Debt Free or Bust

What’s wrong with following a financial cult?

Gurus and Cults

What do you think of when someone uses the word “guru”? I think of it in terms of the people I’ve heard of or follow, like Yaro Starak (blogging guru), Mike Filsaime (controversial internet marketing guru), Ed Dale and Dan Raine (free internet marketing gurus), Dave Ramsey (get out of debt guru), Dan Miller (career guru), Suze Orman (personal financial guru), Depak Chopra (spiritual guru), Richard Simmons (lose weight guru) and Rush Limbaugh (conservatism guru).

What do you think when someone uses the word “cult”? The names that come immediately to mind are Jim Jones whose followers killed their children and committed suicide en mass, David Koresh and the mass murders and suicides of his Branch Davidian cult in Waco, TX, Charles Manson and his cult who committed extremely violent murders, and Hitler and Nazi Germany whose atrocities are recorded in countless history, sociology and psychology books.

There are also benign forms of cults, like the followers of the movie “The Rocky Horror Picture Show” back in the late 1970’s and early 1980’s.

Most gurus don’t have official cults associated with them or go around murdering people or committing suicide (thank goodness), yet we as “normal humans” artificially elevate them to guru status because we find what they teach or sell very useful to us and we are grateful they are there.

Cult-Like Leaders

A few gurus get enough listeners and subscribers through the media to be considered cult-like leaders. They attract a cult-like following, and this cultism is encouraged by the guru. Two of the above list who seem to have cult-like followings are Dave Ramsey and Rush Limbaugh.

Rush Limbaugh is so obviously pompous and arrogant when he tells people that they should only listen to him and not the rest of the world or any other media, it’s laughable. There are people out there that believe him! If you don’t believe him and call his show he at best will hang up on you or will twist your words as he says the rest of the media does while putting you down and calling you stupid. I find it fascinating that people actually follow Rush. I occasionally listen to his show in the car if I have nothing else to listen to and wonder how in blazes anyone can take him seriously. He has a point once in a while, but most people do. He reminds me why I’m a moderate.

Dave Ramsey isn’t pompous or arrogant. He’s well grounded and down right humble at times. He does get on his soap box, but he doesn’t say anything he can’t back up with facts. His main medium is his radio show on which people call in and ask him personal finance questions. He has also written best-selling books on personal finance. He listens to each caller and guides them to ask questions. He may ask the caller questions and listen to the answers. Then he answers the caller’s situation from his specific point of view. which differs considerably from that of the general personal finance world. That’s all well and good. Anyone on the radio or any talk show can pretty much talk about anything they want any way they want.

Before all the followers leave me flaming comments, I listen to Dave’s show and I agree with many things he says. He is right a good amount of the time. But…

Financial Cult

Dave developed a cult following out of putting the fear of debt into his followers. If you’re a member of the MyTotalMoneyMakeover.com website, you’re given different ranking names in the forums as you post more messages. Some of those names are a bit disturbing, like “drank Koolaid” and “shaved head”. The Koolaid reference refers to the way Jim Jones poisoned his followers. Charles Manson and his followers shaved their heads while they were on trial for murder. Other cults shave their heads and don’t commit murder. But I don’t find those references very funny. I remember when those events happened, I watched them on the news and they were nothing short of horrifying.

My current ranking name is “don’t give me advice, you’re broke!”. Some of the rank names are funny and witty, but those two are in very poor taste and I believe should be changed. There are other names that could easily replace them, like “so broke I can’t pay attention”. I’m sure there are others that are just as witty without the very negative cult connotations. Another rank name that’s less offensive and tongue-in-cheek, but I think other sayings could replace is “sold the kids”. Of course we’re not selling the kids!

I’ve also found that the MYTMMO.com subscribers are the very hardcore cult members. I joined because of the budgeting tools and being able to get all three hours of the podcast, all for $81/year. That’s very inexpensive for the quality of the tools and the podcast. But the forums are a different animal, and if you post on them, you’ve got to have thick skin and keep in mind that many of these people have gone off the deep end. You’ll get beat up at some point for posting something someone doesn’t like. The moderators are supposed to keep things above board, but I find the actual moderation to be lacking in enforcing the rules. Only those who blatantly violate the serious rules get their posts removed or edited. I don’t know if anyone has been thrown off the forums.

The problem with following the Dave Ramsey cult mentality is it seems to give the cult-like believers license to beat you up verbally in the forums and post nasty comments on your blog if you do something they disagree with, like file for bankruptcy.

Dave also has a network of counselors and endorsed local providers for other services like real estate, investing, and accounting. The ELPs are independent and do their business in the spirit Dave preaches.

His certified counselors are a different story. I’ve met with one and talked to another on the phone, and I listen to Dave’s podcast regularly. I’ve been told I’m not bankrupt by one counselor who didn’t look at my numbers before he said it and another who said they recommend settling all debts at once which contradicts what I’ve heard Dave say on the show many times. Dave recommends saving up and settling with one collector then lather, rinse and repeat until all old, sleeping debts are paid. He definitely doesn’t recommend waking sleeping giants until you’re ready to deal with them.

