Followup to unexpected medical bills

On September 7 I revealed a few medical bills that were put on our credit card. We had some hard decisions to make, and my wife and I had different strategies for tackling this new debt.

Obviously we were not going to carry a credit card balance, it had to be paid off. This left us with 3 options: tighten our belts and attack it as best we could, use a portion of our emergency fund and then repay ourselves back slowly, or use a portion of our debt repayment to pay it out. Her idea was to use the debt repayment (as that is what it is technically for) and I wanted to use the emergency fund, seeing this as an emergency.

Our compromise was to pay as much as we could during the month and see what was left over at the end, then use the debt repayment amount to pay it. Here we are at ground zero and it stands as thus: out of the $1,700 card balance we have paid off all but $400 just by saving a little extra and putting whatever we can into it (and some generous help). It's been tight. But now out of our debt repayment (what we pay extra towards the principles of our debt) we need only use $400, still allowing us to put $900 towards other debt. In the end, I think we both feel pretty good about this result.

Balance out your utility costs

Gas and electric costs vary wildly throughout the year. According to government sources, these costs will be even higher as natural gas and electric prices increase. This can turn an already tight budget into a catastrophe, or at least a very lean winter. Who needs bigger utility bills near Christmas time? I sure don't.

The easy solution is to adjust your bills and save the difference. You can call your electric/gas company and just ask over the phone if you don't have your statements for a full year, how much it cost you each month. Add them together, divide by 12, and you get an average cost of these utilities throughout the year. This becomes your monthly payment. During the months where your bill is lower than your average, the excess goes into a savings account. During the months that it is higher, the shortage comes out of that account.

This stabilizes your budget and any increases in cost (or accidental overuse) can be more easily managed.

Also do whatever you can to lower your consumption of course.

Don't like late fees? Try paying your bill

Are you upset that credit card late fees are staggering and out of control? I'm not. Sure, I've carried a balance in the past. I even had some significant credit card debt. But I've never paid a late fee. Why? Because I pay my bills.

Right now, the late fee on a Discover card is $15 on balances up to $500 and $39 on balances over $500. For billing periods after Oct. 1, the late fee will be $19 on balances up to $250 and $39 on balances over $250.

I understand that late fees for these cards are pure profit for these companies and they are ridiculously high, but you only get charged when you don't pay on time. With all the buzz surrounding these fees there has to be a huge number of people paying their bills late.

That’s a real stiff penalty to pay for being as little as one day late...when consumers mail in their payment seven to 10 days in advance and they still get hit with a late fee, something is really wrong.

The problem here is that there is no way to verify when your bill arrived. Yes, I have sent letters out first class that took over a week to arrive. It is somewhat unrealistic also to believe that when you send your payment via regular mail that it will be processed on the same day that the company receives it. Though large, these companies probably have many thousands of bills arriving per worker employed to process them each day. If your bill lands in someone's box at 3PM when they have a pile of payments waiting to be processed, it makes sense that it wouldn't be posted the next day. Do I think it's right? No. Do I think consumers can protect themselves fairly easily? Yes! Direct electronic bill payments are the only way to send a secure payment and have a receipt of that payment. Your alternative is to send everything by certified/receipt request mail, which of course costs quite a bit more.

How would you describe an interest rate of 28 percent to borrow money through your credit card

Why on Earth are you borrowing cash from your credit card? Further, the rates they charge are clearly listed on each bill that arrives in the mail. If you don't like paying 28% interest to borrow cash, don't do it. It's that easy.

Rather than blame the credit card industry for their crooked ways, take control. Want to avoid late fees? Pay the bill. Want to avoid high interest charges? Don't use the credit card. Don't want to pay 30% to borrow cash? Don't borrow cash. Stop feeding the beast. The only ones who can stop this madness is us: the consumer. Otherwise we are left to the regulation of the government. Like a parent disciplining a young child, it will only behave when mommy and daddy are watching (or when they think they'll get caught). And who do you think pays for that strict regulation? Is it free? No. You pay for it. Taxes.

This one nearly killed me:

If you do not have any liquid assets, consider tapping the equity in your house, through a home equity line of credit. This really makes sense if you already have an established line of credit.

What an idiotic suggestion. You are going to eat away the equity of your home and risk losing it in order to get cash? That isn't the solution. The solution is to stop borrowing money. How many of these people facing foreclosures (and crying fowl) can't refinance or sell because the value dipped below what they borrowed? How many are because people sank their other debts into home equity loans? You have a spending problem. You have a living-outside-your-lifestyle problem. Borrowing money is only going to make things worse and extend your misery because, sooner or later, you are going to have to repay it. What makes you think your situation will be any better then? You'll just have to borrow more, and extend it further. See where this is going? See where the perpetual cycle of debt leads? Utter dependency on an industry designed purely to efficiently bring more money in than it sends out.

This is a scam, perpetuated by rampant consumerism to feed off the ignorant. There is only one way to use a credit card and if you are paying late fees and interest charges, you aren't using it correctly. Government regulation is not the answer. Consumers educating themselves and making wise financial decisions are the only things that will bring the beast down.

