Thursday, February 17, 2011

Be debt-free in your 30s!

I will be debt-free by age 37. I am quite proud of my family's budgeting and have been told that I should offer my financial knowledge to others, so here is my attempt at it. If you are bored by this type of information, simply click away from my blog now. I won't force anyone to fall asleep at their desks. The following advice is simply that. I am not rich. I won't say what my income is, but it is lower than "middle class" and it is considered to be "poverty" when you look at the averages for a family income.

All right. So, I have been asked more than once how a family of four (soon to be five) lives on a single income and manages to be able to "do it".

The answer is simple: budgeting. For us, it makes sense to have one of us stay home with the kids because of the astronomical cost of daycare these days. Now, many of my friends are in this situation as well, but it's generally (and I'm not trying to stereotype here) the mom who stays home while the dad works out of the home. People have a hard time coming to grips with the fact that it is me who goes to work while he stays home. And people aren't always fair about it either. My husband has been called lazy, feminine, a bum, etc. -- all because he stays home and takes care of the kids. This bothers us, because he does a damn good job at what he does. The kids get three meals a day, all prepared by him, and 95% of the time, it is all made from scratch. We have nothing in our house that comes from a can (got rid of all canned goods once we learned they were lined with BPA), or a mix, or premade. You won't find frozen dinners in our freezer nor fruit snacks in our cupboard (our kids enjoy REAL fruit, and it makes me a little sad that these days, most kids don't get to enjoy what my kids do and instead have become accustomed to the taste of high-fructose corn syrup as a sad alternative to healthy fruit). It's not that we don't have any snacks, because we don't want our kids to be deprived: we just make smart choices. Ice cream made from real sugar (Ben & Jerry's, for example) is a treat 1-2 times a month, or we will get a big cookie from the local co-op to share. However, in general, we just don't have the snacks in our house 24/7. (Furthermore, when it comes to food, having a baby doesn't have to be expensive, especially when you breastfeed and cloth diaper. You'd be amazed at how much these simple steps can save you.)

I realize it may seem that I'm going off on a tangent about food here, but I guess I am just putting it out there that organic/healthy/natural food is our "indulgence" so that is where we spend most of our "extra" money.

I went to college. I did not qualify for grants because based on my father's income (my estranged father whom I don't talk to and whom would never contribute a penny towards my education or any other matter -- hello, I paid for my own private flute lessons throughout high school), it was above the level for Federal Pell grants. So, I took out school loans and I finished college, and graduated in December of 2002. I did receive 2 scholarships at the end of my senior year, and those helped me out with the first year of college (there are benefits to being a good student and teacher's pet; haha). My total loan amount was $12,725 (yes, I remember the figure because my pseud0-photographic memory comes in handy sometimes). They were subsidized Stafford loans, which means that they do not accrue interest while you are in school, which is a good thing. The OTHER good thing, and most of you probably know this, but after you graduate, you have a 6-month grace period before your first payment is due (I assume this is to allow a college graduate to get a job first). Financial tip number one: Save, save, save. My first job after college only paid $8 an hour. It was an administrative assistant position, but I was working full-time. My only bills at the time were my half of the rent, and my half of the utilties. The rest of the money I saved. My first payment was due then, July 1st of 2003. I had saved up $4,o00, so I put all of that money down as my first payment. Never pay the minimum amount due, especially if you can afford to pay more. I continued to pay extra every month and my school loan, to the sum of $12,725, was paid off in TEN MONTHS. It was such a great feeling. I think I ended up paying something like $80 in interest total, but that's not too bad, compared to how much it would've been had I paid less. This helped my credit score a TON, and I'll touch on that in a few minutes here.

Financial tip number two: have a credit card, but never carry a balance. When I was a freshman in college, I got my first credit card offer in the mail. I opened up the envelope. Since there were no cardholder's fees, I decided to have the credit card and use it ONLY when I knew I had the money to cover and then pay it off in full EVERY SINGLE MONTH so that I never paid a minimum payment amount or had interest added. I kept this card and while I started with a line of credit of $1,000, by the time I had held the card for a few years, they upped the line of credit to $28,500. I think they were hoping I'd lose my mind and charge a couple of cars on there. The credit card companies hate people like me. I never made a late payment and I only held the card to help my credit score, and to order things online. Eventually I opened a different card, simply because the one I have now I get Amazon points for (3 - 4 times a year, I can cash them in for a $50 check -- not too shabby).

Financial tip number three: always pay your bills in time or early, and always for the full amount. When you go to get a mortgage someday, if you go to get a mortgage, the bank will run your credit report. They look at these things, so that electric bill you slacked on 4 years ago could potentially come back and haunt you. I see so many people, especially young people, who can afford to go out drinking every night, or out to eat five days a week, yet they claim they don't have the money for their bills. PRIORITIES, people, priorities.

