I’m amazed how fast I grow cash by not using any credit cards
Earlier today, I was in a bit of a financial nostalgic mood. I couldn't sleep a wink last night so I poured over old reports and spreadsheets I had of my financial past. It was quite the journey into the black hole of debt I had. It left me feeling amazed at how far I have come, but with a tinge of regret and wishes that I had ended the debt cycle much, much sooner. However, I still feel re-energized in motivation to keep going on my current path to wealth.
I have this particular spreadsheet that I have regularly contributed to for years now, and continue to do so. It has sheets dating back to September of 2008, showing my Assets, subtracted by Liabilities, and ultimately showing my Net Worth. It's a very black and white financial snapshot, and I kept meticulous track of all of my accounts with this spreadsheet. While I use QuickBooks for business, it doesn't give me the true black and white overview of my "financial snapshot" so to speak, because some accounts in QuickBooks are equity accounts that don't get included in the Profit and Loss reports and others are personal accounts that I don't track in QB.
Anyway, here is the first day of my financial snapshot, to illustrate:
| Financial Snapshot | 9/24/2008 |
| A/R | $ 10,601.61 |
| Chase Checking | $ 1,550.01 |
| Pending Deposits | $ 385.00 |
| ING Orange Savings | $ 2,582.51 |
| PayPal | $ 563.92 |
| Total Assets | $ 15,683.05 |
| A/P | |
| Discover | $ (3,687.17) |
| Chase Visa | $ (3,686.68) |
| Chevron Card | $ (291.51) |
| Sales Tax Payable | $ (838.99) |
| WF MasterCard | $ (7,425.10) |
| Personal Loan | $ (10,000.00) |
| Total Liabilities | $ (25,929.45) |
| Net | $ (10,246.40) |
It was that day when I started my spreadsheet. It was the day I first took out a $10,000 loan because I had large purchases in the pipeline for my business. I had to buy a whole bunch of computers and a server and with my weak capital and credit lines, I simply could not afford it. So, I borrowed $10,000 from my grandparents and set out to track everything with this spreadsheet. You can see that I had over $25k in debts and liabilities. I was always very good about keeping up with bills, which the A/P shows as zero. I also had a savings of $2,500 going. It's too bad I was a horrible spender and credit card user from the outset.
Fast forward to 2009, and the picture looks nearly identical with the debt and liabilities load:
| Financial Snapshot | 9/19/2009 |
| A/R | $ 7,531.15 |
| Chase Checking | $ 6,889.98 |
| Pending Deposits | $ 255.00 |
| ING Orange Savings | $ - |
| PayPal | $ - |
| Nic Owes | $ 7,944.00 |
| Total Assets | $ 22,620.13 |
| A/P | |
| Discover | $ (6,073.59) |
| Chase Visa | $ (6,338.79) |
| Chevron Card | $ (225.00) |
| Sales Tax Payable | $ (736.20) |
| WF MasterCard | $(10,097.84) |
| Loan | $ - |
| Total Liabilities | $(23,471.42) |
| Net | $ (851.29) |
The only difference here is I managed to pay off that loan, and reduce my Net Worth to $-851. However, the debt is still there because I had always actively used my credit cards. My wife owed me $8k here for a boob job that I paid for with my credit card so I could reap huge rewards points with it. She paid me back within the next couple days after this snapshot was taken.
Let's move forward to March of 2010:
| Financial Snapshot | 3/28/2010 |
| A/R | $ 12,268.24 |
| Chase Checking | $ 2,795.91 |
| Pending Deposits | $ - |
| ING Orange Savings | $ 202.92 |
| Chase Savings | $ - |
| PayPal | $ 139.15 |
| Checking #2 | $ 1,201.60 |
| A/R #2 | $ 210.90 |
| PayPal #2 | $ 195.44 |
| Total Assets | $ 23,743.20 |
| A/P | $(20,070.94) |
| Discover | $ (1,408.06) |
| Chase Visa | $ (1,981.88) |
| Chevron Card | $ (30.46) |
| Sales Tax Payable | $ (1,153.43) |
| BillMeLater | $ - |
| Wells Fargo MC | $ - |
| Toyota Visa | $ - |
| Citi Diamond | $ - |
| Total Liabilities | $(24,644.77) |
| Net | $ (901.57) |
What's really interesting here is my Net Worth is still negative, and my liabilities have skyrocketed to over $24k. I also have way more credit cards opened here, and my A/P is a massive $20k. This is because after I reconciled most of my credit cards, I shoved them into the A/P accounts in QB with the intent of paying them all off outright. Of course, that never happened because I continued to use credit and funnel whatever cash I got my hands on back into paying down credit cards. And, my pathetic attempts at growing any kind of savings account was futile, because those credit card bills just kept on coming!
As I have written previously, I finally declared war on debt in January of 2011. I vowed to stop using credit altogether, and focus on paying off ALL debts as fast as I possibly could. The day I declared war was January 1st, 2011, so this snapshot reflects my financial picture a day after that date of infamy:
| Financial Snapshot | 1/2/2011 |
| A/R | $ 7,056.63 |
| Chase Checking | $ 3,597.67 |
| Pending Deposits | $ 330.36 |
| ING Orange Savings | $ - |
| Chase Savings | $ - |
| PayPal | $ - |
| Checking #2 | $ 232.87 |
| A/R #2 | $ 668.90 |
| PayPal #2 | $ - |
| Total Assets | $ 11,886.43 |
| A/P | $ (2,325.17) |
| Discover | $ (6,554.34) |
| Chase Visa | $ (5,109.21) |
| Chevron Card | $ - |
| Sales Tax Payable | $ (1,013.47) |
| BillMeLater | $ - |
| Wells Fargo MC | $ - |
| Toyota Visa | $ (2,690.00) |
| Citi Diamond | $ - |
| Total Liabilities | $(17,692.19) |
| Net | $ (5,805.76) |
What I failed to include in the liabilities section all along, were our car loans at the time. We had two car loans - one for my Matrix and one for the gas guzzling, money pit of a Tacoma truck. In mid-2011, I finally paid off my car loan, and in December 2011, we traded in the truck for a roadster that we paid for with cash. So the adjusted financial snapshot for January of 2011 was more in the $35k liabilities range, and a far, far weaker Net Worth.
