How To Lose Debt

I will cover heating with electricity in the Electricity Section at some point. However, if you are one of the unlucky ones who live in one of those northern, wickedly cold states like Maine, Vermont, or New Hampshire, among others, then you know a large share of your “disposable” income goes to paying your heating bills.

Having personally spent 11+ years in New Hampshire, I know how these costs add up. New Hampshire is absolutely breath taking in the summer, with lots of beautiful places to go, like Lake Winnipesaukee, and Mount Washington. However, the winters can be brutal, absolutely dangerous. During one winter there, we had a three week stretch where the temperature was 30 degrees below zero! That is not wind chill that is ambient temperature! We actually had baseboard heating pipes freeze!! We lived in Southern New Hampshire!

Anyway, getting back to the costs, there are many different ways to keep costs down. One way, which is almost too silly to mention is to keep the thermostat down. A general rule of thumb is for every one degree reduction in your thermostat, you will save 3%. Therefore, if you reduce your setting from 72 to say 69, you will save around 9% on your overall heating bill. When you stretch that over a winter season, those numbers can significantly add up.

For example, if your heating bill averages $300 per month over 8 months of the year, a 9% reduction would be $27 per month for 8 months would be $216! That is $216 dollars you can use to do what? Pay down your debt, that’s right! It’s either one night in a halfway decent hotel, or you are $216 closer to losing debt permanently. I’m guessing the fact that you are reading this blog, you will choose the later. The decent hotel will come later when you can pay cash for it.

Another possibility of reducing heating costs if you do not like wearing sweaters all the time, is to purchase a timed thermostat. These units reduce the thermostat temperatures when they don’t need to be quite so high, like overnight when you are warm and snuggly under the blankets or during working hours when you leave the house to go to work, and the temperature does not need to be so high until you return.

Another way of reducing the overall costs for heat is to enter into a buying plan. Buying plans are more likely with oil, than the two gases, to fix prices called pre-buys. Gas companies will spread your payments out over the year, so you do not see them skyrocket in the winter months. These are called budget plans.

However, oil companies will actually allow you to pre-buy a certain quantity of oil in June or July of one year, to be used during the winter months of that year. If you have not used all of the oil by the following spring, the cost per gallon re-floats to market rate; however, you had the gallon rate fixed during all of the winter months, when the cost usually goes up.

If you do not have enough cash to pre-purchase say 1,000 gallons worth of oil at today’s incredibly low rate of $2.01 ($2.01*1,000=$2,010), then they have other plans were you make quarterly or monthly payments at a slightly higher per gallon rate.

You will need to decide which plan you can afford, as I do not want you to put the heating bill on your credit cards. That would be simply crazy. As a general rule of thumb, you never charge consumables, gasoline, food, energy, etc. on a credit card unless you are planning on paying the bill in full when it comes in.

Why? Because at the end of the day, when you have consumed the consumable, you will be left with the bill, and still need to purchase more consumables. Consumables must be paid for from current “disposable” income.

Now there is a downside risk to purchasing large quantities of oil in advance that you need to recognize. If the price of oil goes significantly downward after you purchased it, as it did when this current recession began, you will be left holding your purchase of say 1,000 gallons at $3.00 per gallon, when you could buy it at today’s rate of $2.01. Not a good move to losing debt sooner.

On the other hand, if you locked it in at $2.01, and it went to $3.00, you get to continue to have oil delivered at $2.01 a gallon when the then current rate of $3.00 per gallon. Isn’t life wonderful?

The oil companies sometimes give downside protection for a slightly higher per gallon rate. So, for example, if the current pre-buy rate is $2.01 per gallon, if you pre-buy at say, $2.21 per gallon, if it drops below that, they will give you the oil at the then current market rate. These plans are not as common as they once were, because the price of oil has been so unstable lately, most companies do not want to enter into contracts like that.

When we lived in New Hampshire, I got personal pleasure of beating my oil company year after year. If I thought the price was going to go down, I would enter a contract paying slightly more per gallon, but having downside protection, knowing that the company was going to have to deliver the oil to me at the lower, then current rate. If I thought the price of oil was going to go up, I would lock in at the lower cost per gallon with no downside protection, knowing that I paid less for the oil, than when they are going to have to drop it into my tank later in the winter at a much higher rate per gallon.

I did this year after year. It was kind of like a crap game, but I always won. That was until the year we moved when the rate per gallon fell precipitously. Like when did that ever happen? Then I had to sell the oil to the new owners at the then current rate, and I got caught holding the bag. However, I figured if I beat the oil company every year for 11 years, and got caught for one, I still made out like a bandit overall.

