J.D.'s note: Last week's talk by Vicki Robin was hosted by the School of Financial Freedom, a Portland-based organization I'm friendly with. At that talk, I met Naomi Veak, one of the school's coaches. She and I have a lot in common (grew up poor in small towns, attended the same college, etc.). I asked if she'd share her story with Get Rich Slowly readers. She agreed.
Have you ever thought how different your life could have been if you’d taken someone’s advice? What if I told you it may not be too late?
I recently rediscovered a letter my mother wrote to me when I was 19, attending a small liberal arts college in another state.
Towards the end of the letter, she told me to save it, so I did -- even though reading it left me angry and frustrated, and not a single word sunk in. You see, she was giving me financial advice after another tear-filled plea for money.
“Don’t expect your thinking to change overnight,” she wrote. “Give yourself time to feel the inward peace of mind that will eventually come.”
This “inward peace of mind” took me 25 years to achieve! How did I finally get there? My name is Naomi Veak, and this is my story.
A Poor Girl at a Rich School
I was a poor girl at a rich kid school.
It was a school I couldn’t afford, and I was surrounded by lifestyles I was ashamed that I couldn’t pay for.
This was only the beginning of a long struggle with finances, where the same money scripts -- unconscious beliefs about money that drive our behavior -- played themselves out again and again. (For more about this idea, see J.D.'s article about how your money blueprint shapes your world.)
I wanted money. I just couldn’t hold onto it.
Shortly after college, I became homeless. One friend after another was put to the test when I crashed on their couch for too long.
A year later, my boyfriend and I were living out of his truck on the cold and rainy Oregon coast. I remember sitting in the cab, crying as I counted our last handful of change. He later wrote about stealing a sandwich to split with me in a short essay he titled “Desperation and a BLT”.
Overwhelmed by credit card debt, I made an appointment at a debt settlement company to help me get things under control...only to continue charging to the same account a couple of months later.
Then my student loan debt doubled when I returned to school for another degree.
Last night, as I do from time to time, I met with a GRS reader. Actually, Debbie doesn't read this site but her sister does. And Debbie means to. Although I met Debbie's sister last year at a Camp FI event, I'd never met Debbie before.
"So, what's your situation?" I asked after our waiter had brought us each a glass of wine. "What do you want to know about money?"
"Everything," Debbie said, laughing. "I feel like I don't know much at all right now. I guess deep down, I know what I need to do. I just don't do it."
I nodded. "I'm like that with fitness," I said. "I know what I need to do, but I just don't do it. I know I need to exercise. I know I need to stretch. I know I need to eat better food. But for a lot of people -- people like you and me -- there's a barrier between knowledge and action. It doesn't matter if we know how to do the right thing. It's the action that matters."
"I buy books about money but I never read them," Debbie said. "I have Dave Ramsey and The Millionaire Next Door."
"Those are both good books," I said. Then, I shifted gears.
Looking for Purpose
"This might seem odd, but let's talk about your goals. What do you want out of life? What are your big plans?" Our waiter brought Debbie a bowl of mussels and me a plate of pasta.
"I want to make the world a better place," Debbie said. "I'm young. I work for a huge multi-national company. But I don't believe in the company and I don't believe in my work. I get paid $20 an hour to bring people coffee and water all day. I have a bartending gig on weekends. I want to do something that matters. Maybe improve our food system, for instance. I hate how people eat. I want more people to have better access to high-quality food."
"That sounds like a noble goal," I said. "How do you get there from where you are now?"
"I don't know," Debbie said. "It seems impossible. I have $80,000 in student loans but they're in deferral. I don't have to pay anything on them, but they still accumulate $600 in interest every month. How can I ever hope to catch up?"
"Yeah, that's rough," I said. "I used to be in a similar position. Twenty years ago, I had over $35,000 in credit card and consumer debt. That's not the same as your $80,000, but it'd probably be equivalent to about $50,000 today. I carried that debt for a long time, just treading water, never getting ahead. I felt like I'd never get it paid off."
"But you did it?"