Don't trash blank pages in your bill

This is probably a no-brainer, but I am guilty of improperly disposing of some of my private information. Occasionally when I receive a billing statement from So-and-So Corporation, they will leave a blank page at the end - or a page with unimportant information. Sometimes I shred them, sometimes I just ball them up and toss them.

But you need to always shred these documents. On one I noticed that my full name and account number were displayed on the header of the page. Not good information to have out there. On another I noticed the name and account number in tiny print at the bottom corner, not where you would expect to look, but there it was. So far I have yet to see account information on the bill itself, but I would not put them passed adding at minimum the account number to the originating address portion of the return envelope.

So now, as a precaution, I shred the entire bill - envelope and all - except the main pages that I keep for filing.

I think my bank stole 54 cents from me

There has finally been a resolution to my auto financing problem. To sum up, the bank decided I didn't have insurance charged me for some of their own, a total of $83.87 that they helped themselves to out of my last payment without telling me (thankfully I always check my payments online).

After faxing over the appropriate paperwork showing no lapse in insurance coverage, it took 33 days to get it corrected - oddly, a day before my next payment was due. $83.87 has been credited to my account and correctly applied to the balance of the loan (the interest was unaffected).

But here's the thing. The insurance payment they took left me with an inflated principle from 8/3 to 9/5. An inflated principle $84 more than it should have. Thus this next payment in which they are going to charge me interest, based on the 33 day billing cycle, is going to be more than I should owe. By my calculation that is a full gain to the bank of 54 cents.

I wonder why it took a whole month to get the problem corrected? I guess they had 54 little incentives to drag their feet.

Charged for bill pay? Let the bank pay you

I was being charged $7/mo for online bill pay by my brick & mortar bank. For a long time it was worth it. Bill pay is just plain convenient. But now online bill pay has come to be expected from any major bank.

Some have started to offer free bill pay to all their normal checking. I thought seriously about switching to one of those until I took a look at my existing account with the online bank ING Direct.

ING Direct has a checking account with free bill pay and 4% interest. That worked out for me! Since I keep a lot of money reserved for annual bills, I have a bit of cash sitting in the account at any time. By transferring the amount of my bills from each pay check and then paying them from ING, I also get to earn a little interest on my bill before it gets sent out. Now that the system is running smoothly, I see that I am earning about the same that my old bank was charging me.

This is how banking should be!

Not living paycheck to paycheck

When my wife and I married 2 years ago, we were literally living paycheck to paycheck. A paycheck would come in and we would pay the bills we had received, the minimums on the cards and loans, buy the essentials like food, splurge a little, and then try to save whatever was left over.

After we were married we decided to tackle our finances. We wanted to manage our personal finances, not just sit along for the ride.

One of the best feelings I got was when I realized we no longer lived paycheck to paycheck. We started saving off the front end of our paychecks instead of the back end, saving money for bills that did not arrive regularly (like insurance), saving for retirement, delegating a huge chunk of our savings rate to paying off debt after having established an emergency fund, stopped carrying balances on the credit cards, and only splurging after all those things (and food and bills) had been paid.

Now that we have money sitting in a bank in emergency fund and our bill savings, we have funds sitting there that we use to pay the bills. This is our "bill pay account", formerly what I called our "readjustment account" - still trying to come up with a good name for it. Now when we get a bill, we just pay it. When a big bill like insurance comes it, we just pay it. No sweat.

It's a great feeling, because we really feel like we're making progress.

Account Flowchart

Above is an example of a flowchart of my various accounts, not including retirement and investments. Basically, this shows where our paychecks go. Since we have stopped our Roth IRAs until we are out of debt, do not fund any other investments, and our 401ks are taken out pre-tax, this is a distribution chart of our net take-home pay.

We have a brick and mortar bank that we use for our everyday spending, for cash withdrawals and debit purchases. A percentage of our income goes into our long term savings (the whole 6 months of income thing), or it goes into short term savings (but that account is already sufficiently funded so it gets nothing at the moment). Why have 2 savings accounts? The FNBO has a great high interest rate, but transferring money can take a few days. With the Wells Fargo savings, which earns barely any interest, I can transfer the money instantly. A credit card is fine for emergencies only assuming the emergency will take plastic! I like having cash available, and the Wells Fargo account beats keeping it under my mattress.

Our bills, weekly readjusted costs (readjustment pool money) and debt repayments goes to ING. From there it sits until needed and a bill is paid and earns 4% interest in the meantime. A savings account wouldn't do for this obviously because it restricts the number of withdrawals per month. Why even have an ING savings? Good question. I opened it with them intending to move my money there until I discovered FNBO, and I just left it open. Maybe ING will come out with a promotional rate, so there's no harm in keeping it.

Seeing it as a chart, it's not as complicated as it sounds when I try to explain it!

Banks love automatic drafts

Banks and companies are in love with automatic drafts. Some even go so far as to require them. I firmly stay away. Why do banks love them so much?

• It guarantees them payment. They control when you pay your bills, not you. Usually when you get your bill you have at least a week to pay it; with automatic payments they have the control.
  
• It increases the odds of an overdraft. Your bank wants you to overdraft $20. It costs them very little but they get to hit you with a $10-30 fee.
  
