Money Archive

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Debt snowflakes

By
mike
– February 20, 2008Posted in: Money

I was replying to Neil’s comment on my recent debt update, and debt snowflakes came into mind, which is related to debt snowballing.

Debt snowballing is where you find an extra amount of money per month and add it to your minimum payment on the lowest debt / highest APR debt you have i.e. your new monthly payment on one of your debts is now the minimum payment of £150, plus your “found” amount of £25 = £175. You continue making the minimum payments on the rest of your debts untill you’ve paid of the £175 a month figure, then you take that £175 a month, roll in into your next debt’s minimum payment (£210 + £175 = £385) and continue paying that. The money you were using on that cleared debt “snowballs” into the next debt, and when that next debt is cleared, roll the £385 into you next debt, and so on. If you’ve only got a couple of debts, bully for you, take that snowball amount and apply it to your mortgage.

Debt snowflakes are the things that make up debt snowballs. These are extra bits of money which you use to pay off your current debt target. You can generate them by selling stuff on ebay, garage sales, charging friends for websites, etc. and then use them to further reduce your debt. They are far better explained by Get Rich Slowly’s post on debt snowflakes, which is were I became aware about them.

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Money update 1

By
mike
– February 16, 2008Posted in: Money, Personal

As previously mentioned, I’m posting my progress on paying down my debts and building up my savings. Thanks to saving 10% of my income a month, i.e. paying myself first, I have some savings – duh.

Total Savings: 19.85% of monthly income (will increase)

Total Debt: 10.32 x monthly income (will decrease)

I know it looks like the my total debt has shot up from last time (it was 5.67), but I did not include my car loan in the previous figure, which I really should.

With Mervyn King (governor of the Bank Of England) predicting the standard of living will fall, it makes sense to tighten the belts and get some savings behind me – as should we all.

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The 10% rule done right; or, an epiphany

By
mike
– December 13, 2007Posted in: Money, Personal

It was not so long ago that I wrote about the 10% rule, as contained in the book The Richest Man in Babylon. Thanks to some French lorry driver writing off my car, I’ve been travelling to work on the bus, which gives me ample time to read. I picked up the book again for a quick re-read (it’s a short book).

In short, I’ve had a life-changing experience.

I’m 36, and to be brutally frank, have not got a penny to my name. No savings whatsoever, and a fair amount of non-mortgage debt. I am very disappointed with myself over this state of affairs. After reading the book again, I realised that I had made many of the classic mistakes over my life: delaying saving for instant gratification and living beyond my means.

I had started the 10% rule when I wrote the post, but a series of purchases were made that should have been avoided, adding to my debt. Stupidly, I stopped saving the 10% in order to throw the money at the debt. The obvious side-effect of this is that I did not have any savings any more, or the ability to save money. By using my capital, I have seriously depleted my “production capacity” for making more money (“product”) via the power of compound interest. You can read more about Product / Production Capacity in Stephen R. Covey’s The 7 Habits of Highly Effective People, and I’ll be writing about compound interest soon.

After receiving this epiphany (aka “smack upside the head”), I realised I would never have any savings unless I truly committed to the 10% rule (the book is also very big on commitment to a task). That very day, I re-instated my ISA Tracker direct debits and set up a new cash ISA. Between these two accounts, I will be saving 10% of my income. Both direct debits start on the 1st of January 2008, and by the 31st of December 2008, I will over the equivalent of one month’s salary saved. I know it doesn’t sound much, but it is a start. Bear in mind that this is only from 10% of my salary. As my debts decrease (a simple, steady payment plan is in place), the money available to save will increase.

As I said, it’s a life-changing experience. I have come to this realisation due to my age (i.e. realising I won’t have much to fall back on), and what I believe will be the coming credit crunch. Basically, I am trying to get my financial affairs in order and provide a strong financial role model to my son. I have already started explaining to him how interest works and I’m paying him interest on his pocket money at certain levels (£10, £15, etc) to give him an incentive not to spend it as soon as he gets it – like I used to.

What galls me is I have given this simple advice to people many times in the past, yet have not had the will required to do it myself – but no longer. To assist me in this, I’ll be periodically posting my progress in building my savings up and paying my debts down. I’ll be displaying my amount in savings and level of debt in relation to my monthly income. I appreciate that what I’m doing here is very personal, but it’s also for my benefit as well.

Total Savings: 0% of monthly income (this will increase)

Total Debt: 5.67 x monthly income (this will decrease)

So, in short, save 10% of your income (with the required will) – and buy and read this book:

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A quick money tip – the 10% rule

By
mike
– August 2, 2007Posted in: Money

One of the most important things that The Richest Man in Babylon taught me was to put away 10% of your income.

With online banking making financial transactions easy, it is simple to set up a regular transfer to save that 10% into a high-interest, 30 day (or more) notice account as suggested by David Bach in The Automatic Millionaire. Having the money out of your account on the day after you get paid is quite useful, you’ll hardly miss it and you won’t have to scratch around to find it towards the end of the month, with all the associated guilt that would entail.

However, if you can’t manage 10%, even 5% is better than 0%, right? Make a commitment to start saving automatically, and for the long term, as that’s where serious gains are made, thanks to compound interest (but more on that in a later post).

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My favourite joke about money

By
mike
– July 17, 2007Posted in: Money

Little Timmy walks down the wooden tiled hall, past the marble statues of his great aunts and uncles, through the great hall, through the library and into the study, where his grandfather is reading the Financial Times.

“Grandad, how did we become so wealthy?” he asks.

Folding his newspaper, Grandad replied, “Well Timmy, there’s a good story. When I was a little boy, my father gave me an apple for lunch. Rather than eat it for lunch, I spent all day polishing it and when the men came out of the local factory at the end of the day, I sold the apple for 10 pence.”

Grandad continued, “With that 10 pence, I bought two apples, and spent the next day polishing them, making them look as appetising as possible. At the end of day, at the local factory again, I sold both apples for 10 pence each. The next day, my grandmother died and left me all her money.”

:-)

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