Recession and Revised Plans

Last year I posted about an extremely ambitious personal finance plan that my husband and I took on in July. We wanted to pay down the principle on our mortgage by an additional $50,000 - above and beyond the paydown we'd see with just our normal monthly payments - over the following 12 months.

Well, that was before it was generally known that the US had entered a recession in December of 2007. Despite the downturn in the economy, we did very well with our goal up until the beginning of 2009. We have not reached it, and as of January, we decided to change tactics and put that goal on hold. You see, right now it looks as though my husband will be out of a job at the end of June.

By any middle-class measure, he's very well compensated for what he does. But he works on a contract basis, and right now it looks somewhat unlikely that his contract will be renewed after June 30th. He had a job offer late last year that appealed to him, and which he intended to accept after June. But that offer evaporated along with the rest of the economy several weeks ago.

Having no debt other than our mortgage, and having built a cash emergency savings to cover six months of expenses, we're situated as well as can be expected to weather a period of unemployment for the main breadwinner in our household. I've been more diligent about doing the various things I do to earn money. And we can be fairly sure we won't go hungry any time soon, given the garden I have all planned out for this year. Still, it's a scary thing to contemplate: losing our income.

Right now we still have almost four months of continued income to count on, and that much time for him to look for other job opportunities, hustle for an extension of his contract, and hope that the economy recovers somewhat. In February I canceled the additional principle payments that we were making automatically each month along with our normal monthly payment. That money will buffer our cash savings for the next four months. If my husband finds another job by June, we'll be able to take that money and apply it to our mortgage as a lump sum payment. If not, well, we'll be using it for necessities.

My plan right now is to either refinance or recast our mortgage in early May if my husband has not secured another job. That will lower our required mortgage payment and let us live longer on our emergency fund. If our finances pick up again, nothing would prevent us from resuming automatic additional principle payments each month, though less of our required monthly payment would be applied to the principle. Still, if we lose our main income, that's a price worth paying.

On the other hand, we are also considering a major expenditure that's not, strictly speaking, a requirement. We've asked for estimates for a solar PV and solar thermal installation that would cut our heating bills down to almost nothing. I have no idea what those estimates are going to look like. Before we would pay out money for that, we'd also have our home evaluated for additional insulation needs.

This may sound paradoxical: that we're contemplating a significant discretionary expense when we anticipate the need to live on our savings. We see it this way though; if the economy remains so weak that my husband cannot find a decent job, we want to be able to heat our house next winter without spending much money. Heating is a major expense in our annual budget, and since we heat with oil, that expense is perilously tied to shrinking supplies of fossil fuel. I'm also concerned about the possibility of hyper-inflation. If that occurred, not only would the value of our cash savings be less, but the cost of oil and electricity might easily become prohibitively expensive. Finally, we reckon that a home with solar electricity generation and low heating costs will hold its value better than many other homes. In other words, it looks like a smart investment to us right now.

We've yet to see the estimates for such an installation, so we don't know whether we'll take that plunge. But it's on the table. And if the price is right we may be able to pay for it with a bonus we're expecting based on last year's performance by the company my husband works for. (For the record, that company is not in the financial/banking sector, nor anywhere near it.)

The smaller amounts of money from my earnings that were occasionally applied to our principle are also accumulating rather than being paid out. But part of these funds are being set aside in my mind for spending as well. Mind you, I'm not planning on any frivolous purchases, but I would like to invest in some items that will be of long-term value to us, no matter what happens with the economy. I figure some responsible spending won't be amiss in these tough times either. On my list of things to buy are some extra sets of long underwear for both of us during the coming spring sales, a solar oven, some solar lanterns, and some materials to build housing for some meat rabbits, and to modify our mobile chicken coop this spring. If there's money left after that, I'll buy another 50-pound bag of bread flour, though I'm almost afraid to know what the price has risen to. Basically, I'm looking to put about $500 into things that will hold their value and pay dividends for our budget year after year.

