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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.

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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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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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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.

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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).

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My Plan To Get Out Of Debt In 3 Years

No More Harvard Debt says:

Debt Pay-down Is a Marathon, not a Sprint … This is 26.2 miles up the side of an extremely steep mountain.

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Obliterating my Student Loan debt has become my top priority. This is my battle plan.

I am embarking on the challenge of rapid debt repayment. The next few years will challenge my former relationship with money and my former lifestyle. I am doing this by choice. I am choosing to take the more difficult route, the route that will lead to financial freedom. I am choosing this because it is hard and things that are hard tend to reap the best rewards. Today I will lay my debts out on the table, acknowledge them, and form my plan.

The Back Story

After four years of college I have accumulated quite the portfolio of student loans. Unfortunately this is not a good portfolio, this portfolio pretty much represents my entire net worth (in a monetary sense) and it is a very large, negative number.

To pay for my first two years of college I took out substantial private loans through my bank, Wells Fargo. I needed the loans to cover my tuition expenses but I also used them to cover housing costs, textbooks, and food. I was also able to take out a few small Federal Loans that helped to cover a small portion of my annual university costs. However, I did not qualify for subsidized interest rates on my Federal Loans nor did I qualify for financial assistance from my university. So, Wells Fargo was there to pick up the slack and fund the rest of my education / college experience.

In 2008 the US financial markets crashed and lending from private banks dried up. I was only half way through my four years of education yet Wells Fargo informed me that I no longer qualified for a private student loan. I was stuck; I needed to graduate in order to get a job to pay off my debt that I needed to incur in order to get an education so that I would qualify for a job (follow that?).

My university told me that I did not qualify for need based aid, apparently my parents made too much money. My parents told me that they couldn’t afford the high cost of my private university education. For a few months the situation became desperate, I was on the verge of being forced to drop out of school. Eventually I was able to find a solution. My parents were willing to take out a parent loan to cover the cost of my education on the condition that I pay them pack. I jumped at the offer.

So I was able to fund my education. I borrowed the money, I went to school, I graduated, I got a job, and I started paying it all back.

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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!!!

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“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.

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