There are thousands of books, magazine articles, and blog posts about how to manage your finances. Many of them differ on advice they give, but all of them agree on one thing:
you have to spend less than you make. I wanted to share some of the things that we have done to cut our expenses, leading us to be able to pay off $23,000 in debt in 12 months.
1. Malachi 3:10 - "Bring ye all the tithes into the storehouse, that there may be meat in mine house, and prove me now herewith, saith the Lord of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it." Following the example set by our parents, we have always
given 10% of our gross income (about 12% net) to our church. Although the monthly tithe amount could have significantly increased our monthly debt snowball payments, the interest returned by God from following his counsel is, well . . . priceless.
Not only were our needs taken care of, but our spiritual, emotional and financial health was improved as He poured his blessings upon us. My testimony of the principal of paying tithing grew as I came to the understanding of how human I am and that He truly is the Almighty God. We don’t own anything. Our children, our home, our clothing and most prized possessions are all a loan offered to us so that we might have joy on this earth. Once I gave up the feeling of ownership of my stuff and my things, my desire to own more stuff decreased. His promise to give us more than we have room to receive was understood and my desire to give more increased. All that we can take with us from this life is the knowledge that we’ve gained and the relationships that we’ve made. Truly understanding and following this counsel has brought us much peace and happiness and was the most important stepping stone to getting out of debt.
2. Our second budget category is Home. This includes our Mortgage, Homeowners Insurance, Property Taxes and Home Improvement. I include furniture, appliances, repairs, yard maintenance etc. Even down to the small things like a picture hanging kit into our Home Improvement category.
a. One of the first things we did was shop around for insurance. By doing so, we went from paying $500 per year to paying $350 per year and we have the exact same coverage. We didn’t higher our deductible, we simply found a company with a better rate. We recently read too that if you haven’t shopped for insurance in the last 6 months, than it has been too long. It takes quite a bit of time, so I wouldn’t recommend doing it that often, but it has been 2 years now for us, so we might shop rates soon.
b. Another lesson we learned the hard way is to pay attention to your Escrow account through your mortgage company. Our mortgage company wasn’t taking any amount out for property taxes, even though it was itemized out in our closing documents. It was a simple mistake made by someone processing paperwork, but at the end of the year we were basically sent a bill for $1500 due to a delinquency in our escrow account. Paying attention to your escrow account and understanding what it means can ensure you won’t have a balance at the end of the year and also you aren’t paying in too much.
c. I designate $60 every month for the Home Improvement category. Some months we spend more, some months we spend less. On months we don’t spend $60, we put the leftover into savings for the months that we spend more. When our water heater needed replaced unexpectedly, we didn’t have enough in our Home Improvement budget to cover it, so we borrowed from our Emergency Fund. But for the most part everything gets covered with the extra $60.
d.
The biggest impact in this budget category was refinancing our mortgage. We had started the refinance process in November 2009 when rates had started dropping and were low enough to make it worth the time. We had one hang up in closing our refinance which turned out to be a blessing. Some of you will know what mortgage insurance is and some of you might not. If you own less than 20% of the appraised value of your home (or your total mortgage is more than 80% of the value) you pay mortgage insurance. Mortgage insurance is a policy that protects the loan company if we get behind on payments. I am spelling it out like this because we owned a home in Alaska and mortgage insurance was part of our payments and so was escrow and I had no idea what they were. I just paid them, because it was part of the payments, but now I understand them. Anyway, during the refinance process, we were approved for the loan, our house appraised for $20,000 more than it had when we bought it 1.5 years before (which was a huge shock and we couldn’t actually sell it for the appraisal price, but it is great news from the loan perspective), but the mortgage insurance company denied us. Their reason for denial was that some of the comp’s used in our appraisal (other home sales that were compared to our home to come up with the home value) were more than a 7 mile radius from our home. This is very common in the rural area that we live, but this certain company didn’t want to approve us because of that. To make an even longer story shorter, we ended up refinancing to two loans. The first loan is our main mortgage and was for 80% of our homes new appraised value and the second mortgage was with the local credit union and was for the amount over the 80%. Because we now had a new appraised value, that automatically changed the percentage of how much of our home we owned. So instead of paying mortgage insurance, we were making 2 loan payments to two different banks. We had to pay closing costs with both banks, but it saved us the $135 per month for mortgage insurance. And here is where it got really exciting for us,
we refinanced to a 15 year mortgage, cutting 13.5 years off our mortgage and we lowered our interest rate by 2%. Our monthly payment was only $200 more per month and from the very first payment, almost $500 more per month was going towards principal. Without making any additional principal payments over the life of the loan, we will have saved over $128,000 in interest.
Update: All $23,000 of debt we paid off was mortgage debt (not including interest). This does not include our regular first mortgage payment which we paid about $6,600 in principal in 2010. We borrowed money from my mom for a down payment when we purchased our home. We paid her back and we paid off our 2nd mortgage loan that was created when we refinanced. We made our last payment on December 30, 2010 and our kids screamed "We're Debt Free!" inside the credit union. This made us debt free other than our 1st mortgage which we currently have just under 14 years left on our loan. We don't carry credit card debt, our van was paid off and we paid cash for a car for Greg in June 2010.
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