If we are somehow able to squeak through this year without a loss of income - and that's a big if - I would like to start another savings fund for an electric assist bicycle. I understand that these are quite expensive. But I know that sooner or later we are going to have to confront the end of affordable gasoline. A bicycle was my transportation for many years out of necessity, and therefore I've never regarded cycling as recreation, as my husband does. We live in a quite hilly area, and it's more than three miles to reach the nearest spot where we could grocery shop or fill a prescription. The bulk food store is 17 miles away along the flattest route. There is very, very little public transportation in our area, and none right now that would get us to the places we shop. It would be faster for me to walk to the nearest grocery store than to take a bus, and I'd still have to walk most of the route anyway. So far, an electric assist bike is the best transportation solution I've been able to think of to the end of cheap petroleum, and it wouldn't be much fun, or even manageable, on many winter days.

Well, that's where we're at in this recession. I'm not feeling sorry for us; I know we're better situated than many. Still, like everyone else, we are feeling the anxiety. My heart really goes out to those who are already dealing with job losses and financial disaster. If you're not yet in crisis, please think about spending wisely where you are able to do so. Remember that food banks and other charities are stretched incredibly thin right now. If you can afford it, check that box to add a few dollars to your utility bill payment to keep someone else's electricity from being shut off. Plant your garden this year, and share what you can. We're in for more tough times ahead.

We Love Our Credit Card

This month our USAA credit card distributed our annual cash back rebate. It came to $478.40. That's a very nice chunk of change that falls like a gift out of the sky. We charge most of our expenses on our credit card, and pay it off in full every month. Additionally, my husband charged tens of thousands of dollars of business travel expenses on the card last year, all of which he was reimbursed for. We get a tiny portion of those charges kicked back to us in by way of this rebate. The card has no annual fee, and right now the APR is only 4%. I had to look this up because I never pay any attention to the APR. Not having to think about the APR is a nice perk of paying off our balance each month.

January is a nice time to get a little extra cash. Some might use it to pay off holiday gift purchases. Others (*cough*) might stuff it into their heating oil tanks. It's less than a 1% rebate for all the charges we made with the card, but given that the card doesn't cost us a penny to carry and use, I don't see any downside. We likely won't get anywhere near this much back next year since my husband will be traveling much less for business.

Now USAA offers credit cards and other financial services only to its membership. You become eligible for membership through military service in the US, or by being the child or spouse of a member. Obviously, this is means a lot of people are not eligible. But if you are eligible, you'd be crazy not to avail yourself of this fantastic resource. USAA offers the best customer service I've experienced from any business, ever. But there are other cash back credit cards out there.

Credit cards, like any other tool, can be used or abused. When your financial house is in order, it's possible to make this tool truly work for you. Even if we had missed paying our bill on time once or twice during the year, and incurred some interest, plus late fees, we still would still have come out ahead with this cash back card. On the other hand, if we were carrying a large balance month after month, the $478 rebate would quickly get eaten up in fees, even at the very low APR of just 4%.

If your finances are in good shape and you trust yourself not to rack up a balance you can't pay off, I recommend looking for a good cash back card with no annual fee. So long as you pay your bill on time and in full each month, you'll see a nice rebate once a year. It's sort of like getting a tiny discount on everything you pay for by using your card. And if you're doing a lot of reimbursed business travel you should definitely get a little something back, besides useless frequent flyer miles, for all those nights away from home.

Using the Numbers for Motivation

Sticking with frugality sometimes gets a little wearisome. Whether it's trying to live or eat on a small budget, or trying to come up with money to pay down debts, living frugally is a long term game for most of us. I think I have it easier than most people who are drawn to read or write about frugality, but I still look for ways to keep myself motivated. I'm really not a math buff at all, but I have found ways of using numbers to motivate myself.

Recently I've seen several personal finance bloggers who freely share monthly updates on their personal net worth, or their debt load, or both. I think this is brave of them, but from my perspective it can be a little dangerous for their readers. The temptation, of course, is for the reader to compare their net worth, or debt load to the the blogger's reported figures. This can take them down two equally detrimental paths. Either the reader is better off than the blogger, and feels a little smug; or the reader is in much worse shape financially than the blogger, and feels depressed or hopeless about his or her situation, and possibly envious of the blogger. Neither of these reactions is useful for the reader who wants to maintain a frugal lifestyle. In my experience, comparing one's own financial situation to someone else's is rarely profitable.

