It has now been about three weeks since we have gone into “hibernation mode” with our finances. So far, we have done well with keeping within our emergency budget and things are looking up for the rest of the year. Many people get into financial difficulties because they buy too many luxury items on credit. Our problems stemmed from our home renovations, most of which, to date, HAD to be done.
Home renovators are a separate breed from the shop-o-holics who spend their money to buy stuff. For most of us, our home is our largest single investment, and our largest single debt. Any substantial work we do on our house tends to cost a lot of money, and any work that is not done properly will cost us a LOT MORE money down the road. And renovations are not something we can sell at a garage sale when we find ourselves in too deep.
How we got into this mess
We knew that the roof had to be re-shingled when we bought the house and we kept out a decent amount of equity from the sale of our previous house to cover that and other expenses. However, the cost of the roof ended up being twice as much as we expected it to be. Soon after moving in, we realized the house did not have adequate cooling and we reluctantly went into debt to finance the installation of central air conditioning. Therefore, we went into debt to finance the air conditioning, which we had installed around the same time.
During the installation of the air conditioning we discovered the problems with the insulation that led me to gut our entire second floor. When winter rolled around, our heating bill soared, putting us further in the hole.
It was a vicious cycle. Our heating bill was high because we had no insulation. And we couldn’t afford insulation, in part, because our heating bill was so high.
One time expenses add up
A one-time expense of hiring a contractor to completely finish upstairs for us made a lot of sense even though it meant more debt. However, our definitions of “completely finish” differed somewhat and we parted ways leaving a lot of work for me to complete. He was the one who pointed out that the plumbing for our hot water heat was inadequate which led us to call a specialist for an estimate.
As it turned out, our hot water heating system was a mess and required a complete overhaul. We went to the extra expense to separate the system into multiple zones. We are able to justify that cost because zoning will make it a much more efficient system and should save us on our heating bills in the future, as well as ensure our long-term comfort in this house and help with its resale value.
Add to these costs the financing for a second vehicle (once my wife went back to work) and activity expenses for a child who is getting involved in various sports and activities and suddenly paying down debts has become much more difficult than in the past.
How we are getting out of this mess
We are comfortable carrying a certain amount of debt, but we are way over that threshold right now. To get things under control, these are the steps we are taking:
Plan for Christmas.
We usually “wing it” around Christmas and we do tend to be overly generous. This year we have an exact budget, including travel expenses, and we are setting aside money on a weekly basis to cover it. I don’t want any nasty surprises come January.
Plan for other major expenses in the next few months.
Our car and house insurance all come due at the same time, at the end of October. Right now, any spare cash is going into a fund to cover the insurance costs. once we pay for this year, we will make a regular weekly contribution to the fund. Inevitably, every year, we forget about the insurance until it is due, and we usually pay for it by credit card. No more.
The grocery budget.
We have reversed our priorities. Before, we would get our groceries and then use any leftover money from paying our regular bills to service our debts. Now, we make regular payments to our debts and have a strict grocery budget. Any extra money left over goes to the debts. All of our meals are planned for the week, so there is less temptation to get meals out. We only dine at the finest establishments– you know, the ones with the drive-thrus, so cooking in every day will also be healthier.
Eat cheap.
Cutting our grocery bill in half, on average, is a challenge, especially with a five year old, but for the last three weeks, we have been pretty successful. These are the strategies that are working for us.
- Pasta: It’s cheap. It’s easy. And a big batch will last for two meals. Variety may be the spice of life, but leftovers are easy on the budget. And it’s easy to mix in some veggies.
- Plan each meal. My mother used to do it quite a bit. You could tell what day of the week it was by what was on the table. Predictable may be boring, but it eliminates the need to make decisions at dinner time. Before, when faced with a decision, we would often choose another option: take out.
- Grocery list. Having a specific list for groceries reduces impulse buying.
- Weekly trip to the grocery store. We hate grocery shopping and would only get groceries when we needed them. If we ran out of food, we would get take-out until we had the time to shop for groceries. Now, we schedule a weekly trip to the grocery store.
- Consider cost per serving. We used to “treat” ourselves to relatively expensive foods. Now we choose less expensive items or items that provide for multiple meals.
- Awareness of the food on hand. By taking inventory of the contents of our pantry and freezer we avoid unnecessarily buying something we already have.
- Avoiding the sale frenzy. We always had a tendency to stock up on sale items. However, we also had a tendency to eat more if we had more on hand. We would spend more to take advantage of a sale, but the food didn’t last any longer and we got fatter. Solution: just buy what we need for that week.
Obviously, the biggest step on our road back to financial well-being is controlling our grocery budget. For us, our groceries represent the greatest discretionary spending in our household. By keeping a lid on our grocery bill, we will have more money to pay down our debts.
Prioritize
Right now, all other spending is on hold until we can cover our insurance, which is due at the end of October. Presently, we are setting aside at least a couple hundred per week for that.
After we make the payment, we will be setting aside a fraction of that amount each week to cover next year’s insurance. The extra money left over will go towards the installation of the bamboo flooring upstairs.
Once that is paid off, a greater amount will be put on the rest of the debts, and I will budget a certain amount of money each week to cover the other costs upstairs, such as trim and doors.
We wanted our daughter in her own room by September. That’s not going to happen. The last thing I want to do at this point is to add more debt as tempting as it is.
Other debt reduction strategies.
When I say we have credit card debts, I should point out that we have extremely low rate credit cards. One is a zero percent introductory rate for 15 months. The other is a guaranteed rate that is now less than prime. Once the introductory period is up, we will transfer the balance to a low rate line of credit and cancel the card. And I will certainly entertain any other low rate introductory offers. Juggling credit card debts is not usually a good way to get out of debt, but low rate cards offer some relief. Just keep a couple of things in mind should you choose to go this route:
Robbing Peter to pay Paul
- Read the small print. Watch out for administration fees and other hidden expenses on low rate cards.
- Don’t carry too many credit cards at once. Having too much available credit can hurt your credit rating. Once the introductory rate is up and the balance is transferred elsewhere, cancel the card. **
- Don’t use the card(s) you are using to service your debts for any other purchases. If you regularly charge certain expenses that you pay off each month, keep them on a separate card and pay it off each month.
- In fact, avoid using credit cards altogether. Pay cash whenever possible. Make a budget and stick to it.
- Keep a running total of your entire debt. It is easy to lose sight of just how much debt you are in if you are just looking at individual credit cards totals.
So far, these strategies are working for us. We will revisit our budget after Christmas, but for now, we are on track. Plus, by postponing certain renovations until we can afford them, it buys me more time to finish things that we already have the supplies for on hand.
**Update July 2016
There is some conflicting information regarding how your credit rating is calculated. According to Clark Howard, your rating is based on the ratio of your debt to your available credit. Therefore, the more available credit you have, the better. On the other hand, I was always told that your debt to income ratio was more important. Therefore having too much available credit is bad because if you max it out, you throw that ratio off. At one time, we had over $100,000 in available credit. If we ever got that far in debt, it would be virtually impossible to dig our way out. So we keep our available credit as low as possible while maintaining a sufficient cushion in case of emergency.