A decade and a half ago, we had piles of debt (2 mortgages, 2 car loans, credit cards…), a single income, not much being set aside for retirement, and a child on the way. A large percentage of our monthly pay went towards debt, we never seemed to have any extra money, and everything about finances was stressful. Something needed to change, but we had no idea what or how.
Getting Started: A Glimmer of Hope
One day, the hosts of a podcast I listened to started talking about this guy named Dave Ramsey who had this program for getting out of debt – a radio talk show as well as some books. The podcasting couple – a husband and wife – had just started the program themselves. I figured, what the heck, can’t hurt, so I borrowed a copy of The Total Money Makeover by Dave Ramsey from the local library. Within short order, I’d read the book from cover to cover and had taken a bunch of notes.
After reading The Total Money Makeover, I discussed the concepts in the book with my wife. We agreed to give it a shot.
Fundamentals: Follow a Budget and Eliminate Debt (Forever!)
The plan Dave Ramsey teaches is pretty straightforward and it works. It’s simple, but it’s not easy. Dave developed his plan based on what he calls the “baby steps”, which he originally formulated from his personal experiences recovering from bankruptcy and becoming debt free, refined while teaching others how to do the same. Eliminating debt frees up your income which you can then give to charitable causes and invest for both retirement as well as future major expenses. One of the keys to doing this requires intentionally controlling your money, which is the purpose of a budget.
A Personal Budget: The Roadmap For Living Within Your Means
We started our journey by developing and living to a budget. I’ll probably discuss the details of budgeting in a future post. It seems counterintuitive, but having a budget was not constrictive, it was actually freeing! It also helped reduce stress. We looked at every dollar coming in, and used the budget to plan every dollar going out – including meeting the essentials (food, shelter, electricity, clothing) and paying off debt. Following a budget (i.e., a plan) also kept us from overspending and reduced impulse spending.
Paying Off Our Debt
Fortunately, our student loans had already been paid off when we started this journey, but we still had plenty of other debt. Now that we had made the decision to eliminate debt and live within our means, we could avoid additional debt while paying down the debt we had.
I had purchased a small condominium unit within a few years of graduating college. I moved away for a few years, but decided to rent out the condominium instead of selling it – probably not the best choice. It was a challenge keeping it rented, and even when it was rented, it was not always easy getting tenants to pay. Soon after starting the plan, we were able to pay of the remainder of the mortgage on the condominium by accelerating our payments – by this time, it was actually one of the smaller debts. Shortly after paying off the condominium, we were able to sell it.
Since the mortgage on the condominium was paid off when we sold it, the entire proceeds from the sale (minus realtor fees and taxes) were ours! We used this to our advantage by paying off the loans on our two cars and rolling the remainder into the mortgage of our primary residence, which we simultaneously refinanced at a lower interest rate (also eliminating PMI).
At this point, the only remaining debt was the mortgage on our primary residence. We had an emergency fund of about 6 months of expenses. It was time to start cranking up the retirement savings and saving for our son’s college education. And throughout this entire process, we were giving generously to our church and charitable causes.
When You Eliminate Debt, You Have Money (and Peace of Mind)
Following our new financial lifestyle means that we no longer borrow money and an comfortable emergency fund. That means when we want something that costs more than is available in the month’s budget, we have to be patient and save up for it. While this isn’t always easy, it does mean that we always have enough money for whatever we need, we have a much larger monthly cashflow due to having no debt payments, and there is almost no financially induced stress. It also means that when the unexpected occurs, we are able to adapt.
Sometimes the unexpected “emergency” is mildly annoying; other times, it can be financially catastrophic if you’re unprepared. Within a few years of overhauling our finances and financial practices, we hit a huge bump in the road, so to speak. I lost my job during the economic meltdown in 2008-09. However, because we chose to eliminate debt, live debt free, stick to a budget, and build an emergency fund, we were able to ride through almost a year of unemployment. It was stressful enough having no source of income; I cannot even imagine how stressful this period would have been if we still had piles of debt too.
After getting another job and getting back on our feet, we continued our plan. When it came time for replacing an aging vehicle, we saved up and bought a beautiful, low mileage, 2 year old car and paid cash (I literally just wrote a check on the spot). We took a couple expensive vacations (Disneyworld was one of them) by saving up and just paying for them without using credit. We save up a little every month into a Christmas fund for buying gifts each year; we budget the year’s gifts in advance and pay for everything without borrowing on a credit card. My trials bikes weren’t cheap, but I saved up and bought them without any debt. Of course we had some emergencies as well, some costing several thousand dollars each, but since we have chosen to eliminate debt, we just paid for them (though I grumbled about it a bit) – without borrowing money or stressing out.
The next big step to eliminate debt was to pay off our home mortgage. After paying off all of our other debt, we cranked up our retirement savings to 15%, began saving monthly for our son’s college education, and then accelerated our monthly mortgage principal payments for our home. When we approached the home stretch on the mortgage, we realized that we had some stock investments that were separate from our retirement funds – if we had remembered this earlier, we would have included this in our “baby steps” plan to eliminate debt. Regardless, it was there, so we used it to write a check for the remaining balance of our mortgage. In approximately a decade, we had gone from overloaded with debt, to completely debt free. And if you think freeing up money that went to consumer debt and car loans freed up your monthly cashflow, wait until you see what happens when you also have no more mortgage payments!
So, what’s the plan now with “all that money”? Well, it does not mean go go crazy, act irresponsible, and blow it all. Every month, that’s for sure. But it does mean that monthly expenses are more flexible, there is more “extra” money for going out and having fun, and we can save much more quickly to pay for the really expensive things like cars, my son’s college education (with zero student loans), remodeling and/or buying a new house, retirement, vacations, etc., without having to borrow money ever again.
You Can Do It Too!
I am not telling you all of this to brag about what we did, but rather to show you what is possible for you. You can do it, but you need to make a choice – eliminate debt (forever), purposefully control your money with a budget and a plan to love within your means, give generously, and invest in your future.
Final Thoughts
One of the primary motivations for publishing this blog is to take what I have learned in over a half century of living and provide it to you, so you can benefit from it. Personal finance is one area that I struggled with for a while, but now have some good habits and valuable wisdom that I can share. Now that I’ve shared some of my story here for context, going forward, I intend to include posts regarding specific details for winning at personal finances. Stay tuned!