Mint’s Note: Below is the follow-up we received from the Tuesday Train Wreck posted a month ago, entitled The Debt That Wouldn’t Go Away. In this story, the submitter faced a difficult business situation, in which he made the mistake to use his payroll tax withholding account to fund the continual operation of his business, and eventually failed to meet his obligation to the federal and state government. The real problem began when the submitter avoided the problem altogether — and the debt, of course, kept growing as no one was around to address it.

So, follow-up:

I’m going to spend the next three years paying off my online expenses to the feds if my current income level and current level of consulting work stays even. This is the equivalent to the amount of time I would spend completely paying off a small condo built locally had I practiced proper expenses management. Since hindsight’s 20/20, and I’ve been working through the events of the past three years with friends and family, here’s what I did right and wrong to land on my feet after literally losing everything:

* Right: I moved to an area of the country that has a very low cost of living, and a relatively high percentage of your income in take-home pay. Texas has no state income tax, and the sales tax is waived under certain situations — fresh food (processed and prepared foods are taxed), certain services, and one day a year, clothes. Since I cook at home most of the time, money spent on my food and all of the money I’m repaying in debt is only taxed at the federal level.

* Wrong: Having a significant other that enabled me to ignore my responsibilities. I was dating a very needy woman that required a lot of my attention and time, and gave me “permission” to ignore my responsibilities to the feds.

Right: I got good insurance. Sure, I’m paying $10 more per month than I otherwise would, but since I hit my deductible this year, I’m definitely saving money. I also insured my car and my dog at a higher level, both of which have paid off even though they take money off my bottom line on a monthly basis. When you’re heavily in debt, you need to be incredibly risk-adverse with your money. Insurance is a great way to avoid risks that could otherwise land you in a large amount of debt.

Wrong: From experience, I’ve learned to manage my life by the numbers and proper expenses management, not by ‘feel’. Have a spouse or friend quiz you: You should know what’s in your daily-use bank accounts at all times, down to the penny. If they ask you and you don’t, you have to contribute whatever your overdraft fee is (mine’s $30) to your savings account.

* Right: I have different bank accounts for different things. I have a checking account into which I deposit all of my money. I have a checking account for bill payments. I have a savings account that my monthly cash goes into. I have another savings account that’s my emergency fund. I have a high-interest Internet banking savings account at HSBC that contains my savings-for-projects. Accounts are cheap. Managing multiple accounts is easy thanks to Internet banking, and this way you automatically know how your money needs to be partitioned. Overdrafts are NOT cheap.

* Wrong: I didn’t get and pay for a professional to help me sort this out. Lawyers, Registered Agents, and CPAs generally save you money in the long term.

* Right: I got a job that allowed me to freelance at night. I turned down a high-pressure job that would’ve paid me approximately $10,000 per year more before taxes, but would’ve required that I spend 80-100 hours per week in the office slaving away. I make more than that, and have more free time, consulting.

* Wrong: I didn’t listen to my parents’ advice, and gave them dishonest answers about how the business was doing. Your parents’ purpose is to help counsel you around mistakes and provide their experience (and THEIR parents’ experience) for you to build upon. I learned the value of age, experience, and wisdom — and it was quite a humbling experience.

* Right: I realized that it was too depressing to deal with the paperwork, so I hired someone to deal with it for me. For $12 per hour, a coworker organized my entire life and kept it organized. It cost me $100 to get everything set up with her, and then for $24 a month, she manages my consulting invoices, figures out what checks I need to write to pay bills, and makes sure that all of my bills are filed. That’s less than one overdraft or late bill payment fee a month.

* Wrong: I financed the business’s startup with credit cards, and never got ahead again on them either through paying or reimbursing myself.

And last but not least,

* Right: I didn’t screw up as badly as Casey Serin did.

Mint’s Note: We doubt most people can top Casey Serin’s financial train wreck.

Train Wreck Tuesdays are a weekly post of horrible financial mistakes. They are posted anonymously. Submit your story; if you’re selected, you get a free personal finance book. The best comment gets the same prize! Check out past Train Wreck stories here.

Further Reading on the Topic:

Online Expenses

Expenses Management

Personal Expenses Tracking

Personal expense tracking is something that we care about here at Mint. Learn more with great personal expense tracking tips in our blog article index.

Today’s train wreck is about payday loans. One great way to avoid payday loans is through personal expense tracking and solid budgeting.

I think the worst thing I ever did was purchase a car from “Ugly Duckling”, also known now as “Drive Time.” Basically, your down payment is the value of the vehicle, and then you’re hit with huge interest rates. The vehicle I got didn’t last a year before the engine blew, but I still owed 2 more years on it. Definitely teach your little ones to stay away from “buy here, pay here.”

The second worst mistake I’ve made involved “payday advance” places, which hold your check until the next payday, but charge huge rates. I’ve written a $350 check to get only $275 in cash; the rest was their profit. Then the next payday rolls around, and you have to do it all over again.

If you must use one, do it for my first reason, not my last. Initially I simply needed money to cover an electric bill, or my lights would be cut off. I had two choices: let the check bounce (and pay $35 for a bounced check fee while risking some nights by flashlight), or pay $25 for the fee on a check that was enough to cover the electric bill and make a cash deposit in my bank account.

The advance was $10 cheaper, didn’t hurt my credit or risk legal issues with bouncing a check, and kept my lights on.

If I had stuck to just this, everything would have been fine. But the bottom line is, it’s too easy to get caught up in this high interest “loan shark” deal, and soon end up paying a large part of your income in advance loan interest.

By the way, I still don’t blame these places for their high rates: a $35 or even higher fee on a bounced check for $5 is a much higher fee than $25 on $100 loan. What your bank does is a thousand times worse than any pay advance place.

Mint’s Take Away:

While it’s true that a bounced check fee from banks can be quite high, they’re usually an exceptional fee — unlike the fees from a payday loan, which are always imposed upon you for the service. We definitely agree with the poster, though, that it can be very easy to get caught up in the (extremely) high interest “loan shark” deal.

Payday loans often compare their annual percentage rate to that of rates imposed by banks and credit card companies on late fees. In reality, though, payday loans are incredibly costly compared to alternatives available.

Let’s compare the original poster’s cash advance from the payday loan to a cash advance from an average credit card.

Payday loan cash advance: $275 loaned, $75 in fee = 327% APR

Average credit card cash advance cost: 3% fee for amount advanced and 25% APR

Credit card cash advance: $275 loaned, $8.25 in fee and $5.75 in interest if paid off within a month. Total cost? $14.

$14 fee vs. $75 fee for the same $275 loan.

Quite a difference!

Although we will never suggest resorting to cash advance from a credit card, they are by far less costly in interest & fees when compared to a cash advance from a payday loan. In fact, if the credit card cash advance is paid off in two weeks (which is the normal duration of a payday loan), the fees you incur will be even less.

In situations like those described by original poster, an emergency fund will come in quite handy! Read more about the importance of an emergency fund and find out how to get one.

Remember, personal expense tracking is important. Without it, you might need to make some very difficult financial decisions.

Train Wreck Tuesdays are a weekly post of horrible financial mistakes. They are posted anonymously. Submit your story; if you’re selected, you get a free personal finance book. The best comment gets the same prize! Check out past Train Wreck stories here.

Further Reading on Personal Budget Management

Personal Budget Management
Create a Personal Budget Online
Household Budget Software
Debt Management Tools