Am I Financially Ready to Buy a Home? 6 Questions to Ask Yourself

Buying a home will likely be the most expensive purchase in your lifetime. You want to make sure you are prepared to be in the best position financially. There are some common misconceptions about renting that you may want to understand, but if you are emotionally ready to take on the home buying challenge, here are six questions to ask yourself to make sure you’re financially ready!

1. Do I have any consumer debt? (Student Loans, Personal Loans, Car Loans, Credit Cards)

Adding six-figure debt is a serious challenge and commitment. If you already have a significant amount of debt, you should consider focusing and eliminating these debts prior to incurring mortgage debt. A mortgage on top of consumer debt would increase your overall expenses and give you less financial flexibility. Paying lenders interest on debt is the opposite of building wealth.

2. Is my credit score above 720?

A credit score is simply a calculated score credit rating agencies produce that measures how well you manage debt; the higher the score the better. Lenders use this score to help determine their risk in lending to you. The higher the risk, the higher your interest rate which makes the borrowing cost of your home more expensive. There are several ways to reduce your cost of borrowing, but one is to ensure your FICO score is above a 720. FICO credit scores range from 300-850, but in most cases, a score at or above 720 is considered excellent credit and will get you the most preferred rates. Below 720 and you will pay additional interest because of credit risk. In future posts, we’ll discuss how to increase your credit score to minimize your borrowing costs.

3. Do I have a fully funded emergency fund? (minimum 6 months of expenses)

Having a fully funded emergency fund is essential even if you’re not purchasing a home, however, it becomes more important when you do purchase. You can no longer simply notify the landlord of a water leak, heat/AC issues, or a major appliance outage – it’s on you. Homeowner’s Insurance may cover some particular events, but even so, the insurance also has a deductible that you’ll have to cover out of pocket. We can’t predict emergencies, but we can financially prepare to deal with them knowing they will happen. Don’t allow these situations to send you into a financial tailspin of debt. Be prepared with at least 6 months of basic living expenses (e.g. housing, insurance, food, transportation, utilities) which is not part of your down payment.

4. Do I have 20% cash for a down payment? (Separate from an emergency fund)

A 20% down payment is important for multiple reasons. First, if you’re going to make potentially the most expensive purchase of your lifetime, it’s important that you have skin in the game. This means that you had sacrificed for a period of time to save above and beyond to make this happen and you’re fully invested. It also greatly reduces the probability of an impulse purchase.
Second, 20% of the purchase price as a down payment avoids Private Mortgage Insurance (PMI). PMI is an insurance policy the homebuyer pays on behalf of the lender in case the homebuyer defaults. PMI typically costs about 1% of the home purchase price annually and is added to the monthly mortgage payment. PMI can be canceled by the homebuyer once the homebuyer has 20% equity (Loan-to-value ratio of 80%). The bank is required to cancel PMI when the Loan-to-value ratio hits 78%. Depending on the size of the down payment, this could mean several years of additional fees. So, if that sounds like a rip off to you, then you’re starting to understand.

5. Am I planning to move within 7 years?

Mortgages are structured in a way that front loads interest payments. The lender gets much of their borrowing costs before you get your equity. In other words, the majority of the interest of the loan is paid earlier and the principal of the loan is paid down later. For example, depending on the interest rate, the first year of monthly payments could be 75% interest and 25% principal. That is important because, within the first seven years, you will likely not have much equity. Without equity, you will likely not able to achieve a return on investment (ROI), when you are ready to sell. If home prices fall during that time, you could find yourself under water (the balance owed on the mortgage is more than the current value of the home). If you move sooner than the equity in the home grows, you could end up still having to pay a monthly mortgage on a home that has already been sold.

