I could have sworn I wrote earlier about how one of the things I was planning on doing was personal finance and money-making outside of a typical 9-5. Oh well, if I haven't said it before, I'll say it now -- I find it annoying that there seems to be a gap between "flat broke with zero personal finance knowledge" and "personal finance guru," and I'd like to bridge that gap, while I'm crossing it.
Where Did I Start?
Okay, admittedly, I haven't been at the "zero knowledge" point for quite some time. My college degrees included courses in accounting, and I grew up dirt poor, so I'm no stranger to finances in general. However, as I'm reading books like Rich Dad, Poor Dad and other "grow your non-job income" type of books and articles, I've found them to be really freaking vague on the details of getting "from broke and homeless" to buying that first investment property or other financial milestone. I suspect part of it is simply because, by the time they've written about it, it's already years in the past, and they've simply forgotten all the details of which a new person is forced to become completely aware. So, the first step, then, is to start writing about it now, while I'm still activelly doing things, and while it's still fresh in my mind.
Rewind, Back To The Beginning Of Q4, 2015
In the fall of 2015, my husband and I both found ourselves burnt out at our jobs. For him, he'd finally had it working at what many in his industry call "a meatgrinder," because of the disconnect between the main corporation and its values and the IT "branch" of things. For me, as I've written about already, I just got burnt out in general. The end result was that neither of us could continue working in our respective positions.
Part of the agreement for me opting out of the conventional workforce, was that I took over the household finances. Prior to this, my husband managed it. Unfortunately, due to the level of stress he was enduring at work, he had allowed the finances to fall by the wayside. Additionally, because his new job was through a contracting company, and I wasn't working at all, we had to find our own health insurance coverage.
What I inherited:
- Three open credit cards with balances
- Nearly every bill was at least late, if not a month or more past due (including the mortgage)
- Half of the bills on autopay, with no savings to speak of to prevent overdrafting
- A new, upcoming bill for nearly $700/month total (premium + copay/deductible)
- Half the income with which to fix it all, which fell about $700 short of the full financial requirement
Step 1: Write Everything Down
The very first thing I did was create a Google Spreadsheet, wrote down the name of the bill, the day of the month that it's due, the amount to pay (average for variable bills like gas and electric), and any notes about it (whether it's on autopay, whether it's a special financing deal, whether it's weird and is billed quarterly, whether it's overdue and by how much, etc). I then sorted them by the due date and applied some conditional formatting to highlight the ones with due dates within certain time frames, so that I can see at a glance whether something's coming due or whether I need to pay it right now.
In a new sheet in the file, I created a primitive "cash flow" sheet. On there, I put down the weekly income we were expecting from my husband's new job, assuming 40 hours (he's hourly now, but generally gets 40+ hours). I also aggregated the payment amounts from the first page of the file, and added rows for additional, non-bill expenses. You know, things like food, gas, savings, etc. Then, it all gets mathed together (
income-(bills+expenses)) and I see where I come out at the end of the month (again, with a little conditional formatting to go red when
expenses > income and green when
expenses < income). I will tell you right now, the first couple of months of that were not pretty. The company hubby was contracted to being closed several days over the holiday (closed company == no pay for hubby) didn't help matters, especially since he was still training, so he didn't have anything to do while his trainer wasn't there.
Step 2: Create A Payoff Plan
On a third sheet in the file (my file actually has 7 sheets in it, though a couple are defunct or only for calculation purposes), I listed out all of the bills that were loans/credit cards. This sheet had the name, the current payoff balance, the interest rate, and the minimum payment. This included all of the credit cards, the car loans, my student loans, and the mortgage. We were fortunate in that most of our stuff has low interest rates and we only had the three cards (two of which had fairly small balances), but it still wasn't particularly pretty. I then imported this debt reduction calculator into my spreadsheet (it was a bit of a pain in the ass, just be warned), to get an idea of what to pay off when, and how long it would take to do so.
Snowball vs Avalanche
There are two common strategies for paying off debts -- the snowball strategy, where you pay the lowest principle, first; and the avalance strategy, where you pay off the highest interest first. They're both the same idea -- you pay as much extra as you can on one bill and only pay the minimum on the others. Once that target bill is paid off, you take the amount you were paying and apply it to the next bill. Either way is extremely powerful, because if I can follow it, I can have what started as over $230k in loans and credit cards paid off in less than 10 years (that includes the house, both cars, and my student loans), and I can be out of credit card debt in less than 5 years, with both cars following shortly thereafter.
