Does getting out of debt, saving more, or building net worth seem hopeless? Fear not. You can make lots of mistakes, start late, and still create financial independence.
Part I of this post details the beginning of Mr. ThreeYear’s and my financial story. Basically, it was the story of how we made a ton of financial mistakes, had several big setbacks, and still managed to make fine progress on the road toward financial independence. It detailed all the mistakes we made like buying a house at the top of the market and selling at the bottom, not saving for retirement early and blowing all our money on eating out and new Apple products, and buying cars we didn’t need on credit. In Part II, I’ll explain how we dug ourselves out of what seemed like a hopeless hole, got out of debt, and totally transformed our financial situation.
Smart Decision #1: Killing the Debt
After I bought the book Total Money Makeover and read it thoroughly, Hubs and I sat down to make a plan. We drew a big thermometer with our total debt on it ($38,000!) and put it on our bathroom mirror. Then, we set a budget, cut back our eating out and every other frivolous expense we had, and put all the extra money we had toward killing our debt. It took over a year, lots of saving and doing without, my husband selling his car and downgrading, and some generous financial gifts for us to pay off that debt. Every time we would pay off a credit card balance, we would fill up a little more of the thermometer with a red Sharpie, until finally we got to the top and had paid everything off.
Smart Decision #2: A Better Employer
Because my husband had been laid off, despite working at his company for six years and always getting stellar reviews (he was one of something like 5,000 employees laid off), he began to search for a job where people, and not the bottom line, would be considered the most important goal of the company. He interviewed with lots of different companies, and then found one in New England that had a no-layoff policy, profit sharing, and stock sharing. It also invested heavily in employee education and training. At this point, I was seven months pregnant with Little ThreeYear #2. The company offered us a very generous moving package, so we packed up our house, staged it for sale, and called in the real estate agent.
Remember when I said we bought high and sold low? When we talked to our real estate agent, we asked what we needed to price the house at for it to sell. Other houses in our neighborhood had been on the market for over a year, in what was the worst real estate market in Atlanta in 100 years (2010). We were in the midst of the financial meltdown, and housing prices were steadily dropping. Our fair city had been hit hard by mortgage fraud, where groups of “investors” would come in to a neighborhood, buy a house, and turn around and “sell” it to their friends, sending the price artificially up. Now, we were bearing the effects of that and the bubble. So we set our asking price $30,000 less than what we bought it for, which was also less than the equity we had in it.
A Ray of Sunlight
We actually had multiple offers in two weeks because we priced the house appropriately (everyone else was still trying to list their houses at closer to what they’d bought them for so they weren’t selling). When we sold the house, instantly all of the money that we put into our down payment ($12,000), and all of the equity that we thought we had accumulated over the four years we lived in the house was gone. Thanks to our relocation package, we were able to offset most of the loss.
When we move to New Hampshire in 2010, we were completely debt free and did have some retirement savings from when we wised up and saved 25% of our incomes, but we did not have the money for a house down payment.
Smart Decision #3: Renting, Not Buying
Because of our terrible real estate experience, we were determined to rent in our new state. We lived in a hotel room for about two weeks and then moved into a nice house we had rented and settled in to our new community. I was extremely glad to be in a house again, because about a month later, I had our second son. We spent the next two years settling in (which means learning what the heck to do with four feet of snow in our yard during a winter that lasts six months!) and saving. We saved as much cash as we possibly could, just putting the minimum into Hub’s retirement so we could get the match.
Within two years, we’d saved enough to put down a 20% down payment on a house so we started looking. We weren’t in a terrible hurry to move, but we gave ourselves about nine months before our current lease was up (we renewed it yearly) to start looking.
Smart Decision #4: Buy a Short Sale (i.e., Buy Low)
It was October when we started house hunting, which was not a popular time to buy a home in New Hampshire. Usually, the house hunting season starts around April, and finishes up in October. There are a lot of residents in our area because of a local hospital, so June is a high-turnover month in the area. Nevertheless, we started our house hunt in October and looked at different houses all over the area. There was a perfect house for sale for our needs, priced really low, but our realtor warned us that we probably wouldn’t get it because it was a Short Sale, and the bank had rejected seven previous offers on the house. Either way, he told us, it would be months before the bank would decide.
