey’s plan at all. Instead, it’s mostly an argument against culture, mostly the idea that the easy availability of debt in our modern life is a serious problem.

I agree with Ramsey in that regard, but I usually find that the root of it is deeper: a lack of personal finance education mixed with a prevalence of awful messages about ourselves delivered by the media. Think about it: did you learn anything about personal finance in school? Also, think about the ads you see – don’t they portray the people in those ads as being somehow better than you?

Together, that’s some awful medicine. Dave, in his own way, takes on both of those factors in this chapter.

Ignorance Isn’t a Four Letter Word
We live in a culture that rewards intelligence and knowledge, and often ignorance is seriously derided when it shouldn’t be. Dave spells it out pretty well on page 78:

In a culture that worships knowledge, to say ignorance about money is an issue makes some people defensive. Don’t be defensive. Ignorance is not a lack of intelligence; it is a lack of know-how.

The idea that ignorance is not a lack of knowledge is vital. Intelligence is the ability to take the knowledge that you have and put it together in interesting ways. Intelligence shines when you read two articles on only vaguely related subjects and are able to put together a completely new idea from those two articles. Intelligence does not mean that you’ve got tons of knowledge in your head. In fact, I’d often make the opposite observation – many of the most intelligent people I know continually respect how little they know and how much they do not know.

I’ll use myself for an example. I don’t know much about world history. I don’t know much about physics. I don’t know much about high-level athletic training. I don’t know much about fixing cars. I don’t know much about plumbing. I don’t know much about complex mathematics. There are countless other areas that I’m willing to admit ignorance in.

Ignorance can be overcome, though. If I so chose, I could spend some time educating myself on plumbing with a good do-it-yourself book or two and some time around the pipes. I could learn more about physics by reading up on the subject and perhaps taking some coursework on it. I could learn more about working on cars by simply trying it. Hard work overcomes ignorance every time.

It’s not shameful to admit you do not know everything – no one does. In fact, I’d argue the opposite – pretending you know everything when you do not is dangerous and harmful to yourself and to others. This same exact logic applies to personal finance – it’s fine to admit that you’re ignorant about money. What’s dangerous is when you choose not to admit it – or you delude yourself into thinking that you truly aren’t ignorant about it.

Overcoming Ignorance About Money (or Anything Else)
Dave’s recipe for overcoming ignorance matches up well with my own feelings on the topic. On page 79:

Overcoming ignorance is easy. First, with no shame, admit that you are not a financial expert because you were never taught. Second, finish this book. Third, go on a lifetime quest to learn more about money. You don’t need to apply to Harvard to get an MBA with a specialization in finance; you don’t have to watch the financial channel instead of a great movie. You do need to read something about money at least once a year. Your actions should show that you care about money by learning something about it.

This really is a strong formula for overcoming general ignorance on a subject. It will not make you a world-beating expert, but it will give you the background you need to actually make that topic work in your everyday life.

Let’s translate it a bit. Pick a topic you’d like to not be ignorant on, then do as follows.

First, with no shame, admit that you are not an expert on that topic because you were never taught or were taught poorly. Second, read a general book on the topic. Third, go on a quest to learn more about the topic. You don’t need to apply to Harvard to get an advanced degree in the topic; you don’t have to watch documentaries or read piles of dry books instead of watching a great movie or reading a fun book. You do need to read something about the topic at least once a year. Your actions should show that you care about the topic by learning something about it.

Sounds like a recipe for getting up to speed to me!

What’s Expected of Us
On pages 81-82:

Peer pressure, cultural expectations, “reasonable standard of living” – I don’t care how you say it, we all need to be accepted by our crowd and our families. The need for approval and respect drives us to do some really insane things. One of the paradoxically dumb things we do is to destroy our finances by buying garbage we can’t afford to try to make ourselves appear wealthy to others.

I fell into this trap big time before my financial turnaround. I constantly tried to buy things to impress others. I’d pay for a huge group to go out to eat. I’d buy gadgets I didn’t even really want simply because it was impressive to have an amazing item. I had to always have the “latest” of everything.

Now? I realized that people didn’t like me because I had the latest things or because I bought dinner. They liked me because I was me. Sure, there were a few hangers-on who didn’t want to hang out with me any more because I wasn’t engaged in whatever activity they were obsessed with, but what was that friendship, really, if that happens?

In fact, it became easier to relate to people once I realized this. I was no longer worried about saying the right thing, having the right thing, or keeping up appearances. People wanted to be around because I was me – and that’s all I needed.

Who cares what the Joneses have? I can either be me, or I can be me with a car I don’t really want and a debt burden making me sad.

What’s Your Jaguar?
I really liked the tale Dave told about owning a Jaguar, starting on page 86:

I had the eye of my heart set on a Jaguar. I “needed” a Jaguar. What I needed was for people to be impressed with my success. What I needed was family raising an eyebrow of approval based on my ability to win. What I yearned for was respect. What I was so shallow to believe was that the car I drove gave me these things.

My Jaguar was food. I felt a constant desire to take people out to eat at my favorite restaurants – often very expensive ones. I’d take my parents out. I’d take my friends out. I’d seek out really expensive amazing places and tell the waiter to just give the whole bill straight to me. I’d tip really big right in front of everyone.

Doing this made me feel like I was important and that I was earning respect. What I found was that mostly I was just making the other people feel sort of awkward. They weren’t there to be shocked by my largesse – they were there because they wanted to go out for a nice evening with someone whose company they enjoyed.

Guess what? I stopped paying for meals for others. Guess what else? Whenever I ask any of my family or friends to actually go out to eat – something I don’t do too often any more – they’re still quite happy to accept and quite happy to fit the bill. In fact, they may be happier – they don’t have that vague sense of discomfort they used to get when I’d grab the bill and throw down the plastic.

The American Nightmare
If you’re jealous of what others have, put yourself in their shoes for a moment. Do you think they are actually able to afford what they have? On page 83:

They present the perfect picture of the American dream that has turned into a nightmare. Behind the perfect hair and the French manicure, there was deep desperation, a sense of futility, an unraveling marriage, and disgust with themselves.

The people that you’re jealous of often have had to make huge sacrifices to get the things you want. The fancy car? It’s often paid for with a huge pile of debt. The amazing career? That person spent a lot of sleepless nights cutting their teeth to get there – and likely has sacrificed a strong relationship with the people around them to get it. That perfect marriage? It’s likely either the result of a lot of maintenance or it’s a facade.