Now, some people say that avalanche is better than snowball, but I don't necessarily agree. I think it greatly depends on what your debt looks like. Avalanche works spectacularly if you have a lot of high-interest credit cards, and your larger debts are relatively low interest. But what if your smaller debts are low interest, interest-free, or at least lower interest than your large debts? If you go the avalanche route, you'll be paying on those little debts for the next several years, while you beat down a large debt. However, if you go the snowball route, you kill those little debts very quickly, freeing up the money to pay off the bigger ones, and/or switch to avalanche once you're dealing with debts that are more similar in length and/or interest rate.
The nice thing about the debt calculator I linked earlier, is that you can switch between methods easily and see which one works better for you. For example, for me, the difference is about $90, with no change in the final payoff date (in no small part, because the car loans run out within the next couple of years, anyway), but the snowball method kills all my credit card debt, first, dropping the number of bills to keep track of very quickly.
Step 3: Find Ways To Reduce Your Bills Immediately
Admittedly, the lattes at the local hipster coffee shop were the first thing to go (sorry, Ramit, but our habit was pushing $50/week for the two of us that we legit couldn't afford), but my previous cash flow calculations didn't even include such indulgences (all of which got cut until we could manage the basics), so we needed to find other ways to cut the expenses.
Now, a number of people may have noticed that I've mentioned cars, plural, and their first thought may be that we should sell one of them. After all, that would immediately knock out a $300-400 payment. Unfortunately, that isn't an option for us, because my son sometimes has behavioral troubles at school, which is over 4 miles away (with no public transportation that connects us, and on a rural route with no sidewalk and barely a shoulder to speak of), and my husband works on the other side of the city (and again, hourly, with no paid time off), so I have to be able to get to the school to pick him up. However, if you're looking to get out of debt or looking for ways to make ends meet, this may be a feasible option for you and is definitely worth considering. We do have the nice advantage of the fact that our car loans are very low interest rate. My car actually has a 0% interest rate (no joke), and my husband's is 2.9%, thanks to some strategic timing on our parts a couple of years ago, and they're both halfway or more through their loans. This makes trading down in order to get a lower payment a bit more limited after interest rates and the reset of the loan are taken into account.
One of the first things I did do, though, was put my student loans into forebearance. To be honest, this sucks in the long run, because I owe something like $80k+ with a 6% interest rate, so once I start paying again, it will have tacked on several hundred dollars. However, in the short term, it meant I could make the rest of the ends meet and bought me time to free up money in other areas. There's no easy choice in this situation, sadly.
One of the other things to do, too, is to get aggressive about interest rates and monthly payments for things like credit cards and internet/cable/phone bills. We were already pretty pared down when it came to internet/cable (since we cut the cord years ago), but calling the cable company about your bill is a common way of knocking $20+ off your bill (I think we dropped ours by about $50). Talking credit card companies down in interest rates makes paying them off easier, and often gets you a few dollars back, as well. Since the circumstances have changed regarding our cell data usage (we don't have a landline), I'll also be reviewing our account to see if a cheaper plan is viable for our usage (though at the moment, it appears that it would only save us about $5, due to offered plan changes).
Leverage Windfalls To Pay Off Bills Or Reduce Payments
One of the most impactful things I was able to do was leverage the final profit sharing check my husband got from his previous employer, and the income tax check that we received for the previous year. These two windfalls allowed me to pay off the two smallest cards (dropped $3000 of debt, regained over $300/month, and dropped two bills off the schedule). The income tax also allowed me to greatly pay down the "equipment installment plan" that my cell phone carrier uses for paying for the phones, dropping that bill by nearly $60.
This tactic is especially useful if you have several small debts (for example, the two that I paid off were each around $1500).
Step 4: Build A Bill Paying System
The details of how to go about doing this is going to depend on how you pay your bills. All of my bill pay is through my bank, so that's what I'm going to detail here.
