image credit: freedigitalphotos.net

Ouch. Ouch. Ouch. That’s about all I can say.  I’ve been absent here at DebtKid for a while. The story begins this way…perhaps as a result of an old injury, or lifting something, I managed to somehow critically damage a disk in my back.

If you’ve never experienced it before, it is perhaps the most excruciating pain I’ve ever experienced.

Co-pays are rolling in…. MRI, CAT-scan, acupuncture (great for pain control by the way), prescriptions and several months of physical therapy. It’s like the budgetary equivalent of death by paper cuts.  Add to that, our oldest daughter had a terrible and mysterious stomach ailment resulting in hospitalization and more co-pays. Daughter #2 still needs those fillings too, a $500 dental co-pay expected soon.

It pretty much wiped out our get-out-of-debt progress for August and the conceivable future.

Due to the back pain and the heavy medication I was unable to work for six weeks, so there’s no cash flow for this month from my two small businesses (again, thankful for my husband’s job!)

Like the proverbial silver lining, from every crisis we can draw a lesson. One thing that I know about myself is that I learn best while uncomfortable (financially, socially or physically, it doesn’t matter… I learn if I’m uncomfortable).

Here’s what I’ve learned so far:

Have an emergency fund

Minimum $1,000.  My CAT-scan was $5,000 with a co-pay (even under my excellent insurance) was $300. That was for the machine itself. Later I got bills for materials, and the radiologist who read the scan. Medical bills go to collections faster than many other bills, so plan to pay them.

Have health insurance

Six years ago I had a very unexpected open-heart surgery. The bills amounted to over $500,000, my co-pays were under $5,000. Our current health insurance plan, while having hefty co-pays does max out at $2,000 per family member per year, so a max of $8,000 in medical bills per year for all of us. Hmm…. $8,000 a year, or $500,000+.  Insurance may be one of your largest household expenses, but even if you are young and healthy like our family (all nonsmoking  generally healthy people under 30 years old) emergencies happen.  You can’t leave yourself in the position of choosing between critical medical care and bankrupting your family.

Take care of yourself

As it turns out, my back injury could have been prevented with a better core-strengthening program—or just re-conditioning after my open-heart surgery.  Had I made an effort at getting my body back in shape and strengthening my muscles, I would have likely saved myself all of this pain, expense and down-time.

Learn how to negotiate with medical providers

They are in business too, and ultimately want to get paid! They will wheel and deal a bit if they think they need to.  Communicate with providers about their invoices.  If you can’t pay it now, call and tell them when you will pay it, and they won’t be so quick to shuttle it off to a collections agency. Better yet, be proactive, call up and ask for a “deal” to pay early, or see if your provider is registered with PaymentClinic (www.paymentclinic.com) as you may be able to arrange for an early payment incentive (lower fee).

Be a patient patient

Better to be alive and well in debt than dead or in misery, right?  This too shall pass. One foot in front of the other.  Follow the steps above and be diligent. Prevent what you can, and properly treat what you can’t. The bright light is that this time I’ve dodged the bullet on surgery which would mean many more weeks without work. Physical therapy is teaching me how to tone up muscles that will prevent future back injuries, and help me to get in shape without causing other injuries–the key to this, just like getting out of debt, will be to stick to the plan.

First off…marriage is awesome. I love living with my wife, and we are a fantastic team.

But marriage has brought me that I wasn’t expecting: more time.

Before I got hitched I would always have to drive home somewhere in the evening, and so most often our nights ended around 9pm or earlier. Now living together, my wife and I are getting lots more time together (mornings, late evenings, lunches, etc).

Need Some Frugal Time Killers

It’s great, but I think I need some hobbies!

For the past 4 years, any spare second I had that I wasn’t spending with my now wife was spent either: working, or working. Even when I would watch a tv show, I was usually working at the same time.

I’ve started playing basketball at my gym quite a bit, but I only want to play maybe 2-3 times a week.

I need some frugal hobbies that take up time that I would enjoy. These could be either things I do on my own or with my wife. I really need a mix of both.

