My Money Mistakes: The Four Times I Accumulated Credit Card Debt

I’ve made a commitment to share my money-related mistakes. These financial lowlights aren’t my proudest moments, but I hope sharing my missteps can help remove some shame and embarrassment from the topic of personal finance.

My mistake with credit cards is a series of mistakes that repeated it four times. Unfortunately, I’m not alone in accumulating too much credit card debt. As of this writing, the average American household has a credit card balance of $8,377 and has an interest rate that is greater than 12%. Consumers typically have 9 credit cards and approximately 14% of Americans have more than 10 cards. (This is far more than the number of credit cards I recommend, which I’ll cover in the next post.)

Mistake #1: Credit card debt in college. I was thrilled when I got accepted into the University of Michigan, the only school I wanted to attend. (Go Blue!) When school started, I couldn’t believe how lucky I was to be attending a school in beautiful Ann Arbor, with fascinating classes, inspiring campus life, and creative, thoughtful students.

It was also my first exposure to those who appeared very wealthy. Some students had cars that cost more than my childhood home, parents that bought them an Ann Arbor house as “an investment property,” or spent their winter break in Switzerland. My sturdy Eddie Bauer backpack seemed out of place - many of the women in my classes carried their books in Kate Spade, Fendi, and Louis Vuitton bags, which I had only seen on Sex and the City.

By the time I reached my junior year, I had accumulated around $2,500 of credit card debt. This debt wasn’t for my books or school supplies, but all splurges I felt I had “earned.” You know, because I was working so hard in school...and “all” my peers had nice stuff, too, so...

To manage the credit card debt, I ignored it and headed off to my summer internship in Washington, D.C. One evening, I was walking to the Metro when my cell phone rang. It was the credit card company, frustrated by my lack of payment. The representative offered to “charge off” my debt. I happily accepted.

Once I returned to campus to begin my senior year, I checked my credit score. It was in the toilet because of my decision to ignore my debt. I worked out an arrangement to repay the debt, which modestly improved my score. My first experience with credit card debt was a double-whammy; I accumulated debt buying things I didn’t need and did a horrible job of managing the debt. I swore I’d never get into credit card debt again.

Mistake #2: Credit card debt after moving to D.C. After I graduated, I moved to the nation’s capital and promptly racked up another credit card bill, around $2,700. I thoughtlessly swiped my credit card to buy essentials for my first solo apartment, shop for a work-appropriate wardrobe, and splurge in D.C. bars and restaurants.

Further, if I had been shocked by the wealth I saw on display in Ann Arbor, D.C. was another level. I vividly remember going to “pregame” one evening at a colleague’s apartment, which had amazing views of the National Mall. He told me it was his parent’s second home, which he’d be getting when his trust fund kicked in. This started a conversation on provisions in trust funds; I finally understood how my peers could afford their lifestyle. Unlike me, they had another meaningful source of income beyond their entry-level job.

About six months into my new job, I got my act together, stopped spending thoughtlessly, and actively sought out friends that didn’t live a lavish lifestyle. I also earned a promotion (and pay increase); all of my extra income went towards my credit card debt. I promised myself I’d never get into credit card debt again.

Mistake #3: Credit card debt after buying a home. I’ve shared the massive size and wild terms of my first mortgage. When my partner and I moved in, we left a 500-square-foot studio apartment for a 3,000+ square-foot house.

There were plenty of things we needed (fire extinguisher, household tools, window coverings for our bedroom) and plenty of things we convinced ourselves we needed (brand new furniture). Together, we racked up over $12,000 in credit card debt. This was the largest amount yet; a massive mortgage and large credit card balance made me feel trapped.

In 2006, Mr. Financier and I created a goal to eliminate our credit card debt in one year, with two $500 payments each month, diverting any “found” money to debt, and reducing three household expenses. We paid the debt off earlier than planned; I kept a handwritten log next to my bed to track our progress.

This was the most significant credit card debt I’d ever paid off, and I swore I’d never get into credit card debt again.

