Choosing Freedom Over Debt

On Tuesday I wrote about how I have changed the way I spend my money in order to accelerate my debt payments. I wrote about ditching my car, cutting cable, eating healthier and cheaper, and destroying my frivolous spending habits. All of these changes have compounded into each other and allowed me to dramatically cut my monthly variable expenses.

The tips on cutting costs that Mr. Money Mustache lays out actually do work. Today I have the proof.

This week I have been busy inputting all of my spending from 2012 into my budget tracking worksheet. With all of this data collected I have analyzed it in order to illustrate how my new spending habits have impacted my finances compared to last year. The effects are great to see.

Variable Expenses

The secret to my extra monthly debt payments is keeping my spending under control. I have been able to cut my variable monthly spending by more than half. These costs include food, bars, shopping, restaurants, etc. Rent, student loan payments, utilities, etc. are excluded from these totals.

Click to enlarge.

Click to enlarge.

This right here illustrates the effects of making smart spending decisions. More importantly, I don’t feel like I’m missing out on anything compared to last year. I don’t miss the daily lunches out or the weekly junk food trips or cable. I didn’t need these things in my life and I don’t miss them now that they are gone.

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The 12 Steps to Fixing Your Financial Life

Mr. Money Mustache says:

Your attitude determines your lifetime wealth much more than your knowledge of financial nuts and bolts.

money2

I’m blatantly stealing part of this post title from Mr. Money Mustache, my unofficial personal finance/badassity mentor. In a recent post he writes what is probably one of the best paragraphs on the interwebs relating to personal finance. He says:

Here’s how to cut your life costs in half. Start by getting rid of your Debt Emergency if you have one. Live close to work. Move to another city if you enjoy adventure. Don’t borrow money for cars, and don’t buy stupid ones. Ride a bike wherever you can. Cancel your TV service. Stop wasting money on groceries. Give your kids the opportunity to achieve greatness without being pampered. Lose the overpriced cell phones. Learn to appreciate the life-boosting joy of using your own body to get things done. Learn to mock convenience. Practice optimism.

13 sentences, one overarching message: take control of your own financial well-being. This little paragraph is the best road map to getting on the path to financial freedom. It eschews the bullshit and minutiae to get straight to the point. Don’t let your debt control you. Don’t let keeping up with the Joneses control you. Don’t let your paycheck or your bills control you. You should be the one in control.

I have either directly been following this advice or found it on my own through common sense. I love that it is now all put together into one concise paragraph with links to further details. If you really want to find out how to improve your finances then take each sentence, put it into a list and work towards achieving each step.

Thanks to MMM we now have this 12 step process that will tell you how to cut the frivolous spending in your life and get on the path to financial freedom. And guess what? It actually works. I am living proof.

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Status: Ahead of Schedule!

  • Extra Payment: $1,435
  • Total Pay Down: $1,740.66
  • Total Pay Down Since Start: $8,482.46
  • Total Outstanding Balance: $62,690.29
  • Percent Complete: 11.9%

Feb13_Goal

*These numbers are for my Wells Fargo Private Loans only.

Month two of my rapid debt pay-down adventure is complete. Overall I did very well in February. I was able to make a pretty large extra payment thanks to low rent this month and modifying my 401(k) deduction.

Again I have tracked every dime I spent during the month and graphed it all out to give myself a visual representation of how well I am doing. I love seeing how my new habits are having a positive impact on my financial health.

Outstanding Debt & Goals

This chart plots my high interest rate Wells Fargo loan. The black bars give you my outstanding balance goal each month and the red line is the actual monthly ending balance I achieve.

Click to enlarge.

Click to enlarge.

I ended February $600 below my goal! Thanks to a special rebate on rent during the month and a clever adjustment to my 401(k) deduction I was able to make a much larger extra loan payment than anticipated. The best part: the adjustment to my 401(k) will allow me to keep making larger than expected extra payments. This means I will be well ahead of my goal in the coming months and this graph is going to keep looking better and better. Stay tuned.

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A combination of increasing student debt, tighter lending standards and high levels of unemployment and underemployment has hampered young adult’s buying power.

StudentDebtA recent article from CNN Money audaciously claims that low debt levels among young adults is bad for the economy. The author, Nin-Hai Tseng, suggests that “young people are less willing to take on credit card debt and auto loans” as if they are doing that by choice. Tseng claims that debt is necessary for a healthy economy. This may be true in the consumer driven American economy however I am not convinced that young adults are choosing to have less debt.

