My Debt Story: An Introduction

This post is from April Dykman, a new GRS Staff Writer. April was a typical GRS reader who used the things we talk about to improve her financial situation. Now that she'll be writing for the site, she wanted to start by sharing some background on her financial history.

In April 2008, I got married. My in-laws graciously gifted my husband, Luis, and me with an adventurous honeymoon in Mexico, complete with scuba diving, climbing Mayan pyramids, and navigating local markets.

Once we unpacked and settled into married life, we knew it was time to get our finances in order.


Photo by Amelia Tarbet.

We had some consumer debt, and then a few months before our wedding my husband's company was bought out. He was unemployed for two months. We didn't have an emergency fund, so money saved for the wedding (paid for mostly by my parents, but we wanted to cover some expenses) paid bills instead, and with balances from wedding vendors due, we relied on credit cards.

We were anxious to be debt-free, and we accomplished that, and more, within one year. This is our story of how we used some basic principles to accomplish our goals.

Getting real
The first step on the road to recovery was to gather balance statements for every credit account to our names. That number included:

  • Credit cards ($11,200)
  • Auto loan for my vehicle ($10,000)
  • Motorcycle loan ($6,000)

Grand total: $27,200. Gulp.

I think for many people, this simple first step is scary. Maybe, like me, you piddle around, paying a little extra, cutting back here and there, and you avoid The Scary Number. Maybe you're terrified because you think you'll never manage to pay it off. Maybe you're worried that you'll have to change your lifestyle, and your friends will think you're a loser and you'll turn into a crazy cat lady and when you die no one will find your body for weeks. Whatever the fear, I suspect most people need the wake-up call. I know I did.

Getting a plan
I don't think it matters whether you pay off the lowest balance first for a psychological boost or pay off debt with the highest interest rate to satiate your logical side. What matters is having a plan. We decided to apply money toward the credit cards first, lowest to highest balance, then the vehicle loans.

I also started to track our spending in a spiral notebook.

Identify big gains
Next, we looked for ways to put big dents in our debt. The motorcycle loan was obvious. My husband rarely rode it because it made me a basket case, and it wasn't a viable work vehicle. He placed an ad on Craigslist and sold the bike, eliminating a $200 payment.

Then, in May, his truck was totaled. Thankfully, he was okay. We received an $8,000 settlement and contemplated not replacing the vehicle. More than a few people thought having only one car was asking for marital strife, but GRS readers encouraged us to give it a go. We put $4,000 toward the credit cards and saved $4,000 just in case the one-car scenario didn't work out. Today we still have one car and buying another is a low priority. It was one of the best decisions we've ever made.

By July 2008, we were down to $11,600 of debt and had $4,000 in savings.

Identify small gains
After a few months of tracking our pennies, I was able to get an idea of where our money went, and we made smaller changes such as:

  • Cutting back on eating out at lunch.
  • Downsizing my cell phone plan (I hardly use it).
  • Reducing the grocery bill—expensive specialty foods could be cut for now.

In August 2008 we made the final credit card payment.

Using windfalls wisely
In September, I received a $500 bonus and $300 from freelance work. The $800 went toward the car loan. I remember thinking that soon windfalls would go toward saving for the future, not paying for the past.

Establish an emergency fund
Our $4,000 savings was a pseudo emergency fund, but it was really money earmarked for a second vehicle should our one-car plan prove to be a disaster. But life without a second car was going well, and we were anxious to wipe out the last of the debt. We used some of the money in savings to pay off the auto loan, leaving $1,200 to establish an emergency fund. We were officially debt-free.

We immediately reallocated debt-repayment money to our emergency fund. By March 2009, we had saved three months of expenses. We were then free to save for more exciting dreams, such as building our house, travel, and retirement. We opened a targeted account for each goal, and every month we see our savings grow as we pore over floor plans or dream up our next adventure.

Lessons learned
I'm proud of how far we've come, but looking back, there are two things I'd have done differently.