About.com has a list of 8 Frugal Hobbies, but most are pretty domestic and one, Reading, I already do a lot of. I just finished, “Enders Game” (a book I had heard about for ages, loved it!) and am currently reading, “Tipping Point”. So, I’m good there. Photography could be something, but everyones “a photographer”…maybe I could get back into making videos. I’ve always enjoyed that.

Jim at Bargaineering has a nice list of 10 frugal hobbies. I already blog, play basketball, and hike. Geocaching could be fun, but I’d need to get a GPS, although I wonder if an iPhone would work. There is a good thread here on Saving Advice with some good ideas. Maybe a class at the local community college? That could be fun.

Top Ideas

OK, after researching a bit, here’s my top picks

• Classes at a local YMCA or Community College (I’ve always wanted to learn to program and do real web design work)
• Acting Classes (not sure if this would be frugal) or something like Toastmasters (again, not sure if could be frugal)
• Digital Photography (maybe try taking a class first) or Digital Filmmaking (I love movies)
• ????

What Are Your Frugal Hobbies?

What hobbies do you have that are fun and cheap?

A while back I did a post about the death of the “high yield savings account“.

Now, over a year later, rates are only lower.

Yep, the days of a 4-5% yield for an online savings account are gone. But will they ever return?

Not any time soon, say most economists.

2010 has been a year of massive withdrawals by investors from equities (stocks) and into more conservative investments (bonds, treasuries, CD’s, etc).

And it’s a simple law of supply and demand. There is lots of supply of money going into these lower yielding investments, which in turn, drives yields even lower.

So don’t expect to see rates on savings accounts up anytime soon. The fed plans to keep interest rates low for the foreseeable future. They see any interest rate hike as a potential knock-out blow to any type of recovery we might get here in the US.

As for me, I am still keeping a good chunk of my savings in online savings accounts and away from stocks. I still don’t see myself investing heavily, if at all, in the stock market anytime soon, give my past with the darn thing.

Are you moving money into lower risk investments? Have you this year?

The past few years, with “this economy” and all, have given rise to more and more talk about a formally very taboo topic:

Money.

But, what still seems pretty taboo, at least in my social circle, is talk about debt.

Student loans are a common gripe from 20-somethings my age, but beyond that, I’ve never had more than a few sentence conversion about credit cards, or other “bad debt”.

Except of course when someone whips out their “rewards credit card” at a dinner and explains,

“I get like 1% cashback at XYZ store”

To which I always try to hide my thoughts. I know responsible people can use rewards cards well, but for alot of people, it just gets them into trouble. And since we don’t talk about debt much, I never know with people which way they use their credit cards.

I think my own journey out of debt is something I’m going to start sharing more with some of my friends. Very few people outside my wife and immediately family know anything about my past debt issues or trading addiction.

I think I am getting to a point now where I can talk about my trading addition and now get too upset at myself about it. And I think that will help me in explaining my history to my friends.

Anywho, if I do tell any of my friends over the next few weeks, I will for sure report their reactions!

How Open Are You About Any Debt?

That being said, how open are you about your debt with your friends & family?

A friend of mine was considering buying a used luxury vehicle (3-4 years old), and while it’s not a car I would ever buy, it fits his personality.

However, he is thinking of now buying new because,

“The interest rate on a new car is a lot lower, 1.9% vs 4 or 5%”

Now, my friend is one of the smartest people I know…but this is just terrible logic, right?

On a $40,000 loan, a 2 or 3% rate difference isn’t going to make a dent in even just the first year of depreciation on a new car.

I know if I ask for advice, everyone is going to scream, “Stupid! Go for the used car”….

but,

Are there ever any reasons to buy a new car? (I can think of a few…mostly not financial though!

Why so much money?

Well, it was just sitting in a savings account earning less than 2%, and I need to diversify my investments a little, but I’m not ready to go back into the stock market yet. I realize there is risk involved with holding a personal loan portfolio, but I’ve met the Lending Club team, and I feel confident in their tactics and processes to minimize that risk.

I’m looking now for investments that generate cash, and Lending Club fits that bill.

Setting up my Lending Club PRIME account

I didn’t want to choose dozens of loans on my own, and since Lending Club was waiving the normal .8% PRIME loading fee, I decided to enroll in their PRIME program.

