Thursday, January 31, 2019

What Changed?

Image result for living stingy bills

When I started this blog, I was living "paycheck to paycheck" which was tough, as I was self-employed.  Today I am retired and financially secure with no debt.  What changed?  Or more precisely, how did I change?

Early on in this blog, a well-meaning reader suggested that I "steal the cheese" with these credit-card come-on offers.  Get the card, cash in the rewards, and then move on - without running up credit card debt and paying 15% to 20% interest on it.   I told him that was a nice theory but that in reality, most people bite on the cheese and then the trap descends on them and kills them.   It pays to be the second mouse - so long as you don't mind a piece of cheese splattered with the brains and blood of your friend.

I read all the time about people who are living "paycheck to paycheck" and unable to figure out why.  In the news today, a Reddit story (which is not news - and may be made-up!) about an Engineer and his wife, making well over six figures each and still living "paycheck to paycheck" and unable to figure out why,   "I go over our finances again and again, and can't see the one thing that is busting our budget!"

What a shitty Engineer.   It is like an associate of mine who once told me I could increase profits of my business by "cutting out the waste."  But try as I might, there was no pie-shaped wedge on my Quickbooks expenses chart labeled "waste" that I could just click on and discard.

In Engineering, you quickly learn that there are no "hail Mary" solutions, but rather incremental improvements that are painful to enact.   Your boss comes to you and says you need to cut $5 out of the cost of a circuit board for an industrial controller.  You spend a month sweating blood, trying to cut 5 cents here and 10 cents there - badgering your suppliers for discounts and looking for alternative suppliers.  You try to figure out ways to simplify the circuit or use alternate chips.   It isn't easy, but a few pennies at a time, you may come close to that $5 goal.

Or maybe you work for a car company and they mandate (or the government mandates) that gas mileage goes up 5% next year.  Easy to say, hard to do.    In the early days, this was much easier.  Cut out weight, change the gearing, go to smaller engines, use fuel injection for better economy - all things tried and done.   But if you want to increase gas mileage every year thereafter it gets harder and harder.   You go to an aluminum body - or composites - and install a 10-speed transmission.   Use turbochargers - better yet, maybe two of them.   The cost and complexity goes up, but you reach those goals, a few percentage points - or fractions thereof - at a time.

When I was at GM, we were experimenting with putting automatic transmission fluid in the differentials instead of 90wt gear oil.   A big savings?   Maybe a fraction of a mile-per-gallon.  But add that to the fractions saved by low-rolling-resistance tires and a more aerodynamic rear-view mirror, and maybe a more efficient transmission - and you get a 1 mpg or 2 mpg increase.   Maybe it doesn't seem like much, but on a 20 mpg car, that's 5-10% - heroic amounts in the Engineering world.

And that's why I say the fellow in the article was a shitty Engineer.  Likely he is one of these dudes working for Facebook or something, writing software.  They have money coming out of their ears right now, so the idea of cost-cutting and efficiency - the watchwords in other "real" Engineering fields - are alien to them.   And thus alien to his personal life.

I learned the hard way that it isn't just any one thing that is busting your budget, but rather a host of small things.   Eating out at restaurants too much.  Those designer coffees.  Leasing new cars every three years.  Home improvement projects that don't really fix anything in your house.   New clothes when you have old ones that fit just fine.   Subscription services for internet, phones, streaming, and whatever else.

Yes, it is only a few dollars here and a few dollars there - but it adds up.   The "Engineer" in question says he is paying $250 a month for car insurance, which is about what I pay every three months (that aluminum body Ford has high collision insurance, even with $1000 deductible!!).  Likely he has had some tickets or accidents from driving like a maniac everywhere, which jacked up his rates.  Ask me how I know this - that used to be me.

Yes, I lived like that.  I was "proud" that I never checked prices when shopping as "I could afford it".  I bought brand-name products and never considered store brands, because I was "wealthy" - or so I thought.   I had cable TV, high-speed internet, two cell phones, and a host of other subscriptions.  And I had a "rewards" card so I could get flyer miles!   And a $10,000 intractable credit card debt, of course.

What changed?   I started applying Engineering principles to my financial life.  I started monitoring spending instead of just spending.  I logged all my purchases and expenses on Quickbooks - which I had done for my business but not for my personal life.  And I was appalled to see what we were spending, without realizing it.   It wasn't a big pie-slice labeled "waste" but a host of smaller things.

I was entering credit card charges and asked Mark why there were not one, but two charges to Starbucks for over $12 each.   "Well, the girls at work like to go there on our break, and it's just across the street.   Suzie forgot her wallet and promised to pay me back, and that afternoon, Lydia said she was a little short this week, so I covered for her!"

"They paid you back, right?" I asked.

"Well, I forget.  It's only a few dollars anyway, right?"

Maybe, but it was those "few dollars" repeated over and over again, over time, that added up to an awful lot of dollars.  Just as a "few dollars" a day put into your 401(k) can end up being a half-million or more by the time you retire, a "few dollars" in excess spending a day can bankrupt you slowly, over time.