There is no such thing as a free lunch in life. The people that have those things that you’re jealous of have often paid dearly for those things. When you peek behind the mirror a bit, you’ll see the cost they paid – and are likely still paying – to get there. And, quite often, when you look at things as a whole, you find a balance of affairs that you don’t want yourself.

That’s why I gave up so much spending. I once thought I couldn’t imagine life without lots of trips to bookstores and game stores and coffee shops. At the same time, though, I was up at night sick with worry about my debts and leashed to a paperwork-filled career. I had those little oases of seeming happiness, but they were surrounded by lots of unhappiness. If you saw me out and about at the bookstore or at the coffee shop, you might have been jealous – look at that guy with the armload of books and the smile on his face?

But if you saw the worried guy, sitting there writing computer code at eleven at night, then not sleeping at two in the morning because he was worried about the bills… then you might get a different picture of things.

A Useful Lesson from Twelve-Step Programs
On page 91, Ramsey points out a worthwhile lesson from twelve step programs:

The Twelve Steppers have it right. They say, “Continuing to do the same thing over and over again and expecting a different result is the definition of insanity.”

If you’re trying to succeed in life – or in some specific aspect of life – and you keep failing at it or never getting anywhere, you probably need to change your approach.

Obviously, Dave is referring to money issues here. If you keep doing the same things you’re doing and you’re not getting ahead financially, you need to make some changes.

But it’s true for everything. Let’s say you’re a writer and you’ve finished a book. You’re trying to get it published but you’ve received twenty rejection letters. You need to change something. Why not give away the book in bite-sized increments? Why not chunk it down into 1,000 word segments and blog the entire book? Why not put that book aside for a while, write something new, and look at it later? The key here is that what you’re doing isn’t working, so you need to try something else. Getting a steady stream of rejection is never the road to success.

On Wednesday, we’ll tackle the sixth chapter – Save $1,000 Fast.

This rule is about as subtle as a sledgehammer, of course. Many of you started visiting The Simple Dollar because you came to this realization on your own – high interest debt is a terrible idea, and even low interest debts are a terrible idea. Let’s count the ways.

The higher the interest rate, the more money you lose with nothing in return. Leave a $1,000 debt on a credit card with an 5.5% APR for a year and you lose $55 – not good. But if you bump that amount up to a level that’s typical for credit cards – say, 19.9% – and you’re up to $199 a year. Gone. Poof. Vanished.

The higher the debt level, the more money you lose with nothing in return. So, you have $1,000 debt on a credit card with a 19.9% APR and you lose $199 a year. Bump that up to $5,000 and you’re losing $998 a year. Gone. Nothing in return.

You’re open to late payment fees, over-limit fees, annual fees, ATM fees, cash advance fees, and countless other drains on your money. If there’s a way to ding you, credit card companies will figure out how to do it. A fee here, a fee there, and you’re suddenly watching even more money evaporate for nothing in return.

A required debt payment each month reduces your freedom. With that $5,000 debt above, you’re paying about $100 every single month as a minimum payment. That’s $100 you could be saving for a down payment. That’s $100 you could be saving to start a business. That’s $100 you could be saving for a car. That’s $100 you could be saving towards retiring early. That’s $100 you could be saving towards a great vacation. Your freedom is gone, eaten by the debt monster.

The mere presence of high interest debt often brings other debt into your life. You make a big commitment to getting rid of all of this debt, then start really bearing down on it. You get half of the debt gone, then all of a sudden disaster strikes. You lose your job. Your car breaks down. Your hot water heater leaks water all over the basement. Suddenly, you’re busting out the plastic again to take care of the problem – and you’re right back deep into debt. It’s like escaping from quicksand – if all of your strokes are perfect, you can pull yourself out slowly, but if even one little thing goes wrong, you’re slurped right back in.

In other words, it costs you money, costs you freedom, and puts you into a vicious cycle of even more debt.

There are really two prongs to getting out of this trap. Whether you’re avoiding it entirely or you’re trying to escape from the pit of despair, there’s one big first step you must take.

Build a Small Emergency Fund
The first step is not paying off debt. Paying off debt first is like kicking to get out of quicksand without getting your arms around something safe first – you might be able to kick out, but if anything goes wrong, you’ll just be sucked in deeper.

So, no matter what state you’re in, give yourself that rock – a cash emergency fund, sitting in a savings account. It doesn’t need to be too big – $1,000 should be your big target, but just start by putting $20 a week into savings – or more if you can swing it. Instruct your bank to do this automatically. Do it right now – call up your bank and ask them to do it.

You won’t miss that $20 a week. Your life will quickly find little ways to save – you’ll eat a few less expensive meals, start carpooling with a friend, or skip a few coffee shop visits and you’re there. What happens is that over the course of three months, your savings account reaches $250. After just shy of a year, your savings account will have $1,000 in it.

If you’re already making extra payments on your debts and you don’t have an emergency fund, stop those overpayments for a while and deposit that extra amount into your savings each month until you reach that $1,000.

Leave this money alone except for an emergency. You might be tempted to spend it on something fun or to pay off a big slug of debt with it. Don’t. That money is your rock – it’ll be there for you if your car breaks down or you lose your job. You won’t be sucked back into debt by these unfortunate events – your savings will save you.

What do you do when you reach that $1,000 level? Many people keep saving. Then, once a month, they sweep anything over $1,000 back into their checking and use it to make an extra debt payment, knocking down their debt without touching their $1,000 emergency fund.

Here’s the big key: if you do face that emergency, like having your car break down or losing your job, and you tap that emergency fund, replenish the fund after the emergency. Go back to minimum payments on your debts and rebuild that fund. It’s your rock.

I’ve written a detailed guide to building your first emergency fund if you want to know more.

Make a Debt Repayment Plan
When you have that emergency fund in place, it’s time to start tackling your debts in an intelligent fashion. Make a big list of all of your debts; then, attempt to get the rate on each of those debts reduced. Give your credit card companies a call and negotiate your rate down. Contact your local credit union and see if there are any opportunities to consolidate your debt at a lower rate.