The PRIME program allows Lending Club to invest on my behalf, which is exactly what I’m looking for. I want a hands off, low risk approach to this pretty significant chunk of money.

They were also offering a bonus on deposits, so I took advantage of that : )

Filling out the forms

I talked with Chris, a client analyst, and he sent me over the form (Prime Investment Account Order Form) that allows Lending Club to invest on my behalf. I figured there must be something to sign to allow them to pick loans for me.

The form has you specify what interest rate you want to show for (and thus how much risk you want in your loan portfolio). The options were: 11%, 13%, 15%.

I went with the lowest risk option, shooting for a 11% return.

Funding Notes

Once I had faxed the form back, the Lending Club team started investing on my behalf in notes in my risk range, in $250 increments.

The process took about 3-4 weeks to fully complete. I imagine with smaller amounts it would be quicker. Larger amount would probably take a little longer.

3 Months Later…

3 Months into the PRIME program and things are looking very good. It’s very hands off, as new payments come in, and I have cash sitting in my account, it gets auto-reinvested about once a week.

I get an e-mail every time that happens, but I don’t have to do anything myself for that to happen. I think that’s probably the best feature of PRIME accounts, once you’re setup, your investments just run on auto-pilot according to your interest rate selection.

Any Defaults?

So far, not yet. But it’s only been 3 months, and I expect with the sheer number of notes that I have invested in (446 as of today) that I will have a number of defaults. I do have one loan that is in the 15-day late category, but hopefully that will get back to current soon.

Diversifying My Investments

As I look into more investments beyond just a savings account, I’m going to get pretty creative. Lending Club is pretty strait-forward, but it is not conventional by any means. I figure as long as I end up with a 5-6% return, I will be happy. There is just no way to have your money work for you sitting even in a so-called high yield online savings account. The rates are just too low right now.

I still plan on staying away from stock investment for the time being. At some point I may look into some dividend stocks for the cash-flow, but for right now I’m sitting on the sidelines. I was pretty much the worst stock investor ever, so I’m very, very hesitant to ever commit a large amount of money to something that I don’t know and understand inside and out.

Well, It’s official.

I’m married : ).

And it’s awesome. : ) : ) : )

Yes, that was three smileys in a row on a blog.

It’s a strange feeling…sometimes it feels strange, but I’d say 99% of the time, everything feels the same with my now wife, which is great, because we are both very happy.

The past few months have been pretty crazy, lots of wedding planning, moving, living in my Mom’s basement, etc. But now I’m settling in with my wife in Portland, and we just love it.

I honestly thought, when I started this blog back in January of 2007, that there was no way in heck I would be getting married anytime this side of 30 (I’m 27 now).

What, you didn’t think so either? Ha.

Bringing Debt Into Marriage

My wife brought very little debt into our marriage, she had a little chunk of credit card debt that we paid off a few months ago. She is now completely debt free.

As for me…I still have a ways to go, but I’m making great progress. The amount I owe my mother is in the 90K range, and continuing to decline each month. I may be able to pay her off in full by the end of the year, that’s the goal at least.

My car is paid off, all tax debts resolved, no credit card debt. I still have about 32K left on my student loans, but those are pretty low interest rates, and while I may pay them off this year, I may just leave them alone.

The good news about my debt issues, is that my now wife was with me through all of them. She used to come hang out with me when I was living in my office. She would wash her hands with cold water after my heat got shut off in the house I had to short sale.

So none of my debts were a surprise to her. We didn’t start dating until I had really turned things around a bit, but it was still pretty touch and go even when we first started dating.

I think bringing any amount of debt into a marriage CAN work, but only if you both are clear on how much and what the plan is for paying it off. Communication is the key.

Mrs. Debt Kid?

I asked my wife to do a guest post here, so hopefully in the next week or so you’ll get some words from her perspective on my journey (and hers with me) over the last few years.

Thanks again for being such awesome readers!

It’s just in a coma.

A big, fat, ugly coma full of nightmares and the scent of Rush Limbaugh’s cigars.  The kind that black market organ thieves look for to stock up on inventory.

