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There are many people out there that say there are two types of debts: good and bad.  Depending on who you listen to, good debt can mean carrying a loan for a home, an auto, or education.  Bad debt can mean carrying a balance on your credit card.

According to this CNN Money Article:

Good debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments. In cases where debt makes sense, only take loans for which you can afford the monthly payments.

Bad debt includes debt you’ve taken on for things you don’t need and can’t afford (that trip to Bora Bora, for instance). The worst form of debt is credit-card debt, since it usually carries the highest interest rates.

Take a step back using common sense and think for a minute:  How can any debt really be good?  You’re slaved to the lender!  Plus, you’re most likely paying interest on the item.  I know, your daily commute back and fourth to work would cease exist without that brand-new Infinity G37 convertible; taken out in a loan of course!  Trust me, that guy riding next to you in his 10+ year old, paid off beater car probably sleeps better at night.  Why you may ask?  He’s not worrying about how he’s going to pay the loan next month!

I had an auto loan once on my sedan and I absolutely hated it!  In fact, I hated it so much that I paid it off in less than two years.  After this, I have never felt the same way about loans again.  According to my final auto statement, I spent wasted over $894.83 in interest over the life of the loan!  That’s $894.83 lost for a vacation, investing, or anything really.  My next car will be used and bought in cash – not a loan!

My next battle with “good” debt is my student loans.  Since 2006, I’ve spent wasted $1,520.48 in interest payments and counting!  I have roughly $14,000 left on them and I’m looking at different avenues to pay it off in less than two years.  As it stands right now, I am on track to pay them off in about 4 years.  It’s going to take some cutting back, but once I send in that final payment, it will be worth all the sacrifices made to get there.

I know we all need a stepping stone and this is where loans can help us out.  Just a word of advice, try not rely on them your whole life.  You’ll never be rich making payments to other people.  Just ask your next door neighbor.

Just the other week I made my final, 0% interest payment on the flat screen TV that hangs above the fireplace.  It was an 18 month payment plan that I paid off in 14 months.  At the time, getting the store credit card and taking advantage of this offer seemed like a really good idea.  If you are not careful, however, the 0% interest can jump to their default percentage (20-30%).  This is something that many people do not take into consideration.  I did, however, consider it carefully and made sure that I had enough funds to cover it before I made my purchase.

Why did I use a store card even though I had the cash to pay for it? I did not want to touch my savings account to pay for it up front.  I was able to keep my money making money (even though it wasn’t much) while I sent the payments in every month.

These store cards can be really tricky, for instance, if you are late or miss a payment they can charge you a late fee, all of the deferred interest, and take away the 0% interest on this item for the remainder of the balance!  This can leave you up a creek, spending money you didn’t intend to.

To give you an idea of the amount of deferred interest, here are the numbers on my final statement.  This is after 14 months of deferred payments:

Initial Purchase: $1,241.16
Deferred Interest Charge @ 26.99%: $237.22
Late Fee: $39.99

Grand Total for Missing Payment: $277.21

Imagine spending an extra $277 on an item because you missed a payment?  I know I’d rather spend (or save) $277 elsewhere.  This is how credit card companies make their money.  Imagine if they gave 0% to everyone and they all paid on time and in full?  Credit card companies wouldn’t be in business!

All-in-all, I feel more free not having another bill to pay every month.  This monthly payment is now going to my “Gotta Live a Little” fund for weekend trips and vacations.  I just felt that having this extra, non-essential bill every month made things a bit more complicated in my life.  As of right now, my goal is to simplify things.  To me, this means de-cluttering the house, reducing my debt, and spending more time doing things I love to do.

What experiences have you had with credit cards?

Picture this: You just came back from an over budget vacation to find your pet unable to go to the bathroom.

First panic sets in because you notice he is in a lot of pain.  Once you bring him to the vet, you find out he is going to be just fine and will need to stay for a few days.  You request a quote for the approximate cost and they tell you $800.  A few hours later the vet calls you back to let you know your pet is doing well.  He’s also requesting authorization for more tests to determine why the problem started in the first place.  The new estimate is now peaking $1,000.  You then find out he needs to stay an extra night and he will need to be on a special diet; the estimate is now at $1,100.  Once all is said and done the total bill comes out to almost $1,300.