After all our hard, hard work in paying down and paying off debts, I can proudly present to you, my current financial snapshot which shows NO debt whatsoever (aside from the regular business A/P and Sales Tax Payable accounts which will always be current liabilities):
| Financial Snapshot | 2/16/2012 |
| Checking - #1 | $ 494.44 |
| Checking - #2 | $ 5,233.95 |
| PayPal - #1 | $ 179.03 |
| PayPal - #2 | $ - |
| Total Cash | $ 5,907.42 |
| A/R - #1 | $ 11,364.25 |
| A/R - #2 | $ 1,377.39 |
| Pending Deposits/Revenue | $ 3,100.00 |
| Total A/R | $ 15,841.64 |
| A/P | $ (350.00) |
| Sales Tax Payable | $ (700.42) |
| Citi Diamond MasterCard | $ - |
| Total Liabilities | $ (1,050.42) |
| Net | $ 20,698.64 |
For the first time in my entire life, I have a current net worth of over $20k, let alone a positive net worth! Granted, there are more things like my businesses and our cars, as well as our material possessions that count as assets which are not included in any of my financial snapshots to date. However, I'm only looking at current, short-term liquid assets here. One big difference here is the lack of liabilities accounts I actively track. It sure has reduced a lot of stress in my life. Another difference here is I focus how much cash I actually have, which as of today, is almost $6k. My short term goal for cash is to have $10k in both of my checking accounts, with the rest spilling over to savings accounts. My biggest problem in the past was cash flow. I have learned time and time again that it is important to have a cash cushion for daily business operations. I was funding it with credit all the time in the past, and could never get ahead, because the credit lines were massive. All the real cash I was pulling in was immediately going out to finance my debts. I was always underwater with credit cards and it didn't matter how "careful" I was in tracking all of the accounts on a regular basis.
The key takeaway here, for myself, and for all of you out there, is you grow your cash so much faster when you have zero debts to worry about!
Having real cash in the bank makes me happy
For the first time in literally 5 years, I have managed to keep over $5,000 real cash in my bank accounts for over a month so far. I plan on growing this cash hoard as fast as I can to reach my short-term goals of having $20,000 cash split between both checking accounts, and then spilling over anything on top of that into a long-term savings account. The reason being, is I have learned that I need to have a sufficient cash-cushion for operating expenses in doing business. Once I reach these thresholds, the sky will be the limit!
Back when I was using revolving debt to finance operating expenses and operations in business, I was one miserable dude. I hated seeing $10,000 cash in my checking for one day, only to know I had to pay off a massive credit card balance. It just seemed that I could not hold onto the dollars. Five years ago, I did have $5,000 cash stashed in a mutual fund over at Vanguard. However, it lasted a mere two months and I quickly depleted that fund when I bought my Toyota Matrix. Since then, I simply did not bother to replenish the account and closed it instead.
So, with the hard five years of constantly doing the debt cycle, and finally breaking free and seeing some REAL cash in the bank, I am so much happier. I think my wife can tell too, since she could always see how angry and miserable I was whenever I was short on cash. If there were only a couple hundred bucks in my operating account, I would be angry, miserable, and lash out at people.
The biggest thing that has helped me in saving money and building up a cash cushion is simply reducing bills. The biggest bill you can kill are credit card bills and to do so, you simply stop using credit cards, pay them off, and voila! You have less and less bills to worry about. At my peak debt, I had a balance on at least 10 different credit cards. It was a huge chore just keeping up with payment due dates, minimum payments, and actually trying to pay down all balances as much as possible, which in turn kills the cash flow. I am amazed how trapped I was with credit cards. It still blows my mind to this day. Now that I no longer have to worry about 10 credit card bills, I feel less stressed and freer. Additionally, I have killed the car payment, which was yet another bill. Having less bills in general seems to make the cash appear so quickly. I am at the point where, after all my regular monthly bills are paid, I have at least $5-10k net profit every month, so that means I should very easily be able to save $50k this year alone, and possibly more.
Here are my cash hoarding goals in a nutshell:
- 1-2 Months: Save $5k in checking account number 2 (DONE in one month!)
- 3-6 Months: Save $10k in both checking accounts for a total of $20k in operating cash after all expenses. This is to be a cash cushion
- 12 Months or less: Save $40-60k total cash across all accounts. Use this money for a downpayment on a home
Now about that home....a topic for another day!
So, kill the bills, save the cash, and become a way happier person who has way less stress in their life!
Some people are just terrible at tracking their expenses
I used to be one of them. I am reminded today about this huge problem I had in the past where I would let certain charges go unnoticed on my credit card. A client of mine just emailed me today asking if I had signed them up for a $49.95/month service by "Merchant Technical Solutions" for anti-virus, backups, and the works. I said no and that it surely sounded like a scam. Upon further googling of this company, it turns out it is a scam and I'm not surprised. What I am surprised about though, is this particular client let this charge slip by since 2010! So $49.95 per year, for nearly two years is about $1,200! And it's money that was literally just thrown away, out onto the street, for nothing in return. Sure, they probably could have gotten this so-called anti virus and online backup service, but they didn't have any piece of software installed. Hopefully the client will be able to get a refund - which is very crucial in staying financially fit. Always get a refund for services or products that you don't use - especially a service like this one which is an obvious scam.
There was a period in my financial life where I was subscribed to everything under the sun. I had several magazine subscriptions, website memberships, ezine subscriptions, and was a member of several organizations that just like to take your money such as the local chambers of commerce for a few surrounding cities near me. While I understand there are intangible benefits to such memberships and subscriptions, it's totally a waste of money paying for them when there are so many free sources out there. The Internet, Google, local library, bar/pub, business gatherings, and more. At one point, I had over 49 different, regular monthly bills. Now? I have exactly 5 bills related to business, and 8 bills related to personal/home use. I no longer subscribe to any magazine, have memberships to any website (except one which is absolutely critical for my business - LogMeIn Rescue), or allow ANY unauthorized charge go by. When I had 49+ regular bills, it was way too easy to overlook fraudulent charges. Just for kicks, I pulled up a few statements from a couple years ago, and actually did find a couple charges that I have no clue about. It's a funny thing - even though I reconcile all of my accounts with QuickBooks, I still let a few charges slip through. I suppose it's no surprise that my client let his charge slip through. He's very wealthy and I am sure has several dozen accounts that he regularly has to keep track of, and untold amounts of subscriptions, memberships, etc.
