I had always been actively interested in money for as long as I could remember. I was good at giving financial advice to relatives and friends, but when it came to my money, I was terrible at it. "Irrational exuberance" is a good descriptive for my relationship with money. I went from the die broke mentality to, I need to save mentality, back to die broke mentality, to I really need to save now mentality. Unfortunately, it took me several iterations, jeopardizing my career, and ruining my credit rating to learn all of this again.
I knew what the fundamentals were, but just didn't apply them. I racked up credit card debt like no tomorrow, but it was never over extending what I could afford. I was naive in both credit as well as how much credit I could get. The first time around, I was naive in how much credit I could get, so the damage was recoverable to the tune of $30k in unsecured debt. I consolidated and paid the debt off quickly, but without applying the fundamentals that would carry me over post-debt. I focused on debt repayment rather than saving and repaying, so when I was debt-free, I started to spend again.
The second time around, I spent and spent again; however, I was no longer naive in getting more credit. I was able to get lots and lots of unsecured credit as well as secured credit in the form of a car loan. At the same time, I did not save much, and what I did save, was in volatile stocks that I was not familiar with nor did I do research on. I managed to manage the debt, because I sold the remainder of what I had in stocks, while at the same time taking on more debt. When the dust settled, I was faced with $70k in unsecured debt, my car's engine had exploded while I still owed $20k on the car. The bank charged-off the car and it was included back into the unsecured debt which resulted in a new total of nearly $90k all unsecured. At that time, my credit had taken a major hit because of the charge off of the car, so there wasn't much more I could do to damage my credit rating. I let several payments lapse in an attempt to negotiate better rates and a repayment plan with creditors. Being in the hole with no wiggle room and no ability to walk away from one credit to another, no creditor would budge unless I either went through a credit counseling agency or filed bankrupcy. I chose the former.
I think it was being at the bottom facing losing my job and having all the debt, and then struggling to get creditors to accept repayment terms that really got me to apply the fundamentals that I had avoided all my life. My wife and I were living in two separate locations at the time, so we kept our pay separate. Her salary went towards her retirement savings and regular savings along with her living expenses with her salary. My salary went toward repaying the debt and towards some savings. I applied a combination of debt snowballing and paying the highest interest. I paid off a couple debts that were $2k or less first, although they may have had lower interest rates, then applied those payments towards higher balances with higher interest rates. All the while, I maintained an emergency fund, and invested some in 401k. I think it is very important to establish your debt repayment along with your savings plan at the same time even if you are in debt, so when you our out of debt you will have the fundamentals already in place. It is very easy to shift debt repayment money toward increasing savings, but when you have no savings plan in place, you are sitting on all that money burning a hole in your account with no direction.
I repaid everything in 3 years, 3 years ahead of the plan the credit counselor agency had established. It has taken us another three years to save $120k in savings, because for half of the time my wife was not working. We are debt free. We make a combined $155k now and live on about 10% of our after tax income while saving the rest. We are in our earlier 30s and definitely behind the power curve, but considering we are managing to save between 80-90% of our income, we are making it up quickly. I think the reason this time was different, was because I really did struggle through the debt. Having an emergency (the car blowing up) without an emergency fund and no way of funding it other than taking a charge off, taught me a valuable lesson in having an emergency fund. You cannot always get credit or use credit to pay for an emergency. When you are in an emergency, the last thing you should be doing is taking on more debt to pay for the emergency. Although not optimal in terms of cost effectiveness, I put money aside to establish my savings plan while repaying all the debt. You have to establish both and have a focus on the bigger picture, rather than just a myopic view of paying off the debt. Savings will offset some of the interest, but I feel it is more important to set up your bigger financial picture in the long run. The first time around, I did not do this, and post-debt, I wasn't focused on saving. Being stubborn or whatever, I knew that my credit would be dinged for 7 years due to the charge off. My wife has excellent credit, so it was very important for us to preserve that and to keep it separate until my debt was paid off. Moreover, putting all her money towards maxing out her retirement savings contributed to the overall financial plan for our family. Now we also faced having to pay two rents and living expenses since living for two years in different cities, too.
We also have roughly $1.6 million in private company shares that we cannot liquidate yet. So although on paper we had over a million in the bank, it wasn't accessible to repay the $90k in debt. This was probably a good thing, because I definitely wouldn't have learned my lesson if it had been easy to repay debt again. Although from the point that we have $1.6million in addition to the $120k in the bank, we live and save based off of our salaries. We also plan our short, mid and long term goals based off of our salaries. So when I say we are behind, we really are behind in terms of our age and how much we should have saved. Most of our salary is tax free for a couple of years. This has the added benefit of us being able to save 90% of our salary since we live overseas and our cost of living is very low. Our goal is to save another $80k by next Spring, when we will return to the states and no longer have tax exempt pay. At that time, we still plan on saving 100% of my wife's after tax pay and 70% of my pay. We will wait until 2009 at the earliest to think about buying a house, because at the end of 2008, the charge off is removed from my credit report.