6. Will my monthly housing costs (mortgage, insurance, taxes) exceed 30% of my monthly take-home income?

If you ask a real estate professional, such as a real estate agent or a mortgage broker, “How much house can I afford?” they will likely hear and answer a completely different question – more like ‘How much risk is my bank willing to take?’ or ‘How much commission can I make?’ That’s not a negative statement about real estate professionals, but they are financially incentivized to give you the largest mortgage they can get approved. It is your job to determine how much house you can afford. We recommend that your housing costs including the mortgage, insurance, and taxes not exceed 30% of your monthly take-home income. Can you afford more than 30%? Of course, but the goal of the financially savvy isn’t to get the largest mortgage possible. The goal is to purchase a home while having the flexibility to achieve other financial goals such as saving for child’s education, paying off the mortgage early and achieving financial independence. You want your home to be a financial benefit to your family, not a financial burden.
Purchasing a home is an important emotional and financial decision. On the emotional side, often people will make the mistake of comparing their first home purchase to their parents’ current home.  What you can comfortably afford 15-20 years from now may be drastically different from what you can afford today and that’s okay. On the financial side, to be financially prepared for a home purchase means not allowing the home to overtake other financial goals. Having the biggest house on the block is pretty meaningless if you can’t afford to furnish it, maintain it or take a vacation from it. Keep the bigger picture in mind!

Renting Is NOT Throwing Money Away

There are many times when conventional wisdom is wrong, especially in personal finance. Many of us were sold on the American Dream of a house with a white picket fence, two cars, and a dog. Many people have discovered, the hard way, that if those dreams were heavily financed with debt the American dream can quickly become a nightmare. The dream isn’t necessarily the problem. There is nothing wrong with having a goal to purchase a home, cars and/or pets; the challenge, however, is putting oneself in a financial situation to truly be able to afford it.
The definition of what one can afford has dramatically changed over the years and our parents have a strong influence on how we define that. The past 40 years have seen dramatic changes in consumer financial products allowing the middle class to participate heavily in the consumer economy. With credit cards, 0% financing, adjustable-rate mortgages and the like, the ‘buy now, pay later’ phenomenon took off and those who save cash for major purchases were marginalized as either unsophisticated or old-fashioned. Like with most fads, many of these financial marketing ploys later displayed disastrous consequences for people over time.
Fast forward to one of the most common themes, “Why are you still renting, don’t you know that you’re just throwing away money every month?” If you’re getting your finances together to eliminate consumer debt, build an emergency fund, save for a down payment or you’re just not ready to commit to an expense that large, renting is exactly what you should do! We are not suggesting that homeownership is a mistake, only that if you’re a renter and feeling social pressure to buy, there are very legitimate financial reasons to rent. Let’s chat about a few of the common myths out there and bust them one by one.

  1. It’s Cheaper To Buy

    In some areas of the country (typically in the South and Western states not named California) it may be relatively inexpensive to purchase a home as compared to renting. However, if you live in or near the 20 most populous metropolitan cities of the US, it’s likely not the case. When people say it is cheaper to buy, they are often comparing monthly rent to the monthly mortgage. Unfortunately, that’s a short-sided view comparing apples to oranges. The additional costs of maintaining a home can costs thousands of dollars each year that renters do not pay. Here are just a few items people typically leave out of the cost of purchasing and maintaining a home:

    • Purchasing: Down Payment, Closing Costs, Home Inspection, Land Survey, Appraisal, Attorney Fees, Title Search, Mortgage Processing Fees
    • Ongoing Costs: Private Mortgage Insurance (PMI), Homeowners insurance, Association fees, Home Repairs, Lawn Maintenance/Snow Removal, Property Taxes, Utilities
  2. You’re Not Building Any Equity

    While it is true that you do not build equity renting, the cost of that equity is important to understand. Also, the additional ongoing costs of homeownership mentioned above like maintenance, property taxes and association fees (not paid by renters) don’t add equity. Those additional costs not paid by renters can be saved and increases a renters’ net worth.
    We’ll use an example for this one: Let’s say you’re diligent and save $20K for a down payment on a $220K home. You get a 30-year mortgage at 4.5% for the $200K balance.
    After five years, you’ve paid a total $68,800 to your lender ($1,013 monthly mortgage payment + $120 monthly PMI X 60 months), but $43,118 of the $69Kwent straight toward mortgage interest and $7,200 went toward PMI. So after 5 years, you’ve only gained $17,684 in additional equity. In other words, it cost nearly $70K to get $18K in additional equity.So the question is whether all the additional homeowner expenses during both the purchasing process as well as five years of maintenance and taxes (not paid by renters) are more than the $18K of equity built. We all know the answer to that.