I'm a believer in keeping things way simple. The more simple, the less things to worry about and therefore the less mistakes are made (as well as less stress!). I only have two business checking accounts, one savings account, and while I do have probably a dozen open lines of credits, I use NONE of them. So really, I am only keeping track of 3 bank accounts, one of which is my high-volume account that I really pay extra attention to in scrutinizing transactions. At my peak, I was struggling to keep track of 3 checking accounts, 2 savings accounts, 2 paypal accounts, 10+ credit card accounts, and a couple car loans. It have managed to whittle all those accounts down to just 4 that I regularly keep track of. I have things set up with all my unused credit card accounts to immediately e-mail me if any charges pop up unannounced.
Ahh, the beauty of simplicity.
Don’t be a Hoarder; It’s tacky and against all what frugality means
Last Christmas, I decided that I didn't want to spend hundreds of my hard earned and saved money on Christmas gifts. I did this all in the name of trying to become debt free and stay debt free. I wanted to protect what little cash I had in my bank account for operating expenses for business capital. I had always noticed that if I dipped below my $5,000 "cushion" of cash for expenses and operating pay-outs in business, I would struggle and strain to stay afloat and in a couple instances, I did have to revert back to using credit cards as my "cash cushion" last year. Additionally, I was tired of getting junk so I wanted to save everyone the hassle of having to buy my wife and I gifts, since I just view Christmas as a stressful time to worry about buying the right gifts for the right person. Anyway, when I announced to my family that my wife and I did not want to buy anyone gifts nor receive gifts because we are trying to save money, the backlash was horrendous from my mother. My father and brother had no problem it appeared, but my mother flipped a bitch when we told her "no gifts!"
You see, there's more to it than just me wanting to save money. I am also extremely sick of consumerism in general. I'm sick of getting junk -- and the same old junk at that -- during Christmas. Instead, I had hoped that my family would be open to doing something together as a family, rather than sitting around like fat Americans gnawing open shiny Christmas presents and getting basically the same old crap that we normally get year in and year out during our massive gift exchanges. Some Christmases were crazy in the past. We would literally get hundreds of these gifts from our parents, grandparents, aunts, uncles, etc. It's all just meaningless junk. Additionally, my mom has a problem. A big problem, whether she realizes it or not. She's an addict as it is, addicted to cigarettes for as long as I can remember, and never could kick the habit (even after a couple serious prognoses regarding her lungs). She's also a hoarder. What used to be my old bedroom from when I was living there, has become a treasure trove for the hoarder. She has piled from floor to ceiling lots and lots of "collectible antiques" as she likes to call it. To anyone else who's not a hoarder and not an addict, it's all just junk. Seriously -- who needs all that crap? This is why I am the polar opposite of my mother in terms of not wanting anything material whatsoever. I try to avoid material goods like the plague. I am sick and tired of things. Whenever I get something new, it's always something that I will actually use and need on a regular basis. I make a point of removing anything that I no longer need, out of the home. I post it on eBay, give it away, or simply chuck it in the trash if it's broken/worn/unusable at that point. Case in point, I just upgraded our home theater system with Apple TVs in the bedroom and living room at a cost of $99 a piece. I effectively replaced the SageTV network I had going, with two Apple TVs that cost no more than $200. I recently sold just one of the two SageTVs on eBay for $260! I will be posting the second one on eBay soon. I basically got rid of something that paid for the new thing many times over. This is the smart thing to do. Don't just shove old things in a closet, box, attic, or garage because you will forget about it and that's cash that will be long gone as time goes. If you can, swap out the old thing with a new thing that's equal to or less in cost than the old thing. It's better to replace a $500 vaccuum cleaner with a $250 one that ideally performs a lot better than the old one did. And if the old one still works, you could try to fetch $100 off Craigslist for it, and cut down the cost of getting the new thing for nearly half off additional than what you paid for it.
When my iPhone 3GS became unbearable to use (it was slow and totally physically falling apart), I posted it on eBay and got a quick $115 for it. I used that cash towards my new iPhone 4S. Instead of just throwing the iPhone away, I managed to salvage cash out of it. If you look around your home, I bet there are hundreds, if not thousands, of dollars in "stuff" that you could probably do without. My golden rule of thumb is, if something is going to be stuffed away in a box in a closet or attic or garage for at least 6 months - try to sell it, donate it, or simply just get rid of it! Frugality means that you have just enough things to keep you happy, content with your Feng Shui surroundings of your home, busy, entertained, and doing so without breaking the bank or making the storage closets bulge on the verge of flooding your home and suffocating you with useless crap. It's also just tacky to hoard things. You've been warned!
It’s so hard to stay debt-free!
What a conundrum now. After breaking free of the shackles of debt, I find myself super-tempted and impatient with refraining from expensing cash out for "business investments". What I mean by that, is I found a good marketing guy who charges $190 per hour to help me with obtaining higher caliber clients for my IT consultancy. For five years, I have worked for mostly the same clients, who have enabled me to earn exactly the same gross revenue year over year since 2007. So after five years, I'm growing impatient and want to grow my revenue NOW. So what better way to do this than by hiring the most expensive marketing consultant on the block? Hah!
Additionally, I hate the way my web hosting business' website looks. I want a complete overhaul - from top to bottom - to position me for the vast Internet market, which is also incredibly saturated and competitive. However, I know it's just a numbers game. Post X number of ads, and get X number of guaranteed clients. All I need is Coupons, a Great Design, Awesome Support, and Wide Array of Features then I have a winner. It's just a numbers game. I posted a job listing on elance.com and after weeding about 30 applicants, I am down to two. The differences between the two are like night and day; yin and yang. One is apparently a "huge" team of developers and designers in India whom collectively grossed over $250k on elance.com alone. The other is a lone guy by the name of Abraham who has quite an impressive design portfolio and was top-notch in communication and ideas during the initial interview. The price tag if I want to hire either one? $2k. I'm torn because I know having a vastly experienced design team would probably get things done quickly, efficiently, and end up being a stellar end game. Or it could be the total opposite of that and everything would just be shit. If I go with the lone hero, it could be a slow, dragged on process of which I'm totally impatient with. It's bad enough I've let this slide for over 3 years now by not having the right kind of website for my business.
