Returning the Favor and other Slices of Life

Returning the Favor
Returning the Favor
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Tuesday, April 01, 2008

But for the Grace Part II - Digging out of the whole

So I painted the picture - I was broke. Suzy and I had no savings, had more money going out than coming in, and still kept on spending.

Yep - that was kinda the key - we kept spending. I was making money writing to supplement my income, but instead of considering that part of my household income, I was considering that "play money" or "extra money." So I'd go to Vegas and play, or go to underground poker games and throw away money, and not even pay attention to what I could have been doing with that money, because it was my "extra money."

Sounds stupid, huh? I agree. It sounds stupid because it was stupid. I wasn't being respectful of my money, and it wasn't doing anything for me, other than buying me more stuff, and I had a house and three storage building full of stuff, so that was the last thing I needed.

So at some point last year, I saw a television ad for an HSBC online savings account that had a 6% interest rate. That was pretty exciting, because I had started a savings account at Wachovia (my regular bank) to serve as overdraft protection, but it certainly wasn't earning me any interest. So I took a chunk of one month's writing money and stuck it in a high-interest savings account. Then, once that started to earn interest, I became intrigued with this concept of my money making money by just sitting there, so I started to ship off a small amount of each week's paycheck into that savings account to try and build up a little cushion.

That's all I was looking for at that time, just a little cushion. We no longer had the theatre, and the truck had been paid off a couple year ago, so our bills were starting to come in line. I signed up for a weekly autodraft from my bank account to my mortgage company which allowed me to pay 1/4 of my mortgage each week instead of trying to save up and pay the whole thing at once, which was getting hard to do since we weren't controlling our spending.

Are you hearing a theme here? Because the underlying cause was never that I wasn't making enough money. The root issue was that I never took the time to get a handle on our spending. If a credit card wasn't maxed out, then we must still have money, right?


So after I stuck a little money in a savings account, I looked at what we were spending, and was absolutely sickened to see what we spent in a month on food. Close to $800 in one month on food, because we ate out for every. single. meal. This was along about the time I decided to try and lose weight, so working on controlling my caloric intake went a long way towards controlling my fiscal outlay as well. Frozen dinners are great for controlling portion size and calories, and they're a shitload cheaper than a prepared meal, too. So I cut a couple hundred dollars out of our monthly food bill by bringing lunch to work and by eating in the house for almost all of my meals.

Late last year I became pretty motivated to get rid of our credit card debt. We had accumulated about $6,000 in credit card debt after getting through debt consolidation and taking out a loan against my 401(k) to pay off all our credit cards. Yeah, I rock. I borrowed from my future to pay off my credit card debt, then just ran up more credit card debt.

But last year I started trying to pay it all off, but I wasn't getting any real traction. So I started looking around the intertubes for financial advice and found a guy named Dave Ramsey. Dave wrote this book called the Total Money Makeover, and it tells his story of getting rich, going bankrupt, and then getting rich again without accruing any debt along the way. So I started reading Dave's book, and following his Baby Steps, and looking at my life along the way. Before you start Baby Step #1, you have to get current with all your bills. Then proceed -

Baby Step #1 - Start a baby emergency fund of $1,000 in savings. This isn't a "rainy day fund," this is an "OHMYFUCKINGGODWHATDOIDONOW fund." It's designed to help you not get further into debt in case something bad happens. Like a car repair or appliance blowing up. Like the time I paid off my credit card only to have the fridge die the same day. I don't think $1,000 is enough to actually cover an emergency, so I squirreled away $2,000 in my emergency fund, which will cover most short-term emergencies.

Baby Step #2 - Start your Debt Snowball. Dave suggests listing your debts from smallest to largest and attacking them in that order. Make minimum payments on all debts but your smallest, and throw everything you have at the smallest debt until it's gone. This gains momentum in your debt reduction plan, and allows you to see successes quickly, thus motivating you to continue. I like this idea. We went at this pretty hard over the past few months, and erased $6K in credit card debt, $2,500 in back taxes and about $1,000 in other assorted debt.

But the only way to do this is to live on a budget. You can't attack debt without controlling spending, and that was the hardest thing for me to do. Working hard and working extra jobs to make more money was never the problem. It was not throwing the money at the first shiny object that came along that was tough.

Now I've said before that I haven't totally drank the Dave Ramsey Kool-Aid, and I'm not quite willing to give up all vacations and eating out and going to the movies. But we have cut way back on those things in an effort to reduce our debt, and right now we've eliminated everything except our mortgage, Suzy's new car, and my student loan. My student loan is ridiculous now because I never made payments on it until this year (I graduated in 1995), but we're now making the payment every month and we're attacking the debt on Suzy's new car. If I'd read Dave's book before Christmas I quite likely would not have bought Suzy a new car this year, but she really needed a car, so I don't feel too bad about taking on $17K in car debt.

I also think I can pay it off in 30 months or less by being aggressive with attacking the principal, so that will help as well. Hopefully I can pay off everything but the house within 5 years, which would put me debt free (except for house) by age 40. Then pay off the house within the next 10 years to be completely debt free by age 50, and thus able to focus my energies on being able to retire while I'm still young enough to enjoy retirement.

On top of that I took advantage of the Fed cutting interest rates and managed to refi my house from a ridiculous 11.49% rate down to a 6.7% rate, which cut $350 each month out of our payment. Still not as good a rate as I could have potentially ended up with had I shopped a little harder, but it was a significant savings and left me with some cash to put central heat and air in our 40-year-old home, so I'm pretty stoked about that.