This was me the day we came back from our Maine vacation.  Our cat Rocky had bladder crystals that made it impossible for him to use the bathroom.  The vet needed to unblock him and watch him for a few days.  They said this is caused by the type of cat food he was eating.  The only thing I did was switch him from Meow Mix dry to Blue Buffalo wet and dry.  I guess this was a big, painful mistake for the both of us.

I learned that cats, especially males, should not eat dry food.  Think about it, if they were in the wild would they have dry food?  They should stick to wet food and make sure they have plenty of water.  Needless to say, all my cat are now on a wet food diet.  The vet also recommended a Drinkwell Pet Fountain.  I picked one up for my cats and they love it.  They play around with the water and drink from it more often than their old water bowl.  I think it’s because of the constant recirculation of water.

This whole experience didn’t come cheap.  I tapped my Emergency Fund for the $1,300 vet bill.  I thought about pet insurance even before this whole experience occurred, but I felt it was not worth the cost.  The plans the vet had me look at was roughly $20/month per cat, plus you have the $50-100 deductible, and 80% reimbursement.

Have you experienced a vet emergency?  Do you carry pet insurance because of it?

Last week I joined the local credit union.  I’ve been putting this off for a long time actually.  What mainly kept me back was the poor interest rates being offered through the credit union at work.  For the longest time, I though I could only join one through an organization.

Listening to a local radio station, I heard them mention a website to find local credit unions.  After all the fun we had the past few years with bailouts for the “national banks”, I wanted to take my money elsewhere.  My goal was to find an institution that’s stable, local, and here to stay with me.  Through research, I found out that one of the requirements to join one is to just live in the community.  Their interest rates are very competitive for CDs and savings, plus they have low interest loans.

After finding this excellent news, I took Dasha and we went to open our accounts.  Upon stepping in, I noticed something different about the credit union:  you are treated as an individual, not as an account number.  It was an excellent experience signing up for an account there.  One huge advantage is I am able to deposit and withdraw at ANY credit union in the country; they are all linked together!  This is extremely useful for when I travel and do not have a “national bank” in the area.  So far I have not found a single disadvantage of signing up.

To sum it up, here are some of the advantages of a credit union:

• They are local and provide services for others in the community
• You may only need to live in the community to join
• They offer competitive rates on their services
• ALL the credit unions across the country are linked together allowing you to deposit and withdraw while traveling
• They have all the services of a “national bank”, such as online banking and free checking

Are you apart of a credit union?  If not, have you been thinking about joining a credit union?

On our most recent trip up to Northern Maine, Dasha and I decided to stay at a Bed and Breakfast.  Growing up and vacationing with my parents, I always stayed at one.  I  found each stay to be very memorable.  You get to discover the story and theme behind each B&B and can have a one-on-one experience with the owner.

However, the B&B experience can be quite different from a hotel one.  From my experience, you normally share the same house with multiple guests as well as the owner.  You may even share a bathroom with another guest.  Breakfast is often served at the same time with all of the guests.  Some may find this a little uncomfortable, but we love to talk with others and have insightful conversations.  You can also find out some of the best kept secrets in the area.

The B&B we stayed at was the only one located in Aroostook County and was VERY reasonable with pricing; around $79 a night.  The Hampton Inn in the next town over was over $100 a night.  The price alone made it a frugal choice, plus you have breakfast included.

The Old Iron Inn B&B shares a story of antique irons and their many uses.  I had no idea that there were so many varieties and each manufacturer had their own idea to make it more user friendly.  For instance, some had little metal slugs that would get heated up on the stove top, versus heating the whole iron.  This allowed the user to have a slug heating up while one was in use.

For your next trip, stray away from the norm and stay at a bed and breakfast.  You may find it makes your trip a more memorable one.

Have you stayed a bed and breakfast?  What are some of the other frugal ways you have lodged?

If you’ve been following my blog, you may be asking: “What happened?”  Well, to put it short: I’ve been very busy with life.