Don’t despair.  You will wake up.  Just make sure you bring a different financial perspective with you when you do.

Because the world will look significantly different when you come out of it.

And if you’re already dead when that happens – because it just might take that long –let’s hope the first thing you see is someone with cute little wings and a cherubic smile as they serve you a warm, calorie-free Cinnabon.

And a completely clean financial slate. 

Heaven.  Where once again everybody gets a mortgage just by asking.

The Times They Are Still a’Changin’

Meanwhile, the past is gone.  Dead and buried.  We have to learn to live with it.  Or the memory will bury us, too.

The real nightmare resides in believing that things will go back to the way they were.  Not just for you, but for the metrics that sum it all up.

They won’t.  It was a bubble.  Which means it never was.  Pinning your hopes on the next bubble is like hoping Santa drops by for a latte in July.

If he does, he’s only there to borrow a few bucks to tide him over ‘til the Season.

Not so long ago we were looking at brochures for timeshares and second homes in places where postal workers wear shorts.  Now we’re shopping for used davenports that will fit through the cellar door at your parent’s place, because that’s where you’re living for the foreseeable future.

The real estate market, it is said, will take as long as a decade to recover.  That equity you once reflected upon and included in your mental net worth is now vaporized, along with that condo in Cabo dream.

You used to be able to touch your toes, too.  The past is the past.

The stock market?  Not much better.  Until employment stabilizes, the national debt shrinks, inflation slows, the two parties find a way to get along and Mel Gibson shuts up, your IRA is just going to sit there.

And if you’re over 50 and looking for a job?  Somewhere there is a 24-year old MBA laughing his or her ass off at your expense.

Good News/Bad News: My son is in college. 

Big time expensive school with huge name cache.  He recently told me, in lieu of committing to a field of study, that it didn’t matter what major he declared, he’ll have his pick of career paths and job offers when he graduates.

Thus far he’s majoring in beer.

No, he’s not attending the University of Denial.  It’s just that he’s been hearing that line of American Dream crap for a decade. 

It was true for the first half of it.  He, too, is living in the past.

Of course, my son won’t believe me when I tell him the economic prospects of the past are as viable as John Edwards’ presidential aspirations, so I’m hopeful that one of those esteemed professors will step forward and get real with all the kids who are forking over fifty grand a year to sit in those esteemed classrooms.

Until then, I continue to fund his meal plan.

You may be wondering where this is going, other than heading for a flush down the shaft of my pity pot.

I’ve actually got a positive message for you today.   It’s about that American Dream we used to think we shared or at least understood.

Really?  The ending of Inception is clearer than what’s going on out there these days.  Ironic too – nobody is sure if Leo ends up dead or alive or alive in that flick.  Not even Leo.

The Dream is still there.  But it’s no longer measured in square feet, gross national product or the cost of the wedding of a former president’s daughter.

It’s measured in hugs. 

Somewhere in a place where women have to cover their faces in public and little girls are auctioned off to drug dealers, the consensus is you’ve still got it pretty good. 

A roof over your head, even if it isn’t yours.

Food on the table, even if it’s frozen.

A reason to get up in the morning, sleeping next to you at night.

Your health.  For the time being, at least if you can stop thinking about retirement.

There’s an upside to all this suffering. 

It’s called clarity.  A massive thundering shoulder-tap reminding us what’s really important.

I get it.  I think I’m waking up.

I think I’ll call my son and have a little chat.

I think I’ll buy my wife a bouquet of flowers.  At the grocery store, not the florist.  Because the florist went out of business.

Now if I could just shut down that dream about waking up next to Glenn Beck.

The nightmare continues.

Nolan, as you can see, remains pissed off.  And if you have a clean sofa for sale, let him know.

by Nolan

A friend of mine got married yesterday.  I wasn’t able to make it, but wanted to publicly acknowledge this happy occasion and offer my best wishes.

And to say this: dude, this is the biggest investment of your life.  Don’t muck it up.

Too many people squander it by making bad decisions after the blush is off the rose.  Bad financially, bad emotionally… and just plain dumb.