I’ve also heard Dave seemingly contradict himself, but since I listen to several podcasts in a row in a short period of time, he’s really not contradicting himself. He’s giving advice based on the caller’s individual needs. I haven’t found his counselors (the two I’ve spoken with anyway) to listen as well or say too much that isn’t scripted, however.

Financial Peace University is another bone I have to pick about the cult-like nature of Dave Ramsey. FPU is a fantastic program and when the class is taken in a group setting members do get a lot of support. But in some groups people can also be pressured unmercifully to do things that are not in their personal best interest. One example is for a single parent to get a second job. The church or group is supposed to pitch in and help her/him out with free baby sitting and whatever, but I find the whole FPU and Total Money Makeover (TMMO) concepts to favor married couples with children over single parents. Dave is perfectly okay with a mom or dad staying home with the kids while the other parent takes on two or three jobs. The kids are being cared for by one of their parents and Dave preaches parenting is a higher calling. But when a single parent is pushed into multiple jobs and spends even less time with the children than he/she did already, that isn’t in the best interest of the children. There are more important things in this world than money and getting out of debt in 2-3 years.

The whole push behind TMMO is that it’s supposed to be done in 36 months. Realistically, you can’t put your retirement savings on hold for 5 or more years while you pay off debt. You lose too much compounding. I’ve run some numbers and I don’t believe you can put your retirement savings on hold at all if you’re over 35. Yes, you get out of debt, have no payments, and build wealth, and that’s good. But sacrificing your retirement for “Gazelle Intensity” is stupid tax in my opinion. You could be leaving 3 years worth of company match money on your 401k on the table. You’re also paying more taxes when you don’t put money into a tax-deferred retirement account. That can be a lot of money.

Time is something you never get back and compounding during that time can never be recovered unless you have so much money you can cover the loss with principal. But, unlike Dave, many people will just make it to $1 million in assets by retirement and some won’t make it. They’ll be in the $500k to $999k range. In twenty years, I don’t think that $1 million will go that far. Those with less may have to keep working.

Not saving up at least a couple of months of expenses in an emergency fund is also not the best advice. The last time I had to have transmission work on a car several years ago, it cost over $1000. I’m sure the price of the same work has gone up considerably. In reality, $1000 emergency fund to keep you from using credit in an emergency just doesn’t work. Too many things that can happen to your family, your house and your car cost far more than $1000. What happens then? You borrow money for the emergency. I like the advice about the emergency fund in Financial Peace a lot better. Dave recommends at least 3 months of expenses in the emergency fund before you tackle the debt snowball intensely. Then you really can pay cash for emergencies.

Dave talks a lot about how risky being in debt is. I agree. It carries a lot of risk people don’t look at. But some of the strategies Dave recommends to get out of debt carry risk, too. You also have to remember that Dave didn’t get out of debt using the TMMO. He had to file for bankruptcy and learned over time what to do about paying the bills and getting out of debt. It took him a few years to go completely broke and become bankrupt. It took more years to work his way out of that. In his case, he was bankrupt and the advice in Financial Peace is what he learned and began to live by.

I don’t understand how his cult followers, especially those on the MyTMMO.com forums can say they live by TMMO but ignore parts of it that may not apply to them but do apply to others. A key example of this is the quote in TMMO where Dave says if you can’t make the minimum payments or get current on your debts, you’re in more risk than TMMO was designed for and you need to read Financial Peace and get individual help with your finances. Dave wrote it and it stayed in the revised edition of TMMO. I think he means what he wrote. I don’t understand how people can tell me that if I asked Dave he wouldn’t say what he wrote in the book. And if he wouldn’t say what he wrote in the book, why buy the book? Why listen to him if he can’t make up his mind about what you should do?

I find Dave to be consistent with what he writes and advises on his radio show most of the time. When he deviates it’s usually because of a caller’s unusual circumstances. His organization isn’t as well-versed in his ways, however.

What Should We Regular Folks Do?

Most of us keep our own counsel and wits about us in learning from and following the teachings of a guru. We take what we need and ignore what we don’t. This is healthy. We should always think for ourselves. When we give up thinking for ourselves we are getting ourselves into serious trouble. Why? Because no one knows us or our family’s situation as well as we do.

We can listen to and learn from a guru, but we must always make our own decisions based on our knowledge of ourselves. When we don’t quite fit a guru’s teachings we should consult others who are knowledgeable about the matter in question, who may have a different point of view than the guru, and who are willing to sit down with us and listen to our full story and look at our documents in detail. A self-help book or radio show host is no substitute for the counsel of an accountant or psychologist or doctor or lawyer or an independent personal financial counselor.

Dave filed for bankruptcy protection when he went broke, so I consider an organization that is extremely against bankruptcy run by someone who used it is at least a little hypocritical.

