I’m Not Paying My Debt, but I am Saving Money

That was sort of the gist of a comment I got on a post last week, and I have commented many times about the fact that if you have debt, and are saving money, you aren’t really getting “ahead” at all.

In the dirty 90’s borrowing money to make money was all the rage, however, eventually you have to pay for what you borrowed (one way or another). Current rates of interest seems to suggest that all you need do is find something that has greater than a 5% return per annum and you are in the money (if you can get a preferred lender rate of 4.5% or so), and yes that might work (NO!!! I am not recommending it, I am simply pointing out that it might work (then again, Lenin thought Communism would work too)), however when the rate of interest on your borrowed money goes up, what happens then?

If I borrowed money at 4.5% and I bought into the Big Cajun Man Guaranteed Index Fund (BCMGIF not to be found on any market anywhere in the world) which coincidentally pays 6.75 % (on average) every year, that means I’ll make 2.25% per year doing nothing (and without using my money).  Now, if I didn’t owe any money and used my money to buy into BCMGIF I’d make 6.75% a year, wouldn’t I?

What if I borrowed that money on my Secured Line of Credit, but interest rates start to jump a little and now I am paying 7.25 % on the money? In a short period I am now losing 0.50% a year, aren’t I? Now BCMGIF might rebound too and make more money that year, or in the unlikely case that BCMGIF starts only paying 4.1% a year, I am now losing 0.4% a year .

To get back to the point if you have Debt (i.e. negative money flow, owe money, etc.,) if you are Saving money as well, you are not increasing your personal value, you are simply creating a weird bubble of Debt and Savings (and my guess is your savings bubble will burst long before your Debt bubble ever does).


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What the Hangover Taught Me About Money

Seriously? How is this one even possible? A movie about a “lost weekend” in Las Vegas can teach someone something about money? I pick up this challenge, and say, Yes, it is possible.

The Hangover

The Hangover (Amazon Link)

One of the most important scenes is the “heroes” (I put that in quotes, since I really wouldn’t call them heroes, but that is how they are portrayed in the film) getting their friend back from the “bad guy” (again not really that bad, more of a comical bad guy) who had kidnapped him. Somehow the “heroes” had won $80K at the blackjack tables (OK that is a little over the top), but they are successful and have the money to get “Doug” back.

The scene looks similar to a scene in Lethal Weapon, however in this case you have a Black SUV and a beat up Bentley in the middle of the desert. The guys see their friend and pay the “bad guy” his money and “Doug” is returned, however, the heroes didn’t check under the hood (“Doug” had a sack over his head) to see if this was the “Doug” they wanted. You’ll have to watch the movie to get the story, however, this made me wonder:

How many “Doug’s” have we paid for without being sure it was the “Doug” we wanted?

Pretty much anything you order mail-order or on-line is an “unseen Doug”, but we can at least return them. The big issue (in the movie) is the guys should have asked to look under the sack before taking the “Doug in a poke”, and a lot of us are guilty of not reading agreements or the fine print (or asking questions about the services we are receiving).  Unfortunately we are to blame (mostly) in those situations because we didn’t ask the questions.

What else did the Hangover teach me:

  • Never borrow Mike Tyson’s white tiger
  • Removing your own tooth sounds like a good idea, at the time, however, it may not be as good an idea as we think
  • What goes on in Vegas, is very odd



Keep it in Your Pants!

An interesting turn of phrase isn’t it? The term is clearly used in a derogatory fashion by both Women and Men and might have a sexual connotation  if you think about it for a minute, however, it also has a very strong financial message.

Don't be whipping this out in public!

Don’t be whipping this out in public! Keep that Bad Boy in your Trousers!

What are 3 things you should be keeping in your pants?

  • Your Wallet, if you don’t whip it out, you won’t spend your hard-earned cash.
  • Your Money, if you won’t have a wallet. Don’t leave your money clip hanging out, or you’ll lose it
  • Your Credit Cards, keep those hot little babies in your pocket and you’ll have less debt

And when I say that, I mean keep them there, don’t take them out (not a simple suggestion of where to store these things).

You want to keep your money? Keep it in your pants (better still keep it in your bank, but leaving it in your trousers is a good start). Of course, those with a UK background, might comment on the use of “pants” and not “trousers” (since pants are the things you wear under your trousers (or slacks)), but be that as it may, keep your money in your trousers and you will save it!

If you need something to whip out, whip out a few pennies and put them in a donation box!

Anything else you should keep in your pants?

Yes, I stole this premise from Blazing Saddles!


