I’ve read it in emails and Facebook messages from readers. I’ve heard it from people I talk to about Money360. I even hear it when I do interviews.
“What you’re describing just isn’t possible for a modern family.”
“I can’t even come close to doing this. It’s just not realistic.”
“I call shenanigans. There’s no way you paid off tens of thousands of dollars of debt in a year while your household income was well below $100,000.”
“The only way you could pull that off is if you had a bunch of secret income that you’re not talking about.”
The truth is that being completely free from debt certainly is possible. It is realistic. And it doesn’t require a bunch of secret income (though that would make it easier).
I’m going to explain in the clearest terms possible exactly how my wife and I paid off tens of thousands of dollars in consumer debt over a period of a little over a year, then paid off a six-figure mortgage in about four and a half years. If you’ve ever doubted how it could be done, or you want a clear explanation to convince your spouse that this is the path you should be following, this is the article to share.
Where We Started From
First of all, let’s look at our situation at the start of all of this. Sarah and I lived in a tiny apartment with our infant son. It was theoretically a two-bedroom apartment, though the second bedroom was practically a glorified closet.
Sarah and I both had reasonably good jobs, but we were only a few years out of college. Our combined income was far less than $100,000 a year, though we had dreams of seeing that income grow over time. I supplemented my job income with a number of side businesses and other gigs – I played online poker, did some computer repair work, and earned just a tiny trickle from blogging – but it didn’t really add a whole lot to the heap. Our income remained well below $100,000 a year.
However, we spent like we earned more than that. We had all the latest gadgets. We had all the cable channels. We had piles of DVDs and video games. We both drove pretty nice cars that weren’t very old. We went out to eat a lot.
The reality was that we were spending a lot more than we earned. Not only were we dealing with student loans that were well into the five figures, we also had a pile of credit card debt that had inched into the five figures as well and saw no signs of abating. We also had two outstanding car loans.
It was not a good situation and, in April 2006, we reached a point where we were starting to struggle to pay the bills. Our visions and dreams for the future looked cloudier than ever.
I’m going to guess that quite a few readers know exactly what I’m talking about here. This probably sounds like you at some point in your life, perhaps even today.
Our First Steps
So, what did we do?
It doesn’t take much reading about personal finance to realize that all of it really boils down to five magic words.
Spend less than you earn.
Everything else is just a specific implementation of that sentence. If you are spending less than you earn, you are going to be heading in the right direction almost regardless of what you’re specifically doing. Similarly, if you’re spending more than you earn, you’re heading in the wrong direction.
So, our first step was to figure out how we could start spending less than we earned.
The first thing we did was make an old-fashioned budget, not so that we could live by it, but so we could see where our money was going. At the time, we used a software package that is now defunct called Microsoft Money. Today, I’d probably encourage people to use the to get started.
We simply went through and figured out every dime that we spent over the course of a few months, using receipts, bank statements, and credit card statements. We divided that money into some sensible categories – rent, utilities, entertainment, food at home, eating out, hobbies. The point of the categories was to see how much we were really spending each month in various areas. How much were we blowing on entertainment in an average month?
The results were painful to say the least. We were spending more than $1,000 a month on eating out. We were spending over $1,000 a month on entertainment and hobbies. Huge, huge numbers.
So, obviously, we needed to cut back in those areas. But there was another problem at the same time. We were actually mailing out about $2,000 a month in debt repayments. (If you start adding these numbers together, you’re getting a picture of how precarious our situation was.)
Together, we came up with a game plan to address all of these things.
First, we stuck a fairly tight allowance for each of us on our hobby/entertainment spending and on our “eating out” spending. We didn’t drop it to zero, but we agreed to limits for each of us in those categories. I don’t remember the exact number, but let’s say we agreed to each limit our entertainment and hobby spending to $100 a month, which drops our monthly total from “over $1,000” to $200. We also dropped our “eating out” budget by a large amount, though mine was slightly higher due to a custom where my work group ate out together twice a week.
That may be too tight for some people, but let me tell you this: When you apply that kind of cap, you begin to quickly see how much of your spending is utterly forgettable. So much of the hobby and entertainment and eating out money that we previously spent in a given month just kind of disappeared, as it was spent on things that were almost entirely forgettable.
In other words, when you cut down on your spending in these kinds of non-essential categories, the things that go away first are the most forgettable purchases.
If you cut your budget by half when it comes to entertainment spending, what you’re going to eliminate is the 50% that you care about the least and, honestly, you barely notice it.
