You know you have a problem in convenience stores if

• The clerk knows you by name
• You buy your beer there….by the can
• You buy your saline solution there
• You go there more than twice a week
• You are there on lottery day
• You do “mini grocery shopping” there

If you find yourself doing one or more of the above items then perhaps you should read The Cost of Being Unorganized

Why did you pay off the mortgage early?

Chris:  Intuitively, it just felt right.  For a few years there, we were a bit flush with cash, with two of us working and zero to one kids.  Looking forward, I knew eventually the economics would dictate that one of us should stay home.  I like to keep things relaxing, and counting on the market to grow our wealth while carrying debt was calculus that made me uneasy.  Maybe you can boil it down to a low degree of confidence in corporate America, which I knew pretty well.

Marta:  The plan originally was to pay off the mortgage while we still had two incomes, before our first child was born.  That way I could quit and be a stay at home mom and with the loss of income we would also have less debt.  Yes, I grew up with Depression era parents who always encouraged saving, and I’ve never liked any kind of debt hanging over my head.

How long did it take from the time you decided to do it and when it was paid off?

Chris:  It’s a bit hard to remember, but I’d guess about the 5 year mark, we started to see that we could do it if we really wanted to.  I think we had it paid off by the 8 or 9 year mark.

Marta:  I bought our first house in 1992, on just my income, even though we knew we were getting married soon.  We didn’t want to have too much of a house to pay off.  We got married in 1993, and every month put extra on the principal.  Also around that time my mom gave me a sum of money from my late father’s estate that I put on the principal and we refinanced to a 15 yr mortgage.  We continued to pay a good amount on the principal every month and in January 1998 we paid that mortgage off.  John (Marta’s first child) was born in April 1998 and I quit my job.

Did any friends or family members think you were nuts?

Chris:  There were probably people who thought we were nuts.  But if they knew me well, they knew I was nuts already.  I think after the fact when people found out (and we didn’t really advertise the fact) they’d say ‘man, wouldn’t that be nice.’

Marta:  My brother-in-law especially thought we were nuts.  He thought we should invest the money we got from the other house.  But then we would still have had a house payment.  And also he doesn’t have any kids and I tried to explain how my situation was different from theirs, and that the peace of mind from no mortgage was priceless when you want to stay at home with your three kids.  I also told him that if, for some reason, Nick (Marta’s husband) lost his job, it wouldn’t be so devastating financially.  Ultimately he didn’t understand my point of view.  My mother was very supportive, she thinks it’s what everyone should strive for, since they never had a mortgage!

Would you do it again?

Chris:  In my mind, life without debt is a better life.  So yes, we’re always going to be working to lessen or eliminate our debt load.

Marta:  I would definitely do it again.  It made it easier for me to stay at home.  And we were able to save for the kids college and retirement and just in general, because we didn’t have a house payment.  I’m very glad for my parents influence.

Themes From Their Answers

Chris and Marta touched on so many themes with their responses.  I think they’ve covered all the major topics on this blog just in one interview with me!  Debt, paying cash for things, savings, living below your means and more.  Some highlights from Chris and Marta:

“I like to keep things relaxing”  – I interpret this to mean that Chris does not like unexpected, financial disasters.  Neither do I.   By being mortage-free, few emergencies in life could really “rock the boat” too much.

“low degree of confidence in corporate America”  – I interpret this to mean that Chris or his wife could be out of a job at any random point in today’s economy.  By having no house debt, he didn’t have to worry about dragging himself into a job he disliked just to pay the mortgage.  Ultimately,  Chris did quit his job to be at home with the kids, but that’s a whole separate story.

“grew up with Depression era parents” – Marta implies that she knows the importance of living life with no debt, paying cash for purchases and other habits we learned from her parent’s generation.  Today’s youth could learn more from Marta’s parents (and Marta!) than any personal finance book anywhere.