Voodoo Emergency Funds

All of us Financial folk talk about the importance of having an Emergency Fund of some sort for the rainy days (or in my case the incredibly frigid days) in your life. Until a big financial emergency arises a lot of us don’t think an emergency fund is that important, but after the first head gasket replacement or the dishwasher dumping it’s load in the kitchen most of us think that having an emergency fund is a little more important. The problem is some of us have voodoo emergency funds as our reaction.

As usual what an emergency fund entails is always interesting, and open to opinion. Many “experts” seem to think you are relatively safe with a fund that is about 3 months pay backed up (but having more is never a bad thing either). Thinking you can’t get that much money socked away is not a good reason to not have an emergency fund. You need to have some cash squirreled away, just in case.

Note I said cash, where my view of cash is either:

  • Cash, foldable money, coins, cabbage, reds and browns: you get the picture
  • Money in a savings account or something as reliable and easily liquidated
  • 300 Krugerands in your basement freezer (but while valuable may not be easily liquidated)
voodoo emergency funds

Ben Stein in Ferris Bueller’s Day Off

I knew a lot of folks in my Nortel days that made the following interesting statements:

  • “My emergency fund is in Nortel Stock, and I can get that in about 3 days…”
  • “My emergency fund is in Nortel Options, so I can convert those quickly…”
  • “I loaned my {familial unit member} money for a down payment so I can get the money from there…”

Why Aren’t These Emergency Funds ?

Can anybody see where these might be tenuous emergency funds? Anyone? Anyone? Bueller? This is an example of Voodoo Emergency Funds, Voodoo Emergency funds (paraphrasing Ben Stein in Feris Bueller’s Day off).

Your emergency fund cannot be virtual money, that could disappear like a fart in the wind if you aren’t watching closely. I knew many “millionaires” at Nortel, who did not exercise their options, and as Michael James has pointed out, that means they are actually “Nothing-aires”. Worse still I knew people who borrowed money and as collateral used their options? How that worked, I didn’t want to know.

Your emergency fund must be: Available at any time, and Not subject to large value changes in a short time.


Financial Tension Arm

I diverge back to my regular line of financial commentary for this week, I will return with further discussions about Disabilities and Finance next week.

One of the classic traps that younger folks fall into as their career steps up, is the mistake of expanding your lifestyle to expand as your salary expands. In some cases the cost of their new lifestyle many times outstrips the raises they receive (a really big mistake). Remember when someone says you get a $4000 raise, you aren’t getting $4000 more a year, you are going to make less than $3000 more a year (depending on which tax bracket you end up in).

In many systems where slackness can occur, due to wear, age or other things the concept of a tension arm is introduced to keep the needed tension in the system (or having the slack cause the system to break down). Replacing a tension arm in your car can be expensive, but introducing a financial tension arm in your life is free and pretty straight forward.

Bloated Wallet

You Think More Money is Going in Your Wallet, but is it?

If you start as a young career oriented go-getter and you make around $40,000.00 and your boss calls you in and says you are getting a 10% raise because of your good works last year. You think that is pretty darn good (wait ’til you get old and jaded like some of us you might think it’s not much, but that is neither here nor there), and you think you are moving up in the world.

Before you got your raise you were living a spartan life in a nice apartment but with a roommate, to save on expenses. Maybe you are driving a used car because that is doing you just fine, but you now wonder if it might be time to:

  • Upgrade your car, because you can lease a much nicer car and your new raise should cover that no problem
  • You are getting tired of your roommate, even though he’s an OK guy (or girl) and you think maybe it’s time to get your own place
  • You worked hard last year and you should get a reward, so maybe a really nice holiday in the sun too?

Let me be the first to say, “Welcome to the world of OVERSPENDING”.

Your pay raise will give you about $2700 bucks after taxes and such, and if you don’t follow through on your spending plans (we’ll revisit those) and instead decide for this year to keep living in the same way, and instead put that $2700 in the bank  how much farther are you ahead? I think that is pretty simple. Each month you put $225 away into a savings vehicle. This saving will act like the tension arm, picking up the slack that this extra money puts in your financial common sense, and helps you to save more.

Do this for 3-5 years, and suddenly you’ll have a down payment on a house, and some nice savings. New income increases create real Financial Common Sense Slack, but if you put a Financial Tension Arm in place you’ll be just fine. The nice part also is you are living well below your means as well.

Oh and all that spending you were thinking about?

  • The car will be at least $2500 a year or so, and that is without your insurance increase
  • Doubling your rent, hmmm… another $2400 say
  • The vacation could be another $700 or so too

Notice that your $4000 raise has caused you to increase your spending by $5500 ? Oh yes, remember that really was only a $2800 raise, so you basically spent twice your raise, funny how that happens, isn’t it?


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