Since my last posting I:

• went on vacation up to Maine
• worked on the house and garden
• harvested many tomatoes, cucumbers, and blackberries
• had a large vet bill to swallow
• thought about other ways of income to pay down my debt
• am considering credit union membership

I will be posting about all my experiences over the past few months and keep the blog updated regularly.  Only this time it won’t just be about personal finance.  It’s going to be about all aspects of my life and personal finance is one of many puzzle pieces.

I’m living like no one else today, so I can do what I want tomorrow.  So far, it’s working out great and cannot wait to reach my ultimate goal: being debt free and my own boss.  I think I’m going to make it there sooner than I originally thought.

If you have read my previous post, Life After an Auto Loan, you’ll notice that I was undecided on what I wanted to do after my auto loan was paid off.  Over the past month I made a decision to split it up.  I am allocating 75% of the $400 to my student loans and the remainder to my Roth IRA.

By making this move, my student loans repayment schedule fell to 4 years from their original 10 years!  This is a huge drop in time and interest.  Based on my calculations, I should be keeping about $3,000 in my pocket that would otherwise go to the loan company.  If I allocated 100% to the loan, that would cut the time down to about 3.5 years.

Depending on your income level, you may be able to claim student loan interest paid on your taxes.  Unfortunately for me, I am unable to claim this.  So, for me, it makes no financial sense to carry this “good” debt.  Depending on how you look at things, some say that no debt is “good” debt.

What exactly is “good” debt?  “Good” debt is any debt that’s taken out for the prospect of growth, such as a student or home loan; it may also be tax-deductible.  When you take out a student loan, you are investing in education that will, hopefully, increase the earning potential over your lifetime.

As much as I want to pay down my student loan quickly, I still need to save for retirement.  I currently match my employer’s 403b at 1% and contribute to my Roth IRA.  Before I bought the house, my Roth IRA was maxed out every year at $5,000.  This past year, I only contributed a $1,000 to it – after my tax return!  This year I am trying to set aside for my Roth IRA every month, while still saving a portion from my tax return.  If my calculations are correct, this will place me at roughly $2,000 saved for the 2010 year.

Once you finished with a debt, what did you do with the extra money?

Wow, it’s been one month since my last posting!  Things have been really busy at work.  I had two weeks of overnight work and had two decent snowstorms that made travel treacherous and time consuming.  This left me with minimal time for myself and blogging.  I’m going to realign my schedule to allow more time for writing quality blog content.

It’s been one year since I closed on my first home and I cannot believe how time flies!  I only have about 28 years left on the mortgage!  Paying down the principle helped.  The house has come a long way since we first moved in:

• Removed all the carpet upstairs and restored the hardwood floors
• Planted a plentiful vegetable garden
• Landscaped the front yard
• Removed carpet on the enclosed porch; cleaned and primed all the walls

These are only a few of the larger projects we have done around in the first year.  Not bad for working full-time on a rotating schedule!

Some of the projects lined up this year include:

• Install a new fence while expanding the flower and vegetable gardens
• Complete the porch by sealing up all leaks, installing electric radiant floor heating, tiling, and possibly a small wood/pellet stove
• Complete the office with furniture and other items.

On another note, I received a letter from my mortgage broker advising me that the escrow is underfunded.  To correct this, I can pay the $604 up front and keep a smaller, almost similar monthly payment.  The other option is to divide the $604 into 12 months to fund the escrow; essentially increasing my payment by roughly $50 per month.  Whether I pay in full or in increments, it all comes out to the same amount in the end.  There are no fees or additional charges if I choose one or the other.  So now the big question: Do I pay it all up front or keep my money and pay more per month?

After talking with a few people, they seem to go with the option of making the larger monthly payments as this gets reevaluated every year.  One person also had an experience where he paid it in full, to only have it all returned one year later.  This was because they over-projected the taxes and insurance.

Since I over allocate for my mortgage every month, this increase will not affect my current goals.  So I’ve decided I will be paying the increased mortgage payment, while continuing to pay down the principle.

