Stanley Johnson (3 of 5)

What would it take to curb your spending habits?

We have all paid our fair share of what Dave Ramsey calls "stupid tax". Stupid tax is exactly what it sounds like; anything stupid that we do that costs us money. Examples include investing in stocks based on a tip from a homeless person, spending $50 more to qualify for the $2 shipping discount, or co-signing on a car loan for your cousin who has been unemployed since 1988. Of course, most of the time the things that lead to stupid taxes aren't as obvious as those examples. But then if they were, we'd never fall into the trap. In our case, we won't say what our particular stupid tax was, except to say that it involved credit card debt and over $8000 of money loaned out that we probably will never see again.

And so at the beginning of 2007, V and I had the following non-mortgage-related debt:

Student Loan I: $8,647.19
Student Loan II: $12,125.40
Stupid Tax: $8922.51
____________________
Debt Total: $29,695.10

Plus, if you've been keeping up with the blog, then you also know that according to our super nifty budget calculations, we are already in the hole $7000 next year. In other words, we are projected to spend 7 grand more than we make next year, and thats after we include the sale of the flip property. [Sidenote: I previously blogged it as $10K shortfall for next year; but I found a couple of mistakes in the 2008 budget that knocked it down from 10 grand to 7]. Combining the four categories, that all adds up to a $36,695 hole that we are trying to shovel our way out of sooner than later. So now that we have an accurate figure to post on the refrigerator, the question is, what are we going to do about it?

The Stupid Tax
Well, at some point earlier this year V just got fed up with the stupid tax thing and decided to pay it off. The debt was in our name after all, and by waiting on someone else to pay it we were essentially sitting on naive optimism and hindering no one's financial future but our own. And so we had to take responsibility for our own mistakes. And with that she started what I have to admit was mostly a single-handed crusade to crush the stupid tax so that we could move forward. To do so, she forfeited about 90% her personal "blow money", tutored on the side ($30 an hour adds up), stripped all types of pseudo-necessities from the equation (bye bye hair salon) and in general sacrificed a whole lot over the past 8 months. In all I have to say that I admire her for the determination she exhibited in order to make it happen. As for where it led us, more on that in a bit.

50% of college graduates have student loans, with an
average loan debt of $10,000. The average cost of college is also
increasing at twice the rate of inflation, which means
that the situation is only bound to get worse.

The Get-Smart Tax
Student loans are a funny thing. When considering debt totals, I think most people (me included) tend to overlook student loans and I guess it's for two reasons. For one, we don't have the same level of guilt associated with them as we do with "typical consumer debt" like car payments or credit card bills. Instead we view them as a necessary evil and excuse them as the price we must pay to get ahead. And secondly, they tend to be at a much lower rate than other owed accounts, so they seem so much more harmless. However, this is where V had to check me because evidently I had gotten pretty comfortable and cozy with our student loans. [Are you starting to see who the real no-nonsense financial tyrant is in this house? And people thought it was me]. She came to me one day and flat-out said, "You know, you seem pretty content with just paying the minimum and having these student loans around forever."

Ouch.

Like a lot of people probably do, I thought I was doing pretty good already since we didn't have any consumer debt, paid all of our our bills on time, and was at least making a little progress towards a retirement fund. But she checked me on that, and by her example she convinced me to join the crusade she had started earlier in the year to get rid of all of our debt and get things moving a lot faster. As I talked about earlier, it started with her desire to finally pay off the stupid tax... but it spread like wildfire as she started to ask more and more "innocent questions"... all the while keeping a steady eye on our student loans and spending habits. Once I saw her commitment to this getting-out-of-debt crusade, I finally started to catch on and about a year later (okay, so I'm slow) here I am, finally on board.

Financial Lab Rats
So with both "taxes" in mind, we conducted a little experiment this past month. For the entire month of November, we pledged not to buy anything that was not necessary. And necessity is a funny thing because over time the line between what we want and what we need becomes so blurred that most of us truly lose scope of the difference. And so for a month we refocused our spending radars, dined out less, put a few more desires on hold, and only put things in our shopping cart that we honestly needed to survive to the next month.

As I mentioned in a previous entry, our annual budget is an Excel spreadsheet that is "broken down on a month-by-month basis and includes just about every expenditure you can think of... From big stuff like our mortgage payments, grocery bills, salaries, emergency car funds and estimated water bills... down to our newspaper subscription, Christmas budget, and ink pens for grading midterm papers." And so at the end of each month, we are able to sit down and see how our ending point compares with whatever the projection was. Usually we are within a couple hundred dollars of the target; sometimes under and sometimes over depending on what curve balls we got thrown that month.

But at the end of this experimental month we were both baffled. We were under by more than $700 and couldn't figure out where that money came from. Granted, the number is probably a little inflated since we also held off on a few household inevitables... but it is still hard to believe that as disciplined as we (think we?) are, we still spend so much money on "stuff" that we can obviously live without. While November could have been a total anomaly, it still gave us an idea of how many holes we might have in our budget... Places where hard-earned money is still seeping through the cracks and getting away from us. Long story short, the experiment was an eye opener as to how much room we still have for improvement and what we can acheive by paying a little more attention to where our dollars go.

As for the mystery money, we took every dollar of it and made our first ever "above the minimum" payment on the student loans. In hindsight, it's kind of sad that we've just been paying the minimum for this long, but hopefully it will be the first of many "extra payments" to come.

So where are we now? Over the past 8 months we've paid off over $5000 of the stupid tax and have about $3200 to go. With just the usual monthly payments plus the extra payment, the student loan totals are down to about $6500 and $11400. But those should also start dropping now that we're becoming more deliberate about how we spend our money. Combining that with the shortfall for 2008, that leaves us with about $28,100 to go. Still a huge amount... but it ain't $36,695. Nobody said it would happen overnight.

But once it's done...

Well, one step at a time. For now, here are two other steps that we are taking in the right direction, and one final illustration about being deliberate with your money...

[To Be Continued]