by Larry Wiener
He is a successful personal fitness trainer with well-heeled clients and a partnership interest in a going gym. He has no family obligations. You’d think he would be as fit financially as he is physically. NOT!! When he came to me about his finances, he was desperate. Drowning in credit card debt and saddled with a huge car payment, finances were ever on his mind.
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Where does someone like that start? If you’re new to Better Budgeting, looking at my friend’s situation may give you some insight into how to get a training regimen going with your personal finances.
The Credit Cards
He thinks he has four credit cards with balances. He thinks the balances add up to around $9000 (not that overwhelming compared to some of the stories I hear about, but enough to be a concern). He thinks the interest rates vary from around 14% to 21%.
Dealing with that credit card debt needs to be the first order of business for us. The first steps will be going from thinks to knows. We designed a form he can use to keep track of his accounts. As each statement comes in, we will note the balance, interest rate, minimum payment, and the contact information for that account.
We will then start a process of paying off the cards. We will set an amount that he feels he can afford each month and apportion the payments as follows: Every card except the one with the highest interest rate will get the minimum payment. Then the one with the highest rate will get all the rest of the payment. The first few months won’t result in much principal reduction, but as he hangs in there, those balances will begin dropping more noticeably.
After a few months of steady payments, we will then look into reducing interest rates. We will contact especially the higher interest cards and appeal to them to lower the rates. We may even look to lower the number of cards he has or seek out some 0% cards if we find some that will work for his situation.
Also, I am going to advise him to cut up all the credit cards but one. I will suggest that he do something to make that card not easily accessible. Maybe he can have a trusted relative keep it. I even heard of one person who put her credit card in a plastic container, filled it with water, and then froze it. She said that way she wouldn’t take it out of the freezer unless she really needed it. Whatever it takes!
My friend will learn what so many of us have learned–that debt robs a person of his or her financial freedom and that credit card debt is the most insidious of all.
Everyone I know has to eat and my friend is no exception. Always on the go, he has formed the habit of going to the supermarket near him (happens to be one of the area’s more expensive chains) and doing a lot of fast food or fast casual restaurants on the run.
If he follows my suggestion of shopping mainly at the dollar store, Trader Joe’s, a great specialty store here in Southern California, and at Henry’s, a low-cost high-quality healthy market, he will probably save $100 a month. Trying to be a little more methodical about not eating on the run so much and he can add another $50 or more a month to his savings.
Then I’m going to ask my friend the big black belt shopper question: Now that you are saving money, how can you use that $100 to $200 a month to increase your financial freedom? For him, it probably will be additional debt reduction and setting up an emergency fund. For you, it may be becoming an investor or saving for something special.
If you’re in need of getting the food budget under control, you may want to read my article on shopping during a supermarket strike. Even if there isn’t a strike in your area, the tips apply.
Several months ago my friend was working a gazillion hours a week and decided that since he didn’t have time to enjoy movies, trips, and the like, he could at least have a great car to do all his driving in.
He treated himself to a brand new $35,000 sports car. He didn’t realize that he was also treating himself to high car payments, high insurance, and high registration. He realizes now that he made a mistake and wishes that he had bought an ordinary car.
That’s going to be a hard one. He’s only had the car a few months. Depending on the terms of the loan and a lot of other factors, he probably actually owes more than the car is worth because of the depreciation of the car. He may even have a loan that will cost a fortune to get out of because of the way it is structured.
We’ll run the numbers and see if it’s worth it to downsize the car. If not, we’ll run the numbers again in six months to a year to see if it is worth it then.
High priced cars are an expensive splurge. A friend of mine has called my 1997 Honda my freedom machine because even though it’s quite ordinary, it gives me the freedom to take some interesting road trips and bring home some good purchases I might not be able to afford if I had a fancy car.
If you’re car poor, do the math. See if it would be worth your while to downsize for the sake of financial freedom. If so, consider it. If not, bite the bullet and then do the math again in six months to a year.
Like many Americans, my friend didn’t have really good financial modeling at home. His parents really didn’t systematically teach him about money and, as far as I know, he never took a course in personal finance. During his wilder days, he wouldn’t listen to anyone who tried to talk financial sense to him. Now he’s all ears.
I found a course called Personal Financial Management at the local community college. I’m going to suggest it. I also am going to suggest that he makes an agreement with me that before he make any expenditure greater than, say, $200, that he talk with either me or his uncle who is well versed in personal finance.
Unfortunately, my friend was bailed out quite a bit when he made financial mistakes in his early adulthood. While his parents and grandparents sincerely thought they were helping, they were really enabling and reinforcing impulsive and unwise financial behavior. By giving him the tools and teaching him, I am trying to empower rather than enable.
My friend is in the process doing in the financial realm exactly what he teaches his physical training clients to do–he is becoming knowledgeable and strong in his ability to deal with money. He is going from being random and impulsive to being methodical and informed in the way he handles money. While we are just beginning right now, I am hopeful.
So what can you learn from this story? Here are a few points:
Avoid Credit Card Debts
If you don’t have credit card debt, don’t start. If you are in debt, get out as fast as you can. This site and others have numerous strategies you can use to deal with creditors.
Know Your Situation
My friend didn’t know how many accounts he had or what shape they were in. Find out all the details of your own situation so you can make better decisions.
Apply the Principle of Black Belt Shopping to Your Situation
The whole paradigm of black belt shopping is to learn strategies to save money and then become very intentional about using the money wisely. My friend is starting with food.
My friend may downsize his car. You may want to downsize your house see our story about a family that had a great experience downsizing their house to get in financial shape. Maybe you can downsize the number of cable channels you have to help out.
Learn All You Can
Take a course. Read articles or books. Pick the brains of people who have it together financially. Many Americans are very undereducated when it comes to personal finance.
Avoid the Bailout Trap
Getting bailed out through relatives or even the bankruptcy process can sound appealing, but it doesn’t help you grow. I’m not saying that some assistance isn’t appropriate, but be careful about taking the easy way out. Also, if you are in a position to bail someone out, think twice before you do it. I have seen more young and even middle aged adults remain in financial adolescence because well-meaning relatives and friends have bailed them out.
My friend tells me that January and February are the busiest months for personal training because so many of us have become physically unfit during the holiday season because of personal indulgences.
Quite a few of us, including my trainer friend, also have become financially unfit because of our indulgences. The training my friend provides empowers his clients to improve their physical fitness. Now may also be the time that you may want to become empowered to improve your financial fitness.
I’m sure my friend tells his clients that developing physical fitness takes working hard and working smart. Fiscal fitness, like physical fitness, involves retraining yourself to approach an area of life in a new way. But, like physical fitness, the effort you put into fiscal fitness is worth the sacrifice when you experience the outcome.
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Copyright © 2004 by Larry Wiener. All rights reserved.