“John was born … and I quit my job” – well how many of you out there *wish* you could do that?  Quit your job to be at home with your kids.  It’s a positive step for nearly all families that do it.  Sadly, most couples think they need two incomes to get by today.  My wife and I took a 50% pay cut for her to stay home with the kids and we never looked back.  Smartest thing we’ve ever done.

“My mother …. never had a mortgage”  – this is totally incredible that Marta’s mother never had a mortgage.  Do you hear what I’m saying!!???  Her parents paid cash for every home they owned.  That is truly remarkable.  And although it may have occurred more  in the 1930s, 40s and 50s it’s still an impressive feat.  I would not say it was a common thing to pay cash for your home then or now.

“Life without debt is a better life”  -  Chris could not have said it any better.

“I would definitely do it again” – Marta knows where she stands in this hyper-materialistic society in which we live and she still would do it again.  But, Marta, what about you driving nicer, newer cars or taking more exotic vacations?  I already know her answer:  this plan works for her – her family and financial future.

Thanks, Chris and Marta, for letting me profile you on MattHutter.com!

He filed for bankruptcy eight years ago and apparently has not learned any lessons from that ordeal.   Filing for bankruptcy is very similar to debt consolidation.  You are basically using your Get Out Jail Free card with little consequence or learning involved.  It’s like a grownup’s version of a “do over” from childhood.  With no pain involved what’s from stopping it from happening again?

On a more day-to-day note, he lives paycheck to paycheck.  Actually he does not quite make it to the next paycheck.  Once he told me how he writes himself a check for cash the day before payday.  He found an ATM that surprisingly allows funds to be withdrawn immediately after a deposit.  When money runs tight, he’ll withdraw the funds from this “deposit” to make ends meet before payday.   It gives him the much-needed cash infusion before he gets his paycheck.  Some of you might have heard another term for this act:  kiting checks.  It is classified as check fraud and playing the “float” between the time of the check being cashed and the deposit of the check itself is illegal.   In some instances, he did not make it in time and had to pay overdraft fees.  He was on the phone complaining with the bank so many times they almost knew him on a first-name basis.  If he just built up an emergency fund none of these cash shortages would have come into play.

Next,  I’ll discuss his car purchase fiasco.  He went to buy a minivan for around $20,000.  Unlike most car purchase stories, negotiating with the dealer does not even come into play here.  When he went to trade-in his old car, he learned that he was $5,000 in over his head on that one.  The dealer also somehow managed to tack on $8,000 more in an extended warranty, underbody rust protection and a bunch of other junk.  Bottom line:  he paid $33,000 for a $20,000 minivan.  This is quite remarkable.  Just on that deal alone he came out $13,000 more in the hole than needed.

If he woke up today and decided to fix his money problems where would he start?

• Make some big lifestyles changes quickly.  Sell both cars and pay cash for very cheap cars.  Or live with one car.  Driving a junker car is only temporary to get him back on the saddle.
• Cease to use credit cards – permanently.
• At each job change or pay raise, bank that money.  Do not change the lifestyle.
• Recognize that these changes today will make for a much happier tomorrow

I’ve oversimplified the remedy for his issues but the above items are great starting points for my friend to begin to enjoy that six-figure salary.

1) Financing: Blame Billy Durant

Billy Durant was the founder of General Motors. When the company began to really grow in the early 1900s he proposed the concept of “installment loans” to finance the purchase of cars for which folks did not have the cash. Mr. Durant created the General Motors Acceptance Corporation (GMAC) which at the time was the largest non-bank source for financing auto loans. His chief rival, Henry Ford, was vehemently opposed to the idea of installment loans and this one decision by Henry Ford cost him the lead in the American automobile industry. So, it could be argued that GM became the world’s largest company in the world partially by allowing customers to buy cars they could not afford! This speaks volumes about America’s obsession with driving cars they cannot afford – even back in 1919 when GMAC was formed. Financing a car is generally done by people who cannot afford to pay for the whole car at once.

