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.
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.
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.
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.
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. 
How I’m Tracking Every Dime
Mr. Money Mustache says:
Enjoying life while spending less money is a skill that develops just like a muscle, as opposed to a permanent state of deprivation.
One of the ways I am going to reach my goal is to build up massive frugality muscles. To begin I need to cut way down on the frivolous spending that has been dominating my budget for the past 18 months. The first step to cutting frivolous spending is to identify where that extra money is going. Identify it, recognize it, and neutralize it.
Mint.com does a good job of this already but I am looking for a little more detail. I want to be able to closely see how I am spending my money as it relates to my gross income and my take home pay. So, for the past week I have been building a badass budget tool that will track everything.
I have always been amazed at the magical powers that can be performed in Microsoft’s Excel program and I am a little bit of a spreadsheet nerd. With just a little effort I created a workbook that will track all of my income and expenses and all of my assets and liabilities. The best part is that this data is fully customizable. I can easily create summary sheets with my financial information and pull all of the data into colorful charts and graphs that give me a visual representation of where I stand.
These charts and graphs will help to re-enforce my debt pay down plan. Seeing my debts go down and my net worth go up will push me to do more and keep the process going. All I have to do is to input the data once a month (and keep making the extra payments).
How I Got Where I Am Today
Mr. Money Mustache says:
Your Debt is not something you “work on”. It is a HUGE, FLAMING EMERGENCY!!!
“What you don’t know can’t hurt you!” they say, but it’s not true. What they really should tell you is: What you don’t know will DESTROY your future! Whoa, did that get your attention? because it finally got mine.
I thought I had a pretty good life, I thought I had my finances under control, I thought I had a great retirement to look forward to! As it turns out, I was just lying to myself through the egregious sin of ignorance. In reality I am in the middle of a DEBT EMERGENCY!!! And not just that, but I have been in a debt emergency for 5 years!! 5 YEARS! And I didn’t even know it.
How did I get here? How could I be so stupid? Why did I do it?
To answer these questions I went back to the beginning in an effort to illuminate the decisions that have lead me here.
I come from a comfortable life. My father was always able to put food on the table, sent me to the best private high school in town, and even bought me a car when I turned 16. He did this all with a high school degree having never set foot on a university campus, a model of the America Dream if I have ever seen one. Yes, life was good. However, despite this cushy existence, by the time I turned 18 and graduated from high school I was eager to leave it all behind and go do my own thing. I wanted freedom! and independence! and College was the way I was going to get it.
About that time every college in the country was sending me nifty little postcards and full color brochures that all said the same thing: We have the most beautiful campus! Our classes are the best and our professors the brightest! Your future will be better if you get your degree here! And you know what dear readers? I bought it. Hook, line, and sinker.