Introduction
Steve Rhode: Hey, you’re back with the Get Out of Debt Guy show. My name is Steve Rhode. I’m the old “Get out of debt” guy. Damon Day is the new Get Out of Debt Guy, and he’s here with us today. Damon, what are we talking about?
Damon day: We’re tired of talking about debt. At least for today. So today we want to talk about saving.
Steve Rhode: Ooh, I like that.
Damon day: Okay, so we’re going to talk about saving and how to do better when you’re living on the edge.
Why cash beats available credit
Steve Rhode: Damon, there are good products that can help people save, and we’ve talked about some of them in the past. Have you even gotten a chance to look at Betterment.com?
Damon day: Yeah, I thought you were going to say how to do better with better. That would be an advertisement.
Steve Rhode: We’re going to talk about that in general, but I’d like to talk about why saving is important. Damon, you’ve talked to a lot of people over the years as a professional debt coach who have absolutely no reserves, no money. Is that correct?
Damon day: Yes, in fact, as a culture we are almost at a point where credit cards are the backup. People use the credit and build this idea around the card: “I need to have this credit available in case there is an emergency.” And then I go back to: if you had the money in the bank, you wouldn’t need the credit.
The other big thing I always point out – especially as their utilization ratios reach the point where they are maxed out and they become desperate – is that available credit that you rely on in case an emergency occurs can be taken away from you with one letter from that credit card that says, “Yes, we have reevaluated your life choices and we have decided that we don’t want to be a part of that.”
Steve Rhode: Well, you look risky.
Damon day: And they lower that credit limit for you. So $2,000 cash in the bank is much better for your family than $2,000 in available credit on a credit card that can be collected tomorrow.
Costs grow to meet revenues
Steve Rhode: Having money in the bank is not sexy. And the problem is that if you think about leaving your money in the bank these days, the savings interest your bank pays is next to nothing. So we have two problems. First, you’ll never really see a return on your money if you invest next to nothing. And number two, if you find yourself living paycheck to paycheck month to month, you simply don’t have any money to save.
Now, my father told me when I was very young, he said, “Steve, no matter how much money you make in your life, your expenses are always going to increase to meet your income.” And he’s right. So unless we find a way to cut back or make some extra money, you’ll never be able to save.
The Side Hustle Solution
Damon day: When you make the decision to start making extra money, you need to take a snapshot of your lifestyle and say that no matter what happens, our budget and lifestyle will remain the same for the next twelve months. This extra money (if you’re going to take on a side job or drive for Lyft or Uber or DoorDash or Instacart or whatever) you need to keep aside.
If you wanted to today, it doesn’t matter what city you live in, if you have a car and a phone, you can go out in the evening when you’re not working, whenever you want. And you can easily make a thousand dollars a month. I shouldn’t say it’s easy, but it is available. It’s an opportunity.
Steve Rhode: One of the things I’ve heard over the years is when people say, “Well, I have a second job, I make extra money, but I work so hard, I make X, whatever that is.” And so the money is spent.
I think it’s a better thing to do if you’re making an extra thousand dollars a month and you want to reward yourself in some way, then do that. Keep at least 500. It doesn’t have to be all beans and rice and spend all your money. You can find a kind of happy medium.
Damon day: I mean, this is a peculiar example, but I went out on New Year’s Eve, Steve, right? I’m going to drop off $900 on New Year’s Eve, ripping off people and burritos.
Steve Rhode: Yes, you just put it in an investment account and never touch it again.
Damon day: That was one night.
Investment Options: I Bonds and Improvement
Steve Rhode: Let’s talk about some investments. Damon, you heard me talk about the government bonds, the I-series savings bonds. When inflation is high, they pay 13, 14 percent interest. Now, the upside of this, right now I think they’re paying 5 percent. Because inflation is very low. And they are adjusted for inflation.
The nice thing about them is that they are adjusted for inflation. The basic rate for these items is 1.3 percent plus an inflation adjustment. So you will always earn at least more than the inflation rate. And it’s guaranteed by the federal government. You will have to leave your money there for a longer period of time. But it is almost the safest form of investing.
