How I Became Debt Free
In early 2010, I took a good hard look at my finances. I saw how I:
- Had over $20,000 in credit card debt
- Had $14,000 remaining on a car loan
- Had another $21,000 remaining on the new truck my wife and I purchased
- Had zero savings
- Had like $400 in checking, with $10,000 tied up in accounts receivables
And I practically had a meltdown. I was making over $160,000 gross per year, only had $400 real cash in the bank, and all this debt? I started screaming at myself in my head how stupid I was to have this much debt with nothing to show for it (except for the business which I had managed to grow).
This made me snap. I thought back to all those sleepless, insomnia-ridden nights where I just kept constantly thinking about money, worrying about money, and wondering when I'll ever finally be able to get ahead. It triggered something deep down within me that made me sick and tired of being in debt and worrying about money. I wanted to change and I wanted to stop this endless cycle of debt. I needed to become debt-free. I needed to do something now and act now to be debt-free and eventually, wealthy.
I had read a book years ago, called Rich Dad Poor Dad by Robert Kiyosaki which had given me good insight on what it means to be rich, poor, or wealthy, or any other kind of level of financial being. There are definitely parts of the book that shouldn't be taken seriously - like never paying your creditors and letting the tax man bang on your door and letting your electricity go out. Robert Kiyosaki is one of those guys whose advice you have to take with a grain of salt. Anyway, what I took from the book - that was sound advice that made sense - is there is a difference between rich and poor by measure of one's wealth - or how long one can live off their money before being broke and poor. He called the high-income earning doctor Dad "poor" and the low-income earning teacher Dad "rich" because they had different financial pictures. The "poor" dad (even though he was making hundreds of thousands a year) was poor because he had the expensive house, cars, and fancy things in life, some debts, and no savings. The "rich" dad had lots of rental properties, was earning income from each one of them, and only making a few hundred thousand a year. If he were to lose his job teaching, he would be fine, because of his rental investments and savings he had amassed by being frugal during his life and never buying more than he needs (think: Warren Buffett). In other words, rich Dad is wealthy, while poor Dad is just that - poor.
After I snapped in late 2010 and decided to change my financial life, I started searching online for answers. I Googled like crazy. I found a wealth of financial independence books and get-out-of-debt books. I read reviews, I searched forums, until I finally stumbled upon a book that resonated with me in its title, and its huge following of fans whose lives were transformed by the author's ideas.
I somehow came across the holy grail of how to become debt-free, and eventually, wealthy. I discovered the book, Total Money Makeover, by Dave Ramsey. I later learned that he's quite well-known for his radio show, and had amassed a large fan base of ordinary people who are just like me - stuck in mountains of debt, running on the credit card treadmill day in and day out, and never seeming to get ahead no matter what. He introduced me to the baby steps of financial freedom. Baby step one was to get $1,000 emergency cash saved up as quickly as possible, even if this meant selling something out of your garage or closet, working extra hours, and/or cutting back on some expenses. I managed to breeze through this step by selling the TiVo for $400 on eBay, cancelling cable altogether, and saving income to build up $1,000 in my savings account. Baby step two was to start working on the debt snowball and cutting up ALL credit cards. I cut up all six of my credit cards, and wrote down the minimum payments for each of the debts, from smallest debt to the largest. It looked something like this:
- MasterCard: $600, min payment $26/mo
- Visa #1: $4,400, min payment $110/mo
- Visa #2: $6,000, min payment $140/mo
- Discover Card: $10,000, min payment $80/mo
- Car loan #1: $14,000, min payment $333/mo
- Car loan #2: $21,000, min payment $380/mo
Within a couple weeks, I was actually able to pay off the MasterCard completely, which started my debt snowball amount at $600. I was able to pay the minimum payments, with the help of my wife for the truck payment, while tackling the next smallest debt with $720 ($600 plus the $110 minimum payment on Visa #1).
