My husband and I are not yet debt free, but we are already a success story! Here’s installment one of our story. Look for installment 2 about this time next year:
We started our marriage two years ago with no car debt, no credit card debt, no wedding debt, and $3,000 in an Emergency Savings Fund. However, we had about $30,000 in student loans and $10,000 in back-taxes from my husband’s business, though we didn’t know the total at the time, as he still needed to file the taxes! He’s the free spirit in our relationship, and somehow tax savings didn’t make it into the business plan (what business plan?)
As soon as we were married, 2009 happened. For those of you with businesses out there, you know what I mean. He experienced a huge reduction in business income as a result of the economy scare, and we weren’t exactly rolling in it to begin with. We made it through the year, paying all of our bills, AND paying the current years taxes,but frustrated that all of our money seemed to only go to liability, and very little toward savings or investments.
Everyone has a different set of resources to work with. To help the scale in this story, we made a combined income (take-home pay) of $50,000 in 2008 and $39,000 in 2009. We live in San Diego (can you say cost of living?)
One year ago, we felt convicted to finally file and pay the taxes that he owed. When we found out they totaled 10,000, we didn’t know what to do but tighten our belts and commit to paying them. We entered into an installment agreement with the IRS and committed to paying $215/month—all we could afford at the time. So we thought. When we realized that owing the IRS is worse than having money on a credit card at a 20% interest rate, we knew we needed to pay it off as soon as possible. Here are some of the things we did:
•Impose a mandatory budget item of $400/month toward taxes (if the grocery budget suffered, so be it)
•Stop funding our Emergency Fund (it was at $4,000 at the time)
•Take $2,000 of our $4,000 Emergency fund and put it toward taxes
•Take my raise and put the excess toward taxes
•Not go on vacation
•Put my 2 extra paychecks a year toward taxes
•Put our tax return toward taxes
•Move out of our 2-bedroom apartment and into a 3-bedroom house with 2 roommates (and one bathroom), and put the difference in rent toward taxes (!!!)
•Move closer to where we worked to save on gas and have more money for taxes
Unexpectedly, my husband’s business picked up in 2010. In the six years he’s been in business, he’s never had a quarter bigger than the one we just had! We know that it’s a result not only of an improved marketing plan, but a result of demonstrating financial responsibility, and being blessed because we did the right thing.
Yesterday I wrote the check to pay off the IRS. In total, we paid $12,295.33 toward the IRS, and paid it off in 8 months, rather than the 52 it would have taken us under the installment agreement. As a result of our gazelle intensity with taxes, we’re continuing our current path and rolling those payments onto our student loans. We have $24,000 left in student loans, and our goal is our 3-year wedding anniversary, one year away. The increase in business income is being leveraged to get us there even faster if we can. Our projected take-home pay for the next year is back up to $50,000, so we're planning on putting half of it toward knocking out our debt for good!
There is absolutely no way that we could have done this if we weren’t on the same page. You have to be a team to tackle the finances! For all the nerds out there: make sure you include the free spirit when setting the budget (and make sure there’s SOME spending money in the budget!). For all the free spirits out there: when you’re frustrated with the restraints, get mad at the budget that you approved, not at the nerd who’s just trying to help!
One of the most challenging aspects of our financial life is working with a variable income. This makes budgeting very interesting. Advice to self-employed and sole proprietorships out there:
1. Give yourself a paycheck. How are you supposed to budget when you don’t know how much you have to work with? If you have a business account that gets deposits daily, divide your deposits into workable budget periods. We use a weekly budget. So everything that comes in this week will be the “paycheck” for next week, and we can set the budget accordingly.
2. USE THE CASH METHOD
3. ALWAYS set money aside for TAXES and business expenses. We typically set aside 15-18% of his gross income for taxes and 15-20% for business expenses, and put them in separate savings accounts. Make sure you pay your quarterly estimated tax payments if you are self-employed.
4. Set a sliding scale budget. This has helped tremendously. During the really good weeks (or months), don’t “catch up” on your eating out, but leverage it and put the excess toward your debt! Also during the good times, set money aside in a flexible savings account to make sure you can pay the bills during the slow periods. Don’t use the money in the flexible savings account for Christmas gifts or a vacation – set up separate savings accounts for those! Set up the sliding scale budget to reflect appropriate spending based on how much you made. Our sliding scale is identified by colors: code red means you’re barely breaking even. Codes orange and yellow are levels of frugal survival. Code green means you’re making a decent profit. Code silver is everything you want your business to be! If you’re in “code red,” your grocery budget should be smaller than if you’re in “code green.” If you’re in “code green” you can afford to save for a vacation.
We paid off the IRS mostly while we were in survival mode (codes orange and yellow). If you don’t have a lot to work with, at least make that little bit count. Then find ways to get more. Don’t be afraid to make life-altering decisions, like making a move. When we decided to move in with roommates to reduce our rent, the move was from an apartment to a house, and now we have a yard and garden to enjoy (which also keeps us from going out on the town and spending money).
Above all else, do the right thing. You will be rewarded as a result, primarily with the knowledge that you made decisions you can be proud of. Don’t be surprised if you’re rewarded in other mysterious ways as well!