You can go to treasurydirect.gov and look at the I bonds. Actually, I’m looking at it right now. The current rate they pay is 5.27 percent. One of the benefits of Series I bonds, not just because they are 100 percent backed by the federal government, is that you can invest as little as $25 and you can make a regular monthly investment.
Another option is something called Enhancement. Betterment.com. I have actually been a customer of theirs since the beginning. I think 2010 or earlier and it’s a very good self-directed investing platform where you can do something as complicated as rolling over an IRA or 401k if you quit your job, or starting a savings account.
They have a general investment fund with a pool of major banks that the money is distributed to when you invest. And if they pay 4.75 percent, you can top up or withdraw at any time for free. If you just continue drip investing now, you’ll be surprised at how many hundreds of thousands of dollars you’ll have when you get ready for retirement.
The numbers
Steve Rhode: Let’s look at the numbers. If you put in a thousand dollars a month and you start with a thousand. We assume you only earn an extra $1,000 per month. At the end of the year, at an interest rate of 4.75%, that will be about $13,300. Now I wouldn’t kick $13,000 out of bed for eating crackers.
If you do that consistently for ten years, and earn a little extra income every month for ten years, 4.75%, then it will be $154,000. That’s much better than having nothing in the bank.
Damon day: Yes. So you know, I don’t think you need to go in and complicate any kind of investing. You just have to start doing something.
Want to save while you have debt?
Damon day: One of the biggest things I hear from clients who don’t have savings is that it’s actually pretty consistent. It’s, “Well, I can’t save because I have debt. And I’m paying 25%, 28%, 29% of this debt. What’s the point for me to take $100 and put it in a savings account that pays 4.75%, when I can take $100 and pay off the debt?” Steve, I’m going to hear your opinion on this because there are arguments on both sides.
Steve Rhode: I completely understand the math. But I don’t think debt is ever about the debt. It is about the underlying problems and situations that led to this. Personally, I would much rather see someone, after over thirty years of helping people, put $25 a month in their savings account while paying off $25 a month on that debt. I think you should do both at the same time. Screw the math. You have to think: what is my money personality?
If you go to my website, getoutofdebt.org, there’s even a money personality calculator that shows you what your subconscious approach to money is. And that will help inform you on what to do.
The problem with budgets
Steve Rhode: And here’s a dirty little secret. I have been the Get Out of Debt guy for 30 years. Damon is the new Get Out of Debt guy. And we both absolutely hate budgets.
I always call budgets a page full of lies, because people just make up numbers and write them down. It doesn’t actually mean anything. What’s your approach to budget, Damon?
Damon day: Budgets are good to give you a snapshot. It forced you to sit down and put numbers on paper and realize where your money is going. They are good for that. They are not good for changing habits and daily decisions. Most people can’t do that. It’s not how you want to live your life. Or you do it for a week or two.
Steve Rhode: What’s fascinating is that 15, 20 years ago, whenever it was, I had 20,000 debt clients. We did a survey and asked people to create a budget when they first came to us. And then we did it a few months later and asked them to track their expenses. And what we found was that 75% of those people’s budgets were over $400 per month incorrect, meaning their expenses were $400 or more per month higher than they had ever accounted for.
And so when you sit down and make a budget, it’s almost like you’re guaranteeing that you’re going to fail.
When creative solutions are needed
Damon day: Sometimes you have exhausted all options. There isn’t enough money coming in to pay all the bills we currently have, or to make any kind of dent in these debts. And then we have absolutely nothing left for savings or for emergencies or anything like that, and so that cycle just continues.
That’s where thinking of ways to make some extra money comes into play. And that’s also true, if that’s maxed out or if you can’t do that, we start to look at some of these more creative strategies that a lot of people don’t like to talk about. You’re talking about settlement. You’re talking about bankruptcy.
Steve Rhode: What’s the point of spending the next five years trying to fix the past? Screw it. You made a mistake. You screwed up. Let’s do better to move forward and take you to success.
Wrapping up
Steve Rhode: Okay, Damon. Let’s end it here. If you haven’t already subscribed to this audio podcast, the Get Out of Debt Guy podcast, be sure to do so. And for now, Damon, I say: goodbye.
Damon day: Peace.
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