Steps and Missteps to Cord Cutting

After some setbacks to my cable television independence, I've recently climbed back on the horse. This time I have some new weapons and a new strategy: ownership. I'll get to that in the next post but for now I'd like to summarize my attempts to cut the cord.

This all started about 4 years ago. I made a change to our cable plan and I let the nice CSR sign me up for the $100/month "Triple Play" service that includes Internet, phone, and Cablevision's extended "optimum" television line up. She also threw in a second DVR, free for a year and made it so the first DVR was billed as a regular cable box. All told it was about $120/month, but for that money I got a lot of services and perks.

Then the introductory period ran out after 12 months. Those perks that seemed so nice for $120 didn't seem so great when the bill started closing in on $200. I took a step back and questioned how much I actually needed these services and which ones I could afford. I kept the Internet services, as theirs is the best in my area. I returned the both DVR boxes. I cut my cable back to their lowest plan, which isn't much more than a rebroadcast of channels available over the air (OTA). I even tried getting a better antenna to see if I could switch to just OTA, but apparently I can only do that if I speak Spanish. Also, I switched my phone service to Broadvoice.

These changes brought my total back down to a more manageable $80. I didn't sack the extra money away in the bank, though. I knew if I'm to make this work I need to invest in some other forms of entertainment. I do have a child, and I'm a guy who likes to watch TV and movies. So I bumped up my Netflix membership to 4 discs and made it a point to buy my son DVDs every couple weeks. I augmented my viewing with online streaming services like Hulu, and I started watching a lot more fansubbed anime. This worked well.

...For a while. Then my mother moved in for a month or so. She's hopelessly addicted to TV. In her house the TV runs 24/7. Often on one of those blathering, vile, manipulative news channels. I'm sure you know the one. So we had to reinstate a broader cable line-up. We kept our separate cable service, though. No DVR this time. A couple months after she left, we dropped our television service back to previously low levels.

...For a while. Next up came my wife's research project. Her concept was to monitor some of those blathering, vile, manipulative news channels and write about how they influence one's worldview. I'm sure it was interesting, though she never let me read it, and she got a good grade. However, this meant we needed to increase our service level and add a DVR. At the time my son was approaching his third birthday.

Big mistake. Once a habit formed of recording shows on the DVR and watching them later we became stuck. Sure, we can always just get rid of the thing and deal with him when we do. That's annoying, though, and it's a little unfair to him. He's just a kid and he likes some shows that have a limited or non-existent DVD presence. We limit the time he watches TV, but kids seek out new things so the shows he watches will drift over time. Two shows in particular seemed troublesome: Nickelodeon's Bubble Guppies and Disney's Jake and the Neverland Pirates.

That brings us up to a week ago.

Here's a quick rundown of the setup:

Service	Provider	Cost/Month	Notes
Cable	Cablevision	$70	including DVR
Internet	Cablevision	$50
Phone	Broadvoice	$15	No Long Distance
Rentals/Streaming	Netflix	$28	4 disc plan

Since we're all caught up now in my next post I'll go over some changes I've made, others I plan, and what the long term picture looks like.

Creditor Protection

I was just reading this article and it reminded me of the time when I mistakenly bit on this trap. While there is a circumstance where you may not be covered by standard life or health insurance policies but you would under this protection, namely the loss of you job, it just isn't worth it. It's far too expensive.

The problem is the pitch. It only costs 1% of your balance, they say. So you may think that it will bump your APR up a percentage point. Wrong! It bumps your APR by 12 percentage points. It is 1% of your balance monthly. Your monthly interest is calculated by multiplying your average daily balance (on most cards) by one twelfth of your APR. If your annual number is 12% then your monthly number is 1%. In that case you would double your interest by taking this offer.

It just isn't worth it. If you carry no balance then this does nothing for you and it can make your debt balloon in a situation where you start carrying a balance. If you do carry a balance then you'll instantly double your interest owed. You're better off putting the money into your emergency fund.

