Our Financial Makeover

Hesitation

It’s with quite a bit of hesitation that I sit down to write a post on our financial makeover, but after having thought about it for a while and having talked it over with my wife (Robin), we think it is worthwhile to share. My hesitation comes from a number of things, but most notably:

  1. What will my family/friends/coworkers think? Money, and especially the mistakes one makes with it, is not something one is supposed to talk about.
  2. I consider myself pretty smart, so to say I followed a book (more later) geared towards “other people” by a guy who sometimes comes off as a loud mouth is a bit humbling.
  3. Even more humbling is the fact that I/we knew everything in the book already (all the “Baby Steps”), we just never executed on the ideas until now. But hey, you gotta start somewhere.

On the positive side, we’ve shared our story now with a few friends and family members and it seems to resonate, even if it is a bit weird to hear. Moreover, after 10 years of marriage, this single book and the ensuing process has radically changed our marriage for the better and I think that makes it worthwhile to share.

A Little Background

Robin and I have always made decent money. Not the stuff of retire-at-45 dreams, but still, good money such that all of our needs are met and most of our (reasonable) wants. Like most Americans, we had a few credit cards, car loans, mortgage, etc. When emergencies came up, we put ‘em on the “card” or scrambled somehow to put together the money. We’ve had some small windfalls from time to time which either paid off debt or went towards a house or vacation or some other major purchase. I don’t think we ever had more than $10K in credit card debt (until recently) and we’ve managed to scrape together some decent retirement money. At the end of the day, we kind of planned our money, but we were never really on the same page about money. Robin did the day to day money stuff and I did the strategic investing (if you can call it that, mainly I insisted that I put money into our 401Ks.) For a long time, we’ve had an undercurrent of not wanting credit cards and debt, but it was always kind of a love-hate thing. As for Robin and getting rid of credit cards, she’d always pull out the old saw of “Everyone has credit cards; I’m not going to live like that.” and I would back down. Finally, I think we both treated each other, in regards to money, as if the other person was somehow making it harder for us to get the things we wanted. My fixation was (is) on travel and her’s is on the house and decorating (and travel.) Neither are cheap interests. I can only imagine how much worse it would have been if we made less than we did at the time.

The Fall

In the Fall of ’08 is when things started to change. We had started construction on our “dream” house back in April of ’08 while still occupying our existing home, figuring we could put it on the market 4-6 months prior to completion of our new house. Of course, as you all well know, that’s when the real estate market really started to tank (or at least it did in the Raleigh area, I know other markets started sooner.) To make a long story short, our house didn’t sell for 16 months or so, meaning we had two mortgages for a good 10-12 months. On top of the two mortgages, we put something like $10K into the house to update it and fix issues that needed to be addressed as well as moving expenses and some things for the new house. Even with both Robin and I working, we needed to charge some of those expenses. Things started to pile up. I don’t know if we could have foreseen this any better, but it still had a pretty dramatic effect on our finances. One that we are just now getting out from under.

Backing up a little bit, and this truly was a mistake, we screwed up on the mortgage for our new house. Kind of, anyway. Here’s the thing: I was an independent contractor at the time, meaning we needed to set aside money for taxes, which we dutifully did. We also set aside money for the down payment for our new house. I think you can see where this is going. We put both of those monies into the same savings account. So, when we went to buy the house, we looked in our savings account and said “Look at how much we can put down” and off we went to get the cashiers check! A few weeks later, we dutifully did our taxes. Sh*t, we’re $20K short (there were probably a few more expletives in there too.) Where did it go? You guessed it, into our down payment. Stupid, stupid, stupid. It is hands-down the biggest financial mistake we’ve ever made. We simply forgot about taxes for that one week of time where we went to buy our house, caught up in all the frenzy of the closing. Thankfully (I never will be able to truly express how meaningful the gesture was to me) a friend of mine bailed us out with a short term loan. No lectures, no arrogance, just an offer to help. Talk about humbling and uplifting all in one situation.

Flash Forward

With the house finally sold (we lost $30K! Yipee!) in December of 2009, we took out a HELOC (home equity loan) and a 401K loan and paid off the friend and got rid of some other debt. It wasn’t ideal, at this point, to trade one debt for the other, but it made a bit more sense financially since at least we would get a tax break and the 401K loan meant we were paying ourselves interest (at the cost of lost market opportunity.) At this point, I’d say we had about $50K in total debt (credit cars, HELOC, 401K.) Adding to the situation, Robin lost her job. Bam, there goes half our income. Still, on paper we were OK, especially if we cut back on some things and thankfully we didn’t have 2 mortgages anymore.

Me, Robin and Dave

I first saw Dave Ramsey on Fox one late night at a hotel on a business trip, flipping channels to fight jet lag. For some reason, the show caught my eye. Maybe it was the people on the show blowing up their credit cards. Or maybe it was Dave’s tough talk. I don’t know, but I filed it away as something to check out later. A month or two later (June 2010), I happened on Dave’s “Total Money Makeover” at Target and plunked down $15 for it (we have not bought any of the related materials and frankly, I don’t think most people need to, either.) It was by far and away the best financial investment I’ve made in my entire life and that includes buying Apple at $16 per share back in 1998 or so (I believe it has split twice since and is now in the $350/share range). But that’s getting ahead of myself.