A. Get A Bank That Doesn't Have Account Fees
Many banks out there now that don't charge fees for personal checking or savings accounts. I personally really like Ally, because they don't have any fees for having accounts and their customer service has done very well by me. The important part here, though, is no fees for having an account (ideally, unconditionally no fees), because the system I use utilizes several accounts to handle things.
The one exception to this is Simple bank, which is built around a single account, but uses a "Goal" system to organize money. My system works with this kind of interface, and I actually use it extensively, as well. I still recommend a bank that doesn't charge fees for having an account, though, because the bank is already re-investing your money and making 3-4 times the amount you deposit, you don't need to be paying them for that privilege.
B. Set Up Financial Buckets
In my Ally setup, I have a checking account that I call "bill pay limbo," which is separate from my "income"/"safe to spend" checking account. I did this for a couple of reasons -- 1. Some of the larger bills require saving up money over the course of the month (the joy of having both the mortgage and the health insurance due on the 1st...), and 2. bill payments don't always get deducted from the balance immediately at my bank, so both of these reduce the cognitive overhead of dealing with the money that's actually there. (Yes, I know how to run a ledger and balance a checkbook. Since I'm not the only one withdrawing from the account, I prefer to use the tools the bank provides.)
I also have two savings accounts. The first is the actual "savings" account, which is for long-term savings. The goal for this account is to deposit money and not withdraw it until I'm ready to invest it somewhere that has a better ROI than a bank savings account. The second account is my "buffer" account. It's the overdraft protection account that is shared between the income and limbo accounts. The goal there is to have enough to cover bills if/when income falls short. This should have, at minimum, a couple of hundred dollars, but would ideally have enough for a month's worth of bills. Splitting these savings accounts is optional, but I recommend it, so that you can use the savings to grow your wealth in the long run, without impacting your immediate buffer.
In my Simple bank setup, Goals take the place of different accounts. I use it to seed my business and fund our HSA account, so I have a couple of permanent goals -- profit, HSA, and taxes. Then, I have other transient goals for various expenses that are incurred over the course of doing business. For a personal account, these goals can be things like "savings," "bill pay," and "buffer."
C. Immediately Fill The Buckets (And Automate It, If Possible)
The next step is to fill those buckets, ideally automatically (if possible). For example, every Friday (weekly pay), I have $430 transfer to bill pay limbo, and $10 to savings. I get this number by adding up the entire month's of bills that have a due date and dividing by the number of paychecks per month.
(Confession: that amount is only the minimum required to pay health insurance and mortgage for me, I then manually move an additional $400 or so to the bill pay, this is because hubby is hourly, and it's happened a few times that he didn't have enough hours to break $800. However, if you're salary, go ahead and calculate how much you need per week to accumulate the amount necessary to pay the bills with due dates.)
Technically, Simple has the amounts automated, but it's a daily transfer, which I don't really like. So, I just do this manually. Each week, I go in and move the money to each of the buckets. On this one, I actually keep the "safe to spend" at 0, because everything gets earmarked (this is a little more difficult to do in the Ally setup, because things like food and gas vary so much).
What this does is earmark your money, so that you're less likely to spend it on impulse buys and can better create (and stick to) a budget. It also ensures your bills get paid.
D. View What You're Actually Paying During The Month
I'm a fan of Wave, since it's free for personal and very small business use and includes a personal section for personal finances. However, Mint and other personal finance software works, too, and Simple has this built in. The important part here is that your transacations are all categorized, so that you can see what you spend where each month. This helps you find where things can be trimmed, as well as where you're spending less than you think. I come back to my Wave account at least once a month to ensure that I'm still spending the amounts I expect, and I'm not getting spending creep anywhere.
Where I Am Now, And The Future
I've done all this for the past several months, and have now paid off two cards, gotten us a little breathing room for some modest social spending (ie -- dinner out a couple of times a month with friends or family), and am poised to start aggressively paying down the biggest credit card. At some point, I'll need to reactivate my student loans, but that's a bridge I won't need to cross until next year. In the meantime, I can grow my own income and work on paying down our debts. The goal I'd like to reach by January is enough income to be able to also cover the student loans.
If you're just starting on the road to financial recovery, rest assured that you can get yourself out of debt. It takes time, and it seems daunting as hell at first, but it can be done. Just take it one step at a time, one day at a time, and once you get started, you'll be able to build momentum on your way to being debt free. :)