This guest post, authored by Bogleheads forum member digarei, is reproduced from the original monograph by a generous granting of permission.
I tell them to set aside 10% of their check so they’ll have something to fall back on. Do they listen to you? They haven’t so far! (wink and a smile)
“I was broke but didn’t know it”
This is an account of how I was able to recover from years of poor financial management and debt, and how knowledge about myself, some of it hard-won, contributed to that success.
I was a salaried employee in a good paying profession who went far into debt at a time when I should have been saving for retirement. In twenty years, I had managed to save… nothing.
By the mid-90s, I was broke and didn’t know it. Because I had spent everything that I made–and more, year in and year out. But I was also lucky… fortunate to wake up in time, to realize that opportunities are fleeting. Fortunate also that since I began investing, the markets have mostly gone UP. Fortunate to have worked long enough in government to qualify for a pension.
I retired at age 59, in the same year that I finally paid down my debts, and the first year I was able to max contributions to a retirement account. But digging out required YEARS of austerity. I was paying interest rates of 25 and 28%… and more, on what were some very significant loans and credit balances.
“Pay yourself first”
It didn’t have to be that way.
When I was quite young, no more than seven or eight, I remember my grandfather telling me about the spendthrifts who worked for him, men drawing sales commissions that dwarfed the middle class salaries of the time. They drove late model Cadillacs and lived in well-appointed homes in upscale neighborhoods. But inevitably, toward the end of the pay cycle, one or the other would approach him for a loan so they could buy groceries for their family or pay an overdue bill. His advice for them, apparently unheeded, was just as wasted on me.
Leaning down to my ear level, in a whisper betrayed by his deeply resonant bass voice:
Try to remember: “Always pay yourself first.”
Its meaning was for me as obscure and abstruse as the quantum theory of relativity. Still, I wish now that I had asked him to explain its meaning. Unlucky, that.
~ ~ ~
Austerity means different things to different people. I knew that I didn’t want to be poor all my life. To accelerate my recovery, I took lunch at my desk or went home. $100 lunches and $80 happy hours, gone. Reserve wines were replaced with $10 bottles purchased at the grocery store, and I found that my car didn’t complain even if I stopped washing it for several months.
For ten years I had to pass on nearly every family vacation that involved air travel, I contributed less than what I wanted to my daughter’s education; when my loved ones had financial difficulties, I had to BORROW money to help them. My clothing budget was zero for many of those years.
“I have agreed to let the punishment fit the crime.”
One of the outcomes of that period is an agreement that constrains my use of credit. I’m permitted, by the agreement, to hold and manage one credit card. It’s set up to automatically pay the balance, in full, on its due day each month. It’s actually the first bill to get paid from my checking account and always has priority.
The credit limit on my one card is less than 20% of the credit line I enjoyed on any of the cards I used in the 1990s. This can be inconvenient when I travel or have a large purchase to make.
- The credit limit for any card I hold (max 1) is set at $5000 and is not negotiable.
- I must ask for and receive permission before using the card for purchases over $500.
- If the balance at any time exceeds $2500 the card may not be used for 60 days.
- Non-automated transfers into checking to compensate for a payment over $2500 are not allowed. The money has to be made up by another budget expense item.
- I am not permitted to apply for or to hold any type of rewards card though I could potentially earn hundreds of dollars each year.
Some of you may be pondering whether this restrictive agreement is legal in the U.S. I assure you, it is. No court will come to my aid, because the agreement… is with myself. For the truth is this: I did nothing for a long time to break the spell I was under. I have agreed to ‘let the punishment fit the crime’.
“A product of middle-class affluence and entitlement”
Rationalized overspending was deeply ingrained in my psyche. Made easier with the tacit approval of the banks, whose fortunes I was adding to each day, when they felt obliged to compete with one another by waiving fees and offering ever-more-generous lines of credit, letting me work out for myself the consequences, the impact on lifestyle and identity that would follow at some future undefined tipping point, when it would become mathematically impossible to maintain a schedule of payments that could satisfy the accreted debt with compounded interest, even over a lifetime.
“Debt crushes the soul with its relentless pursuit of your income” – How to Think About Money” A Gem , TheTimeLord, forum topic
This then was a complicity enjoined by myself and the institutions of higher fleecing. As the product of middle-class affluence and entitlement, I lacked a commensurate education in personal finance and was a willing if unknowing victim to an economic system that is indifferent to class disparities, harboring no ill will toward anyone, yet whose excesses imperil the security of all classes except for the top .1%. (I’m mindful of the relative ease in which I effected a turnaround. The uneducated and underemployed have far greater challenges to face.)
My assets and future earnings were being siphoned off partly, as it turned out, to support corporate malfeasance, Wall Street manipulation and greed. An unattractive and potentially ruinous aspect of capitalism.
Yet, it was investing that saved me. First, by giving me a reason to want to reduce the debt I had accumulated – so I could save more, and invest more. It became fun, like a game where a certain level of skill can affect the outcome. I liked being in control, paying myself first, watching small contributions grow.
“My credit score is ridiculous in light of past history”
The rate of increase in the amount I owed began to slow a little, then after some months, stabilized, but recovery seemed like a lifeless march in the beginning. I learned to ignore the mostly bad advice proffered by the largest creditors and just kept on sending money. The first five years were tough, difficult and hard. The middle years were somewhat better—I was on automatic pilot along with my debt repayment and savings/investment plan. The credit and housing crisis of 2007 led to precipitous market declines in 2008. Though 100% invested in equities, I’d come from a darker place. I closed my eyes and continued to pay down debt while buying stock, but my net worth declined.
The last two years, in contrast, were wonderful… as decades-old debts and credit obligations fell from my budget with an increased velocity, redirection allowed additional sums to buy up investments.
I’m glad the banks now think so highly of me—my credit score is ridiculous in light of past history, and I’m flattered but no longer fooled by their solicitations.
My indentured servitude to the big banks ended not when I finally paid the balance on my last credit card; it was when I acknowledged my willingness to correct a lifetime of over- spending.
A reformed alcoholic should not hang out in bars. An individual nearly destroyed by overuse of credit cards should not carry 4 or 5 in his wallet “just in case”.
“My rainy-year fund”
For a dozen years after I agreed to reform my use of credit, I paid down the debt and, starting about the same time, commenced retirement contributions.
In mid-2015 I achieved financial independence, having paid off a mortgage, an equity loan, several personal loans, an unsecured line of credit, and 10+ credit cards/retail accounts. Somehow, I had simultaneously managed to build a small portfolio of investible assets. I call it my ‘rainy-year’ fund but it’s far more than that. With a little coaxing (and no decades-long ‘sequence of returns’ black swan) I could live modestly on its income alone. That’s far more security than enjoyed by a third of the world’s population.
“Paying myself first” is no longer mysterious, it’s what I do every day. It’s part of what I know about myself.