I do agree with Dave that Americans need to get out of debt and too many people use bankruptcy when it won’t actually help their financial problems. People with IRS debt, student loans and back alimony and child support will not benefit from filing for bankruptcy. None of those debts are bankruptable. People who could pay their debts off in 24-36 months with some budget tightening and amputating toys and the payments associated with them won’t benefit from bankruptcy either. I know Dave is speaking to many people in that situation when he tells them they’re not bankrupt, because they really aren’t. They just spend too much and need to learn how to cut back and live below their means.

However, someone with twice their annual income or more in unsecured debt would benefit from bankruptcy protection. Bankruptcy is a method of debt reduction and elimination. It should be the last resort, but it shouldn’t be off the table entirely. With Dave Ramsey’s team, bankruptcy is off the table entirely in my personal experience. When I’ve spoken with Dave Ramsey counselors, the first thing I’ve been told is I’m not bankrupt before the counselor even looks at my financial situation, which none has looked at thoroughly enough to make any sort of judgment one way or the other. Those I have spoken with also know how to push your guilt buttons when you do come down to reality and consider filing for bankruptcy or actually file, as in my case. That’s wrong in my book.

When you’re in debt so badly that you have collectors harassing you, suing you, and filing writs against you once they have a judgment, you can’t pay enough each month on the debts to make the balance decrease and your balances are increasing, you’re in a far greater risk pool than the TMMO crowd.

I don’t agree with Dave when your debt is huge and bankruptable. Keeping debt and not making progress on paying down the balance quickly is ridiculous, especially when it comes to getting on with your life and putting off retirement savings for more than 24-36 months. If you put off retirement and only have $1000 baby emergency fund for more than 3 years you’re putting yourself at far greater risk of financial disaster. Something will happen that will cost more than $1000, and you won’t have the money or the credit to cover it. Then what do you do? Good question.

Putting off saving for retirement is especially risky. If you’re over thirty you lose a lot of compounding by not putting money away for retirement. If you’re over 40 you really can’t afford to put off retirement savings just to get out of debt faster. In my opinion, if you can get out of debt in 5 years and still keep an emergency fund of 3 months of expenses and continue to contribute 10% to 15% to your retirement fund you should do it that way. It’s a lot less risky. You can find ways to cut your spending and acquire extra cash without cutting out retirement savings. If you have a 6 month emergency fund, take it down to 3 months of expenses instead of $1000. If you’re putting more than 15% toward retirement you could reduce your contribution to 10% - 15%, especially if your company matches your contribution. If you’re not taking advantage of the company match, you’re leaving free money on the table, and to me, that’s stupid tax.

Make Your Own Decisions

In dealing with the whole Dave Ramsey cult thing I’ve relearned a lesson I’ve been taught before:

• think for yourself
• get advice from more than one source
• make your own decisions

If the outside pressure you’re experiencing is not in your best interest, you should consider amputating it. If you’re easily guilted into doing something against your best interest, stay away from those who are pouring on the guilt and pushing your buttons.

It’s your life and you have to live with what you choose. No one else has to do that. So seek broad advice, make your decision, and stand your ground. Nobody guaranteed you or your decisions would be popular. Don’t seek popularity and external approval. Do what is right for you.

What’s Wrong with Following a Financial Cult?

Like all cults, members are discouraged and pressured into giving in to the collective ideas of the cult. Members are strongly pressured to do what they’re told rather than think for themselves and do what is best for them. The cult and its beliefs are more important than the individuals who belong to it.

When someone starts using phrases like “drank the Koolaid” and “shaved my head”, be very cautious.

Technorati Tags: cults, Dave Ramsey, financial cult, gurus, MyTMMO.com

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July 11th, 2008 Posted by joubess | Dave Ramsey, Debt Reduction, Legal Issues, Saving | 19 comments

Article on MSN Money About Dave Ramsey

I just read an interesting article on MSN Money written by The Dough Roller entitled Here’s the real deal on Dave Ramsey. The author equates Dave Ramsey and debt to an alcoholic and alcohol, calling him a recovering debtoholic. I disagree.

I don’t believe Dave’s extremism about getting out of debt stems at all from his inability to control debt. I see it as Dave was scared to death and got a real feel for debt risk on a large scale. He was very young with a wife and babies to support when he went broke. He looked at his family who looked to him for their support and he was terrified. That fear was quite justified. He looked at his family and wondered how he was going to feed, clothe and house them.

I believe Dave was so scared that he will never put himself in a position where he would have to face a similar situation ever again. It’s not an addiction to debt, it’s a fear of the risk debt has associated with it that the article author doesn’t see or ever discuss.

Here’s an interesting quote from the article:

So here’s the deal: Being debt-free is not the holy grail of financial freedom. My wife and I could be debt-free quite easily. We could sell our house, pay off all our debt, and have some money left over. I guess we’d then rent a house or apartment, and I would continue to go to work every day. Would we be more financially free? Nope. I suppose we could move to a less expensive area and perhaps even pay cash for a home. Would we be any more content in life? Nope. In fact, all we’d end up doing is uprooting our family and moving away from a place we love.

Apparently, this guy doesn’t see that a mortgage ever gets paid off and you no longer have a house payment. No house payment in my life would be an extra $700/mo. Dave doesn’t say you can’t have a mortgage, nor does he condone selling your house to pay off all your debts unless you simply can’t afford your house, in debt or not.

