5 Topics All Couples Should Agree On Financially

Let’s be honest, money is emotional and complex! It impacts nearly every aspect of our lives and most certainly impacts our relationships with our significant other. Since money is still such a taboo topic in our culture, miscommunications can create small cracks in the bonds of our relationships. Like a small crack in a windshield, it can expand over time and damage the entire windshield. However, it’s also true that small cracks can be repaired simply if they are identified and corrected early.
When thinking about finances as a couple, we must understand that we’re partnering two people with different backgrounds, experiences, goals, and values when it comes to money. A couple partnering their finances is essentially entering into a business partnership, with the exception that businesses typically have a formal written contract which stipulates the rules each partner must abide by, most couples don’t have a written contract. In absence of a written contract, we need to come together to have a common understanding of some fundamental questions.
Before we get into those fundamental questions, let’s be cautious about how we set up these conversations. Personal finance is just that, personal. When we’re having conversations about money, they can be extremely intimate and bring up emotions of shame, defensiveness, guilt, and even anger. Do NOT corner your partner in an interrogation room Law & Order-style with a bright light asking intimate financial questions. You want to create an environment that is safe, positive, private, honest, and free of judgment. This is also not just one conversation but should be several and ongoing. Make it a finance date! We’ve created a checklist of items to discuss to make sure you can cover all your bases.
[convertkit form=5115696]
So let’s get to the questions! The following are 5 topics couples should agree upon financially.

1. What are our financial values and priorities when it comes to money?

As we mentioned before, we have different priorities and values when it comes to money. One partner may view money through the lens of power and control. For example, they may be a meticulous planner and want to maximize every penny. The other partner may believe money enhances their experiences and relationships. They may see money as a means to see more and do more. In this situation, one partner views their partner’s financial behavior as controlling/limiting and the other partner views their behavior as undisciplined and wasteful. If we only view our partner’s behaviors through our own frame, it can create a purely biased and unbalanced view that can create many small cracks in the bond. It’s important to discuss these views openly and come to terms with what your joint values and priorities are.

2. What are our individual and joint financial goals?

After discussing your values and priorities, then you can discuss financial goals. Goal setting is important individually, but it’s even more important as a team to ensure you’re both rowing in the same direction. Your goals have to be specific, written and shared.  An unwritten goal is called a wish. Can you think of any successful teams, businesses or organizations that don’t have specific written goals? Come up with your financial goals individually and then bring them together to set joint financial short, medium and long-term goals.

3. What is our plan for managing debt?

Misuse of credit is one of the largest contributors preventing people from building wealth. Debt is essentially present borrowing against future income. Unfortunately, too often people find themselves in a situation where their future catches up with them, and their new present is unbearable. Living paycheck to paycheck can create ever-present stress because financially they are just treading above water, knowing that one uncontrollable change could cause them to start drowning. Working hard just to pay off debt from the past and not being able to take advantage of opportunities in the present or save for the future can put a serious strain on both the individual and the relationship. Discussing current debts, and being on the same page in terms debt that you may incur in the future (mortgage, business loan, student loan) is vital.

4. What is our plan for handling emergencies/loss?

You know the saying, $%*? happens! The question is not whether it will happen, but rather are you prepared for it when it does. Having an emergency fund is vital for anyone to have, but that’s just a first step. Once you’re in a committed relationship and are partnering your finances, you need to discuss how to handle a situation in which one or both of you are disabled or passed on. If you think those are difficult conversations now, think about how much more difficult it would be in the absence of these conversations afterward. Don’t add financial stress to grief.
Life insuranceDisability Insurance, Living Will, Healthcare Power of Attorney, and organizing confidential paperwork and passwords. These are examples of items you can take care of relatively inexpensively which go to piece of mind.

5. What is our plan to build wealth?

So you’ve sorted your values, set goals, managed debt and planned for contingencies, now let’s talk about wealth building. Most people who work simply exchange their time and skills for money. At some point, they may no longer want to continue that exchange. Some people call it retirement or financial independence, the goal for most people is to amass enough financial resources to have independent control over the use their time and talent. The best way to do that effectively is to plan, save and invest as early as possible. There are a zillion routes to get there; combinations of employment, entrepreneurship, equity investing, real estate investing, inheritance just to name a few, but you and your partner want to be on the same page in terms of what is the end game, how much do we need, and approximately how long will it take?
We created a checklist of items for your finance date and we are also developing an online course with live coaching to help couples dig deeper into some of these topics to get on the same page financially.
[convertkit form=5115696]
Discussing finances as a couple can be a very tough road to travel. There can be potholes, detours, roadblocks, speed bumps, accidents, and traffic. However, if you and your partner can agree upon where you’re going, how to manage challenges and which routes to take, it’s much more likely that both you will get there, together.
 