2) Leasing:The Sacred Cash Cow of Auto Companies

Many struggling and even profitable auto companies make most or all of their profits from their financing division. Exactly like the story of Sears at one point being a finance company with some goods out front, auto companies are often in the same boat. Below are just brief snippets of recent news stories about the auto industrie’s profits:

“Ford Posts Profit as Finance Unit Offsets Auto Losses”

“DaimlerChrysler said Thursday that fourth-quarter profit rose 84 percent on gains in vehicle financing and sales of Chrysler cars…has counted on earnings growth at Chrysler, commercial-vehicle and financing divisions to more than offset declining profit at Mercedes.”

“Ford Profits Surges On Strength of Financing”

The above headlines demonstrate that these car companies are basically making products that lose money year after year, yet consumers that finance or lease through these company’s in-house leasing divisions contribute to the only profits of the companies. So, it could be argued that certain car companies only make profits from customers who lease. They do not even make money on their chief product: cars! Leasing is not only a rip-off for consumers, but it artificially inflates the profits of companies that otherwise would be going out of business if they exclusively stuck to their core industries.

Another reason that leasing is so popular is that it lets you drive a car you cannot afford. Otherwise, buyers would be stuck getting cars within their means and within their budgets which would likely be older, cheaper and less of a status symbol.

3) Paying Cash: The Epitome of Weird

How many people do you know who pay cash for their cars? I can probably count that number on one hand. Paying cash for a car is just plain weird. But borrowing or financing the car is normal, right? Who wants to be weird? Well, those “weird folks” have learned the truth about car payments. The truth about car payments is this: car dealers, on average, make $1200 on leased cars, $700 on financed cars and $72 on cash-purchased cars. Yes, you read that correctly. $72 profit on customers who pay cash for their cars. So, if you are a car salesman which financial product are you going to push?

If paying cash seems out reach for you, then ask yourself this question: have you ever missed a car payment? Has it ever been a stretch to make the car payment each month? If the answer is no, then why not discipline yourself to make a “virtual car payment” each month (say, $350 per month) even when it does not go to a real car payment. Take that cash of $350 per month, save it for 3 years and you’re at $12,600 which can buy a decent used car. You don’t spend a time on financing interest, you can negotiate better with the dealer and you reach a financial goal you set for yourself. This is something on which a price cannot be put.

1. When you pay cash for things, the chances of identity theft are zero. Now, I mean actual cold, hard, green cash not a debit card. If you are worried about a problem with your purchase be sure and keep the receipt. I’ve never once heard of a merchant basing the return policy on the method of purchase. All purchases by reputable retailers allows returns regardless of the purchase method.
2. Reward or loyalty points are a great deal from all the products I get from using my card. Wow, let me walk through all of the flaws in this arguement. First, if you are a person who carries a balance, those reward items are free! Your interest charges are paying for those “free” products. If you are someone who never carries a balance you may think the rewards are still a sweet deal. What if an Act of God happens one month and a bill does not get paid on time? Wham! Finance charge on that card with the “free” reward points. Also, what if the bank makes an error on your account? If you don’t have an account you won’t EVER get a bill or an error on that bill!
3. A credit card is good for emergencies. Well, I see two ways out of emergencies; your main checking account and a savings account/emergency fund. Do you want to know another saying for emergency credit card purchase? Poor planning. If you have a big enough emergency fund, how bad is the emergency that it will wipe out the account? A simple rule is that the bigger the emergency fund, the lower the chances of it being wiped out by any emergency.
   1. Home repair – maybe $2000 – $4000 if it’s really bad. Hopefully insurance covers something which is not your fault. Any other repair bigger than that may have been looming since you bought the house or you ignored the repair for too long.
   2. Car repair – maybe $2000 or so. Any more than that and it should be covered by insurance due to an accident or it’s time to look for another car.
   3. Health problem – maybe $500 – $30,000 for serious health problems. Any $30,000 medical bill may have been caused by no medical insurance or experimental treatment. These are certainly possible, but rare for most people.