Here’s another quote:

Keep total debt payments below 30% of your gross income. I know that for many this will be very difficult, particularly if you live in an expensive area. But I’ve found that if monthly debt payments exceed 30% of gross income, life gets very uncomfortable. And I should add that as you get older, this percentage should be going down. It should go down because your income should be going up, and it should also go down as you pay off debt.

This basically covers the amount you shouldn’t exceed with the first mortgage on your house. There is no room to borrow anything more if you stick strictly to the 30% of gross income figure. This guy must have a low mortgage payment and lots of equity built up in his house. He tells us that he is a real estate investor, so I take it his debt is tied up with his investments. He could sell a house if a deal doesn’t pan out, if the market doesn’t crash on him.

What he never discusses is what happens on the down side. Where is the risk factor? What happens when his real estate investments don’t pan out? What happens if he loses his business or his job? He doesn’t discuss the risk associated with debt, and risk is the biggest reason to get out of debt and stay out.

The author goes on to promote budgeting and not buying things of no tangible value. Why have a credit card if you don’t spend money you don’t have? You don’t need a credit card. He’s putting down Dave Ramsey and then turning around and preaching the same thing Dave teaches, except he borrows on his real estate deals.

The article author finishes as follows:

Dave Ramsey is entertaining, and I agree with a lot of what he preaches. If you choose to avoid debt as he does, I certainly won’t tell you that’s a bad decision. But I also believe that responsible borrowing can improve your finances with modest risk.

The author vaguely defines responsible borrowing to mean borrowing your first mortgage at a fixed rate and investing “wisely” in real estate. What is wise borrowing in real estate investment? He never tells us. Dave teaches that it’s okay to borrow to buy your house. Where does responsible borrowing come into play on anything else? I see no argument in this article that justifies using credit cards and spending beyond your means.

I believe Dave is more extreme in his own house than he is to the world because of his own experience. I also believe a lot of the extremism comes from Dave’s fans. Many take what he teaches and really go out on a limb with it. Some fans reinterpret Dave’s teachings into things I have heard him recommend against on his radio show.

Some people go overboard with the self-help stuff and start believing that because they did something by their interpretation of Dave’s books that it should apply to everyone else. I’m a member of the MyTMMO.com site and the forums get really extreme. I see things I can’t believe the moderators haven’t removed. They certainly don’t fit with anything I’ve read in Financial Peace Revisited or The Total Money Makeover.

I’ll ask the same question the author asks:

Is Dave Ramsey’s approach to debt the right approach for everybody?

I think the answer is yes and no. Being debt free is the key to financial freedom. Ask wealthy people if you don’t believe it. However, you have to gauge where you are on the debt-to-income spectrum when you approach getting out of debt. If you don’t fit The Total Money Makeover you shouldn’t use it. You should read and apply the principles in Financial Peace Revisited or take Financial Peace University because you are in a different risk category than those with a good income who spend more than they make. Financial Peace Revisited explains what to do and why you should do it when you’re truly broke and in desperate trouble. TMMO is the how on becoming debt free and building wealth. In my opinion from being a long-time listener of Dave’s radio show and reading both of the above books, he doesn’t intend for the how to supersede the why.

How would you answer the above question? Please speak your mind in the comments.

Technorati Tags: Dave Ramsey, debtoholic, Dough Roller, extremist, Financial Peace, MSN Money, personal finance

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May 12th, 2008 Posted by joubess | Financial Peace | 11 comments

Comment Answers and a Total Money Makeover Epiphany

I got a lot of great questions in the comments of the last post and I’ll answer them in this post in case some readers haven’t sifted through the comments. Maybe I should rant more often…

Confusion

I know a lot of things I write in a single post don’t make sense and may even be contradictory.

The comments from the last post have really helped me to step back, take some deep breathes, stop panicking and start thinking more clearly.

Unfortunately, confusion is what happens when you panic. Panic leads to desperation and that leads to stupid. I’m not thinking straight a lot of the time and it shows in my lack of progress. I’m scared and depressed, and things get confused. I’m not getting any traction because I can’t seem to focus on two things at once: get spending down & get income up. I seem to be able to focus on one, but it’s at the expense of the other.

This isn’t an excuse, but I suffer from depression and it became severe in the aftermath of Hurricanes Katrina and Rita. I was too depressed to even notice I wasn’t paying enough attention to my finances or looking at the big picture and seeing something needed to be done. I was having trouble just getting out of bed. Clinical depression can really knock you down and make it hard to get back up. I tend to dwell on the negative and not take action. Even on medication I fight this daily.

I haven’t done a good job of implementing many of my ideas. That’s very true. But I’m doing better than I was 2 years ago. I know none of you sees it because I haven’t been blogging that long. Just blogging and letting out some frustration is getting me moving faster than I have moved in quite awhile. That’s still at a snail’s pace, but I’m getting up to turtle since I’ve been tutoring. Being around teenagers and doing something I rock at (math and science and school) really helps me to have a little more positive outlook. That little bit of positive outlook doesn’t last very long, especially when I look at the big picture.

