In this post, I would like to share with you the first stage of my FI journey- getting out of debt.
How I got into debt
When I was a university student, I decided that moving out of my mother’s house to go live with my (now ex) girlfriend was a great idea. I did, however, ignore the facts that:
1. I had no job or other income
2. I had very little savings
3. I would have to start paying rent and bills
4. I would have to pay MORE for the commute as the flat we moved into was A LOT further from the university than my mother’s house.
5. I would struggle to find a job as all my time was consumed by lectures and commuting.
Anyway, you can see how this brilliant financial move got me into debt.
My parents were very helpful and despite trying to explain to me that this is a bad financial move, they still lent me money so I could make this mistake and continue studying towards my degree.
We broke up (me and my ex-girlfriend, not me and my parents) before my final year in university and I moved back home. The fact that I also started earning some decent money as a teacher and tutor helped as well.
Eventually, I finished my 4 year period in university with a valuable degree in accounting and economics and around £16k in debt.
For those who missed the irony- I went to study accounting and economics to understand how money works (that always fascinated me) and ended up in debt.
Moving to the UK to live with my grandmother
My late grandmother was an amazing woman and I loved her dearly. Despite living in different countries, we spoke every week.
Ever since I was 18, England was always my choice of destination whenever I had a chance to go abroad. I always wanted to spend time with her and always told myself “I may not get another chance”. The fact that I always flew to the same place became a running joke in my family. You know what? I always thought “let them laugh, I want to have no regrets when I look back” and I am so happy I did that. Since I was 18 and until I was 27 (when I moved to the UK), I don’t think there was a year I didn’t come to London.
Anyway, as I said, we spoke every week. I would always end the call with “I’m coming to live with you when I graduate”. She always used to tell me she was too old to plan that far ahead. Eventually, I graduated and I moved to the UK to live with my grandmother. Again, “this could be my last chance”. I am so happy I got to spend 17 months with her before she passed away.
I don’t know many 93-year-olds that would let their 27-year-old move in with them and change their whole routine but as I said, she was an amazing woman. She also enjoyed my company (I hope) and the fact she had someone that could pop to the supermarket and get her anything she needed within a few minutes.
Anyway, what has that got anything to do with debt?
Getting out of debt
Firstly, moving in with my grandmother allowed me to focus on my work, exams and savings without paying bills. Secondly, I moved to the UK after securing my first serious job, as an accountant trainee at a BIG 4 firm.
Lastly, I decided I was going to get rid of my debt (which was around £16k at the time). That’s when found Dave Ramsey on Google. I ordered his book “The total money makeover” and loved his approach.
Here’s a link to the book, I get nothing if you order it and I recommend you check if your local library has it available before buying it.
For those who’ve never heard of Dave Ramsey, he is an American financial guru who specialises in getting people out of debt. He combines simple money rules with Christianity and while I’m not Christian, I still really enjoyed his content.
His main rules are:
- Don’t use credit cards, use cash or debit
- Make a budget
- Start paying your debts off starting from the smallest, regardless of the interest rate. He calls this “the debt snowball”. The reason behind the name is that every time you pay off a debt, you have more free money each month to “attack” your next debt. The amount you use to pay off your debts gets bigger and bigger like a…. yeap, you guessed it- snowball.
Although that is not the most mathematically efficient way, he says once you pay off a small one, you get a sense of accomplishment. That sense of accomplishment motivates you to keep going so basically- psychology over math. As I only had one low-interest debt to the bank and two interest-free debts (thanks mum and dad!), I didn’t have an issue with that.
His plan is to follow 7 steps (which he calls “Baby steps”) in order:
- Save $1,000 for your starter emergency fund
I went for £1,000 but I still agree with this as a first step. The biggest advantage of this baby step is that if an unexpected expense comes along, you won’t go deeper into debt and get discouraged. An emergency fund is a great thing to have.
- Pay off all debt (except the house) using the debt snowball
This is the main step that made Dave Ramsey famous. It is where you give all you got to pay off your debt. This is also one of the longest (timewise) baby steps to complete. In order to stay focused, I would listen to his daily radio show while at work. He would basically repeat himself to a point you already knew what his answer is going to be before the caller finished his question. However, I believe in “self-inflicted positive brainwash”, which is what the show was for me. Also, as I didn’t have a mortgage at the time, after completing this baby step I was debt-free.
