Announcement

Collapse
No announcement yet.

Our debt story...

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

    Our debt story...

    In December 2005, my wife and I bought our first home together. We put 20% down on a $650,000 home, had a great interest rate and made our payments on time every month. However, we never had to work for that 20%. We both bought homes with little money down RIGHT before the run-up in housing prices and made a ton of money when we sold our individual homes and combined our profits to purchase this one.

    Six months later we took a $50,000 HELOC out on the house to do some improvements...

    Then the housing bubble burst...my wife lost her income due to the economy. I couldn't keep up with the payments alone. We still made our payments on time, every single month, but it was choking us financially without her income. She couldn't find a job.

    We held on for three years. Prices kept declining, other credit accounts suffered because we spent everything trying to keep current on the mortgage and basic living expenses. The value of our house when we decided to walk away was $350,000. Today it's $260,000.

    Because we lived in AZ, no one could come after us for the deficiency on the first mortgage but that wasn't the case for the second. We owed $50k on the second, $10k on our truck, $8k on my wife's credit card (because we had to use it to live on since we were so strapped) and $12k to the IRS (we couldn't afford to pay our taxes). Not only had we just lost our home, it was still plaguing us with $80,000 in debt.

    Life, to be honest, sucked. My wife was 6 months pregnant when we lost our home. But we had a choice. Accept the fact that we had a long road ahead of us, suck it up and do what had to be done or admit failure and just rent forever. We chose door #1.

    Today (two years after leaving the house), we are 100% debt free with the exception of a trailer that we kept making payments on to help rebuild credit and have $50,000 cash in savings. One of my credit scores is 690 (unfortunately that's the only one the trailer payment reports to - doh). The other two are around 640. In June 2013, we'll be eligible to purchase a home again so we still have 18 more months to save. We're going to do it!

    Getting to this point was the toughest thing I've ever had to do. I'm 34. I grew up in Northern California in a relatively affluent area. I was never taught to be frugal or save or the value of money. I just thought it was the natural course of things that you got out of school, worked, and magically had a 4bd/3ba suburban home with boats, ATVs and vacationing a couple times a year. I think a lot of people in my generation grew up that way. Working hard and saving for a goal that was YEARS off was totally foreign to me.

    However, we started down the long road. We had two problems: the IRS was about to start levying my paychecks but at the same time we got served and were informed that the bank was suing us for the deficiency (keep in mind I have a pregnant wife this whole time, how she made it through this I will never know). The bank wanted everything in one payment, they wouldn't accept a payment plan (after all, the first one I made with them never worked out). They told us they'd settle for half the balance if it was paid in full within a month. We sold a car and several other items to pay them off. At the same time, we made a payment plan with the IRS.

    Fortunately, our rent in the new place was half our mortgage payment so that freed up some cash to work with. We were used to living without any extras, so we just continued that lifestyle and made the choice to put any "extra" money towards debt. We BADLY wanted to spend on something for ourselves...we hadn't been able to in three years. But, those are the choices we had to make.

    We made deals with the credit card company and used the cash we were saving from our lowered housing payment to help pay those off. We got them to knock our balances down about 50% as well if we paid them in one payment. So essentially, we negotiated down about 50% of our $80,000 debt. $25k of the remaining $40k was paid with the sale of the car and other items and the remaining $15k we paid over a year of saving money from our lowered housing payment. In February 2010, we were officially debt-free (again, except for the trailer)! It took us a year of living with NO extras (we now had a 1 month old daughter) to get there.

    Throwing THAT MUCH money towards debt was INCREDIBLY difficult. It's hard to watch $40,000 go into a black hole. It takes an incredible amount of resolve. But it's what you have to do. My family's well-being depended on it.

    Goal #1 - get out of debt - attained.

    Goal #2 - save for the next house - let's get going...

    So the next goal was to save for a house. You have to understand, my wife NEEDS to own a home. It's not a normal need, it's embedded in her DNA. Renting is killing her. This is the first time in her life she's rented. She hates it. With the fire of a thousand suns. Have I made this clear enough? There is a 3 year waiting period after foreclosure to purchase a new home. This means that we can't purchase until June 2013. So that's our goal date. We need to have as much money as possible by then. There are a few things that we know:

    - We will NOT make the same mistake. The new house will have a max mortgage of $250,000, so it's affordable on one income and so that the idea of paying it off is at least remotely feasible.

    - $200,000 around here (S. California) doesn't buy a whole lot. So anything above $200k we need to save for.

    - Our ideal house costs around $350,000. That means we have about two and a half years to save $100,000. Holy crap...