I go from very depressed to angry. Believe me, ranting and being angry are a lot better than depressed. Ranting and anger get you up and moving. There are still days when I look at the money situation and cry or start thinking about whether my life insurance policy would take care of my son. Then I put that out of my head because no matter what, my son needs me and bankruptcy isn’t worth dying over.

I feel like I’ve already failed, and failure has more inertia to overcome before action starts happening. It’s another reason I’m pretty sensitive when anyone says something negative in a comment. I dwell on the negative and I’ve already kicked myself a bunch, so when someone even touches me it hurts.

Having y’all dish out a bunch of tough love has cut through some of the pain and even though I feel lower than an ant, I’m making more progress as I describe further down in this post. One big thing is another job to go along with tutoring. It will replace tutoring while school is out. Getting my income up fast is critical. Even if my online business took off this second, I wouldn’t get paid for 6-10 weeks. More income now is what I need and that means work that pays daily or weekly, like delivering pizzas.

The Epiphany

I assume anyone reading this blog has at least read Dave Ramsey’s book, The Total Money Makeover. Maybe I shouldn’t assume that. If you haven’t, I hope you’ll pick up a copy at the library and read it. I’m not asking you to buy it, just read it so you’ll know where some of my plans of action are coming from and why I’m changing some of what I’m doing.

In TMMO, you’re supposed to get current with all your creditors before you start your $1000 baby emergency fund. The debt snowball comes in baby step 2. I can’t get current on all my debts so I can’t get to baby step one. Thus, I am not ready to do a total money makeover.

Prioritized spending: I follow the plan in Financial Peace by Dave Ramsey. Essentials of food, clothing, shelter, transportation, utilities and medical care come first in th budget. It’s basically the same in The Total Money Makeover. Then I start paying for the few other things we spend on and debts. 95% of the rest of the money pays debts.

Debt Payments

I can’t get my debts current because I’ve defaulted on all but one unsecured debt. I didn’t pay most of them for over a year, and when I started paying them I was paying them on a pro rata basis, except the smallest debt. That’s how I was able to pay off 6 small debts totaling nearly $5000 over the last 12 months. I allocated $450 a month to pro rata payments and anything left after that went to pay off the smallest debt in line. That’s how I ended up paying $12,000 to pay off only $5000.

It also demonstrates how fast compound interest can work against you when you’re on the paying end of it.

I haven’t used credit for 2 years now to pay for anything because I couldn’t and can’t pay the bills. That at least stopped the source of the madness.

I’ve rethought pulling money out of my IRA to use for debt payments and I’m not going to do it.

I worked very hard to get our necessary expenses down to $2500/mo. They were down to $2300 until oil prices skyrocketed again this spring. We had all kinds of leaks in the budget that I found as I made it tighter and tighter over the last 2 years. When I was making $3000, we still had some lifestyle to cut back. In 2007, my tutoring income went to necessities when we were short (when something went wrong), and the rest went to pay on debts. With tutoring and the business, I was bringing in $3500 a month on average. This year I’m making at least double what I did last year tutoring. But, without the business that’s not enough, so I’m getting another job to fill in for the business income.

Answers to questions from the last post

Some have asked why I didn’t shut the business down sooner.

My income bottomed out when I closed my FP business as of February 1, 2008. I went from some income and getting nowhere to no income from that source. I closed it because I would have to take money from my IRA to pay all the upcoming memberships, subscriptions, licenses and taxes that would have been due in May and June 2008. These bills would cost about $7,000, so it’s not trivial. I took the money out of my IRA last year to pay those expenses, which was stupid. I feel I had to cut that loss, and I believe that was the right thing to do. I also didn’t make any money in January, so I decided to close in February.

During the first 1.5 years of my FP business I was able to cover our necessities and then some. Prior to Hurricanes Katrina and Rita, I brought home $4200/mo and I was able to make the minimum payments or a little more on the debts, both business and personal. Katrina hit on August 29, 2005 and Rita hit just 3 weeks and 6 days later. Between the two hurricanes, 41% of my potential client base was thrown into chaos. Business dropped off extremely.

In Oct. 2005, the bankruptcy law changed, and the minimum payments on all the credit accounts went up, too. Minimum payments used to be 0.5% of the balance or lower. Payments went up to 2%-4% of the balance. Some of my payments tripled or quadrupled or worse. Interest rates started rising then, also. The hurricanes caused a huge business interruption and I didn’t have the money to pay debts when the payments went up so much. Instead of continuing to pay something, even though it wouldn’t have been enough, I quit paying completely. Not a smart move.

If you were in a hurricane zone from the 2005 storms you could withdraw from your retirement savings without penalty in 2006, so that’s how we survived most of 2006, but I only took out enough to meet our essential expenses plus the business’s annual lump sum expenses. Any payments I made were from the business making some income or other work. I also had a roommate most 2006 who was paying $375/month. A lot of people needed a place to live after the hurricanes.