During this step, I was really focused on getting out of debt. I was saving more than 70% of my income and I was really intense about it. Me and Lazy FI Mum were dating at the time (long-distance) and she was very supportive of my journey toward getting out of debt. Whenever she came to the UK to visit, it was never about shopping or expensive restaurants. She was happy to go around London and hunt for pokemons. To be honest, it was loads of fun, we had a great time. It just goes to show you that the best things in life are free. It also showed me that I was dating a super supportive person that does not care about expensive nights out, which means we were suitable for each other.
This baby step is why I highly recommend Dave Ramsey to anyone who’s want to start getting out of debt.
- Save 3–6 months of expenses in a fully-funded emergency fund
Now that you’ve paid off all your debt, its time to increase your emergency fund. I still believe an emergency fund is important as it allows you to sleep well at night knowing you can deal (financially) with a lot of unpleasant surprises. If you have a very stable and secure job- you can lean towards the 3 months. If you feel insecure- go closer to 6 months.
Me and Lazy FI mum doubled our emergency fund when COVID 19 started. We did that because there was a lot of uncertainty in our life. Once we realised our jobs were secure and we understood (roughly) what the “new normal” world looked like, we went back to our normal emergency fund.
- Invest 15% of your household income in retirement
In this baby step, you save 15% towards your pension.
If I’m honest, this step is where he lost me. In baby step 2 he got me to live off less than 30% of my income (save 70%). Now, he’s kind of telling me to “relax” and only save 15%.
“Are you kidding me? You just got me used to living off rice and beans and putting more than 50% if my income towards debt, why only 15%?”
The answer, of course, is that he plans for people to work until the traditional retirement age (over 60). For these people, that is good advice. However, for me, it felt like he gave me some amazing tools and skills to live on less than I earn and save more than 15% so I did not like that approach.
This is where I started looking elsewhere and found the FIRE movement. I was so happy to find a community of people who kept saving a large chunk of their income in order to retire early.
- Save for your children’s college fund
You can tell by this baby step that he’s very American. As he already lost me in step 4, I found it very easy to ignore this step, especially as I had no kids at the time.
- Pay off your home early
As he already lost me in step 4, this baby step was also easy to ignore as I had no mortgage (and didn’t own any property).
- Build Wealth and Give
As I mentioned, he uses a lot of Christian “rules” in his content. One of them is tithing, which is giving 10% to charity. That’s the “Give” part, which I get. However, the “Build wealth” was very vague, especially as he says to only invest 15% in retirement.
You know what Dave? I am grateful for baby steps 1-3 but since I discovered the FIRE movement, I’m already building wealth.
Back to the story
As I mentioned, I moved to the UK towards the end of 2015 with £16k in debt. In June 2016, the UK voted to leave the EU, which caused the value of the British pound to plummet. My debt was in Israeli Shekels and I was earning in GBP. This meant that overnight my debt (in GBP) increased by almost 25%! Nonetheless, I was still able to clear all my debts by the end of 2016. This meant that from 2017 onwards it is all about pursuing FI and having the option to retire early.
The people who helped me
I do believe in the power of community and the importance of the people you surround yourself with. I owe a lot to the people who helped me get out of debt (each in their own way).
My parents- For letting me make my own mistakes and lending me the money to complete my studies. I guess parenting is not about preventing your kids from making mistakes but being there for them when they do.
My grandmother- For opening her home to her young grandson at the age of 93. I have no idea what made her do it but I am grateful she did.
My uncle- For opening his home for more than a month when my grandmother (his mother) passed away. I was a wreck at the time and really appreciate that. Both he and my grandmother taught me a lot (by example) about how to treat family.
My wife, Lazy FI Mum- For her support during this journey, for countless money talks we had and for always having a positive attitude. I feel bad for her, I think she thought it would all be over once I was debt-free. How wrong she was!
Dave Ramsey- For his amazing content that helped so many people get out of debt.
Conclusions- things I’ve learned
- Dave Ramsey is awesome for getting out of debt.
- Even a personal journey is not really just yours, many people helped me along the way.
- I have no regrets. Not about flying to the UK every time I could and not about getting into debt, I learned so much from it.
- I learned how to treat family and open your home to them.
- I learned how important it is to have a supportive partner.
Did you go through a similar journey? what methods did you use to get out of debt?
Let me know in the comment section.