Once you’ve done these things, list all of your remaining debts in order of interest rate, with the highest rate first. Then throw everything you can at the highest interest rate debt. Your only extra payment should be towards this top debt, and it should be the biggest overpayment you can muster without tapping your emergency fund. Live lean. Sell off stuff you don’t use. Find ways to earn a few extra bucks to throw at it.

Once that first debt is gone, throw everything at the next one, then the next one, then the next one. Your extra payments will grow larger because you’ve got fewer minimum payments to make, and soon you’ll find yourself free.

I’ve written a detailed guide to building a debt repayment plan, too.

Avoiding High Interest Debt
I’m not a “no debt” absolutist. I think that home mortgages are often worthwhile for most people, and I think credit cards can be a useful tool if used carefully.

Having said that, many people do not use credit cards carefully. Instead of carefully using them as a tool during very regular purchases (like gas) and then setting the cash aside to pay the bill in full each month, they use credit cards mindlessly to buy whatever they throw in their shopping cart, not worrying too much about prices because, hey, the credit card will cover it!

Bad idea. If you have any inclination in that direction, cut up your credit cards, seriously. It’s the equivalent of swinging a chainsaw around with your eyes closed after knocking back three shots – you might luck out and wind up safe, but it’s more likely to wind up bloody and painful.

Instead, adopt a different approach. Leave your card at home most of the time. When you do use it, use it for specific purposes, like using a BP credit card and use it only at BP gas stations so you can get a nice kick back, or use the Target Visa only at Target to get 10% off your entire purchase regularly, and pay off the balance in full every time. Otherwise, leave it at home and use a debit card (one that features a Visa or MasterCard logo) for your purchases because then you’re actually accountable for every dime you spend while still enjoying the convenience of card use.

There are two big reasons for using this approach instead of going entirely down the cash road. First, it builds a positive credit rating, and a good credit rating improves your insurance rates and helps your employment opportunities. Second, using cards only in a very targeted fashion – as shown above – and paying off the bills in full each time results in some sweet cash kickbacks – 3% at least.

You’ve just got to respect the tool – and not start swinging it around like a toddler with an axe.

Currently, we have around $100,000 in credit card debt and we’re having a very hard time making the interest payments. How can we consolidate that debt and get a lower rate? Should we go to our credit union?

Mitchell is falling into the same trap that I see a lot of people who email me falling into. To put it simply, they’re just prolonging the inevitable – putting off the necessary changes in their life because they don’t want to face it. They want to keep living their life as it is now.

I know all about this. For years, I did it myself. From 2003 to early 2006, I racked up tons of debt, and near the end of that period, I was concerned not with actually fixing the problem, but with thoughts about how I could move the pieces around to keep the game going. My thoughts weren’t directed towards the choices I was making to create that debt – I was instead thinking about how I could use “tricks” to not have to face those choices.

But no matter what kind of clever juggling I did – even once going so far as to do cash withdrawals from one card to pay the bill of another card – eventually, I found myself backed into a corner. I found myself with a pile of bills, no way to pay them, and a little child completely dependent on me to make good decisions.

When I finally faced facts and realized I had to make a change, I found out something painful. All of that shuffling of money to prolong my current standard of living had made my situation far, far worse than it could have been if I had just faced facts earlier on. The actions I had to take for recovery were more drastic and the lifestyle changes I made were much more stark. Even now, after years of working myself out of the situation, I can easily see how, if I hadn’t been so focused on just maintaining my lifestyle in 2005 and 2006, I would be in much better shape today.

The choices you make today will affect your future. You can either make the choice to keep spending with reckless abandon, or you can choose to take a real look at what you’re doing and see if you can make some changes.

Where can you start, especially if all you really want to do is just keep up your lifestyle? I suggest five things.

First, simply think about what makes you truly happy in your life. What do you do that actually brings you sustained joy? Most people immediately begin thinking about whatever action brought them a burst of excitement and joy recently – like a shopping experience – but that’s not what I’m talking about. Those bursts of joy fade quickly and don’t bring lasting happiness. Instead, look for the wells in your life that constantly provide joy, even days later when you think back on them. Family? A few very close friends? Good books? Going to church? Don’t worry about what others think – focus entirely on what makes you feel good. Whatever you find, that’s what you should be focusing your energies on – the other stuff can just fall by the wayside.

Second, think about the things that are broken in your life. Most of the time, I’ve found that when people overspend (myself included), they’re doing it to overcome some bad feelings about something. For me, it was a lack of self-esteem, which manifested itself in a desire to impress those around me. Other people might just spend money to cover up feelings from a hurt relationship. If you find those broken pieces, don’t flinch – instead, address them head on. End the painful relationship. Make an effort to patch up a relationship. Find new friends who lift you up instead of constantly dragging you down.

Third, set a one day goal. Can you get through today without spending frivolously? Instead of diving into opportunities to spend, look for inexpensive or free ways to enjoy the things in your life. Don’t worry about big things – just focus on the small. Then, when one day is a success, look to the next one. Then the next. Take it just one day at a time. And pair it with gravitating towards the positive things in your life and moving away from the negative things.

Fourth, discover things already around you. Look around your town for free things to do. Try new things. Glance at your community’s calendar (you can find it online easily enough). Visit the parks in your area, the museums, the community festivals. Dig into all of the opportunities out there instead of just doing the same old thing all the time. You can’t break bad habits and build good ones without dipping your toes into the pool.

Finally, focus on building relationships that aren’t built around spending. If all of your friends focus on shopping and going out all the time and criticize those who aren’t wearing expensive clothes, you might want to back slowly away from that circle. Instead, look for the people in your life who don’t focus on such things. The best friends are the ones who are perfectly happy to kick back on the couch and watch a movie together or simply have a great conversation over a bowl of ice cream. They add value to your life and don’t subtract from your bank account.

Yes, consolidating your debt at a lower interest rate is a good tactic for financial recovery. But if it’s not coupled with some other behavior changes, it’s just prolonging the inevitable – at some point, you’ll have to face facts or face destroyed credit and possible bankruptcy. Stop prolonging the inevitable – and instead start thinking about what really brings you happiness.

Snowflaking is a spinoff of the Snowball approach to debt reduction popularized by Dave Ramsey. With the Debt Snowball method, you figure out what amount you can pay to debt every month, and then you keep paying that amount, even as your debts shrink and your minimums get smaller. To implement it, in a nutshell, make a list of all your debts, order them from either smallest to largest or highest interest to lowest interest (that is a debate in itself), and you focus all extra money above the minimum payments on a single debt (either the smallest total or the highest interest, I use interest order). As you eliminate debts, you apply the payment you were making to that debt to the next debt in line until the snowballing effect of decreasing minimums and increasing amounts applied to particular debts eliminates all the debts on your list.

