Beating Broke

Personal Finance from the Broke Perspective

Opportunity Cost is Bull

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That’s right.  Bull.  All these experts go on and on about calculating the opportunity cost of something and adding that in to your cost analysis when deciding whether you should do something yourself, or hire it out.  Heck, even I have used it before.  But, we’ve all taken it way too far.

Let me ask you this; What is your opportunity cost of reading this post?  Of eating your breakfast this morning?  Not relevant?  Bull, again.  We use it to determine if we should keep cable T.V.  We use it to determine the added cost of our daily commute.  Personally, I’ve used it to validate paying people to do all sorts of things.  Mechanics?  The cost of doing it myself is too great, let them replace those brakes!  Plumbers? I hate doing plumbing.  Let them fix that leak!  We’ve become so obsessed with being frugal and pinching our pennies that we figure out the cost of everything that we do.  If the cost is too high, we should avoid doing it, or do it ourselves, our mantra goes.  But, that isn’t always true! Sometimes, it’s just straight up bull.

We all want to improve our finances.  That’s why we do those calculations.  It’s simple mathematics.  The problem with opportunity cost, however, is that most people assume a 100% efficiency.  I hate to be the one to break it to you, but there is nothing that is 100% efficient.  Not you, me, or anything ever created.  There’s gonna be some loss.  So, yes, I can figure the opportunity cost of my time.  But, it depends on my using that time to be efficiently working on something that will make me money.  The opportunity cost of my time at work is about $25/hour.  But, that doesn’t mean that every hour I sit at home watching T.V. has an opportunity cost of $25/hour.  I can’t stop watching T.V. and replace that time with paid time for work.  They don’t like paying overtime.  Plus, I’m paid on salary, so every extra hour I work at work, reduces the effective hourly pay.  Did you catch that?  Every hour over 40 hours a week that I work reduces my efficiency to earn money.  If I were paid hourly, that might be slightly different.  But, I’d be willing to bet, my employer would still have an aversion to paying overtime and would not allow me to work many more hours over 40.

If you’ve got side projects, like I do, there is a opportunity cost for every hour that I’m not working on them.  Some side projects are extremely easy to figure the cost of.  If I contract out my work on an hourly basis, my cost (for every hour I’m not working that project) is that hourly rate.  But, just like my job, I can’t be 100% efficient at my side project either.  I’ve got to sleep sometime.  (Egads!!!  The opportunity cost of sleep!!!)

The point is this; If you’re going to try and figure the opportunity cost in order to validate a decision, don’t do it blindly.  Realize that you won’t be 100% efficient.  Just because you disconnect the cable T.V. doesn’t mean you’re going to replace all that T.V. watching time with efficient money making time.  Some of it might be spent reading a book.  Or playing with kids.  Or napping. 😉  Each of those may have some benefit to you, but they really don’t have much place in a financial cost analysis.  Sorry, you can’t bill your kids for playtime!

The personal finance world is full of stuff like this.  Mantras and rules-of-thumb that we use like crutches to validate and justify why we do what we do.  It’s like an addiction.  If you truly want to take control of your finances and live a better life, you’ve got to discard those addictions like you would a pack of smokes and begin to analyze what you do with a critical view.  Nothing is worth using in your finances until you’ve tested and proven that it is.

photo credit: zogh

The Scales of Finance

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IMG_2394Not to be confused with the scales that our friend Lady Justice carries around with her everywhere, the scales of finance are a bit different in function.  To truly weigh something, using a scale, you load up one side of the scale with that which you want to weigh and then put weights of a known mass on the other side.  When the scale is balanced, you count up the known mass weights and you’ve got the weight of the item(s) on the other side.  Lady Justice, as the story goes, does this by weighing a persons crimes and adding the appropriate amount of punishment to the other side so that the Scales of Justice balance.

When we think about personal finance, there are those that are die-hard frugalers.  There is no other way to save money, retire comfortably, or live, than by being frugal.  The more frugal you are, the more you save, and the less you spend.  Coupons are their best friends, as are black friday deals and places like farmers markets and flea markets.

There are also those that are the die-hard incomers.  Skipping a latte isn’t for them.  The only way to get ahead is to make more money while not spending any more.  They’ll work three jobs to achieve levels of income that were previously unheard of and use that added income to pay off debt and save for retirement.

But, much like justice, the scale can pretty easily be tipped into unbalance.  Frugaling, while a good idea, can only take you so far.  Income increasing can only take you so far.  Eventually, you’ll need to make a bit more money, or work less.  The right way to do it is to strike a balance between the two.  Cut your costs as much as you can, without going to extremes.  Increase your income as much as you can, without going to extremes.  Find a place where you can balance your financial life while still getting to live life and not be classified as a cheapskate work-a-holic.

