During March and April it was very exciting to make payments of several hundred to over 1k and pay off credit cards. When I say exciting in my head I’m thinking what else I could do with the money. Quickly, I click the button and the confirmation screen that a payment was made is a sigh of relief. We paid off 7 cards in two months, who does that?

A portion of the money was used to buy a new TV. Sure this isn’t something that was truly necessary, it was something we have been wanting for quite some time. I wasn’t willing to go increase our debt just to have something. It’s amazing to look at my living room and actually own everything. I’m trying to figure out what I can do with the old TV.

The stimulus check came this month and half of it will be held over to July for our long scheduled vacation. The remaining half has been or will be spent within the month. I had a car repair done, will need to have some dental work done, and the EF needs to be back to the 1k mark. Car insurance is another expense that is going to be looming here this summer too, so we’re preparing for that.

I cannot explain how good it feels to reduce our debt and have an EF. In the past when a problem would come along, we would throw the credit card down to make it go away. We’re still paying for those past problems and it’s important to be prepared for whatever could happen in the future.

Government and agency statistics illustrate this troubling trend. The Federal Reserve reported Wednesday that Americans’ credit card debt jumped 6.7% in the first quarter of this year to $957.2 billion, This spike comes despite the fact that nearly one in three banks is tightening guidelines for credit cards.

The US is near $1,000,000,000,000 dollars in credit card debt. According to the story racking up credit card debt isn’t a choice people want to make. They had to run up their credit cards because the costs of their basic needs were going up. The reason they have to use their credit cards is because their lines of credit and home equity has been used up. At no point have they acknowledged the fact that they are living beyond their income and going deeper into debt. The great expert says that they can’t increase their income, but their expenses are going up.

Why does a weak housing market all the sudden create a financial problem so people have to use their credit cards? They drained the equity they were getting out of their house to fund their frivolous lifestyle. The system of not being able to tap their house for cash like an ATM has caused them to run to their credit cards. Now their balances are increasing to the point they cannot make the minimum payment. You will never get out of a hole by digging out the bottom.

The best line was at the very end:

“A lot of people will quit going out to dinner if they see their balances rise,” Hampel said. “This will hurt the economy.”

NO!

We received a flat payment of $1200. Half of this will go to our vacation, the $300 that was taken from the EF to fix my car is going back, and we will work $300 into our budget to help us tackle some debt. The government of course wants us to go out and spend it, but we recently purchased an HDTV so I think we already have done our part. This money is nice to receive but is not necessary to our economic stability by no means. I’m glad we didn’t spend this money on something before we received it, because it may have never came.

When we buy things like cars or property, we need to prove our identity to do so. This guy used a copy of a driver’s license and social security card which was faxed in his dealings. He had started out small buying 4 trucks, ATVs for his toy hauler, then got daring and a Dodge Viper, finally houses and land all totaling $3.2 million.

This loser got caught when he tried to buy an ATV and business required original documents. He claims that his brother gave him permission to use his credentials to buy things. How low do you have to go to drive up this much debt on a family member? The brother refers to him as a “thief, crook and slime ball” which I would happen to agree with.

Sadly though this guy doesn’t feel he did anything wrong. He got eight years in prison and his brother has to clean up the mess on his credit report. This kind of thing is exactly why it is so important to have identity theft insurance and do annual checks on your credit reports.

Below is the breakdown of what the average consumer will spend their income on annually. I took note on some of the areas that peaked my interest:

• Housing 42% It puts 2.4% for vacations in this category for some reason. Meanwhile home owners spend about 24% of their income on their home.
• Transportation 18% Gas prices are 5.2% of our annual income, which is up 26% so we’re only paying a quarter more for gas. If you break that down, it’s about $550 more a year on 40k income, that’s $45 more per month. There’s way too much hype and panic over gas prices.
• Food and beverages 15% Adding 2 categories together, this thing shows the average consumer blows 5.4% of their income on eating out! This might have something to do with the health care costs going up.
• Health care 6% The skew in this graph is that prescriptions are 1.5%, doctor and hospitals make up 2.6%, yet we only pay 0.5% to health insurance? Maybe I’m looking at it wrong but health care costs are something that needs to be taken seriously.
• Education/Communication 6% College costs up 6% which is near twice the average inflation rate. If my generation is Gen Debt from large student loans than what generation will my children be stuck in, Gen BK?
• Recreation 6% Cable makes up the largest single component of this area at 1.2%. The media obviously can’t report this to you because they need you to watch them lie to your face and work up your emotions.
• Apparel 4% This area is a bit sexist because the women’s categories are broken up into a few things, and men has about 5 or 6 categories. Both sides are 1-1.5% but they make it look like women spend more money in this section.
• Miscellaneous 3% Obviously tobacco products take up the largest slice of this area at 0.7% on the average consumer. If a person making 40k a year stopped smoking, they would have an extra $280 a year to save or invest. Again this could be related to the health care costs too.

Feel free to look at the chart and let me know what you find interesting.

We got a lot accomplished in April though paying off over 6 grand in debt. A combination of using my bonus from work, our income tax return, and just pure focus on getting this stuff done was our motivation. I’m very pleased to say that we went from 12 credit cards to just 5 (originally I thought it was 4) which is huge. As we start to tackle these other cards, it will take larger payments to knock them down faster. I would like to see our credit card debt reduced by at least $500 a month, that would put us at 20k come the beginning of 2009. We have to get rid of our credit cards before we even think about tackling the student loans, so paying them off quickly is important.

