You know that already, I started a fight with my consumer debt back in… 2012. We will all agree that I lost the first round (2012) when I failed to go drop under 300K of debt. In 2013, I used a similar technique… and got similar results.
Einstein defined madness by doing the same thing over and over and expecting different results. I guess that there is always a little bit of madness in each of us!
But towards the end of 2013, I started to get very sick of seeing so many debts on my balance sheet and began to look around to find a solution. I sat down for hours looking at both columns; revenues vs expenses, and found out the solution wasn’t in the latter.
When I decided to pay off my debts back in 2012, I did what made sense: I created a sound budget. I thought by looking carefully at how cash was flying out of my wallet, I would control my personal finances and my debt would drop. It didn’t happen in 2012 and the same result happened in 2013. I was very good at finding excuses:
#1 The addition of central A/C
#2 The addition of a pool
#3 Car repair$
#5 etc, etc, etc,
But I ignored the most important part of my budget during this exercise: my sources of income. I’ll go back to this point later on in this post but I want to finish about how to do create an effective budget first.
Making a good budget doesn’t require a fancy online app where you get 3D graphs in multiple colors. All you need is a pen and a piece of paper (or an excel spreadsheet if you don’t feel like using an old fashioned calculator!). I’ve made a list of all monthly expenses and classify them into three simple categories:
What I can’t do anything about: mortgage, taxes, electricity bill (you can’t cut that forever), healthcare (mainly products for kids), savings (pay yourself first!), gasoline.
What I can reduce: food, restaurant, wine, car payment, insurance, etc.
What I can waive: car expenses.
At that time, there was only one expense I could completely waive without affecting my lifestyle too much: sell my second car. I didn’t have a car payment on my RX-8 but it was costing insurance, gas and car maintenance bills on a monthly basis. By selling my old car, I was getting rid of a few hundred each month.
Then, I attacked what I can reduce. I actually sold my two cars to replace them with a new one back in September 2013. It has increased my total debt but my monthly payments were greatly reduced. Since my car value drops as fast as my new car loan, it had no effect on my net worth; only on my budget. I’ve slowed down on wine and cut out restaurants. I went to my own limit of my lifestyle.
After cleaning up my budget and reducing expenses, the numbers still didn’t work perfectly yet. I faced a dilemma: I had to either cut back on lifestyle or find another solution. I consider that I’ve worked too hard when I was younger to give away on my current lifestyle. I love the way I live and don’t want to sell my house, miss going on vacation or reduce my children’s activities. This brings me back to finding another solution.
For several years, I was able to both increase my lifestyle and not increase my debt level. It just happened recently when I’ve lost control over my personal finance temporarily. My first reflex was to cut down on my expenses and try to manage my budget tightly. This was a mistake.
In fact, a few years ago, I accepted a new position at work. It was a promotion but also a long term move where I could make more money… but only in the future. Since I had to start a new book of clients from scratch, in the beginning bonuses would be smaller than in my previous career. This is exactly what happened in 2012 and 2013. On top of making less from my day job, I also started to make less from my online company. Back in 2010 and 2011, I was withdrawing some good amounts to support my lifestyle and enjoy life. In 2012, Google slapped us big time and we had to reconsider our business model.
While the business is now back on its feet, it wasn’t the right time to withdraw company money for leisure. So back in 2012, the issue I ran into was not a spending problem, it was an income problem.
The key with your personal finance lies within your ability to make money, not to reduce expenses. I can appreciate my “new” strategy as we are now making more money since September 2013 with the opening of a daycare at home. On top of this, the company is now generating more income and we can also benefit from it.
I saw the positive impact instantly on our budget as months are easier to get by and I see my debts reducing each month now. I don’t have to wait for a bonus or a tax refund to apply a lump sum payment on my debts.
That’s right! This year, I will get rid of 15K of consumer debts and go on two vacations! We will have a couple’s vacation and a family vacation! Both can be done because we are making more money than ever.
So I won’t have to sell my house or get rid of my new car and will continue to live the way I want. On top of this, my debts are going down and I’ll be ready for more investments no later than 2015!
The morale of my story is simple: focus on your ability to make more money and you will pay down your debts. You can spend hours to reduce your expenses, do things by yourself to save a few bucks and burn yourself out in a miserable frugal life. Or, you can live the life you want, enjoy all the good things while making the money to pay for it. I’m done fighting with my budget. It’s time to make some more money now!Google+
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