Monday, April 28, 2014

Becoming Debt-Free (Part 1)

It has been just over 2 years since my family first began our "debt elimination" journey. My extended family may be getting tired of hearing about it. Every time they ask "what's new?" I answer with an update on the most recent debt we've paid off.  But within the walls of our little house, we are constantly talking about our budget and the progress we're making. The "Pickles" now start their requests off with "When we get our new house can we have..." because no big requests are going to be granted before then.

Too many families believe debt is just a "part of life". That's the way it was for my family. We had a lot of debt. It was "normal" to have a balance on credit cards. It was okay to finance a car. It was fine to finance a house for 30 years or take out a student loan (or two or three) as long as the payments were manageable.

We had much more debt than we realized. But we were able to afford the monthly payments on everything so we never thought we had a problem. And the saddest part is that surprisingly, we were "normal".

So there we were, living our lives thinking everything was great and we were doing well. I had a full-time job that I loved while Mr. LH finished grad school so he could do the job he loved. We took a wonderful celebratory mini vacation in Roanoke, Virginia the weekend Mr. LH graduated.


Then the following week the company I worked for closed. Unemployment only paid me half of what I used to bring home. Our savings account took a huge hit covering the difference.

Mr. LH, with his new degree, was able to secure a new job but it meant we had to leave North Carolina and move to Colorado. We had to sell our home in a depressed market. Thankfully, we had enough in savings and enough money coming in that we never fell behind in our bills.

You would think this whole experience would have rattled us enough to start fixing things then. But once Mr. LH started his new job in Colorado, we slid back into our normal, comfortable routine of making payments and using credit cards. Since we were still paying the mortgage on the house in North Carolina, things were pretty tight. That means we weren't being frivolous, but the amount of debt going on to the credit cards every month was getting larger and the payments we would send every month to pay it were getting smaller. Still, we thought as soon as our NC house sold, we could buy another house and move out of our rental.

Our house in NC had been on the market for almost a year by then and had been under contract several times. We had no idea when it would sell but we wanted to be ready to move into our own house once it did. So in late summer of 2011, MR. LH and I met with a Realtor, to see what homes were available in the area. There were several we liked but we still couldn't commit to anything just yet.

The NC house finally sold 2 months later but instead of reaping the rewards of having lots of "equity" in the house, we had to contribute money to the closing. Housing prices had dropped so low that we lost all the equity we thought we had accumulated. Even so, we were so thankful that house was no longer a worry. Our savings account had been depleted from the mortgage payments we had kept up throughout the year the house had been on the market. We wouldn't have been able to make the next mortgage payment if the house didn't sell.

We didn't have a penny left for a down payment (and the days of "no money down" loans disappeared when the housing market crashed). Our house hunting came to a disappointing, embarrassing, abrupt end.

Still, we continued to live as we had always lived. Nothing changed. In fact, we breathed a little easier now that we didn't have that NC mortgage looming over our heads.

Six months later, in April  2012, our landlord “requested” a lease extension of 12 months. The extension can with an rent increase as well.

We thought again about buying a home. We had gotten used to home-ownership and had not exactly enjoyed renting for the previous year and a half. The house needed so many repairs done and it seemed the owner just didn't want to do any of them. Rental prices in this area were out of control. A "cheap" house in a low rent area was still $1300 a month. So many people had lost their homes in the real estate crash and as a result the demand for rentals remained extremely high, even with rents increasing every year.

Our options were to either turn in the signed lease or give an evacuation notice within 2 weeks. A mortgage payment would be considerably less than our rent but we weren't in a position to buy yet. Our rent, even though it was going up, was still towards the low end of the rent scale for the area so finding someplace cheaper to rent would be next to impossible.

It was at this point that we became angry. We were angry about the economy. We were angry about the rent being raised on a house that had so many issues. We were angry we couldn't afford to move anywhere else. We were angry we had stupidly gotten ourselves into this mess. We wanted to kick all our bills to the curb. We were ready to get out of debt.

We extended our lease and made a goal to do everything possible to rectify our financial situation. We didn't want to be sitting in the same house a year later signing another lease extension.