Well, what are snowballs made of? Snowflakes! I have a set amount I pay to debt without fail every month that is above my minimum payment due (about $800). On top of that, I also try to collect up little bits of money wherever I can and I apply those as well to my top priority debt as immediately as possible. I take surveys online, I sell possessions on craigslist and ebay, I have yard sales, and any money I get from these endeavors goes directly to my debt. I also keep a very strict accounting of all the money that comes in every month and what I spend and everything left over at the end of the month not earmarked for future expenses also goes directly to debt. These are my snowflakes. I have averaged over $200 extra going to pay down my credit card debt every month due to these snowflaking efforts.

Many small snowflakes make a snowball, and no amount is too small for me to snowflake. I used to pay my credit card directly every time I collected a snowflake through their online interface, but now that I have moved my credit card debt to another card with a 0% interest offer, I collect the snowflakes and pay them once per week (I am limited to the number of payments I can make to this card a month). If you are able to and your debt is not at 0% interest, I highly recommend the “pay snowflakes immediately” method. The faster your balance is reduced, the less interest you will accrue.

Snowflaking is, quite simply, a great way to get aggressive with your debts. It gives you a little extra push towards achieving your goals. Even better, you can also “snowflake” towards any savings goals you might have.

Don’t know how to get started? Here are 15 ways you can get snowflaking going in your own life. These are low-impact ways – far from starting a side business – to earn a few bucks without devoting countless hours to a major project, things that sync very well with what you already do or can be picked up whenever you feel like it.

Have a yard sale. Go through your house, identify the items you don’t use much, and sell them. Put them out for sale in your yard over a weekend (with reasonable prices) and put that money straight towards your debts or other goals.

Keep your aluminum cans separate. In Iowa (and in many other states), there is a nickel “deposit” that one pays for each aluminum can (or bottle) purchased. Keep these cans and bottles separate from other trash, then occasionally return all of them for $10 or so. It helps the environment and gives you a bit of snowflaking cash.

House-sit. If someone you know goes on vacation, offer to house-sit for them, look after their pets, and so forth. It’s pretty easy work and can earn you some quick cash to knock down some debts.

Walk pets. If you already walk your own pet in the morning, it’s not much of a stretch to stop by another house or two, pick up their pet, and walk that pet as well – for a fee, of course. Put that fee straight towards your financial goals.

Blow snow. Got a snowblower? You’ll be blowing the snow from your own lawn anyway, so why not set up an arrangement where you’ll blow the snow from your neighbors’ driveways and walks for $10 or $20. Then, take that cash and put it towards your goals.

Eat a “free” meal. Freeze your “utility” leftovers, then make a meal out of them once in a while – mix your leftover rice, vegetables, and chicken pieces to make a “free” meal. That’s worth $5, easy, so just snowflake $5 when you do it.

Take surveys. It’s a great way to make a few bucks at your computer while watching a TV show or a movie. It’s not a great money maker, but it’s low-intensity and can be done whenever it fits your schedule.

Mow lawns. Got neighbors who can’t mow very often? Mow their lawn whenever you mow theirs for a few dollars. You’ve already got the mower out, right?

Write. You don’t have to start a blog and post regularly (though there’s success to be found there, too). Instead, just write articles and submit them to services like Associated Content or make “lenses” at Squidoo. It’s a great way to burn an hour or two on a lazy evening and earn a few bucks in the process.

Do simple tasks. Amazon’s Mechanical Turk will pay you a few cents for a mindless task that just takes a few seconds. One of my friends does this on her laptop during commercial breaks when she’s watching a television show and makes enough to cover basic cable.

Babysit. If you already have kids at home, put out your shingle as a babysitter. Most evenings, you’re already at home, so you’ll be getting paid just to mind another little one around the house. I know several people who do this.

Deliver groceries. If you know of any elderly folks or shut-ins who have difficulty getting out to buy groceries, give them a ring whenever you shop and offer to pick up what they need. They’ll often pay you several dollars extra for the service (and even if they don’t, it’s a great way to help someone in need).

Make crafts. Many people enjoy some sort of craft as a hobby. Create projects that reflect the best of your work, then sell them on sites like etsy. Anything from knitting to woodworking to scrapbooking to jewelry making can make you a few dollars in your spare time.

Be a “search guide.” If you’re just browsing the ‘net, why not help others find what they’re looking for online and make a few bucks? Cha Cha does just that – people send text messages to the service with questions, they pop up on your computer, you figure out the answer, send it back, and earn a bit to throw towards your debts.

Give charitably. Give what you can to charities – goods and other donations. Then, when you get the receipts for tax deductions, figure up how much you “get back” on your taxes and contribute that to your debts.

Good luck!

I’ve done this three times in the past:

The first time, with Your Money or Your Life, went really well, with tons of good discussion. You can browse through those entries here.

The second time, with Born to Buy, went pretty well, though it seemed to engage parents much more than other elements of the audience. You can browse through those entries here.

The final time, with The Intelligent Investor, didn’t go well at all. I think the key problem was that the material was too dry and the topic was perhaps a bit too far away from what most Simple Dollar readers are interested in, at least with that much coverage. You can browse through these entries here.

One big thing I learned is that doing it weekly was too slow. If I bring it back, it’ll last about a month to a month and a half, with three entries a week. Another thing I learned is that the book really needs to be in sync with what you all are interested in, because if you’re not interested, the discussion isn’t interesting. You seemed to get into the first two (especially the first one), but didn’t like the last one at all.

So, are you interested? I’m considering these eight books as possibilities (click through to read my earlier shorter reviews of them): Getting Things Done, The Total Money Makeover, Never Eat Alone, Debt Is Slavery, Scratch Beginnings, The 4 Hour Workweek, You’re So Money, and Green With Envy. I think each of these books have enough information and enough material in them to discuss to really get some good discussion going as well as teach us all something along the way.

If you’re interested in doing this again with one of these books (or another one), leave a comment. If you really are opposed to one book or another (or to the whole concept), leave a comment. I’ll try it again if there’s a clear consensus towards a particular book (or two) – otherwise, I’ll let this sleeping dog lie.

