- We have no student loan debt (even with two bachelor’s & two master’s degrees between us)
- We have no credit card debt (true even before we got married).
- We own both of our vehicles outright (also true before we got hitched).
- We own our home—no mortgage payments.
- We own our own business (even though we both still have full time jobs, because we’re apparently craaaazzzzyyyyy) and have NO debt on it.
- If one of us lost our job tomorrow, we have enough in savings to cover that reduced income for over 6 months.
- We each have multiple retirement accounts (401ks & Roths) that we contribute to monthly.
But it wasn’t always that way. Neither of us came from money. Our parents didn’t go fishing for fun—we went fishing for FOOD (though it did happen to BE fun, most of the time). I do in fact know what deer, squirrel, rabbit, and frog taste like—and not from trying them at a fancy exotic meats restaurant. While other families went to Yellowstone or Disney World on vacation—we went camping. My first year of college I got extra financial aid because my dad had been out of work for a year and that dropped our household into the “low income” category. Most of my clothes were hand-me-downs from my older cousins (who, thank heaven, were pretty stylish—I WORE OUT the pairs of Lucky jeans that got handed down) and new clothes usually came from Wal-Mart. The dress from my senior prom was borrowed from my mom’s best friend, whose daughter was a couple years older than me.
But…funny thing is… THAT is normal.
- 92% of Americans have a car payment.
- 80% of American households have some sort of debt.
- 67% of households in the U.S. currently have a mortgage, and the average monthly payment is $1300.
- 65% of Americans who graduated college between 1996 – 2013 currently have student loan debt, with the average amount of loans after graduation hovering around $32k.
- 46.7% of households carry a balance on their credit cards each month, and the average amount of credit card debt per household is over $15,000.
- Only 25% of Americans say they have enough savings to cover 6 months of expenses if they were to lose their job.
- 45% of working-age Americans have no retirement savings.
How did we get to our “abnormal” status? Here’s our “How-To” list for getting to “abnormal” finances. Hopefully there’s a nugget of something you can find useful.
1. We spent a crapload of time at college. I have to point this out because otherwise it’s just the giant elephant in the
I can’t say I didn’t backslide from time to time. There were several times (like when I moved to Louisiana, or when I moved out on my own) that the credit card debts started to climb again. But I just went back to the basics & started the Snowball all over again. And in 2009, I paid off the last of my credit card balances. Today, I still use credit cards, but I pay off the balance each month.
3. We have a modest home. Median home value for our town is $144k. My husband bought our house for about $90k in 2005; it was new construction at the time and has about 1300 sq ft of living space. It’s perfect for us right now, though we’ll probably have to upgrade someday when we have
If you’re in the market to buy a house, make sure you don’t get more house than you can afford, and save up for a nice down payment—10-15% is recommended (you’ll get a better interest rate too—and when you’re talking about spending six figures on something, you NEED that low interest rate). And get a 15-year fixed mortgage, with a monthly payment that is NO MORE than 25% of your monthly take home. Dave’s got a great calculator here so you can determine how much home you can afford. And my favorite adage is: “Never have more house than you’re willing to clean by yourself.” :D
People tend to buy too much car, and then accept a longer financing term (up to 5 years) in order to make their payments affordable. But if you decide you don’t want to keep that car for 5 years and it’s not paid off when you decide to trade it in, then you’re “upside down” in your loan (i.e.—you owe more than it’s worth). But no worries—they’ll just roll the difference into your new financing, right? So now you’re even further in debt. Studies show that around 30% of Americans are upside-down in their car loans.
How do you break the cycle? Again, I refer you to Dave Ramsey for some easy (though not instantaneous) rules for how to get into a $10,000 car that you OWN outright in 30 months, even if you only own a $1500 clunker right now.
But if you DO have to get a car loan: a) don’t buy more car than you can afford (experts say no more than 10-15% of your monthly take home as a payment), b) don’t get a loan term longer than 36 months, c) ALWAYS pay more than the minimum payment, and d) once you pay it off, KEEP it for a while and put the money you WERE sending to the bank into a savings account. That way when you decide to trade it in, you have cash PLUS your trade-in value. Let’s say you have a car that’s worth about $6k when you’ve paid it off. If you save $300/month for two years, you’ve got $7200 in CASH plus about $5000 in trade to shop with. You can buy a very nice car for $12,000—and since you’re paying cash, you can haggle with the dealers for a better deal. Also—shop on Craiglist or the classifieds. You can get more car for your money if you buy from an individual (example—my $9700 car would have been closer to $12,000 from a dealer). It might be a little more hassle (having to sell your own car outright first), but it’s really worth it in the end.
5. We pay off our credit card balance each month. This is where we’re not “true” Dave Ramsey devotees, since Dave is anti-credit cards altogether. But we both have cards that earn airline miles, so we use them as our primary card instead of a debit card (which is how we’re able to take multiple vacations each year and only pay a few bucks for airfare). Our credit card payments are set on auto-pay, and they pull the full balance each month so we never pay any interest. This really scared me at first---back when I hadn’t fully reigned in my “extracurricular spending”. How will I know there’s enough in the bank??? But actually, that put a little “tic” in the back of my brain, which helped to curb unnecessary spending. Do I really NEED these shoes? Do I really HAVE to buy that CD? Now, our monthly payments stay relatively steady, so the money is always there. Why?
6. We keep money in the bank. When I was new to the “managing my finances” world, I didn’t trust myself. When a paycheck came in, I said “okay, I have $1000 here. Out of that check, I need to pay rent, car loan, cable, and buy groceries. That gives me $200 left over.” And I would immediately move that $200 “extra” into my savings so I couldn’t spend it. Now—that was a pretty great theory, most of the time… until a bunch of unexpected expenses popped up. Then I had to contend with the dreaded “overdraft fees”. So, then I started keeping my “Emergency Fund” in my primary checking account, so there was always an extra $1,000 on top of my typical expenses in my bank account. Once I started doing that, I never had another overdraft ever again, but my finances were still staying in check, AND I was still putting the extra money (once the $1,000 was established) into a separate savings account. If there was an emergency and the $1,000 got depleted, I would move some back from savings into the checking account, but that was the only time money came out of savings.
7. We have a budget for EVERYTHING. Our bank account comes with access to an online software called Finance Works. If your bank doesn’t offer something like this, I might suggest switching banks or downloading a program like Mint.com, which is free. We have our bank accounts, credit cards, and investment accounts linked into it, so records for ALL transactions, whether from a debit card, check, or credit card, all show up there.
The “Goals” section will have a wide variety of categories: Auto, Mortgage, Medical, Groceries, Work Related, Cash, Insurance, Utilities, Clothing, Fitness, Dining, Entertainment, etc. You enter in your spending goals for each category. Note: If you’ve never made a budget before, Dave Ramsey has a nice online budget-building tool so you can enter in your income and your goals & it will tell you how much you have left.
From inside the software, you can categorize every transaction—and even split transactions if they fall into multiple categories (say, if you get an oil change at Wal-Mart & do your grocery shopping while you’re waiting, and then pay for everything all at the same time—you can split out the cost of the oil change into your “Automotive” budget and put the rest under “Groceries”. Or if you get Cash back while you’re shopping—because yes, we have a “Cash” budget too.)