4 Money Lessons from the 2016 U.S. Presidential Election

The 2016 Presidential Election was historic on multiple fronts. Two of the most unpopular candidates battled in one of the most contentious, divisive and unconventional campaigns in modern history. For some, the result was a deeply shocking and painful event, for others it was redemption for voices long ignored. In all, nearly 120 Million Americans voted and the popular vote was separated by less than 200,000 votes, which is about the population of Little Rock, Arkansas. Regardless of your politics or preference of candidate, there’s no question that the country is divided politically. Whether you’re extremely disappointed or excited by the result there are lessons to be learned from the election and how it can affect our wallets and thus our livelihoods. How can the lessons from this election make us better managers of our finances?

1. Conventional Wisdom Isn’t Always Wise

Nearly every political expert and reputable polling firm who had been polling voters on a weekly basis for 18 months were completely wrong about the actual results of the election. Polling models that were used for the electorate in 2008 and 2012, became obsolete in 2016. Conventional wisdom can often be generalized and not specific to our individual situation.

There are certain standards of conventional wisdom in our finances that are also outdated or need to be challenged based on our individual situations. For example, conventional wisdom often stresses going to the best college one can get into (regardless of cost), pursuing a degree in a field of interest (regardless of expected future salary). This is not to say that people shouldn’t go to college or pursue a major solely based on expected future salary. It is to say that mode of thinking was developed at a time when people could pay their full student tuition by working part-time. That’s a 1970’s/80’s model, which needs to be challenged and may not take into account the realities of increased tuition costs and the impact of student loan debt on your future livelihood.

Our motto is Reject the Status Quo. In order to manage your finances well, there are times when you’ll make decisions that are not popular. The status quo embraces consumerism culture in which many people equate spending with projecting wealth or building relationships. It may be tough to navigate being the odd one out if you don’t subscribe to that mode of thinking. You may find that unnecessary spending actually doesn’t project wealth or make you happier, but rather delays and extends the time it takes for you to reach your personal and financial goals.

2. Prepare for the Unexpected

To say that Donald Trump becoming the 45th President of the United States was unexpected is a dramatic understatement, but life can often be very unpredictable. It was the Greek Philosopher Heraclitus who said, “Change is the only constant in life.” Sometimes change is good and sometimes it isn’t, but regardless, we have to plan for the unexpected. [bctt tweet=”Being unorganized with your finances is like playing Russian Roulette. ” username=”moneyspeakeasy”]

One of the lessons learned from the 2008 Great Recession was the people that were impacted the most were folks who carried high levels of debt and lived above their means. That’s not a judgment on them personally, but we need to ask ourselves if we have recession-proofed our finances. The following questions can help you assess your readiness:

Do you have 3-6 months living expenses in an emergency fund?

Do you have more than one source of income?

Do you have a written budget and track your spending?

Do you have life and disability insurance?

Do you have revolving credit card debt?

3. Depending on Government is a Losing Strategy

One of the truly negative impacts of having a divided country and a divided government is that even topics of general consensus may not get accomplished. There are serious financial issues, such as the cost of higher education, the cost of healthcare, student loan debt, social security, increasing wages and tax reform that can have dramatic effects on our finances, both positive and negative.

We believe the best plan of action is to treat your finances as if you will not get any assistance from the government and if you do, it will be a bonus. If you are under the age of 50, you should have no expectation that you’ll receive any social security benefits in retirement. If you have student loans, you should have no expectation that the government will help reduce the cost or forgive any portion of it, unless you are in a loan forgiveness program, have it in writing and understand the nuances.

The point is that our government is not a nimble organization, even when there is a consensus. Big changes can often take years, if not decades. Therefore government assistance should not be an important part of any financial planning.

