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Doing it Right

The biggest problem most Americans seem to have in common is finances. Making that check work for everything: bills, debt, savings, emergencies, and some form of a social life. For me, the unconscious level of priority went like this: social life, bills, debt, savings(emergencies).

The result was that I had a great time doing little dances with friends, sometimes overdrew my checking account at great expense, paid off very little debt, and had no savings whatsoever. There was a time when I did have some savings, and I was very proud of my savings plan. But my friend Keith told me on a long drive to Colorado in 2003 that savings is worthless if you have high-interest debt, so I emptied the account when I got home, and used it to make a one-time chip at the roughly six thousand dollars of credit card debt I had at the time.

Fast forward to 2008. Some bad luck pushed me to the unemployment line, and with no savings and six months before I got a job, my personal debt jumped to about twenty thousand dollars. The amount of time it took me to pay it off advanced the total to about thirty five thousand dollars because of assessed interest. The job I got didn't pay enough, to my mind, to pay my debt and bills, so the debt grew.

I got a new job in 2010 that paid significantly more than any job I'd previously had, and this naturally pleased me mightily. But after a couple months, I noticed that my financial situation hadn't really improved, and certainly to the extent that I expected twenty five thousand dollars of extra annual income would improve it. I realized that I was doing it wrong, and further, had been doing it wrong for my entire adult life.

I was sitting in a conference room in Dallas when I was going over my finances. The financial plan to which I was adhering was to track my expenses and enter every receipt's amount into a web application that I wrote. I entered predictable expenses like bills and debt payments into the application for future dates. The goal was to keep a realistic picture of how much money I had, which I realized quickly was the lowest amount of money in the future. Meaning if I had $700 in my account, but I knew that I had a $150 electric bill coming up on the 18th, The application would report that I had $550 available.

That was my problem. My thinking was wrong. The application was great, and it did its job very well-- I paid my bills, and seldom overdrew my account --but my situation never improved. I had no savings. No safety net. No plan for my now massive debt. I was doing it wrong.

I was being paid weekly, which was nice on its own, but no one check was big enough to handle my biggest bills, like my mortgage. So I got the idea to divide my mortgage in quarters, and make a payment for that much automatically each week. CitiMortgage did not like this however, and informed me that though I was sending them money, none of the payments registered as my actual monthly payment, so I wound up owing them a pile of money. It was unpleasant.

I decided that going forward, I would transfer that 25% amount I had been paying into my long-dormant online savings account, and at the end of the month the full payment would be made automatically from there. This worked exceptionally well, and I found that my biggest monthly expense was no longer a source for even the slightest worry. I had by accident discovered the first inkling of a better way. It was very exciting.

I proceeded to look at my full budgetary picture and for the first time, compiled a total of all my monthly expenses. I then compared that to my total net income, and realized that it was all well within reach. Anything extra was just that: extra. Before I got too carried away with that, I realized that the extra had to be used for debt, savings, and day-to-day spending. From that thought I concluded that debt, savings, and day-to-day spending had to be budgeted too, so I added amounts for them to my monthly expenses.

I determined that by splitting things up into two accounts, I could meet my financial obligations and goals more easily. I figured out how much money I would need to live day-to-day: food, gas, beer, the occasional fun purchase, and set it up so that this amount was all that was deposited into my checking account when I got paid. The rest went into the online savings account. Actually, the online savings account had a checking account element to it as well, so I used that, and called it my "operations account."

My operations account paid all my predictable bills automatically(mortgage, dues, cable, phone, electricity, etc) and was where the majority of my financial activity took place. Since my checking account had a set amount contributing to it, the operations account was where my monthly surplus went. That surplus went entirely toward paying debt. I went from struggling to make minimum debt payments to overpaying them by fifteen hundred dollars.

I realized that with minimal effort on my part, I now had an actual date on when I was going to be out of debt. It was about a year and a half away, but compared to sixty or seventy years with minimum payments, or more likely never, that figure was immeasurably exciting.

In this way, I paid my last debt payment at the end of January, 2012. Since then, I've been saving money. By 2013, I had enough savings to be able to start investing and paying down my mortgage.

My only regret in all this is that I didn't do it from the beginning. I would be wealthy now if I had. So if you're reading this, know that if you're snowed under, there's hope! I'm not selling anything, and I'm not a Dave Ramsey adherent-- at least not by design. Today, I have a checking account with UMB which is tied to my debit/cash card. I have a credit card gathering dust somewhere in my room. I honestly don't know where it is. I should probably cancel it.

3:27 PM, Jun 9, 2014

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