I’ve written before about how my husbands near death from septic shock taught me about the importance of emergency funds and emergency planning. Today I’m going to write about how the experience impacted my attitudes about debt, and tell you my debt freedom story. I hope this story can either help you to keep out of debt if you’re already debt free, or inspire you to continue your own debt-free journey.
For many years, I was completely debt free except for my mortgage. That all started to change when I was 29. My husband was in a bad accident in my lovely old car (a 1997 Dodge Stratus – loved that one) and it was unfortunately totaled. At the time we had two young kids, and we both worked opposing shifts, so we needed another car. I had a good job by then, having worked my way from $22k per year up into the $70k – $80k range by that point.
The Car Loan – Mistake One
I asked my brother what kind of car I could get that would last forever, and he recommended a Honda Accord. I’m not a car person, and my brother is, so I decided to take his advice. He had a friend who was a Honda dealer in the next town over, so we went by to check it out. This was my first experience buying a new car, and I wanted to just get one and drive it forever. Note – I still have this car today, it has over $100k miles on it and still going strong. The dealer gave me a good price, at under $20k for a brand new car. I had done my research so I knew it was a good deal.
But here’s where I made the mistake – I decided to get a car loan. Now, I had the money to pay cash, so why would I get a loan? I didn’t want to deplete my cash reserves entirely. I was starting an MBA program in a few months and thought I might need the cash for something related to school, or that an emergency might come up and I’d need cash. So I put 30% down and took a loan for the rest.
Was this a bad decision? It’s actually hard to say. I did end up needing that cash. My husband lost his job only three months later, when his factory closed thanks to The Great Recession. He would be out of work for years to come. So not depleting my cash reserves was a good idea. But if I were to do it all over again, I would have bought an inexpensive used car for the cash I used for a down payment on this one.
So now I had a bit of debt, but manageable payments. Not a big deal. Even with my husbands job loss, his unemployment coupled with my salary was enough to cover our expenses. But it was barely enough, so here’s where the second type of debt came in: credit cards.
Credit Cards – Mistake Two
Do you know those people that put everything on their credit cards for rewards/points/cash back, and then pay them off every month? I was using that strategy, and it worked well – until it didn’t. Suddenly there was a month where the balance on the card was more than I could pay off with my paycheck. No problem, I thought, just a tricky month. I’ll take a bit out of savings to cover the difference.
The problem was that it kept happening – again, and again, and again. Every few months there would be a credit card bill that we couldn’t quite cover. Not a problem, it could come out of savings. Unfortunately this kept knocking down our emergency savings until it was running low. But then I’d get a windfall – a bonus or a tax refund – which would go to replenishing my emergency fund. Oops, then would come another credit card bill that my salary just couldn’t cover. It was a vicious cycle. Then would come the times where I couldn’t pay it even with the emergency fund, and I would need to let the balance carry over to the next month. There was one year that I paid over $1k in credit card interest-which I never had before.
This was a hard cycle to stop. Since my cash in my checking account had become dependent on this strategy, there was never enough in it to cover day to day expenses. They had to be put on the card, and then the card paid off with one of my paychecks. In order to stop this cycle I would not only need to pay off the card, but I would need to start using the checking account for all expenses, meaning I would need enough in checking to cover the expenses for the month. I couldn’t do that if the money had already gone to paying off the credit card.
Student Loans – Mistake Three
Remember that MBA I had started back in Mistake One – right before my husband lost his job? Well, my original plan was to fund it the same way I had my undergrad, with employer reimbursements. Unfortunately there was a flaw in that strategy that I hadn’t seen coming, and it came when I switched jobs.
The company I had been working for, that I had been at since the late 90’s, was in trouble during the Great Recession. Its stock had once been over $100 per share, and had bottomed out at $3.65 before they received a TARP bailout of $4 billion to stay afloat. The company had come extremely close to bankruptcy, and it showed in the opportunities available at that company, as well as the attitudes of the employees. I was ready for bigger and better things – more opportunity, a better environment, and more work/life balance than I was getting at the time. So I found another job at another company that actually had a better reimbursement policy for graduate school. I struck gold, right?
Well, no. Unfortunately there was something I’d forgotten to ask about – when, exactly, you could apply to start reimbursement. You had to be at the company for six months first. But I was in the middle of a semester, and I didn’t want to slow down getting my MBA. So for the first time ever, I took out student loans. $25k worth, to be exact. Most of that was to pay tuition and fees, but some of it went to clean up Mistake Two. At the time, I was focused on trying to keep the family afloat as the Great Recession roared on, and my husband still couldn’t find work. I didn’t recognize this situation for what it was – a downward spiral into debt that was going to get worse unless I did something to stop it.
I also took advantage of the opportunity of getting my MBA by doing some of my education in France and in China (including some adventures at a Chinese Walmart). Fun, educational, life, and perspective changing times were had-but it was all on the back of this debt.
One Last Mistake – Then Everything Changed
Through all this time, I had made another “mistake” (sort of) – I had continued to invest in my 401k and my kids college funds. The reason I say it was sort of a mistake is that if I had stopped and just cleaned up the debt, I would have been debt free faster. However, those investments continued through the lows of 2008, 2009, 2010, etc. This means I bought at the bottom, and those investments have worked out financially much better than if I had paid off the debt. I had no way to know that would be the case, though, and when my husband lost his job I should have stopped the extra savings.
According to my net worth spreadsheet, as of February 2012 (the month before my husband almost died), I had $33k in debt. I was paying that car payment every month, but the student loans were still deferred because I was in school doing the MBA. Some of them had no interest accruing, but some of them were growing while deferred. No payments were due yet, though. We continued the struggle with those credit cards, but I had set aside a substantial chunk of bonus money in our emergency fund to pay for my husbands upcoming surgery.
And then in March of 2012, everything changed.
To be continued on Friday
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