Mistake #4: Credit card debt following a significant raise. When I started my consulting career, I set a goal to be a Director by the time I turned 30. Colleagues in this position were generally 35 or older, but my career ambition and desire to grow my income inspired me to put my nose to the grindstone and shoot for this lofty goal. I earned a promotion into the Director position the month after I turned 30; my base salary rose to $150,000.

In End Financial Stress Now, Emily Guy Birken writes about the windfall effect. When we receive a windfall - an unanticipated bonus, or a generous birthday check - we’re more tempted to frivolously, quickly spend it. Our brains tend to compartmentalize and we view the extra money as distinct from our paycheck (which we spend more responsibly). One study on the psychology of unexpected, windfall gains concluded, “...the unanticipated nature of windfall gains is responsible for their heightened proclivity to be spent.”

I had one hell of a windfall on my hands, so I did what all responsible adults do in that situation. I rewarded myself well before I had actually saved the money to do so. Yup, you guessed it - I racked up another $3,100 in credit card debt. After the high from my shopping sprees wore off, I felt sick to my stomach. How in the world did I end up in debt, again?

It was this fourth time in debt that forced me to break my pattern. I was ashamed to be carrying a balance on my credit cards (yet again) and my debt dulled the achievement associated with my promotion. I had more than enough in my emergency fund to pay the debt off, but refused to do so, forcing myself to pay the costly interest charges as penance.

My fourth time in debt finally caused me to reflect on what habits I needed to change; there were four.

1. Watch out for life changes. I realized that I’m vulnerable to credit card debt during big life changes or times of stress. I’d feel like I “deserve” something nice and this emotional spending would push me into debt. This may not be unique to me, but since I’m conscious of this fact, I put my credit cards on lockdown when change is afoot and watch my spending even more closely.

2. Increase my save-to-spend account. I needed a cushion to fund the things I enjoy. My budget was so lean that I didn’t leave myself enough space for occasional splurges. I adjusted my automatic savings, increasing the amount going to my “save-to-spend” accounts to allow for the things I love, like shoes and dining out, that can tempt me into debt.

3. Change my shopping habits. I adjusted my shopping patterns to make myself less vulnerable to temptations. I stopped meeting up with girlfriends to shop - instead, we went to art galleries, parks, vineyards. I stopped browsing and only go shopping (online or in a store) when I have a specific item missing from my wardrobe. And, I unsubscribed from the many email lists I was on from my favorite retailers. If I missed out on a huge sale, so be it - I wouldn’t miss the possibility of subsequent debt.

4. Stop using credit cards by default. I changed my default card to my debit card, which pulled directly out of my checking account. Today, I only “allow” myself to put expenses greater than $100 on credit cards and I transfer the payment immediately from my checking to my credit card, so I can’t be surprised by large credit card bills.

I currently remain out of credit card debt and love getting zero-balance credit card bills in the mail. My money mistake with credit cards is one that I chose to repeat until I took the time to address the underlying issues. Have you struggled with credit card debt? Or, are you one of the lucky ones that excel at keeping your cards under control?

xoxo, Ms. Financier

How Do You Budget? Scarcity Budgeting Works Best for Me.

Wealth is created in the space between your income and expenses. If you’re interested in growing wealth, I suggest you grow your income and manage your expenses. If you’re like me, you enjoy increasing income more than reducing costs. But, if you don’t keep an eye on your expenses it is very easy to over-spend. 

I believe the most efficient way to manage your expenses is to find a budgeting method that works for you. If you’re partnered, you need to determine how to blend your approach with your partner’s - but we’ll explore that in a future post. 

The budgeting approach that works best for me is something I call scarcity budgeting. At a high level, the idea is to set up your finances such that you do not have excess money in your checking account. By creating scarcity, you don’t have the ability to comfortably over-spend or let your money sneak away from you.

Here are the four steps to scarcity budgeting:

1. Track your expenses to understand what you’re currently spending. Then, based on your actual expenses, decide what you want to reduce, change, or keep the same. For example, you might be appalled that you’re spending $1,250 monthly on food, drink, and eating out. Or, you may be disappointed that you aren’t investing enough for your future or donating enough to the charitable causes that matter most to you.

