Thursday, August 22, 2013

How to Have Ab-“Normal” Finances

So, my husband & I are not NORMAL 30-somethings.  We acknowledge and embrace this.  And we frequently get asked “how we’ve done what we’ve done”.  The following things are true about us:

  • 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.

This isn’t intended to be braggish…I just cannot tell you the amazing feeling of peace that I have writing the above things.  We have been so blessed in so many ways. 

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.

I LURVED this dress.  It made me feel like Jessica Rabbit.

In college, I racked up multiple credit lines of debt (Free T-Shirts, what???) and had horrendous spending habits (not enough cash for pizza?  That’s okay—just put it on this “emergency” credit card that I signed up for because it came with a cool tie-dye background!!!)  There was a time when I needed a $300 repair on my car and I just broke down in tears because I had absolutely no way to pay for it. I was scraping by paycheck to paycheck, working MULTIPLE jobs & going to college, while paying the minimums on my credit cards.  I had one credit company file a suit against me for a credit card that I had stopped paying…and that card only had a $1200 limit on it.  I didn’t get a 401k until I was 27, even though I’d been offered one through my employer at age 22—because I didn’t understand how they worked & didn’t realize I could “roll it over” into my next job. I once got EIGHT overdraft fees on my bank account in the same MONTH—that’s $280 of money out of my pocket simply because I never kept track of how much money was in my bank account.

But…funny thing is… THAT is normal.

That’s a little depressing, right?  But just because something is “normal” doesn’t mean it’s right, or that you have to accept it for your life.

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 room blog.  We both have 4 year degrees and a master’s.  Which is something that only about 11% of Americans can say (note: over 30% of Americans have a Bachelor’s degree). But it’s not like we’re “using” that grad degree to climb the corporate ladder.  My husband still works the same job he did before he got his MBA, and only about half of my coworkers at the same tier as me have their master’s.  And NO, I’m not saying you have to go to college to get out of debt—in fact, I know plenty oil-field workers in Louisiana who make double what I do with no college education whatsoever.  But college was the road we took.  And we got pretty good jobs because of it.  Together, our household income just barely cracks into six figures, which is above average for our area.  We’ve also been in our professional careers for a good while now…I’ve got almost 8 years under my belt in my current field & the Hubs just celebrated 10 years with his company.  So sticking it out does pay off.

Thank you MSU…and your beautiful fountain that is only ever turned on for pretty photos like this.

I’m also not advocating spending a crapton of cash on fancy schools.  We both went to a state school & did just fine—and we both chose to go to that state school BECAUSE the school offered us a (small) scholarship, while other schools we applied to hadn’t.  We took the ACT test multiple times to qualify for a Bright Flight scholarship.  My senior year, my parents made me apply for every single scholarship that I even remotely qualified for.  We both worked while we were in college so that we only had to get loans to cover the basic tuition costs.  There’s a lot of financial aid out there for those who are willing to work for it.

2. Dave Ramsey’s Debt Snowball.  I can’t tout the awesomeness of this man enough.  I started listening to his radio show when I was about 23 while delivering pizzas in college.  This was not long after I had that credit card judgment against me, and right around the time I had the breakdown over the $300 car repair.  I started to realize how ridiculous it was that I had two jobs, made pretty decent money, was at work or school all the time, but still never had any money in the bank.  Where was it going?  I didn’t think I was living frivolously…I mean, I wasn’t eating steak dinners every night or feeding my cat raw ahi tuna.  But I wasn’t spending consciously either.  Eating out more than I cooked, hanging out with friends, spending $5/day at the university vending machines, buying CDs and thrift-store shopping when I got bored…THOSE were the things that were killing me.  It’s different for everyone.  Once I stopped ignoring my debt & faced it head on, I wanted it to go away.  And the only way to make that happen was to pay it off.  I used Dave’s Debt Snowball theory, where you pay off your smallest debt first, and then roll what you were paying on that into your next smallest debt, etc. etc.  The feeling of paying off that first debt (a loan for a laptop that I had been paying on for over 2 years but still owed $250 on) was AMAZING.  I was hooked.  Next was a $750 credit card balance.  Then a $1000 Perkins loan.  Then more credit cards, then a car loan, then the student loans… debts start to disappear a heckuva lot faster when you have an extra $300-500 to throw at them each month.

