Friday Finances: Getting out of Debt

  Wealth after all is a relative thing since he that has little and wants less is richer than he that has much and wants more. –Charles Caleb Colton


Wealth is relative I know to some it may seem like we have a lot, to others on the brink of nothing. Money matters are generally off limits in polite conversation especially how much debt you have, how much money you make and how much money you have in savings or invest each year is not something to talk about, especially if you are among people of either extreme wealth or poverty. I’m sure I’ll be breaking all the rules with this post as I  get personal and lay out our finances for the world to see. If you stumble across this post and are looking for investment tips as a day trader or the best IRA to start your retirement fund this won’t help you.

I’m going to give a little personal history share some strategies for getting out of debt and managing daily spending  and give you some personal encouragement if you happen to be in the same predicament as we are. We are simple, frugal, people but honestly haven’t handled our money sensibly over our 23 years of marriage even though we’ve been trying to live within our means.  In the early years we were living slightly above the poverty level still trying to find our niche in the working world and it was extremely hard to make ends meet. At our lowest we made $24,000 one year in the late nineties. Miraculously, as the new millennium hit, our income increased 3 fold over the next 4 years and we’ve now broken the 100,000 per year mark. Now that we’ve caught up with the Jones’ including all their debt we want to go a little further.

To put things in perspective though we live in the richest country in the world in the richest county in our state and make the median income. We live in a nice neighborhood, drive nice cars, and have plenty of food in our refrigerator. We are able to take occasional modest vacations. We sponsor a child in India, give to our church and try to be generous with others. We are not even close to the poverty level anymore.

On the other hand we have very little in retirement, struggle to save money and live pay check to pay check.  Our debt to income ratio is 39% when looking at gross income, much higher if we look at take home pay. We have an interest only mortgage and interest only home equity loan and negative net worth. Our interest only term on the home equity loan is up next year and we have 6 years left on our interest only mortgage.  We want to pay off the lesser debt and either increase our income to the point we can afford a conventional loan on our present home, or sell and move into a smaller more affordable home to drastically decrease our debt to income ratio. Then start saving!  Wayne is eligible to retire in 15 years. that seems crazy, especially because we have very little saved or invested.

We’ve put our car loans and small credit card debt into a snowball calculator and will have those paid off in 2.5 years. That’s a conservative estimate, we hope, if we throw everything we have at this debt, it will be sooner. Once those are paid off we can either make the decision to sell our home or convert to conventional loans and just stay put. We are also building up an emergency fund and trying to save for those yearly lump expenses like Christmas, taxes and vacations. If we don’t have the cash we won’t spend the money. That’s the plan

Why haven’t we done this sooner? How did we get here to begin with?

Simply living beyond our means doesn’t quite explain it.  The short story is that in 2005 at the peak of the real estate bubble we sold our small 1300 square foot home in a not so great neighborhood for a ridiculous price(450,000, cleared 150,000) and bought a home almost twice as big in a great neighborhood, for a ridiculous price (559,000), with the hope of always having rental income from the basement apartment in the new house to afford the mortgage. For about 2 hours on September 15th, 2005 we had no debt and a nice nest egg. If we had bought a home with a conventional mortgage at about 200,000 less  we could have, by this time, been almost 1/3 of the way through the term of the loan and would also probably have a positive net value. We knew that interest only loans were not a smart financial move, how and why we agreed to that I’m not sure but, there’s another aspect of our journey into debt.

Two months after  moving into the new and improved home the bubble burst and the value of our home dipped about $30,000 we still had enough equity over the next 1.5 years to be eligible for and able to finance two international adoptions through a home equity line of credit.  We are so grateful and truly see God’s hand in this. At just the right time we were able to leverage our assets to give two children a home and forever family.  So I’m not going to say that was a bad decision!  We can talk the joys and struggles of adoption another time. Financially it put us in a lot more debt than we would otherwise have had but it was the right decision at just the right time.

Over the next few years much of our discretionary income went to therapy, surgery and other things to care for our adopted children.  During that time we drove two cars into the ground and it really seemed that financing cars made a lot of sense. We haven’t had car debt in 15 years and Dave Ramsey might disagree but to have two relatively new cars and not to have to worry about reliable transportation gives peace of mind. A few unwise decisions though, have put us in over our head such as taking retirement money to put wood floors in and using credit cards to finance vacations.  This finally caught up with us and we’ve reached the breaking point.

We have a plan though and a desire to work the plan. We are years behind some of our peers but I am hopeful that we can turn our situation around.

Today is the first payday with our new cash only system.  I cashed a check, allocated money to envelopes titled food, fuel, clothing, household, and miscellaneous (for things like eating out and coffees or sweet frog) and hope, for once, the money will last till next paycheck. Thankfully I was also able to put some to savings and giving first.  It will take careful planning and mindful spending but I hope as it becomes habit to use only cash for every purchase it will get easier and our goals will be realized.






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