40 Places Where Freelancers Can Learn More About Business I tend to think that these are resources that anyone can use to sharpen their business skills, particularly if they’re self-employed or starting a small business. (@ freelance switch)

Stocks Are for Losers? A more appropriate statement would be that individual stocks are for losers. Although the stock market grows over time, that growth is pushed almost entirely by the top 25% of stocks – the ones that really hit it big and drive industries. The other 75%? A net loss. Interesting – and a great reason for wide diversification. (@ five cent nickel)

5 Ways to Dramatically Improve Your Finances – Beginning NOW These are probably the best five principles around if you’re just getting started turning your finances around. Great article with tons of links to more information. (@ simple mom)

Failed Frugality: Five Clues You’ve Gone Too Far In a nutshell, if your frugality is interfering with your interpersonal relationships and driving people away, you might want to rethink things. (@ wise bread)

Is Converting a Traditional IRA to a Roth a Brilliant or Stupid Idea Right Now? I actually get this question fairly often – and I agree with the conclusion. It entirely depends on the assumptions you make and your own situation – there is no blanket right answer, just like the 401(k) versus Roth IRA debate. (@ frugal dad)

Saying No This is one of the hardest lessons I’ve ever had to learn. If you’re good at something, the surest way to ruin it is to not know how to say “no” – you’ll take on more than you can handle and you’ll eventually fail miserably or burn out. (@ seth godin)

When a person decides to make a lifestyle change — financial or otherwise — there’s a temptation GO ALL OUT. With the zeal of a new convert, you leap headlong into a life of thrift, for example, giving up everything you valued before.

There’s a problem with this.

Most people who leap from a lifestyle of deficit-spending to one of extreme frugality find the waters very, very cold. It’s a shock to the system. It feels oppressive. They struggle to stay afloat, but before long decide they’re going to sink rather than swim, so return to the warmer, familiar waters, the waters of debt.

I made several false starts before I found my way. I would decide to give up comics completely, or to never buy another computer game. These sorts of goals are foolish. Nobody has that kind of god-like self-control. Everyone needs an indulgence now and then.

Rather than quit cold turkey, I think the best way to begin a life of frugality is by taking small steps. Small steps eventually become big strides, but only after you’ve developed your frugal muscles.

I understand where he’s coming from here, and I think he’s speaking the truth about his experience in adopting a frugal lifestyle and overcoming debt. I also think that quite a few people will identify with this perspective – perhaps even a majority of people.

However, for a lot of people, laser-like focus is a key part of their personal finance success.

I find myself in this group. When I finally hit financial bottom, I dove into debt repayment and frugality with the fervor of a freshly-minted missionary, bent on converting the unwashed masses of my debts to the purity of clean financial living. I spent many long nights going over my bills, keeping track of every cent I spent, and reading every book I could find on personal finance. I spent my weekends trying every tactic I could find in those books, hoping to discover things that actually worked for me. In fact, The Simple Dollar was borne from this – I started it to simply share the things that were working for me and the things that were not.

It was only with that intensity that I was able to hammer away many of my worst habits and actually do the hard work that I needed to do to put my financial life in a better place. For me, day to day life is a series of patterns – and it’s hard work to change those patterns. It was only through serious intensity – yes, I would even call it obsession – that I was able to change a lot of patterns in a reasonably short amount of time.

Without that focus, I would have never found success. I might have been able to keep my head above water – or maybe not. One thing I do know – a leisurely approach to this would not have worked for me.

Gazelle intensity This is largely the same philosophy that Dave Ramsey espouses. As he puts it:

Gazelles are gentle creatures hunted by the fastest animal on earth, the cheetah. With the cheetah being so fast, you would think the gazelle would be extinct. However they’ve learned that the cheetah is only the fastest animal on earth while running in a straight line. So when being chased, the gazelle bobs and weaves and runs in circles until the cheetah gets tired and gives up.

It’s time to think like a gazelle. If you are a gazelle and the marketing and credit card companies are cheetahs, bob and weave and run; do whatever it takes to get away. When you get that new credit card application in the mail – you know, the one that promises low introductory interest rates and lots of bonuses – scream CHEETAH! and destroy it as quickly as you can!

What works for you? Every person is different, and different techniques work well for them. Some people learn from text, while others learn visually and still others from audio. Some people learn best by repeating lists of facts – others learn by figuring out the patterns.

In the same way, some people succeed by applying a laser-like intensity to changes in their life, while others succeed by dipping their toes in and gradually moving forward. There are different levels for each.

Here’s a great example of how it actually works on the ground. A while back, I wrote a list of 100 ways to start saving money. A person who succeeds by taking slow steps might try one or two of them, then try one or two more, bringing gradual change into their life – and that’s awesome! Others succeed by taking that list and trying to do as many as they can at once, hammering on them until many of them become new habits – and that’s also awesome!

In my opinion, the best personal finance advice is modular. In other words, people who move more slowly can take a piece at a time, while people with gazelle intensity can grab them all and dive in head first. I usually try to see both sides of the coin.

Which side of the coin are you on? Are you a practitioner of intense focus on your money and personal habits, or do you like to dip your toes into new tactics?

Washington Wire summarizes the bill very succinctly:

Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
Bills: Issuers must send a bill 21 days before the due date.
Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
Minors: For consumers under 21 years old, a company must get the signature of a parent or another to take responsibility for the debt, or it must obtain proof that the under-21 consumer can repay credit.
Disclosure: Cardholders must get 45 days notice of change in terms.
Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.
Gift cards: All gift cards must have at least a five-year life.

Meanwhile, The Wallet offers a few predictions for what this means:

“We’re in uncharted territory here,” says Curtis Arnold, head of CardRatings.com, a credit-card comparison site. Mr. Arnold says consumers can expect issuers to work overtime to lure high-end, high-volume clientele while adding fees and rate hikes for customers with less-than-stellar credit profiles.

The rationale is that credit-card issuers make money off interchange fees (fees merchants pay to card issuers). So customers who charge everything and pay off their balances are seen as less risky and still profitable by card issuers.

The future of rewards programs is also up in the air. Mr. Arnold advises cashing in reward and airline mile points, as their purchasing power has been on the decline in the last year or so. However, he points to new cards from brokerages like Charles Schwab and Fidelity, which offer higher cash-back rewards that lure customers to their brokerage products.

