Monday, January 31, 2011

How We're Paying Off Debt

Maybe you're sitting there, consumed by, or completely ignoring, the piles of debt that surround you. So, how do you get to where we are — actively paying off debt, living on a budget and hopeful for the future? Well, the first step is to STOP IT.

Seriously, just stop using credit cards. If you've got credit card debt, the last thing you need is more credit card debt. Take them out of your wallet, freeze them in a block of ice, bury them in the yard, fling them into the ocean, whatever you have to do to take them out of your life. They can't be an option for you while you're paying off debt. Using credit cards when you have credit card debt only intensifies the problem. So get rid of them. It will take time to rearrange your thinking, but you'll get there. Before long, you'll be used to the idea of not buying things you can't afford, and you won't even miss your (life-stealing, soul-sucking) credit cards.

Figure out how much debt you have. For someone who's never been in debt, this may sound so elementary, but in my experience, we debt-carriers are fairly good at avoidance. Recognize that the problem isn't just going to go away, and you WILL have to take care of it at some point. You can either deal with it now, when you are up-to-date on all of your payments, or you can wait until the debt collectors come calling. It's your choice. We use Dave Ramsey's debt software to keep track of all of our finances. It costs less than $20, and it will tell you in black-and-white what you have to do to pay off your debt and when it will be paid off. Then you just start chipping away at it.

Create a budget. Dave Ramsey's software will walk you through this one as well. The word "budget" is so scary to so many people, but when you're actually living on a budget, it's so freeing. Now that we have money allocated to various purchases, I never feel guilty when I'm spending money (you know, unless I'm knowingly blowing our budget for an item, ahem). If I budget money each month for a haircut, I know that the money is there for when I want or need to get a haircut. I don't have to fret about the cost; it's built in and there for the spending.

Get rid of stuff. This can be big or small, but getting rid of it can go a long way. If you've got a car payment and you can make do with one car, get rid of a car. We had two car payments, and my husband decided to sell his car. He made enough on it to buy an old, but functional, pickup truck. It's transportation, and it's helpful when we're working on home renovation. AND that's $350 per month more we can put toward debt. If you've got a bunch of old books, sell them online (we made a couple hundred dollars that way). If you've got baby clothes you don't need any more, have a yard sale or take them to a consignment shop. You'll get rid of the "stuff" clutter that is so paralyzing, but you'll also make a little bit of money that you can put toward an emergency fund and/or put it toward chiseling away at debt.

Pay with cash. We've actually gotten out of this habit (tsk, tsk), but it's so much easier to stick to a budget when you commit to using cash for everything. There's no "going over" budget when you only have cash. A trip to the grocery store means carefully considering every item you're putting in  your cart, because you don't want to be that person who doesn't have enough money at the checkout. There's no "extra just in case" with cash — you either have enough money or you don't. It makes us much more conscious of every penny, and it's a surefire way to stick to a budget.

Open multiple accounts. This might seem random, but it's really worked for us. We have a bill payment checking account and a grocery/gas checking account and an account that I'm putting some money into for a birthday trip in March. We transfer $100 per week for groceries and $60 for gas onto our grocery/gas debit card, and we take out cash for the smaller amounts that we put toward other expenses (like haircuts and eating out). Then we ignore the rest in the bill payment account. Our bills are all set up to autopay, so they get paid and any extra we have in the account stays in the bill payment account. It helps not to see a big number in our "spending money" account, and we never run out of money to pay our bills.

Be in it for the long haul. If you have thousands of dollars of debt (like we do), recognize that this isn't going to be a quick fix. You'll hit bumps in the road. You'll have unexpected expenses. You'll want to scream because everyone you know goes out to dinner every single night and you have to eat at home. You'll want to throw things because everyone else seems to have life so easy and it's only hard for you. Believe me — many of the rest of us are right there with you. (And, I truly believe that those friends who aren't making any more money than  you but are spending like millionaires are hiding dirty debt secrets. It will catch up with them. Karma. Right?) For those unexpected expenses that WILL come up, try to build up $1,000 or $1,500 in an emergency fund even before you get started paying off debt. That way, if your car needs repairs, you won't have to stop making payments toward debt, you can just roll with the punches.

Set goals for the future. I can't tell you how much money I blew for the instant gratification of having a new thingamajig. You've got to change your mindset by setting goals for yourself and your future. Do you want to buy a house? Quit your job? Have kids? Own your own business? What are your motivations for getting out of debt? Keep those things in mind when you spend money. Think of money as a tool and make informed decisions about how you spend it. Do you want to spend your life working so that you can pay off things you have forgotten about, didn't like that much or have discarded already? No one does.

