Last year was tougher than usual for us financially. There were a number of different factors that came together to draw down our savings substantially, and caused us to get a bit too close to needing to tap into less liquid assets for current expenses. Some factors were not our doing, but others were, and we need to take charge of the things that are within our control.
Ultimately, our financial tightness came from not spending less than we earned. And just like things fall into place if we spend less than we earn, we found out that they fall apart if we don't.
Where we stand now
For 2011 and the first part of 2012, we had some pockets of savings here and there in addition to our main savings account. We had built them up through side businesses: my web publishing business and my wife's historical fantasy book.
Each month, we would have a couple of big withdrawals from our checking account: our Visa bill, and our mortgages. The number of months that we had to shuffle money from our pockets of savings to the main checking account to cover these withdrawals increased. The realization would usually happen a few days before the Visa bill would be taken out, or in the time between the Visa bill and the mortgages.
We'd first transfer money from our main savings account, and then from our business accounts. What hit us at the end of this year was that all of those savings accounts were getting low. We could get by with (maybe) one more month before needing to sell less liquid assets.
So, we've met the bills, but we're running out of money in those savings accounts. We need to let the business accounts build up again and replenish our main savings account.
Pay attention … with feeling this time
Spending less than you earn is simple advice. A couple of commenters made this point. It's the implementation that can be tough. Specifically for me, it's the tracking of expenses that I've failed at again and again. Tracking expenses is the “simple, but not easy” part for me. I guess in the back of my mind I've been hoping that I'd be able to look at the big trends and things would fix themselves, but that hasn't worked.
I've come to the conclusion that there isn't any way around paying attention to the details. Clearly something's broken, and we need to diagnose the problem. That can't be done without good data, and data take time and effort to collect.
The big rocks: Where we're headed
The only place where we can start any journey is where we are, right now. This includes financial journeys. After talking with my wife about this, here are the big milestones we're looking at to shore up our finances, and eventually rid ourselves of all financial debt:
- Savings replenishment. Before accelerating any debt payoffs any more than we are now, our first priority is to replenish our savings account. We've drawn it down for too long, and this has added stress to our lives. Having savings will add to our peace of mind. We arrived at an amount of $5,000 for this milestone. Based on some early success (discussed below) I'm thinking this is doable by end of August 2013.
- Van loan payoff. After we reach the $5,000 mark in our savings account, we'll continue to contribute some of our excess to that, but part of the excess will go to accelerate payoff of our van loan. We've already been paying this down faster than we need to (like a biweekly mortgage acceleration with extra principal), but once we have a savings cushion, the faster this gets paid off, the better. Currently we're on track to pay off this vehicle loan in April 2015 (a year and a half early) but by pumping extra money at it we can get this paid off even earlier. We'll aim for September 2014.
- Buildup of “vehicle fund.” Needing to take out a vehicle loan should have been a warning sign a year ago that things weren't as healthy as they could have been. Once the current loan is paid off, we can pretend we still have that loan (or at least part of it) and pay ourselves into an earmarked account for purchasing the replacements for our current vehicles. Taking resale of our current vehicles into account, $15,000 should contribute a long way toward one vehicle or the other. Contributing $500/month to this (which should be less than what we'll be paying on the loan near the end) will build this up in 2 1/2 years.
- Payoff of rental. With the current track we have now, our rental property will be paid off mid-2018. Our plan for the time being is to keep the property as a rental. At that point (or before) there will be a relatively large mortgage payment that goes bye-bye, and quite a bit of cash flow gets freed up. Depending on the extent of our cost-cutting and increased income, we can make this happen even earlier. An extra $300/month after the van is paid off will bump the payoff of that mortgage a year earlier.
- Payoff of primary mortgage (or purchase of more rental property). With the mortgage on the rental paid off, and rent checks coming in, things then start to get fun. We could almost double our current mortgage payment from that rent check alone, or purchase another rental to produce more income.
The smaller rocks: What actions are we taking now
These plans are exciting to us, but now comes the implementation. Here are a few ways we're working to find the money to make it happen.
- Shop with a purpose. We've realized that shopping — especially grocery shopping — is something that we need to do purposefully. My wife was proud (rightfully so) that she got through shopping at Costco, Wegmans, and Lowe's in under two hours yesterday. There was a fair amount of shopping that was done, but it was all from lists. She minimized the time she was in the stores, and got out unscathed by high-powered marketing. Related to this was our Christmas shopping. We kept to task and got something special for everyone, but didn't go overboard. Our Visa bill will be kind to us this month, and we're on track to have another kind Visa bill in February.
- Really trim back on eating out and convenience foods. This has been a weakness of ours. We've already been working together to make sure that we have prepared food to take to work. The little costs add up — especially if we haven't been paying close attention. Our Visa bill was fairly kind to us this month, but it will be even kinder if I'm not buying lunch when I'm out and about, either for work or pleasure.
- Track and analyze expenses. We're trying again for the 38th time. The extent of our success/failure in implementing our plan will hinge on identifying our financial hot spots and fixing them.
- Make do with what we have. My wife is wonderful at making things pretty. We're rearranging some of our living space (more on that at some point, perhaps) but she's redone our bedroom, and plans to redo our new office, using stuff we already own. (We did buy a ceiling fan fixture because the new office didn't have one.) If replenishing savings is the game, then not buying stuff helps. With regard to my information “habit” I already have more reading material for my business than I'll ever look at, both free and paid. It's time to use more of it.
- Take a hard look at our subscriptions. I don't think we've gone overboard with subscriptions. Not just magazines, but services. Our family Y membership is already gone. That's $50/month right there. Others will be considered, especially if they're used infrequently.
- Sell off what we no longer use. I'm really seeing the appeal of de-cluttering. So much stuff we have isn't used, and finding someone who can make use of it (potentially for a fee) will help everyone.
- Continue using our time effectively to generate extra income. My wife and I both write: she has a new book out and I have this blog and others. I occasionally have music or tutoring gigs. We'll continue plugging away and serving our customers to help meet our financial goals.
Anyway, thanks for reading to the end. This post is a bit personal, but that's personal finance for you. I hope that you'll get some value from this, and perhaps use it in some way to contribute positively to your own financial goals.