    Please understand, I have never had more than about $8,000 in savings in my entire life. The mere notion of being responsible for saving $100,000 in 2.5 years is nothing short of impossible to me.

    Fortunately, I got lucky in my career. I have a high school education, but I make good money as a software engineer, it's something I taught myself to do a long time ago. My job was paying me $75,000 a year at the time we got out of debt. Hmm...with living expenses, plus savings, that's not enough. I started looking for a new job and I got lucky to find one with a company that bumped me up to $90k. That's still not enough. I took on part time contract jobs where I could which would average out to about $120k/year.

    Ok, so that sounds like a lot. I thought so too. But it isn't. Not when your goal is $100k in 2.5 years. Take taxes out, take living expenses out, take unexpected car repairs out, take rent out, etc. Take my dad calling in a $5k debt I owed to him (that I thought he had forgiven) because he was running into difficult times. There's a lot that comes out of that income.

    However, within the past 12 months, we've managed to put away almost $50,000 of that income away. I put 25% of my paycheck from my full time job in the bank -- every month. I put ALL of my extra income away. We live on what's left, which isn't a lot. We get by on maybe $1,500/month (after rent) for bills, groceries, gas, etc. We allow ourselves to eat out (at a restaurant like Pei Wei or Daphne's Greek Cafe where the tab is MAYBE $25) once a week. That's about it. Everything else is savings or living expenses.

    We've sacrificed Christmas vacation travel, sacrificed all of the extras we want to do, we've gone through bouts of low-grade depression over feeling like we're wasting these years. It SUCKS to earn a very decent living and have to live like we're flat broke.

    All I have to do to make it worth it though? Look at my wife and know that it's going to make her a thousand times happier when we get there. And we're right on track, a little ahead even. Today it's January 6, 2012 and we have $48,000 in the bank with 18 more months to save.

    I wrote this in the hopes of giving people who might be starting on this road a little encouragement. I'll admit, we have VERY lofty financial goals and I'm lucky enough to have the financial earning power to get there in the time frame we set. However, most people don't start with $80k in debt and aren't trying to save a hundred grand in a couple of years. You could just as easily cut my goal and income in half (trying to save $50k in 2.5 years earning $60k/year) and apply the same principles if you cut the living expenses by that much too.

    It doesn't matter how much you earn. I earn a lot, but we had a lot of debt and a VERY lofty goal. The key is to make a commitment and to stick to it. It's been almost two years and EVERY DAY we have to make financial decisions. "Let's go eat out, I'm dying to" - "No, we already had our once a week". We LOVE saltwater aquariums, but they're expensive to set up and maintain so we don't have one right now.

    Going from the way I felt when we left the house (depressed, hopeless, wondering what life was going to be like, etc), to how I feel today (secure, happy, hopeful) is worth EVERYTHING we've gone through to get here.

    Lessons learned:

    - Good financial management is a way of life, not something you to do achieve a short-term goal.

    - NEVER purchase more house than you can EASILY afford. If you want more, work for it and save.

    - NEVER, EVER take out a second on your home.

    - Nothing can replace the feeling of having financial security, money in the bank and the knowledge that you're on the right track. It's a long road, but the harder your work for it, the shorter the road.
    Last edited by Scott927; 01-06-2012, 08:34 AM.

    #2
    Excellent job on cleaning up your debt and getting your savings built back up.

    In addition to saving 20% for your house you will want to also save up a 6 to 8 month Emergency Fund. Don't blow all of your savings on your downpayment.

    Something else to think over. Rule of thumb is to not buy a house that costs more than 3 times your annual income. It lessens the chances that you will get yourself in a bind like before.
    Brian

    Comment


      #3
      Very nice job. I would suggest renting for a few more years than 2013 though and start building up a EF and contributing 10K/year to a Roth. Actually if I could have a do-over I would not buy a house at all, and we bought well below our means and could pay it off right now if not for the 3.4% loan rate. I hate owning a home and all of the work it involves.

      Comment


        #4
        Originally posted by KTP View Post
        Very nice job. I would suggest renting for a few more years than 2013 though and start building up a EF and contributing 10K/year to a Roth. Actually if I could have a do-over I would not buy a house at all, and we bought well below our means and could pay it off right now if not for the 3.4% loan rate. I hate owning a home and all of the work it involves.
        If it was just me, I'd agree with you. However, my wife doesn't want to rent a day longer than she has to. Some things you just do because it makes the people in your life feel secure, even if it's not the MOST optimal financial course.

        Comment


          #5
          That is great how far you have come and should show others what hard work and doing without should accomplish.

          You don't mention (that I found) anything about any retirement savings or if your work gives you and your wife and child health benefits. These are very important. And you don't have to answer just be aware of this.