"I did," I said. "I did it by creating a gap between my earning and spending. Fundamentally, there are only two things you can do to improve your situation. You can make more money or you can spend less. Ideally, you'd do both. You want as wide a gap as possible between what you earn and what you spend. Right now, it sounds as if you don't have a gap. You have a deficit."
Debbie nodded. I slurped down some noodles.
Two Familiar Foes
"How much is your rent?" I asked.
She looked sheepish. "I pay $1200 for an apartment in northeast Portland," she said. She gave an address near where I lived after my divorce. "I know I should have roommates but I don't. I don't want the complications."
"And what's your take-home pay?"
"Just over $2000 per month," Debbie said.
"Yeah, your rent is pretty high," I said. "I mean, it's not high compared to other places in Portland -- it seems about average -- but it's high compared to your income. Nearly 60% of what you earn is going to housing. That's a lot! The average American spends about one-third of their take-home pay on housing. So, that's a great place to try to cut costs. Maybe not right now, but over the long term."
"I like where I live," Debbie said, prying open a mussel.
"You might want to consider roommates," I said. "Aside from your housing costs, it doesn't sound like the rest of your spending is outrageous. Honestly, if I were you, I'd try to find ways to boost your income. Especially since you hate your job."
"I know," Debbie said. "I've thought about that. I have a marketing degree that I'm not using. My current company offered to give me a raise and a promotion, but I turned it down. I would have been doing work that I hate even more. It would be difficult for me to be in a position where I had to represent a company I don't like."
"Why don't you quit?" I asked.
"I did once," she said. "But then I went back right away. I was scared to apply for new work. I don't have much self-confidence. I mean, I'm 31 and have a marketing degree, but I don't have any experience. Who would hire me?"
"I get the lack of self-confidence," I said. "I totally get it. I struggle with that every day."
"You do?" Debbie said. She seemed surprised.
"Yes," I said. "Every day. Even today, I've been dragging around with my head full of negative self-talk. But here's the thing: I've learned to just do the stuff that scares me anyhow."
My friend Amy recently wrote with an interesting dilemma. "Should I pay off my mortgage early?" she wonders.
Amy has a high-paying job and has managed to save enough that she could be completely debt-free if she wanted to. And she kind of wants to! But is this the best choice? She's aware that this is a nice problem to have — but it's still a bit of a muddle. She'd like some guidance.
Here's an abridged version of her email:
I'm wondering if you have any advice for me related to paying off a mortgage vs. keeping it for tax purposes.
Here’s the basic rundown: I have 22 years and $103,000 left on a 30-year fixed-rate mortgage at 3.95%. My monthly payment is $668 per month. I will pay about $48000 in interest this year. I pay both my taxes and insurance out of pocket annually.
The past two years, I've made close to a quarter of a million dollars each year, and this year I will likely exceed that amount. This is a wonderful place to be. With no other debt, I'm contemplating whether I should completely pay off my mortgage in one swoop come November when I get my bonus.
I have advice coming from both sides. My accountant warns me against it, as I would have no other write-offs to offset my high income. However the freedom of being DEBT FREE sounds amazing, even if it comes with a high tax bill.
I would love your advice (or the advice of your readers, if this offers an opportunity to share with them).
My stock answer to this question -- which I get a lot -- has always been: This is a no-lose situation. Deciding whether you should pay off your house is a case where either option is awesome.
Mathematically (and financially), the best choice is almost always to carry the mortgage. However, many people receive a huge psychological boost from not having a mortgage. In other words, this is one of those situations where the smart financial decision and the smart psychological decision aren't necessarily the same.
Although Amy is asking specifically about the tax implications, let's start by examining the Big Picture.
The Pros and Cons to Paying Off Your Mortgage
Just so everyone is on the same page, here's a quick look at the pros and cons to paying off your mortgage. There are advantages and disadvantages to both choices. Are certain advantages more important than others? You make the call.
I am not a trained financial expert. I'm not an accountant, I'm not a financial planner, and I'm not a stock broker. What's more, I've made many many money mistakes on my own financial journey. As a result, I've always been reluctant to sit down with people and go over their budgets.
