Twenty years ago I was a freshman in college. I was a poor kid from a poor family, but my roommates came from wealth. In order to fit in, I went out and picked up a department store credit card. I bought some new clothes, an electric shaver, and a bottle of cologne. From that day on, I’ve been in debt.

Getting hooked
My debt grew slowly at first. The department store credit card had a $500 limit. I knew that I shouldn’t come close to the limit, and that I should pay the card off, but within a year I’d maxed it out and was only making minimum payments.

By the time I graduated from college in 1991, I had acquired two additional credit cards. I was glad I had them, too — when my job plans fell through, the credit cards became my emergency fund. I lived off them for months. I also bought a brand-new Geo Storm. Within six months of graduating from college, I was unemployed and carrying $20,000 in debt.

Deeper in debt
To escape impending disaster, I went to work for my father, something I had vowed never to do. During the 1990s, I was the salesman for my family’s box factory. My debt declined a little when I began to bring in a steady paycheck. But I wasn’t out of the woods yet. I began to spend more and more. By the middle of the decade, my debt had crept up to $25,000.

When my father died in 1995, I received a small life insurance settlement. To my credit, I applied this money to debt, and for a few years my balances declined. But then I returned to my profligate ways, buying a new car, buying computers, buying any toy I wanted. By 2004, I had accumulated over $35,000 in debt.

Turning things around
During the summer of 2004, Kris and I bought a new house. It was the home of our dreams: a century-old farmhouse on half an acre close to Portland. It seemed expensive, but the bank said we could afford it, so we leapt at the chance. Things became problematic, however, when we were forced to spend several thousand dollars making unexpected repairs. (Old houses are like that.)

I began to feel overwhelmed. I was drowning in debt, and the expenses were flooding in. I had been living paycheck-to-paycheck for more than a decade, merely staying afloat as the water slowly rose around me. Now I felt myself sinking below the surface — I’d reached the end of my credit and the end of my cash. Fortunately, a couple of friends threw me life preservers.

First, my friend Michael recommended that I read Your Money or Your Life by Joe Dominguez and Vicki Robin. Then another friend suggested Dave Ramsey’s The Total Money Makeover. When I read these books, something clicked. I saw the light. I went to the public library and borrowed more personal finance books. I devoured them. They motivated me to action.

The method to my madness
Using the ideas I learned from personal finance books, I set out to eliminate my debt. I stumbled at first — I made plenty of mistakes. But eventually I developed a system that worked:

  1. I set goals. I can’t stick to a budget to save my life, so I developed what I call a spending plan. Like a budget “lite”, this tool simply gives me a rough idea of my income and expenses so that I can determine where best to put my money. It’s like a roadmap to my money, and it has helped me reach my goals.
  2. I read everything I could find. I continued to read personal finance books of all sorts. I learned that even the worst books generally contained a piece of advice I could use. I developed the ability to extract the stuff I could use from a book and to discard the rest. I subscribed to personal finance magazines. I read personal finance web sites.
  3. I tracked every penny I spent. I never realized how easy it was for me to overspend simply because I didn’t keep track of my money. I’d kept rough records in Quicken before, but now I became precise. By paying close attention, I was able to spot weaknesses and correct them.
  4. I attacked my debt. Following Ramsey’s advice, I started a debt snowball. I lined up my debts from lowest balance to highest, and repaid them in that order. Though this didn’t yield mathematically optimal results, it gave me quick victories. I knocked off several debts within just a few months — the psychological boost was amazing. It kept me in the game.
  5. I cut my expenses. I began to look for ways to live frugally. I didn’t cut everything, and I didn’t cut a lot of things at once. But gradually I winnowed out the little things I didn’t need. I looked for ways to save money, to get things for less. These small savings made a real difference to my bottom line. And I started adding to my savings account.
  6. I pursued extra income. I began to sell stuff on eBay and at garage sales and on Craigslist. I liked the idea of making money online, so I started a web site about comic books. As an afterthought, I started a site about personal finance. Eighteen months later, the comic book site is defunct and the personal finance site has become my vocation.
  7. I tried not to get discouraged. And when I did get discouraged, I didn’t let myself sink into despair. In the past, any mistake would have led to a sort of cascade failure. If I blew money on comics, it would make me feel guilty, would have caused me to buy more comics. I learned to simply accept my mistakes and move on, re-focusing on my financial goals.

It took a lot of time and effort, but these actions have finally paid off. Today I wrote a check for the last of my consumer debt. I am now debt-free, except for my mortgage. I’ve been walking around in a happy little haze all day long. To celebrate, I bought carne asada at my favorite little hole-in-the-wall Mexican joint.

Getting rich slowly
Now that I’ve eliminated my debt, it’s time to shift my focus from the past to the future. Thanks to great advice from GRS readers, I’ve been preparing to live debt-free. If you read this site regularly, you already know my plans for building wealth:

  1. I will quit my day job to write. Beginning in January, I’ll begin the transition from box salesman to full-time writer. This is scary, but it’s also a chance for me to pursue my dreams.
  2. I will create a budget. I can hardly believe I’m writing this. For years, budgets have seemed like a waste of time to me. But my income will soon move from a regular, known quantity to something less predictable. I need a budget to keep me focused.
  3. I will build my emergency fund. I’ve accumulated $1,000 right now, and that’s helped me weather some small storms. But the move to full-time writer is going to require a larger safety cushion. Over the next year, I want to save at least $10,000. Ultimately, I’d like to have a twelve-month cushion in a high-yield savings account. Excessive? Perhaps. But it’ll help me sleep easier at night.
  4. I will continue to fund my retirement account. The Roth IRA contribution limit increases to $5,000 in 2008. I aim to make the maximum contribution.
  5. Kris and I will strive to repay our mortgage early. Though we’re aware of the drawbacks to prepaying our mortgage, it’s something we both want to do. We sat down tonight and drafted a plan, which I’ll share in the near future. Basically, we’ll make an extra payment to the principal every month, effectively halving the life of the loan.
  6. I will automate my financial life. Over the past few months, I’ve erected a paperless personal finance system. I’ve signed up for automatic bill pay and paperless billing at the cable company, the phone company, and the gas company. I’ve scheduled automatic transfers to my ING Direct savings account. I’ve scheduled automatic investments to my Roth IRA at Sharebuilder. I’m not able to completely automate things, but I’ve done what I can.
  7. I will use a cash rewards credit card for regular expenses. I know that many GRS readers oppose credit card use of any sort, and I don’t blame you. I know the dangers first-hand. But I believe I’ve mastered the damn things, and I’m finally ready to make them work for me. My card gives me 1% cash back, so I use it to pay for all my utilities and for other planned expenses. (I don’t use it for unplanned expenses.)

Over the past few months, I’ve been building this system one piece at a time, testing each component to find weak spots. It’s sure to undergo changes in the future, but for now these are the actions that work for me. They fit with my way of life, and they will allow me to pursue my dreams.

Tying up loose ends
I’ve eliminated my non-mortgage debt. I’ve paid all my bills through the end of the year. I’ve boosted my personal emergency fund back to $1,000. I have a plan to fully fund my 2007 Roth IRA by early January. There’s $250 in my MINI Cooper fund, and $250 in my vacation fund. All I have left to do is my Christmas shopping. And to write some more articles for Get Rich Slowly!

Addendum: Big congrats to my friend Leo at Zen Habits. He just got out of debt, too, but his achievement also includes paying off his mortgage. Rock on!

This article is about Debt, Planning, Real-Life, Savings