In 2007, the business made more money and really seemed to ramp up during the first 6 months of the year. I thought we were out of the woods between the business income and tutoring income. I met clients in the morning or early afternoon and on Friday and Saturday. I tutored as much as I could Sunday through Thursday evenings.

By July 2007, I was cleaning houses while my tutoring income was low. I’m not cleaning houses again because my asthma and allergies got much worse. I was moving slowly that month because I was sick with allergy symptoms most of the time, though not sick enough to not work. I decided I wouldn’t clean houses again. I would have to find something else that didn’t aggravate my allergies. I can mow grass, deliver pizzas or anything else as long as it doesn’t involve indoor dust and allergens, especially cat dander.

Then the business picked back up again in August and September 2007, but bottomed out in October through the end of the year. I had 3 clients who didn’t need much help during the 4th quarter of 2007. When the business didn’t make anything in January 2008, I closed it.

My roommate also moved out in the spring of 2007, and I haven’t been able to find another suitable roommate. There is a lot more housing available now for reasonable prices, so moving in with someone else isn’t a necessity like it was in 2006.

Everyone thought the business interruption was a temporary slump because of the storms. We all thought things would stabilize and growth would resume. Many small business owners, including me, attended several meetings and workshops held by FEMA and our local, state, and federal representatives to help guide us through the disaster recovery process and get whatever help we could. Help was in the form of counseling, marketing and opportunities to network. We didn’t get checks from the federal government. We’re not in New Orleans, we’re where many people evacuated to. Business didn’t pick back up in some sectors, mine being one of them.

I would have shut the business down a year earlier if it hadn’t been for the hurricanes. Instead of taking the money out of my IRA last year to pay for the annual fees and expenses, I should have shut it down. If I didn’t have to cash to cover those expenses, I shouldn’t have kept the business open. It might also have taken off if it hadn’t been for Katrina and Rita. I’ll never know because that isn’t what happened. I’m where I am now and that’s where I have to work from.

What will be different this time about getting my income up?

I’m looking for more of my own students to tutor. I’m starting a pizza delivery job I hope this Friday evening. When tutoring is over for this semester in May, I’ll be delivering pizzas 5-6 afternoons and evenings a week. Then I’ll reduce those hours again when school starts back up in August. But I’ll keep the pizza delivery job until something higher-paying comes along or my internet business starts making double what I’m making delivering pizzas.

If the internet business makes money and doesn’t take any more time than it does now, I may keep the pizza delivery job until all the debts are paid off. The more money I can throw at the debt the faster it will go away.

Some have asked why I don’t teach full-time.

I don’t have a teacher’s license and classroom teaching isn’t something I really want to do. My degree isn’t in education, it’s in chemistry. To get my teacher’s license I have to get accepted into Teach for America in my parish (county) and if they take me, I have to pass two tests, attend a 6-week summer workshop (full-time, only $1200 pay) and some classes over an 18-month period. Until I get the license, I’d only make about $22,000/year. That’s $1833/mo gross, or about $1550 net. That comes to $11.46 an hour. I would have to cut my tutoring hours down to no more than 8/week, and I’d have to study for the required classes. I wouldn’t have the energy to get a third job. I’m 47, not 27, and I physically don’t have what it takes to work 16 hours a day anymore. I can and have managed 12 hours a day, but that’s my physical limit. I’ll make more tutoring 25 or more hours a week and delivering pizzas.

Tutoring, pizza delivery and any other odd jobs I can find also leave a little room to work on my online business. I have more niches in the works and I’ll be working on each project until it’s finished before I continue work on another. I’ve worked on my projects in a scattered fashion and I’m not finishing any of them. If I can get work finished on the things I’ve already started I will start to bring in more money from online sources.

Being scatter-brained is part of the depression. I often lack focus when some distraction comes up, like placing a new plug-in or adding a widget to a site or blog. I spend too much time on theme work instead of on content production. I’m making that change by not allowing myself to do anything until I’ve produced solid content for at least an hour each day. I’m not even reading email before I work on whatever project is at the top of the list.

What’s the point of paying $1-$2 to each collector?

The point of only paying a collector $1-$2 is it keeps the debt in limbo. I’ll pay that amount to all my unsecured creditors except the one with the lowest balance. That debt will get as much as I can dump on it, and hopefully, it will be paid off quickly. Then the next lowest debt will start getting the lion’s share of what I have to pay.

All the debts I defaulted on are unsecured. If I pay nothing, there are specific procedures in place to sue me and, at worst, get a writ of garnishment. If I pay something, even if it’s only a dollar, it effectively keeps the collector from moving forward. There is no procedure for accounts that stay active and in contact but don’t pay in full or work out a settlement. The collectors continue to throw a fit and foam at the mouth, but don’t’ do anything substantive. They just keep sending more letters demanding payment in full or some other amount, and continue calling non-stop. The debts sometimes get sold to other collectors after a certain period of time. There doesn’t seem to be a set period of time before a debt is sold.

