Welcome back. So from the previous post, you’ll know me and my wife had to “Unite the Clans” and get on the same page financially. Our first step in our financial experiment was to figure out a way to get out of debt. Despite making a decent living, we were living paycheck to paycheck and not getting ahead financially. It seemed like our salary was increasing year over year, but our wealth wasn’t. As this article from MSNBC outlines, we were living like most Americans. Does this sound like you? As the article outlines, we were part of the percentage of people who felt our debt was manageable, but it felt like we were working just to give our money away. We were tired of being normal! We needed a plan to be effective money managers.
Before my wife and I got married, asking her about how she managed money wasn’t on my radar as a question to ask when getting to know her. It’s not exactly a sexy thing to talk about, but once we did get married, our approaches to how we both managed money began to surface, and became one of the top three things we “talked” about. I use quotes here to indicate that our talks could be contentious at times. Since we didn’t give money management a lot of thought before we got married, building a family budget was one of those topics we discovered we needed help with.
What did we discover? I am the analyst of the family, probably why I’m an engineer. I love working with numbers, building things, and staying within boundaries. I like building spreadsheets, tracking the dollars coming in and going out, and figuring out how much money is left over after the bills are paid. In addition, I hate debt and use credit cards sparingly. Most of the time, I will save up money to buy something as opposed to using a credit card. This is how I managed money before married life.
My wife, on the other hand, is more of a free spirit when it comes to money. While she is concerned with having enough money, she is less concerned with the details of a budget, especially any kind of fanaticism on tracking numbers. She is more willing to use a credit cards if an event is occurring and money is low, as long as it is paid back. These two perspectives about how to manage money led to conflict from time to time. As we learned, it can be frustrating when two people are not on the same sheet of music. Needless to say, over the time of our marriage, we’ve had to adapt and compromise on how to manage money together. I needed to become less structured on managing money and she needed to be a bit more structured. The most important thing to do though was to work on a financial plan together to obtain our goals. Before realizing this, we often did our financial planning in a box. She would make her plan and I would make my plan. We need to communicate more and work together!
Two books that helped us accomplish this were “Start Over, Finish Rich” by David Bach and “The Total Money Makeover” by Dave Ramsey. There are other books that helped us rethink how to manage our money, but these two books were the most influential in terms of helping us re-frame our way of thinking about money. The main themes we gleaned from both of these books were these:
- Find your money
- Get out of debt
- Stay out of debt
- Rebuild your financial future
Both books offered different tools we used to change our approach to money. In “Start Over, Finish Rich”, David Bach outlines a system for getting your finances organized. He recommends a simple file folder system, some of which are labeled as follows:
- Tax Returns – Mr. Bach recommends keeping all of your tax documentation for the past three years including the current year. Tax documentation includes items such as W-2 forms, 1099s, and the tax returns you filed for that year.
- Retirement Accounts – Mr. Bach recommends filing your quarterly and annual statement for all of your retirement accounts. He also recommends filing information on the investment options you have selected in your retirement accounts. These should be review annually.
- Social Security – Keep track of your most recent Social Security Benefits Statement in this folder.
- Investment Accounts – Mr. Bach recommends filing any statement received from other investments outside your retirement accounts.
- Savings and Checking Accounts – This file folder is pretty straight forward. Review and file your monthly bank statements.
- Household Accounts – Mr. Bach recommends printing and filing all documents pertaining to your home. These documents include your home title, any costs for home improvements, and home mortgage statements.
- Credit Card DEBT – Again this file folder is pretty straight forward. Review and file ALL of your monthly credit card statements. Mr. Bach recommends writing the word DEBT largely on this folder to motivate you to pay it off.
- Credit Scores – File your yearly credit scores here.
- Other Liabilities – Mr. Bach recommends filing any statement received from other debts outside your mortgage and credit cards in this file folder. Other debts include college loans, car loans, personal loans, etc.
- Insurance – Mr. Bach recommends printing and filing all documents pertaining to your insurance. These documents include your insurance policy and associated payment records.
In all, Mr. Bach lists 14 financial folders which we should be using to track our finances. What a simple yet elegant solution. I mean seriously, how many of us have our finances as organized as we’d like or even know what we should be tracking. As mentioned earlier, we are all money managers, but how well are YOU managing your money? Mr. Bach offers a solution finding your money and organizing your finances. Mr. Bach also offers strategies to pay off debt, to build an emergency fund, to build wealth, and to give. I highly recommend reading his book.