Since we had so much time, we went ahead and put in an offer. Since the bank had rejected the previous seven offers, we put in an offer $5,000 over asking price. Then, we waited. We heard nothing for weeks, then we heard that the two banks that held the first and second mortgages couldn’t agree—in short, it was an emotional roller coaster. I told myself there was no way we’d get the house, and we tried to focus on other things, like our upcoming trip to Chile.
Now You Tell Us!
Finally, in February, while we were in the middle of a two-week vacation to Santiago, our realtor let us know that the banks had accepted our offer, and the house was ours! The only problem was, after all that waiting, the banks wanted to close next week (when we would still be in Santiago!).
We called an engineer friend to act as our proxy at the house inspection, which we arranged remotely. He asked tons of detailed questions, and made sure the house had no big surprises. At that point, though, short of something catastrophic, we were going to take the house, because there was no more negotiating with the banks (and who would want to?). Luckily, the house was in great shape, even though it had been sitting empty for a number of years.
We ended up closing on the house in two weeks more, which meant that we’d bought a beautiful house at a really great deal!
Smart Decision #5: Max Out the 401K
Fast forward six months—we had moved into our new house, painted the entire thing ourselves (whew!) and were enjoying being homeowners again and having a yard. We knew, though, that because of the years of aggressively saving for a down payment, we were behind on our retirement savings. We needed to start doubling down on retirement and really getting financially savvy.
At this point, I’d started reading Mr. Money Mustache, and realized that early retirement was actually possible for us. We had some instant equity in our house, had a fifteen year mortgage in place, so would pay principal down quickly, and had an emergency fund. We now needed to get serious about retirement. Since I didn’t work at the time, Mr. ThreeYear’s 401K was our main retirement vehicle.
Slowly but Surely…
I wish I could tell you that we immediately started maxing it out, but we didn’t. We had been investing 6% to get the match, so we decided to gradually increase the amount we contributed. Each year, when he got a raise, we put the entire percentage of the raise into increasing his 401k. In just a few years, we were saving the maximum of $17,500 then allowed.
If I had to pick the best single thing we’ve ever done with our finances, it has been maxing out our 401Ks. Maxing out your 401K not only gives you retirement savings (and we picked an index fund with a 15-point basis, so it was low cost as well), it gives you tax savings as well. You’re taking an additional $18,000 (in 2017) off the top of your taxes, effectively shielding that money from your highest tax rate.
When I started working, setting up an i401K was one of the reasons I became convinced it made financial sense for me to take on a part-time job. Otherwise, my earnings would be taxed heavily. With the 401K, I could shield up to $18,000 (or even more) from taxes.
Smart Decision #6: Keep Getting Better at the Little Stuff
For the past five years, we’ve been focused on creating financial independence and getting better at saving. We’ve still managed to make some Average Joe financial decisions, like taking out car loans, taking nice vacations when we could have saved the money, and spending more on groceries than we probably should (we really love to eat!), but despite these setbacks, we’ve kept our eye on the goal: the freedom to live our lives the way we want.
That’s why we keep working on getting better: it’s the reasoning behind my YNAB experiment earlier this year, which, by the way, has continued to be a fantastic tool for our budgeting, why we started manually tracking all of our spending a couple of years ago, why my husband works hard to get the highest raise possible at work (four years in a row—nice job, honey), and why I took a second part-time job. We like our lives, and have a really nice work/life balance, but we also want to be able to live abroad, travel the world, and give our kids a totally new cultural experience before they’re in high school.
I hope these posts have shown that it is possible to make lots of bad financial decisions, and still create financial independence for your family. We always like to think change happens in one fell swoop, but in my experience, change is slow and incremental. We get better at things little by little. We change one habit, then another, then another, slowly, over the course of a year. Then, before you know it, five or ten years have passed, and the results of all those small, incremental changes have added up to a huge win!
Let me know what your biggest small win has been in your financial journey! Did you make lots of mistakes, or were you smart early on?