Category Archives: Budgeting

How The Pandemic (Almost) Cost Me $100,000

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Dollar, Money, Cash Money, Business, Currency, Finances

It will be a surprise to nobody reading this blog that I tend to be just a little obsessed with managing my personal finances.  And by “a little bit,” I really mean “a lot.”  There are no shortcuts to growing one’s wealth, and taking the time to budget, increase income, and decrease spending – all while living as well as possible – requires careful thought and planning on a regular basis. 

The average person makes about $2,700,000 in his or her lifetime and the average working couple makes about $5,000,000.  At first glance, this sum seems staggering so the thought of $5 per day on coffee and $100 per month on cable television seems insignificant.  However, when you consider that $2.7 million represents $45,000 per year (as an adult), or $3,700 per month, or about $100 per day with which to support yourself and your family, the scarcity of that amount feels very real.  After all, essentials like taxes, housing, and food will likely comprise over 50% of your income, so it’s incredibly important to ensure that you know where the rest of your money is going.

Anyway, one of my credit cards has a very useful feature of alerting me when there are notable changes to my credit score.  Most of the time, the news is good and pretty trivial (“no change to your score this month”), but I still recommend paying attention to these alerts on the off chance that something has gone awry, as today’s article will demonstrate.

In early June, I received one such alert stating that there was a change to my score, which was strange because I didn’t have any recollection of any change to the major factors that affect your credit score.  Imagine my shock when I saw this:

Over the last ten years, as Lady Centsei and I bought property or acquired debt, my credit score fluctuated by approximately 10 points in either direction each year. But this drop from 760 to 695 was completely unexpected.

I began investigating and quickly discovered that one of my accounts had been reported as 30 days past due by the lender.  This mistake can really hurt your score!  A little more research revealed that it was, of all things, my mortgage!  I have my mortgage set to auto-pay and hadn’t received a single alert as to a non-payment or failed payment.  How could this have happened?

I checked my account balance used to pay the mortgage, and it did seem a bit high.  However, even more unusual was a tiny alert that I had a message in their portal.  I opened the message and saw this, to my horror:

I had attempted to make an automatic payment on April 28th for my May 1st mortgage payment, and it failed, as well as a May 28th payment for my June 1st payment, and it, too, failed.  I hadn’t noticed anything too strange in my monthly budget (aside from some expenses like gas being quite low these days during quarantine) and couldn’t understand how this failed transfer could have happened.

I called the credit union that holds my mortgage (we’ll call them “The Credit Union”).  A representative picked up the phone and reiterated my worst fear – I had missed two payments and was now more than 30 days past due, so they had reported me to all three credit bureaus for a being late on my mortgage payment.

My heart sank.  My legs bucked.  My throat swelled up.

I began asking for more details.  Why hadn’t they called me?  Why had the automatic payments failed to go through?  Why hadn’t they notified me in writing?  How could The Credit Union be so poor at handling this process?  Surely a simple call or letter would have solved this entire thing with weeks to spare.

The core issue of the failed transfers is that my mortgage had gone up in April by about $25 per month due to changes in local property taxes The Credit Union withholds for me.  Basically, in April and May, I had attempted to pay the old amount rather than the new amount, so The Credit Union rejected the entire payment.  And before you ask, no, they did not notify me of the increase until I called in May.

They also explained a few critical details:

(1) They interpreted the government’s guidance for banks in April regarding the virus as stating that they were not allowed to contact customers for past due amounts or collections. 

Therefore, when my account was late, they believe they were legally not allowed to tell me.  Obviously, if I had received any kind of communication, even a friendly reminder, I would have paid!  However, the bank’s interpretation of the governmental guidance made that impossible. 

Let me also state that this is dead wrong.  Federal law in the U.S. suspended collections calls related to student loans and state law in my area halted the foreclosure process during the pandemic, but there were no laws or regulations against bank calling to remind borrowers of a possible past due payment on an installment loan.

A mail or phone reminder would have prompted immediate action from me and would have been 100% legal.  If they had done so, this entire situation could have been avoided.

(2) They claimed that they had provided me notification of the increase in my mortgage amount in January.  I did not receive this notice, and they admitted they did not send it via certified mail. 

Banks and credit unions are supposed to notify their customers in writing when their mortgage is set to increase.  Mine did not do this.  I keep all financial documents for seven years, and I checked for the notification several times.

(3) Their policy does not allow for partial payments.  I was never informed of this.

My automatic payments had both attempted to go through on March 28th and April 28th, both just $25 shy of the required amount.  If they had accepted them as partial payments, I would have been current for April as of 28th and never been past due by 30 days.

(4) The burden was entirely on me to uncover the issue.