I brought home the book and started in on the first chapter and talked about it a bit with Robin. She was tepid at best, but in her defense, I’m often a bit stubborn when it comes to something that gets in my brain and getting rid of debt was in my brain. She didn’t want to have to live like she was poor and go without. I agreed, but I also showed her how much money we were paying in interest and if we had all that interest money we could buy the things/experiences we wanted with cash. Then, something magical happened. OK, so it was actually quite mundane, but the result has been amazing. We drove up to NY in July of 2010 to visit family and friends (want to guess how we paid for it?). The drive from NC to NY is about 12 hours. Typically, I do most of the driving, but on the way back, I was tired of driving and Robin took over. I relaxed into the passenger’s seat and pulled out Dave’s book and started to read. I’ll never know what prompted it, as we’ve never done it before, but Robin suggested that I read it out loud. So I did. I read a chapter and we discussed it. I read another chapter and we discussed it. Lather, rinse, repeat. We probably read/discussed for 4-5 hours that drive home. My voice was almost hoarse by the time we stopped for dinner. The damage, however, was done. The gears were turning.

Over the course of the next week or so, we read a chapter together every night and then discussed it. We hashed through whether it was even possible. We argued a little bit and there was definitely some tension as to how far we should go, after all Dave preaches an all-in or don’t-bother strategy. However, several things really clicked:

  1. Dave doesn’t say you can’t spend any money. He just says you need to put a label on absolutely every dime you take in and if you can’t afford something, you can’t buy it yet. We had budgeted before, but we always just left a bunch of money as “miscellaneous”. Now we sit down and plan out the month ahead and, often times, several months ahead.
  2. Dave aptly points out that most things that most people categorize as emergencies are not emergencies. Your car breaking down is not an emergency. It’s an inconvenience, no doubt, but it is not an emergency. Your child needing clothes for school is not an emergency. Birthdays come every year at the same time. As does Christmas. They are not emergencies. Plan for them. Seems obvious in retrospect, but I can’t tell you the last time we planned for any of those things beyond the week or two before they happened (or maybe the month before in the case of Christmas.)
  3. Pay your smallest debt first. Most advice is to pay the highest interest rate first, but Dave, rightly so, focuses on the emotional side of the equation. Get a win by paying off something and it will further motivate you. Success breeds success.

Once these items clicked in, we both fed off it and worked hard to stick to it. Heck, we even sacrificed. Not in any big way, but in a lot of little ways that adds up pretty quickly.

Baby steps

Dave’s step one is to put $1K of cash in an emergency fund so that you don’t have to use the credit card if something comes up. We did that relatively quickly, figuring we could dip into it if we had to for those typical non-emergency emergencies. Turns out, though, as Dave says, that step alone makes you realize most things aren’t emergencies. Next, we set up a plan to pay off our consumer debt using the “snowball” plan. The snowball is simply applying the money from the debt you just paid off (the smallest one) to the next smallest debt, while paying the minimums on all others.

Over the past 6 months a strange transformation has happened. Every month, we’ve sat down together in front of a spreadsheet (we share it on our computers so we can access it separately as needed) and we plan out all of our income and all of our expenses. We talk about it in a real, direct way. What do we owe, what do we want, what debt can we pay off now and what will have to wait. Lay it all on the table. Rarely do we fight over money now during the month because we have it all allocated up front and we both agree on it. Agreement is critical. The meeting isn’t over until you both agree. If something comes up, we sit down and review where we are and figure out how to change it and still meet our goals or forgo. We also forgo buying things we want until we have cash for it, but I think both of us would agree we don’t feel like we are living without.

This new communication has bled over into other parts of our marriage as well. It’s so much easier to be real with each other when you are both working towards mostly the same goals. I say mostly, because we both also know that part of this new found capability involves letting the other have their piece of the pie to do as they see fit without begrudging them. Dave helped us see this because it gave us something outside of the two of us to talk about. It wasn’t me versus her, it was us, discussing Dave. He was the genius or the idiot, not me and not her. It was almost academic in nature, like studying for an exam.

Debt Free (almost)

As of today, I am happy to say we are free of all of our credit card debt and the 401K loan ($30K paid off in about 7 mos all on 1 income and some unemployment.) That leaves us with 1 car payment and the house as our only debt (mortgage plus HELOC). The car will be taken care of by July of this year. As for the HELOC, well, I’ll come back to that. In the meantime, this is the first year ever that we planned and saved for Christmas and purchased everything in cash. Furthermore, neither one of us has used a credit card in 7+ months (although I still use one for work and get reimbursed from my employer.) Not only that, but in addition to all the extra Christmas expenses, the month of December brought on an emergency visit to the Vet ($600) due to our dog swallowing a friend’s prescription meds as well as $1300 in car repairs. All paid in cash. We did dip into the $1K emergency fund for the dog, but we’ve already paid it back.

As for the HELOC, well, we’ve decided to sell our house. Yeah, the one we had built, more or less, to our spec. two years ago. Could we afford to keep it at this point? Yes, actually we could, but it takes up too much of our income relative to what our priorities are. It was not an easy decision. I really love the house and the neighborhood we are in, as well as the peace and quiet it brings being out in the country a bit, but we both feel more opportunities are out there if we can increase our monthly cash flow and the house is the biggest impedance to that.
We still don’t know how the house stuff will all turn out, of course, and I don’t know if what we’ve done will work for you, but I hope that by reading this it might help. If nothing else, try picking up a book with your spouse and reading it out loud to each other. You can thank me later.

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