Monday, August 3, 2009

A Tale of Two Mindsets Continued...

Continued from "A Tale of Two Mindsets"


Part II - The Light

One of the first major steps to freedom was getting hold of our grocery bill. We had four young children, all hungry as ever. Anne became very interested in saving money in this department and began researching coupons and many other money saving methods (these methods will be discussed in future posts). After much hard work and time we began to see our grocery bill get smaller and smaller, yet the food we ate seemed to be getting better and better. Next we learned about things like smart shopping. CVS, Walgreens and Target all became resources for saving, instead of drains that led to the abyss. After a while, we started to see positive trends and notice that we still had money left over at the end of the month. The debt was still there, but the checking account was at least in the green. We decided it was time to start pouring every little extra cent into debt. First the cars, then the cards. We used nearly all of our tax returns for the last several years to melt the debt snowball. With “gazelle intensity” we started running down the path to financial freedom.

The most important lesson to learn is that no method will be successful without the proper mindset to back it up!

It is never easy. Waiting on the winning lottery ticket never works. Quick fixes never work. We began to view credit as almost an evil entity and delighted in slicing up old cards and cancelling credit accounts. My favorite cancellation experience was when a customer care representative, after having tried for a while to convince me of the great benefits of credit and why I shouldn’t cancel, asked me,

“Well, how are you planning on paying for things?”

“Aahh… With money,” I replied.

That may have been the epiphany for me. …The moment when I realized just how deluded our society has become in regard to credit. How will I pay for things? The answer should be so simple. Maybe the question should be, how should I pay for things? Or, how will I pay off things I never had the money to purchase in the first place? Unfortunately, the answers are usually found in painful lessons and in hind-sight.

FACT: Significant credit card debt can put you at a markedly higher risk of bankruptcy. (reference)

Here’s a scenario that puts things into perspective:

The Benefits of Freedom

Hypothetically speaking, if one makes $35,000 after taxes, they have approximately $2,916 per month to spend (no savings available or extra sources of income). Let’s say we have a house payment of $1,166, $150 in utilities, $700 in groceries, a $300 car payment ($7,500 left), a $75 cell phone bill, a $150 cable bill, $200 eating out and entertainment, and $150 in other misc bills/subscriptions, etc. That’s a total of $2,891. That should leave us with an excess of $25. Not much room to spare, but often the scenario many people face. Obviously, sudden extra expenses will be a problem, especially if they are sizeable.

Now let’s say we decide to get frugal and use less A/C, spend $150 less on groceries, cancel cable, stop eating out and cancel all of our subscriptions.

We should now have approximately $625 that we never seemed to have before.

We’ll take that $625 and apply it toward our car for one year (12 x $625 = $7,500 = Paid Off). Oh, look, no more car payment.

Now we have $925 more per month.

Take it to the next level. Take your extra $925 and put it in savings every month for 1 year.

You just saved $11,100 in only one year!

You now have a 3 month emergency fund. Do the same thing for the next 5 years and now you have saved or invested $55,500!! I won’t get into the math or philosophies of investment and savings in this post, but the basic math speaks for itself. Keep in mind; these numbers do not even take into account tax returns or other sources of income. (Disclaimer: I’m not too good with a calculator, but you get the idea.)

At the beginning of this post, I mentioned that finally being debt free is not as fun as you might think it would be (at least initially). In some ways it is a great feeling and a relief, but it can be somewhat humbling and intimidating as well. That’s because it takes a lot of hard work and determination to get there and the very last thing you want is to go back into debt.

We are considering buying a house at some point (considered an acceptable debt by most financial advisors if done properly, even Dave Ramsey), but are apprehensive about even that form of credit. Currently, we rent our home, so we are literally free of debt in every way. We never want to use credit again or worship the FICO score, but the temptations don’t just go away. They are everywhere, and sometimes it becomes very easy to justify certain expenses. So far, we have been able to keep those desires within our cash budget, but every day we must remind ourselves how far we’ve come and just how much work and sacrifice it took to get here. We want to keep our freedom.

We have a lot of decisions ahead of us, but the most important will be to remain focused, continue on the path to financial freedom and to pass along what we have learned to our children. Hopefully, they will be much more prepared to face the wide world of credit and fend off debt wolves in sheep’s clothing than we ever were.

More Info You Need To Know:

10 Things Your Credit Card Company Won’t Tell You (money.aol.com)

What You Don’t Know About Credit Cards Can Hurt You (money.com)

Credit Card Company Secrets (CBS News)

The Dirty Secrets of Credit Cards (wisebread.com)



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