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50 days and a 1000 dollars – Part I

This is the first installment in the 50 days and a 1000 dollars series. Here are Part II and Part III.

From the title of the post, you must be thinking this post is about a suspense thriller set to hit the theaters this Friday. Well, I’m sorry to disappoint, but this is a post about our Money Experiment that crossed a small milestone on Tuesday, the 30th of December. However, I promise to keep it as dramatic as a Bollywood movie though. We had set a target of $1000 to scrape before the end of the year. To give you some background on the experiment, let me just rewind a little.

On the fateful day of November 12 2008, I happened to check my bank balance and was unpleasantly surprised to find that I had just 98 dollars in my bank account. To be honest, I had an idea that I was not managing my money properly for a while. However, I had never felt the gravity of the situation until I saw my measly two-digit bank balance. Never had I made a conscious effort to take control of things and be a little more responsible with my finances. That night it hit me though. What if I lost my job? What if there is an emergency? A health issue, an emergency trip? With no money in the bank and loads of debt to pay off, what would we do? That night I decided that it was time to take matter in my own hands. It was time to account for every penny that was coming in and going out. That is how the experiment began. In fact, money scraping was never part of the plan!

The goals of the experiment were simple.
1. I wanted to track the inflow and outflow of money. In other words, track income vs expenditure.
2. I also wanted to fix the outflow since I knew we had been living outside our means for a while.
3. The most important goal was to enjoy the experience. Believe me, the sight of a large wad of cash in my hands at the end of the experiment was pretty delightful to say the least!

So the first thing I did was to sign up with QuickenOnline (Try it, it’s really good). Like I said before, the idea was to see how much money I was making and how much money was I spending. And what I saw was terrifying. I was spending more money than I was making! No wonder I was bankrupt.

Loans- The good guys with a bad side

One of the reasons behind our excessive expenditure was our so-called ‘mortgage’. This was for an apartment that we bought in Bangalore last year. It was a 66k investment that we undertook without much forethought. Well we had thought it out, just that we were not prepared for enormous spending, month after month. I mean 66k is as low as it can get for a home right? It would have if it were a conventional home with a conventional mortgage. But this was on an altogether different payment plan. A mortgage which wasn’t really a mortgage. The way it works in India, and correct me if it works the same way here, is that the builder who is undertaking the project starts booking units well before the construction begins. The client pays the builder through the course of the construction process in installments, usually 10-20pc. We being residents of TX, were not in a position to procure a home loan back in India (security issues) and ended up paying in cash. Long story short, our monthly payment came up to a whopping $3000. What kind of a money-making machinery would it take for a middle-class, service-industry worker like me to make that kind of a payment every month?

We started making our loan payment every month while pushing the credit card payment to the next billing cycle. Months went by like this. After a few months, we had a massive pileup of credit card balances. It was hard playing catch-up. Another mistake that we made was to pay off our car loan. My great theory was to have as few loans as possible. What I failed to realize was that, while I had paid off a 5 percent APR loan, I had also accumulated more 15 percent ones. After lots of juggle work, I somehow managed to consolidate all my high-interest credit card balances into one zero APR balance. It came with a 3 percent transaction fee and I did end up paying finance charges on some outstanding balances that could not be transferred in time.

If you’re in a similar situation as me where you are planning on buying real estate, make sure that you get a home loan first. No matter how much money you make, it is a no-brainer to shell hoardes of cash in one shot. There are other things to be taken care of too other than a mortgage. Also, home loans come with a very small interest-tag. If you have the cash, invest it in high-yield mutual funds or stocks, not in one large asset like a home. Diversify.

Lesson learned: Always buy real estate through a home loan. Pay off your high interest balances first. It is not important how many loans you have, what is important is how much loan you have and how much you end up paying in interest.Your first goal should be to be debt-free.

To be continued…