  1. Live (a little). I tend to go at something full-force. After a couple of months of miserly behavior (mostly on my part), we eased up and allotted money for frivolities, creating a bit of life balance in the budget.
  2. Start with the emergency fund. First, it mitigates future risk. Maybe a tire will blow out. Maybe the A/C will break down when it's 100 degrees outside. We were simply lucky that neither happened. Second, there's a psychological component. Dan and Chip Heath, authors of Made to Stick: Why Some Ideas Survive and Others Die, make a case for the whisker goal, “a target that [is] a hairsbreadth away from the status quo.” While “stretch” goals (pay off $27,000 of debt) are great if you feel empowered, whisker goals (save $1000) are better if you feel overwhelmed. They can get you past the fear that holds you back.

It wasn't easy. While we had the benefit of a middle-class income and the luck to have no major setbacks, we also made big lifestyle changes. We were highly motivated from the day we calculated our total debt.

I think taking that first step was key for us, but what about you? If you've paid off debt or are currently doing so, what do you think are the most important actions you've taken to become debt-free?

J.D.'s note: EVERYONE wants to skip the emergency fund. I did too. We listen to people on the other side say “start with the emergency fund” and we think “meh — why do I need to?” Well, now that I'm on the other side, I wish I'd started with the emergency fund too!

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friend
friend
11 years ago

Welcome, April. It’s good to hear your inspiring story. You are a person of real determination — obvious you will succeed in whatever you put your mind to. Best of luck in the one-car scenario. We are hoping to do that, too, when I switch to a new job within walking distance of home.

Emily@Under$1000PerMonth
[email protected]$1000PerMonth
11 years ago

Thank you for not giving a blanket endorsement for debt snowballing. Some people really do get more out of knowing their money is being put to good use with the highest interest debt first.

Michael
Michael
11 years ago

I have about $18,500 worth of debt and with a 26K a year income, discipline is vital. Thats the one trait I have learned even before paying down debt due to doing my workout routine among other things – but I feel it is the most important first thing to learn before achieving long term goals.

Generation Y Investor
Generation Y Investor
11 years ago

I 100% agree with you on being a 1 car household. Cars are the most expensive thing the average person buys that loses value. If you value your finances you should do everything you can to keep transportation costs to a minimum.

-Gen Y Investor

steve weaver
steve weaver
11 years ago

The emergency fund is huge. I haven’t had one for long but the psychological boost has made me much more aware of where my money goes. I still have a lot of debt to pay off and may have to use a good chunk of my emergency fund for closing costs. If I do use it for closing costs, the income from renting out the spare bedroom should allow me to replace it in less than 3 months. Thanks for reinforcing a lesson I still need to make more concrete in my life.

Malisa
Malisa
11 years ago

Question on April’s statement and J.D.’s note about the emergency fund: Why?

-Had an emergency and needed it?
-Think it’s good to balance debt reduction with acquiring a savings habit?
-Just feels like I should have done it/wish I could say that I did it?

And are you saying you wish you had built an emergency fund of X months worth of expenses before/while you were paying off debt or just SOMETHING in savings for an emergency?

Curious.

Michael
Michael
11 years ago

Great post. Look forward to reading many more by April

Mr. Not the Jet Set
Mr. Not the Jet Set
11 years ago

Thanks for sharing, April. I thought that the notes about skipping the emergency fund and going straight to the debt reduction were interesting. Once on the radio, I heard Dave Ramsey get a question about that. He said that early on when he started financial counseling, the first step was the debt snowball. But with no credit cards and no savings, there was no safety net for anything. That’s when he knew he had to revise his plan. 2 important thoughts: 1> This journey isn’t just about math – it’s about life. It’s about behavior and people. 2> There’s a… Read more »

Adam
Adam
11 years ago

Great story. We had $7,000 on a car loan when we got married and paid it off in 6 months, then moved to a new state and bought a house 4 months later. We’ve had to put on a new roof and put in a new furnace, but we still have an emergency fund and we are working to get it much larger. I work from home and my wife works in walking distance, but we still have two cars. One car usually just sits there and only has insurance for 7500 miles a year. The multi-car discount means it… Read more »

Beth@Smart Family Tips
[email protected] Family Tips
11 years ago

Welcome, April!