With "gazelle-like intensity" (my favorite term coined by Ramsey), I reduced our expenses significantly, and we even moved from our $1750/mo expensive apartment to a similar sized one a block north for $1400/mo, saving $350 per month to go towards debt pay-downs. We killed the cable TV ($150/mo savings), reduced cell phone bills ($50/mo savings), reduced restaurant visits to once per week ($300/mo savings), amongst other small, but significant, savings. All of these savings went to tackling the debt snowball, which I grew to be $3200 per month at its peak. In six short months, I paid off ALL credit cards, except for the Discover card which had $7,000 remaining. Then, I either did a smart thing, or a really dumb thing, but I did a balance transfer of the Discover card to a new 0% APR credit card for one whole year, at a cost of $110 for the transfer itself. This would allow me to "hold" the debt, interest-free, for a year, while I worked on the two biggest debts that really bugged the shit out of me - our car loans.
When we bought my wife's truck - we bought it totally under impulse. She was super excited to graduate from her 9 month massage therapy program, and I was happy and proud of her. Her paid-off Honda Civic was a perfectly fine vehicle, had low miles, was low maintenance, and all that good stuff. The only problem with it was it would not allow her to fit her massage table in it. And since she was going to be a successful massage therapist with lots of clients, we needed to get her a bigger vehicle. So, we went shopping for a Toyota Tacoma truck with an extended cab and bought it the same day by trading in the Honda, and plunking down $8,000 cash from my wife's windfall savings account. After all this, we still had to finance $22,000 at 6.25% interest for 5.5 years at a payment of $380 per month.
There are few regrets in life that I have. This was my number one regret.
We lived with the truck and its $380/mo payments, of which my wife was barely able to keep up with to begin with, for a whole year. In mid-2011, she finally landed a new job as a massage therapist in her hometown, Sherman Oaks, which is an hour's commute from where we live now (Rancho Cucamonga). Normal Toyota Tacomas actually have great gas mileage, in the 25-28 range. However, her's was a V6, raised, and souped up Tacoma (The PreRunner SR5), and thus was a total gas guzzler. She was paying $300-400 a month in gas alone (and this was the same amount of money she was earning from massage jobs!). So, this truck was a total money pit and I knew it. It took awhile for her to finally realize the truck was killing her financially, but I had planted that seed in her mind that she was earning money and all of it was going to the truck's bills and eventually she was no longer in denial and agreed that we needed to dump the truck and get something more economical and efficient.
Meanwhile, I had finally, finally, after having a car payment for over 7 years at that point (from the previous car I had given away to my brother, to my first fully owned car now), I had finally paid it off! I plunked down $3,000 cash into the Toyota Financial Services account and said bye-bye forever to my car payment. I have been car-payment-free for over six months now and I freaking love it!
I think this made my wife jealous as it was not too much time later when she finally admitted it was time to trade in the truck for something better. She traded it in for a small, used two-seater roadster, with 65,000 miles on it from 2007. This thing has a V4 engine and gets 177 horses, and still only sips gas. She gets up to 35 miles per gallon and is easily able to keep up with it financially, in gas and in the fact that it has no car payment. We were able to trade in the truck, get the original loan of $18,000 remaining paid off, and still have enough equity to buy this roadster with $14,000 cash from her windfall savings account - all in an effort to be debt-free with zero car payments for both of us. Now you may be wondering - what about the massage table? How the heck can that fit in a tiny two seater roadster? If she ever needs to bring the table with her (which is like once every six months it turns out), she can use my Matrix, which is a hatchback wagon and can easily fit it. Duh, if we only had thought about this first before trading in the Civic for the Gas Whore. I guess we have to learn things the hard and dumb way sometimes!
So, in summation, I have paid off $20,000 in credit card debt, $35,000 in car loans, and finally saved up $10,000 cash in just 11 months since I first took action on Dave Ramsey's debt snowball method.
Now it's time to grow money on trees.