4. Your Money, Your Values

Finally, if you want to know what someone truly values, you may listen to their words, you may even look into their actions, but one of the most revealing aspects of a person’s values is their spending. As they say, follow the money! We may vote for a Presidential candidate every four years, but we vote daily with our financial resources. [bctt tweet=”The more we control of our finances, the more resources we can direct toward causes we value.” username=”moneyspeakeasy”] For example, if a company decided to move a factory overseas or company funded organizations that were contrary to your values, an organized voter base could decide they were no longer willing to purchase products from that company and impact that decision. Just as many Americans believe that every vote counts, your dollars and purchase decisions count. Make sure your bank statement reflects what you value most.

If You Hate Maintaining a Budget, Track these Two Numbers Monthly

As personal finance nerds, we are interested in where every dollar goes, what bucket it falls into and how that compares to the previous week, month, and year. Most people are generally not interested in tracking every dollar. Some people say, “I’m just not a math person” or “that’s just more detail than I care to know.”

If forced to come up with two metrics to evaluate your financial progress, we would have to say without a doubt, it’s your net income and net worth. Let’s define both and then let’s talk about why these are the most important financial measures to track.

What is your Net Income?

Your net income is simply taking your monthly after-tax income (the amount that comes into your bank account) and subtracting all of your expenses during the month (housing, food, utilities, transportation, debt payments, personal, etc).

Net Income = After Tax Income – Expenses

If you were a business, your Net Income would be called ‘profit’. You need to know what your profit is each monthly. You don’t want to run a business that’s losing money each month. You want your net income to be positive each month and you want it to be growing over time.

A common mistake people make is that as their income increases, they increase their spending along with it (a.k.a. lifestyle inflation). So if you get a 3% raise at work, but you increase your spending by 4%, you could actually be worse off financially, that’s why tracking net income (profit) monthly is so important.

 

What is your Financial Net Worth?

Your financial net worth is simply adding up all your financial assets (everything you own) and subtracting all of your financial debts (everything you owe).

Net Worth = Assets – Debts

Financial Assets can include real estate, securities (stocks, bonds, mutual funds), vehicles, checking, savings, cash or anything you can sell and turn into cash. Alternatively, your debts can include mortgages, credit card debt, personal loans, home equity loans, student loans, etc.

Let’s be clear about a few things, first, never confuse your financial net worth for self-worth. Regardless of whether you’re a millionaire or your net worth is negative, it says nothing about who you are as a human being. We live in a ‘more is always better’ culture, we glorify millionaires and condemn the poor, but that is not the goal of this measure. Your financial net worth is simply a number that applies to you individually or as a family to track and increase over time to assess how close you are to reaching your financial goals (i.e. financial independence).

Second, the majority of Americans have either zero or negative financial net worth, so if they sold everything they owned, they would either have nothing left over or would still owe money. Many young professionals fall into this bucket due in part to student loans. Building your savings and getting out of debt both increases your assets and reduces your debt, thereby increasing your net worth.

Why are net income and net worth the most important numbers to track?

Good question! Why not Salary? Savings? Credit Score? The answer is simple, your net worth is the bigger picture goal, net income is how quickly you’re moving towards that big picture goal.  In your financial journey to your financial destination, your net worth would be the miles traveled to your destination, your net income is how fast you’re driving.  There are all sorts of metrics that you could measure if you were taking a cross-country journey, but if we had to choose only two, we would want to know how far we’ve gone (net worth) and how fast we’re moving (net income).

Both Net Income and Net Worth are simple formulas and there are only two ways to increase them:

  • Increase income/assets
  • Reduce expenses/debt

Increasing Income/Assets

Unfortunately, the majority of our expenses (after our essential expenses) are for items that decrease or depreciate in value. So when we buy a pair of shoes or a phone, if we were to sell it used a month later, we would receive much less in return than we paid for it. On the other hand, if used the same money to purchase stock ownership in the company that manufactured that shoe or phone, that stock could potentially increase or appreciate in value over time. When you hear phrases like ‘the rich get richer and the poor get poorer’ that is partially because wealthy people are more likely and able to purchase appreciating assets (e.g. businesses, securities) and the middle class and working class are more likely to buy depreciating liabilities (i.e. debt – a.k.a. stuff that makes us look/feel rich, but actually make us less wealthy). A depreciating liability, such as a car note, is a double loser because not only is the car rapidly declining in value, but it’s also financed from a bank, which means paying additional money in interest (increased cost & reducing value).

We have to change how we look at what we buy and whether showing off our expensive stuff is more important than actually growing our wealth. Recent studies have shown that 76% of Americans are living paycheck to paycheck, that includes high-income earners, so the people we compare ourselves to or try to impress are likely broke.

