A few years ago the recession hit and I was saying good-bye to colleagues who were let go and I was wondering if/when it was my turn to be let go. I was a spender, heavily in consumer debt and had no emergency savings. Like many, I was not remotely prepared for a job loss. Fear prompted me into action.
I had to ask myself some serious questions and do some hard work to find the answers.
Question #1: How much do we really need to live off of?
I had no idea. We were doing okay and so I never thought about it. I had the mentality that credit cards paid for emergencies. I had to force myself to do the math. I made a list of all our fixed monthly bills and estimates on what we spent on variable expenses.
Question #2: How wrong is my list?
It was very wrong. I forgot about the expenses that we have to pay annually like car and home insurance and property taxes. I forgot about a lot of things including debt repayment. Ugh. I had to re-do the math to come up with an actual monthly amount.
Question #3: Where is all the money going?
According to my list, there should have been money left over every month... and there never ever was. It would be easy to simply blame debt repayment, but stupid spending was the cause. Even still, there was money slipping away at a fast rate than what it was coming in and we needed to face the facts. We were spending more per month than what we made with the mentality that we would "pay it back later". If we could live off of less than what we could make, then why were we spending more than what we made? Our justification at the time was "you have to live life". We needed to re-think that concept.
Question #4: What could you live without if you had to?
Here's where the cutting started. The easy things were cable (substituted for Netflix, watching TV the day after online and rentals from the library), cell phone features (I never actually used voicemail anyway - I'd always call the person back before ever hearing what they said), land line telephone (google phone, skype and we had our cell phones)... those were fairly obvious. In order to really cut things down, I had to imagine what I would think about the things we had if I was jobless. Can we cut back enough to survive? The answer was yes. The cutting began.
Question #5: Can you cut out even more?
Yes! The variable expenses were obvious, but what about our fixed expenses like our mortgage? Yes, that too could be shaved back if ever faced with an emergency. This is when we re-evaluated some of our "needs" and the items that we considered to be essential, but really aren't (yep, a family can survive without toilet paper!). Then followed more cutting, more cutting, more cutting.
Question #6: If you could get so low during an emergency - why not do it now?
We knew we had the ability to get costs down to an absolute "bare bones" level. I think everyone knows (thinks) that if they really needed to costs down, they could. Not many people really have the motivation to figure out what their bare bones number is, or to try it before they really have to - even if they are heavily in debt. It's also tough when living in a partnership and one person is on board, but the other person doesn't have the right attitude.
Question #7: Do you want to try it now? How low and how long can you go?
This is about when we decided to try what we dubbed the "Minimum Wage Challenge". Thinking of it in terms of a challenge rather than a "budget" really gave us incentive. Budgets seem onerous. Not having money to do the things you want seems depressing. Giving things up might hurt or just plain suck. But a challenge - well, that's aiming for a goal, that's setting a fixed time period, that's a test. It's also not embarrassing to talk about. "Sorry, I can't do that - we are on a "Minimum Wage Challenge" is easier to say than "I can't afford it."
We set our time frame at six months. We implemented all of the things we would do if we needed to in an emergency. It was tough at first, but as we became accustomed to our new lifestyle it became easier and easier. We started adopting new habits, making substitutions and learning more about what we can do on less.
Question #8 - How to apply these savings to debt?
I was worried about the "right" way to pay debt. I've heard of paying high interest first, I've heard of paying smallest debt first and many other techniques. For me - I took the approach of getting rid of what would go away. Maybe there is a term for this. I don't know. Credit cards and line of credits can be paid off and then racked up again. I tackled the cars first because I knew that once they were paid - they would be gone forever. Because we were living bare bones, there was no more use of credit cards and line of credit and so we paid the minimum. But all extra money went to what would go away. Adios! Next was line of credit and credit cards.
I'm not sure if there is a 'right' way to apply the savings to debt. What's crucial is that the money does go to debt. Don't waste your efforts. Hold strong and get excited about the grand total at the end of the time period. All the little savings will add up. The key is to not cave. You can't go out to dinner to celebrate that you found crackers on sale. Just like when you are dieting, you shouldn't "treat yourself" to ice cream just because you went to the gym that day.
Question #9 - Why didn't we do this sooner?
I'm summarizing a couple years worth here in these questions. It took a long time to readjust our thinking, but now that we are looking back on things we really are kicking ourselves for not starting sooner. We are also questioning why we were never taught about money properly as we were growing up. We are questioning a lot.
As a result of this, we are taking extra efforts to teach our 4 year old about money, waste and the relationship between the two. She will remind us "You are spending money on lights" and that's a good attitude to have in our opinion.
Question #10 - Why not keep at it?
Our goal was six months and by the end of the six months we had a fair chunk of debt paid off. It felt rewarding. We still had a lot of debt remaining, so why would we just go back to our old lifestyle? What did we find we really missed at the end of the six months? Only a few things. We added back in a couple of little things so that we didn't feel so deprived, but have kept on the path of being debt free. We stopped talking about our "Minimum Wage Challenge" because our family and friends and colleagues too had become used to our new approach to life and money. How they interacted with us changed - for the better. We started having girls' night in instead of meeting out for drinks, we started having pot luck parties instead of going out for dinner, we started heading to sample sales and thrift shops together... and the list goes on.
Here we are now... a few years later and we have eliminated all that consumer debt. Yet, we are still maintaining the same frugal lifestyle. Because we were out of debt we have now shifted gears to savings and investing which helps us feel more secure.
During this time though, my fear of a job loss never came to be and so we were lucky to apply all of our "savings" to debt. But the threat of a job loss still looms, even a few years later. I'd say every month there is a new "crisis" at work or a new threat made by the bosses. I still don't feel stable. It's getting stressful. Even now there is chatter at work that there will be a "big announcement" in the next few weeks about job cuts. We'll know for sure in the new year. At least I know that we are prepared this time.
It really doesn't matter if you are trying to cut back out of necessity, out of desire to become debt free or to start on the path of savings and investment... the basic concept of living below what you bring in will always apply - for us, the missing ingredients were the motivation and having the right attitude.
What are you waiting for? Are you going to check out your credit card balance, complain and then go out for coffee - or are you going to pass on going out and pay a couple of dollars toward your debt today?
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