How a Drop in Income Turned Out to Be a Good Thing

Over the last few months, my husband and I have lost some income.  Not a little drop in income.  About 20 to 25% of our monthly income.  And let me tell you, we weren’t earning more than the median income for a family of five to begin with.

Our budget was already tight, so when the drop in income happened a few months ago, I’ll admit, I panicked a bit.  I felt a little bit desperate.  I’m sure those of you who’ve been in a similar situation know the feeling.

And then I took a deep breath, and told myself we’d be alright.  And we are alright.  We’re actually better than alright.

Taking Stock of the Positive

The first thing I did, after I calmed down a bit, was to look at the positive side.  We had already paid off half of our debt, so we don’t have several debts to pay monthly.  We’re only left with one student loan payment every month, so that is a relief.  (When we started our debt repayment over two years ago, we had five monthly debt repayments that totaled almost $1,000 a month.  Now, we only need to pay $315 a month.)

drop in income a good thingSecondly, we’re used to living on a tight budget because we’ve been doing so as we try to pay down debt.  Our income drop, though not slight, was not going to throw us into a completely different style of living that we weren’t accustomed to.  I’m used to buying my clothes second hand.  I’m used to cooking all of our meals from scratch and not going out to eat.  The only adjustment we had to make was buckling down even more.

Why Our Income Drop Turned Out to Be a Good Thing

While our budget is lean, we still had some fat there.  We subscribe to Netflix for both streaming movies and DVD home delivery.  After the income drop, I decided the home delivery at $11.99 a month could go.  I had been thinking this for awhile, but I was afraid we’d miss the service.  Guess what?  We don’t.  I can borrow most of the movies for free from the library.

In addition, I think much more carefully about purchases now.  Buying something on a whim is no longer a possibility.  I have to think carefully before making a purchase, which has made me realize I don’t need many of the things I’ve been thinking of buying.

I also took other frugal steps that I’d been to lazy to take previously.  I had always read that making your own laundry detergent can be a big money saver.  A year ago, I bought all the supplies that I needed, but I never got around to making it.  Well, I finally did a few weeks ago, and it works great.  Sometimes it takes circumstances to prod me into changes I should have made a long time ago.

Of course, we don’t want to live with such a tight budget indefinitely.  But now I know that there are many cost cutting measures I’ve implemented that aren’t difficult.  When we make more money, that just means I’ll have room for greater savings and paying off that last student loan.

Have you ever experienced a tight budget?  If so, did you find it to be a good thing as I have?

How Your Confidence Affects Your Finances, Part Two

For part one of this series, go here.

In our earlier post, we talked about how debt can seem insurmountable to some, as documented in the movie, Maxed Out. Unfortunately, some people feel their debt is so overwhelming that they take their own lives. That includes a college student who owed $12,000. While $12,000 is not a small sum, it’s not worth taking your life.

Debt and Your Self Worth

Our culture recognizes that many people identify their worth by their jobs. When we meet someone new and tell them what we do for a living, we say, “I am a teacher” or “I am an engineer.” We literally take on the identity of the job that we do.

What is not discussed is that we often measure our worth by our debt, also. If you’re in debt and struggling to make your monthly payments, it’s easy to feel worthless and hopeless. When my husband and I finally faced our nearly $57,000 in credit card and student loan debt, I felt embarrassed and stupid. After all, how did I let myself get in this position?

Your Thoughts Can Determine How Quickly You Can Get Out of Debt

Keep Calm Payoff Debt 2You may begin your debt pay off journey as I did–chiding myself and feeling like it was hopeless. How would I pay off this debt that was greater than our annual income? The whole process felt hopeless, and I wanted to give up before I even started.

But through our two year long journey thus far, I learned some things that make paying off debt easier.

  1. Be confident. When I stopped chiding myself and instead decided to encourage myself, the weight caused by debt was lifted. Instead of thinking, “I’m so stupid for being in this much debt,” I thought, “We’ve made mistakes financially, but now we’re on the right path. We’re making strides in our debt repayment plan, and eventually we’ll be out of debt.” This encouraging self-talk increased my confidence and reduced my anxiety. I felt empowered.
  2. Look at the little picture. Sometimes looking at the big picture–the total debt that you owe–can be overwhelming. Instead, focus on the smallest debt. If you put your extra money on the smallest debt, you’ll see progress more quickly. If you owe $60,000 but your smallest debt is $5,000, focus only on that one. Don’t look at your total debt load. You’ll feel elated as you watch your progress paying down the smallest debt.
  3. Celebrate small victories. Encourage yourself every step of the way. Praise yourself when you’re able to pay more off in a month than you typically can pay. Celebrate when you pay off one debt. Shout in your house that the debt is gone. Share it with your friends if they know of your debt struggle.