2. Automate your finances. I do this by having separate accounts for things that aren’t daily expenses. Travel, fun money to splurge on shoes or gifts, and boring necessities like car maintenance are funneled into different savings accounts. Each payday, a certain amount of money automatically transfers out of my account and into these savings accounts. Same for charitable contributions, regular bills, and investing; money is sent to those organizations on a defined schedule.

3. Spend only what’s left. After my money is whisked away, I’m only left with enough to buy gas, groceries, household items, and restaurant meals in accordance with my budget. I keep an eye on my checking account and don’t give in to putting things on credit cards to “tide me over” until my next payday.

4. Save or invest any excess. This is the fun part of scarcity budgeting! (Yes, I’m serious). If my checking account grows too large (because I haven’t been spending that much on regular expenses), I save or invest. This “found money” contributes to my other financial goals and gives me an unexpected financial boost. 

That’s my approach to scarcity budgeting in four steps. For me, this budgeting approach has worked wonders. Because I do not have excess money in my checking at any given time, I am not tempted to spend. Importantly, I rarely use credit cards because I have struggled with credit card debt in the past.

Do you use scarcity budgeting? Is there another approach to budgeting that you prefer? Or, are you one of the financial unicorns who doesn’t budget yet still manages to build wealth? Let me know!

xoxo, Ms. Financier

How To Create Your Retirement Budget

I get incredibly excited about the idea of creating a retirement budget. It is a chance to imagine my life at a point when I no longer have to work and can fill my time as I choose. I think about my retirement budget as a “financial freedom budget;" I aim to stop working a traditional job (or before) I reach the age of 45. Those that know about my goal of financial freedom ask about my budget. In this post, I’ll share how I think about my future spending.

I created my first financial freedom budget in 2013 when I started exploring the FIRE community (Financially Independent, Retired Early). Before that, I'd always thought, “Retirement is so far away, I can’t imagine what my budget will look like.” I had never considered how I’d be living when I stopped working; it was always “off in the future” and so “far away.” I could figure it out later, right?

My thinking changed once I was bitten by the bug to achieve financial independence. I became inspired to figure out exactly how much Mr. Financier and I would need to save to become financially free. A key part of that is how much we’d be spending, so modeling our future budget became critically important. 

At first, thinking about the expenses we’d incur for the rest of our lives was overwhelming. There are so many variables and assumptions. So, I began in the most obvious place - with our current household budget. I reviewed our annual expenses from 2012 and began making adjustments from there. The first adjustment was easy; I immediately deleted my two largest monthly expenditures. These were our mortgage (which we plan to pay off before we stop working) and our retirement savings. That change immediately reduced our monthly expenses by 59%.

Are you surprised that we were spending nearly 60% of our income on retirement and our mortgage?  Two things to keep in mind: First, we refinanced our generously-sized home (and associated generously-sized mortgage) into a 15-year loan that we pay extra on each month. Second, in 2011 and 2012 we had already optimized our budget to remove extra expenses in order to invest more our income.

Note that many mortgage payments include property taxes and homeowners insurance payments; these won’t disappear once your loan is paid off. If you plan to pay off your mortgage before retirement, include your taxes and insurance payments in your retirement budget.

Next, we reviewed our entire budget and made adjustments to reflect what we expected to spend once in the future. Like any budget, ours is a best guess and a living document that we keep coming back to and modifying over time. Here is a summary of the major changes we made.

Home Maintenance Saving: We added a dedicated line item equivalent to 1% of our home’s value to save each month for repairs, since we would not have salary and bonuses to help pay for any big expenses out of upcoming cash flows.

Health Insurance and Healthcare: We increased costs for health and dental insurance for us both, estimated based on visiting online sites and getting quotes (pretending we were 55.) We assumed we’d be paying more for healthcare as we age and increased spending in that category.

Auto Insurance: This line item decreased, as we’d sell one of our two cars in retirement (no more dual commuting) and we’d also be driving fewer miles annually, without the daily trip to work.