No phone calls.  No mail.  No e-mails.  No text messages.  No smoke signals. The only notification was that small message on the bank’s internal e-mail system to me, which of course is antiquated and cannot connect to my other preferred forms of communication.  This issue could have continued for months if I hadn’t been monitoring my accounts regularly and my credit damaged irreparably.

(5) The initial rounds of customer service were abysmal.  I had to fight tooth and nail to correct the issue.

After this initial phone call with The Credit Union, I began the arduous process of correction the payments going forward.  I’ll admit that this took several of “those” 5-minute phone calls, but they were well worth it.  Unfortunately, even after the payment issue itself was rectified, the incident was still reflected in my credit score.  I had to correct this if I ever wanted to borrow money at a reasonable rate again.

The next three calls were to The Credit Union’s lending department to get them to correct the ding to my credit.  This process could warrant its own post.  Long story short, I remained calm, polite, persistent, and confident.  I explained to them it was a genuine mistake under strange circumstances that caused me to miss the payment to begin with, and the fact that my record with them had been excellent for many years.  It took speaking to three people (one with an attitude “you should have known better”; one with some empathy but no authority “I understand your perspective but I can’t help you”; one with the director of lending “OK, you’ve shown your point and I don’t feel like dealing with you”), but they finally removed the ding on my credit report.

(Not actually me. No Gandolf-sized beard. No flying piggy bank sidekick.)

What a relief!

My credit score had recovered by early June, though not without drama and stress.  I confirmed the credit reporting agencies that the previous delinquency had indeed been removed.  All was well with my financial world again.

Why does this even matter?

The difference between a score in the high 600’s and the high 700’s (over 100 points) could be the difference between getting the best loans with the best interest rates.  Sometime in the next five years or so, it’s very likely that Lady Centsei and I will buy our “forever home” in an area of the country where the median home price in the area is just shy of $600,000.

If we were to buy median home via a 30-year mortgage, the lender often takes the lower of the two applicants’ credit scores for use in their interest rate decision.  According to Bankrate.com and MyFICO.com, here is the interest rate one should expect at various credit scores.

FICO SCOREANNUAL PERCENTAGE
RATE (APR)		MONTHLY PAYMENTTOTAL INTEREST PAID
760-8502.73%$2,442$279,171
700-7592.95%$2,514$304,734
680-6993.13%$2,571$325,410
660-6793.34%$2,640$350,748
640-6593.77%$2,787$402,783
620-6394.32%$2,976$470,952

Each 20-point interval in your credit score will cost you an average of 0.20% on your mortgage for 30 years.  My 100-point drop could have increased my rate by 0.50% to 1.00% depending on the lender.  On a $600,000 home in our area, equates to almost $100,000 over the life of the loan.

Penny can help us reiterate this math in very simple terms.

I’m glad I worked with my bank promptly to correct this issue.  Nonetheless, it’s impossible to ignore “what could have been.”  One late payment without notice easily could have become two or three.  Three late payments could have hurt my credit score by even more than 100 points for up to 7 years (at which point late payments are removed).  This damaged credit could have caused banks to increase my next mortgage interest rate by 1% or more.  I could have paid $100,000 more in interest over the next 30 years.

I blame myself a little, as I could have been more diligent.  I blame The Credit Union a little more, as they could have communicated better at many points.  I blame the pandemic the most, since it caused this chain of unfortunate events in the first place!

Lesson learned.  Hopefully the same thing never happens to you and this story serves as a good lesson in the importance of not only managing your credit, but also handling these issues quickly when they do come up, so the outcome is to your advantage.

Now more than ever, be sure to check your account regularly and don’t postpone resolving problems.

100 Money Hacks (that take 5 minutes or less) – Part 1: Budgeting

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grayscale photography of analog pocket watch

Welcome to the first article of the Top 100 Money Hacks series, where each tip takes five minutes or less.

Our days are crowded: Sleep (when we can manage it), shower, eat breakfast, get ready, commute, work all day, commute home again, eat, wind down, sleep.  Repeat.  With these “essentials” seeming to take 20+ hours of a 24-hour day, it’s no wonder we don’t drink enough water or get a fraction of the exercise we should, much less manage our finances.

But we do have the time.

Believe it or not, nearly every method of improving your finances takes just 5 minutes.  Most can be completed in 5 minutes, while others can at least be started in 5 minutes and give you the power to combat the inertia of a task that feels too big begin. 

You’ve got this!  In the time that it takes you to wait for your coffee, sit through a round or two of commercials, or check social media, you could be making yourself a millionaire.

In this 5-part weekly series, we will be examining 100 ways to improve your finances that can be done in 5 minutes or less.

Part 1: Budgeting

Part 2: Increasing Income

Part 3: Spending Less

Part 4: Health and Wellness

Part 5: Everything Else!

Start simple by just doing one task today.  Try another tomorrow.  And, if you make a habit of regularly checking off items on this list, your future self will thank you!

