Updated on 07.13.11

Starting with a Blank Slate

Trent Hamm

A few weeks ago, I put out a call on Twitter and on Facebook for detailed posts that people would like to see. I got enough great responses that I’m going to fill the entire month of July – one post per day – addressing these ideas.

Lois on Facebook wants to know about starting from scratch. “After two years of living just on basic needs in order to get rid of 60k in credit card debt – yea! we did it! But what is the best strategy for starting over (we have do have 1k emerg. fund).”

Congratulations on your positive financial changes! It feels really good to be free from the burden of debt.

You’re facing a problem that many people face when they reach debt freedom. They’ve been in debt for so long and burdened by constant debt payments for so long that they’re unsure what to do when they’ve been freed from those shackles.

For people in your situation, I would recommend a three phase plan for continuing forward in your financial journey.

Phase 1: Retirement planning
This is absolutely the next thing you need to focus on. By retirement planning, I mean having money available to you when you reach the point in your life where you want to step away from work and enjoy the years you have remaining in your life.

My usual advice to anyone is that they should shoot to have 25 times their annual living expenses in retirement savings on the day they retire. That seems like a huge number, but it’s an achievable one.

The key is to start now. A good rule of thumb to use is, if you haven’t started contributing to your retirement, start contributing a percentage of your income to retirement that’s your age minus fifteen. If you’re 30, contribute 15% per year. If you’re 40, contribute 25% per year. If you’re 50, contribute 35%. This isn’t a perfect solution, but it’s one that’s going to get you as close as possible to a path to be able to retire at a reasonable age. In truth, if you’re approaching fifty and haven’t started saving anything for retirement, you’re either going to need a pension or you’re going to be working until at least seventy to maintain your standard of living.

Phase 2: Protecting yourself from falling back into debt
Once you’ve got retirement savings lined out, you need to use your remaining extra money to prevent yourself from falling back into debt. This comes in a few big pieces.

First, build up a bigger emergency fund. Try to save two months of living expenses for each dependent in the household. This will help you deal with almost any crisis that crosses your path.

Second, start saving for any known large expense that’s coming. For example, you’re going to have to eventually replace your car. Start making car payments now, except put those payments into a savings account. This way, instead of having to pay interest to the bank on a car loan, you’ll collect interest that you earn yourself on the savings account.

Finally, make sure you and your partner have adequate life insurance. I usually suggest getting a term life insurance policy so that you’re not left destitute if your partner dies. Shop around and look for the best deal you can find. Try to get one with a benefit equal to at least five times that person’s salary – and preferably more.

Phase 3: Establishing long term goals
If the above things are well in hand, you’re building a strong financial backbone for yourself. You should start thinking about your long-term goals at this point.

Is your goal to retire as early as possible? If so, ramp up your retirement savings as high as you possibly can.

Is your goal to go back to school? If so, open up a college savings plan (also known as a 529) and start socking money into that.

There are lots of goals that people have – and many of them require some significant savings in advance. Now is the time to start doing that.

Good luck.

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  1. Bill says:

    Keep making those payments. Put the money in your bank account! You will enjoy seeing that balance grow.

  2. valleycat1 says:

    Another part of phase 2 would be re-evaluating your budget; in particular budgeting in the fun stuff you want to add to your life now that you’ve reached this goal.

    Planning to live within your net income & not getting back into the debt cycle includes budgeting for infrequent but recurring costs (car registration, property taxes, repairs, major gift-giving occasions, payment of insurance deductibles/copays, etc.) & saving up for short-term goals as well as saving for long term goals. I agree with Trent that now is the time to beef up your emergency fund.

  3. mary w says:

    I agree with valleycat1, budget a little fun money into your life! Otherwise I think this is a pretty good list of things to do.

  4. krantcents says:

    Whenever someone breaks a bad habit like out of control spending and debt, I would like to see things in place to keep you on the straight and narrow so you don’t go backwards. How do you keep from racking up debt again?