I, too, tried to tackle debt first without an emergency fund and every little thing that came up, forced me deeper into debt — just because I didn’t have a cash reserve to draw from.

Creating an emergency fund was the best thing I ever did. Once it was in place, I could easily cover the $200 car repair, or whatever else it was, without added to my credit card debt and without taking away from the amount I was paying against my debt.

SF_UK
SF_UK
11 years ago

Really loved the tone of this post. Looking forward to more from April. And well done for getting rid of your debt so efficiently! On the emergency fund front – I’ve been in the position of really needing mine. Got stuck on the wrong side of the atlantic with a bankrupt airline, travel insurance (all three of them!) said “you’re not covered for airline failure” and the only flights home were business class at $3800 per person one way! No other tickets for over a week, which would have cost us the difference to the economy tickets in accomodation/food etc,… Read more »

moxie
moxie
11 years ago

Love this post! Hubby and I are in the process of paying off credit card debt, and to be honest, we COULD go a little faster. But, it’s important to us to have an emergency fund built up as well, for several reasons: A. Peace of mind for both of us. Otherwise we would both be worried and miserable. B. In these economic times, you never know what will happen as far as jobs go. If one of us were to get downsized, we don’t want to be completely crunched, especially while we’re paying off debt. C. Just this week… Read more »

Ann
Ann
11 years ago

I’m 7 semi-monthly payments from being mortgage-free and the ability to not care what other people think about my minimalist lifestyle (I don’t think I’m a minimalist; I just don’t see the appeal of hitting the mall every lunch hour) or to tune them out when they tell me I’m not normal. Meh. Who wants to be normal? As for the emergency fund, it provides peace of mind. When I had to gut it to help out the parental units, I felt like I was living life on the edge–an edge where one side was made up of spiky rock… Read more »

Melanie
Melanie
11 years ago

I think this is a great post. It’s very inspiring to hear other people’s tale of triumph when it comes to their finances. I’m debt free besides a mortgage. I’ve never had credit card debt so I feel good about that. However my sister is in a place where this kind of inspiring story may help her to realize she can turn things around, be debt free and live the best life she deserves! I will be passing this along to her. Thanks April!

lx
lx
11 years ago

I’m not sure I understand the logic of establishing an emergency fund before paying off credit card debt. Is it purely psychological? Eg. 10k cc debt. savings rate = 5k per year emergency fund starts at zero. So at the end of year 1 (simplified math) we’ll either have a 5k emergency fund, and start paying off a 11k cc debt, or have 5.75k cc debt, and have no emergency fund. without the emergency fund, net worth is higher. if a 5k medical emergency comes along, what is wrong with then charging it to your cc? you still end up… Read more »

RB @ Financial Samurai
RB @ Financial Samurai
11 years ago

Howdy April – Thanks for sharing your debt story. Do you mind also sharing the other side of the equation, your income as well? By sharing your income, you help give us perspective on how big $27,000 in debt really is. Otherwise, it’s kind of just a number. At Financial Samurai, we have a 1/10th rule where the vehicle purchase price we buy equals no more than 1/10th our yearly gross income. Hence, with $16,000 of auto loans, we come up with at least $160,000 in gross income for your two. Do you mind letting us know whether that’s in… Read more »

Kate
Kate
11 years ago

Re: the emergency fund. We’ve been both paying down debt and accumulating an emergency fund at the same time. If we focused one vs the other I suppose we could do either faster, but I feel good about attacking both.

Can somebody explain why Ramsey advocates for doing one at a time? Or is it more just about making sure that you’re giving yourself an emergency fund?

Rae
Rae
11 years ago

Great to hear your story.

And I agree with comment #2 – it’s nice to see someone else that didn’t do a blanket debt snowball.

I think that’s the biggest issue I have with Ramsey. I understand that some people need the psychological motivation of paying off the smallest debt first, but not everyone. It’s a much bigger motivator to me knowing that I’m paying it off faster, and with less interest, by tackling the high-interest rates first. (I’ve heard that called Debt Avalanche at one point?)