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 kids kids’ toys to contend with.  The average home value across the U.S. is $167,000 and the average mortgage payment is $1300/month.  When we got married, we tripled the amount we were sending to the bank each month (because we had the extra money from my former rent payment, and now sharing utility costs).  Then, last year, I received a small inheritance & we used a portion of that to pay the last of it off---but even if we hadn’t done that, we still would have paid it off this year. 

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

If you’re buyin’ this house, youze best be able to afford a maid too.  And a pool guy. And probably a window guy, and a landscape guy…

4. We have used cars.  I’ve never owned a new car in my life…and I’m completely okay with that.  Did you know the average new vehicle loses about $4,000 in value the SECOND you drive it off the lot?  The “newest” vehicle I’ve ever owned was 3 years old when I bought it—it even still had about 15,000 miles of warranty left on it.  I paid $12k for it, drove it for 5 years, and then sold it for $8500.  Which means it depreciated in value only about $700/year during the time I owned it (30% overall).  I then took that $8500 & put it toward a nice “new to me” vehicle that we bought for about $9700—which means I was only out of pocket $1200 for my “new” car.  And I must say—paying cash for a car feels pretty freakin’ fantastic.

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.)

transactions Screen shot of categorizing transactions.

After categorizing, you can go to the “Goals” section & see how you’re doing in each category.

budget

Screenshot of the budget tracking section.

Using this tool, we can sit down at the end of the month and see how we’re doing.  Like this month, looks like we dined out a bit more than usual—which could be related to us coming in way under budget for groceries.  We can also see if our goals are realistic--if you see a budget get blown several months in a row, you probably need to re-evaluate: do I need to curb my spending in this category, or is the number in my budget unrealistic?  Likewise, if you see that a category never gets fully spent, you can reduce your goal and move the excess somewhere else—like savings!  Recently I had to adjust our Medical spending category, because one of the medications we were paying for is now free under the new Health Care Reform Bill.  So that budget doesn’t need to account for that amount anymore. 

And yes—FinanceWorks does let you set up mobile alerts, so it can send you a notification if you’re getting close to (or go over) your budget for a particular category.

And if you are BRAND new to budgeting, I actually do recommend Dave Ramsey’s cash budget Envelope System.  I used it when I was first reigning myself in and it totally worked.  Once you feel like you have a good grasp on your budget for each category, you can move back to using debit cards, so long as you still REGULARLY track your budgets in a software system.  I’m also a fan of Suze Orman, who recommends that during your first month of trying to develop a budget, you keep EVERY receipt you get in a box, and then sort through the receipts at the end of the month so you can tangibly see where your money went, since we all tend to get ‘spending amnesia’.

8. We use coupons & Price Matching to save on groceries.  I’ve already discussed this in detail over on this post, so I won’t go into it here, but seriously, it helps.  We save about 30% on our grocery bill by doing that.

9. We live modestly.  Maybe that goes without saying, but I’ll say it anyway.  We don’t go out clubbing every night.  We typically go out on Wednesday nights for trivia (& have a couple of whatever’s on special), have a Date Night on Friday (which can range from dinner & a movie, to bowling, or sometimes ends up just being a night in with pizza, Redbox, & a bottle of wine), and then usually do something fun on the weekend, whether it be going out with friends, catching a local baseball game, canoeing, or camping.  But we rarely go out Friday, Saturday, AND Sunday…partially because we like to have at least one day to be lazy around the house.  We try not to eat out more than once a week, and when we do, we almost ALWAYS use a Groupon/Living Social type coupon (and we still get to try new places all the time because the Springfield area has over 1,000 restaurants).

