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October 1, 1998

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Subject: Re: A Word of Warning
Author: PatrickDW

"A question for those who have dug themselves out of debt. Are you able to use credit cards to your advantage (ie rebate cards, airmiles...)? This question is really directed to those who had a credit problem, and are now "cured." Is your cure not going into debt even for the grace period? Was there a complete shift in mindset so that the card balance is always known so that a monthly paymnet check will ALWAYS cover it? Do you prepay? Do you write a check for the amount of purchase the minute you get home?"
This will be a long post, but IMHO, worth it.

I am somewhat an "expert" on making a financial turnaround, and I'll share my knowledge with you. I had bad CC debt and a foreclosure on a rental house in my early 20's. (Why is it that nobody teaches American kids how to handle money -- we are all pretty much self taught [and the "education" is painfully expensive]). When I finally realized that these debts were not going away, I adjusted my lifestyle so that I could pay off the debts (as many of you have -- congratulations!). In my opinon, the ONLY WAY to truly recover from financial trouble is to learn to BUDGET for the rest of your life. It works, and I have the good credit and positive cash flow to prove it.

"Oh, budgeting is no fun," you protest. "I know how much it costs me to live per month," you tell yourself. No, I don't believe you do, because I didn't until I adopted the "envelope" method of budgeting. This method is a neat little psychological game you play with yourself to stop frivolous spending, and to be sure you can pay that balance in full when it's due.

The "envelope" refers to the practice of cashing your paycheck and putting small amounts into envelopes marked for specific expenses. We all have computers and direct deposit now, so the envelopes are virtual, but the method still works better than any other I've seen. Here is how it works:

  1. Get a spreadsheet (Hell, I'll e-mail you mine if you want it).
  2. Put headings on the columns such as: Groceries, rent, insurance, car tags, entertainment, clothing, personal, utilities, gasoline...I mean EVERY expense you can think of (and I mean EVERY expense -- birth control pills, shots for the cat, etc.)
  3. Decide how much these things cost you per paycheck (so if you pay an expense once a year, like car tags or cat shots, divide the annual expense by the # of paychecks in a year).
  4. Add it up...if the sum of the expenses is bigger than your paycheck, put less into clothing, entertainment, anything but birth control -- you can't afford any more kids. MAKE IT BALANCE!
  5. Every payday, split the check among the various columns, adding money to the "envelopes".
  6. EVERY TIME you make a purchase, (or write a check, or use your credit card) deduct the amount of the purchase from the appropriate column.
  7. Keep a running balance so you know how much is in each "envelope." When the "envelope" is empty, QUIT SPENDING until you replenish it.

Sounds kinda labor intensive, right? It's not too bad, and believe me, you will reap a reward. Let me explain the benefits:

  1. You will have money for those "unexpected" expenses that you should have been planning for, like cat shots, car tags, and semi-annual insurance payments, because you have been putting money into those "envelopes" all along and not using it for other things.
  2. You will decrease frivolous spending. It is too easy to go out for dinner when you look in the checkbook and see a big balance -- but if your entertainment "envelope" has only $5 left, you know you have been out too much this month. Conversely, there are no guilty feelings when you go out to dinner when there is money in the entertainment "envelope" to pay for it!
  3. You will always have the money to pay off your credit card balance monthly, because you quit charging when the "envelopes" were empty.

The psychology really does work. If you look at your budget as discrete (nearly empty) "envelopes" instead of seeing the (big fat, I hope)lump sum of your checking account balance, it is much easier to stay on track.

I have used this method for 7 years, with great success. I don't carry a balance, and charge about $20K per year on credit cards. I get nice cash back checks annually. My wife and I never argue about money, because we each have "personal envelopes" that can be spent as foolishly (or Foolishly) as we want.

Sorry for the length of this post (is anybody still there?), but I feel very strongly about this, and I hope someone else can have the great experience I've had with it.

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