   If you are like me, a credit card creates a false sense of security to help you out of financial jams. However, when paying that emergency expense with a credit card you now essentially created another emergency (albeit a long-term one) with a new, large, unexpected debt. An emergency fund can solve many emergency financial problems. Living without one is like an acrobat flying without a net.

4. I’m young and I want to build up my credit rating. As I detailed in The FICO Score Flaw a credit rating is basically a loser’s game. All it shows is how well you manage the revolving door of debt. A young person just entering the workforce likely has two major purchases on the horizon. A car and a house. Ideally you’d pay for both with cash, but that’s not in the cards for all of us. For the car purchase, most lenders will recognize that you have a steady income and approve you for a loan. For the home purchase, I’d strongly recommend the following: 20% down payment on a 15-year traditional (not adjustable rate or interest-only loans) mortgage. This shows the bank that you are a conservative borrower who takes this loan very seriously. Building up a 20% down payment and choosing a higher payment (the 15-year loan is a higher payment than the 30-year loan, but it’s paid off twice as fast) shows that you have commitment. If the bank balks at your loan application with no credit rating ask that the loan be manually underwritten.
5. Credit cards are safer online that debit cards. First of all, if your bank tries to pin the unauthorized charges on you for either kind of online fraud, credit or debit, mention to them that they are violating federal law. The Electronic Funds Transfer Act (EFTA), which applies to debit cards, specifies your liability for fraudulent transactions is $50 if you notify the bank within two days of a lost of stolen card and up to $500 if you notify after two days. The Fair Credit Billing Act, which applies to credit cards, specifies your liability for fraudulent charges is no liability if the unauthorized use involved just the credit card number, and only $50 in the case of a lost or stolen card. So, it literally would take an Act of Congress to occur before your bank rightfully holds you responsible for unauthorized charges.
6. I like paying only bill per month. I have many friends who put everything on the credit card and (claim) to write only one check for all their bills per month. Many times these are the same folks who use rewards loyalty points on their card. First of all, if you pay cash for all face-to-face transactions you pay no bills per month. For online purchases use a debit card only and either keep the receipt or record it in your checkbook. Now, back to the paying only one bill per month. Dunn and Bradstreet did a study that shows consumers spend 12-18% using credit cards than paying with cash. Exactly like poker chips, no emotional involvement occurs when swiping a plastic card. However, when you are pulling out ten $10 bills to pay for something, you feel the pain.
7. I travel and hotels/rental cars won’t take debit cards. Um, time to change hotels. Ask to speak to the manager on why this policy exists. If you are traveling with a company credit card, keep in mind this is affecting your credit rating, not your employers. Even if the card is in their name.
8. Credit cards are more convenient than cash. Smart personal finances are rarely about convenience. Convenience is what gets most people into debt over their heads. Impulse buys, payday loans, cash advances and credit cards are like everything else convenient….they’re expensive. It would be convenient for a limo driver to bring me to work everyday, but very expensive. It would be convenient to eat out for every meal, but expensive. You get my point.

The bottom line is that eliminating all of your credit cards is a trade-off. You may give up some convenience, but the peace of mind and better sleeping at night will make the trade far worth the effort.

The essence of this trick is to take the total purchase amount and keep rounding it up from smaller coins to larger bills until you reach the amount given to the cashier. Let’s look at a bill for $2.17 and you give the clerk a $5 bill:

Continually rounding up we have

• 3 pennies to go from 17 cents to 20 cents.
• 1 nickel to go from 20 cents to 25 cents.
• 3 quarters to go from 25 cents to a dollar (now you are at 3 dollars).
• 2 dollars to get you back to the original five-dollar bill given.

The coolest part of this trick is that it’s designed to help out cashiers (thus invented by my roomate the cashier at the time) return change in the exact order of the change drawer. The above example returns three pennies, a nickel, three quarters and two dollars ($2.83) back to the customer and it’s in the exact order by which a cashier would draw the change.