There are many sites on the web that cover oil “futures”, which give you some indication of the upwardly or downwardly movement of the oil market. One example is Bloomberg.

I need to cover a couple more topics here. The first is the oil spot market. When you purchase oil from a local dealer there is an unwritten rule saying that they will service your equipment should your furnace break down in the middle of a godforsaken winter. It won’t be for free, unless you have a service contract. It is also first come, first served among their customer base. If they have too many service calls to handle, you may have to wait.

When my pipes froze during that hellish winter in New Hampshire, I needed to wait ½ day with no heat for them to come out, and when they did, all they would do it shut off that circuit, and restart the system. So we had one room, our bedroom, without any heat at all. The reason why they went this route was they had many other customers in my predicament, and it’s better to quickly get everyone partially working, than to have some customers continuing with no heat to the point where additional pipes would freeze.

Makes sense, no? The other reason they wanted to cut off the circuit and move on, was the pipe that froze was in the wall behind my stand up, plastic based shower. They were concerned if they got back there with a torch; they would burn down my house. In a cold winter, that would not be the best solution.

There will be a whole section in this blog about doing it yourself, so I do not want to belabor this situation too much. But, I want to point out that sometimes, assuming you have the skill, or buddies that have the skill, you need to take ownership of the issue and do it yourself.

After a couple of estimates to solve the frozen pipe issue that were in the neighborhood of $2,500-$5,000 to rip out the entire shower to fix the pipe, I decided to do something about it myself.

Now picture this, I have had desk jobs my entire life. There was no reason to use my hands ever, other than typing on a keyboard that is. But, I was blessed with the skill to use my hands, and the guts too, handed down by my mother believe it or not. She used to fix everything, and I learned quickly. So where my heating company refused like pansies to get behind the wall and fix it, I was going to do it myself.

So behind the wall I went with a propane torch, a piece of asbestos to shield the wooden wall frame, some solder, flux, and a spray bottle of water to stop the fire if one started.

Now I will have to admit, even I was concerned about burning the house down, but with my trusty partner and third arm, my wife Lisa, who held the spray bottle, I knew I was covered. Anyway, if I fixed the pipe, and saved $2,500 to $5,000, and got the heating circuit restored, I was that much closer to losing debt permanently. I understand that not everyone is lucky enough to have these types of skills, but if you do, use them. You will save bundles.

So let me get back to the spot market. You can buy oil from the same local dealers that you would buy from normally, or from some nationwide buying plans at what is known as the spot market rate. The spot market rate fluctuates upward and downward with the market at any given time, unlike the buying plans where you pre-buy at a fixed rate. But, the key here is that the spot market rate is almost always cheaper than the rate you could get if you wanted to prepay. In other words, if the rate of a pre-buy contract was going to be $2.20 per gallon, you could buy oil on the spot market for $2.01, or somewhere near that.

There are two downsides to dabbling with spot market purchases, risks if you will. The first is that your purchases are at a market rate. So if the spot market rate goes through the roof in a really cold winter, you still need to buy the oil at the then current spot market rate. It could be painful.

The other downside, getting back to my nightmare with the frozen pipe, is that all oil companies will always service their direct customers first, before they will even consider taking on outside business. What this means to you or me, is that there may be no one to service your system in a particularly bad weather period. But, if you can shoulder both of those risks, you are likely to buy oil slightly cheaper than at the regular customer rate.

My final comment in this section has to do with the pre-buy contracts. You see, when you enter the type of pre-buy arrangement with an oil company and hand them a stack of cash, you are actually entering a contract with that company, for them to supply you oil at the agreed up rate, for the remainder of heating season, or until you have used the entire allotment that you paid for. In other words, you pay for the entire 1,000 gallons for example, up front.

As I will mention elsewhere in this blog, contracts, any contracts, are only as good as the two entities (people or businesses) that have entered into the contract together. What that means to you is that if the oil company goes out of business, while it may still owe you the oil based on the contract, you may never be able to collect on it. Therefore, there is a risk in pre-buying that I want you to recognize.

When the oil shot through the roof several years back, many local oil companies, and even some fairly large wholesalers got caught holding the bag, and many went out of business. Therefore, you need to understand and calculate that risk when you enter into these types of contracts. You may save money with a pre-buy arrangement, provided that you “time” the market well, and your oil company doesn’t go belly up!