It feels a little surreal to even type this, but as of January 1st 2016, Michael and I are debt free. This is something that has completely changed my life so I wanted to just share a quick recap. I feel like sometimes it’s weird to talk about money, especially when it relates to how much debt you have because it is kind of shameful. Do I really want to spread the news about how Michael and I were totally mismanaging our money and got ourselves into serious credit card debt? Not really. But do I want to share how we got to the other side of it and now life is so much better? Totally. If this story inspires even one person to do the same it will be worth it. So here we go.
When Michael and I got married he had never had a credit card and only had ever operated on cash. I had always had credit cards because I assumed that was what you did when you became an adult. This is where the biggest myth of American culture had ruined us: we thought we had to have credit cards. We thought that we had to build our credit. But surprise, surprise you totally don't. Maybe you knew that, but we didn't.
So we had many credit cards, and even when we had plenty of cash, we would still spend on the credit cards. When we first got married we were in a pretty good financial situation. Lucky for us we started off with a really cushy savings account. We spent on credit cards. We paid it off from savings. Slowly over time that savings account dwindled and with a cross country move and some job instability we came to rely more and more on our plastic little friends, until suddenly we had no savings and were truly living outside of our means.
We also didn't budget. Like in no way shape or form. We had no visibility into what we were spending our money on, or how much was coming in. We would go to target and drop $400 on things that we wanted, just because. This was a regular occurrence. We traveled a lot. We basically never told ourselves no, because when you are an adult, you don't have to.
So there we were 4 years after getting married and we knew something had to change. So here is what we did to get out of debt.
1. Moved to Dallas
Moving to freaking Dallas was the worst, but ultimately this meant higher paying jobs for both of us and a lower cost of living. We didn't move to Dallas solely because of the debt but this was a nice fringe benefit of moving.
2. Read Dave Ramsey’s Book “The Total Money Makeover"
This book outlines a step by step guide to paying off all of your debt, and becoming financially secure. We recommend it and give it to anyone we know that is getting married. We didn't buy the workbook, just read the book. Essentially we just followed (and are still following) the steps in his book. You can quickly read through the steps here. You can buy the Total Money Makeover on Amazon for Cheap, you don't need the most updated version, older ones work just as well.
While the steps are simple, a big benefit of actually reading the book is the motivation it gives you. The book is full of stories of people who put these different principles into action, and the results it brought them. As we both read the book, it gave us energy and excitement to make behavioral changes in how we dealt with money, which was what allowed us to see progress over time. If it wasn’t for that boost of energy from reading all those stories, I don’t know if we would actually have made the changes we did.
3. Took our credit cards out of our wallets
This might seem like a duh, but it really helped me. When you are spending on credit cards you always have the "I can pay it off later" attitude. When you are spending your cash or on a debit card, that does not apply. Whatever you spend is your $ coming right out of your account.
4. Created a budget
This is the most important step. YOU HAVE TO KNOW WHERE YOUR MONEY IS GOING. YOU HAVE TO KNOW WHAT IS COMING IN AND WHAT IS GOING OUT. You have to plan each and every single month what your expenses are going to be. You have to constantly follow up on that to make sure it’s right. The idea is a $0 balance budget. You want all the money that comes in to be allocated to the things you need to buy, tithing, savings, debt, etc.
We created a google document and would literally input every single expense. $1 at the gas station? In the budget. $5 on lunch? In the budget. This is something that we still do, and it brings an incredible peace of mind to know where it’s all going.
This is really where the rubber meets the road in changing spending behavior. We had created budgets in the past. We would plan for all the categories at the beginning of the month and feel very accomplished and responsible, only to forget all about it as the month went on, and then never again come back to see how our actual spending compared to our planned expenses.
For a budget to really be effective, you have to plan, but then you also need to keep track of where all the money goes, and measure your spending against those predetermined categories. This is the only real way to know where your money is going. Anything else is wishy washy. You may have a vague sense of how you spend, but until you see it itemized for the month (and there are usually over 100 line items) you really don’t know.
As far as how to plan and how to track the information, there are probably lots of ways that could work for different people. We liked using Dave Ramsey’s budget cash flow sheets for our planning process, and we created a google doc to track our actual expenses in a dynamic way throughout the month.
Here is a link to the google doc we created - PERKINS GOOGLE DOC BUDGET
You can copy and paste it into an excel or google doc it you want to use it. When you choose your categories and such it will auto populate and tally up how much you have spent in each category. It's kind of complicated to explain so here are some super sexy screen shots of our budget to show you how it worked for us.
We made a list of all of our known expenses and around when they would hit every month. We also totaled our Gross (before taxes, medical, etc.) and Net salaries (after taxes and all the other $ they take out of your account).
This is what our empty budget sheet looks like. We start by planning in the "Budget" column. This is what we think we will spend for the month. Then as the month progresses we input our expenses on the left. As we input the category type, the expense auto sums to the "Actual" column. The "Delta" column tells us how much we have left in a given category for the month, and then we have a percentage spent column as well.
The idea is to 1) record exactly what we spend each month, and 2) know how this relates to our budgeted categories, so we can adjust accordingly throughout the month to stay on target.
This is what a filled out budget sheet looks like (this is faked, I love you guys but not enough to admit how much I spend on diet coke every month). Because the budget is automated it makes tallying up everything so much easier. I think it would be super hard to keep track of that yourself. If we go over the 100% in one category then we highlight the box red and know that we need to freeze spending in that category (or shift some stuff around).
5. Saved a $1000 emergency fund
Dave Ramsey talks about this, but this is essentially so when you hit your first bump in the road, your debt plan is not derailed. Our bump was fixing the brakes on my car. The fact of the matter is that things you don't plan for come up and by having $1000 socked away you can take care of them without going into more debt.
6. Tallied up all of our debts
This was hard. Again we made a google spreadsheet and there were about 8 credit cards totaling... $20K. Yikes. Seeing all the money you owe all in one place is a little sobering but you need to face the music and get real with yourself.
7. Attacked the smallest debt first, then the next smallest, so on and so forth until they were gone.
The smallest one first is another Dave Ramsey thing. Would paying off the highest interest or biggest one first probably be best? Sure. But the fact is paying off debt is really hard and you need a little reward in the beginning to keep yourself motivated.
So that is it. That is how we paid off $20K in debt and if you have any questions about it, let me know! WHEW. If you made it to the end of this you are a champion.
Also, one of my favorite blogs to keep me motivated with budgeting: http://www.ourfreakingbudget.com/
Over and out.