 

 

 

 

Balancing the Scales of Finance

  • Create a budget. Know where your money is going (even if it’s going down the drain), and plan where you want it to go.
  • Cut costs. A little bit of frugal living isn’t going to hurt you.  Drop cable T.V.  You can replace it with Netflix, or books.  Find other things that you can do without completely or cut usage of.
  • Analyze your finances. Use your budget to determine the inflow/outflow of your finances.  How long to payoff your debts?  Could it be accelerated greatly by taking on a second job?  Maybe you only need a second job for 6 months to pay off a credit card.
  • Increase your income. There are other ways, besides taking on extra jobs, to increase your income.  Prepare for, and then ask for a raise.  Sell off stuff you no longer use.  Find a way to get paid for hobbies you already do.
  • Don’t over-do it. Maintain focus on your end goal, but keep your sacrifices to a bearable level.  All that extra income won’t do you any good if you burn out in 3 months because you’ve been working 80 hour weeks.  And all the frugal in the world won’t do you any good if you burn out in 3 months because you’ve been manually separating the plys on your TP.

Don’t think that just because you do all of this once, that you’ll remain in balance forever either.  At first, you will probably benefit from regular weekly or bi-weekly check-ups.  As you get more comfortable with it all, you might be able to do it once a month.  Much more infrequent than that and you’ll lose your focus and begin letting things slip.  If that happens, pick up where you left off and continue on.

As you continue on, the Scales of Finance will become easier to balance.  You’ll become better at it, and the scales will gain a little extra margin for error.  It may seem hard now, but it does get easier.  And, believe it or not, it can be fun.

Photo credit: Thatedeguy on Flickr

Interview with Debt Free for Life Author, David Bach

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Recently, I got the chance to review David Bachs new book, “Debt Free for Life” (Look for the review coming up on Yakezie.com!). David was kind enough to answer a few questions that I send to him. Some great stuff in there as well! Here’s the interview:

BB: Most of your previous books seem to be aimed towards people who, while likely in debt, just need a bit of a push in the right direction. Debt Free for Life, however, seems to be aimed more at people who are deep in debt and spiraling out of control. Is that what you intended? If so, what made you decide to move in that direction?

David:

For over two years I have been a weekly contributor on NBC’s Today Money 911 segment, where viewers ask me live financial questions. These questions used to be primarily focused on investment and wealth building; however, over the months I noticed that debt related questions started to dominate the segment week after week. I was also getting tons of debt questions from people on my website (www.finishrich.com ) and on my Facebook page (www.facebook.com/davidbach ). So, I decided to write Debt Free For Life as a guide intended for anyone who has debt and wants to get out—fast!

It offers an honest plan that will work—if you work it. I know some people are picking up my book because they are really drowning in debt and are looking for a life preserver. I believe this book can be the life raft that gets those people back to dry land. But let me be clear: you don’t need to be in over your head to benefit from my book. The truth is when you’re in debt; it doesn’t matter if you owe $1,000 or $100,000. I believe all debt is bad debt if you don’t have an action plan to pay if off. Debt Free For Life is about a totally new approach to building financial freedom that stresses “paying down your debt” so you can take control of your financial life. I teach my readers a revolutionary new system that makes paying off your debt easier than it ever has been—no matter how much you owe!

BB: You spend a good deal of the book talking about subjects like debt settlement, time-barred debt, and bankruptcy.  Those are topics that seem to be frowned upon by many of the mainstream personal finance folks. Were you afraid, while writing and publishing the book, that those same personal finance people would chastise you for bringing the subjects up?

David:

No, I wasn’t afraid to bring up those subjects. People should be educated about the good, the bad and the ugly of personal finances –each person’s situation is different – so it’s imperative to provide the readers with all the options, information, and tools possible so that they can make the right decision based on their own personal financial position. I think a lot of times people can get themselves into these sticky financial situations by being undereducated and misinformed about what options are available to them.

Time-barred debt, debt settlement and bankruptcy are all options that can be considered depending on your financial situation but you will need to take a very close look at your finances and you may be required to seek a professional in order to choose one of these options.  With time-barred debt, you need to consult an attorney before taking any action, but yes, I do believe that you’re entitled to use your legal rights in that regard to get out of debt and get back on your feet financially. Time barred debt is basically the equivalent of the statute of limitations in regards to your finances and debts.