Furthermore, I just got a bill from my CPA for $1k. She's a pricey CPA but she's helped me so much with saving money in taxes. She helped me restructure my business as an LLC so I don't get raped with self-employment taxes like I had all these years. In 2008, I paid approximately $35k in taxes. Last year? Just $11k (for both federal and state). And keep in mind, I've made the same revenue and net profit each year since 2007. If you have a business and you're paying Self Employment tax, restructure it as an S Corp or an LLC ASAP! The benefits are tremendous from a protection, tax, and overall business image standpoint. I wish I did this from the outset. I would have at least $150k sitting in my bank account if only I were as smart 5 years ago as I am now. Aside from that point, it just sucks how all these big bills crop up. I owe $2500 in taxes in April, $800 for the California LLC tax, and I still don't have a savings cushion yet.
That's what's got me so down right now. I have all these business goals I want to do, but am severely lacking the patience in saving up my money before jumping into these investments. I am also severely low on cash, as they all just seem to get tied up in A/R so quickly, and have to be reserved in A/P for fast-approaching bills. Case in point: today I had to buy a $1200 server for a client so that's $1200 less cash I have, that instantly gets tied up in A/R until god knows when they'll pay me. This client owes me over $1k from previous jobs this past month too.
I don't know what I'm so afraid of either, because I know in business you do have to spend money to make money. Last year was a struggle because I had to work twice as hard on half the expenditures I was doing. I had to spend extra time reaching out to clients, getting things done all by myself, and reducing the use of outsourcing as much as I could. It was super difficult but I pushed through my goal of becoming debt-free in just a year.
Will I survive this scenario? Keeping up with my bills, while staying out of debt as best as I possibly can, and trying to grow my cash reserves? Just a short 2 years ago, I would have been like "pffft, who cares if you don't have the cash - it's only delaying the inevitable and delaying potential growth further down the line". That's what got me in trouble in the first place with debt, so I'm trying really hard not to make that same mistake again and before I know it, I'll have $3-5k piled up on credit cards all over again!
Time to dig into a Ben and Jerry's Half Baked pint of ice cream so I can feel better.
College Really Isn’t Necessary
A good buddy of mine sent me this:
I laughed my ass off because that is the epic classic example of what probably 95% of all dumb chicks assume as they go through life and hope to meet Mr. Perfect With Shitloads of Money while they focus on beauty and not brains. You can't fix stupid, Ron White once said.
I'm very, very blessed and grateful that my own wife is the complete opposite of that. She was the one who told me I was nuts for using my credit cards and getting into debt, while she has always used cash. It was ME who told her to spend a good sized chunk of her savings on a down payment on that Gas Guzzler truck we had last year. Boy am I lucky to have such a smart woman as the power behind the throne.
Touching upon this dumb chick's subject, "college really isn't necessary"; I do have to concur with her -- to a point. I went to college myself, and graduated a community college with Honors and obtained two degrees -- an AA and an AS in Computer Information Systems. What happened afterwards was what I call a huge mistake and a waste of time. I transferred to Cal Poly Pomona, didn't like it, then transferred to Cal State San Bernardino. By the time I went to CSUSB, I was already earning good cash on the side from my fledgling consulting business. When I sat in a class that was literally called "How to build and maintain your own computer", I had had enough. I simply stopped going to classes and ultimately dropped out.
Like a sheep in the great flock of sheeps, I thought the best path to success in life was to get as high of an educational degree as I possibly could. I even had aspirations of obtaining a Masters in something and/or an MBA. I thought I was going to be like my Dad, a drone in a corporation that gets nice vacation times, a big fat Christmas bonus, and a steady salaried paycheck. Little did I know that I was going to be doing the total opposite of that -- be my own boss and own and operate my own businesses. I became an entrepreneur and for that, you certainly don't need a college education. Look at Bill Gates, or even Mark Zuckerberg and realize that these guys are multi-billionaires and are college dropouts. While one may argue that they did get some sort of education at their college, they still did not graduate and get that piece of paper that supposedly "guarantees career jobs".
I do admit that I am partially successful in business due to some courses I took in my community college. I took courses like business law, which prepared me immensely for all the contracts I have written between clients and myself, and accounting, which helped me learn bookkeeping as I use QuickBooks daily in my business and without basic knowledge of accounting, I would probably be wasting money every month to have to pay someone else to do it all for me, or I would do such a crappy job at it, that my CPA would hate me. Aside from these business prep courses I took, I also took a lot of other courses that ultimately ended up being a complete waste of time. I took more and more general education courses and even most of the IT-related courses were a waste of time since I had learned all the technical stuff on my own.
As a result of my own college experience, and from looking at the world around me, I ultimately feel college is an absolute waste of time, unless you want to be a professional in the areas of medical, law, or some other super-skilled craft that actually requires a university environment to open your skull up and pour your brain with mountains of knowledge on the field. For everything else though -- especially all forms of doing business -- you really don't need a college education. You just need to work hard, use the Internet as your source of education, library, and read read read, as well as gain some hands on experience by freelancing as an intern or apprentice with someone. If I were to hire a tech, I would not hire the guy that came fresh out of college. I would hire the guy that has 2+ years of REAL experience doing tech stuff. To me, this guy is way more valuable than the textbook college student guy because for myself, I didn't really learn as much in CIS courses than I did in actual real hands-on experience.
It saddens me when I see the parking lot of a local college always being full. This isn't even your traditional state university or community college. It's a corporation that has programs designed to get you in and out of there in 10 months or less. They teach people things like pharmaceuticals, dental assistance, massage therapy, and other related "medical" fields. I just know that they people are financing their way through this type of college. If you have to finance your college education, be smart about it. Apply everywhere for scholarships and try everything you can to avoid student loan debt. I was fortunate to have financing for my college education by my parents whom worked at employers who provided this as an employee benefit. My brother had this advantage too and was able to graduate with a BS in business/human resources. However, if I had to pay for it out of my own pocket, I would not have done it because student loan debt is a horrible trap. How shitty is it to have to finance your college education, then when you get done with it and go into your job, you have to work towards paying this debt down in 10, 15, 20 years? Of course you can pay it down faster, like this guy did, but still!
Why FICO Score is a Stupid Score and Credit Cards are the Devil
Despite a great credit score of zero, tons of savings, and cash in the bank, my friend could not get approved for renting an apartment.