Sandy
Sandy
11 years ago

My husband and I are paying off debt and we initially skipped the emergency fund too. Finally, 2 months ago, we dicided we probably needed one, just in case…

Within 2 months we built a $ 1,700.00 emergency fund and sure enough… last week we had an emergency worht $ 1,100.00. I’m realy happy we decided just in time to start saving towards emergencies!

We’ll be building up the fund straight away!

Sara A.
Sara A.
11 years ago

Oh wow… there are MULTIPLE new staff writers… I thought there was only going to be one.

sunny
sunny
11 years ago

I read Dave Ramsey’s book and one thing that struck me was that when you have no emergency fund, every emergency is something that needs to be thought through and the money found. He appreciated the fact that when he had an emergency fund, he didn’t have to THINK about something. If he needed to pay a repairman $400, he merely wrote the check and didn’t THINK about it. I don’t have an emergency fund (even the first baby one of $1000 that Dave recommends) and if something happened to my paid-off car, I’d be stressed out and frantically trying… Read more »

didi
didi
11 years ago

My husband and I tackled both the emergency fund and debt at the same time. We’re consumer debt free now and have an EF in place. It feels great! I highly recommend having a fund in place. Even a small one of $500 will help when a budget is tight and things come up because they always do and then what? Use a credit card again? No thanks!
@ Ann – congrats on being nearly mortgage free! We don’t want to be normal either lol

Great post April 🙂

Andrea
Andrea
11 years ago

I think it is so important to tackle the emergency fund either first or jointly with the debt. We had a small emergency fund last year that we were building up before trying to seriously tackle our consumer debt- a good thing, too, because a few months after we started saving my husband got laid off and was out of work for 3 months. That event wiped out our small emergency savings and now that he has a job again we’re starting from scratch, but I am so, so grateful I didn’t use that money to pay off some of… Read more »

Wes
Wes
11 years ago

lx- I don’t think it is about this growth vs. that reduction. It is about having a resource to pay for “emergencies” rather than putting those costs right back on top of the cc debt you are trying to eliminate. The E-fund provides a cushion that allows you to develop and stick with a debt elimination plan with specific goals and practices. Luckily while we were paying off debt we didn’t have any emergencies come up. Our cc bills were fairly small, most of our debt was school loans. We just now got the emergency fund up and running (new… Read more »

Anthony
Anthony
11 years ago

I’ll respond directly to April’s question: “If you’ve paid off debt or are currently doing so, what do you think are the most important actions you’ve taken to become debt-free?” The BIGGEST step for me was to admit that I was in debt. Much like an alcoholic, the first (and biggest) step to recovery is admitting the truth. I’ve known that I was in debt for a while, but not until April 2008 did I admit that debt was a problem and that I needed to fix it. Once I stepped over that hurdle, I set up a quasi-budget (I… Read more »

Sarah T
Sarah T
11 years ago

April, I think you’re right on the mark that even those of us engaged in aggressively paying down debt probably need a little bit of “play money” that we can spend on little frivolities without guilt. I allocate part of the money from my second job for this. About the emergency fund: you guys, I listened to all of you. I started veeeeeeery slowly (I’m talking $10/mo, here) putting money away in a high-interest savings account, adding extra when I could, but focusing on paying down debt. And then, last month, when my car got hit while it was parked… Read more »

Debbie M
Debbie M
11 years ago

“…what do you think are the most important actions you’ve taken to become debt-free?” My lowest point was $10,000 in student loan debt plus $700 in credit card debt (I had maxed out my credit card). My most important actions were: 1) Lived very frugally my senior year so I wouldn’t have to take one of the loans in my financial aid package. 2) Lived with my parents (for free) while job hunting. 3) Stayed employed as much as possible–never quit one job without having another lined up. 4) Lived without a car for 4 years — for a while,… Read more »

Marc
Marc
11 years ago

April’s story is one that is very similar to my own. Coming off of a wedding and grad school, my household is full of worries and fears about money. I am trying to slowly work my way out of our funk and some of the steps that April took are one’s that we are considering.

It’s encouraging to hear how quickly April turned her finances around.