Because you are the antithesis of dumb, I don’t worry about you on that account.  But there is something to be said for a perspective that categorizes your marriage and your financial health on the same page.

Once you’ve been poor, you have a new sense of value and a new set of values when fate once again smiles on you.  That goes for money and for love.

If you’ve known debt you’ve known the sick feeling that is very similar to heartbreak.

And almost always, we look back and legitimately find cause to blame ourselves.

It’s all about maintenance.  About assessing reality.  About prognostication, prevention, repair and the ongoing care and feeding of the investment.

And… make sure you don’t mention to your new bride that you’re looking at her like an account balance.  Not smart.

May all of your debts once-and-for-all disappear and may your days be an ongoing stream of pure growth and bliss.

Just make sure your deposits out-weigh your withdrawals.

Now for today’s thought about short sales.

One of the hardest parts of this nightmare experience is the continuing need to lower your price.

The first thing you have to let go of is the relationship of your asking price to what you perceive to be the home’s fair market value. Or what used to be fair.

You’re already wrong about that, your equity is history.

Hanging on to an asking price that isn’t attracting buyers is the epitome of insanity.  And you know what they say about insanity, definition-wise.

The reason you need to keep lowering your price is to attract a new stream of prospective buyers.  To lower the bar – the upper price threshold on the part of buyers that determines whether they’ll come look, or not.

Personal experience bears this out.

After a series of price tags that were above my break-even, with no offers forthcoming, it was time to lower the price into short-sale territory.

At first it feels like a diagnosis of a fatal disease.  You resist, you resent, and finally you cave in to it.

Because the only cure for this type of insanity is getting out from under this thing without a foreclosure on your record.

But guess what… nobody came at that first short sale price.

So I lowered it again.  And still nobody came.

Meanwhile, the tumor of your resentment continues to grow as that foreclosure date approaches.

There is only one solution: keep lowering the price.  Gradually.

Why gradually?  So you can prove to your bank that you did everything you could to get as much as possible.  If you radically lower the price to something really ridiculous (rather than incremental decreases), the bank may decide they can do better on their own with a foreclosure auction.

But if you can prove that the price is right by showing them your efforts to sell it at a series of higher prices, none of which worked, they’ll understand they are facing the same situation.  In which case it’ll make more sense for them to take an offer when it arrives.

And then, you just might be surprised.

We’d lowered our price five times.  The second to last price was $649,000.  Zero offers.  Not even any real shoppers.

Then we lowered it to $599,000.  It felt like a betrayal to all that was good and hopeful about the American dream (because, way back in the beginning before the crash, the market value of the home was north of $1,300,000).  But the bank needed an offer, and I needed hope.

As it turns out, that ridiculous $599K price was the sweet spot.

It was the price that attracted a whole flood of lookers who, it seemed, couldn’t believe their eyes.

Within two weeks we had four offers.

All four of them were above our asking price.

True story.  We received offers of $605K, $610K, $629K and… get ready for this… $650K.  A grand above our previous asking price.

You might be muttering… go figure.  Or, holy sh*t. I know I did.

If you lower it, they will come.

When you hit that sweet spot, everything changes.

People who wouldn’t otherwise show up will now come.  And if they fall in love (which they will because, after all, in their minds as well as yours it’s still a $1.3 million home), they’ll stretch their budget to make sure they get it.

All four offers now rest on the desk of a negotiator at our bank.  If it doesn’t happen here – the shortfall is only 15 percent of the amount owed – it wasn’t meant to be.

More home short sale posts: Short Sale vs. Foreclosure, Short Sale vs. Deed in Lieu, Countrywide Short Sale

Inquiring retirees want to know.

And now for the oxymoron of all time: there’s good news for retirees who are also taxpayers.

Or used to be taxpayers.  And perhaps, who no longer wish to be.

It’s actually not exactly news, which implies something has changed.  No, this one is simply a realization that many newly retired folks sometimes don’t hear about right away.

Understanding this translates to a worry-free cash flow that allows you to balance your social security benefits, any earned income you may generate and the rate at which you withdraw funds from your I.R.A.  