We also have to change the way we think about our income. It’s often said when talking about investing, that ‘you don’t want all your eggs in one basket’, you have to diversify your investment assets to reduce risk. Well it’s much less talked about, but just as important to diversify your income because having one source of income is just as risky as having all your investments in one stock.

In order to put more wins in the asset/income columns, the focus should be to develop multiple sources of income and free your income to purchase assets that appreciate in value. Building an emergency fund, increasing your 401k contributions, contributing to an IRA, are all ways to increase your assets in the near term.

Reducing Debt/Expenses

The other end of increasing your net worth is reducing your debt. Everyone has different types and levels of debt, but the most advantageous position to be in financially is having no debt. There are entire industries that rely on people getting and staying in debt. Credit cards, auto manufacturers, mortgage lenders, banks are examples. In fact, the credit card industry calls people that pay their balance in full every month, deadbeats. They are deadbeats because the card companies aren’t making any money off them in finance charges. If you choose to use credit cards, please be a deadbeat! Unfortunately, in our culture we have become accustomed to debt as a way of life. When we start to understand how much debt impacts our ability to reach our financial goals, we begin to make different choices. Keep in mind, our debt is someone else’s asset (i.e. banks, credit cards, auto companies, mortgage lenders), just like your loss is someone else’s win.  If you are a lender, the loan contract is an asset that appreciates. You lend someone $20K for a car purchase and you’re paid back $22K over 5 years.

In order to reduce losses in the debt/expenses columns, the focus should be to free your income to pay off debt more quickly and avoid additional debt. Also, reduce the purchasing of items that depreciate in value. Tracking your spending for a month, using only cash for 60 days or selling possessions are all ways to increase income or reduce expenses in order to reduce debt.

The Bottom Line

The bottom line is that we cannot wear or drive wealth. In one camp, the majority of millionaires live well below their means, drive used cars, and live in modest homes (read: The Millionaire Next Door).  However, in the other camp, the majority of Americans live far above their means, live from paycheck to paycheck and finance their lifestyle with debt. There are free online financial aggregators such as mint.com that will allow you to centralize all your financial accounts and calculate your net worth automatically. Tracking your net worth monthly allows you to become more aware of not only which camp you’re in, but also allows you to know how close you are from moving from one to the other.

Yes, It’s Your Parents’ Fault You’re Broke!

 
If you were born after 1980, you are likely the children of one of two generations that were absolutely lousy with money. Baby Boomers and Generation X are two of the most indebted generations in the history of the U.S. The 1970’s – 1990’s saw a massive expansion of consumer credit and innovations in financial products that fundamentally changed what the middle class could ‘afford.’
Their parents (many born in the 30’s and 40’s) were children of the Great Depression. They did not have credit cards, car leases, home equity loans, adjustable rate mortgages, 0% financing, payday loans, etc. They had to save cash for what they wanted and if they couldn’t afford it, they simply went without it.
Unfortunately, we do not typically develop our money habits and behaviors from our grandparents; we typically learn money management from our parents. Whether our parents talked to us about managing money or not, we learned from their behaviors. Some studies have shown that many of our financial habits are formed by the age of seven and parents have the greatest influence. What were your early childhood experiences with money?

  • Were you spoiled as a child with seemingly endless amounts of toys?
  • When was the first time you were aware of money? The first time you went to a bank?
  • Were you aware of lack/scarcity in your childhood? Did other kids have things you wanted but your parents couldn’t afford?
  • Were you rewarded with money or toys for good grades or behavior?
  • Did you have an allowance? When did you open your first savings account?
  • When were you aware of how much your parents made and how that was different from your friends and classmates?

When you think back to those experiences, it may highlight some of the subconscious decisions you make with money.  For example, some people resented growing up without material wealth and it is a driving force for how they present themselves to others. They may purchase items to communicate to others that they can afford expensive items (even if it causes them to go into debt). They worked hard and thus they ‘deserve’ nice things. Others may have grown up with material wealth but never learned how to manage it or accumulate it so they may simply go on living the lifestyle they are accustomed to, but their finances are struggling to support it.
So yes, you can blame your parents for not teaching you positive financial habits! However, chances are if you are reading this, you’re way too old to blame your parents for anything, ever. It’s now up to you to break those habits and create better habits for yourself and the next generation.
How can you break the cycle of bad financial habits? I’m glad you asked! Here are some questions to get you started. The more honest you are with yourself, the better.

