You Can’t Give What You Don’t Have

Birthday GiftA new thought occurred to me recently. That is, you can’t give what you don’t have.

For instance, if you come to my house and ask me for a can of Pepsi, you will be disappointed. I don’t have Pepsi, so I can’t give you any.

I’m sure most people will agree with this simple illustration. But let’s shift the discussion toward a sensitive topic: gift giving.

It is my belief that birthdays and Christmas are two big reasons people resort to credit and go into debt. I’ve run the numbers before. It’s quite easy to drop $50 to $100 a month on gifts. Real figures are probably more than that.

The trouble is, most of us don’t budget for gifts. And so when several birthdays fall close together… or it’s time to buy gifts at Christmas… it’s not uncommon to ask Visa or MasterCard to pay the bill.

But let me ask you a question. Are you giving the gifts? Or is the credit card company?

Instead of signing our gifts “From Dad & Mom” or “From Your Hubbie,” perhaps we should sign them “From Visa.”

Since many people have negative net worth (they have more debt than assets), then they really have no money with which to give. Therefore, it stand to follow that they cannot give what they don’t have.

For this reason (among others), I’m considering putting a temporary stop to gift giving. It just doesn’t make any sense to depend on credit to give gifts. Not only are you paying more than you should (because of interest on the revolving balance), you’re also delaying the time when you finally become debt free.

The biggest objection people will have to following this advice is the fear of what people will think. They will say you are being a Scrooge. But really, you probably have more to fear from mounting debt than people’s opinions. Something to think about.

P.S. I just finished re-reading Charles Dickens’ The Christmas Carol. Remember, Ebenezer Scrooge was wealthy. He actually had the means to give.

Why I Made an Egregious Mistake

After reading Part 6 of my story, Anonymous Reader writes: “I can’t believe after all you went through, you didn’t learn your lesson. […] What are you going to do about this egregious lapse of reason?”

It’s an excellent question, even if it is a bit hard for me to swallow. But before I begin telling you what I plan to do (a topic for later posts), let’s examine why I made such an “egregious” mistake–namely, adding about $47,000 to my total debt load in a single year. (If you don’t know what I’m talking about, read my story starting here.)

As I tried to explain, one reason I went into more debt was greed. I let my desires get the best of me. Just because I was moving in the right direction (paying off debt) doesn’t mean I was no longer subject to emotion and the lapses in judgment it causes.

Here was my reasoning for buying my motorcycle.

1. My dad already has a motorcycle. It would be fun to go riding with him.

2. My dad is in his 50s. Won’t be long until he’s over 60. If I wait too long to get a motorcycle, I might not get to ride with him.

3. Hmmm… what motorcycle do I want? Safety is a priority, and BMW is the only company that builds motorcycles with ABS breaks–very important in Colorado where there’s frequently gravel on the roads.BMW K 1200 R: The Cause of My Debt

4. Which model do I want? Well, that BMW K 1200 R is pretty sweet. Oh, 163 horsepower should do.

5. But no. I can’t. I don’t have the money for it and I don’t want the debt.

6. (Months pass. Then…) A special financing deal? That’s cheap money. It will hardly cost me anything to borrow that money. Why the heck not? After all, I deserve it.

That, in a nutshell, is the thought process I went through. And that’s why I road a brand new BMW motorcycle to my house in December 2006.

Could I have gotten a less expensive motorcycle? Absolutely. Was it right to go into so much debt over a “boy toy?” No. But I did it anyway. I share my thought process with you so you can see how easy it is to justify expenses when we want to.

Now, the minivan.

As I already mentioned, my wife became pregnant in February 2007. She is due in two weeks… about November 4. When we found out she was pregnant, we knew we’d have to get a larger vehicle.

We had turned in a leased vehicle and we had a 2001 Hyundai Elantra. We still own the Elantra. It is paid for. The problem is, it is impossible to fit three car seats side-by-side in the back seat. You just can’t do it.

So we knew we’d need a bigger vehicle, probably a minivan. We knew we wanted a Honda Odyssey or a Toyota Sienna simply for reliability reasons. We looked at a few used options, but they were for the most part badly abused.

And with Honda Odysseys in particular, it seemed they didn’t depreciate much. You could buy a used one with 35,000 miles on it for $26,900… or a brand new one with zero miles for $31,000. Would I pay $4,000 for an extra 35,000 miles worth of engine wear and tear? Yes, I would. And I did.

Again, could I have purchased an older minivan for $15,000 or less? Absolutely. But I didn’t.

I’m not trying to justify my behavior or my actions. I’m only sharing the thought processes I went through. Perhaps you can relate to them. Perhaps you have used similar lines of reasoning to justify your own credit purchases.

Anyway, the decisions have been made and my financial situation is what it is. It may be a let down reading Part 6 of my story after reading Parts 1-5. But what would a story be without a little drama, right?

So, I now have some decisions to make. As Anonymous Reader asked so well… “What are you going to do?”

Of course, I’ve considered many different courses of action. But I haven’t arrived at anything concrete yet. There is pain involved in making these decisions, which makes it difficult to take action.

If you were in my shoes, dear reader, what would you do? Please leave a comment and let me know your thoughts.

The Story, Part 6

In Part 5, it looked like I was headed for a debt-free life. I had paid off over $20K worth of unsecured debt in 11 months. But a few things conspired to put me further in the hole.

For one, I got greedy.

You see, I love motorcycles. I commuted on one for an entire summer before our first child was born. I hadn’t had one since, and I wanted one.

I had posted up a couple pictures in my office. I looked at them every day. One picture was of a Triumph Speed Triple. The other picture was of a BMW K 1200 R.

After staring at those pictures every day for more than a year, I was ready to buy. So when I found out BMW was offering special financing, I took advantage of it. That was in December 2006. I didn’t add the motorcycle to my list of debt until May because that is when the payments finally started.