This method of dealing with collectors is what will keep me from having to declare bankruptcy. All the debts I’m doing this on are unsecured. You can’t use this on secured debts because they’ll come and take the thing you borrowed to buy, including your house. It will also allow me to stay in better control of my finances and get the debts paid off or settled more quickly than if I continue to pay any amount on a pro rata basis. All that did over the last 12 months is cost me $7000 to make $5000 of progress. I’m not doing that this year. Most of the money I put towards the debt has to make an impact on the debt or my money isn’t working as hard for me as it should.

At one point I calculated that I would need to bring in about $2800/month over our basic expenses just for debt payments to pay everything off in 5 years. That number is way too low. At a current balance of $200,000 and the average interest rate at about 15% (roughly) it would take $4,760/month for 5 years to pay off the debt in full. The longer it’s dragged out, the more I’ll pay in interest.

I don’t have $4,760/month just to pay on debts. I’ll eventually have to stash some cash to settle some of them. The older the debts get the less the collectors will take to settle the accounts. Since about $50,000 has been tacked on in interest and fees since I quit using credit 2 years ago, I’m negotiating settlements, when the time comes, based on the balances I had before the debts went to collections. I’ll have to pay more than that, but if I start at the low end and they start at the high end, I think we’ll be able to reach a compromise. The creditors that don’t get paid in full will also get more out of those settlements than if I declared bankruptcy.

I don’t care how trashed my credit gets as long as I can avoid bankruptcy. I plan to have a zero credit score some day because I’m done worshiping at the debt alter of FICO. After this mess is cleaned up, no matter how long it takes, I will never borrow another penny in my life, so help me God. A credit score will no longer be necessary if I no longer wish to borrow money. If I can’t pay cash, I’m not buying it, whatever “it” happens to be.

Why do I want to have an emergency fund of 3 months of expenses?

My hurricane deductible went up to $7500 (5% of replacement value) and will go up each time the replacement value of my house is adjusted upwards. I’m pulling $6500 out of my IRA to build an emergency fund with $7500 in it. That’s about 3 months of expenses.

The only reason I’m pulling the money out of my IRA now is because the tax hit will be a lot less than if I wait until I’m making substantially more money. Also, the deductible expenses from my failed business will offset the withdrawal, even with the penalty. The government let us withdraw from retirement savings without penalty during 2006 for hurricane recovery. But there is no guarantee they would allow that again if another major hurricane devastates South Louisiana.

We live along the Gulf Coast. Hurricanes happen. $7500 is a lot of money to me just about anytime, but now especially since it would take me quite awhile to earn that much and live. I have $1000 saved already. I only have to take out $6500 to bring the fund up to the hurricane deductible.

I’m not putting any of my earnings into savings until all basic expenses are met and my debts are paid off or settled. I was going to put a small amount away from each source of income, but that wouldn’t really help me. The amount I would save would only be around $30/month. I just need to put everything I can toward the debt. That’s where it will make the biggest impact.

I also have no credit, and I wouldn’t borrow anyway. I can’t pay back what I owe now. It would be stealing, or at least borrowing knowing I would violate the terms of agreement even though I would eventually pay the money back.

If something goes wrong with the house I can fix it. If I have to replace my 11 year old Honda with another one 11 years old or older that still runs, I could pay cash for it. Any salvage value from my current vehicle would go immediately back into the savings account, and any money earned would be socked away into savings until I have at least $7500.

It will take me much longer than 24 - 36 months to pay off all my debts. An emergency fund of at least 3 months of expenses is insurance against borrowing when something happens that costs money. And we all know Murphy happens. A baby emergency fund of $1000 for longer than several months is too risky. I get a knot in my gut every time I think about not having it and I know that’s my own personal risk meter going off like a siren.

I hope this clears up some of the confusion from previous posts and comments. I hope I’m beginning to have a clearer picture of what I need to do and how I’m going to do it, and that what I’m writing isn’t contradicting itself. Please let me know in the comments if I’m still not being consistent. Maybe if I can get my head on straight I’ll be able to earn more, use my time more efficiently and tackle the debt faster.

Thank you all for getting me to wake up. I’ll probably keep getting mad, but I’ll do my best to use that energy to make more money.

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Technorati Tags: avoid bankruptcy, Baby Steps, Dave Ramsey, Financial Peace, income crisis, total money makeover

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April 16th, 2008 Posted by joubess | Baby Steps | 18 comments

Be Careful When You Put Yourself Out There

I asked a question on the My Total Money Makeover member website community forum. It was a simple question, “Which debts go in the debt snowball? I remember Dave Ramsey saying something about any debt that is over half you annual income doesn’t go in the snowball”.

I did remember correctly. Debts over half your annual income go in baby step 6, not in baby step 2. That will help me out on the 3-5 highest debts I have, and the 3 that are running up interest at the greatest rates as well. Now that I know they go in baby step 6 I have to find out what to do to stop paying on them right now. But I’ve been too scared to ask another question on the forum.

When I started getting replies to my questions I got a question back from one member asking me very nicely if I would share the details of my situation and that said member also reads this blog. So I gave it a little thought and decided what the heck, this member has real life experience in business debt and self-employment. And said member was very helpful.