I don’t know how big of an impact on debt we’ll have in May due to my car breaking down and having to replace funds in the EF. We’ll get through this and move forward slowly, but at least it isn’t going backwards.

Characteristics of an Emergency Fund:

• Baby EF If you’re just starting out, like getting out of debt, have a starter emergency fund in place. It has been recommended that $1000 should be sufficient. If you have a family, it would be wise to double or triple that starting out.
• Full EF Maybe you don’t have debt or just completely paid off all your non-mortgage debt, time to save. A good emergency fund contains 3 to 6 months of expenses, not income.
• Emergency! Don’t rush to this money like it will make your problem go away. Sit on the issue at hand and see if you can get through it without having to resort to the money. If it won’t happen, at least you have this money sitting there for it. Christmas is NOT an emergency either, it comes every year in December people.
• Inve$tment? Too many people think they should take this money and invest it to make money on it. This money isn’t for investing, it’s insurance for when life happens. Don’t tie it up in a CD or bonds, a money market will do. Keep this cash liquid and accessible to access it when you need to. It will rain and you’re going to need an umbrella.
• Rebuilding Maybe avoiding the emergency situation was too much to handle, and you had to use it. Now that things are back on track, replace the funds that were used back into the EF. Avoiding this crucial step and leaving the EF underfunded could become a problem later.

There are a lot of cases where you might need this money. Covering the deductible on medical insurance, sudden job loss, mechanical breakdown (like a car?), death in the family, and the list goes on. As I stated before this money isn’t sitting there like a savings account you can go blow on Christmas or a vacation. You set the money to the side and forget about what else you could be doing with it. People just starting to get out of debt often skip this step. The reason it is there is to avoid having to borrow money in the event of an emergency. Why would you fix one problem by going into debt thus creating a new problem? The EF is there to avoid trepidation and ease the situation at hand. You know as they say: People who fail to plan, plan to fail.

For the most part it sounds like I am at the mercy of a mechanic. I’ve got to get it to them, towing it there is going to run some money anyway, and then hopefully it will be something easy for them to spot. I’ve narrowed it down to spark or fuel. Either the spark plugs are bad or my fuel pump isn’t functioning. Either case I could be looking at $200-500 in parts and who knows how much in labor to replace stuff. What is sad is this is the first major breakdown my car has gone through. I change the oil regularly, check my fluids, change air filter, and don’t beat on the car by quick acceleration or hard breaking. Sometimes things break though so this is just part of life.

Hopefully this won’t be a huge setback, but I will most likely be part of the EF to handle this car issue. This is exactly the reason everyone should have an EF! I’m glad my wife has a job now too and we don’t have to go through this battle scraping by my income alone. Debt reduction could be limited this May, but my asset doesn’t have much value it doesn’t work.

I have a feeling that this stimulus payment could actually be helpful for our economy. Unless you live like a hermit, inflation has become a larger problem for most of us. Gas prices going up, food prices going up, and for those out there with fixed income it can be difficult to absorb the increased cost. Not that this stimulus payment will be spent on frivolous things, but what about the basics like gas and food?

We are planning to save part of the stimulus for our vacation this summer. The remainder will be rolled into our income and will help us make slightly larger payments in May. I think getting out of debt is the most efficient way to stimulate the economy and ease the stress of inflated costs. The fewer payments to debt I have to make, the more money I have in my pocket to handle higher costs of living. That is a winning game plan no matter what happens in the economy or the election.

Question to my readers:
Have you received your stimulus payment yet and what are you doing with it?

I feel the following order is the best way to go about it:

1. IRS - The federal government is the last form of debt you should owe or have on the backburner. They can go into your bank account and drain it. When you receive a regular W2 paycheck almost the first thing that comes out of it is the income tax withholding. Get rid of this debt before you do anything else even if it means transferring the amount to a credit card.
2. Credit Card - Many of us got into debt because of how easily these stupid things let us spend money we don’t have. The minimum payment is usually 2-4% of the balance, yet they can carry anywhere from a 0-35% interest rate. This unsecured source of money is the second most important debt to get cleared.
3. Car Note - If you finance a car typically these are a term loan with a set payment over a period of few years. Interest rates can range all over the place because there isn’t a car dealership that won’t find a way to get you into a car, even if that means a 20%+ loan. A lease is even worse than financing a car because you don’t even own the car after you have rented it for a few years. Depending on the rate and balance, the car note could be paid off before, during, or after credit cards.
4. Student Loans - I don’t have a huge problem with taking out a reasonable amount of student loans while trying to get through college. The advantage is the payment can be deferred while in school and later during the repayment, the interest paid on them is tax deductible up to $2500. It is still debt that is important to get paid off quickly in order to build retirement and tackle the mortgage.
5. Mortgage - Most of us, at least younger people starting out, have resorted to using a mortgage to buy a house. It is important to make sure that the payment is between 25-35% of your income. Retirement is also important to have established before tackling this debt. The worst thing one can do is pay off their house without saving for retirement, you’ll just end up selling it. Once the mortgage is gone take the payment on it and save it in retirement and watch the wealth grow.

We’re currently in the middle of this process of paying off debt. Credit cards have limited our cash flow and we want it back! Our student loans are a looming amount but without making monthly credit card payments we will be able to knock out large amounts of them every month. It all takes time but this is a crock pot process not a microwave solution.