Mark started drinking the free coffee in the break room and told Lydia and Suzie to go fuck themselves.

We started talking with each other about finances, and we started cutting things out.  It wasn't easy.   It was far easier to add things to your lifestyle and painful to cut them.   Cable TV was the first thing to go.   And eating out several nights a week (or ordering take-out or delivery food) was next.   We were getting fat and unhealthy and spending three to four times as much as necessary because we were "too tired to cook".   It was stupid.

We lucked out in the Real Estate world - selling our house at the height of the market and "cashing out" before it crashed.   Drunk on money, we spent it on a lake house and poured well over $100,000 into remodeling it.   That was a big-ticket item - they do exist.   But what killed us at the lake house was little things - we spend a lot on remodeling projects that added nothing to the value of the home.  We could have rented the basement apartment full-time and paid the property taxes on the place.  We could done a lot of "little things" differently.

But hey, I was still making big money, right?   No need to do that!

The money started going away and I started to panic.  An unexpected tax bill maxed out a credit card.  Suddenly it seemed we were right back in the shit.  So I started this blog.  And I started examining every damn thing we did, from large to small and started cutting things out. Even something as stupid as changing from coffee to tea saved hundreds a year (we still have coffee - made in my cheap-ass found-on-the-street coffee maker, just not every damn day).

Today, a lot has changed. My income from work is now zero.  We live on maybe $30,000 a year in passive income.   We have no debt, no mortgage, no car payments.  It makes things pretty easy to deal with and budget.   It still is a struggle, to be sure - and I can still step in the dogshit big time if I am not careful.   Being older and retired, I have no "do over" to fall back on - no job to generate lost income to make up a shortfall.

Oddly enough, I am now in a position to "steal the cheese" more than ever.  Since I have no debt, including no credit card debt, I can pay off my credit card balance several times a month and as a result, my credit score is over 820.   I get offers.

One offer from Capital One offers a 15% credit card with 1.5% cash "rewards" and a $200 signing bonus if I spend $1000 in the first three months.   It isn't hard to spend $1000 in three months on a credit card, particularly when things like the water bill are automatically debited to the card.   I put the card in Mark's name, as he has little credit in his name alone - and if you die, your spouse may find out their credit cards are cancelled, if they were taken out in your name (with the spouse as an authorized user).

Or consider this offer from Fidelity:

$150 Bonus! Confirmation Code: 
With the Fidelity® Rewards Visa Signature® Card, you could start spending smarter and saving more than you ever thought possible. How can a little card do so much? Here's how:

Unlimited 2% Cash Back
That's 2% cash back on everyday purchases deposited into your eligible Fidelity account to spend or invest. No caps. No category restrictions.

No Annual Fee
Try to find another card that gives you all this without an annual fee. We dare you.

$150 Bonus3
Earn 15,000 Bonus Points—which equals $150 cash back when deposited into an eligible Fidelity account1—after you spend $1,500 within 90 days of account opening.3

These are attractive offers, but financial bear traps for the unwary.  If I was living "paycheck to paycheck" and rolling over a balance onto one of these cards, odds are, I would end up paying interest on that balance (in addition to the 3% balance transfer fee) and it would wipe out even the $150 to $200 signing bonus in short order.

The me of a decade ago would be foolish to accept these offers.  The me of today, well, they are still loaded handguns and should be treated as such.   But I will try to "steal the cheese" on one of these and see how it works out.   If you are living paycheck-to-paycheck or have a credit card balance, I would strongly suggest you find a low-interest, low-frills card and work toward paying that off and then getting your financial house in order.  Do as I say, not as I do (today).

I changed.  It took more than a decade - and it is an ongoing process.   But it was a transformation worth making.  We talk about money more now - a lot in fact.   A friend opined that "all you talk about is money and death!" which may or may not be true.  I suspect what galled her was that we talk about these things rather than denying they exist, as most Americans do. 

Most Americans don't want to talk about topics that make them uncomfortable.  Yet, your discomfort with a subject is probably a good indication that it is something that desperately needs to be discussed.  Many married couples don't talk about money - and end up getting divorced, as the marriage becomes a "race to the bottom" where each partner sees how much more they can charge to the credit card before it all unravels.

Eventually, this change happens to everyone - some by choice, others have it thrust upon them.  The latter is often tragic to see.   An older couple loses it all through poor planning and wasteful spending (and lack of communication).   Elderly and infirm, they are forced to live on Social Security, with no excess money for even the simplest of pleasures in life.  They end up in the State home, when they run out of money and can no longer care for themselves.  Or they are reduced to begging money from friends and family members - who quickly distance themselves from them.   They learn to live on a budget, not by choice, but mandate.

I hope the "Engineer" in the article figures this out.  But it is just as likely he never will.  Many Americans view the paycheck-to-paycheck lifestyle as something that "just happened to them" like a tornado or a hurricane - a natural disaster from which they need a bailout.  They are not spendthrifts, they are the victims here, even as they make $200,000 a year, which places them in the top few percentile of income for the nation (and top 0.5% for the planet).

It's a lot easier to be a victim, and the press and the politicians are eager to help you out, in that regard.