What I didn’t consider about opening up my financial closet full of skeletons is other members are going to read the post and comment on it as well. Being a member forum helping each other means people generally answer questions from their own perspective. This means they will say things like “I’ll try to be kind” (translation, I’m going to be just slightly less mean than usual), “from your reply it doesn’t sound like you’re committed to the plan” and “you haven’t made the BIG changes you need to make”.

In my current financial and mental state, saying things like that to me is like waving a red flag in front of a very angry bull. I exploded in writing and got back replies chastising me for being so angry. I apologized about ranting on and blowing up, and more people wrote back with encouraging words instead of advice.

But still, even if you put your private life on display in a member forum to seek help you shouldn’t get kicked for it - that’s how I felt and how I still feel. You either shouldn’t have done it in the first place (wisest choice), or people who comment on forums as emotionally charged as the My TMMO forum should be a lot more gentle about what they say to others. Not everyone is looking for an accountability slap, or advice that doesn’t really apply to them.

For example, those who have never run a small business should not comment about small business and self-employment issues unless they are there to be supportive of anyone in a desperate heap of trouble. I’m not going to get on the forum and tell someone I don’t know that they aren’t committed. I don’t know them or their situation.

Maybe I’ve had too much therapy, but if someone asked me if they were committed enough, I’d probably say back to them “I don’t know, do you think you’re committed enough?” Most people are going to be tougher on themselves than anyone else. Unless someone really reads your detailed post and understands your world from their own personal experience, they are not able to give you advice worth having.

Why should you listen to anyone giving advice on the forum? They’re broke! (This is an inside joke from the MyTMMO forum. One of the avatar captions you get is “Don’t give me advice. You’re broke!”).

I wish I had the debt problems of 90% of the people on that forum. I could manage their debts easily on what I make. I’d gladly trade with nearly anyone of them.

I’m frighteningly close to bankruptcy and I’m just trying to figure out a way to avoid it. I figured that out when I was preparing my last debt report post. I’m paying $1000/mo on the debt and it’s going up $1500 or more per month above that. I now realize there isn’t a way to deal with this by reading a book and following a cookie-cutter plan.

My only hope is to start making substantially more than I’m making now and get professional help with restructuring my situation so it’s manageable in the short-term. High income doesn’t just fall in your lap. It takes work to find work. It takes a lot of work to find high enough paying work. It takes time along with a lot of work to develop a high-paying income stream doing something you love. It takes soul-searching, time and a lot of work to figure out what you love.

I have a copy of “48 Days to the Work You Love” by Dan Miller on the way free shipping from Amazon. I’m earning as much as I can doing whatever right now, but I’ve got to find a plan to be doing what I love making what I want to make in 5 years or less. If I don’t find a passion to turn into a profession, I’ll doom myself to the corporate world of industrial chemistry and face getting laid off about every 3 years or so. That’s assuming I can ever find another job as a lab chemist. They just don’t seem to be around here anymore. It’s not that being a chemist isn’t great. I love it. But many manufacturing jobs here are going to places like Mexico, China and South America where labor is cheap and environmental laws aren’t such a pain (yet).

I plan to call the Dave Ramsey professional counselor team Monday or Wednesday. I don’t know if they will be closed Monday, New Year’s Eve. I tried working with the only local DR counselor, but he didn’t have the knowledge or experience to help me. He didn’t even look at my numbers before he told me I wasn’t bankrupt. He would have been right 90% of the time. With me, he is more than likely wrong, unless some restructuring will really help buy me some time until I can get my income up.

I’ve gone through every financial item I have on my budget and worked out the expenses without the unsecured debt payments in an Excel spreadsheet, so I’m ready to provide timely and detailed information to whomever I work with. I have it printed and ready to fax.

When I did the budget for January 2008, I managed to get expenses down to $3300 from $3700 in December. There may still be more to cut. I hope so.

I learned some valuable lessons:

• Don’t give out personal details without a guarantee of confidentiality. It will likely be used as ammunition against you by some schmuck who thinks because they’re doing X, it applies to everyone else.
• Don’t seek advice from amateurs when you need a professional.
• Get answers to specific questions a readership or listener-ship will be able to answer factually. But don’t tell your detailed story even if asked.

Technorati Tags: baby step, Dave Ramsey, my total money makeover

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December 29th, 2007 Posted by joubess | Baby Steps | 2 comments

Dave Ramsey Baby Step 1 - Done!

I’m a Dave Ramsey follower, patron, client, I guess. First, I read Dave’s book “The Total Money Makeover” and signed up on the MyTMMO website to use the tools available there. I could have used a spreadsheet, but the forum is definitely worth the annual cost of membership, plus you get all the neat tracking and budgeting tools.

I completed Baby Step 1 on May 31, 2007! I have a baby emergency fund.

On to baby step 2 - Debt Elimination (debt snowball).

This blog will document my journey from huge, paralzying debt ($157,171) to debt freedom, hopefully while keeping my sanity.

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June 4th, 2007 Posted by joubess | Baby Steps | no comments