Financial tip number four [and this is a no-brainer]: if you don't have the money to cover it, don't charge it! Think about the consequences. If you decide to buy that expensive pair of jeans, they are only going to end up costing you 3-4 times more after all the interest is added in if you continue to pay the minimum payment on your credit card. Remember, credit cards are technically unconstitutional. They are a business and there's a reason they've been around for so long: they know how to make money. Some people are better off just paying for things in cash -- I do know people like this who don't trust themselves with a credit card, so they simply don't have one (my sister is one of these people). Out of sight, out of mind.

Financial tip number five: don't take out a loan for a vehicle. I think this is one of the least financially sound things you can do. Instead, save up some money and buy something affordable. You don't need a $30,000 SUV to cart yourself to and from work. How many times do you see so many SUVs on the road, each with one person in them? What a waste. Not to mention, when you have a loan on a vehicle, you will be required to have full coverage insurance, whereas if you drive a car with less value, you can carry liability only, saving yourself bundles. And then there's the gas costs to boot. What we do in our house is we just have one vehicle now. I use it to commute to work. It's a 2007 Ford Focus that we bought used in 2008 that we paid cash for. By paying cash, we were able to negotiate with the dealer and get them to come down. Believe it or not, there are people who think we can't possibly get by with one vehicle. The solution is simple: if he needs the car during the day, he can drop me off at work and go about his business, and then pick me up when I am done. It's how it was done in the 70s and 80s and it was only until the 90s when people thought it was a "requirement" to have two or more vehicles to "survive". There's also walking and biking, which are modes of transportation to the park or wherever my family might want to go during the day.

Financial tip number six: when buying a house, save, save, save, for that down payment. If you put 20% down on a house, like we did, you do not have to take out mortgage insurance, which is something they lenders impose on people who have 20% or less (I know people who put 0% down!). This will end up taking away from the amount you put towards your principal. I was able, at 25 years old, to get approved for my mortgage all on my own (the hubby and I weren't married yet) simply based on my outstanding credit, my previous payment history, and my lack of debt. The more you have as a down payment, the lower your mortgage will be, the more you can afford every month to pay towards the principal. Furthermore, in regards to saving: look at your paychecks and decide what that money is for. Right now, one of my paychecks is designated "for the mortgage", and the other is simply "extra". I don't go on a shopping spree every payday simply because I have the money to do so.

Financial tip number seven: if it's feasible, refinance. Our original mortgage, taken out in November of 2005, was a 30-year WHEDA loan at an interest rate of 5.875%. When the rates started to drop, we talked to our banker and asked him when/if it would be smart to re-finance. He said that he uses a formula, and if you can break even by a certain amount of time (taking into account the amount it costs to refinance vs. the amount you will save in interest, etc.), he would definitely recommend it. He took my information (what we had paid thus far) and crunched some numbers and decided that yes, it would be smart for us to re-finance. This was five years after the original loan (September of 2005) and we went to a FIFTEEN year mortgage at 4.25%. Even though we were going to a 15 instead of a 30, our mortgage payment went down a few bucks every month, which was really a nice surprise. Our monthly payment is $775.00 and I also pay $225.00 extra towards the principal every month because every little bit helps. We had the banker do some math again for us, and he figured that if we continue to pay extra like this, our loan will be paid off in 6.5 - 7 years.

That is how I will be debt-free by age 37, at which point I will continue to put money away for my children's future. I refuse to become a victim of the system, working until I'm 70 years old, dying with debt still in place. The future may not always be bright, but I can make the best in my little world by making financially sound, smart choices.


Rojas Family said...

Why couldn't I have read this when I was 18? It would have saved me a lot of trouble. No one ever taught me anything about money, my credit, saving, etc. My first credit card was like free money to me. Yeah, that ended up going to a debt collector.
I'm very impressed you did all this at such a young age. You should defently share this with more people, especially young people. (So says the lady that just bought a used 2004 Toyota Sienna this week with a loan for 4 yrs) ;o)

Johanna S said...

Sarah, I know you will love this! You can plug your numbers in and get an amortization table. You can compare the difference between only paying your mortgage and putting some additional money towards your principle. Just for hahas, you could also put in your original mortgage and jump up and down when you see the difference! We are refinancing right now. Originally, we got a 30y mortgage at 7.125%. 18 months ago we went down to a 15 year mortgage at 5.125%. Now we are going down to a 4.5%. It is hard to get a mortgage when you are self-employed, which my husband is. So it is almost a miracle that we were able to buy this house three years ago. I bet you if we had W2's, we would get an even lower rate, but this is awesome as it is, so I won't complain. We will save about $230k in interest, so I am very excited!

Very thorough post and excellent advice, BTW. Budgetting is definitely the way to go. I wasn't good at it, but my husband is, so we have balanced each other out. He was Mr. Never spend a dime and I was quite into shopping! One thing we like to do is put 10% of our income aside for fun. That way you get to do both the responsible and the fun stuff!