• If the charge is denied for insufficient funds, the company gets to hit you with a fee.
  
• They have access to your bank account. Do you have a dispute over a bill? A changing bill, like a cellphone can always have errors or mistakes. Whether or not you really owe what they claim, they'll snag it from your account and you'll have to fight to get it back (either with a credit or refund check, which can take months).
  

Two big mistakes, related?

I was going through my finances this morning and came across 2 pretty big mistakes. The first was with my credit card. I pay my balance every month, and it has been quite a while since I have ever been hit with a finance charge. However this month I was double-checking my bills and noticed that I paid a total of $390 towards my card...but the balance due was $397! Of course now the billing cycle for the previous period is closed and I can't pay any more money into it, so because I paid $7 under what I should have, I'm going to be hit with a finance charge.

Ugh!

Worse, I quickly calculated my average daily balance to be around $250. $250 hit with a finance charge for my stupid $7 mistake.

I also found a pretty bad leak in my budget. I discovered that I have been paying an average of $57 a month on liquor. My evening pre-dinner drink is really creating a huge leak in our spending. Do I really need to spend $57 a month on alcohol? I don't think so! Starting immediately I am going to switch to a nonalcoholic beverage after work. We'll save the alcohol for wine over nice dinners.

I think that these two may be related. To have paid $390 on a $397 bill, maybe I was drunk!

Signs of bankruptcy

Are you in danger of filing for bankruptcy? Would you be able to recognize the warning signs if you were?

The AICCCA released its top 5 warning signs that may indicate a path towards hitting rock bottom.

1) Living paycheck to paycheck

If all of your paychecks are wrapped up in bills, especially if those bills include minimum monthly payments on credit cards or other loans, you may be headed for trouble. A loan adjustment, card rate increase, or emergency could quickly send you into the red with little hope of recovery. My solution? Start slashing your spending and immediately begin saving money, at least 10% of your check. Then double up on debt payments to pay them off early, or put together a debt repayment plan (there are many out there). This will eat up a good chunk of your income so that if something does happen, you can either slow your savings or take a break from early debt repayment until you can recover.

However to avoid living on each paycheck doesn't mean you always have money in a checking account. It's silly to keep any money in a no-interest account, which brings us to...

2) No savings cushion

Put aside money for an emergency fund, that should be a #1 priority. At least a thousand or two, even if you have debt. If you're debt free, continue saving. Save for future purchases that people often finance, like automobiles and furniture. There's nothing wrong with spending money as long as you are putting plenty into retirement, have a sufficient emergency fund, have no debt, and are paying cash for those purchases (unless you decide to be savvy and play the "greater return" interest game).

3) More than 20% non-mortgage debt to income ratio


Um, how about zero non mortgage debt. You can't get ahead while you're borrowing money at 10-20% interest. Dump it ALL. The only debt you may need to have is a mortgage (and unless you are subprime - which means you shouldn't have bought a house in the first place - its a pretty cheap debt at that). Anything else is holding you back from financial freedom, because whether or not you can "earn more in investments" you are still letting debt eat into your earnings. You're paying someone else, a bank, to make up for your lack of fiscal management. Your money should work for you!

4) Making only minimum payments on credit cards

If anyone is in this position, cut up those cards immediately. Not only are you borrowing money at a high rate, but you are extending your repayment so long that you will double the due balance by the time it is paid off.

5) Not adequately insured

You don't need perfect health insurance, but one hospital visit can send you into a debt black hole. The basic minimum anyone must have is catastrophic. Your emergency fund can take care of the small stuff if you really can't afford medical insurance.

Seek credit counseling before you think you may need to file for bankruptcy, but be careful. Many of those counseling agencies will try to get you to consolidate bills and you may end up paying more for it in the end (to the agency of course).

What are your priorities?

When allocating your income to paying various funds, what are your priorities? Obviously savings and retirement should be up there, but with the ridiculous amount of consumer debt on the table (the average American family has $9k in credit card debt now?), paying off credit cards needs to be taken seriously.

Are there any low priority debts? Student loans, mortgages, car loans? Many people describe these as "normal" debt. Am I unusual in believing that all debt can and should be avoided? And if unavoidable, at least attacked aggressively until it is gone as quickly as possible?

Here are my priorities:

1) Pay down high interest debt (credit cards with obscene 15-30% rates need to be eliminated before all else).
2) Begin saving emergency funds.
3) Saving for retirement.
4) Paying short term low interest debt (student loans, car loans, etc).
5) Paying long term low interest debt (mortgage).
6) Saving for spending and high dollar purchases.
7) Additional investments.

I also believe in doing all of these on the front end of your income. Rather than paying bills, setting aside some spending money, and then throwing whatever is left at a debt, I calculate my budget and spending habits, figure out how much I need for bills and casual spending and then figure out a percentage plan for my saving/repayment goals. 10% goes here, 5% goes there, 5% over here, etc as soon as the income checks are deposited. Then I pay bills, and then whatever is left over can be used for spending. Any miscalculation then ends up cutting into my personal spending, instead of my savings or debt repayments.