Monday, February 18, 2008

How We Got Into Debt

About a month ago, a commenter asked me how we managed to accumulate all this debt. It's not a surprising question, and I've been meaning to discuss it for a while now. I've been procrastinating for a few reasons, the biggest of which is that it's pretty embarrassing. I am ashamed of how we managed to go $38,000 in the red. There was no medical crisis, or house fire or tragedy that we borrowed money to cover. We just made a series of poor decisions. A series of very poor decisions.

We bought our first house in April of 2005. This in itself was not a mistake; however, we made too many assumptions when we purchased the house. We primarily considered the cost of the mortgage and not all the other costs associated with home ownership. Even with that, we would have been just fine.

In May 2005 we got engaged and began planning our wedding. We made a budget for the wedding based on how much money we could put towards it every month until the following summer, when we were to be wed. In June 2005, we bought a new car. Not new-to-us, brand spankin' new. With the car payment, we were still ahead and making more than we spent.

So what pushed us over the edge? In July 2005, I quit my job to work for a small business as their sales and marketing director. It was a commission based position. If I didn't make any sales, I didn't get paid. Unfortunately, I didn't have any sales experience, so I didn't make a lot of money. My income dropped by about 75%. All of a sudden, we didn't make enough money to pay our bills.

That alone wouldn't have been devastating - if we had made adjustments to allow for the lower income. But we continued living our old lifestyle, going out to eat, vacationing, buying needless things. We went away twice in less than a year - both trips piggybacked on business trips, but there were, of course, plenty of expenses incurred. We only sent the minimums to the credit cards and incurred a variety of late fees and over limit charges. The interest rates skyrocketed t 29.99%.

In October 2005, we attempted to minimize the damage by transferring some of the debt to a zero percent card. Within 2 months we were back up to the limit, as well as using the zero percent card. We had bills being automatically paid by the credit cards: cable, internet, gym fees, tolls. Every month was a decision of which bill would be paid late, as we never had enough to pay them all on time.

On top of our every day expenses was the wedding. While we stayed within our original budget, we by no means had any savings to draw upon. We didn't go all out, but there were plenty of places where we could have spent less money. We even took out an additional loan of $10,000 just for the wedding - which later blew up in our face.

When we returned from getting married, I found a new job almost instantly (I had been looking for a few months) and we turned a new leaf. Our rock bottom debt was in October 2006: $38,440. Since then we have paid off $26,000 and wiped out 8 separate debts (and added one). I cannot wait to erase the remaining 3 credit cards from our life!


Sharon said...

Congratulations on your progress so far! And it is absolutely AMAZING that you realized this in your 20's. You have a VERY bright future, for sure!!!

Anonymous said...

I was the poster who asked you the question a month ago, because I too am a 20-something newlywed in a tightening financial situation. From the stats I've seen, for what they're worth, the typical 20-something is carrying about $20,000 worth of non-mortgage debt by the time he/she graduates college, and because the typical starting salary is closer to $30,000 on average, a lot of folks end up in the red for a while. Not that being typical is any comfort, haha, but after getting beat up a little, the best place we can be is in a position of discipline and understanding. Thanks for the story, and best of luck!

gonna_make_it said...

I give you props for realizing your mistakes before you dug yourself too deep. $38K is a LOT of money but it is still manageable. I know, I owe $50K and am making it work. Should be debt free in 2.5 years. :)

tracyho said...

Great post ,

Wish you all the best

Tracy ho

JvW said...

sharon - I am so happy to have figured this all out now and be able to set us up nicely for the rest of our lives. That's the plan, anyway!

anon - Thanks for pushing me to answer the tough questions. :) Discipline and understanding, from casual observance, isn't all that typical for our age group, so you and me might just be ahead of the game.

gmi - I checked out your blog and see that your $50K includes SL. Believe me, my SL numbers are waaaaay higher than $50K, so your 2.5 year plan sounds amazing!

tracyho - Thank you!

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