I remember those first months of our financial turnaround so clearly.
It was honestly a pretty exciting time. We had this ongoing sense that our finances were in serious trouble – the kind of serious that would leave us without the kind of future we wanted and could even do serious damage to our present through repossession or something similar. We were on thin financial ice and we were scrambling to get to something thicker and more secure before that ice cracked.
We did many of the typical things that people do in that situation. We sold off a lot of things in our closets and on our bookshelves. We became big time sellers on eBay. We ate everything we could at home and made lots of very cheap meals.
And, eventually, things started to turn around for us. We caught up on all of our bills. We paid off one credit card, then another. Eventually, after several months, we paid off our car loans, too.
Up to that point, our motivation had been in the form of the financial hounds nipping at our heels. Gradually, though, those hounds that were chasing us disappeared. We managed to escape them.
Of course, at that point, we were left in a difficult spot. Without our very powerful motivator – the sense of immediate financial failure just around the bend – what was our motivation to keep doing these things?
We weren’t blind. We could clearly see that our day-to-day spending choices were helping our finances to get better. However, we were still in more or less the same situation we were in when we started. We were still young adults with reasonably well-paying jobs. We were still working at the same jobs and saw the same co-workers who would share the same water cooler talk with us. We still had many of the same friends.
In other words, the temptation to revert right back into our old bad financial habits was pretty strong. The call to snap right back into those old habits and routines was very strong. Those patterns were familiar and they came with a lot of day-to-day pleasures.
Honestly, those months right after our initial financial rush were the hardest months of all.
Yet, somehow, even after a few missteps, we persevered. We ended up sticking with our new path and, within a little more than a year, we had become debt free. Within two years, I was able to switch careers into a path I had always dreamed of. At around that same time, we bought a house and dropped a nice down payment on it. About three years after all of that, we paid off that house in full. Today, about four years later, we’re rocketing along a path to extremely early retirement.
There was a point where we really had a choice. We could either revert back to old patterns and keep simply struggling to keep our head above water. Or we could firm up our new patterns, stick with them, and achieve all of those things we listed over the course of a little less than a decade.
How did we choose the new patterns? What did we do that allowed us to overcome the temptations of the old routines and stick to the new ones?
I’d point to five key factors. By making sure to achieve these things in our lives, we managed to stay on a better financial path and begin to achieve our dreams, things that would have simply been out of reach without good financial choices.
Factor #1 – We Built New Friendships
Before our financial turnaround, I went out very regularly with a group of young professionals in my field. They formed a big part of my social circle. The only catch was that most of the conversation and activities of that group were expensive. We went out for drinks and meals that weren’t cheap. We bought lots of gadgets and nice clothes. We went golfing, too, which was really not cheap.
When we realized we needed to make some changes, I checked out of that group. I started spending my evenings at home and begged off of a lot of that group’s activities.
Of course, when our finances started to turn around, I was really tempted to go back to that group and I actually went out with them a time or two, but I found that I felt fairly uncomfortable with their spending habits and conversations when I did so.
Still, I could have very easily slipped right back in that group. What kept me from doing so were new friendships and relationships.
During our really lean period, I started to get more involved with community events. I joined a few groups because they seemed interesting (and, of course, they were free) and I met a bunch of interesting people because of those events. I also started to rebuild a couple of friendships with old friends who now lived in the area.
These new relationships were largely with people who made much better financial choices. Our time spent together were focused on doing things, not buying things. We went to community events. We went hiking and bike riding together. We had potluck dinners. We played board games on rainy days and winter weekends.
In the end, we chose to stick with our new friends rather than our old ones. Today, most of my social circle comes from a few old friends from college (all of which have their houses and student loans completely paid off in their mid-thirties) and people from a few free community groups.
Those people are naturally frugal. We do things together that are inherently low cost, like potluck dinners and board game days. We go to free community events and meetings. We share a ton of ideas for saving money. We often give each other good coupons or share bulk purchases. We help each other with small things, particularly when there’s travel involved.
As Jim Rohn puts it, “You are the average of the five people you spend the most time with.” It was true when my social circle consisted of a bunch of big spenders. It’s true now that my social circle is decidedly more frugal.
