If you don’t know where you’ve been it’s hard to know where you’re going. Growing up as an immigrant, I knew there were three ways to financial freedom: (1) get an education and get a great paying job; (2) start a business and hope that it is successful; or (3) use whatever money you can find to save and invest in the stock market or real estate.
The education part got taken cared of when I joined the military and I was able to get a bachelor’s degree debt free. While undergrad was free, I had to pay my way through law school, even with the help of the GI Bill. At the end this was a success because I was able to land a great job with far less debt than most folks coming out of law school. Though my student loan debt was low, I still owed $55,000 coming out of law school, which was on top of car and credit card debt.
The starting a business is a work in progress. I am just now venturing into opening my side hustle as a financial and investment coach and blogger. As a side hustle, it is not really a business until it generates a profit. I hope that it doesn’t become and expensive hobby. I know a lot of folks like to say that blogging is a fun pastime and the joy from it far outweighs any economic benefit—that type of talk is for those with privilege. I still have a mortgage to pay so I hope this hobby will generate some income towards the goal of paying off my mortgage. I guess I can leave active duty and start my own law firm. Time will tell whether or not I go down that path. For now, I’m finishing up my military career with the hopes of retiring in the next two years.
Having started investing at an early age, even if I made poor choices along the way, I’ve been able to do well with the save and invest portion. After high school I joined the Air Force as an enlisted member. As a junior enlisted member I tried to save but I did a poor job of it since I didn’t have the fundamentals down (upcoming post on this topic). For most of my early years I lived above my means, hence why I had car and credit card debt. By the time I got to law school, poor money handling choices and not budgeting properly resulted in a substantial debt. When I started as a Judge Advocate in the military in January 2005, I had graduated with $80,000 in debt, with only my car as an asset, for a negative net worth of $77,000 (the car was valued at $6,000). Here is the breakdown:
$55,000 in student loans;
$9,000 on a car
$16,000 in credit cards
Total debt of $80,000.
Undeterred by this debt and making a steady income of $65,000, I promptly purchased a home for $110,000 in May 2005. I didn’t want to rent. But despite not having an emergency fund, or a 20 percent down payment, I went ahead and purchased the home as a way to change my net worth. Additionally, the housing market was still sizzling hot so buying a home at this time was a no brainer.
In April 2005 I had totaled my car. Looking back the smart thing would have been to purchase a car in cash, or the next best option would have been to buy a used vehicle. Instead, I ended up buying a brand new 2005 Volkswagen Jetta for $19,800 (with $3,000 as a down payment and 1,800 towards taxes and fees). There’s a story being this and I’ll save it for another post.
So by the time I proposed to my wife in December 2005, after dating for about 8 months, this was the breakdown of our debts and assets.
Where we were in December 2005:
I was able to reduce my negative net worth by $28,000, but I was not reducing my debt fast enough.
Fiancé (Mrs. Chocolate):
Negative net worth of $48,925.
Excluding mortgages, total debt of $110,900.
We quickly decided to sell both homes, use the equity to pay for the wedding and some of our debts. We would not have any money to put towards a down payment on the new house, but we would use my military Veterans benefits for a no-money down financing. This was a bad idea, but at the time we didn’t know any better.
Today I’m shocked to see that we were more than $110,000 in debt outside of our mortgage, and a total combined debt of $331,500. I didn’t even know I had $187,500 in total debt. The funny thing is the first thing I did in January 2006 was list all of our non-mortgage debt so we could see how to manage them, decide on an amount to contribute towards 401Ks and IRAs, and planned for how much we would spend on the wedding. Despite all this planning, I never actually counted the total debt. Since 2015, I have learned that it is very important to count all your debts, focusing on the total amount rather than just the monthly payment owed. Once you’ve actually put the numbers together and total them up, that is when you will finally realize that you have way more debt than you actually thought. Additionally, so that you have an idea of where you are financially, it’s equally important for you to track your debts and assets to calculate your net worth. Starting in 2010, I started to track the growth of my investments, but I never took stock of my overall net worth. If there is one key take away from this post it is that you have to track your debt so you can make a plan to get out of debt and stay out of debt.
When we sat together in January 2006, we made a decision to live within a certain budget to control spending, work toward getting out of debt, and pay for the wedding. The first thing we did was analyze spending. We realized that my wonderful wife was spending way too much on restaurants every month. We agreed that she was going to cut back drastically, which was a huge sacrifice for someone used to eating out 4-5 times a week. This wasn’t fun at all, I didn’t want to be the tightwad or the guy to control her even before we got married. But my soon to be wife realized that if she could cut back on certain things, she would have more money to pay off her debt, save towards retirement and pay for the upcoming wedding. I too resolved to control my spending and lower my debt.
We next looked at how much we were contributing towards retirement in the forms of 401k contributions and IRAs. Although my wife was getting a match, she was not contributing enough to get the full match. She also had her contributions going into bonds funds earning about 3 percent per year. We bumped her contributions to 10 percent and moved her money out of bonds and into five types of mutual funds, Large Cap at 30 percent, Mid-cap at 20 percent, Small Cap at 20 percent, International Large Cap at 20 percent and corporate bonds at 10 percent. I was already contributing 10 percent of my income towards my 401k so I did not need to adjust my retirement contribution or allocation. The military had just started the 401k for active duty personnel but was not offering a match. (Learn about my investment philosophy during this period)
Despite earning more than $60,000 each, and having enough disposable income to contribute to our retirement accounts and pay down debt, we decided to pay for the wedding by cash flowing some of it and getting a 12-month no interest credit card to pay for the remainder. This is quintessential Robbing Peter to pay Paul. We thought it made perfect sense to put everything on the interest free card while paying down the credit cards with the highest interest rate. While this makes mathematical sense, it is still using debt while paying down debt. Remember also that I bought the engagement ring on a 12-month no interest if paid in full account as well. The idea of using no-interest cards to pay for things is something we would do over and over again and it took some time before I learned my lesson.
In October 2006 we got married. The housing market was starting to slow down but we didn’t know it at the time. Nonetheless, we were able to sell our homes and purchase a home together. By the time we got married I had only owned my house for about 16 months, so it was a miracle that the home had appreciated in value to cover the cost of closing and have a net proceed of $1,700. With that short of a period, any positive gain is a major bonus. The Mrs., on the other hand, was able to walk away with $28,000 in equity from the sale of her home. We used the money to cover the closing cost for the new home, pay off her credit cards, car loan, part of her student loan and help pay for part of the wedding. We continued to use the no-interest credit card with the goal of paying it in full before the no-interest period kicked in.
By the time we said I do, here were the numbers as a couple in October 2006.
As a couple, by selling two homes and aggressively paying on debt, we had reduced our debt by $83,000. However, we still had a negative net worth. We also had a household income of about $120,000, which means that with budgeting and attacking our debt, we would be able to turn that negative net worth into a positive number.
In 2009, we met with a financial advisor for some good and not so good advice. Click here to see our progress.
Looking back, if we had to go back and do certain things differently, here are three things we would change:
1-Pay off consumer debt as quickly as possible and get on a realistic budget.
2-Don't get a variable interest rate on our mortgage (this is something we did a few years later)
3-House hack. There are several variations of this and I hope to write about it in a future blog.
Overall, the best thing we did soon after our marriage was pay off some debt and invest at least 10% of our income in our 401k. This proved to be pivotal in our ability to build wealth.
No matter where you are in your journey, continue to take those small steps, eventually you will reach your goals.
Do you have a question or comment? Feel free to email us, we will be happy to help.
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