Financial Freedom Gone Wrong: How To Loose Freedom Fast!

The Start Of Our Story

Our story is a classic one. In some ways we snatched defeat from the hands of victory! Let me explain: After five years of marriage, lots of learning and a commitment to living financially free, my wife and I built a financial freedom lifestyle that looked like this:

  • Eliminated all debt except the mortgage: no car or credit card debt
  • Moved into a small but comfortable home with a small mortgage
  • Built up a 3 month Emergency Fund
  • We tithe at church and support several small non-profit initiatives
  • Contributing 15% toward retirement (including company match)
  • Invested money for future known purchases (cars, furniture, etc)
  • Lived on a balanced, sustainable budget that met our long term financial goals:
    • Live debt free, hoping to retire the mortgage in 10 years
    • Continue to grow our generosity
    • View wealth from the standpoint of freedom and options, not just money
    • Retire by age 60

It wasn’t that we were wealthy, far from it. But our cost of living was so low when compared to our income, we had lots of freedom and options! At the time, we were enjoying a simple but rewarding lifestyle. One of the major benefits of this lifestyle was that we knew each of our financial goals would be met IF we just stayed the course with our savings and discipline. But that is where the story started to go wrong…

Poor Influences, Poor Decisions

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The two biggest components to our balanced budget were our commitments to living in a smaller home and living credit card debt free. Our housing expenses were really low, less than 25% of our take home pay and that included the mortgage, taxes, HOA and utilities. Combining that with no credit card debt, we had a lot of money to save or be generous with, and we did both.

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But after watching many home remodeling shows and thinking way too much, we started discussing remodeling our home. What started out as some new paint and some small repairs, turned into all new furniture and some kitchen appliances. The remodeling isn’t bad in itself. Many times it can add value to your home and it is far less expensive than buying a new, bigger house. But the issue was we did not have a good plan or a good budget, which means we just kept spending. Pretty soon we used up all the money we had saved for home improvement  and started to load up on the credit card.

We rationalized the use of the credit card because 1) it was less expensive than buying a new house and 2) we needed the points on our credit card to earn miles for travel. We always wanted to travel and since we started the discussion about raising a family, maybe we should go sooner than later. Again, not necessarily all bad, travel and home improvement were good things. And besides, we told ourselves we would pay off the credit card later this month. Next month at the latest! But it got worse…

After $20,000 and 3 months of home improvement and new appliances that included $10,000 on the credit card, we made a really bad decision that put our financial freedom into a tailspin. First, we let the credit card debt remain on the credit card for several billing cycles because we were a bit lazy and didn’t want to tap into our emergency fund. Second, we talked ourselves into considering selling our currently refurbished home and buying a newer, bigger home. We decided we would only go forward and buy the new home if we did two financial things: Take emergency fund money and pay off the credit card debt and cut back on our generosity for a while, until expenses settle down. So we sold our house and bought a bigger home that ended up increasing our mortgage and expenses by $1,150/month. We knew that was a big increase but we justified the increase because this new house would easily handle our future plan to raise a family. What we didn’t realize until it was too late, was that there are a lot of house selling expenses. We ended up reaching deeper into our emergency fund until it was depleted and even had to finance some of the costs. Couple that with the fact that the home sold for slightly less than we expected, resulted in more credit card debt and a bigger than planned monthly housing cost increase.

About this time, one of our two cars started to have issues. It was old and reliable up until this point, but now it was becoming a pain in the neck: First, the muffler rusted out and needed to be replaced. Then a failed state inspection required new front tires. The final straw, so it seemed, was that two electrical parts, a window switch and a rear light needed replacement. Not realizing most of these issues were normal maintenance type items that we should expect, we talked ourselves into trading in our car and getting a better used one. We justified the purchase because we were 1) buying used and 2) we had some money set aside for a replacement car. What we could’t justify was getting a luxury used car that cost four times what we had saved for the car. Meaning we had to take out a car loan to purchase the car. It was small by car loan standards but it was $400/month for the car loan and extra insurance and gas costs added another $150 to the monthly expenses.

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Summing up the financial decisions we made:

  • Monthly housing increased $1,150
  • Monthly car costs went up $550
  • Depleted emergency fund
  • Credit card debt around $7,500
  • Stopped being generous to some non-profits
  • All savings gone except the retirement savings

All told, we added over $1,800/month in expenses and depleted most of our accessible savings, including all of our emergency fund. In addition, we were not nearly as generous as we once were. Needless to say, we were no longer feeling financially free! But we thought that with our two good jobs and some spending discipline, we could absorb the expenses, rebuild the savings and restart the generosity. We estimated that within three years, we would be back where we wanted to be. Bad assumption. First, with a bigger house, you have more rooms that need furniture. So we bought more. Then, even worse, some of our new furniture that we purchased when we lived in the old house did not match or work in the new house. We ended up selling some of it at a substantial discount and buying still more furniture. Ouch! Add another $3,300 to the credit card debt!