This often surprises people who actually commit to these kinds of changes, because when they think about their entertainment or their hobby spending, they think about the handful of things that they care about the most and dread the idea of cutting them. The truth is that unless you’re cutting to practically zero, you’re not going to be giving up those things that you’re thinking about. Instead, you’re going to be giving up the things that you’re forgetting about — the little forgettable expenses. The books you didn’t enjoy. The forgettable meals. The DVDs that just sit on your shelf. The membership that you never use.
We gave up things like buying more books when we already had a ton of unread books on our shelves and a well-stocked library within walking distance of our apartment, for example. We eliminated a bunch of channels that we basically never watched from our cable service.
We actually started digging into some of our backlog of unread books, unplayed games, and unwatched DVDs, as well as hitting the library that was just down the street and checking out other DVDs and books. And, honestly, we really didn’t notice the changes very much, even though we expected it to be miserable. We could still spend money when we really cared about something. We just stopped spending when it wasn’t important.
In terms of food, we just started cooking stuff at home a lot. This was a transition that was already happening due to the new presence of a baby in our home, of course. We simply taught ourselves how to make different meals – and, yes, some were disasters at first. Eventually, though, we learned what meals we liked and we built up skills that made making those meals pretty easy and quick, and we started taking leftovers to work more and more often. Cooking at home was probably the most noticeable change in our life, honestly.
We also started looking for ways to spend less without making significant lifestyle changes. We started adopting what little energy efficiency improvements we could get away with in our apartment, like switching our incandescent bulbs to CFLs (LED bulbs weren’t on the market yet at that point). We put a weather strip on the two outside doors in our apartment, which helped with drafts in both the winter and summer.
These changes brought us to a point where, month over month, we were actually spending significantly less than we were earning. These changes trimmed somewhere around $2,000 a month from our monthly spending and we were previously in a situation where we were spending $500 a month more than we were bringing in. We were now spending less than we earned and we had a lot of money to throw at our debts.
Paying Down Debts
Our first step was making lifestyle changes, but it took a little while for the financial benefits of those lifestyle changes to really start making themselves apparent in our checking account. At the end of the first month, we definitely had more than we started the month with, but it was merely enough to make a big payment on one debt.
We wanted to start slashing those debts. We were making almost $2,000 a month in debt payments, so the sooner they started disappearing, the better.
We took the common advice from personal finance books and lined up our debts according to interest rate. Interestingly, this was almost exactly the same order as if we lined them up from smallest to largest, as the smallest debts seemed to have higher interest rates (credit cards, in other words).
Our plan was to keep making minimum payments on all debts, but to also make extra payments on the first debt in line – the one with the highest interest rate – until it was gone, then move on to the next one. Since we no longer had to make those minimum payments on the debts that we’d already paid off, this meant that we were able to make progressively bigger and bigger extra payments each month.
Still, we wanted to start off with a bang.
What I did – this was mostly my project, though Sarah helped – was go through a lot of my various collections and possessions and identify which items that I rarely looked at or used. I had a sizable vintage baseball card collection and Magic: the Gathering collection, most of which just sat in boxes for months and years without me even looking at them, so I sold those off. I went through our DVD collection and identified ones that we were highly unlikely to ever watch again and sold all of those off (I remember selling off many full seasons of television shows).
The big key was to not fall into nostalgia traps with the stuff I was considering selling. Looking at some of those items brought back waves of memories and nostalgia, but if I was honest with myself, it was clear that my life had changed and moved on.
I used and for most of the sales (today there are even more ways to sell unwanted items), and I took the money from those sales and applied all of it to extra debt payments. In the end, I sold off a bunch of stuff that I didn’t regret in the least and used that money to pay off the first two or three debts in line in their entirety.
That opening salvo trimmed the amount that was going toward debt minimum payments by a few hundred a month. That, along with the fact that we were now spending significantly less than we earned in the other areas of our life, made it possible to pay down the remaining debts with tremendous speed. Roll forward a little over a year, and all of our debts were paid off in full.
That’s all we did. There was no secret additional income. I did start Money360 in that timeframe, but it earned almost no money for the first year or so of existence. There was no bonus at work. There was no inheritance.
We just cut back hard on our most forgettable spending, sold off some of our most forgettable and unused possessions, and applied all of it directly toward debt. Nothing more, nothing less.
What Came Next
Around the time that we achieved freedom from debt, we decided that we needed to move out of the apartment we lived in. Our second child was on the way and our apartment was simply not going to work well for a family of four.
We looked at a lot of options – houses for rent, larger apartments, and houses for sale. We eventually decided on a house for sale, which required us to take on a large mortgage – well into the six figures.
Going back into debt in that way after achieving debt freedom was a bit frustrating, sure, but we knew we had the skills to tackle it.