In “The Total Money Makeover”, Dave Ramsey outlines a seven steps to get out of debt and stay out of debt. You might have heard this guy on your local radio station and blew off his advise. I know I did. In fact, my father-in-law had given us a copy of this book to read within the first year of our marriage, but I stubbornly didn’t think this book would be much help. Boy was I wrong!
Dave Ramsey is a folksy old dude that dishes out financial wisdom. He offers a straightforward way to become debt free. Surprisingly, one of the first things Mr. Ramsey focuses on is that fact that, if you are married, you must both be committed to get out of debt, in order to make his system work. He emphasizes that you need to be able to communicate and work together to be successful. This simple fact drew both of us to this book. Before reading this book, I think we had different opinions on how to manage our money. We weren’t too far apart on our opinions about money but our approaches were different. For example, we both wanted to be out of debt and saving for our future, but we were having trouble prioritizing what we should do first and how we should do it. Should we save for our future first or pay off debt or both?
This book helped us get on the same “financial page of music”, and quite frankly, the way Mr. Ramsey lays out his steps to get out of debt just made sense to us. Mr. Ramsey outlines the following steps, which he calls “The Baby Steps”, to get out of debt, stay out of debt, and build wealth. You can also find the “Baby Steps” on his website:
- Baby Step #1: $1,000 Emergency Fund – Mr. Ramsey first recommends saving $1,000 dollars before paying off any debt as an insurance policy to any unexpected emergencies that may occur along your baby step journey. During this phase he also outlines how to build a budget and track your finances which should be done monthly, at a minimum. “The Total Money Makeover” outlines tools you can use to plan your budget and allocate your money via an envelop system.
What we did: We already had a emergency fund, so for us, the biggest thing we need to do was to figure out what we were doing with our money and create a budget. Of course, me being the analyst, I built a elaborate spreadsheet to track our bills and figure out where our money was going. On to step two!
- Baby Step #2: Pay off all debt using the Debt Snowball – In this step, Mr. Ramsey recommends you list all of your debts, and begin paying them off from smallest to largest. The rationale is that as you begin to win the small debt battles, you will be motivated to win the debt war, so to speak. As he states, 20% of personal finance is head knowledge, the other 80% is behavior.
What we did: As you work through these first two steps you will begin to condition yourself to track your money, communicate with your spouse, get motivated to pay off your debt, achieve financial confidence/control again, and begin to realize that financial freedom is in reach. This was a new concept for us. I had always aggressively attack debt, but listing them out for both of us to see and discuss how we would attack the debt, helped us get on the same page. Once we had a plan and the focus, we paid off our debt within a year! Watching the debt be eliminated monthly was a great feeling and you learn to get excited about paying off of debt together, as well as keep each other “in check”. On to step three…
- Baby Step #3: Save 3 to 6 months in living expense.
What we did: This step was pretty straight-forward. I didn’t take us much time to save up a couple of months of savings since we had gained the discipline to live on a budget and wipe out debt.
Baby steps 1-3 completed our objective 1 of our financial experiment. We have deviated from the remainder of Mr. Ramsey’s steps, but I list them here for completeness.
- Baby Step #4: Invest 15% into retirement accounts – self explanatory, though Mr. Ramsey also has a part A and B to this baby step. Part A essentially allow you to save for a down payment for your home before you fund your retirement accounts.
- Baby Step #5: Fund college for your kids
- Baby Step #6: Pay off your home early
- Baby Step #7: Build wealth and give
If you listen to Dave Ramsey’s radio show, you know he has a lot of sayings. One of my favorite Dave Ramsey sayings is “live like no one else so that you can eventually live and give like no one else.” In other words, live below your means, pay off your debt, and save in order to WIN both financially and in life. I couldn’t agree more. Again, this is another book that is easy to read, simple to follow, and just makes sense.
These two books helped us do two things:
- Get financially organized.
- Get out of debt.
I highly recommend adding both books to your personal finance library. They are both very helpful and they both give financial advice in simple, straight-forward terms. Again, research the books and gather the tools that are right for you. The goal of this objective is to find teachers and methods that can assist you with getting out of debt. These were our teachers and the methods we used to kick debt to the curb. Through this process you will become more financially self aware, gain more self discipline, and learn to work TOGETHER with your spouse to meet your financial goals.