Travel: I love exploring, so this line item went up significantly. I increased our travel expenses three-fold. Right now, Mr. Financier and I are very time constrained and don’t travel as much as we’d like given our careers. I look forward to “slow travel” when we’re financially free - weeks or months in one location, living more like a local.

Clothes & Dry Cleaning: This went WAY down, as we wouldn’t need to be in our professional work gear every day. I still plan to buy shoes, but perhaps not quite as many new pairs each year!

Food, Wine, Dining: We increased these slightly; business travel subsidizes some of our fine dining today and we do plan to enjoy going out weekly in our financially free days. I’m also a wine enthusiast, and I’d like to explore it even more in the future.

Hobbies: We increased our hobby expenses, though not by much as we have pretty inexpensive hobbies (reading, running, hiking, camping, and yoga). I did add in additional costs for classes and seminars; there are so many amazing programs in the D.C. area and I regularly can’t participate because of my work schedule.

With these adjustments, Mr. Financier and ended up with a total monthly requirement that is far lower than our expenses today. When I did the math, I was stunned that we could have the lifestyle reflected in this retirement budget, for so much less than we were living on.

What about inflation? Many prefer to include inflation in their modeling. I do all of my calculations in today’s dollars.  Yes, inflation is real, but we never intend to move our entire portfolio out of the market, so we expect that keeping our money in the market will combat inflation - just like it does for us today.

Is my retirement budget perfect? Like any model, I know it isn’t. However, it is a starting point that allows me to explore how much income I’ll likely need to replace when I stop working full time. Many that approach financial freedom begin to live on their post-retirement budget a few years before they stop working. I like this idea as a way to reality-check and pressure-test the budget.

Have you built a budget that reflects your expenses post-career? If so, how did you do it? What feedback or suggestions do you have for me?

xoxo, Ms. Financier

I've Tracked My Expenses, Now What?!

Let’s save some money! Once you’ve tracked your expenses - for a week, a month, or longer - I bet you’ve found a few things you can spend less on. And, I’m guessing you had a moment of, “Holy crap, I spend THAT on THIS!?” Yeah, we've all been there. (See: my shoe spending in 2013.) Is your wealth sneaking away from you in your shopping cart?

I’ve had the chance to review the expenses of many women - as a money nerd, I happily comment on and offer to review budgets. Here are the categories I find cause trouble for most women:

Food. Groceries and restaurants often represent one of our largest monthly expenses. Higher food costs often result from a lack of meal planning.

If you don’t plan your meals, you’re vulnerable to takeout and restaurants. We’ve all been there, hungry and without a dinner plan. Call the Thai place ASAP! This habit can add up to thousands of dollars annually for lunches alone. I enjoy restaurants, but go out meaningfully and occasionally (versus by default).

If you’ve skipped meal planning, you may enter the grocery store without a list. This puts you in a position to look for inspiration while shopping, which costs in two ways. First, you’ll pay more as you impulsively add items to your cart. Second, you’ll be more vulnerable to food waste - throwing away spoiled food that never made its way into a meal. Yes, actually throwing money away!

Drink. Enjoying a few cocktails at the bar can sneak our money away from us. The recommended markup for bar drinks is 75-80%, and provides an important source of restaurant profit. However, that doesn’t give us an excuse to blissfully over-indulge. Invite your girls over and learn how to make your favorite cocktails. Look for lower-cost but delicious wines like Bota Box (a Wine Enthusiast best buy wine) and raise your glass to the savings. Cheers!

Cell Phones. Providers like Republic Wireless and Virgin Mobile offer affordable, month-to-month plans. If your monthly cell bill is more than $40, you owe it to yourself to consider switching! These low-cost providers run on the same networks as the big guys and don’t require contracts. You may need to buy a new phone initially, but the cost savings can be tremendous.

Gifts and Presents. Gifts can be a double-whammy. Events like birthdays can sneak up on you (creating a surprise expense) and there is tremendous social pressure to gift generously. Gifting often falls disproportionately on women, who are often purchasing on behalf of others. I suggest budgeting for regular gifts, and giving memorable experiences or high-quality homemade gifts.