  3. You Can Save On Taxes

    The mortgage interest deduction is commonly misunderstood and while we’re not going to go into tax policy, there are a few things of note to be informed of when confronting this myth. First, only about half of homeowners receive the mortgage interest tax break. In order to qualify for the mortgage interest tax deduction, youmust itemize your deductions. For many homeowners, the standard deduction outweighs their itemized deduction and therefore, they fail to qualify.Even if one does itemize and qualify for the mortgage interest deduction, note that it is adeduction and not a credit. Some mistakenly believe that it’s a $1 for $1 reduction of taxes, so if you spend $10K on mortgage interest, you’ll save $10K on your taxes, which is false. If you spend $10K on mortgage interest and itemize, you would save $10K multiplied by the income tax rate (i.e. 25%) or $2500. So you would be paying $10K mortgage interest directly to a bank to save $2500 in tax liability. This is not a reason to purchase a home.

  4. It’s The Best Way To Build Wealth

    We imagine there are hundreds of thousands of homeowners who faced the 2008 Great Recession that no longer agree with that statement. The reality is that the housing market is unpredictable. One has to be financially prepared for market swings.
    In the earlier example of the $200K 30-year mortgage at 4.5%, at the end of that loan, the homeowner would have paid nearly $165K in mortgage interest.
    Let’s make that clear, a $200K loan at 4.5% costs $365K, not including PMI.
    So we do not believe paying $365K (plus the additional purchase and annual maintenance costs) to buy a $220K home is the absolute best way to build wealth.Note: for more information on the costs of a mortgage, check out the amortization calculator in our Wine Cellar.

If you are a renter and/or feeling social pressure to purchase, we hopefully have busted some myths about renting. Everyone’s finances are different, so run your own race. Decide on your own terms if or when homeownership is right for you. If homeownership is in your future, be well prepared financially as it may be the most expensive purchase in your lifetime.

The Money Talk – 10 Financial Questions To Ask Your Significant Other

It is often referenced that finances are one of the leading causes of divorce in the U.S. However, money problems in relationships are typically a symptom of larger issues having to do with communication, expectations and power struggles that lie underneath. Money can represent different things to people, for some it may represent power or success, others it represents freedom and others it represents security. Having said all that, the fact that opposites attract in relationships does not only apply to personality, but it may also apply to their relationship to money. It is not uncommon to have a saver and a spender in a relationship. Much like an introvert and an extrovert, they both have their advantages and disadvantages. Spenders, for example, can often live in the present and take advantage of memorable experiences. Savers can often live in the future financially and potentially miss opportunities in the present. The goal is not to change the other person to your way of thinking, but rather to have all the cards on the table, understand and respect each other’s perspective and agree upon common goals and priorities.
Keep in mind that this will typically not be just one conversation. Please don’t ambush and interrogate your partner like a scene out of ‘Law & Order’.  This should be a planned conversation where both parties are prepared to be honest and open.
The first challenge is getting the cards out on the table. Keep in mind, there’s a ton of shame and blame that come with money. People often make personal value judgments with how people manage their money. Having a ton of credit card debt, for example, can be perceived as a failure of judgment or lack of self-control. On the other hand, someone could have a sizeable inheritance that they don’t speak about for fear of judgment or fear of ulterior motives. One has to judge whether the relationship is at a point to overcome these reservations and ‘open up the books.’
In a 2015 Fidelity Investments survey of over one thousand couples, over 40% did not know how much their partner earned. Some people can have more complicated earnings; such as freelancing or commission-based income, which could make it more difficult. However, in order to plan for the future, it is important to know where you’re starting from an income standpoint. The next logical step is debt. There are multiple ways to get at the debt question. Many people do not know the sum total of their debt, so pulling and sharing each other’s credit reports may be a way to be fully transparent while understanding the entirety of their own debt picture. Another way to understand the entire financial picture is if one or both of you use financial aggregation tools like Mint or Personal Capital. One of the benefits of these tools is to get to a number that is important for anyone to know and that’s your net worth. If you take all of your assets (cash, property, investments) and subtract all of your liabilities (mortgage, loans, credit cards, etc), the balance is your net worth. Finding you and your partner’s combined net worth is a worthwhile exercise to understand where you both are currently and set joint goals for the future.
Again, it’s not how much money one makes or how much debt each other has that impacts the success or failure of a relationship, but rather the communication and expectations around money. It is important for both partners to be engaged financially and make decisions together even if one partner is primarily responsible. Below is a list of a few discussion questions for your money talk.