Thanks

Foxie@CarsxGirl
11 years ago

The Big Scary Number — Yup, I’m avoiding that for a bit… For me, it’s the total amount of student loans that I have. Ugh. I know I can look it up now, but I think it’s only going to make me more depressed since I’m still just adding to the pile at this point…

Martha
Martha
11 years ago

For those who wonder why an emergency fund is needed — what is your plan for when something unexpected arises? If it’s to pay for the emergency with a credit card, keep in mind that you will then be paying high interest on that money — AND that banks are closing credit cards left and right these days. What if they close your credit card on October 1 and on October 3 your car breaks down? That kind of thing has happened. Money in the bank means you never have to go through that panic.

Little House
Little House
11 years ago

That’s a terrific story April and very inspiring. I totally agree with you and Generation Y Investor on the one-car family thing. My husband and I also share one vehicle and when we need to go in different directions, one of use will use a bicycle (that one of us is usually me, but I love biking).

Keep up the great work!

moxie
moxie
11 years ago

The one thing that the hubby and I are doing differently than what Dave Ramsey advises is we’re handling our debt snowball a little differently. Starting out, we had two credit cards with massive debt (each pushing 30k) plus my school loans (around 7k, but on a fixed payment plan), our car debt, and a couple of balances on furniture we had financed (interest-free for the next two years). Instead of starting with the smaller furniture and school loans, we started with the lesser of the two credit cards. Because we both see the credit cards as being huge financial… Read more »

Brent
Brent
11 years ago

I’m wondering what you think about the order of paying things off when one has a LOT of debt. Due to 2 bachelors and a Masters degree (between me and my wife), we have $90K in student loans, but no other debt (except the house). Would you suggest sticking with a small emergency fund until the entire thing is paid off? What about retirement investing? It doesnt seem prudent to stop investing for retirement for the next 10 years while I pay down debt. I’m 27, w/ 10K in retirement accts, 75000 income (my wife doesnt work outside the home).… Read more »

E
E
11 years ago

Thanks April and welcome. Three cheers for the one-car family. We have only one car and I bike or use transit most of the time. For the rare times we need 2 cars I have a zipcar membership. Works great! I’m debt free except for the mortgage and a ridiculously cheap student loan. I’m working on the emergency fund, but something always comes up and cleans it out. I have yet to build up to even one month’s worth of expenses. It’s frustrating, but still better than where I was, having to put everything on the credit card. Not having… Read more »

Jason
Jason
11 years ago

I really like the emphasis on having a plan. We most closely identify with the Dave Ramsey one, but have deviated from it in few key ways. 1) We have a larger emergency fund than he advises. We don’t feel comfortable with only $1K in the bank — we have a couple kids and live in a part of the country that’s expensive to live in, so $1K can disappear pretty quickly. We selected $5K as our baseline, and this has worked out pretty well for us. We have had one emergency that required us to write a check for… Read more »

cathleen
cathleen
11 years ago

Today is officially the first day of the rest of my financial life! My husband and I were self employed for 10 years. We sold our business just as the economy was tanking. We have both worked our entire lives (we’re 46) And neither one of us could find employment for nearly two years. Never in my wildest imagination would I have believed we would not only NOT have jobs, but good jobs. But it happened to us. Well he started his new great job in June and I just received a very nice job offer today!! I am walking… Read more »

Kuhle Kitchen
Kuhle Kitchen
11 years ago

Congratulations, you guys really moved quickly and paid your debt off fast.

I like your method of having only one vehicle. I bet that more couples could get by on one vehicle than they think.

Jacque
Jacque
11 years ago

#35 Jason

I don’t think that buying term/disability insurance and setting up a will are outside of Dave Ramsey’s “baby steps” at all. In fact, he dedicates an entire session of Financial Peace University to how important it is to do both of these -especially when you have kids.

Congrats on your financial progress!

Caroline
Caroline
11 years ago

While agreeing that having an emergency fund is essential, when I first started tackling debt I was so terrible with money that the money wasn’t safe if I could get at it. Until I reached the point where money could be left in an account, it was a matter of throwing any money at the debt in order to have the money ‘gone’. I dealt with emergencies the same way I always did – with panic and credit – but I could see my debts steadily dwindling. It took a long time and constant improvements to change the way I… Read more »

Budgie
Budgie
11 years ago

Lovely wedding photo! My wedding is scheduled for October and we plan on having an outdoor wedding as well. Fingers are crossed for great weather!