Mr. Arnold also advises those customers with existing balances to pay them off as soon as possible and consider transferring them to smaller banks and credit unions, which may be able to offer more generous rates and repayment terms. He, and others in the industry, expect interest rates on existing balances to keep climbing before the proposed legislation kicks in. (An optimistic guess would be that card issuers would have to comply nine months or a year from now.)

Something else to keep an eye on: Annual fees. The era of reward cards, or even non-reward cards, with no annual fees may be at an end. Stay tuned to notices from your card issuers and the changing fine print of your statement

So what does this mean for you?

First of all, these rules do help people avoid getting into trouble with credit cards. I applaud the change that requires minors to get parental approval or to prove they have the ability to repay before getting a card. I also like that all extra payments always go to the portion of the balance with the highest interest rate – no more shenanigans with companies applying overpayments to 0% balance transfers. Eliminating fees for different types of payment is also a plus.

But what else will change? It’s important to remember that the full ramifications of this bill won’t be seen immediately. Obviously, the credit card companies will try to keep their level of profits the same, which means that, inevitably, they’ll have to change their business in some ways. However, as Arnold noted above, they don’t want to kill the golden goose – the interchange fees that they rake in as a result of wide credit card use.

So, beyond the immediate impact for credit card users noted above, I’m going to make a few predictions about how this bill will affect things over the long term.

Interest rates will keep climbing. The days of easy low-interest credit are ending. That means the role of the credit card will begin to change as smart consumers begin to use credit cards more like charge cards – they pay off the balance in full at the end of each month.

What this might mean for you: Paying down your credit card balances as soon as possible is more important than ever! If you’re carrying a credit card balance, now is the time to start buckling down and wiping out that debt. If you aren’t carrying a debt on your cards, don’t start one – stick to spending less than you earn and keep using the credit card as an intelligent tool.

The credit card syndicates (Visa, Mastercard, etc.) will seek to raise interchange fees as a first line of attack. Credit cards work most effectively when lots of consumers have them and then expect this service from merchants. Think about it from Target’s perspective, for example – if half of their customers use credit cards to pay, they’re somewhat tied to offering that service to customers. Thus, I predict credit card companies will use that to their advantage and raise interchange fees, particularly on large retailers.

What this might mean for you: Many merchants will attempt to recoup this increase in interchange fees by passing the cost along to the consumer, so I would expect a slight bump in prices – 1% or so, spread out over many purchases and items. For most people, this will largely go unnoticed and will be seen as normal inflation.

Credit card issuers will get clever with fees, but annual fees won’t return. Most consumers have come to expect that their credit card will have no annual fees, so I don’t believe these will return in wide use. Instead, the companies will see other avenues for fees – cards that require a minimum number of uses per month, cards that have fees to enroll in particular rewards programs, and so on.

What this might mean for you: You’ll have to be more careful with credit card offers in the future. Also, when there are updates to your terms, you’ll need to read them carefully. Again, if you keep your balance paid, your credit will be good, so you can walk away from any cards that try to slip sneaky fees in on you.

I don’t believe rewards programs will go away. I would expect, though, that rewards programs will become more tied to specific “partner” retailers, like Target and Amazon, and away from more general programs like Drivers’ Edge. Why? Merchant-specific cards encourage loyalty to those merchants, and that has quite a bit of value to the merchants – those aren’t programs they will want to see go away.

What this might mean for you: Don’t be surprised if you find some of your rewards programs changing, particularly when your current card expires. For now, though, stick with what works for you.

Any thoughts or predictions on this new world of credit card rules?

The Dollars and Cents
Let’s walk through three examples that demonstrate quite clearly how rounding up can directly save you money.

The Scenario You’ve just taken out a $150,000 mortgage to buy a home. It’s a thirty year mortgage, locked in at 5%. Thus, your monthly mortgage payment is $805.23.

Rounding up to the nearest dollar If you decide to round the payment up to the nearest dollar, you’ll just submit a payment each month for $806 – an overpayment of just $0.77. Your final payment would be reduced to $165.16, and your total savings over the lifetime of the loan would be $363.64.

Rounding up to the nearest ten dollars If you decide to round the payment up to the nearest ten dollar increment, you’ll submit a payment each month for $810 – an overpayment of $4.77. Your payments would end four months earlier and your final payment would be only $112.15. This would result in a total savings over the life of the loan of $2,220.67.

Rounding up to the nearest hundred dollars If you decide to round the payment up to the nearest hundred dollar increment, you’ll submit a payment each month for $900 – an overpayment of $94.77. Your payments would end six years and four months earlier and your final payment would be only $2.95. This would result in a total savings over the life of the loan of $34,605.19.

The savings numbers are actual savings – the amount that the total interest on the loan would be reduced. I did these calculations using Bankrate.com’s excellent mortgage calculator.

The Psychological Benefits
For me, there are big gains from this method beyond the mere dollars and cents.

First of all, as I mentioned above, it makes personal finance calculations much easier. With rounded payments, I can easily do calculations in my head that, without rounding, would require a spreadsheet or a calculator. That convenience comes through time and time again, from thinking about ATM receipts to doing some basic budgeting on a piece of scratch paper. Rounded payments save time.

Second, I feel good in the realization that I’m paying ahead on the debt. While it’s not a large amount, it is an amount that’s going straight against the principal, and with each month’s overpayment, the interest burden is going down faster and faster and faster. It feels quite good to see that each time on the account statement.

Third, the overpayment amount is small enough that I don’t “miss” it. If I make an $8 overpayment, those $8 are not going to make the difference in my personal finances. I’ll silently make up the difference throughout the month with better buying habits at the store or an impromptu decision to not splurge on something. The “downside” of the early payment is small enough that it has no real impact on my finances – until, of course, the bill goes away earlier than expected.

Automation
Having said that, it’s worth pointing out that automating your finances changes this pattern somewhat. Instead of worrying about a round overpayment on each of my automatic bills, I instead make sure that the total amount of the bills I pay automatically each month is rounded to a nice even number.

Here’s how I do it. Each month, I have a payment due for my student loan, my car, and my mortgage. When I add these together, it comes up to a very odd number. That’s the number I round up, to the nearest hundred, then beyond that I contribute several hundred more in an effort to pay down the debt early. In the end, I have a nice flat number I use each month in my calculations – $2,500, to be exact.

