Debt to debt-free

On July 19, 2013, I married my best friend. Five days later, we have another reason to celebrate. We’ll tell you about it together in what I call a he-said / she-said format and what Connie calls an opportunity for rebuttal.

He says:
In under a year, Connie and I have gone from having a fairly sizable chunk of debt (in the form of various loans and credit cards) to having a positive net worth, and finally to being debt free (aside from the mortgage).

This is a huge accomplishment that we’re both very proud of. We were able to manage this without having to make drastic changes in lifestyle, by having regular discussions about the money situation, by making conscious decisions about what we’re spending money on, and by working together toward a goal.

Here’s what the past 10 months look like:

See where that line hits 0? All kinds of awesome and win. That also includes having to replace the AC unit for the house and paying for the wedding, which we managed to do without having to add to our debt at all.

When we started, Connie said she could have us out of debt in a year. My normal approach to money has been to set up everything on autopay, automatic transfers, etc and leave things to run on auto-pilot. I thought maybe a year and a half, two years was more reasonable considering how much of it we had, but she was certain she could get it done in a year. I handed the financial reins over to her and told her to have at it. We took a hard look at the finances and what we were/I was spending money on. We looked at everything: utilities (cable, water delivery, phone, etc), food, eating out, entertainment to name a few.

She says:
September of last year was before we had combined our finances, but it shows the low point for us in our debt, so it’s important to the graphic. Eugene was starting to clean up some financial matters related to his past in September and October, but we didn’t combine goals and finances until mid-November. When we sat down and went through everything — income, debt, bills, and current balances — I did tell him we could be out of debt in a year. I don’t remember if Eugene said he was skeptical or if he just gave me a look, but there’s no way to describe his reaction other than skeptical. I think that’s maybe a reason a lot of people stay in debt perpetually, because it doesn’t feel like they can get out of it, so they don’t really try.

Eugene mentioned that he handed over the financial reins to me, but really it was a team effort the whole time. We took everything off auto-pay, and I started to handle the day to day money chores. I keep Quicken up to date, I pay the bills when they are due, and I update our monthly budget spreadsheet. However, we make the decisions together. Eugene deserves more of the credit for this accomplishment than he’s currently willing to accept, but don’t worry; I’ll continue to remind him how awesome he is. Because he is.

He says:
We cut out a lot of things, or replaced them with less expensive alternatives. Even if it only saved $5 or $10/month, if it was an expenditure, it was examined. We traded in cable TV for Netflix. The $70-something/month phone bill was replaced with MagicJack for $45/year. The slow DSL was upgraded to broadband cable for a little bit more money but 10x the bandwidth of the DSL service I had at the time. The water delivery was dropped, I brought lunches more often, and didn’t eat out quite as much. Blockbuster DVD deliveries got the axe. We put the 401k contributions on temporary hold and used that money towards paying down the debt.

By looking at all the expenses, we worked out what we needed, what we didn’t need and what we could cut down or scale back on. It’s harder than it sounds, and while some of the decisions were easy to make, others were harder.

That process helped us free up a bunch of money that we could use to pay down our debt with, but by itself isn’t enough. The next step was to create a budget and make ourselves stick to it. Creating a budget is easy. It’s the sticking to it that’s the hard part.

For us, the budgeting process involved figuring out where our money was going and what categories to create budget line items for. We started with a regular budget first, then transitioned to a zero-based budget. It took me a little while to understand the concept, but once I got it, it made sense. Every dollar needs to be assigned to a budget item so that it is “spent”. That doesn’t mean we were spending every dollar we made though. “Spending” could be putting some money towards savings, or using it to pay down debt. The gist of it is that all your money has some purpose assigned to it, whether it’s paying bills, groceries, or put towards savings. Income – “expenditures” = $0.

She says:
“We started with a regular budget first”? We didn’t have a budget. We had a “pay all the bills, and pay them on time” budget. Then if any money was left over at the end of the month, we’d put that toward the debt. That wasn’t a budget.

You can see we made a decent sized payment in November and another larger one in December, but that was just our taking cash we had (which was actually from the loans) and using it to pay down the debt. But then see how the progress all but stopped in January and February? It’s because somehow we just didn’t have money left over at the end of the month. I think that’s probably another human-nature part of why people stay in debt. We spend what we have if we haven’t worked on the discipline to do otherwise. By the last week of February, we realized we needed a better plan of attack.

In March, we started the zero-based budget. It gets a lot easier after the first couple of months, but it was hard that first month making everything come out right. In addition to our normal monthly expenses, we had taxes to deal with, plus we were saving for a wedding. We still didn’t make tremendous progress on the debt that month, but at least we paid it down a little.

Starting with the April budget, we made the change that I believe was the most critical thing that has allowed us to get out of debt so quickly. Thinking ahead to after we had the debt paid off, we knew we’d then build up more of an emergency fund. After that, we’ll re-start our contributions into retirement savings. We want to save 15% of our pre-tax income for retirement. When we get to that point, our monthly budget won’t include that money. So, we decided to stop seeing that money now, and put it directly toward the debt instead. That was the plan, anyway, at the end of March for the April budget. Then the first few hot days of Charleston hit, and we realized that the HVAC wasn’t going to last the summer. Those April debt payments went with our savings to buy a new HVAC instead. Of course we wanted to pay down the debt, but not going further into debt for such a large expense was awesome.

Starting in May, those payments were put towards debt as planned, and you can see that our progress really took off.

He says:
Each month, we’d get together and plan out the budget for the following month. Then at least a few times each month, we’d review the budget for the current month, see where we were spending-wise and if any amounts needed adjusting. For the first few months, we used the “cash envelope” method for some items, like eating out and groceries. Having to fork over actual paper dollars made us think a little more about spending money. Later, when that behaviour became kind of instinctive, we did away with the envelopes.

An important budget category we created was one we called “Wiggle room”, which was just that. If something unexpected came up, or we saw that we were going to end up spending more than originally budgeted in one category (something we tried to avoid doing), we could adjust other categories or pull it out of our Wiggle room. Any time one of us wanted to buy something that wasn’t budgeted for, we’d discuss it together. At the end of the month, any left over money was put into the budget for the next month, or put towards debt.

Talking and working together, planning and reviewing the budget, and thinking about the money we were spending all helped us stick to it and played a big role in helping us reach the debt free milestone. We had to be very disciplined, and there were one or two lapses, but Connie did a great job keeping everything on track.

She says:
Seriously, it was a team effort.

He says:
Now the next step is to take all that money we were putting towards debt and start building up the emergency fund, which shouldn’t take too long. Then we’ll restart the retirement savings.

She says:
I’m really glad Eugene trusted me enough to go along with these ideas. I think the best thing about this process has been how much it’s helped us grow in our relationship. We’ve learned to talk about our goals, we’ve worked out problems, and we’ve enjoyed successes. I think we’re going to have a really awesome life.

He says:
I think so too 🙂