On the other hand, the benefits to the blogger are obvious. Making a practice of posting a monthly or quarterly update on your own finances is a good discipline that will, one hopes, keep you honest with yourself. The key difference here is that the bloggers are comparing their current financial state to their own previous financial states. Comparing yourself to yourself is extremely useful as it lets you track progress and can provide plenty of motivation. Monitoring your finances in this way also makes it much easier to set a series of short term goals, increasing your chances of reaching your overall goal sooner.

But I'm going to take the argument one step farther than that. If your finances are such that your assets include stocks, your net worth is subject to the rise and fall of the stock market. And there's almost nothing that you can do about that other than invest as wisely as you can. So my suggestion is to watch that number, but largely ignore it for the purposes of a monthly or quarterly calculation. Leave it out of your calculations altogether. Instead, focus on your total debt. That's the number that you have the most direct control over. If you're living within your means and practicing frugality, that number should, barring something like a house purchase, always go down. The lower the number, the better you should feel.

If your income and living expenses are relatively stable, over time the month-to-month reductions in your debt should get larger and larger. I remember when I was in my early twenties and I decided to get out of credit card debt that I actually looked forward to making my monthly payments. Because it meant that my balance was going down, and that next month I'd be racking up less owed in interest. I feel the same way now about our mortgage. I feel good when I'm able to scrounge up a few extra dollars to send off to our lender, no matter how small the amount. Getting to nothing owed on my credit cards felt FANTASTIC. I think it'll feel even better when we get to that point on our mortgage.

So set up a simple spreadsheet for yourself, and create a graph that shows your total debt going down, down, down. When you feel like you've had it up to your eyeballs with frugality, or when you look ahead and see only years of obligatory financial discipline in your life, turn back to that graph and think about the progress you've already made. Your actions, and efforts, and way of thinking about money have already made that much of a difference. Each payment you make cuts down on the interest you'll pay in the future. Remind yourself that steady progress is real progress.

For extra motivation, run some additional calculations. Keep a separate graph of the amount of interest you're charged each month. Or see how much more of your standard payment is being applied to principle from month to month. You can watch those numbers shrink or grow for extra cheer.

Scrounging Money Around the House

For me frugality is a means to an extra principle payment on the loan we have for our vacant land where we plan to build a log home for our retirement. This mortgage has the higher interest rate of our two loans, and it's the property that means the most to us. So every nickel I scrape up is earmarked for that purpose. The extra principle payment is why I don't drive my car more than a couple times per week; why I keep the thermostat set at 64 during the day; why I'm selling our extra stuff on ebay, and looking for any possible way to cut expenses.

Recently, I discovered a bag of money just sitting in our home office. It contained not American greenbacks, but a large variety of foreign coins and bills we'd collected over our pre-mortgage years of vigorously decadent travel. I opened it up and sorted through the bills, some of which were for obsolete European currencies replaced by the euro. There were Australian dollars, Hong Kong dollars, Iranian rials, Estonian kroner, Finnish marks, Venezuelan Bolivars, New Zealand dollars, Russian rubles, Swedish kroner, British pounds, Irish pounds and Italian lira. I didn't even bother trying to sort the coins.

After sorting through the paper money, I called up my wonderful bank, USAA, and asked about depositing foreign currency in my account. They said they'd take everything but the Iranian rials and the expired European currencies: the lira, Irish pounds and Finnish marks. Best of all, they wouldn't charge me a currency conversion fee. Yet another reason why I love USAA! Running a few quick calculations on the exchange rates, I estimated that I'd just scrounged up around $250 towards next month's extra principle payment. That felt great! It may be a drop in the bucket, but it all adds up.

I was a little sorry to see the Estonian currency go. It's among the prettiest I came across in my travels. And also a little disappointed that we'd hung on to the old European currencies long enough for them to be worthless today. I have no ideas about how to cash in foreign coins. I'd probably do it if there was a somewhat easy way. In the meanwhile, the coins are fun for my nephew to play with, and they're nice mementos of our travels. We might see about selling the Iranian rials to some Persian acquaintances of ours who occasionally travel back to that wonderful country. We'll keep at least one 10,000 rial note as a souvenir. The rest would only be worth around $9 anyway.

At some point, I'll tell you about USAA and why you should definitely do business with them if you're eligible.