  1. Do you have memories from your childhood of feeling inadequate when it came to material things (i.e. clothes, shoes, car, home)? How does that affect how you spend money? Are you trying to prove yourself or get validation of being “successful” by spending?
  1. What are your default behaviors, values, and attitudes with money? For example, what did you do the last time you received an unexpected sum of money (bonus, tax return, student loan disbursement, birthday gift)?
  1. What are your current giving and saving habits? Do you save or give with what’s left over or do you prioritize it before spending?

Personal finance is indeed personal. It can be as much or more about your values, experiences, and emotions than dollars and cents. If you want to change your money habits, understand the why behind some of your choices. Once you understand the why you’ll be well on your way to creating better habits.

Why Retirement is Obsolete and the Goal Should Be Financial Independence

When you ask people under the age of 40 when they want to retire, you typically get three common answers:

  1.  ‘Age 50 or as soon as I can afford it’
  2.  ‘I have no idea. I can’t think that far ahead’
  3. ‘If I love what I do, why would I retire?’

The concept of retirement is based on an outdated model that doesn’t quite fit with today’s economy or the values of the millennial generation. In past generations, the corporate contract awarded you a pension if you worked for a company for 30 years that would cover your retirement. Pension plans have all but disappeared and now the corporate contract sounds more like the following:
Cubicle40 years (ages 25-65) of work, from 9 AM – 5 PM, Monday – Friday with two weeks of vacation per year.  Employers can terminate your employment at any time, so you may end up working for multiple companies and have several careers. You are responsible for your own retirement including how much you contribute and your investment selections. Employers can also choose whether or not to contribute to your retirement.
 
There are several issues with this corporate contract, but one of the most important is flexibility. Young professionals place the utmost value on flexibility and control. Flexibility in the hours, days and years they work.

  • If I can do my job effectively from 10 AM – 2 PM, why do I need to be in the office for 8 hours?
  • What if I’m more effective working in the evening than I am in the morning?
  • Of our 16 waking hours, we likely spend 10+, either working or traveling to work, which leaves us less than 6 hours per weekday to spend with family and/or handle any personal affairs.
  • Five days working for every two days off is not ideal for anyone
  • Children are not conducive to 9-5 work schedules; they typically do not get sick on the weekends.
  • The idea that we may not get an opportunity to spend more than one week at a time on vacation until after age 65 is depressing.
  • Unpaid maternity leave is a joke. It makes no sense to have to work harder to afford to pay others to care for a child whose survival is dependent on the mother.

That is just a small sampling of the challenges that occur with the traditional corporate contract. This means young professionals must be radical about taking control of their finances in order to overcome these challenges and give themselves more flexibility and control in their careers. Financial Independence does not mean saving for retirement isn’t important, quite the contrary, it means you should drastically reduce your debt and expenses so that you can save even more!
Let’s give it a definition and describe what it looks like:
Financial Independence – The state of having sufficient personal wealth to live, without having to work actively for basic necessities.
Let’s take a family whose basic necessities (housing, food, health, transportation) are $2000/mo. Now remember, this family is debt free. Once that family develops enough passive income and/or built enough of a nest egg (interest/dividends from investments) to cover the $2000/mo, they will no longer be dependent on an employer. They canchoose to work, choose to volunteer, or choose to pursue their passions and interests.
People will say, “Easier said than done, I’m barely making it!” How much could you save each month if you didn’t have student loans, a car note, a mortgage, credit card payments, or personal loans? It doesn’t take much to imagine what could happen if you stopped paying banks interest and started paying yourself.
Please understand that if you’re in debt, your financial past is stealing from your financial future! Debt is simply an agreement that ‘Someone will give you money today if you pay them more tomorrow’. The problem is, like the Bond movie title, Tomorrow Never Dies. Credit card debt revolves, people in their 40’s and 50’s are still paying off student loans, and people continue to trade-in or lease new cars.
FlowingAmericanFlagPursuing financial independence is not a get-rich-quick scheme. We’re simply making the argument that if you want flexibility in your job and your life you have to earn it! If you want to renegotiate the traditional corporate contract, you have to have leverage. If you are able to save/invest enough to cover your basic necessities, you have leverage. The best way to accomplish that is to reduce your expenses, eliminate your debt and save radically.
So the next time you consider buying/leasing a new car, getting that new bag or great shoes, or the latest tech gadget, weigh that decision against the potential of moving closer to financial independence.  GM, Coach, and Apple are already wealthy; maybe you should focus more on investing in yourself.