A friend of mine shared with me the fact that when he tried to apply for an apartment, he could not qualify due to having no credit whatsoever. He had always paid cash for things his entire life, has always lived way below his means, and has always put his money in the bank, even in CDs where he accumulated great gains in interest. He did all of this against the grain of what most Americans, including myself, have always done. As a result, he had tens of thousands of dollars in his savings account! He even has a steady, good paying job. Despite all of these great financial points, he could not qualify for renting an apartment because his FICO score was zero. How messed up is the renting, financing, and banking industry to require an I Love Debt metric such as FICO in order to allow one to rent a place to live?! Why couldn't they just look at how much freaking cash he had in his bank accounts? His income? His bank statements? No, says Mr. FICO Banker Shithead. You must have a credit history created by the use of debt instruments like car loans and credit cards in order to qualify for renting a place to live.
My quick assumption is that Congress has been lobbied so damn hard by the FICO corporate greedy banker bastards for requiring such a metric that all Americans are forced to have some sort of credit history driven by debt and credit cards and loans in order to be qualified for a necessity such as renting for a place to live.
By the way, FICO is a registered trademark of a company that invented this score. It is not even a generic, government-agency-created metric of credit worthiness. It is a corporate invention. Those who live and die trying to raise their FICO score to the highest possible metric of 850 is a complete sucker. The best FICO score is still zero. I say fuck them all and take the power back and refuse credit from the outset! If you are denied a place to rent on the basis of having a zero FICO score, I say alert the media, call your Senator, strike against the rental community. Do whatever it takes to stop the FICO bullshit train.
Now that we know FICO is a Stupid Score, what about credit cards themselves?
One time, a banker told me to start using my business credit card for all my expenses and purchases because I get rewards points and it's a great way to control expenses (!). I felt a rage coming on and had to really constrain myself from screaming at her what I really wanted to scream; "YOU GREEDY CORPORATE DRONE! ITS DRONES LIKE YOU THAT WE ARE ALL IN CREDIT CARD DEBT AND MAKING YOU BANKS RICHER!!" Instead, I calmly, but sternly told her No Thank You! I have $10,000 credit card debt because of that and have been diligently working on paying down that debt and eventually paying it off. Credit cards are the devil, and a complete trap, and I will never, ever use a credit card, ever again, after I pay it all off. They have all been cut up and you should do the same. Debt is for stupid people." With that, she shut up and had the classic blank look on her face. I love it!
All my life, I was under the impression of having to use credit cards for everything in order to build up my credit history. I diligently used my first MasterCard, from age 17 onward, and paid it off each and every month. I used the card faithfully, with the proud knowledge that I was building my credit and doing a smart financial thing for my future. The problem with this, is it was all too easy to get deep into the hole to where I eventually was unable to pay off my card in full each month. I began to accrue massive interest on the card, so I opened up another, did balance transfers, then another, then another...
The problem with credit cards is they are just too damn convenient. It is way too easy to slide that piece of plastic in a credit card payment machine to buy anything the credit line will allow you to buy. It's easy to splurge on $400-500 shopping trips, buy a $2000 TV, buy $1000 pieces of furniture thinking you can easily just pay it off later. Then, whenever I actually built up cash in the bank account, it always quickly got depleted in having to keep up with minimum payments.
So, do yourself a Financial Favor, and avoid credit cards like the plague. Henry Ford once said that financing was dumb and should never be done. It wasn't until something like the 1950s that Ford Motor Co. offered financing on new vehicle purchases - and it was only so they can keep up with Chevrolet who started doing it first. Think for a moment. People actually paid for their cars with cash before the 1950s! Who says we need credit cards and credit lines?
Once again, FICO Score is a Stupid Score, and credit cards are the Devil/plague/anti-christ/Apocalypse/disease/death machine/whatever!
How the Great Recession has Affected Me
The Great Recession, according to Wikipedia, began in December 2007, and deepened into an even deeper downturn in September 2008 and supposedly ended around July of 2009. However, the aftermath of the Great Recession to this day still includes high unemployment, reduced consumer confidence, rising bankruptcies, foreclosures, a federal debt crisis, inflation, and rising gas and food prices. It sure is all doom-and-gloom when reading this Wikipedia article about the Great Recession.
Try as you might to keep your head in the sand, it's all true, and it's affecting everyone of us in some way or another.
I am very aware of how fortunate my wife and I are being independent, self-employed citizens, where we are finally debt free, and are able to continue to live comfortably in a two bedroom apartment in a very nice community. I am still making good money in business, and my wife is still working almost every day and earning money towards our new goal of starting a family and purchasing a home. I think the Great Recession has helped keep me acutely aware of how fortunate we are right now, and to never take it for granted.
When I think of how the Great Recession has affected me, I can't help but think how lucky I have been. I literally grew my business overnight, in late 2006, at the peak of the housing bubble and runaway economic successes in the stock market, businesses, etc. People were making loads of money and I was riding high on that wave. It was during the peak of the economic uptick that we upgraded from our low-cost $990/mo one bedroom apartment to a $1750/mo apartment, bought myself a new car, financed of course. We also bought various toys like gaming consoles, flat screen TVs, furniture, and other nice things, mostly financed by credit cards.
Then, while things started crashing all around us in late 2007 throughout 2008 - with people losing jobs, businesses going bankrupt, and people losing their homes - I was still earning the same amount of money year after year. I was also still spending like an unchecked fire hose. Then 2009 rolls around, goes by, and finally at the end of 2010, when I came to face the realities of the damage I had done with my accumulation of debts, I, along with millions of other Americans, pledged to stop the debt, and start paying it off.
The Great Recession has taught me to never take money for granted. When I was earning the same high incomes in 2007 through 2010, I ignored what was happening to the country around us. It was as close as Riverside where something like 40% of homes were foreclosed on. The San Bernardino County area had the worst unemployment in all of the U.S. at its peak - something like 13-15%. And here I was, making loads of money, and still blowing it all on stupid shit.
In a way, I'm glad that I was never personally affected by the Great Recession, and so far I'm still good. But I am also acutely aware of how it can all change in an instant, to where our clients could no longer afford to call us for services, where we could lose everything, and stop being able to pay our bills, and eventually have to move in with parents, live in our car, or do something totally drastic in our lifestyle level. I, of course, hope that never happens, but for each day that I save money, I grow more and more confident that I will prevent such a drastic scenario from happening.
