I had a few bad years of personal finance. I was one of those guys who bought houses without any money during the Great Housing Boom of the 2000s. I bought my first house in 2006 when I was 24 with nothing more than a signature. It was working out pretty well, so I bought two more in two years with nothing more than two more signatures. I was going to be rich.
In December 2010 I nearly went bankrupt. My bank accounts were overdrawn and all of my credit cards were maxed out. If one more thing went wrong I was going to have to start picking and chosing which bills to pay.
Luckily I didn’t go bankrupt. We survived until February when my tax return came in and then we slowly started to dig out of debt. 2011 was another thin year, 2012 was better, and this year we made some real progress towards long-term financial security, learning some valuable financial lessons along the way. Here are some of those lessons.
There are three steps to financial security:
- Spend less than you earn
- Save what you don’t spend
- Invest what you saved, and when your investment returns are higher than your expenses you will be financially free
Here are the ways we’ve reduced spending in the last few years:
- Housing – The bad news is those three houses I bought are probably all still worth less than I owe on them. The good news is I was able to refinance all three to low interest rates over the past three years, making them manageable until the market recovers. One of my houses used to carry 9% interest rate, and this year we refinanced it down around 4%! If I could go back in time, I wouldn’t buy until I had enough money to put 20% down, and I would have gone much less expensive for my first home. Savings over $1,000 per month including the investment properties
- Food – I used to order out at least once per day, and on some long work days, I’d eat breakfast, lunch, dinner, and two coffee breaks out. One month we spent over $1,500 on food and beverages as a family! Now we make all of our meals at home, pack meals for work, and we grocery shop the greatest grocery store in the world: Aldi. Savings up to $1,000 per month
- Cut the cord – At one point our cable bill was over $200 per month. We canceled cable, and now use high speed internet ($40), Netflix ($8), Hulu (free), and a Leaf HD antenna (one-time charge of $60) for all of our TV entertainment. Savings over $160 per month
- Insurance – We switched to high deductible home, auto, and health insurance. I canceled my whole life insurance policy that I got suckered into and switched to term life. Savings over $500 per month
- Things – We stopped buying most things. If we buy something now – gadget, gizmo, or contraption – we buy used off Craigslist. Savings unknown per month, but a lot over the long haul
- Cars – We made some bad car choices years ago too, by buying and leasing a couple of expensiveish new cars (we’re talking Hondas here, not Mercedes). This year we bought out Kelly’s lease with a low interest loan from a credit union that actually lowed our monthly payment compared to the lease, instead of leasing a bigger and better car. Once it’s paid for we won’t borrow money for cars again. Savings of $40 per month for now, but much more in the long run
Here’s what we’re doing with our new savings:
- Budgeting every penny – I use Mint.com for tracking spending, setting savings goals, and budgeting everything.
- Maxing out 401k contributions – 401k savings lower our taxable income and keep our money safe from our spendy habits.
- Saving and investing – We save as much as we can now. We have a tiny amount in a savings account, and the majority of our savings in VTSAX – Vanguard’s Total Stock Market Index.
- Paying off credit cards forever – Next month we’ll be completely credit card debt free. Not bad considering all of our cards were maxed out just four years ago. Never using those suckers again
Here are my favorite personal finance blogs that helped us get our finances in order, and helped me write this post through blatant content stealing:
- Mr. Money Mustache – “Financial freedom through badassity.” By far my personal favorite.
- Extreme Early Retirement – “A philosophical and practical guide to financial independence.”
- J.L. Collins NH – How to simply and effectively invest your savings for long term growth.
- Budget Bites – A huge collection of the best inexpensive recipes.
Debt and irrational spending habits make you a prisoner – a prisoner to your banks, a prisoner to your consumerism habits, and a prisoner to whoever provides your income (employer). 250 years ago our country was founded on principles of freedom, but it’s now filled with citizens actively pursuing financial indentured servitude.
And lust for luxury knows no bounds. That next $10k in salary will make me happy. One more bedroom will make us happy. A bigger car, more storage, or more stuff to put into the storage, maybe that will make us happy. It’s never enough.
I’ve interviewed too many job seekers who, “HAVE to make $100k plus to survive.” It is absurd to require such a ridiculously high income for “survival.” It’s also absurd to call maintaining a luxurious lifestyle fit royalty survival.
After all of our expense cuts, we not less happy. In fact we are happier in a lot of ways.