When it comes to movies, we usually wait until things come out on Redbox, or go to see them at the second-run theater, which charges $3.50/ticket rather than $10.  If there is something we want to see right away, the Hubs can usually find a discount code or get us some free movie bucks through Fandango (or we use gift cards).  (And we TOTES sneak in our own snacks instead of paying theater prices.  Shhhhh…)

When it comes to clothes…we may officially be classified as tightwads.  According to this article, the average American household spends about 3-5% of their income on clothing.  I’m guessing this is probably skewed by families that have kids who are constantly outgrowing their gear.  But as far as we go… well, I discussed it in my 2013 Fashion Challenge post, but last year I spent all of about $145 on clothes.  That’s less than 0.3% of my income.  This year it will be a little more than that, but still not even 1% of my income.  I usually only go shopping when I need to replace something—though I do still love to go & browse (Marshalls, TJ Maxx & Ross are all in the same shopping plaza near our business—it’s like Heaven!).  But it’s very hard for me to purchase something unless it is INTRINSICALLY DIFFERENT from something I already own.  I may fall in love with a pair of purple ballet flats…but unless they’re on a crazy-cheap sale & really comfy, I can’t say yes to that because I already OWN a pair of purple flats. (For the record—if they ARE on crazy-cheap sale, I will TOTES buy them, and if I like them better, I’ll donate my old purple flats to Goodwill…because hey: tax deduction.)

shoe Sorry cutie…I’ll just have to wait until you’re on sale.

We rarely buy music albums—if I like a song, I keep it on a list in my phone (My Tags in Shazam) and then the next time Amazon does an mp3 credit giveaway (or I get a gift card from someone), I’ll buy some songs off my list.  If we buy a DVD or video game, we typically re-sell it on Ebay when we’re done with it.

We also really try not to be wasteful.  Many nights our meals are heavily influenced by “what is about to go bad in the fridge?”  This makes for some pretty offbeat combinations sometimes, but hey—sustenance is sustenance.  Sure, I may not always “feel” like eating whatever it is…but our bottom line is more important than cravings from my belly (which ALWAYS wants pizza). 

Honestly, I think these behaviors are influenced by our growing up “poor”.  I talk about it a little bit above, but please don’t think I had a bad childhood, by any means.  It’s not like, as a kid, I even KNEW that we didn’t have a lot of money.  I never thought in those terms. I don’t ever remember not having enough to eat or feeling “deprived”.  I grew up with a tight-knit extended family and loved playing with my cousins more than anything—which is probably why I still value a good BBQ & Board Games Night more than going out on the town with friends.  I totes had an old-school Nintendo (8-bit) and eventually a Game Boy (black & white, of course)… but we picked up used games at the local flea market or thrift store for $5 bucks instead of paying $30 for brand new.  My parents made me use my allowance (a reasonable $5/week for doing my chores) to buy things that I wanted, so had an understanding of the value of money (and saving up for big things) from a young age.

10. We think about the bigger picture.  We LOVE to travel. I mean, love it.  We’re like: God, each other, then American Airlines. (Just kidding, family…kind of.)  So for us, when we look at the price of things, we compare them to vacations.  When I wrote about going all-organic and thought about the extra $3200/year it would cost us, my first thought was, “my gosh…that’s a week in Europe!”  Saving $60 on something equates to a hotel room somewhere, or a tank of gas (about what it takes for us to travel to St. Louis or Kansas City for the weekend).  $200 equates to the amount we would spend per person on our yearly trip to the Gulf.  By keeping those goals in mind, we are less likely to splurge on unnecessary things, because they essentially use up our travel money

Find your thing that you love, and think in those terms. If you really want a new car, think of every dollar you save as going toward that purchase.  If you have always wanted a pair of Christian Louboutin shoes, or a Tag Heuer watch, or a trip to Italy, or a week at culinary school…just use whatever motivates you.  Develop a “unit” for that thing (“$20?  That’s one of the tiny diamonds in my dream Tag watch!”  or “$125…nope, that would cover the cost of my knife set for culinary boot camp.”)  If you stop living in the moment all the time, you stop SPENDING in the moment too.  What is going to be more rewarding in the long run…that super-cute but too pricey tank top that will probably go out of style next year, or the satisfaction of finally having the money to sit on a veranda in Tuscany while sipping a glass of brunello made by the vineyard next door?  Which will you remember longer?

IMG_0027

Standing on top of the Acropolis: better than a new tank top any day. PS—I actually AM wearing a top in this photo, just FYI.

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