Remember, there's a light at the end of the tunnel. We had close to $100,000 in debt when we started trying to dig our way out. That's a deep, deep debt hole. It can be discouraging to plug numbers into the Dave Ramsey software only to find out that it's going to take three years to get out of debt. But every day we get closer. And, when it comes down to it, we don't have a choice. We can pay it off now or pay for it later. We're young, we're just starting out — I'd much rather learn to live within our budget now than have this debt catch up with us later.

Disclaimer: Do I need a disclaimer? If you take advice from random people on the internet who are not professionals, do so at your own risk. And check out Dave Ramsey ... dude knows a thing or two about debt.

Great Minds Think Alike

So I recently mentioned to my husband that I'd started this here spot on the Interwebs to talk about all sorts of stuff that would be uninteresting to most everyone we know. Stuff like paying off debt, buying a house in the country, raising chickens, keeping bees, living simply and generally being the crunchy, tree-hugging folks we are. Or want to be. And what do you know, but he said that he started a blog many moons ago to talk about some of the same things. It's been left dormant for a while, but I thought that some of the entries might provide some insight into how we got to where we are now. For instance:

Beginnings
Written by Josh on May 27th, 2008

Kati and I have been thinking about the way that we and people in general live life. Of course, we aren’t the first or only people to think about these things, but this blog will be for us to record our thoughts and ideas. Perhaps some of these thoughts will become plans, and some of those plans realities.

Lately we’ve been noticing that our household income has been steadily rising, but our stress level hasn’t decreased. We acquire things — possessions — but aren’t satisfied.

We’re reading about the homesteading and self-sufficiency movement (or practice) as it’s done today and wondering what it would take for us to live that kind of life. Would it be possible for us to make the switch from suburban white-bread to tending a small plot of land as a family and living off of what we can together produce? Can we get to a point of not living in excess?

I'll plan on posting a few items here and there from his blog as it's relevant to the conversation. And, I've invited him to be a part of the blog as well, so I'm sure he'll pop in and write about his thoughts and passions every now and then. 

Sunday, January 30, 2011

Step one -- Pay off debt

The next couple of posts will be designed to get everyone up to speed on where we currently stand (since we're not exactly new to this particular journey). Once they're out of the way, I'll start logging our current progress, thoughts and ideas on our way to Rabbit Hill.

So, the first step in the process is to pay off our debt. Why do we have debt, and how much debt do we have? Short answer: Many reasons, and a lot.

Until I graduated from college, I never had a credit card. But that didn't mean I was financially responsible. I frequently got down to the last dollar in my checking account before I'd even realized it (because, of course, I wasn't keeping track), but I was still on my parents' dime and so my funds were always replenished. I never remember saying no to going out to eat or buying a bunch of junk at Target. Then I got a credit card. I don't really remember why or how or even what card it was, but I got one and started charging. It wasn't that I bought a lot of big, extravagant stuff (if I did, maybe I'd have something to show for these thousands of dollars of debt). Instead, it was meals out, cute trinkets, this and that, here and there. I had absolutely no knowledge of credit cards or financial responsibility, and it was always my goal to just have enough in my checking account to pay the minimum balance when it came due.

At the same time, my (now) husband had his own credit cards, and bought bigger things -- a laptop, land in Kansas (don't ask) and pretty much paid for all of our dates with plastic. (Wooing is expensive!) Then we got married and went on a honeymoon which, you guessed it, went on a credit card.

By the time we'd been married for a few months, we'd racked up a good bit of debt, even though we weren't particularly aware of it. We weren't bumping up against credit limits, but we weren't paying anything off either. Then my husband, who was working for his godfather at a very small start-up company, started getting paid a little less frequently. It got to a point where we couldn't count on his paychecks anymore. Some months there was just one check, some months we wouldn't see anything. And when you're pretty much living paycheck to paycheck, that's serious. He started to look for a new job, but he felt tied to the company and thought better days were right around the corner. So we hung on for a while. Then one day, I remember very vividly sitting in the office at the house we were renting, going through our bills. And we simply didn't have enough to make ends meet. I had no idea what to do, and I was terrified. We were able to get a loan from my husband's family to tide us over, but we added that to our debt tally -- there was no way we were going to stiff our parents on a loan.

Eventually, my husband found another job, one that was much better paying and with significant room for advancement -- but it was three hours away, so we had to move. We were renting a house at the time, and there was no way for us to break the lease. But with him not getting paid, we knew we had to make a change. So, we packed up everything in a U-Haul and moved. For several months, we paid both our rent at the old place and rent at the new place. And since we moved, I'd quit my job and hadn't found another. So even though my husband was making about as much as our previous combined salary, our expenses were much higher.

I could go on and on about all of the bad choices we made along the way, but suffice it to say that while it always seemed like money was tight, and we felt guilty using credit cards, we weren't DOING anything about our debt. And then came the worst decision we've EVER made.

We took out a low-interest loan to pay off our debt.