So, in mid-2007, we moved into a house with a big mortgage attached to it. It’s a pretty typical story.
In the latter half of 2007 and early 2008, Money360 took off like a rocket, becoming a huge success but also a huge personal time investment for me. During that period, we had a very healthy boost to our income, most of which went toward the costs associated with moving and furnishing our home as well as toward some big initial payments on our mortgage.
Then, in early 2008, I made the decision to start working on Money360 full time, which knocked the legs out from under our income for a while. Our income dropped below where it was a year prior. Sarah and I believed in what Money360 could become if I was devoting more than a couple hours a day in the evening to it.
Through all of this, we kept paying down our mortgage as fast as possible. Sarah and I kept contributing to our retirement plans, and when I switched careers, I started saving in a Roth IRA.
The Sustainable Change
There’s something extremely important to note here, something that is vital to making a great financial future for yourself. Spending less than you earn is not a short-term fad. It is a change to how you live your life.
Many people approach personal finance change like they approach a diet. They make a bunch of very tight changes to their life, changes that aren’t sustainable over the long haul. They pledge to spend $0 on their hobbies and never eat out and so forth. They sell off a bunch of stuff that they actually really care about and come to regret it.
And then, like with many diets, it all fails. There are huge spending binges and you end up right back where you started.
One of the biggest keys to turning your life around financially is making sure the changes you’re making are sustainable, but that you don’t give into short-term temptations either. There are absolutely times where I want to spend my money on something I don’t really need, but those temptations fade pretty quickly if I don’t act on them impulsively. I usually just make a note of some item that I want so I can feel like I’ve “taken action” on it and then I usually just forget about it entirely, because the desire was very temporary.
Don’t make changes to your life that you can’t sustain, and if you do, just go back on that one change that isn’t sustainable.
However, having said that, don’t be afraid to try out some changes, even those that seem like they might be tough.
Quite often, you’ll find it’s not nearly as hard as you think, and if it is, just roll it back and try a different approach. The key is to never stop trying to improve, never stop trying to find the peak of your fulfillment curve.
The biggest challenge of this path for many people – and it can be for us as well – is overcoming temptations. We see stuff, we want it. It’s even worse when we know quite well that we have plenty of money in the bank to pay for it without skipping a beat.
The real trick to overcoming that kind of temptation is twofold. First, you have to recognize that the vast majority of those temptations are extremely fleeting. You won’t remember most of them in a few hours, let alone a few days.
Second, television and the Internet are giant floods of temptations. Between ads and direct product placement in the content, they often serve just to tempt you into wanting things that you hadn’t even heard of before you started watching or clicking – which means that you don’t really need the stuff at all.
I solve that conundrum by consciously spending less time watching unplanned television (meaning if I catch myself channel surfing or just browsing a streaming service, I find something else to do) or browsing websites without purpose (again, if I catch myself doing it, I go do something else). If I find that I’m wanting to buy something, I add it to a list somewhere and then tell myself I’ll buy it later if I still want it. Most of the time, I just end up purging those lists in a month or two.
Onward and Upward
So, throughout all of these changes – a new house, a new career, a second child, a third child – Sarah and I stuck with our financial changes – most of them, anyway – and we kept trying new things.
Our children became very familiar with every park within a 20-mile radius of our house. We switched our light bulbs from the incandescents that were installed in the house when we moved in to CFLs and then eventually to LEDs. We started making meals and freezing them, to the point that today that we have most of a deep freezer full of meals that just need to be thawed and cooked. The list of these little changes go on and on.
In 2011, we paid off our entire mortgage and became fully debt free. Not too long after that, I sold Money360 to a company that specializes in managing blogs – it was getting to the point where I had a handful of part-time employees in place just to keep the thing running – and signed a contract as a long-term writer for the site, which I’m still doing.
Since then, our primary goal has been financial independence, meaning that we’re striving to reach a point where we have enough in investments so that we no longer have to work for an income and can meet our annual spending needs just from the income from those investments. We’re hoping to reach that point at about the time our youngest son leaves the nest.
We’re still operating with many of the same principles we started with in 2006. It’s all about spending less than we earn, and we do that by a very healthy margin. It’s all about keeping our non-essential spending under control, and we still put a monthly cap on our spending on non-essentials and keep a watchful eye on any lifestyle inflation.
There is no magic trick. That’s really all there is to it.
You can do it, too. It’s not impossible. It doesn’t require a miserable life. It just requires you to get a grip on the most wasteful parts of your spending and find a happy balance that provides true fulfillment.
Are you willing to make some changes and build the life you want? The ball is in your court.