How We Paid Off More Than $100K in Student Loans in 4 Years

I often read stories of people reaching amazing goals and sharing their inspirational stories. I enjoy reading them because they often give me an emotional lift to keep me going on my own journey. Sometimes it’s people losing significant weight and keeping it off, quitting smoking or overcoming an illness such as cancer or diabetes. One common thread I have seen among these stories is there is typically a turning point that changes their perspective from one of inconvenience to absolute obsession.
Sometimes they hit rock bottom and sometimes it’s an inspirational moment convincing them that their current circumstances are no longer acceptable. Whatever it is, they make a decision that ‘enough is enough’ and come hell or high water, with a passion and obsession these circumstances must change immediately.
For myself, that day came in June 2011 when I received the notice of the full amount of my graduate student loans. I was very financially conscious prior to going to graduate school, so I knew what I was getting into, but something about seeing the final bill after graduation really hit home for me. I had six-figure debt for the first time, I was recently engaged and nearing my 30th birthday and I didn’t even own a home. I always thought of myself as pretty financially savvy. As a teenager, my father had me read personal finance books for my allowance. Books like ‘Rich Dad, Poor Dad’, ‘The Millionaire Next Door’, ‘The Total Money Makeover’ and ‘The Road to Wealth’ shaped how I viewed money in my high school and undergraduate years before I received my first full-time paycheck.
With that perspective, I was very well aware how holding that much debt could impact my future, just as much as someone who is significantly obese realizes how the weight can shorten their lifespan and make life much more difficult. In my eyes, debt (especially at higher interest rates) meant that today’s earned dollars were going to pay for purchases made in the past. The more debt one has, the less one is able to put a financial focus on the present, much less on the future. Add to that the idea of enriching someone else through interest payments (read: Your financial institution of choice) at the expense of enriching yourself.

Can you imagine if exercising today was only burning off calories from a burger you ate 10 years ago?

People have different theories and feelings on debt; how there’s good debt and bad debt and you can use other people’s money to leverage. It all boils down to your comfort with risk. For myself, I’m more risk-averse. I desperately wanted to leave the past in the past and focus my dollars on the present and even more on the future. Living without debt for me means freedom, flexibility, ownership, and choice. There’s an assumption of risk when you take on debt that there will be steady income to service that debt and the market will continue to rise. As we learned in 2009, those assumptions can have devastating implications.

If You Fail to Plan, You Plan to Fail

He-who-fails-to-plan-is-1For the first time in my life, I looked at my own personal balance sheet, added up my assets (i.e cash, investments, property), subtracted my liabilities (debt) and I was deeply in the red and I was embarrassed. Bringing this much debt into a marriage seemed unfair. Having children and buying a house seemed so elusive financially with that debt burden. That same day, I sat down with my fiancée and told her about my plan to pay off all debt in 5 years. It was not an easy conversation as I knew it would require sacrifices for both of us, but she fully supported me and we negotiated the sacrifices.
One of those sacrifices was our living expenses. My fiancee moved back to her parents’ home for a full year after we graduated to save money to pay cash for our wedding. We did not elope, we did not starve our guests, we simply agreed on a total cost upfront (including a honeymoon) and planned it far enough in advance that we could save for it all while still maintaining our debt pay down goals. So the first and most important aspect of our pay down program was planning. One of my personal favorite sayings is ‘If you fail to plan, you plan to fail.’

Money has a strange attribute in that it will wander off and disappear like a toddler unless you watch and monitor it carefully.

If you’ve ever had the experience of taking $100 out of an ATM to find that you only have $10 the next day and can’t explain exactly where the $90 went, you can probably relate.
Planning our finances in advance allowed us to live dramatically below our means. We were living comfortably on less than 40% of our combined monthly income. It’s amazing how much money we spend when we aren’t paying attention. One idea that I read from Dave Ramsey that resonated with me is that our monthly bank statement should reflect our personal values. If you were to print out your bank statement and organize the categories, are you spending the most money on the categories you value the most? Do you value eating out more than giving to charity? Bars/Clubs more than savings? These are the types of choices one should make before opening their wallet.
 