When I see news stories about the 60-year-old woman who was a high-profile executive at a large company that suddenly found herself on the street, as she lost her home, her job, and all of her savings, I can't help but wonder why the hell she didn't save enough money to prevent such a thing from happening? But then I remind myself that I was once on that track. If I hadn't snapped and had my financial meltdown, I would still being recklessly spending, racking up more and more debts, buying new cars every year or two (I have a friend that does it every couple months - it's ridiculous), perhaps buying a house that is way over our heads with a very bad interest-only ARM loan that will switch higher 5 years later, and buying more consumerist crap that I don't really need. Extrapolate that over a lifetime of 40 years of a working life, and you can see that's how that woman ended up on the street after losing her job. There are a LOT of high-income earners in America that live extravagant lifestyles just because they can afford a $5,000/mo car lease, or a $20,000/mo mortgage with their high incomes. It really pissed me off when I read somewhere that Tiger Woods actually financed his Florida mansion. The dude has millions of dollars in cash. Why does he need to finance anything?!
This, I think, is the fundamental problem with America. As a whole, we simply do not live within our means. We are barraged by all of the capitalistic corporate drone machines to finance everything and anything so we can afford all of the nice toys and live super star extravagant lifestyles on a beer budget. This is how we all got into this recession - simply by living above our means, and financing anything and everything. We financed our homes with really shitty loans, leased new cars that lose their value the instant you drive it off the lot, bought boats, lavish vacations, and expensive toys on plastic.
I was on this path. I had the mindset that you just had to finance everything in order to get anything. That is not true. We were able to pay cash for a freaking cool roadster. We did not have to lease one at $600/mo. The 60-year-old woman who ended up on the streets probably earned well over $100,000 per year, but she probably had a huge home that had a 30 year mortgage tacked on it, a BMW that she was leasing, and credit card debt. This is the typical financial picture of most middle class Americans from what I have read in various books on the subject. Most American's are below their "recommended net worth levels" meaning they should have a home paid off by 50 years of age, a significant, six or seven figure savings, and be able to actually retire by age 62. This is the "perfect financial picture", but for the majority of Americans, it is simply not the case.
My new mindset, courtesy of the Great Recession, is to quickly achieve the level of lifestyle success that my wife and I want, and be able to stay there indefinitely. What I mean by this is, we want to be able to buy a home, and start a family. Once we reach that level, we want to pay off the mortgage as quickly as possible, so that we can have a roof over our heads that doesn't cost us an arm and a leg every month. While that is being done, we'll contribute to investment accounts that will eventually make enough money for us to live off of and finally be able to retire and never have to worry about losing the lifestyle level we have built up to. A side goal of my businesses is to get to the point where I can offload most day-to-day tasks to other people, and basically be a passive income earner in my businesses.
So, hopefully the stars will align and allow our dream to happen. We just have to remain steadfast on being frugal, debt-free, and focus on growing our businesses, increasing income while staying way below it in expenses, to finally achieve the ultimate goal of Financial Independence.
How I Became Debt Free
In early 2010, I took a good hard look at my finances. I saw how I:
- Had over $20,000 in credit card debt
- Had $14,000 remaining on a car loan
- Had another $21,000 remaining on the new truck my wife and I purchased
- Had zero savings
- Had like $400 in checking, with $10,000 tied up in accounts receivables
And I practically had a meltdown. I was making over $160,000 gross per year, only had $400 real cash in the bank, and all this debt? I started screaming at myself in my head how stupid I was to have this much debt with nothing to show for it (except for the business which I had managed to grow).
This made me snap. I thought back to all those sleepless, insomnia-ridden nights where I just kept constantly thinking about money, worrying about money, and wondering when I'll ever finally be able to get ahead. It triggered something deep down within me that made me sick and tired of being in debt and worrying about money. I wanted to change and I wanted to stop this endless cycle of debt. I needed to become debt-free. I needed to do something now and act now to be debt-free and eventually, wealthy.
I had read a book years ago, called Rich Dad Poor Dad by Robert Kiyosaki which had given me good insight on what it means to be rich, poor, or wealthy, or any other kind of level of financial being. There are definitely parts of the book that shouldn't be taken seriously - like never paying your creditors and letting the tax man bang on your door and letting your electricity go out. Robert Kiyosaki is one of those guys whose advice you have to take with a grain of salt. Anyway, what I took from the book - that was sound advice that made sense - is there is a difference between rich and poor by measure of one's wealth - or how long one can live off their money before being broke and poor. He called the high-income earning doctor Dad "poor" and the low-income earning teacher Dad "rich" because they had different financial pictures. The "poor" dad (even though he was making hundreds of thousands a year) was poor because he had the expensive house, cars, and fancy things in life, some debts, and no savings. The "rich" dad had lots of rental properties, was earning income from each one of them, and only making a few hundred thousand a year. If he were to lose his job teaching, he would be fine, because of his rental investments and savings he had amassed by being frugal during his life and never buying more than he needs (think: Warren Buffett). In other words, rich Dad is wealthy, while poor Dad is just that - poor.
After I snapped in late 2010 and decided to change my financial life, I started searching online for answers. I Googled like crazy. I found a wealth of financial independence books and get-out-of-debt books. I read reviews, I searched forums, until I finally stumbled upon a book that resonated with me in its title, and its huge following of fans whose lives were transformed by the author's ideas.
I somehow came across the holy grail of how to become debt-free, and eventually, wealthy. I discovered the book, Total Money Makeover, by Dave Ramsey. I later learned that he's quite well-known for his radio show, and had amassed a large fan base of ordinary people who are just like me - stuck in mountains of debt, running on the credit card treadmill day in and day out, and never seeming to get ahead no matter what. He introduced me to the baby steps of financial freedom. Baby step one was to get $1,000 emergency cash saved up as quickly as possible, even if this meant selling something out of your garage or closet, working extra hours, and/or cutting back on some expenses. I managed to breeze through this step by selling the TiVo for $400 on eBay, cancelling cable altogether, and saving income to build up $1,000 in my savings account. Baby step two was to start working on the debt snowball and cutting up ALL credit cards. I cut up all six of my credit cards, and wrote down the minimum payments for each of the debts, from smallest debt to the largest. It looked something like this:
- MasterCard: $600, min payment $26/mo
- Visa #1: $4,400, min payment $110/mo
- Visa #2: $6,000, min payment $140/mo
- Discover Card: $10,000, min payment $80/mo
- Car loan #1: $14,000, min payment $333/mo
- Car loan #2: $21,000, min payment $380/mo
Within a couple weeks, I was actually able to pay off the MasterCard completely, which started my debt snowball amount at $600. I was able to pay the minimum payments, with the help of my wife for the truck payment, while tackling the next smallest debt with $720 ($600 plus the $110 minimum payment on Visa #1).