As for debt settlement you can usually use the rule of thumb – if it sounds too good to be true—it probably is too good to be true.  I would never let anyone I love go that route– but there are a few narrow circumstances where it might make sense, which I detail in Debt Free For Life – if you are thinking about a debt settlement company make sure you check all your options and check them out with the Better Business Bureau.

Finally, there is Bankruptcy. Bankruptcies reached 1.5 million in 2010, the highest in five years.  With so many people who are drowning in debt and turning to bankruptcy I thought it was necessary to include a chapter explaining how it works, when to use it and how long it will take to recover. When it comes to bankruptcy, I always stress that you get professional financial and legal advice first, and to think of it as a temporary solution to a temporary problem – it doesn’t excuse you from making real changes in your life so you’re never in that situation again. But you need to know that filing bankruptcy is also not the end of your financial life. Let me stress—if you think that bankruptcy may be in your near future make sure that you don’t wait too long – act now and read Debt Free For Life!

BB: What further advice, that isn’t included in the book, would you give to a reader about to read the book?

David:

I would say if you are serious about getting out of debt and staying out of debt you should build a support team of your friends and family. Have them know what you are doing, see if they will join you in your pledge to a debt free life and use them as a support system. One of my favorite success stories is of a woman by the name of Genevieve – who has a “DOLP Team” at work that keep each other on track during their journey toward financial freedom – they pick each other up when they fall down, they work together and share their progress.

To provide further support for people on their journey toward financial freedom I encourage anyone in debt to join my Debt Free Challenge at debtfreechallenge.com. Challenge participants will be automatically entered to win $10,000 toward paying off their debts. Joining the challenge will help you commit to a debt-free life and stay motivated with free information and a community of support from others pledging to pay off their debts. Finally, you can join my Facebook community at www.facebook.com/davidbach – here you can share your accomplishments, ask questions, and speak to like minded individuals.

BB: What do you feel is the current state of personal finance?  (By that I mean, do you feel that people as a whole are moving in the right direction when it comes to their finances, or are we still stuck in a bit of a quagmire?)

David:

The truth is millions of Americans are buried in debt and want out! There is a movement in this country right now to pay down debt and save money. Savings rates are up to 6%, the highest in two decades, and debt levels are falling. One credit bureau estimates that more than 45 million people (or roughly one out of every five Americans with a credit score) want to improve their financial well being through debt reduction. Furthermore, according to creditcards.com almost $200 billion of credit card debt was paid off last year – so I think that people are starting to see the light about getting their personal finances under control – starting with paying off their debt.

People are ready to take action—smart action—that will help you become financially free and secure. And this is why I have written Debt Free For Life to give people new ideas and tools to help them be smarter about their money and their debt. The best system I’ve found for that is Debt Wise, which is an online tool that automatically pulls debt information from your Equifax credit report and uses it to create a priority debt payment plan while simultaneously tracking your progress towards debt freedom.  This online program basically does what I have taught for years as the “DOLP method” and does it automatically for you.  To get you started Equifax is offering a FREE trial of Debt Wise that so you can see how it will save you time and money while helping you pay down your debt.

I think that people have a lot of good intentions when it comes to their personal finances, but they still struggle with debt and don’t know how to start tackling it. Equifax, just released a report listing the top metro areas in the country hardest hit by credit card debt, and in many places, the percent of household income going to credit cards is more than 15 percent – and that doesn’t include car payments, mortgage payments, etc.  People are getting tired of the routine of going work, making money, spending money, going to work, making money, spending money. It’s time to free yourself from this vicious cycle by taking control of your finances.  I would encourage people to take a good, honest look at what their share of debt is and then make a plan of action for paying that debt down.

BB: Finally, what advice would you give to personal finance bloggers like myself?
David:

Be an advocate for your readers – they look to you for financial advice, so treat them as you would your best friend when dispensing advice. Act with integrity and don’t hesitate to tell the truth about personal finance topics, even ones that seem controversial. And always be responsible in how you present different subjects, being sure to fact-check and look at both sides of the issue first, but have an opinion. The more you care about your readers the more they will care about what you write and share.

I also just want to say thank you for taking the time to my book read and ask me these questions.  I really appreciate the support and the opportunity to help inform your readers!

My thanks to David for taking the time out of his very busy schedule to answer my questions. Again, I’ve got a review of the “Debt Free For Life” book coming up on Yakezie.com.  (I’ll link it when it goes live!) If you’d like to give the Equifax Debt Wise system a try (I’ll have a review coming up) I was able to secure a free trial for my readers.  If you go to http://www.debtwise.com/beatingbroke, you can sign up and give it a spin for free.  At the end of the free trial, you will be charged, so make sure that you cancel before the free trial expires!