Image courtesy of Stuart Miles / FreeDigitalPhotos.net

The First Step

I took a look at our assets…ALL of them. Surprisingly, we had just under $10k in assets. Now, that didn't include our vehicles, but it did include our depleted savings accounts, IRAs and cash value life insurance plans. For a couple of people our age, $10k is very very sad. But it was encouraging too because before I pulled all this information together and looked at it, I thought we were completely broke.

I then dug into our income vs. expenses. It had been a long, long time since I looked in-depth at our financial situation but I dove right in and pulled out every bank statement, every receipt and every bill we had received since January 1st of 2012.

We had a ridiculous number of credit cards. Five. Who needs five credit cards? The balances would be paid down…then an "emergency" would come up…or Christmas…and the balance would swing right back up again. All but one of them had a balance. The interest alone on that balance was enough to make me bang my head on the desk over and over in despair.

We also had FOUR student loans. Those included the most recent ones for Mr. LH's graduate degree.

It seemed our first order of business would have to be eliminating all the debt BEFORE we attempted saving for a house. There was no sense in buying a house only to lose it later because of mounting consumer debt. The dream of a new home was already starting to blur. I now knew our original 1 year goal was very unrealistic without some windfall of money coming our way. 

We needed to lower our expenses to help get rid of our debt. We were living beyond our means. There was too much being added to the credit cards every month. The credit cards were going away. The credit cards were stuffed into a sealed envelope and placed in a locked box in the house. That would keep me from having them with me when I went out to do the shopping. They were later moved to the safe deposit box and removed and shredded as they were paid off.

Dining out: It cost us anywhere from $30 to $50 every time we dined out. The dining out year-to-date total (as of April 2012) was over $500. Most of the time, we went out to eat because we had nothing planned for dinner. With careful meal planning, we could eliminate those restaurant meals. Our grocery bill would increase, but eating at home only costs a tiny fraction of eating out, especially when my son could wolf down a full adult pancake breakfast (and still be hungry) and my daughter had a habit of ordering the $4 macaroni and cheese kids plate everywhere we went.

Note: We still go out to eat once in a while. However, those trips are reserved for birthday dinners (and only if the trip is specifically requested as a gift and then budgeted as a gift) or if we receive a gift card for a restaurant.

Groceries - Saved $1200 to $1800/year: Our monthly grocery bill for a family of 4 was averaging about $500. I knew I could lower that amount. I read a blog where a family of 8 had, at one time, a monthly grocery bill of $400. So my family of 4 should be able to make it on $200 a month, right? We weren't going to stretch it that much, but cutting out $100 to $200 a month on groceries would be great, even though we would also be dining out less (or not at all).

We started out with a $350/month budget and after about a year of struggling with that amount, I changed the grocery allotment to $400/month. This covers food AND toiletries.

Re-evaluate the phone bill - Saved $240/year: We were still under a 2-year contact for our home phone/internet service, but I called the company anyway, told them I was looking to cut my expenses and wanted to take a look at my phone options.  Once that phone call was finished, my bill was reduced by $20 a month and I didn't lose any services.

Our 2-year contract for our cell phones had expired. We needed to take a look at new cell phone plans available to see how we could save money. Our cell phones were already the basic bottom-of-the-barrel phones with no data plan. We didn't text anyone so we didn't pay additional for that either. But we did pay for 2 cell phones and I never used mine. Ever.

Re-evaluate the trash bill - Saved $36/year: When we lived in NC, there was only one trash service. You either paid it or made frequent trips to the dump. We were limited to two trash cans (which was no problem), they did not pick up bulk trash, yard waste or recycling. When we moved to Colorado, we had several trash companies to choose from. The one we chose was the cheapest, had great reviews and offered the same services as everyone else – unlimited trash, yard waste and bulk pickup – all for the same price we were paying in NC. Recycling was extra.

We were very happy with that company but then a new garbage man came to town.  They offered all the same services AND recycling for almost $3 less a month. We switched. It was a good decision. We pay $36 less a year and get recycling for free! We continue to use them 2 years later. 