With "gazelle-like intensity" (my favorite term coined by Ramsey), I reduced our expenses significantly, and we even moved from our $1750/mo expensive apartment to a similar sized one a block north for $1400/mo, saving $350 per month to go towards debt pay-downs. We killed the cable TV ($150/mo savings), reduced cell phone bills ($50/mo savings), reduced restaurant visits to once per week ($300/mo savings), amongst other small, but significant, savings. All of these savings went to tackling the debt snowball, which I grew to be $3200 per month at its peak. In six short months, I paid off ALL credit cards, except for the Discover card which had $7,000 remaining. Then, I either did a smart thing, or a really dumb thing, but I did a balance transfer of the Discover card to a new 0% APR credit card for one whole year, at a cost of $110 for the transfer itself. This would allow me to "hold" the debt, interest-free, for a year, while I worked on the two biggest debts that really bugged the shit out of me - our car loans.
When we bought my wife's truck - we bought it totally under impulse. She was super excited to graduate from her 9 month massage therapy program, and I was happy and proud of her. Her paid-off Honda Civic was a perfectly fine vehicle, had low miles, was low maintenance, and all that good stuff. The only problem with it was it would not allow her to fit her massage table in it. And since she was going to be a successful massage therapist with lots of clients, we needed to get her a bigger vehicle. So, we went shopping for a Toyota Tacoma truck with an extended cab and bought it the same day by trading in the Honda, and plunking down $8,000 cash from my wife's windfall savings account. After all this, we still had to finance $22,000 at 6.25% interest for 5.5 years at a payment of $380 per month.
There are few regrets in life that I have. This was my number one regret.
We lived with the truck and its $380/mo payments, of which my wife was barely able to keep up with to begin with, for a whole year. In mid-2011, she finally landed a new job as a massage therapist in her hometown, Sherman Oaks, which is an hour's commute from where we live now (Rancho Cucamonga). Normal Toyota Tacomas actually have great gas mileage, in the 25-28 range. However, her's was a V6, raised, and souped up Tacoma (The PreRunner SR5), and thus was a total gas guzzler. She was paying $300-400 a month in gas alone (and this was the same amount of money she was earning from massage jobs!). So, this truck was a total money pit and I knew it. It took awhile for her to finally realize the truck was killing her financially, but I had planted that seed in her mind that she was earning money and all of it was going to the truck's bills and eventually she was no longer in denial and agreed that we needed to dump the truck and get something more economical and efficient.
Meanwhile, I had finally, finally, after having a car payment for over 7 years at that point (from the previous car I had given away to my brother, to my first fully owned car now), I had finally paid it off! I plunked down $3,000 cash into the Toyota Financial Services account and said bye-bye forever to my car payment. I have been car-payment-free for over six months now and I freaking love it!
I think this made my wife jealous as it was not too much time later when she finally admitted it was time to trade in the truck for something better. She traded it in for a small, used two-seater roadster, with 65,000 miles on it from 2007. This thing has a V4 engine and gets 177 horses, and still only sips gas. She gets up to 35 miles per gallon and is easily able to keep up with it financially, in gas and in the fact that it has no car payment. We were able to trade in the truck, get the original loan of $18,000 remaining paid off, and still have enough equity to buy this roadster with $14,000 cash from her windfall savings account - all in an effort to be debt-free with zero car payments for both of us. Now you may be wondering - what about the massage table? How the heck can that fit in a tiny two seater roadster? If she ever needs to bring the table with her (which is like once every six months it turns out), she can use my Matrix, which is a hatchback wagon and can easily fit it. Duh, if we only had thought about this first before trading in the Civic for the Gas Whore. I guess we have to learn things the hard and dumb way sometimes!
So, in summation, I have paid off $20,000 in credit card debt, $35,000 in car loans, and finally saved up $10,000 cash in just 11 months since I first took action on Dave Ramsey's debt snowball method.
Now it's time to grow money on trees.
History of Me Hemorrhaging Money
When I was 12 years old, my mother took me to Wells Fargo and helped me open up my very first bank account - a savings account - of which I promptly deposited a small jar of coins I had accumulated. She told me to be diligent in putting whatever money I could into this savings account, since it will help me reach goals in being able to buy things. Sound advice - except for the latter part of it. Reflecting back to this moment, I wish it was my grandfather who was teaching me about savings accounts in the first place. His advice years later would be "I wish I saved $20 a week and just forgot all about it. Put that money in a savings account and forget all about it". I was in my late teens when he gave me that great advice. Unfortunately, it was too late since I had been brought up to save money then immediately spend it.
My dad used to pay me and my brother a weekly allowance of $5. I used to buy baseball cards whenever I could get my hands on that cash. As soon as I had the cash, I would go to the supermarket, where they had an actual sports card display full of unopened packs of cards and I would hope to land the next awesome Ken Griffey, Jr., or Frank Thomas, or Cal Ripken card. I actually did score a few nice cards, and to this day, they are all in plastic sleeves stored in a huge stack of 5-row card boxes pilled from the floor to ceiling in my old room's closet at my parents house. I guess some would call this an investment, but unfortunately the period I was actually collecting cards was a bad period to collect cards in. They were all over-printed, over-priced to begin with, and thus were way too saturated in the market. So, the baseball cards of years 1989 through 1995 that I do have are not that valuable, even more than 15 years later. Reflecting back on this, I wish I had Warren Buffett as my dad who would have told me to invest money in the stock market, especially before the dot-com boom, then cash out at the peak of that bubble. Baseball cards were a stupid thing to invest hemorrhage my money on.