We put effort into building a new social network, filled with people who were smart with their money and encouraging of our good financial choices, and broke free of our old network.
Factor #2 – We Set a Strong Budget with a “Splurge” Allowance
During the early stages of our financial turnaround, we didn’t really formalize a budget. We tried to do it a few times, but it never really “clicked” for us.
Instead, we made progress against our debts by simply spending as little as possible, selling off a few possessions, and throwing every spare dollar we could against those debts.
And it worked. Many of our debts just melted away. Credit card debts. Car loans. Student loans. They went away.
Of course, that change had the great benefit of actually reducing the bills that were coming in. We didn’t have those minimum monthly payments any more. We found we had more financial breathing room than we had for a long time.
And with that breathing room came the return of temptations.
We’re people. We have things that we want. For us, it tends to be things like books, kitchen gear, games, home brewing equipment, and other such items.
Once our financial panic was contained, those temptations came back to the forefront. We hadn’t really spent much money on anything “fun” for months and so the temptations were strong.
We splurged. And then we kind of regretted it.
We didn’t really regret our purchases so much. Because we hadn’t splurged in months, the splurges were on things that we really, really wanted and enjoyed greatly.
What we didn’t like was the negative impact those splurges had on our finances. We were now much more aware of the impact of those splurges.
So, what was our solution to this conflict? The solution came from budgeting.
We essentially made our first “real” budget based on our actual spending. We used receipts and credit card statements to make a model of how we actually spent and then set targets that were based on reality for each spending area.
What we realized is that we could easily fit in a budget item for each of us for hobbies and splurges. This allowed us both to have a certain amount of money we could spend freely each month without having to worry about it having a negative impact on our overall finances.
This is something that we still use. Both Sarah and I have a certain amount we can spend each month without question from each other. We’ve both become quite good at managing our own splurge money, so when we see each other spending, we don’t really question it at all. I do a lot of trading and bargain hunting and online selling to bolster my own splurge money, while Sarah doesn’t really worry about it and sticks to her own budgetary portion. It works for both of us.
I initially just used Excel for budgeting, using my own homemade spreadsheet. Eventually, however, I moved to You Need a Budget to handle all of this, and it works great.
Factor #3 – We Tried Lots of New Hobbies
Before our financial turnaround, many of my hobbies were pretty expensive. I collected vintage baseball cards and other trading cards. I played a lot of video games, often leapfrogging to the latest releases even if I hadn’t beaten the older ones yet. I also took pride in eating at all of the restaurants, even the expensive ones. I was an avid reader, but I often bought books at a much faster rate than I could read them. I also went golfing fairly regularly. Sarah had her own hobbies as well.
All of those hobbies were a big drain on our finances. All of them required a lot of expense just to participate, and I had several hobbies like that at the same time.
Naturally, during our financial turnaround, I had to put those hobbies on hold for a while. I couldn’t justify buying vintage baseball cards or the latest video games when we were trying to turn our financial ship around.
Putting a lot of our hobbies on hold left us with a lot of free time, so we tried filling it with new activities or new angles on old ones. I spent a lot of time reading the books that I had accumulated and visiting the library for a few more, reorienting that hobby from accumulating books to actual reading. We started going to state parks a lot, hiking the trails and exploring. We started getting into preparing meals at home and learning the art of cooking, starting with simple stuff like scrambled eggs and gradually moving on to more complex things.
We tried lots of things, with the only common thread being that they didn’t cost much money. That was really our only criteria, as we were making an effort to try lots of new things.
Some of those new hobbies really clicked with us and stuck around. Others? Well, they didn’t click with us at all, but at the very least they were learning experiences.
What we found is that as our financial situation grew stronger, we didn’t actually have that much motivation to return to our old hobbies. I still played video games occasionally, but I found I enjoyed things like exploring the trails at state parks, reading books (instead of collecting them), and having potluck dinner parties was far more enjoyable for me than many of the expensive hobbies I had before.
