Joel’s note: this is a guest post from Tony Standin.
Getting into debt was like a long night of drinking.
I knew there would be consequences to pay later, but the more I consumed, the less I worried about them.
After my debt bomb and spending binge, filing for bankruptcy was the worst hangover of my life. The experience was even more humbling than waiting in line at the grocery store with my change jar to use the coin-counting machine so that I could buy food.
As you’ll see, getting my debts discharged was just the beginning of reviving my chronically ill personal finances.
Looking Beyond the Debt Bomb
A big reason for my bankruptcy was that my income to expenses ratio was too low. In other words, I was living well beyond my means.
Sure, part of that was overspending. But a larger part was that I just wasn’t earning enough money to fund my lifestyle.
Of course, bankruptcy didn’t exactly wipe the slate clean; because filing for bankruptcy in the United States does not wipe away student loan debt.
My bankruptcy repaired some of the consequences of my debt bomb, but it didn’t solve the root cause of the problem. I had to rebuild my credit and make some major lifestyle changes so that I didn’t end up with financial meltdown deja vu.
Changing my relationship with money was the big challenge.
Reevaluating My Spending Habits
For one month, I kept receipts from every purchase I made and put the details of my spending in a spreadsheet.
It was tedious and often annoying, but it taught me a lot about my spending habits. It was only after I finally figured out where my “money sinkholes” were that I could start working on a budget.
Side note: I recommend that anyone having trouble managing their money track their spending for at least a month to see where their money sinkholes are.
But I needed more than a simple list of income and expenses.
When creating my budget, I set limits for the common purchases like gas, clothing, and food, as well as the infrequent things. I made a date with debt by planning for known future expenses instead of scrambling to pay my bills at the last minute like before.
Another big change was that I had to force myself to stick to my budget category limits.
If it didn’t fit into the budget, no buying it. Period.
In retrospect, the power of this one simple, mindful habit could have probably prevented my bankruptcy in the first place.
The next step was to attack my income to expense ratio to make more wriggle-room in my budget. And since I couldn’t increase my income, I cut expenses.
Maybe some steps in my thinking and process could work for you. Steps like:
- The car swap: I traded my beloved, gas guzzling SUV in for a much more modest and affordable compact car. While I didn’t do anything fancy like go for a hybrid, I did see some significant savings like $40-$60 / week in gas (I do a lot of driving). And my car insurance went down almost $400 / year.
- The new roommate: My housing costs were more than I could afford on my own. But since I couldn’t afford to move, I found a roommate who helped cover 50% of the rent and part of the utility bills. My roommate wasn’t nearly as frugal as I was with his habits of always leaving the lights on, air conditioning running when not home, TVs always on, etc. So we compared the utility bills before and after he moved in and came to a fair compromise. However, he was poor at keeping the house clean, which turned into a bit of a nightmare. That meant we arranged for a weekly cleaning service – and added expense – but it didn’t bust the budget because I was still saving so much on rent and other utilities.
- Reassessing food: Eating out became a rare treat and couponing became my new best friend. While cooking my own meals and packing lunches for work took more effort (but less overall time), it cut the money I spent on food in half compared to my old ways. After a while, I actually began to enjoy my time cooking and I didn’t miss eating out at all. Even more so, I loved the fact that I was developing a cushion in my bank account and not living paycheck-to-paycheck any more.
Starting Over (with Credit)
I started to wonder if I could trust myself again with credit cards after all these big, positive changes.
I didn’t want an eternally poor credit score, but I also didn’t want to fall back into the bad habits of overspending. After I felt like I was in a good place financially, I got a small credit limit secured credit card and only made purchases that I knew I could pay.
It was tempting to take my new credit card and splurge after my long frugal period, but I successfully resisted the urge. Leaving the card at home unless I was traveling a distance and might need it for an emergency helped.
If I really wanted to charge something (especially online), I followed common advice to make a list and see if I still wanted that thing in a week or month.
(Most of the time, I didn’t.)
I also had to learn to reassess wants versus needs. I also made sure to set aside the money in my bank account – just as if I had paid cash – so that it was there when the bill came due.
After a while, my credit limit was raised, my credit scores went up, and I was able to qualify for an unsecured card with a better interest rate.
The Light at the End of the Tunnel
The best part was that once I started being more responsible with money, I stayed that way.
Despite all the work it took to get there, I was much happier once I learned how to stick to what I could afford.
It feels fantastic knowing that the money is there when a bill comes in the mail.
But to reiterate, filing bankruptcy is not a cure-all solution.
Diffusing the debt bomb only provides temporary relief, unless you learn how to permanently – and properly – manage your money.
Don’t fall into the traps I did. But if you’ve fallen into personal finance quicksand and there’s a debt bomb waiting to detonate, take a page or two out of my book if it will help.
Tony Standin is a personal finance specialist with a passion for helping people live fulfilling financial lives. He hopes to use his personal experiences to show others that it is possible to recover from financial difficulty and move forward in life. Join him on Twitter @TonyStandin.