The motorcycle set me back about $16,000. But I figured I could handle it. My debt level at this point was still lower than it had been a year ago. And the debt was secured. I could always sell the motorcycle if I had to.

If the motorcycle was all I had purchased, it wouldn’t have been that bad. But here’s the thing. I had also leased a car two years prior. The lease was up in March 2007. I turned the car in, and my wife and I began car shopping.

We were looking at a few options, including a Honda CRV. But we took our time. And thank God we did! Literally days before we were about to make a decision, we found out my wife was pregnant with our third child. This immediately put us in the market for a minivan.

We went with one car for a few months while I did some research. Ultimately, we purchased a new Honda Odyssey in May. After options, the price came to about $31,000. And so our debt nearly doubled with a single purchase.

Again, I justified all of this because the debt was secured. If I found myself in a tough financial spot, I figured I could sell the motorcycle and van to cancel out the debt.

Since we’re keeping score here, you should know my total debt in September 2007 came to $72,307.59. Not a small number. Here is a snapshot for you to see…

Debt Snapshot September 2007

Note where it says “Reduction” there is a positive number. That’s because my debt level increased instead of going down. If it had gone down, the “Reduction” number would have been in (parentheses). That’s how a debit is recorded in accounting.

Lately, I’ve found it difficult to keep up with all my payments. Why? Because I started paying my brother in July 2007 to work with me in my business. So far, he’s done fantastic work. But we haven’t increased cash flow. I’m paying him $2,500 a month on top of all my other expenses. At first, this was fine. But it’s catching up with me.

So now you know where I’m currently at and how I got here. Now it’s time to try to turn things around. I’ll be posting my debt level every month for you to see my progress (or lack thereof). I will also be posting advice, book reviews, and what I’m currently doing to reduce my debt.

I invite you to follow along, leave comments, and link to any articles you like. If you are in debt, then perhaps you will find the information or motivation you need to start moving in the right direction.

The Story, Part 5

My focus on reducing our debt paid off during late 2006.

Every time I got paid for a new copywriting project, I’d practically zero out my bank account to pay off outstanding debts. This reduced our debt fast. Here’s a snapshot of what our debt load was like when we started…

Debt Snapshot May 2006

After just 11 months of intense effort, we managed to reduce our debt by nearly half. Here is a snapshot from April 2007…

Debt Snapshot April 2007

After the whole interest rate hike with MBNA/Bank of America, I had declared war on the credit card companies. And make war I did.

As you’ll see in the second image, we had eliminated $21,583.12 in unsecured debt. If you do the math, that’s a reduction of $1,962.10 per month.

Some months we did better than others. In the second image you’ll also see a box that says “Reduction.” In that cell I had put a formula to automatically calculate how much we reduced our debt each month.

If we didn’t reduce debt, the figure would show up positive. This still keeps us honest when we’re not moving in the right direction.

Most of my ability to pay down debt was because of me raising my fees as a freelance copywriter. So I used my increase in income to pay down my debt.

But I also reduced costs.

When I began to catch up on my accounting, I was able to see how much money I had been wasting on education I wasn’t using. As a result, I immediately slashed a number of monthly subscriptions that required monthly membership fees. I was able to use the money I saved to further my cause.

Now, at this point in the story, you might be thinking it’s almost over. But it’s not. You see, there’s another speed bump ahead. Once I share it with you, it will bring us up to the current time. At which point we can really get down to the business of getting out of this mess.

(Click here to read Part 6.)

The Story, Part 4

Egg DietWe lived with my parents for five months. Then we bought a home. We qualified on my income alone (my wife stays home with our kids)… but barely. The first year was rough. We ate eggs and oatmeal a lot.

Still, I was seeking “the” opportunity that would make me rich. So I began blogging about alternative health. I began studying to become a financial planner. And I continued to work through a freelance copywriting course I had purchased from AWAI.

Long story short, I quit my job on April 19, 2005 to become a financial planner. It didn’t work out.

Then, with only two weeks of money left, I launched my freelance copywriting career on June 13, 2005. I had been learning how to write advertising copy in my job at Sonlight Curriculum. And I had completed the course about how to become a freelance copywriter. So it seemed a natural fit.

The good news is, I quickly picked up some clients and never looked back. To this day, I am still a freelance copywriter.

The bad news is, I continued to wrack up debt to fund my new business. I paid for home study courses, coaching programs, and marketing seminars. I paid for traveling expenses. I paid to register, host, and build web sites. I paid for accounting. I paid for a new laptop computer.

The expenses never seemed to stop.

What’s more, being self-employed wasn’t all smooth sailing. For a stretch of 45 days in late 2005 I made only a thousand bucks. I went in the hole nearly five grand just to pay the bills.

Ultimately, our debt wasn’t going away. In fact, it was increasing.

Finally, in the spring of 2006, I waged war on the credit card companies. Why? Because MBNA (now Bank of Amercia) jacked up the interest rate on our credit card to 26.99%, virtually without warning.

I called the company to find out why. They said it was just the way it was; they had sent a notice. I pointed out that I had paid all my bills on time and was below my credit limit. They told me it didn’t matter.

I was livid.

I did some research online and found that this practice is commonplace. Many people have posted angry rants about the unethical business practices of MBNA and Bank of America.

Anyway, this event became the catalyst that convinced me that I needed to turn things around. We couldn’t keep borrowing from the future to pay for the present. We had to stop spending as much and start paying off our debt.

To begin the process, I pulled a credit report (with credit scores). And I built an Excel spreadsheet to see how much debt we had accumulated… because I really didn’t know. To my horror, our total debt came in at $46,351.39. That was on May 23, 2006.

(Click here to read Part 5.)