Most of us do not need more “stuff” but would appreciate an experience tailored to our interests. Think about gifts like: a restaurant-quality meal at home (served, cooked, and cleared by a close friend); a museum, art gallery, or winery visit; or a carefully planned day hike complete with a delicious picnic!

Beauty. This is a tough one for women. It’s incredibly easy to fall prey to the $60 billion dollar beauty industry. But, do we really need all the makeup and skincare goodies we buy? Will the latest miracle cream be that much better than what we're already using? Haircuts, coloring, makeup, and skin care represent a huge expense for women.

I used to spend a ridiculous amount on high-end skin care and makeup. Each individual purchase was small…until I added them all up. Now, I’ve switched largely to drugstore brands. For example, I splurge on Kiehl’s sunscreen and Dermalogica moisturizer, but buy Maybelline makeup, and wash my face with Dove.

For kicks, I compared my Maybelline Great Lash® mascara to YSL’s Mascara Volume Effect Faux Cils - the price difference was 400%! If you love mascara, this may be well worth it. But, if you splurge on every beauty purchase, these “small luxuries” will add up and create a barrier to saving and investing.

Target, Costco, Kohl's. Your store may vary, but this concept comes up all the time! This is the store you “swing into” for one item, but leave with a full shopping cart. “It’s just shopping,” you may say. But over time, you’re putting less and less wealth in your pocket.

Stores are carefully designed to separate you from your hard-earned money. I don’t blame the retailers - they don’t force us to spend more than we planned! However, next time you go to “your” store, stick to the items on your list. Before making an unplanned purchase, ask yourself, “Do I really need to this item?” This will prevent money from sneaking out of your wallet!

The most important action to take when you’ve freed up some money? Save it, automatically.

How? Let’s say you decide to cut the cord on your $150 cable bill (seriously, *do it* - more on that later). Immediately set up an automatic deposit for $150 to your savings at the same time your old cable bill was due. You will not miss the money, you will not “accidentally” spend it, and it will be creating a lot more wealth for you each month.  Boom!

What are you trimming back on? Are there different categories you spend too much on? Let me know. Managing what you spend is hugely important in creating the gap between income and expenses, which is where real wealth comes from. You got this!

xoxo, Ms. Financier

A version of this post also appeared on the Fairygodboss blog - I love their mission to improve the lives and workplace for women, through transparency.

Manage Your Expenses: Step 3 of 5 Fabulous Steps to Financial Freedom

We’ve talked about income - let’s stop being polite and start getting real. Time to dig in and explore how we spend that hard-earned money.

What's the goal of this step? Reduce and manage your expenses over time (and understand your current expenses) to increase your wealth.

Why is this important? Remember, there are two big levers to creating wealth - money in and money out.  Today, many of us are pay our daily expenses with a debit or credit card. Studies show that cards encourage extra spending. It is much easier to lose track of the money we spend when we only have to swipe a card - compared to the physical act of removing cash from our wallet. Further, so many of our expenses are discretionary that reducing smartly in a few key categories can have a huge difference.

When and how do I do it? Start today by tracking your expenses, if you aren’t already. Over time we’ll look to smartly reduce your expenses to create more space in your budget. There are many, many ways to reduce and manage your expenses - let’s begin with the basics.  

Where is your hard-earned money going? I started cataloging my expenses in Microsoft Money when I was a teenager (yes, I am a money nerd.) Since then, I have continued to use technology to track, categorize, and analyze spending. This allows me to find hidden areas where I over-spend (like eating out, which can add up fast), and identify costs that I don’t budget for (but should) like car maintenance and gifts.

There are several apps that will connect your bank accounts and provide a complete view of your household expenses. I have been a Quicken user for years. Two others to consider are YNAB (You Need a Budget) and Mint.

You work really hard for your money. You owe it to yourself to truly understand where your money is going, so you can effectively target areas to reduce and therefore grow your wealth. Further, if you track your money, you can budget more effectively, too.

So - how are you going to track your expenses?  If you’re already tracking, what tools do you find useful?