If you’re in debt, you can either hurt yourself mentally and physically by berating yourself and wallowing in self-pity. Or, you can heal yourself mentally and physically by praising and encouraging yourself through the long journey of paying down debt. Which would you rather do?

How do you encourage yourself when paying down debt?

January Financial Reset

You’ve had your fun.  You spent the holidays with your loved ones, did some frugal gift giving (right?), and probably ate way more than you should have.  But, the new year is upon us, and it’s time to get back to business.  It’s time for a January financial reset.

With tax season right around the corner, there’s no better time to get all your financial books from the last year in order, take a good look at the balance sheet, and decide on the directions you’re going to take your finances in the coming year.  For some of you, that will mean finally getting a handle on your debt.  For others, it will mean finally paying off your debt.  And for more of you, it will mean finding the best ways to make your money work for you as you build your net worth and make strides towards financial independence.

For those in that last group of people, this post isn’t likely to help much, but you might want to take a peek at my Lending Club page for a great way to keep your money working for you.  The rest of you, stick around.

Reformulate your debt

January Financial ResetIf you’ve still got debt hanging around, a new year financial reset is a great time to investigate reformulating it. What the heck does that mean?  It means taking a good look at the debt that you’re carrying, and considering the options you may have to pay it off earlier.

  • Reduce the rates: The worst feature of credit card debt is the interest rate that they like to charge.  12%, 15%, 22%, or more.  The interest payments eat into any payment you make on the debt quickly, and make it that much harder to make any meaningful progress.  If’ you’ve got good credit, consider finding some good 0% balance transfer cards to transfer your existing balances to.  You should be able to find something with a 12 to 15 month 0% rate.  Be aware of the balance transfer fee when you do this, but otherwise it can be a good way to help you make some good progress on your credit card debt repayment.
  • Refinance: In some cases (mostly secured debt) you may want to look into a refinance of the loan.  If you can reduce the rate on a loan and extend the length of it, it can free up some of your debt repayment money to go towards loans with higher rates and speed up your debt snowball.

Recalculate your debt snowball

Now is also a really good time to update all the numbers on your debt snowball plan.  (or debt avalanche if you’re so inclined) Unless you’ve been keeping it updated throughout the year, the numbers are probably pretty out of date, and need to be freshened.  Take the time, while you’re doing this, to determine if you need to move one debt ahead of another, or if you can afford to increase the snowball payment to speed it up.

Seed your budget

Your budget can be the lifeline for your financial life.  It’s a blueprint for how you’re building your financial house.  Even a simple budget can help tremendously, and the beginning of the year is a great time to give your budget a full inspection (or just to start one) and make sure that it’s got all the categories you need, that it’s still balancing, and for planning out where you’re going to focus your efforts in the new year.

Examine your bills

We all get bills throughout the month.  In many cases, we throw them in a pile, then enter them into bill pay, (or, gasp, write checks) and then forget about them until they show up the next month.  While you’re going through your finances from the previous year, pay attention to the bills that you’re paying.  Are there bills that have increased?  How about ones that you meant to cancel the service but didn’t?  Or maybe there are some that you just haven’t called to try and get a better rate for?  Know what time it is?  You guessed it.  It’s time to cancel that service. It’s time to call and see why the rate increased, and if there’s a change you can make to get a better rate.  It’s time to compare your services with their competitors and see if there isn’t a better rate/service available out there.  You may think it’s a waste, but you could end up saving hundreds a month.  And that can quickly make your debt snowball grow!

Keep on your financial path

Here’s the most important thing you have to take away from this post.  You’ve got to keep on that path.  Once you’ve done the things above, you’ve taken some really solid steps on your path to being debt free, but they’ll only work if you keep working with them.  Keep that budget going, keep a close eye on your bills, keep your snowball updated, and know how much debt (and at what rate) you have left.  Whether your debt feels like a mountain, or just a molehill, knowing the what/when/where of it make the climb that much easier.

Will you take the time to do a January Financial Reset?