          Also: some of that savings for a home would be a good EF to put away.

          EF's will keep you always out of debt, always able to pay your mortgage even in bad times, and always secure.

          That would be a good foundation to have and then keep saving for your home you want in a secure financial situation.

          You have gotten this far and out of financial problems by making the sacrifices many refuse to do.

          Comment


            #6
            One thing you and your wife might need to keep in mind is that some banks won't even lend to you if you don't have a decent amount of cash reserves beyond the down payment.

            Additionally, I know it is motivational for you both to focus on these short term goals, but make sure you're not forgetting long term goals like retirement and college funds. These may be on the back burner now, but will it be any easier to save for them after you have a mortgage and possibly another child? Which idea does your wife hate more: renting or being a financial burden to her child in your old age?

            Comment


              #7
              Wow. Great Job you've made there!

              Comment


                #8
                Originally posted by bjl584 View Post
                Excellent job on cleaning up your debt and getting your savings built back up.
                You did a great job of "offically" cleaning up your debt but why not really do the job and take $40k out of the $50k you have saved up and pay back the original amount you owe to the cc companies? I know you negotiated a great deal with them which they accepted, and maybe that should be the end of it, but the reality of it is you spent that money on something and didn't pay it back.

                Did you ever delare bankruptcy or did you just walk away from the house? I would guess you didn't since the bank came after you later for the amount owed.

                I'm sorry if I sound harsh about all of this but I find it somewhat hypocritical (maybe the wrong word) when someone benefits greatly from the housing bubble (i.e. having a 20% downpayment in no time for a bigger house due the appreciated value of property owned) but when the bubble bursts and you're underwater you can just walk away. I know everyone's situation is different and with your wife losing her job it probably didn't matter whether the market tanked or not.

                You did a great job with what you had and sound as if you're not willing to make the same mistakes again and I commend you for it. God knows I've made my share of mistakes in the past and have learned from them. I just wish I could call up my broker and say "Hey, let me have that money back from that Netflix investment since it didn't work out so well although it should have." I know stocks and houses are different assets but a loss is a loss no matter what caused it.

                Again, I don't mean to sound harsh or judgemental on how some dealt with the housing bubble since it was terrible, but hopefully people who were caught up in it learned some lessons from it.
                The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
                - Demosthenes

                Comment


                  #9
                  Originally posted by Scott927 View Post
                  We've sacrificed Christmas vacation travel, sacrificed all of the extras we want to do,
                  It's great that you're turning your life around.

                  However, using the words sacrifice, vacation and extras all in the same sentence are probably at the foundation of how you got into trouble in the first place. Feeling entitled to anything beyond absolute necessities is usually a dangerous assumption.

                  You speak often of how miserable your wife is with a roof (over her head) that doesn't have her name on the deed. That's a huge red flag to me.

                  Comment


                    #10
                    Great Work,
                    You have suffered a lot but it will make your life more smoother. Now you had cleared your debt, you can enjoy your life.

                    Comment


                      #11
                      Wonderful Work,

                      You have make your life more smoother threw your efforts. You had cleared your debt now you will be happy.

                      Comment


                        #12
                        Originally posted by kv968 View Post
                        You did a great job of "offically" cleaning up your debt but why not really do the job and take $40k out of the $50k you have saved up and pay back the original amount you owe to the cc companies? I know you negotiated a great deal with them which they accepted, and maybe that should be the end of it, but the reality of it is you spent that money on something and didn't pay it back.

                        Did you ever delare bankruptcy or did you just walk away from the house? I would guess you didn't since the bank came after you later for the amount owed.

                        I'm sorry if I sound harsh about all of this but I find it somewhat hypocritical (maybe the wrong word) when someone benefits greatly from the housing bubble (i.e. having a 20% downpayment in no time for a bigger house due the appreciated value of property owned) but when the bubble bursts and you're underwater you can just walk away. I know everyone's situation is different and with your wife losing her job it probably didn't matter whether the market tanked or not.

                        You did a great job with what you had and sound as if you're not willing to make the same mistakes again and I commend you for it. God knows I've made my share of mistakes in the past and have learned from them. I just wish I could call up my broker and say "Hey, let me have that money back from that Netflix investment since it didn't work out so well although it should have." I know stocks and houses are different assets but a loss is a loss no matter what caused it.

                        Again, I don't mean to sound harsh or judgemental on how some dealt with the housing bubble since it was terrible, but hopefully people who were caught up in it learned some lessons from it.
                        Paying an old deby brings it back current on your report and actually drops the credit score. Not only that but renews the 7 years they have to report it.

                        Comment

                        Working...
                        X