Automotive (gas) - Saved $300+/year: Thank heavens the cars were both paid for and, for the time being, doing well. We had to replace some tires and get a full tune-up earlier in the year, but otherwise, our auto expenses were only for tag renewals, regular maintenance and gas.


To lessen gas expenses, I walked to school with the children once in awhile – though not as often as I could have. I also planned for multiple errands to be done during the same trip. Most days, the van never left the driveway and was only used on weekends for family outings.

I used to have to fill up the gas tank twice monthly. That dropped to about 2 - 3 times every 2 months - or saving half a tank to a full tank of gas every month.

Since Mr. LH drove the most, he used the more fuel-efficient car. It just happened to also be the one that would get him to work safely in the snow as well.

Electric, gas and water: Unfortunately, there is only one game in town for electric and gas suppliers. It’s the same thing with city water services. There wasn't much we could do except what we'd been doing…watch the thermostat carefully (since we have no air conditioning, the thermostat stays between 58 and 60 degrees year-round), keep air filters changed regularly, monitor all electrical appliances and conserve, conserve, conserve.

The city didn't allow rain barrels for harvesting water, but we made sure there was an aerator in place on the faucets, limited shower times, minimized lawn watering (the lawn was all weeds anyway) and made sure all laundry loads were full-sized. We also started to hang-dry a lot of our laundry. The low humidity here really assisted in drying wet clothing quickly.

I thought it interesting that right around this time, both children were studying conservation in school. The Girl came home telling me how long my showers should be and The Boy brought home a package he received at school from the utility company full of CFL bulbs, an air filter monitor, a digital thermometer, a glow nightlight and all sorts of stickers and magnets reminding you to “turn off the computer” or “turn off the light”.

Trying to determine how much we've saved on our utilities is difficult. Even as we started to consume less electricity, water and gas, the costs for these utilities also increased. So we're still paying about the same as we always have. I budget for the high end (the highest utility bills we've had) and if our monthly bill happens to be lower, we throw the difference at our debt.

Car Insurance - Saved $36/year: I had been with the same car insurance company since I got my driver’s license years and years (and years) ago. There may be better rates out there, but we have very good rates and no other company has made me feel confident in them enough to make me switch.

Although the car insurance didn't change, I did talk with my insurance company about lowering premiums by raising my deductibles. In our case it didn't make much of a difference in the premiums. We started paying bi-annually for our auto insurance and annually for our renter's insurance to avoid the $3 per month service fees.

I reserved a copy of The Total Money Makeover by Dave Ramsey from the library. I was able to pick it up a few days later and I immediately started reading it. It didn't take long to finish. This book makes sense. The goals are attainable and the stories of people who have worked the plan and succeeded are very inspiring. After going through this book, I was able to put together a workable plan.

As much as I wanted everything to be in order for change immediately, I knew this would be a long road and a struggle. It had taken me over a week to get to a point where I could catch my husband in a free moment and say “okay, this is what we’re looking at.”



Progress...

The following month, we were already seeing progress. We paid off one credit card and 2 smaller student loans. And then the first of what would be several financial "emergencies" hit us. Both "Pickles" needed braces. Thankfully, we had dental insurance to help lessen the blow but even after the insurance paid their portion there was still a hefty balance due. We rolled the braces into our new budget and tightened our belts a little more.

As of the date of this post, it has been just over 2 years since we started our debt-elimination process. We still have just over a year to go before all the debts are paid. We will still need to save a large emergency fund and a hefty down payment for a house. It's been a long road so far but we're making great progress. In those two years, all of our credit cards have been paid off as well as two student loans and two sets of braces for the "Pickles". Anything new that comes up (like car repairs or school expenses) are paid for with cash so it doesn't increase our debt.

In Part 2 of this mini-series, I'll explain the steps we took in lowering our grocery bill. We're not eating steaks, but we're not living on just beans & rice or ramen noodles, either. 



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1 comment:

Joy said...

You've made great progress! Good luck shedding the rest of your debt and meeting your financial goals.