On the surface, perhaps that doesn't sound like a bad idea. Pay off high-interest credit cards with a low-interest, fixed payment loan and you're home free. Except we had not yet REALLY realized the error of our ways. We knew credit cards were bad, but we hadn't stopped using them. And it wasn't like we were buying big things, just dinner here and there and lunch here and there and sometimes a few new clothes or little things for the house. So once the credit cards were paid off with the loan, we kept using them the same as always. And so we filled them right back up. (I swear we are both college-educated people who are smart in so many other ways, but we were financial morons. Please don't follow in our footsteps.)

So, one day, we sat down and figured things out. I had always assumed that we probably COULDN'T live within our means, that we probably had more bills and debt than we could realistically pay on the money we were making. So I was absolutely terrified to sit down and figure it out. But we did. And, guess what? We were going to be OK. We used Dave Ramsey's software to figure out a budget, a realistic, though tight, budget that we could stick to and could pay off every single shred of debt (except for our house) in about four years' time. That included the credit card debt, two cars, student loans, the personal loan we'd taken out -- everything.

And you might be praying that this entry is almost over, and it really almost is, except as we were plowing through our debt, doggedly adhering to our budget and paying for everything with cash, my husband came home one day this past July with a letter saying that his (very small startup) company was putting all employees on "furlough," which is basically just being laid off, but with a chance you might get to come back at some point.

That threw all of our plans into a tailspin, but I'm SO glad we had reigned in our spending before that happened. As it was, we just went back to the software, typed in how much he was going to make on unemployment, and cut money where we needed to. Fortunately, he was only out of work for three or four months, but his job is still uncertain. Right now, we're paying credit card minimums and putting the rest of what we should be paying toward debt into our savings account. When things look a little more stable, we'll dump all of that to the debt at once and hopefully not be too far behind. But, if something catastrophic happens and he's out of work again, we'll have a little bit of a cushion for the future.

So, that's where we stand with paying off debt. After paying off debt comes making babies, quitting jobs and homeschooling. Stay tuned for a backgrounder on that!

Friday, January 28, 2011

The Plan

Before I get into the nitty-gritty of what we're doing on a day-by-day basis to move toward our Rabbit Hill, I thought I should outline our plan. Do you have a plan for your life? Obviously, as much as we'd like to control every detail, we know that our plans are subject to change. However, having a step-by-step guide helps us make decisions while keeping in mind our larger goals.

So, our plan, should it happen in the best possible way:

STEP 1: Pay off debt
STEP 2: Quit my job, stay at home, homeschool
STEP 3: Have more kids
STEP 4: Finish renovating current house
STEP 5: Find and buy "forever home" — our Rabbit Hill

We've also got a general idea of how long these things will take us. For instance, if everything keeps going forward as it has been, we should be completely out of debt by the summer/fall of 2012. Our son will be 5 in June 2012, and since we want to homeschool, I'd like to be at home with him before he starts kindergarten in the fall of 2012, so I'll plan on quitting my job before the end of next year. Once debt is paid off, we'll have more free cash, even after I've quit my job, so that money will go toward the remaining renovations on our house, and some of it will be saved for a down payment on Rabbit Hill. Before we have a third kid, we'll want to be in our "forever home," but that timeline starts to get a little blurrier. We'll have to work it out as we go.

So, that's the overview of where we're headed. I'm going to do a post about each of these topics to get everyone up to speed on the W's of each one. Then, like I said, we'll be off to the races with the day-to-day progress toward our goals.

Thursday, January 27, 2011

Why Rabbit Hill?

Farmhouse photo by Flickr user mindy_G
Well, this is not a blog about a house. Not really. And there's no Rabbit Hill, yet. Instead, Rabbit Hill is a sort of metaphor for our dreams for the future, and this blog is designed to chronicle the path we're taking to get there. Who's "we"? Well, we is me, my husband and my son. Where are we going? Well, currently, my husband and I both work and my son is in preschool. In the next couple of years, we want to pay off our debt completely, finish renovating our current house, have another baby (or several) and move into a new, "forever" home. We call that forever home "Rabbit Hill." Why? Well, many years ago my husband dreamed that we found a beautiful old farmhouse called Rabbit Hill, and ever since, that's been our nickname for that idyllic future home. Oh, and I also plan on quitting my job and homeschooling our kid (and any future kids).

Needless to say, we've got a lot on tap for the next couple of years. We wanted somewhere to chronicle our journey that we could share with only selected people and, of course, any strangers who might happen upon this here blog.

So, as we go forward on this blog, we'll be sharing how we're progressing toward getting out of debt, what we're doing to save money and how we're renovating our current home. We'll also eventually chronicle what it's like to transition to life as a stay-at-home mom, how we're adjusting to homeschooling, future pregnancies, finding our Rabbit Hill and so much more. Glad to have you along for the ride.