Check Your Accounts

This piece of advice has been all over the place lately: Check your accounts. Do it now. Check your credit cards, redeem your points. Make sure your bank is still afloat, see if they lowered your savings interest rate. Review your expenses and see if there is a way to reduce them.

Tonight I received an email that my statement from AT&T Wireless was available. I logged in to check what was due. No overages, tons of roll over minutes, but that data plan price tag is a bummer. Then it clicked, we haven't been with AT&T for very long, yet we already have 2,400 roll over minutes accrued. Two clicks later I reduced the bill by $10 per month by lowering our plan to 550 minutes each month. Even if we have a busy month our roll over minutes will make up for it but we never came anywhere near the 700 minutes we were paying for.

If I can save $120 a year with 20 seconds of effort then you can probably save too. At the very least you'll know if anything has changed.

Cutting the Cable

Enough talk. This weekend I took action. I cut my cable service back to basic cable. This means my cable bill will be roughly $13 per month for television. I still have to return the DVR/cable boxes, though, so currently the television part of my bill is around $40.

The number porting process seems to have canceled the VOIP service for me. That part of the bill has already gone away. I am not going to cancel Internet service, so that will represent $50 of my bill. The final cable bill should be ~$63, the actual number depends on what taxes apply.

Here's the breakdown of the old bills:

Cable television, Internet, and phone: $164
Netflix: $15
Total: $179

The new bills:
Cable television, Internet: $63
Netflix: $18
Phone: $15
Total: $96

Savings: $85

After a few months of savings in the entertainment budget I will probably buy another antenna to see if I can get a good enough signal. If I can make that happen then I can save almost $100 per month over the old plan. We already used the first month's entertainment budget to buy Kevin some DVDs. I hope he won't miss Moose, but at least he can still watch a show or two.

One last note: Cablevision's customer service was top notch during my interactions with them. I'm unhappy that they misled me when I switched to their service but at least they were pleasant about everything. Most importantly, I never once had to speak to a customer retention specialist. No one tried to talk me out of my decision. No offers with strings attached. They just did what I asked while treating me politely.

Debt Based Budgeting and Saving

This is an idea I've had floating around in my head for a while now. It should work for people who have credit card debt, but that debt only takes a portion of their budget each month. For this to succeed you will need to be able to budget your money without resorting to using separate accounts or using cash for certain purposes. Also, you'll need to have available credit, you won't be able to do this if your cards are over their limit.

Still reading? Good.

Here's the idea: Pay down your credit cards instead of putting money into savings or keeping it in your checking account, then use those cards for your purchases instead of debit/checks/cash.

This seems to go against most advice to only use credit when you have to. It can work to reduce your debt, or at least lower the interest you pay each month. Since credit card debt is likely your highest interest debt the more you can pay towards it the better. If you budget your expenditures, especially basics like food, and pay that money to your credit card as soon as you get your paycheck then you will lower your average daily balance, and possibly your period ending balance as well.

This uses the Average Daily Balance in your favor. To understand this let's look at an example. Say that I have $1000 in credit card debt at 10% yearly interest. My monthly interest rate will be 0.83%, and that will likely be calculated against the average daily balance on my card. If I pay nothing that month (let's not count any late fees) I would be charged $8.30 in interest. If I do pay something, but I wait until the last day of the billing cycle, my interest will barely change. For instance, if I pay $100 on the last day then my average balance is still $996.67 and my interest will be $8.27. Not much savings this month, it would help the next, though.

To calculate your average daily balance you need need to multiply what your balance was by how many days it was at that balance, then add it to every other balance over the period, and divide the final number by the days in the period. If I bought nothing on that $1000 balance card during a 30 day period, but I paid that same $100 on the 15th day of the period then my avg. daily balance would be calculated as such:

((1000 * 15) + (900 * 15)) / 30 = $950

With the earlier payment I would save almost 50 cents. Now that you see how it works, perhaps you can imagine what it would look like with bigger numbers. Unfortunately, that is about as easy as it gets to conceptualize because normal use will cause fluctuations in the balance that make calculating your average a chore. The important thing to walk away with is that the earlier you pay a credit card the less interest you will pay at the end of the period.