It’s a Journey Not a Sprint

With any new habit or regimen, you have to be patient and understand that success will not happen overnight. Planning can help you avoid failure, but adaptability, patience, and routine practice are what help you to succeed. The first time you create a budget, you’ll likely forget expenses that come up quarterly or annually. You’ll likely way overspend for Christmas shopping or completely under-budget for a vacation, some may even fall victim to retail therapy after a bad day. The important part about the process is that you’re playing the long game. We judge ourselves very harshly when we lose a small battle, but don’t lose perspective on the larger goal. Repetition, consistency, and resiliency are key. Notice the most serious runners run outside regardless of the weather conditions. I’ve always admired that level of consistency and dedication, but for them, it’s as routine as brushing their teeth. Build routines that last the test of time.
 
For us, it was sitting down together at the end of each month to budget and plan for the following month. We started slow and small. First by building a firewall. We agreed that during the process we would under no circumstances add additional debt. That firewall was an emergency fund, so whether we got sick, lost a job, or in our case Hurricane Sandy damaged our car beyond repair, we would not add any additional debt to the liability side of the balance sheet. Once we fully funded six months of expenses, we felt comfortable going full throttle on the debt.
Month after month of practicing to control your money, instead of having your money control you, creates a sense of discipline. You start to notice when you’re overcharged for small items, or you actually look at your cell phone bill detail when it’s a few dollars higher than it normally is. When you really start paying attention, that attention pays you back! Instead of becoming a chore (another budgeting meeting…), it becomes a challenge and fun (how much did I come in under budget this month?). You also have to celebrate the small wins. Paying off individual loans, coming in under budget for the month or making more income than you planned. It’s the small victories that keep you motivated throughout the journey.
I also don’t want to imply that it’s always fun and there are no roadblocks. We faced several roadblocks from the cost of living in Manhattan to Hurricane Sandy to job instability to intra-state and international moves. We also had our first child during this time and while I certainly wouldn’t consider him to be a roadblock, there are definitely costs associated with a child that weren’t factored into the original five-year plan. We paused on paying down debt to bolster our financial situation in preparation for his arrival and got back on track once we were satisfied.

Run Your Own Race

Compare-quote-200x300Finally, it’s important to note that in this time of social media and sharing information publicly, it becomes very easy to fall into the comparison trap. Prior to social media, television and magazines would model women and men whose body types, associated with less than 1% of the population, as the standard in order to push product. These days, with the prominence social media, it’s not only media and advertising companies, but the general public displaying their ‘highlight reel’ in vivid detail and portraying it as their everyday lives. It is particularly important to be aware of this for two reasons.
First, advertising is designed to engender an emotional reaction (i.e. You have a problem) and position its product as the solution. The more you recognize this, the more money you’ll save. Secondly, people have varying levels of income, expenses, debt, goals, and values. Money is still a very taboo and private topic, so it’s not wise to make assumptions on any of those factors. Statistics show that the vast majority of people handle money very poorly and the level of financial literacy to be very low. The comparison trap can be detrimental to accomplishing financial goals because it can alter one’s perspective on their own success by comparing to others with completely different circumstances. Run your own race and define success on your terms in your own situation.
 
So to sum up lessons we’ve learned in paying off six-figure debt, I would share the following:

  1. Know and be able to communicate your “WHY?” – What is it that will keep you running outside when the weather’s bad? Be passionate and obsessed.
  2. Start with a reasonable long-term plan (keep in mind life events)
  3. Break that down into shorter, specific goals (build an emergency fund by X, pay off loan #1 by Y).
  4. Develop consistent habits over time whether it’s a monthly planning meeting, checking your accounts daily or reducing unplanned spending.
  5. Get a trusted partner(s) that can keep you accountable (significant other, friend, relative), preferably someone that manages their own money well and celebrate the small victories together.
  6. Make budgeting fun! Budget for miscellaneous spending, but make it reasonable, so there’s no guilt.
  7. Expect roadblocks. There may be months where you cannot pay down any extra or you may have to pause your payoff plan. Life happens! That’s okay! Readjust the plan and continue forward.
  8. Run your own race. Everyone has different income, expenses, debt, goals, and values. Don’t fall into the comparison trap.
  9. Have a vivid picture of what success looks like. How will you feel the first month you have no more debt to pay? How will you celebrate accomplishing your goal? What are you going to allocate that money toward afterward?

We celebrated by sharing the good news with our friends and family and then starting this blog to share our story and continue the conversation.
I wish you the best of luck on your own journey.