Let’s start with Part 1: Budgeting, or “how to allocate the money you have and plan for the future”

1) Make a simple budget.  You cannot manage what you do not measure.  Making and monitoring a real budget is perhaps the most vital step to your financial well-being.  I’m a big fan of the 50/20/30 rule: devote 50% of your income to essentials, 20% to saving, and 30% to discretionary/fun. This savings figure, 20%, is the amount of money you should be saving for retirement and longer-term goals.  Doing so will put you profoundly ahead of your peers on the road to financial independence.  67% of people don’t budget at all.  For example, if you’re making $60k, calculate $60,000 x 2 ÷ 10 = $12,000 per year… or $1,000 per month.  

Let’s make this even easier:

2) Update your budget regularly.  Once your simple budget is made, get in the habit of comparing it to your actual expenses and improving it over time.  You can even begin to develop a yearly budget to account for expenses that occur less than once per month.  There is no such thing as an unexpected expense, and you should plan for these less-frequent one-time expenses (a medical bill, a car repair, a tax expense, a fine, an appliance repair) in your budget over time.  Every single dollar should have a designated purpose at the beginning of the month, and no expense should be truly unexpected.  Using the above example, the individual devoted $1,000 per month to retirement savings and has $4,000 remaining per month.  Calculate the absolute essentials out, including taxes, rent, utilities, food, and healthcare.  Allocate a percentage to your emergency fund, if you don’t have one.  Devote the next portion to paying down your higher interest debt, if you have any.  Assign the next allotment to longer-term savings goals, like retirement savings, a house, a car, or investments.  Whatever percentage you have left over can be your discretionary/fun money.  Stick to your goals, and be careful not to let this slip away as your finances improve.  Don’t think you can get away with spending and “saving whatever’s left over at the end of the month;” there won’t be anything left!  Save first.

3) Prioritize your financial goals.  Too often, we think about our financial goals in an abstract way.  “Pay off my student loans.”  “Buy a house.”  “Retire early.”  Yet, few have written down these goals on paper or a spreadsheet and calculated precisely what it would take to make this happen.  Take some time every month to prioritize your financial goals, rather than hoping you’ll find money at the end of the month to devote to them.  Take concrete steps, one at a time, towards achieving these goals.

4) Sign up for a budgeting tool.  Tools like Mint (free), Clarity Money (Free), Personal Capital (Free), or YouNeedABudget “YNAB” (Free trail w/monthly fee later) often let you connect your bank accounts, retirement accounts, credit cards, and other financial accounts in a single place.  You can set goals, classify expenses, and calculate your net worth instantly.  Check and update it weekly (or daily) to better keep track of your money.  They can also give you spend alerts when you’ve gone over budget or if a bill is due soon. I use Mint and love it.

5) Calculate your net worth.  Whether you use Mint/YNAB or figure it all out by hand, calculating your net worth every month (or more) frequently is essential.  Net worth = Assets – Liabilities.  Assets are everything significant that you own: your house, your car, your retirement accounts, your investments, any “payables” owed to you by friends, family, or businesses, and anything else that has significant resale value (no, your 50” television and custom rims don’t count).  Liabilities are everything you owe: your student loans, your credit card debt, your mortgage, your car loans, and anything you owe to family, friends, or lenders.  Take a few minutes to create a chart and see how this number changes over time.  Your net worth is the single best barometer of your financial health.

6) Automate one aspect of your savings.  Again, the best way to save money is to automate it so you never have to “decide” to save or spend.  Most payroll companies let you deposit to multiple accounts, so make one of these your emergency fund, your retirement fund, or your long-term goal fund.  Most banks let you make a recurring payment like this as well.  Start by having this 20% taken out of your paycheck each week and automatically submitted to savings (ex. your IRA or your company’s 401k plan) before you pay for anything else.  I call this the “save first, essentials second” mentality.

7) Create an IRA or other investment account.  An IRA or Individual Retirement Account is one of the greatest vehicles for savings and can have outstanding tax benefits.  Half of Americans and nearly 90% of people across the globe don’t have a single dollar invested.  All it takes is 5 minutes and $100 or less to start saving for retirement.  I recommend Vanguard and Fidelity.  The key is to find a company that has options with no minimums and zero/ultra-low expense ratios.  If you don’t have an account, don’t be intimidated and don’t worry about the specifics just yet.  You can do it.  Just sign up for an account, link a bank account, make an initial contribution to a zero/low cost index fund (VTI or FZIPX), and set up an auto-contribution if you can.  Don’t rely on your pension; don’t rely on social security; rely on yourself.

8) Contribute to your IRA.  In just a few minutes per month, you can easily set up a one-time or recurring contribution to your IRA.  You can set this up either directly through your broker or even with your payroll to automate your savings (see #6!).  In 2019, you can contribute up to $6,000, so if this is your goal, make a monthly contribution of $500 or about $120 per week.