All with a view toward avoiding or minimizing a tax bill.

What I’m talking about here is how any withdrawals from your I.R.A. account may affect the potential taxability – or liability – of your social security benefits.

And how any money you may actually earn may — or may not – have the same impact.

Social Security Benefits and Wage-Earning Tax Filers

You probably already know that if you have no other earned income (the key word there being earned, as in, reported to the I.R.A. via W-2 or Schedule C), mostly likely your social security benefits will not be taxable.   Your benefits have a separate line on a Federal form 1040, which in effect separates them from other types of income.

Key words there are most likely.  When it comes to taxation, take nothing for granted.

You probably also already know that if you do earn a paycheck while you’re also receiving social security benefits, there’s a limit on how much you can earn before you cross a line the I.R.S. uses to determine if they can now tax your social security income.

Earn too much and your social security benefits become, to an escalating extent, taxable.  Up to fully taxable if your earned income is high enough.

Tax exposure on earned income is a given, and obvious.  Whether you actually do end up paying taxes on it depends on other factors (exemptions, deductions, etc.), but the money is technically taxable the moment you earn it. 

If you earn too much you need to talk to your tax professional. 

Because at some point every dollar you earn above that nasty threshold will result in a proportionate amount of your social security benefits to suddenly – unexpectedly perhaps – become taxable, as well.

Probably not what you had in mind when you took that part-time job at Baskin & Robbins scooping cones to help fund your next cruise.

So where is that threshold?

I’ve asked around, and I’ve surfed around in the internet looking for that answer.  And because, a) I’m not a licensed tax professional, b) I’m not in the market to become liable for anything in the way of misleading information, and c) I’m not completely sure, even after all that research…

… allow me to generalize. 

Many folks I’ve talked to, some of whom are in this situation, say it’s around $14,000 in earnings.  After that, some portion of your social security benefits may become taxable.

If you have a larger income, at some point all of your social security benefits become just as taxable as your earned income.

A nice problem to have.  Unless your goal is to avoid paying taxes altogether and the double taxation (on your earned income and your social security benefits) reduce your net pay on that part-time job to something like fifty cents an hour.

Do the math before you sign that timecard.

But here’s that good news. 

When you withdraw funds from your I.R.A. account – which may be and probably will be tax-exposed dollars, the destiny of which also depends on other variables on your tax return – that money does not count as earned income.

That’s what you need to keep straight.  Earned income and I.R.A withdrawals are labeled and treated separately for tax purposes.

Which means, in theory, you can withdraw a huge chunk of change from your I.R.A., and while that may or may not result in a tax liability on those funds (probably will, but you didn’t hear it from me), it won’t expose any of your social security benefits to tax liability as a result.

Too much earned income, yes.  I.R.A. withdrawals, no. 

Which means, you can still afford that cruise and avoid writing a check to Uncle Sam if you fund it from your I.R.A. instead of a part-time job.  Provided all the other numbers align toward a tax-free April.

A quick example.

Let’s say you received $12,000 a year in social security benefits.  You have a part-time job earning $6000 a year.  And, because you want to maintain that country club membership, you withdraw $36.000 a year from your I.R.A.

Here’s how that probably looks on your tax form.

The six grand from your job?  Taxable.  Just like anybody else with a job.

But because, in this case, your earnings were well under the threshold, your social security benefits remain tax free.

And because that $36K withdrawal doesn’t impact the tax liability of your social security benefits, your benefits are still tax free.

What isn’t tax free, however, is that I.R.A. withdrawal itself. 

Like your earnings, the I.R.A. withdraw is exposed to tax liability, and when added together the sum becomes your total taxable income.  Your social security benefits are not included in that number… unless your earnings are too high.  In this example, not to worry.

It is from that number – which, again, doesn’t include your social security benefits – that you juxtapose exemptions and deductions and other variables to come up with your bottom line tax bill.

Which is why we have C.P.A.s and even tax software.  Both are well worth the investment.

Naturally, no article with the word “tax” in it would be complete without a Big Fat Caveat advising you to consult with a tax professional.  

Nolan is not a tax professional, he’s just trying to help a brother out.