When I was 17 years old, I proudly applied for my very first credit card. I wish I could remember who told me to apply for the card. Maybe it was a commercial or ad I saw somewhere. Maybe it was a friend. Maybe it was my parents. I have no idea, but I remember the excitement I had when I opened the Wells Fargo envelope that contained my first piece of plastic. I showed my mom my card and she smiled and said she was proud of me and that I am now a grown up. I had a whopping $700 credit line, which was huge for me, being a high school student with no job, aside from the allowance my parents gave me. What's interesting to me right now, as I reflect back on this, I recall that I was still smart with money. I was still very smart with the credit card. I would use the card for certain items, like food, maybe a DVD or two, and then promptly pay it off. I understood the importance of "building credit" so that I eventually would be able to get a loan for my first car, my first house, and a loan for anything else I needed. I felt, at the time, that this was very important. My main financial goal was to obtain and maintain a FICO score of 700 or greater. When I checked my first credit report, I was proud to see I had a 714 FICO score. I felt I had achieved financial greatness and was on the right path to being financially smart and responsible. After all, I was paying off my credit card each and every month, without accruing any late charges or any interest. I did this for years, until I moved out of my parents house.
Even during college, when I had a job and was earning roughly between $400-1000 per month, I was still using my credit card for everything. I was actually depositing my checks into my bank account, but using my credit card for purchases and then paying it all off at the end of the month with all the cash from paychecks. I was keeping careful track of purchases in a spreadsheet and making sure that I wasn't going over my "budget" which basically was my credit line. I was always earning more money than my credit line, which was $700, but always managing to rack up $700 in charges each month, and then some. I was using the card as a means to be able to buy things and be a consumer. I never looked at my finances as if I had to "save up" for something, since I had the credit line ahead of time, and could simply work for the next 2-3 weeks to pay it all off and then start over. Reflecting back on this habit, I realize that the credit card, and the way I was using it, was keeping me in an endless trap of consuming, spending, working to pay it off, consuming more, spending more, working to pay it off. Never did I actually set aside a percentage of my earnings in a savings account and "just forget about it" like I sure wish I did.
While in college, I met my future wife. We would go out all the time to dates, dinners, and whatnot. My spending greatly increased during the time of my early twenties. I had a $2000 credit line at that point, and was beginning to earn money on the side freelancing for computer consulting for various businesses and individuals. Once again, I was racking up thousands in charges, and managing to pay it all off without ever getting hit by fees or interest. I continued to spend all the money I earned without saving anything.
When I was 24, my future wife and I decided to move into an apartment together. I didn't even have a job, although I was getting social security payments (about $550 a month) due to my disability, and I was still earning some cash on the side from computer consulting. By this time, I had zero savings (of course), probably $1000 in credit card debt, and a few hundred in cash/checking. We knew we were going to be okay to begin with, as my future wife had a large savings account built up due to a windfall that she came into. We were very lucky to have this windfall, but we refused to touch it. Within a few months, I had personally racked up over $5000 in credit card debt, had even started opening up more credit lines, and "investing" my credit lines into my new business, which I was trying to grow.
In late 2006, I landed my first big fish client. Once a week I would go there, work all day, then come home. Four solid working days a month of this equaled about $1600 per month in guaranteed income. This was huge for me and my fiancee (whom I proposed a short while later). I was on cloud nine making so much money. I went from earning $550 per month on Social Security, to earning $3000-4000 per month from clients. I had obtained several other accounts along with the big fish one.
Even while earning this much money, I was still trapped in the debt cycle. For the first time ever, I incurred my first interest charge on my credit card. I could no longer pay it off in full, because I had to have cash as working capital in order to buy computer hardware and software for clients, and then they would be late in paying me back, so I would be hit with all kinds of finance charges. It was a mess but I still paid no attention to it.
In January of 2007, my brother had totaled his car in a rear-end accident. At the time, I was driving a car that my parents helped purchase by taking out a loan from their home equity line, and I was paying my dad back interest-free at $150 per month and nearing the end of the car payments and finally paying it all off. Since I was now making so much money, and wanted to help my brother out, I gave him the car free and clear and let him take over the car payments. I went out and financed a brand new 2007 Toyota Matrix at 6.15% interest for 5 years. I did put $5000 down which was supposed to be working capital money but I didn't care - I wanted the best interest rate and the dealers said in order to get it below 7%, I would have to have a small stake in the purchase with a down payment. I would now have a car payment of $333 per month for five years. This didn't faze me since I had so much credit line, was making good money, and was able to stay on top of bills.
A few months later, we decided to move from our one bedroom apartment into a much larger apartment. We went from 800 square feet to 1250. We went from $990 to a whopping $1750 per month in rent. We had all the nice amenities with this new apartment. An attached garage, a second bedroom of which became my office, and fancy stuff like crown molding, nine feet high ceilings, a BBQ pit, and a nice green belt right outside our windows.
What would eventually follow from this move would be a lot more money hemorrhaging:
- Adopted another cat
- Bought two flat screen TVs, priced at $2,000 each
- Bought a PS3, XBOX 360, Wii (and eventually sold them on eBay for a fraction of the purchase price when we got bored of them)
- Bought a TiVo and the most expensive cable package (bill was $200/mo)
- Bought new furniture and home decor (pffft, thousands of dollars right there - I'm scared to look at the financial records here)
- Bought a brand new truck for my wife
- For my business, I built a new computer and home server, costing around $5,000 all told
- I bought a $2,200 Dell laptop - top-of-the-line - which eventually died 2 years later, out of warranty and salvaged about $200 off eBay for it
- We bought iPhones, and had unlimited plans costing us $120 per month at one point
- Adopted a dog
- Bought 3 servers for my web hosting business - which put me way over my head into debt
- Gambled away $3,000 in a Vegas trip
- Spent hundreds a month on bowling in a league
- Spent over $2,000 on building my company website which gets zero traffic anyway
- Spent over $1,400 on building my web hosting company website which I admit sucks, and isn't pulling in any customers
- Bought countless other things
All told, I racked up $20,000 in credit card debt, still had a car payment with about $14,000 remaining, and we had a new truck which was another $21,000 remaining on the loan by the end of 2010. And we did this during the recession!
Granted, I have been making good money with my business, which has thankfully been successful during this horrible recession. I still have my big fish client, and others to boot. My hosting company is now very profitable and I am easily able to cover my high costs and then some. I just wish I wasn't so stupid with money from the outset, and grew our lifestyle and my business with cash instead of financing everything with debt.
Stay tuned for my next posting, which will be all about how I turned it all around and finally became DEBT FREE!