9) Set essential bills to auto-pay.  Assuming you always leave a reasonable balance in your checking account, which I would recommend, it makes sense to set your truly essential bills to auto-pay each month so you don’t get hit with late fees.  For example, setting utilities, rent/mortgage, insurance, and minimum credit card payment to auto-pay could save you money on fees long term. Make sure you don’t use auto-pay as an excuse to spend more.

10) Plan out the timing of purchases during the year.  Being patient and planning ahead can save you 20% or more or many major purchases.  The best time book travel?  January, February, and August.  Fitness equipment?  January and February.  Holiday decorations?  After the holidays.  Gym memberships?  June and July.  Cars?  August and September when the dealers need the prior year’s models off the lot.  Halloween candy?  After Halloween.   Wedding dresses (wait… plural?…)?  December when they need to make room for new year’s designs.  Best days to book travel?  Tuesdays, Wednesday, and Saturdays.  Budget these expenses into a your yearly budget and enjoy the savings (or should that be “SAVING???”).

11) Review your monthly bank statements.  Taking a few minutes to go through your bank statements is an excellent financial habit to develop.  Even if you only identify one or two fraudulent transactions or unnecessary recurring expenses and correct them, your time was well worth it.  Reconcile this with your budget to see how you did each month.

12) Review your monthly credit card statement.  Similar to the above, look for fraud, bogus fees, or unnecessary transactions on your card statements and fix any findings.  Don’t neglect this.

13) Adjust your tax withholding.  I’m not a tax adviser, but you should review your tax withholding if any of the following apply: you get married, you have a child, you had a substantial refund last year, you had a substantial tax liability last year, or your income is changing significantly from expectations.  You may need to claim more “allowances” if you’re withholding too much for taxes or claim fewer allowances if you’re not withholding enough for taxes.  If you’re self-employed, a business owner, or a 1099 contractor, you may need to ensure that you’re sending the right quarterly estimated installments to the IRS.  If you’re not from the U.S., check your local and federal responsibilities to make sure you’re not over or under paying.

14) Make a meal plan for the week.  Budgeting = Planning.  With a simple meal plan, you’ll waste less food, eat healthier, save time, stay orderly, and avoid using a restaurant as your kitchen.  This small task pays for itself time-wise and budget-wise many times over.

15) Make an inventory sheet for your refrigerator or freezer.  Americans waste about 40% of their food, and most other developed countries aren’t much better.  Waste often starts with simply not knowing what is in your kitchen, and taking 5 minutes per week to track you inventory has been proven to reduce waste significantly.  You spend at least this amount of time throwing out moldy leftovers and going back to the grocery store anyway.  Start with this or purchase an inexpensive reusable like this.

16) Prepare snacks for the car or office.  Save yourself a trip to the drive through or vending machine by preparing or purchasing healthier snacks, in bulk, for times when you need a quick snack.  Doing so can cut your empty calories by 50% and your costs by 75% over the alternatives.

17) Take the first step towards estate planning.  Budgeting is a life-long endeavor.  For a larger estate, you will want to contact an estate attorney from the beginning.  For the smaller simpler estates, you can create a simple will yourself or at least begin to summarize your assets and wishes until you do have the time to work with an attorney.  In a document like a will, be sure to include the basics like stating your full legal name and address and age, testifying that you are of sound mind and not under duress, naming an executor, identifying you heirs with no ambiguity, including witnesses, and getting the document notarized.  The more work you put in yourself, the more you’ll save in legal fees (and the more trouble you might prevent between your heirs).

18) Write down and evaluate today’s expenses.  When you’re first getting started with your budget, make a nightly habit of writing down everything you spent money on that day, including automated payments, and consider one simple thing:  Did each purchase bring you joy?  This exercise shouldn’t make you feel guilty, but you should reflect upon what spending is actually necessary and begin to take steps towards forming better habits.  Be willing to change your behavior when you realize what’s really important to you.  As this process becomes familiar, you can start doing this monthly for the larger purchases only.

19) Write down how you spent your time for the day.  Budgeting is as much about allocating your time as it is your money.  Writing down your time spent each day is a great habit that I’ve been trying to develop more thoroughly myself.  Take a few minutes to write down, in 15-minute increments, exactly what you did that day.  Use a digital template if it’s easier.  Be as honest and specific as possible.  You’ll likely find that you waste a bit more time that you realize, and you can slowly work to better manage your time throughout the day.

20) Set a reminder.  Set a reminder on your phone or calendar to do anything on these “100 Tips” posts, whether it’s something to do multiple times per day (walking, drinking water) or once per year (annualcreditreport.com, shopping your internet/cell plan).