Have fun with that one.

The Impulse Buyer

I had a friend once who received an inheritance of $13,000 from a deceased aunt and put that money into the world’s worst investment. My friend probably slept on this newfound money at most a day or two if that. At the time he had not completed his four-year degree and since this was the early 1990s that $13K could have helped him wrap up his diploma. If you analyze just those two purchases alone (a car or a four-year degree) one will be worth nothing in 7 – 8 years and the other can literally be worth over a million dollars over a lifetime. Yes, a college degree will always be worth far more than any car. My friend spent his unexpected cash windfall as an impulse buyer. He did not have to work for this money, did not spend years saving it up (but his aunt did) and most importantly did not fully appreciate how a mere $13K could have had a major positive impact on his life. Hopefully some day my friend will realize the true potential of what modest sums of money like that inheritance could have done for him by now fifteen years later.

The Thoughtful Investor

When this type of person receives an unexpected sum of cash she can finally implement her plan that she had been devising all along for this day. Start a small business with that cash, invest it in the market for the long haul, put a down payment on real estate with that money or use it to kick-start a plan of paying cash for everything. Whatever our fictitious receiver of this cash does with the money you can be assured that she won’t regret it one month, six months or one year later. Her brain and spending habits had already been programmed to spend wisely sums of money both great and small. In other words, this unexpected cash windfall merely helps her accelerate her financial plan at a greater pace.

Windfalls the De-motivator

What if your parents told you that you were going to get brand new car for your sixteenth birthday? What if your parents told you that you’d get $50,000 for a down payment on a house when you get married? What if they told you that you’d get $200,000 of their estate on your thirtieth birthday? What effect would that have on your subconscious mind? Suppose you were in your late 20s at a job you hated? How long would it take for your mind to say “what’s the point of trying to succeed at this dumb job if I’m getting $200,000 in two years when I turn 30?” As detailed in the Millionaire Next Door parents like this are unknowingly giving their children economic outpatient care. In other words, they are actually doing their children more harm than good. They are de-motivating their children to succeed financially in life. If you play chess with your kid for years and years and always let your kid win, how prepared will he be during his first real chess tournament? That tournament loss will hit him like a ton of bricks without Mom or Dad letting him win. The same is true in finances. If your child never learns to appreciate the value of money how will your child be expected to turn out when she has her first big financial fiasco like a runaway credit card bill or car repair. She’ll expect Mom or Dad to be the financial knight in shining armor. I believe children turn out best financially when they either a) have no idea of their parents true net worth or b) expect to get little or nothing when their parents die. Anything else will just act a demotivator for the child.

I’ll begin with a link to someone who has successfully weaned himself off credit cards. He makes some fascinating points including:

• it’s a lot more painful to pay cash than swipe a card
• if don’t use the (credit) card, you won’t get a bill
• he ignores the deluge of loyalty-point offers from banks and credit card companies

I’ll expand my thoughts on each of those items as well as add some more of my own.

First, paying with cash is more painful than swiping a card. During my experiment the last couple months of paying cash for items that allow it (my fixed bills and utilities do not have any benefit of getting paid with cash) I learned firsthand how painful cash can be to use exclusively. A couple days ago I went to a discount grocery store that only takes cash or checks. I forgot my checkbook and did not want to go back to the house. So I withdrew money from the in-store ATM (fee-free surprisingly) and that fixed amount was my budget for this grocery trip. I knew that if I exceeded the amount of cash in my wallet I would embarrassingly have to tell the cashier to skip some items while at the checkout in front of everyone. Having this fixed amount also disciplined me to resist the temptation to buy foods that I don’t need including junk food and convenience foods. If this store accepted credit/debit cards what discipline would I (or any spender in that store) have to stop me from spending 110%, 120% or more than I planned on spending? None.

