Old habits die hard. Even though we looked great on paper (healthy young couple, in love, recently married, baby on the way, able to buy our first home), we were still behaving like messed up college kids in terms of how we managed our money.
When we had extra money, we thought it was there to spend. We would be excited to spend it.
So, there we were, in our first home, going from $1,000/month in rent to a mortgage payment of $1,900, and our spending habits didn’t change. On top of the mortgage payment, we had monthly HOA dues of over $250.
It’s easy to look at it now and say, “what the hell were you thinking?” Our expenses changed by almost $1,200/month in housing alone, but we didn’t tighten up our spending in other places really.
Until rock bottom hit.
We both still remember it vividly – we were on the stairway landing of our first house. Isn’t that where all important conversations happen? Brian became aware that we received an overdraft charge on our account.
Married, with a mortgage and a son, and each with good jobs…and an overdraft charge.
Our conversation went something like this:
“This is crazy. We are making enough money to pay our bills. We have good jobs. How are we in this situation? We’re not kids anymore – we should be better with our money. This is not acceptable. But how can we dig ourselves out of it? This feels impossible and overwhelming.”
We knew something had to change.
I hate that this sounds like a cliché thing for a woman to say, but I wasn’t passionate about money management back then. I’m still not great but have grown so much in this area. I am grateful that Brian took the lead on this task for our family, and he became extremely passionate about it.
9 Things We Did To Fix Our Finances:
1. We wrote out all our expenses per month – every single thing – and our incoming money each month.
Maybe it sounds like common sense, but we had never really done that before. We knew how much we made and paid our bills on time. But we hadn’t ever itemized where our money was going. It was eye opening.
It’s impossible to know what your plan should be if you don’t fully understand where you’re spending your money.
They make apps to track your spending, but you can also use Excel or a Word doc and a calculator, or pen and paper and a calculator. Add up your expenses and subtract them from your income – you’ll see what’s left over that way. The left-over amount is what you’d pull from to pay extra money on a debt, save, invest, etc.
*Note* – we excluded optional things (like dinners out and new clothes) from our expenses in this step. It was important to us to see the exact amount of our required expenses. Confusing a want with a need is how people typically get into trouble with their finances…but that’s a topic for a whole other post 😊
2. Brian started listening to podcasts on money management.
These two were his favorites:
Why listen to podcasts? We needed to research ways to get out of debt and save money. It was obvious we had a lot to learn in that area, and one way to learn is to hear how other people have successfully done something. If you do a Google search for “get out of debt,” you’ll get 532,000,000 results – there’s a lot of info out there. We’re not saying these two podcasts are the only things to listen to, but if you’re not sure where to start, start with these! They make money management interesting, achievable, and funny.
3. We tried the “Snowball Method” of debt reduction.
Dave Ramsey is a big proponent of this method, and you may already be familiar with it. Paying off debt is overwhelming and it’s hard to know where to start. What a lot of people try to do is pay as much as they can on all their debts each month. What does that do with your money though? It spreads it thinly across all debts.
The Snowball Method says it’s better to focus all your energy and extra money at paying off your debts with the highest interest rate first (that usually means credit cards). While paying your minimum payments on everything else, pick whatever loan or credit card has the highest interest rate, and pay extra each month towards that item. If you can make double payments on it, do it. Pay more if your budget can handle it.
The point of the Snowball Method is to build momentum and give yourself the positive reinforcement that you’re making progress. By focusing all your extra efforts on one piece of debt, you will pay something – your first thing – off faster.
That momentum helps you continue to change your habits and actually feel excited about managing your money.
P.S. Dave Ramsey has a podcast, too. Check it out if you want. His personality wasn’t our favorite.
4. We gave ourselves a daily spending allowance.
Paying off debt and focusing on spending can make you feel suffocated. We wanted to make ourselves feel like we still had some freedom, so we allowed ourselves a daily spending amount on whatever we wanted. If we didn’t spend any money that day, it would roll over to the next day, and we could spend all of it that day if we wanted…or continue to let it increase.
We budgeted $15/day for each of us.
5. We consolidated all our debt (even student loans) through SoFi – an online financial services company.
The Snowball Method wasn’t going fast enough for us; we wanted to accelerate our plan. It felt a little crappy to admit we needed debt consolidation, but it made total sense for us: a fixed monthly payment at a fair (low) interest rate of 6%. Our credit cards were anywhere from 15% to 30% interest, and we didn’t see a way to make real progress on them.
Our SoFi payment was $340/month for 15 years, but the term didn’t worry us – the term on the student loans still had around 10 years left, and the payment was at $400/month and climbing (with graduated payments).
The consolidation felt like a win.
Learn more and check out your own options with SoFi using my personal link here, and you can earn a $100 welcome bonus (full disclosure, I’ll get a bonus, too).
6. We each opened a hidden savings account with automated daily deposits.
By “hidden” I mean that it was not accessible via online banking or an ATM, which is something you can enable in your account settings. We weren’t good at saving money, and it was because we couldn’t control our impulse to spend. We then set-up small daily deposits into those accounts.
The idea of small automated deposits was so we didn’t notice the missing money.
By hiding the savings account and automating deposits into it, we made it more difficult to access the funds, and allowed the money to start piling up (small piles, but still. It was something). I set my daily deposit at $5/day. Brian was making more than me at the time and set up his daily deposit into savings to be $15/day to start, and slowly inched it up to $30/day.
7. Brian started using Betterment, an online investment services company.
He loved it. It was a great way to automate investing and control our risk level. His Betterment account replaced his automated daily savings method – he transferred the daily deposits there instead to get a higher interest rate.
Ideally, you’d invest your money for a longer length of time, but we ended up using the money we had in that account for a good faith sales deposit on our new house.
I’ll share more about selling our first home when the story continues in Part III next week.
8. We created a passive income stream.
Brian is a UX designer and front-end web developer. Those skills translate well to creating online course content. He discovered a platform called Pluralsight which hosts courses on technology and decided to create a course for them. He went on to create five courses total.
Yes, that meant he was working full-time in his career, and then working for hours at night and on the weekends to create his courses. But that extra work was for a short time, and then we started earning additional monthly income on them.
With managing your money, you have three choices: 1) spend less, 2) earn more, or 3) spend less AND earn more. We were shooting for #3.
9. We got life insurance.
This new effort to get our finances in order made us think more about our future (and our children’s future). We realized that we didn’t want to leave our kids to clean up any of our finances if the worst happened, and we wanted them to have every advantage possible.
We researched life insurance options using Quotacy and budgeted in the monthly cost (which was less than we thought it would cost). It felt really good to be covering all of our bases.
And that’s how we started to climb our way up from rock bottom. The above steps really worked for us!
If you’re following along, although we had implemented a plan, and were making progress, we still had our consolidated debt loan to payoff and our car debt.
And then we realized our home value had gone up…
Stay tuned for Finances, Part III next week.