Since I pay all of these bills on the same day automatically, it’s easy for me to look at my balance and do the mental math necessary to make sure everything is in proper order.

What do you do when you find your car is worth less than you owe on it?

This is a pretty common question, particularly given the current state of the economy. Some people are out of work. Others are looking to seriously cut back. Thus, there are a lot of people out there that would like to get rid of their current car loan – but they’ve found that their car is worth less than they owe on it. Often, there’s not enough cash laying around to make up the difference, either.

So what do you do? I see a handful of options.

Ask yourself if you really need to change cars. Many people who are underwater in their car loans are looking at upgrading their car. If you’re in this situation, spend some time asking yourself if you really need to make a change. Would this upgrade serve any purpose other than aesthetics? If there is a purpose beyond that, is it worth the huge amount of debt you would incur?

Delayed gratification is the key here. If you can put off the purchase for even a year or two, you’ll end up in substantially better financial shape than if you pushed things right now and wound up even further in the hole than you are now.

Trade down. If you still need the car for transportation, consider trading down – you’ll take a big loss on the value up front, but over the long run, it will definitely balance out.

Let’s say, for example, that you’re driving an almost-new 2009 Toyota Avalon that’s worth $6,000 less than you owe. You realize you can’t really swing the $500 a month car payments. So, you take it in and trade it for a $7,000 late model used low-end sedan. Some dealerships will accept this trade – others won’t – but what you’ll wind up with is an upside-down loan on this used car. However, the car payments will be significantly lower, as will the insurance rates.

Park it and remove insurance. If you don’t need to drive the car right now, consider parking it somewhere safe and eliminating insurance on it. This will reduce your monthly bills (no insurance), plus you’ll not actually have to give up the car – it’ll still be there for you if you return to work. It’s not accumulating miles or wear and tear, so you save on maintenance costs as well.

This strategy works well if you’re in a situation with a healthy emergency fund and are anticipating several months without work. I know of several people in this position – they’re currently staying at home, either looking for work or trying to get their own business started while living off of savings.

Get a different loan, then sell. If you have very strong credit, you might have the option to get a personal loan or perhaps add to a home equity line of credit in order to pay the car loan down enough so that you’re not upside down in the loan. When you’ve done that, actively seek to sell the car.

This is a great solution if you have strong credit (or at least access to a healthy credit line with low interest elsewhere). Essentially, you’re just eliminating the car (and its value) from the loan, leaving you with just a small debt that can be repaid over time. Plus, you get the additional savings of no insurance and no vehicle tags.

Are there any other good ideas that Michael might be able to try?

“If you have an unpaid credit card balance [and] not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can.”

Furthermore (with my own emphasis added):

Orman says that all spare dough–after making the minimum payments–should go into an emergency savings fund. Ideally, she says, that fund should contain eight months worth of living expenses.

This is a pretty surprising shift, since Orman was, until very recently, a very strong advocate of focusing on eliminating all high-interest debt. Obviously, this shift has been brought on by the recent economic downturn – but is it really a sensible change in philosophy? I’m not so sure.

Let’s start with the basics. My philosophy on debt repayment is pretty typical: get a small emergency fund built up, then start snowballing all of the high interest debt (anything over about 6% or so) by focusing all of your energies on paying off the debts in order of descending interest (highest interest first). If you’re interested in how to get this philosophy rolling in your own life, I’ve discussed it in detail before.

Suze used to have a very similar philosophy, but now it’s changed in one significant way: instead of a small emergency fund at the start, she encourages people to get an eight month emergency fund before continuing on to repaying debts.

Although I agree with Suze that a change in strategy is appropriate, I disagree with this particular change.

First of all, it’s a long term solution to a short term problem. Many economists expect the economy to rebound in 2010. A typical estimate is that the recession will drag on for a total of eighteen to twenty-four months, with a bit more than half that time already elapsed.

What about jobs? The rate of job loss is slowing down across the country and in some areas is already beginning to rebound.

In short, it’s quite reasonable, based on the information before us, to conclude that we’ve already caught the brunt of the storm and that the future holds an economic rebound.

In this environment, making the decision to jump from debt repayment to emergency fund building is about two years overdue. Of course, two years ago, many fewer people would have listened to such advice.

At the same time, proposing an eight month emergency fund is really poor money advice to most people, particularly in the face of such a short-term concern. Eight month emergency funds are long term goals, taking years of careful planning and consistent saving to build. Proposing such an enormous goal to someone facing a big pile of monthly bills and a typical income isn’t great advice.

I know this from experience. If you had told me a few years ago that I should have eight months’ worth of living expenses in the bank, I would have laughed at you. It simply wasn’t realistic.

I propose a different solution.

First of all, ignore a huge, long-term goal like an eight month emergency fund. It took me years of difficult decisions and hard saving to reach that kind of buffer – and I had a strong income and a stubborn streak behind it. Sure, it’s a great long term goal, but if your focus is on getting through the downturn, your focus should be on the short term.

Instead, if you’re worried about the downturn, focus on three key things through the rest of this year (and thus, likely, through the bottom of the downturn):

One, apply some realistic frugality in your life. I’m not suggesting completely revamping your life and completely altering your behavior – that will simply fail most of the time, just like a crash diet.

Instead, look for truly effective ways to trim your spending, particularly things you can do one time and have them continually save money over the long haul. Work on improving energy efficiency, for example, by air sealing your home, installing a programmable thermostat (and actually programming it), and using more energy-efficient equipment (like light bulbs and appliances). Prepare home-cooked meals in advance and freeze them (so when you’re busy during the workweek, inexpensive homemade meals are very easy). Call and get your credit card interest rates reduced. Cut out services you’re not using – and try to negotiate any package deals you have, like a cable/phone/internet bundle. All of these tactics can be done once in a big energetic flurry, but they trim your monthly expenses thereafter.

Two, acquire no new debt. Instead of replacing things, stretch out their use a little bit longer or find alternate means. Take your credit cards and hide them, so you’re not tempted to use them for things you don’t truly need. Most importantly, take it one day at a time. Focus on just avoiding the credit cards in the here and now – don’t stress out about the long term.

