EDIT: during the three years that we’ve been paying off this debt, the highest total before-tax income we ever had was $56,765 for the two of us together. That was in 2006, and was considerably higher than the previous two years. We paid off the debt by being frugal, not by earning big bucks.
This week I’ll be sending $500 to Discover Card. That will bring our total balance down to $518. Three digits! Whoo hoo! When that is gone, we’ll only have our mortgage debt. We have recurring monthly expenses for our business, but they’re paid from our business account before our paychecks are written. So as far as our personal finances go, as of August we will be free of non-mortgage debt. That is an amazingly wonderful feeling. Now that it’s so close, I felt like sharing what our situation was three years ago. We were a couple years into the self-employment thing (just over a year for me, 2.5 years for my husband), and we were sinking further into debt every month. These days, we have separate accounts for our business, and a business credit card. We’re incorporated, so legally our business and all it’s financial processes are seperate from our personal finances. But back then, we just had our personal credit cards that we used for business expenses, and our business checks just went into our personal bank account. We didn’t get a business loan – instead we just put business expenses on lines of credit in our own names. With a little luck and a lot of hard work, everything worked out and here we are.
At the time, I was stressing huge about our debt situation. I had never been in debt in my life, and I was feeling overwhelmed. So I sat down one day in November 2004 and made a list of all our debts. Here’s what it looked like:
- Insurance agency we had been working for…… $10,410
- multimedia business card company:…………. $7,423
- Discover Card…………………………………………… $3,700
- Wells Fargo Visa………………………………………. $3,200
- CitiBank…………………………………………………… $5,365
- MBNA……………………………………………………… $1,483
- Capital One (dental)…………………………………. $900
- my parents………………………………………………. $900
GRAND TOTAL = $33,381. And this was after we had been digging out for a couple months. My best estimate is that at the peak of our debt (summer 2004), we were at nearly $40,000. So what were these expenses? The huge $10k debt at the top of the list was because we didn’t know what the insurance industry was all about when we got into it. We started working with an agency that offered advances when we sold policies (pretty typical of big agencies). So we would sell a policy, and the insurance company would pay the agency one month at a time, as the client paid premiums. But the agency would give us 10 months of commission up front. Then it would get paid back as the client paid premiums over the next ten month. Plus interest. And if the client cancelled the policy before 10 months? Oops. And then there were the leads. Because of a misunderstanding, we thought that we were getting free leads based on our sales volume. Turns out we were just getting the right to BUY leads ($10 a pop) when we sold a certain number of policies. Once we figured all this out, we realized we would be much better on our own, and set out to grow our own agency (with more than $10,000 owed to the agency). That was in early 2004, and that was when the debt started piling up, because now we were just getting our commissions as they were paid, one month at a time. We had no money, but at least we weren’t going further into debt to an insurance agency. Instead, we went into debt to everyone else.
The multimedia business cards was another bummmer. We signed up when they were an awesome product. It cost us $12,000, but the product was going to be great (it was an interactive DVD for our clients). Then, midway through the production of our order, the company nearly went belly-up. They managed to come back from the brink, but it took almost a year for our order to ship, and it was nothing like what had been promised originally. We were hugely disappointed, but what could we do? We read all the stuff about legal action against the company, but from what we were seeing, it would have cost more than our $12k to do anything about the situation, so we just had to pay up (the debt was owed to a third party, who made sure that all the screwed-over clients knew that not paying was not an option). And we did get a product that was somewhat useful (just not $12k worth). We’ve been sending them to select clients ever since, so it wasn’t a total waste. By November of 2004, we had paid that debt down to $7500.
My parents. When the multimedia business card company was going broke, they made us an offer that we couldn’t refuse (this was before we knew about their troubles). They said that if we paid $1800 by a certain date, they would cancel out $3000 worth of debt. Sweet, but we didn’t have $1800. So we asked my parents if they would lend it to us. They did, and it was the only interest free loan we had at the time. But it was the one that weighed on us the most, and it was the first one we paid in full. As of March 2005, we had paid back my parents.
Capital One. Dental expenses for my husband. As of the fall of 2004, he had only had the first part of the treatment he would eventually need to replace his bridge. The debt to Capital One went up to $3950 in June 2005 (after getting down to $300). This was the only debt on my chart that ever went the wrong way (until our tax fiasco last spring), but it had to happen. Luckily we got a zero-percent deal from Capital One, and since we paid the whole thing off in 12 months, we never paid any interest on the teeth. Good thing, cause the whole dental thing sucked enough as it was – paying interest would have made it even worse.
Wells Fargo, Discover, CitiBank, and MBNA were all credit cards. When we started getting into debt, we took advantage of zero-precent offers from cards my husband and I had when we were in college. We hadn’t been using those cards since we had gotten married and opened a joint credit card, but they came in handy during our debt period. We shuffled balances and tried to take advantage of the lowest rates we could get. We never missed a payment, and we never forgot about an end of an intro period. So through all this mess, our credit ratings never faltered. The balances on those four cards were about half business expenses (computer, postage, office supplies, gas – we had to drive to meet our clients back then – and all the other stuff we spent on our business) and half living expenses that we charged because we weren’t making enough money to pay more than the mortgage and utilities some months.
Just by writing down all the balances, and making neat columns across the page with the coming months labeled at the top, I found some calm amid the money turmoil. Each time I paid a bill, I would record the new balance in my notebook. When I got to the edge of that first page, it was July 2005, and our total debt was down to $20,301. By the end of the second page, it was February 2006, and our total was at $5241. Then we suffered a pretty big setback when I did our taxes that spring. We had made a lot more money in 2005 than we had in 2004, and we owed the tax man $7000 in addition to what we had paid in estimated payments. So for two months we lived off our credit cards and everything we earned went into an account to pay our taxes. It was April 11 when we had enough in our account to pay our taxes that year. We did it, but it set our debt repayment back by several months. It taught me some very valuable tax lessons though, and in 2006 we incorporated our business, which gives us some tax advantages over being strictly self-employed. Never again will I be blindsided by taxes, so I guess it was a good thing in the long run.
I don’t think I’ll ever throw away the three sheets of yellow legal paper that show our month by month struggle to dig ourselves out of debt. There were so many times that I would sit and stare at those pages, looking back over where we had been and looking forward to the day that all the boxes would say zero. Now we’re almost there. We didn’t do anything earthshattering to get out of debt. Selling my ring was about the most far out thing we did, and that was long after most of the debt was gone. We just did all the tried and true, not-so-sexy ways of being frugal. We ate at home. We didn’t go to movies or concerts. We only bought second-hand clothes. We didn’t upgrade our cars (a 1991 Honda and a 1990 Oldsmobile). The list goes on an on, but there are no big secrets or earth shattering revelations. We just didn’t spend money unless it was really necessary. And looking back over the last three years, we’ve had a lot of fun. We didn’t live a life of misery just because we were living poor.
So that’s our whole story. If you’re on your own debt journey, I wish you well. And I’m grateful to all my fellow bloggers who have shared their stories. Now on to the mortgage debt…