  1. What were your first experiences with money? First savings account? First major purchase?
  2. How do you believe your parents impacted your financial habits? Do you talk to your parents about money?
  3. How do you feel about saving? Have you been able to save regularly?
  4. How do you feel about giving? Do you give regularly?
  5. What is your most regretful financial decision? (purchase, investment)
  6. How do you feel about investing?
  7. What are your financial goals for next 5 years? 10 years?
  8. (Kids) Would you consider one of us staying home if we could afford it?
  9. (Kids) Would our children go to private or public school?
  10. How can we help each other reach our financial goals?

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.

EMERGENCY: Stop What You’re Doing If You Don’t Have an Emergency Fund!

Imagine this: You spend an entire year trying to pay off your credit card debt, just to have your car break down. You don’t have the cash to cover it, so the $2000 repair goes right back on the credit card. You right back where you started, or possibly even worse.
One of the biggest personal finance pitfalls is a lack of solid emergency fund. Emergency funds are critical because they can be the difference between an inconvenient bad day and a financial catastrophe that can take years to escape.
Let’s start some facts to get us on the same page.

  • A recent study showed that over 60% of Americans do not have enough cash saved to pay for unexpected emergencies such as a $1000 ER visit or a $500 car repair.1

That means that the majority of us are living so close to the edge of the cliff that even the slightest nudge can tip us over.

  • The average American household has over $15K in credit card debt, over $26K in auto loans, and over $47K in student loans. The average household is paying over $6K per year in interest on their household debt.2

Let me rephrase that last sentence, the average household is paying financial institutions $6,658 just in interest per year. If we don’t financially prepare for emergencies, we end up working harder to pay more in interest to financial institutions. No thanks!

Paying off debt without emergency savings is like running a long distance race in flip flops, you may be able to get to the finish line, but your chances of falling and hurting yourself are pretty high.

Most experts recommend 3-6 months of living expenses in cash savings. The only problem with that recommendation is that can be more than most people have ever saved, so it can be overwhelming. If that’s true for you, start small. Start with a goal of at least $1000 so that if you have an emergency while paying off debt, you don’t run to credit cards and add to the debt pile. However, if you have a house, car and children, $1000 may not go very far in an emergency. Set a goal that’s appropriate for your situation and build upon that.
We’ll discuss specific saving strategies in detail in later posts, but for emergency funds, some people like to use larger sums they receive to put it away quickly. Birthday money, income tax refunds, bonuses are just a few examples of how people can stash away savings quickly.
One of the most important aspects of building savings is your perspective. Many people view saving money as a chore and painful. There’s a common belief that saving money gives us less to spend when we should view saving as giving you more financial control and independence. Change your perspective and view saving as splurging on yourself and investing in your financial goals. Focus on how much better you’ll feel when you reach your savings goal and have confidence that you can tackle debt even harder.

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.

Welcome to The Money Speakeasy!

In the United States in the 1920’s, speakeasies were bars run in secret during Prohibition. In many cases, speakeasies were the only establishments that were fully integrated where people could gather socially. In the 21st century with social media, we often share many aspects of our lives publicly, but our personal finances still remain private. The Money Speakeasy is your social outlet to talk about taboo financial topics many of us have questions about, like budgeting, debt, savings, credit, housing, and insurance.
Imagine your closest friend at work. You may have shared meals together in your homes, you know their significant others and maybe even family members. You’ve even likely shared intimate details about your lives. Having said that, we’ll take a wild guess and say it’s likely that you do not know their salary, level of debt or how much they are saving in their retirement plan. Let’s be honest, you know more about your coworker’s sex life than you do their personal finances!
This is what we mean when we say money topics are still taboo.  We’re committed to creating a judgment free zone where you can ask anything from the most basic questions up to advanced topics. We don’t care how much money you make or how much debt you owe; we care about what you do with what you have!
We’ll serve up some drinks (articles) as conversation starters to give you some liquid courage, but it’s up to you to engage and get the answers you’re looking for. Some of our drinks will be tasty and sweet, but others will be bitter and tough to swallow.
The Money Speakeasy is a community that desires to learn and master our financial habits in the pursuit of financial independence.
Peruse the site and have a drink of your choice and suggest other topics to serve up in the future.