Wednesday, February 6, 2008

Going from "Yeah, right" to "All right!"

A couple of posts yesterday really got me thinking about where I am in my "financial recovery". Trent wrote that a very inspirational post detailing the bad place he found himself in a couple of years ago, and the steps he took to get to where he is today. JD wrote about the experience of developing positive cash flow. Both of these really hit home for me, as they underscore the changes in behaviour and outlook that have helped me improve my financial picture over the last several months.

I've been in debt for a long time. Maybe not as long as some, but long enough that I had more or less forgotten what it felt like to be debt-free. Over the past five years, I've searched for advice and motivation on getting myself in better financial shape, but never really found any traction. The advice I read then was the same as what I read today:
  • Spend less than you earn

  • Pay yourself first

  • Have an Emergency Fund

  • Pay off high-interest debt

  • Save for retirement
When I used to read these tips, however, I would tend to scoff at the suggestions. "Sure," I would say, "it would be great to have an Emergency Fund of 6 months' expenses, but how am I supposed to get there when I'm barely making minimum payments on my credit cards?" I would then dismiss the advice, and more often than not, go out and buy myself something to make myself feel better.

As my income (and thus the denominator in my debt ratios) grew over the years, I was able to get an unsecured line of credit to help with my cash flow. By using my line of credit to "pay off" my credit cards, I stopped paying interest on my credit cards. As a result, I no longer looked at my credit card spending as revolving debt, and didn't realize that I was still digging a hole, just with a different shovel. My total revolving debt continued to grow.

Finally, last April, I found myself with a $1,500 tax bill, a car needing a $900 timing belt, a line of credit rapidly closing in on its credit limit, and no savings. At this point, I finally realized that something needed to change.

Fortunately, I had been reading a few personal finance blogs, particularly The Simple Dollar, and had some ideas for where to start. I opened an online savings account at ING Direct, and started throwing money into it. My goal was to build this up to a $1,000 Emergency Fund, as a starting point for something bigger. At the same time, I drew a line in the sand, saying that all my existing revolving debt was "old debt" to be paid off, and that I would budget to avoid taking on "new debt". Basically, I accepted that my current situation pretty much sucked, and decided that any improvement had to be better than the way I was living.

Over the next few months, I started to see these improvements. Suddenly I had money in a savings account that was still there at the end of the month. My revolving debt started to go down consistently every month. Within six months, I had built my $1,000 Emergency Fund, and knocked down my debt by 10%.

For the first time in years, my cash flow each month was positive. Granted, most of this "positive" flow reduces my debts rather than growing my savings, but the net effect is the same.

I still have a long way to go before I say a final goodbye to my revolving debt, but I know how I'm going to get there, and I'm starting to get a sense for what a debt-free life will be like.

It looks good, and it's all because I took that first small step.

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