Second, if you don’t use the card you won’t get a bill. I cannot tell you how many times in the past my wife and I did not clearly communicate to each other our spending on the credit card bill for the month and then WHAM-O we get socked with a much bigger bill than we planned. That would be exactly the reason why banks that offer credit cards often turn into billion-dollar behemoths in a short period of time. They’re collecting all of that massive interest from debt-holders. Sheryl Harris, a consumer advocate columnist details some fascinating facts about the history and current state of consumer credit in the U.S.:

Decades ago, credit was seen as something to be used cautiously. One might borrow to buy a home or a car or in a dire emergency, but lenders and borrowers alike shared the belief that credit was to be doled out sparingly.

In the 1960s, Household Finance’s ads included the caution to never borrow needlessly.

Banks turned away would-be homeowners who couldn’t amass a sizable down payment and show they could devote a chunk of their income to the serious business of paying off a mortgage – both principal and interest.

Credit-card issuers generously funded credit counseling programs to help borrowers who slipped up learn how to budget. If wayward debtors joined a financial counseling program, lenders routinely would lower the interest owed to help them get back on track.

Those days are history.

Tweens – kids 11 to 13 – are pitched secured cards to help them get in the habit of using plastic early. College kids are handed applications for credit cards before they even step on campus. People emerge from bankruptcy court to find new offers of credit waiting in their mailboxes.

Creditworthiness has become a state of mind. No down payment? No real disposable income? No worries.

Between 2000 and 2005, among households that use plastic, the average credit card debt went up 17 percent to $9,159 per family.

Yes, you read that correctly. $9,159 of credit card debt per family. At 17% interest paid back over two years, you’d pay back $1709 in interest. Or put another way, you just bought one of the credit card managers in that bank a cruise in the Caribbean for a week! How do avoid becoming one of those families with $9K in credit card debt? Don’t use the card. That is certainly easier said than done, but some useful steps are here in the How To Avoid Using Credit Cards article.

He ignores the deluge of loyalty-point offers from banks and credit card companies. I heard a caller on the Dave Ramsey radio show the other day fiercely debating Dave on how the caller is taking the credit card companies to task. He says he puts everything on his credit cards and pays them off each month. Dave’s rebuttal points were:

• Studies have shown that consumers spend 12 – 18% more when using plastic (both debit and credit). How is this guy coming out ahead if he is spending more 12 – 18% money just to get some loyalty points? He’d have to buy everything on sale at 12 – 18% off just to break even!
• Does the caller actually believe he can beat multi-billion-dollar credit card companies at their own game? The banks plow millions of dollars each year each year into television, radio and print advertising in an effort to alter consumer behavior. “Come on, you deserve than trip to Vegas. Tough day at work? Go buy yourself those new $500 golf clubs? Need some home improvements but don’t have the money? Put it on your new Home Depot card and get 10% off your first purchase.”
• As I detailed in paragraphs above, Dave reminded the caller that paying with cash is inconvenient and therefore you spend less.

The caller was bullheaded and probably was not convinced by Dave, but millions of his listeners including me certainly were influenced by that call.

Another intangible benefit I received from paying with cash for items is the satisfaction of saving up for something. How many parents teach their children about spending by saying “here’s ten dollars for that new toy. You can pay me back over 12 months by doing your chores around the house for nothing!” No, you teach a child proper spending habits by making the child save up for that big-ticket item (big-ticket to them). If a child receives a toy by doing nothing he or she won’t fully appreciate that toy. If the kid needs to spend two months saving for it, you can bet she will take great care of that toy and play with it often. The exact same holds true for adults. Eliminating the “have to have it now” attitude makes us savor and enjoy the big purchase once the big day finally arrives.

If you give yourself several months to change your mindset about using cash versus plastic eventually the seeds will sink into your subconscious mind to save up for items rather than make impulse buys. You can’t put a value on the personal satisfaction of paying with cash as well as your savings in interest from credit card use.