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The Next Shoe To Fall

About two months after moving into the new house, the unspeakable happened. I lost my job. Since I am about 60% of our combined household income, we now had a major budget problem: We could not afford all the new housing, car and credit card debt expenses without my income. In fact, we calculated that our budgeted expenses would exceed our one remaining income by over $2,200/month. And with no emergency fund or savings, we were exposed to taking on more debt that would only worsen the problem. This was the opposite of financial freedom. It produced worry, anxiety, stress in the marriage and uneasiness when we went to the mailbox! Living in debt, with no savings and having a budget that does not balance each month is pressure packed and confining. We felt enslaved to our stuff. We realized that we had focused on stuff and away from freedom, and that the freedom was much more valuable to us than all the stuff! Financial freedom made us feel rich, stuff made us feel stifled, enslaved and vulnerable.

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What To Do?

First and foremost we had to make a plan that both of us were committed to, and it included:

  • I had to find a job, fast, as my top priority. My job was to find a job.
  • Cut back all non-essential spending. Cable TV, gym memberships, etc. gone
  • We considered tapping into our retirement money but the fees/penalties we too high at this point. We did stop 401K contributions for the time being.
  • We made a big decision: We had extra bedrooms in this big new house. At least for the short term, we decided to rent out a bedroom, or two, if we could find the right people who needed to rent.
  • We agreed to sell the newer used car, if we could get a good price for it. Luckily we bought the car at a good price so we were hopeful we could sell it and break even on it or maybe even make a small profit. For a while, we would make do with only one car. Then purchase a less expensive car that met our basic needs.
  • We approached our parents and family, told them our predicament, and asked them to consider foregoing presents at Christmas and birthdays and possibly helping with cash instead. We were desperate. They readily agreed.
  • We tightened the budget in other areas: Cut back on food and gas. Even though these are considered essential, we would find ways to limit expenses.

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Recovery

It took one month to find a renter, a family friend, and two months to find a job that almost paid at the same level. We sold the car at a small loss and was able to use a sibling’s extra car for about three months after which time we purchased a very simple, inexpensive car that met our needs. Also at the three month mark, we rented another room to another younger family friend who needed a place to stay while attending college in our area. We found out during this time that we COULD live without cable TV and we could live very well at the reduced expenses level and chose to stay there. One more thing, when we moved to the new house, we realized we had accumulated more than a garage’s worth of stuff that we no longer wanted or needed. We held a huge garage sale and even though we only made back a small portion of the prices we paid for it all, by selling it we experienced a huge relief by not having all that stuff clogging up our new garage !

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By The Numbers

By the end of this period of time where we went from financial freedom, to financial distress, back to financial freedom, which took about eleven months, we did the following (on an annual basis):

  • Our combined work incomes declined by $3,000/year with the lower pay of the new job, but…
  • Our rental income increased to $8,400/year by renting bedrooms to two people
  • Our housing related costs increased about $14,000/year due to higher mortgage and house costs, but…
  • We reduced our living expenses by $6,000/year by permanently eliminating expenses like cable TV, reducing cell phone plans, less eating out, less shopping for “stuff”
  • We took the garage sale money, $2,000, and applied it toward our credit card debt. We will be credit card debt free in three months
  • We will rebuild our emergency fund to 6 months of expenses because unexpected things happen. More importantly, we agreed to limits as to when this money can be used!
  • We will return to being generous in helping others. Although we never stopped tithing to our church, we did stop helping others and it placed a hole in our hearts during that time. Full financial freedom requires us to be generous. We are more contented and grateful when we are generous
  • WE WILL BUILD & DEFEND FINANCIAL FREEDOM BECAUSE THAT IS MORE IMPORTANT TO US THAN MORE STUFF!

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WHAT DID WE LEARN?

  • Financial freedom is more about living in contentment and gratitude, within a balanced budget budget that supports our dreams and goals, than it is about having lots of money and possessions
  • Financial freedom is far more important than having more stuff
  • Emergency funds are only for emergencies, not for wants
  • Credit card debt is expensive, enslaving and addicting. Stay away from credit card debt
  • Live within your budget at all times. Do not let your neighbors or the culture dictate your lifestyle and spending
  • Driving an older paid for car is far more satisfying than driving a luxury car with a big monthly payment tied to it
  • Less is more: Less distractions like cable TV allowed for more quality time with my spouse!
  • Learn from the past, plan your best for the future but live in the present, enjoying what you have instead of coveting what you don’t have
  • Achieving our goals is far more important than instant gratification!

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I hope this post helps you. I hope lessons can be learned so that our poor decision making and recovery can prevent others from experiencing the same consequences. There is no one path to financial freedom, but there are basic rules that must be followed: Kill your debt, save for future needs, live within your budget and learn to live with contentment and gratitude.

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