Three, build up your emergency fund a little now, but be prepared to reduce it in 2010. If you’re really concerned about the short term, it’s okay to slow down the debt repayments in the short term. Just pay the minimums and put the extra payments (along with all of that other money you’re saving through the steps above) into your emergency fund. Then, when the economy rebounds and you’re clearly in a more secure state with your employment and other factors, don’t be afraid to put some of that savings towards your debts.

To put it simply, an eight month emergency fund, if you have high interest outstanding debt, is overkill. However, in the current economic environment, there is reason for people to feel much less secure about their employment. So, in the short term, I’d bulk up my emergency fund a little – but only in the short term.

If you take nothing else away from this article, take this away: everyone’s personal sense of risk is different. For many people, the current economic state goes far beyond their comfortable risk threshold – if you feel that way, bulk up your emergency fund in the short term. If you feel confident and comfortable where you’re at, pay down your debt – or, if you don’t have any debt, start saving for retirement. The key, as always, is to spend less than you earn. If you do that – and do it with all your might – the details of whether to pay down debt or to have a bigger emergency fund pale in comparison.

My philosophy on these freebies is pretty simple. I tell them flat-out that I’m not going to review their product unless that product actually turns out to be interesting in some way or another. If they want to take that gamble, they can go right ahead and send it.

What I’ve found is that this response filters out most of the nonsense. The few things that I do get sent – mostly personal finance books and, on occasion, some purely promotional stuff – is either stuff that clearly isn’t going to get mentioned (like a logo t-shirt) or it’s actually worthwhile, like a personal finance book from a reputable publisher.

The only problem is that this free stuff piles up. So what I’ve started doing is taking a box with me when I go to speaking engagements, filled with these freebies after I’ve read them. I then give them away to anyone who asks a question, since, if people are listening to me talk, they must be at least somewhat interested in the topic.

Several people asked how I deal with such things. That’s my policy, in a nutshell.

Sinful Indulgence This article has some great insight into the dangers of splurging and the question of whether conspicuous consumption is actually depriving yourself (I say it’s not). (@ 60 in 3)

Did Your Parents Give You a Whole Life Insurance Policy? Here’s What To Do With It. My wife has such a policy, and we’ve long debated about what to do with it. This is some real food for thought. (@ wisebread)

About Closing Credit Card Accounts and Your FICO Score Just because you finally pay off your credit card doesn’t mean you should close the account. Doing that can actually have a negative impact on your credit score. (@ money under thirty)

The Psychology of Automation This is a pretty worthwhile book excerpt. I strongly agree with the central idea here – automate your savings and it’s a lot easier to save. (@ tim ferriss)

Want To Stand Out At Work? Get The Small Stuff Right I agree wholeheartedly. Get the small stuff right consistently and you’ll be fine, even if the big things don’t turn out perfectly. (@ dumb little man)

How to Save $100 (or More) at the Grocery Store This Month There’s some excellent advice here on grocery shopping. The store circular, meal plan, and shopping list are key. (@ get rich slowly)

Are You Emotionally Invested in Your Credit Card? This is a really interesting perspective on credit card use that I hadn’t considered. (@ bible money matters)

The argument against the loan is pretty simple: debt is bad. By having it, you’re indebted to someone else, condemned to make payments for quite a while or else risk wrecking your credit. Instead, pay cash for everything – no debts, no worries.

I agree with that philosophy to a large extent. Using credit to buy something you couldn’t otherwise afford is an extremely dangerous game. It can bite you hard if life doesn’t go as planned. I know this from experience – in April 2006, I let easy credit almost bankrupt my family due to overspending.

But what if you’ve done things the right way and saved up for a major expense before buying? Is it always the correct choice to make a major purchase simply by writing a check? When you write a check for a major purchase, you’re taking a large amount of liquid cash and investing it in a material item. The ability to use that cash for anything else is now gone (excepting, of course, equity loans, which usually don’t have great interest rates).

Now, at first glance, you seem to gain quite a bit from that exchange. After all, you’re not paying interest on the loan and you’re not required to make a payment every month.

But compare that to the situation where you have all of the money to pay off the debt sitting in a savings account. You can easily earn 2-3% interest on that money just by allowing it to sit there, doing nothing. Thus, the advantage of simply writing a check for your purchase isn’t quite as strong as simply not having to pay the interest on the debt. If you can write a check, for example, to cover a 5% debt, but you can earn 3% by holding onto the money in cash, your dollars and cents benefit is only approximately 2%.

Another factor worth considering is that having extra cash on hand always serves as a supplemental emergency fund. While savings intended for a major purchase should never be juxtaposed with a true emergency fund. having more cash on hand in the event of a major crisis does have value.

There’s also the opportunities that cash provides. If you put all of that money into your purchase and deplete your savings, you no longer have cash available to take advantage of exceptional opportunities.

Here are two examples of what I’m talking about. In late 2006, I made some extra money flipping Nintendo Wiis. I had a good run finding them in stores and I was able to buy them new for $250 and sell them in just a few days for $325. The only problem is that I didn’t have a lot of excess cash to do this – I actually had to do it on credit cards. Because of that, I didn’t want to take a big risk when doing it, so I only flipped one at a time – I’d get the $325 (or so), use it to pay off the debt in full (and use the extra $75 to pay a little more on my debts), then buy another one.

If I had a large bankroll at the time, I could have been flipping these by the armload. I knew where and when to go to get the systems and I also knew where to sell as many as I could get my hands on. I simply didn’t have the capital to do this. If I had, I would have been able to earn a very good return on my money.

Another example: in 2005, I had the chance to buy 72 packs of Magic: the Gathering cards for about $1,500. It was actually part of a much larger lot of trading cards from a shop going out of business. Here’s the catch – these particular packs could be flipped for $200 a pop. Those packs alone would have earned me over $10,000. Unfortunately, money was so tight at the time that I had to pass on the opportunity, even though I knew I could make very good money on the sale.

Exceptional opportunities do come along, and the rewards of those opportunities go to the people who can take advantage of them. Most of the time, that means the people who have easy access to liquid cash.

In the end, my feeling is this: having cash, even if it just sits in a savings account or a CD, is advantageous over putting that cash into a material item. Thus, if you do have the cash to buy an item in full, it’s worth considering keeping the cash and getting a low interest loan for the item.

The key here is low interest. If you cannot secure a loan that’s less than 2% or 3% higher than what you can get in a savings account, you’re better off paying for the item in cash.

That’s my stand on the subject. What do you think?