  5. valleycat1 says:

    #4 krantcents: Once the money formerly going toward debt elimination is freed up, it’s time to do what Trent said – look at your goals and allocate money toward them. A big motivator to me is to keep the grand total of the interest I’ve paid out during the debt repayment plan in front of me, as it’s a potent reminder of $ I could have used elsewhere. Set up a reasonable budget based on the new available income total and continue to be conscious about where you’re spending money. Keep the credit cards out of sight and vow to never use them for an expense you can’t pay off in full when the next statement comes in. I’ve used charge cards (where the total’s due each month) to train myself to use regular credit cards more responsibly.

  6. kristine says:

    I would add spending money on at least minimal prep for the unseen crisis, a bit of emergency food and water, first aid and flashlights. It is definitely something most people do not prioritize when climbing out of debt, but now you can establish a baseline of self-sufficiency instead of being a deer in the headlights for a grid down or disease situation.

  7. First of all, kudos to Lois!! That is a noble accomplishment indeed!!

    May I respectfully suggest swapping Phases I and II? Without an emergency fund, you’ll go into debt; that debt will charge you more in interest than your retirement will pay you. Once your emergency fund is adequate, then you can save for retirement. As Bill (1st comment) wisely stated, keep making those payments…you’re used to living without that money, that’s what will create your emergency fund.

    Now you’re on your way to being LIQUID: having enough to meet your obligations and an adequate emergency fund. The rest goes to retirement.

  8. Lois says:

    Thanks, Trent and all you commenters! These last few years have been a bit stressful and exhausting – a lot of work. The advice I’m getting here has impressed on me that the work is not over! We really do need to beef up the emergency fund and retirement is not that far off. But the hard work ahead of us will be a bit easier because we don’t have the stress of debt to combine with it anymore. AND…the next door neighbors just GAVE us a matching couch & love seat since they are getting new stuff – it’s the nicest furniture I have ever had :) Thanks again, for all the encouragement I get from all of you by reading this blog every day.

  9. Georgia says:

    Lois – I once read two huge books by a financial guru. Of that, I took only one hint and it has successfully helped me a lot, especially when getting out of debt and afterwards.

    The hint was to make a list of all your annual and semi-annual bills, add the annual total up, divide by 12, and put that much away in a savings account each month. In the early years we were making $50 a week, with home & meat provided, and would have a 500 gal tank of propane gas come due all at once. OUCH!!!! This took a little while to get started, but I have never looked back. It is a sort of emergency fund, in that you have the money immediately available when car insurance, health insurance, AAA, and other bills come due. In fact, the amount grew nicely and I was often able to use it for unexpected expenses and not feel the pinch.

    I absolutely love being debt free, paying off the sometime large cc bills each month, being able to have some fun, etc. I wish more people had this option.

  10. Maureen says:

    Way to go Lois! But I agree with Max from Liquid and would strongly encourage you to build up your emergency fund to at least 6 months. Most of the people I work with I encourage 12-18 months since our economy is so shaky and we have seen first hand how many people with an emergency fund of 6 months are still unemployed a year or more later.

    Without the emergency fund in place, if something comes up and you don’t have the money to pay for it you’ll resort to credit cards again and you don’t want that to happen.

    Once you establish a solid fund you can begin to fund retirement. You’ll be on more solid ground. I agree with Bill above in that you’ve lived without this money so use it now to build up the emergency fund.

    Best of luck!

    Remember, true financial recovery is a balance of saving, investing and spending wisely.

  11. AnnJo says:

    Congratulations, Lois! Paying off that much credit card debt in two years is a real accomplishment.

    I agree with some of the commenters that a bigger emergency fund should be your first priority. $1000 is a start, but not enough.

    I also agree with Kristine that building a well-stocked pantry of food, first aid and household supplies is very important. In fact, you can do both at one time: An extra few months’ worth of food stored in your pantry IS an emergency fund, besides being a tremendous convenience and money-saver (buy products in bulk when they’re on deep discount sales) and helping avoid the impulse to buy take-out or eat out because “there’s nothing in the house and I’m too tired to go grocery shopping.”

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