So right now I think we're out of the hole. We've got $2K in savings, plus a little in my Wachovia savings for months when my writing income is leaner (like the next few months before the WSOP kicks off). But it's meant a lot of sacrifices for us in the recent past and near future. We're not going to Boston for my niece's commencement and I'm not going to Vegas this month for BadBlood's birthday bash. I'm still going out in June, but I'm listing things for sale on Ebay to pay for it, and working to win more money so that trip can be funded completely out of bankroll. I refuse to put anything on a credit card for this trip, so that's what has to happen. We haven't cut up our credit cards yet, but I have put them away in a box on a high shelf so they're not easy to get to. I gave Suzy her card back last month for her to shop for Anne Frank with, because the theatre is cutting her a reimbursement check for all of that, but in the future we'll just pay for that with either cash or out of our bank account.

So we're not rich. And we're not completely debt-free, but we're in a great place right now and I think we're in a good place to get the rest of this debt knocked out. But I know what it's like to have bill collectors calling on every phone, and I know what it feels like to sign for certified letters from the IRS telling you they're gonna garnish your wages if you don't pay them. It sucks. And there's no easy way to get out of that hole.

But the first step is admitting that you have a problem. And as Americans, we are as addicted to debt as we are to anything else. We have allowed ourselves to become a gluttonous society addicted to immediate gratification, and that's what caused a lot of this current economic slowdown - too many people bought too much shit that they couldn't pay for, and now the bills are due. I've been there. I've stood on my front porch in the rain with my power shut off and a final disconnect notice from the water company asking my sister to loan me money to cover the check I was about to write to the power company. It's a terrible feeling, and I don't ever want that feeling again. And I don't want any of you to have to have that feeling, so if my story can help you avoid the pain I've felt from my own financial stupidity, then it's worth it.

Because as much as it sucked to live through it, I wouldn't change a thing. I made it through, and I'm proud of that. I got myself into a mess, and I got myself out of it. There was no Fed bailout, and no help available from Mommy & Daddy, either. I'm a better person for it, but I'd love it if you didn't have to follow that particular path to enlightenment.

If you're in trouble and wanna talk, you know how to find me. I can only tell you what I've done, and maybe point you to a book or two that helped me, but I'm happy to listen.


Astin said...

Congrats on getting your financial house in order... or at least on the way to it.

I've never understood the desire by people to purposely accumulate credit card debt. Short of payday loan places, they have the worst interest rates you can find. My mentality has always been that I can only spend on cards what I can afford to pay off entirely. It's a means of accumulating points and keeping money in my account until it can earn interest at the end of the month. So credit cards actually help me ACCUMULATE money instead of losing it due to debt.

Good luck with the bankroll building for Vegas. Stick to your guns on this and you'll come out okay. You're in a better boat than a lot of others out there.

Special K said...

Astin is correct, but I wouldn't recommend an alcoholic drink a glass of wine with dinner for the health benefits, so you might want to wait before moving to the advanced topics like using CCs for savings and points.

A wonderful book on the subject is The Richest Man in Babylon by George S. Clason. It talk of money like slaves. You work, you earn. You save and your money works for you 24/7. Spending you savings is like selling the children of you slaves. It build on that analogy. It sounds like you are probably beyond needing it now, but others might profit from it.

Finally, don't be afraid to put a little more in savings and not so much into your remaining debt. Car loans are the cost of transportation. It's not the same as paying on credit card debt for stuff that you've already used up. It's an ongoing monthly expense and that's OK. Same for the home loan. You pay for it as you live in it and earn equity along the way. Student loans are a little different. Does your loan cost more in interest than you earn from saving? If not, you should pay the minimum on the loan and save the difference. You earn more that way. Same for your mortgage. (11.5% - Well, not your mortgage)

Savings is your buffer against disaster and your key to freedom. Don't discount it. Work in it with equal effort.

I am proud of you for what you've done. It's awesome.

DuggleBogey said...

I also enjoy Dave Ramsey's philosophies, well, the money ones anyway. Congrats on getting going on it. You will be very happy you did, as I am.

My wife and I are debt free except for the house, and are saving for a new (used) car.

Ramsey has a great radio show. He does quite a bit of religious evangelizing along with his financial peace evangelizing, but his information is worth it to me even with the parts I disagree with.

You can hear him on XM Radio, but he wouldn't agree to paying for radio until you are already debt free.

He might be on an AM station in your area though if you search his website. It's a great show and really inspires you to work on your debt snowball.

Congrats again! Keep it up, I guarantee you will be happier for it.

Jim The Knife said...

Congrats my friend.
When I was your age I thought life was a series of "getting into and out of debt". That went on for more years than I care to count.
Then some time in my mid-forties I got smart. I didn't read a book, I just looked at the interest I was paying and said "holy shit".
I got divorced and was forced to file bankruptcy. (The good kind)
I remarried, paid off the bankruptcy 2 years early and have remained debt-free ever since.
We have 2 credit cards and pay for everything we can with Discover because we get 1% back. Neither card sees a dime of interest as we pay them off EVERY month. They are just a tool to save writing checks.
I suppose it all comes down to having "discipline" and I'm happy for you that you found it.
It's a nice feeling.

CarmenSinCity said...

Hey you! I got the book - thank you so much! I am going to tear into it this weekend.

Thanks again sweety. You are awesome.

Drizztdj said...

One good thing about working in the credit/finance industry is that you get to see how credit works, and all the horror stories.

Those stories scared me enough to become debt free (except house and new trailer) by age 33.

The Wife said...

Way to go! The accountant in me is ecstatic for another fiscally sound member of society.

Lot of discipline.