I wouldn’t have discovered these things without forcing myself to try new things. A simple willingness to try activities, with the only constraint being a low cost, introduced me to the activities that now fill much of my free time.
Factor #4 – We Talked About Big Goals Constantly
We had a lot of dreams – and we still do. We wanted to own our own home. We wanted to eventually live in the country. We wanted to have at least three children and provide great childhoods for them. We wanted to travel with our children during their older years.
It was pretty clear to us that our old financial path would not allow these things to happen. We also knew that we would be able to pull off those things if we stuck to our new financial directions.
The problem was that these goals were big ones. They weren’t things we would achieve in the next week or two. On the other hand, the tempting things to spend our money on were constantly present.
Our solution, then, was to talk about our dreams and goals quite often. Those goals became a very regular topic of conversation between the two of us, as we considered the big goals that we shared, how long it would take to get there, and perhaps most of all, what we could do now to make those goals actually happen.
Sure, we didn’t agree on every goal, but we did agree on a lot of them. We talked through each of the goals we individually had and figured out the big ones that we shared, because knowing that we shared them made those particular goals much more powerful.
With that constant reminding through regular conversation, it became easier for us to make choices in our day to day lives that would lead to those big goals. Those goals weren’t daydreams any more – they were real things that we both were deeply in touch with.
When you have big goals for yourself, do everything you can to integrate them into your daily life. Talk about them. Plan around them. Make the choices that you need to make to bring those goals to fruition a normal part of your life.
Factor #5 – We Automated Our Finances as Much as Possible
In the end, though, having a hefty bank account balance was still a temptation. We could have inexpensive hobbies. We could see our long term goals. We could have spending allowances. We could have positive friendships.
But, still, that money would be sitting there, making it so easy to splurge and still feel like we were in good shape. The truth, of course, was that those splurges were real setbacks on our future goals. Not only did the splurges themselves serve as minor setbacks, they opened the floodgates to more and more and more splurges. Once it became acceptable to splurge once outside of our budget, it became okay to do it again… and again… and again.
Our best solution to all of that was to just make sure that there was never much cash in our checking account to begin with, and our most powerful tool to make that happen was to simply automate as much as possible.
So that’s what we did.
We put as many bills as possible on auto-pay. We set up several automatic savings and investment programs, from something as simple as an automatic weekly amount going into savings for an emergency fund to automated contributions to Roth IRAs.
We put most of those things in line with our regular pay periods, meaning that most of those things would occur automatically a day or two after a paycheck would arrive in our accounts. We never had periods where a lot of money just sat in our checking account.
The best part about this plan is that it created a sense that, even if there was money in that account, it would probably be automatically withdrawn in the very near future, so you didn’t want to touch it out of fear of overdrafts.
Of course, there’s also credit cards, right? Our solution here was to simply peer review each credit card statement for a while. If a credit card statement came to the house, we would both look at it and look for expenditures that looked fishy. That kept us from “hiding” expenses on credit cards.
An automated system like this not only kept us from spending money unnecessarily, it also ensured that we started taking real steps toward our savings goals. We began to fund our savings for retirement, for our next house, and for college education for our children. It was all automated. We didn’t even have to think about it, and we still don’t!
Together, these five factors kept us on track. Even when the financial pressure on us abated and it became easier and easier for us to splurge, these factors provided a framework for our lives that made it possible for us to keep going in a positive financial direction even without the motivation of the wolves nipping at our heels.
Today, because of that framework, early retirement looks like a real thing to us. We own our home. We have zero debt. We’re saving money like mad for that goal of early retirement. We have three children, just like we wanted, and they’re well cared for.
We’ve either achieved our goals already or we’re directly on pace to achieve them, and I attribute that to having a great framework to keep us on the right path.
If you’ve managed to make it through your financial turnaround and have put some distance between yourself and the financial hounds at your heels, consider adopting some of these factors in your own life. Try to put them to work for yourself.
It’s not easy. Financial success simply isn’t easy. If it were, everyone would be financially successful.
However, it is absolutely possible, and it’s not even that hard to stay on track provided you set up your life in a way that makes it easy to keep taking steps toward your goals.