Now we need to apply this to budgeting and savings. The idea here is that if you have money budgeted then you should immediately pay that money to your credit card, lowering your balance immediately, then use that card to buy the things you've budgeted for. During the time between the payment and the purchase your balance will be lower, positively affecting your average.

This works great for groceries. We can continue to use our $1000 debt card to show this. Assume that you budget $50 for groceries each week and you're paid every other week. You use $100 of every paycheck on groceries, but you pay with debit each time. Your money isn't working for you. Instead, pay the $100 immediately to your card (above any normal payment you would make) and use the card for those purchases. Here's how it would look if you were paid on the 1st and 14th day of the period and you bought groceries on the 7th, 14th, 21st, and 28th days:

((900 * 6) + (950 * 7) + (900 * 7) + (950 * 7) + (1000 * 3) ) / 30 = 933.33

Notice how even though our ending balance is the same as it was at the beginning of the month our average daily balance is far lower. In fact, it's actually lower than if we paid $100 on the 15th and never used the card. The interest for that period would be slightly less than if we made a substantial payment in the middle of the month. What happens if we combine the two and make a $200 payment on the 15th ($100 for each, the groceries and to pay down the debt)?

((900 * 6) + (950 * 7) + (800 * 7) + (850 * 7) + (900 * 3) ) / 30 = 876.67

By rolling your budget for monthly expenses into the money you pay upfront to credit cards you dramatically lower your average balance. Think about how much of a difference that could make if you applied it to your food budget (which is likely more than $50 per week, especially if you have a family), your gas budget, and anything else you can pay using your card. If your interest rate is higher then you get more benefit as well, and 10% is a fairly low rate. The other aspect that is hard to quantify is just how much you will save over future periods, because the interest charged this period will accumulate more interest every period until you pay it off.

It works for savings, too. Actually, it works better for savings. If what you are saving to buy can be purchased via credit then you should consider this method. Think about the difference in interest rates between your savings account and your credit cards. I can imagine that the difference is stark. I should note that the better savings accounts compound interest on a daily basis, which will generate more interest than the same rate compounded once a month. That isn't enough to overcome the difference between most savings and credit rates. So, financially you may be better served by paying off your debt instead of saving for purchases.

Even if your savings interest rate is fairly high and compounds daily you should save more money by paying off higher interest debt. In our previous examples we used a 10% interest credit card, which is on the low end, so let's go to the high end of savings and compare a 5% savings account (you can't get these right now, but it will prove the point). Using those accounts if you saved $50 per month, at the beginning of the period, towards a $300 TV you would double your return by paying off the credit card. I'm going to spare you the math, but my calculations showed a credit interest savings (money you don't owe in interest) of $8.84 and a savings interest return (money you earn in interest) of $4.32.

Obligatory warnings and clarifications: If you do this you must be careful about it. Monitor your spending carefully to be sure that you stay within, or at least reasonably close to, your budget. That may limit the usefulness of this plan, because if you are deep in credit card debt you may have issues with monitoring.

This should not replace your emergency fund. The last thing you want in case of an emergency is to run up tons of debt. You may run into problems with that debt down the road. If nothing else, cash is infinitely more useful in emergency situations.

The idea should be that you use this in place of saving to spend or use already budgeted money that you will spend during the course of the month. Don't use this to replace other savings such as retirement, emergency funds, or college funds. Obviously, if you're in debt you should think about discretionary spending carefully. I like to think that this makes such thought easy, because you don't have money burning a hole in your pocket, it's working for you to dwindle your debt.

Lastly, I'd like to apologize for the ugly equations. I tried to keep the math simple and clear. I realize that there are better ways to express the equations I included, but they would be less clear and probably more confusing.

That's it. I'd like to know what you think or if you've done something like this before. Let me know in the comments.