If you really dig into the data you will find that lower debt and spending levels among young adults is a result of the economy instead of an increase in frugality and/or savings. As the article mentions (and the report from Pew states) student loan debt has increased while all other forms of debt have decreased for people under the age of 35. The author is perplexed by this:

What’s maybe most perplexing is that student debt has increased while all other consumer loans fell.

This isn’t perplexing at all; the decline in other loans is directly tied to the increase in student debt and the great recession. Acquiring student loans is still relatively painless while it is much more difficult to secure other types of loans or lines of credit, especially for young adults.

Consider this: in 2007 it was extremely easy to get loans and credit while student loan debt levels were much lower than they are today. In fact the average student debt level for people under the age of 30 in the first quarter of 2007 was $15,848; however by Q1 of 2012 the average student debt level had grown to $20,835 among adults under 30 [1]. Average student debt levels are accelerating with reports for recent graduates showing a staggering rise to $26,000.

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A Special Trick to Increase Cash Flow

Mr. Money Mustache says:

There really is no suffering here, in this highly frugal life. Just a lot of rewarding work and effort and accomplishment.

retirement_planning

I am one of the lucky American’s that gets free money from my employer just for saving money for retirement! Whoever invented this system is a genius. Additionally the Company I work for gives me the option of paying taxes on those retirement savings now or in the future. I have the choice between a traditional 401(k) and a Roth 401(k).

For those of you who are unaware a Roth 401(k) allows me to save money into a 401(k) account after I pay my taxes. Traditionally people are able to save into a 401(k) before paying taxes. Under the traditional plan you are forced to pay taxes when you withdraw that money in retirement. For me that is over 30 years away. Under the Roth plan any qualified distributions in retirement are made tax free because you paid taxes on that money before you put it into the account.

I decided to go with the Roth option when I started my 401(k) because I am currently in the 25% federal tax bracket. While it is impossible to guess what the tax rates will be in 30 years I am absolutely convinced that taxes will never be as low as they are right now. Tax rates are generally at the lowest level they have been in the past few decades. However, the United States has a massive debt that sooner or later is going to have to be paid back and in the coming years millions of baby boomers will be retiring with little to no savings and ever rising health care costs. The burden will fall to the people still working to pick up this tab, that includes me. I am happy to pay the 25% now and avoid the coming higher rates. [1]

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The Number One Song in America: Thrift Shop

Macklemore says:

They be like, “Oh, that Gucci – that’s hella tight.”
I’m like, “Yo – that’s fifty dollars for a T-shirt.”
Limited edition, let’s do some simple addition
Fifty dollars for a T-shirt – that’s just some ignorant bitch, shit
I call that getting swindled and pimped
I call that getting tricked by a business

By now you have heard the hip hop-rap sensation Macklemore’s hit song, Thrift Shop. This is a catchy song that rejects the endless consumption mindset that dominates the American psyche and instead promotes wearing your grandpa’s hand-me-downs. I could not have chosen a more opportune time to live a more frugal life.

While not the best song from the Seattle artist I love the message of Thrift Shop. Macklemore tells us that we are being tricked, swindled, and pimped by businesses that want nothing more and nothing less than to separate us from our hard earned money. His message is simple, straightforward, yet powerful: We don’t have to buy (literally) into the consumer mindset and become a clone of our peers.

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Status: On Track

  • Extra Payment: $6,500
  • Total Pay Down: $6,741.80
  • Total Pay Down Since Start: $6,741.80
  • Total Outstanding Balance: $64,430.95
  • Percent Complete: 9.5%

Goal_Jan13

*These numbers are for my Wells Fargo debt only.

January was the beginning of my journey to debt freedom. I got off to a great start and am well on my way towards my goal. This may be my biggest month in this entire process, from here on out it is going to be a steady marathon.

Outstanding Debt & Goals

This chart plots my high interest rate Wells Fargo loan. The black bars give you my outstanding balance goal each month and the red line is the actual monthly ending balance I achieve.

Click to enlarge.

Click to enlarge.

I was about $10 shy of my outstanding balance goal mostly because I made my payment one day late so more money went towards interest than anticipated. Overall though, I am on track. The affect of my extra payments on my total outstanding debt is really starting to look good.

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