RB @ Financial Samurai
RB @ Financial Samurai
11 years ago

JD – As the editor in chief, anyway you can get April to respond to our questions? 🙂 It would be much more interesting, and dynamic this way. My main inquiry is her income level during the time they had 27K in debt and whether she worked on any ratios to manage her debt.

After all, in finance, it’s all about the Debt / Equity ratio!

RB

yourfinances101
yourfinances101
11 years ago

Taking the first step is the hardest..getting a plan, to me, is a bonus. I just dove right in, and actually, by the time I decided that I needed a plan, I was almost out of debt.

Good story though!

joruva
joruva
11 years ago

@33 Brent, Student loans are something I struggle with also. Here’s what I do, which may or may not work for you. I got this plan from a number of financial books, and from talks with my accountant and Bogleheads forum. I’d appreciate any feedback as well. Since I assume you have no high interest debt (credit cards), try this order: 1. Start an emergency fund and gradually increase it 6 months. Others suggest more or less. You don’t have to “stop” 401k contributions while you’re doing this. 2. Contribute up to maximum employer match for 401k. 3. Max out… Read more »

Idea
Idea
11 years ago

Thanks for the wonderful story!
I think that crucial thing is that you and your husband agreed on doing the savings and establishing the emergency funds.
But what to do if you are the only one with such intention??? My wife is a shopaholic and does not care about debts. Every time I tried to do something about it we end up fighting and not speaking for a few days.
Has somebody resolved such situation?

mattias
mattias
11 years ago

the two most important actions i’ve taken have been to

1. keep separate bank accounts for different purposes (especially separating by debit card account from my account to which my salary comes)
2. track my expenses. this has made me concious about my spending.

Janette
Janette
11 years ago

@41- I don’t really have the need to see how much she made- it is about the process to me. My experience of debt is my brothers- but they are the kings. One makes a lot (46), the other makes hardly anything(57). Both struggle to pay the bills and borrow from our mom (79) when they have run out of money and have taxes to pay. The sisters (49,52,55) watch and made sure they are debt free. The example of what happens is what encourages us to stay debt free. Mom encourages the debtors…. Three out of the four sister’s… Read more »

Brent
Brent
11 years ago

#43 Joruva, Thanks for the plan. So you’re saying that you just put everything in order of interest rate/expected return and plug in money accordingly? So you’re just resigning yourself to paying on your student loans for 20 years? I’d like to make extra payments, but I hate the idea of decreasing my retirement investments. I also have the monthly cash flow to consider. As all of my student loans come out of forbearance, monthly cashflow is going to get tight. I’d like to find a way to pay off some of the loans so that my monthly payment is… Read more »

Sam
Sam
11 years ago

We worked a similar post marriage, merger of finances plan. We added up our debt which totaled $55,500 (half of which was Mr. Sam’s MBA student loans) and faced the music. We went with the Dave Ramsey debt snowball which worked for us as we got to pay off small debts quick, quick, quick. We tracked our finances using Quicken which helped us figure out where our money was going and helped us come up with a spending plan (our form of a budget) and we had the $55,500 paid off in just over a year. We did start with… Read more »

Kevin@OutOfYourRut
11 years ago

Using half the insurance settlement on the truck to build an emergency fund was a great idea. Even if it does cause some strife, it isn’t a permanent decision. At some point in the not to distant future, when your finances are stronger you can buy a second car, maybe a second hand one to avoid another debt.

Very inspiring post!

ryan
ryan
11 years ago

Brent (33, 45), I basically agree with what Joruva wrote. I think in your situation it’s important to realize that you’re on a good track and you’re not going to make a wrong decision here. You’re considering all the right things. I would probably need to know more of your specific details to offer any real advice. The big factor is the details of your mortgage. Also, are you happy living in that house for the next 20 years or so (size, schools)? Will your wife maybe take on part or full time employment when the children are older? Do… Read more »

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