I set aside biweekly for my mortgage so I can accumulate one additional  payment per year. Over the next year I want to try something new: Take the extra allocated money and make a monthly principal payment while still making one large principal payment every year.  This will allow me to cut my mortgage down even faster.  However, I am having remorse about paying the house down more when I have student loans that I want to pay down quickly.

The emergency fund is probably the most important savings account.  Think of it as self-insurance.  You save for an unforeseeable event: loss of income, furnace goes, or the roof springs a leak.  So how much do you need to keep in an emergency fund?  It all depends on your comfort level and what you are saving for.  You may even want to have different, targeted, emergency funds.  Some people recommend saving for at least 6 months of expenses.  Personally, with everything going on in the world, I would save for at least 12 months of expenses.  This will give you some flexible time to look for another income.

My current emergency fund is for anything at this point in my life.  Once I reach my ultimate goal of $20,000, I will set this account aside and name it the “Loss of Income Fund”.  The $20,000 will keep my current lifestyle afloat for about a year.  I may even open short-term CDs to make some more money rather than letting it sit at a lower interest rate.  To keep my savings on track, I could direct the money a few ways:

• Keep putting money into the “Loss of Income Fund” after I reach my goal
  • Every $1,000 I go over my goal, a 1-year CD gets opened
• Create a new emergency fund targeted towards another goal
  • Maybe an “Emergency Home Repair Fund”?
• Send it to another savings account for non-emergencies
  • Vacation fund
  • Auto fund
• Save more towards my Roth IRA

I also use my emergency fund for when I overspend on my credit card the previous month.  I refuse to maintain a balance on my credit card unless I have no other choice.  Most of the items are unforeseen expenses and this is where it is very nice to have a fund to tap into.

Do you have an emergency fund?  How do you use it?

This is the third in a series of weekly posts titled “How I Did It”.  I’ve been so inconsistent with the weekly postings, I’m not sure that I can call it a weekly series.  The past week has been very unusual with two blizzards and getting stuck overnight at work.  I will try my best to post on a weekly basis. Throughout this series I will be describing my methods of personal finance, frugality, and what it took to get where I am today.

If you’ve read the series from the beginning, you’ll notice that I received my first credit card when I opened my checking and savings accounts.  This was around 2004 when they were giving credit out like free pancakes at the diner.  To recap, my local bank offered me a credit card.  I was hesitant at first and I asked a few of questions that were important to me:

• Is there a monthly/yearly fee associated with this card?
  • No
• Does it cost anything to apply?
  • No
• What’s the benefit of holding this card?
  • Reward Points: 1 point for every dollar spent
• If the card it paid off every month, will I incur a finance charge?
  • Not unless cash advances are made

Once I had the questions answered, I sat and thought about the positives and negatives of holding a credit card.

Positives

• Building a credit history at an early age
• Have it in case of emergencies
• Order items online without too much worry; It’s not linked to my checking account
• Ability to reserve hotels and rental cars without putting a hold on my checking account

Negatives

• I could slip into debt if I did not think about my spending.
• Someone could steal my card number and use it.
• The company could change my terms of agreement at any time.  If I did not pay attention to the changes, it could cost me in fees.

After careful consideration, I decided that the pros outweigh the cons and I went for the credit card.  About a week later the approval letter arrived in the mail.  The credit limit: $500; not too bad since this was my first card and I haven’t held a job for too long.

Using this card responsibly, every month, opened up another door from my local bank.  About two years later, they were offering me another credit card.  After reading their terms and talking with the local representative, I decided to go for it.

The advantage of this card was:

• It was from the same company as my local bank
• It had a better rewards structure
• A higher credit limit

Now I had two credit cards in my name from the same bank.  A few weeks later I understood what their reasoning was.  I received a letter in the mail about how my first credit card company was separating from my local bank.  I believe the local bank wanted to keep me as a customer.

In the end, I am glad I signed up for these credit cards.  It’s been 5 years since my first card and I’ve had a great experience ever since.

By making this small first step, I was able to build my credit history at an early age.  Keep in mind, I always pay my cards off.  It does not make any sense to leave a balance on them.  You’ll never gain back the money in interest payments through a savings account.  If I overspend, I tap into my savings account to pay it off.  Yes it hurts, but it hurts less than owing more money in interest.