That seems to be changing.
In March, I spent a couple of hours talking with a friend about her financial situation. A few days ago, another friend asked if I'd be willing to meet with him in the near future to puzzle through his budget woes. And yesterday, I took three hours to chat about money with my friends Wally and Jodie.
As always, I've changed names and certain identifying features in the story that follows. Unless I have explicit permission to share details, I do my best to protect people's privacy when I write about their intimate financial lives.
Wally and Jodie have recently begun dating. He's in his early forties (and recently divorced); she's in her late twenties. They both work in food service, and have done so all of their lives.
Their trouble -- and the reason they asked me for help -- is that they cannot seem to make ends meet. They work hard but never have anything to show for it. In fact, they feel like they're falling further and further behind.
"Can you help us?" Wally and Jodie asked.
"I can try," I said. "Let's look at your numbers."
This is a guest post from Travis Hornsby, founder of Student Loan Planner. I met Travis last year and realized he knows a lot about something that's a blind spot for me. I asked him if he'd be willing to whip up an article for GRS readers about refinancing student loans. Here it is!
How would you like spending $4000 each year and have nothing to show for it? Sounds crazy, right? Yet that's exactly what happens when you find yourself buried in debt -- whether it's credit-card debt or student loans.
Let me give you an example.
To conclude "back to basics" month at Get Rich Slowly, today we're going to explore an important concept, one that's new to most people. Today, I want to talk about building a wealth snowball.
After nearly twelve years of writing about money, I've gone from not knowing anything to having some very strong opinions.
I now believe know, for instance, that the single most important thing you can do to improve your financial situation is also the most elementary: Increase the gap between your earning and spending.
This guest post from Marissa -- a local woman I learned about last November -- is part of the "money stories" feature at Get Rich Slowly. Some stories contain general advice; others are examples of how a GRS reader achieved financial success -- or failure. These stories feature folks from all stages of financial maturity. Today, Marissa (a.k.a. The Budgeting Wife) shares what she and her husband have decided to do after paying off $87,000 in debt.
Does life change after becoming debt-free? Yes! The freedom that you get from being debt-free is amazing, life-changing, and encouraging for the future.
But does your lifestyle have to change after becoming debt-free? Not necessarily. Here's my story.
As part of back to basics month, let's use today to explore how you can get out of debt without gimmicks or games.
After twelve years of reading and writing about money, I've come to believe that debt reduction ought to be a side effect and not a goal. Getting out of debt is a target, not a habit. And, as we've been discussing recently, good goals are built around actions instead of numbers. If you restructure your life so that you're spending less than you earn, you will get out of debt. It's a natural side effect.
Having said that, I realize that a lot of GRS readers are struggling to get to square one. Getting out of debt is their goal and primary obsession. That's okay.
Before you can begin repaying your debt, you must be earning a profit. Unless your income exceeds your expenses, your debt is actually increasing. If you’re continuing to add debt, or if you’re only able to make minimum payments, you must first find ways to spend less and earn more until you have a positive "saving rate". (Both businesses and people earn profits. But when individuals earn a personal profit, we call it "savings".)
After you're earning a personal profit, you can (and should) make debt elimination a priority.
I'm an optimistic guy. I believe that most people are basically good. So far, life has proved me correct.
That said, I'm not naive. I know there are still plenty of scumbags out there -- and that many of these scumbags prey on the unsuspecting in order to line their pockets with profit.
The Trouble with Phantom Debt
Recently, for instance, Kim has been receiving phone calls from a company purporting to be collecting a debt owed to the Internal Revenue Service. Kim knows she doesn't owe the IRS anything. She's always paid her taxes in full. This company is attempting to coerce her into paying on what is known as a phantom debt -- a debt she does not owe.
Dave Ramsey sometimes takes a lot of heat. His assumptions on investing are, well, questionable. Plus, there are people who take issue with his version of the debt snowball, which focuses on repaying low balances first instead of high interest rates.
I don't listen to Ramsey's radio show, but I took the time to view this 73-minute video clip featuring the top 10 calls from 2017.