Have you ever found yourself drifting through life without direction or purpose? Drifting is how you get nowhere, fast. When you’re drifting, directionless and without goals or a plan, you can fall, unprepared, right off a cliff. This happened to me. In my mid-twenties, I fell off a financial cliff and hit my financial rock bottom – HARD. This is an abbreviated version of my story and the 2 powerful financial lessons that I learned the hard way.
My Rock Bottom
I hit rock bottom in 2011. I was a single mom to a baby boy, living in a tiny efficiency studio apartment, drowning in medical bills, credit card and student loan debt, and unable to pay my bills. One night, after I put my son to sleep, I sat down on the couch to pay bills. I had avoided opening my mail because I knew bills were overdue and, yet again, I didn’t have enough money to make the minimum payments on all the bills.
My credit cards were maxed out and the credit card companies lowered my credit limit each time I made a payment, so I never had any available credit. I was alone, living far from my family. I received no child support payments and received no government assistance. My dad was not employed, my siblings had no money, and my mom had passed away several years earlier. I didn’t know what to do and had no one to turn to. I didn’t know how I was going to buy groceries or gas to get us through the week until payday. A friend had bought me diapers that week or I wouldn’t have even had a clean diaper for my baby.
I slowly opened the dreaded credit card statement. I noticed, for the first time, the box that said something like, “If you only make the minimum payment, it will take you 26 years to pay this off.” In shock and horror, I dropped the bill. 26 years!!!! I could not imagine my life staying the same for 26 years and having this debt hanging over my head for that long. In despair, I broke down crying. This stressful moment was my financial rock bottom moment. After lots of tears, tantrums and some theatrics, I committed to getting serious about my financial situation.
How did I end up at rock bottom?
I had graduated from the University of Washington at age 22 and immediately got my first full-time “real” job. Most of my college friends were moving away because they got new jobs, were attending graduate school or were getting married. I had no clear idea of what career I wanted, so even my job was just a placeholder – it was a vehicle to a paycheck, nothing more. I drifted financially. I contributed a small amount to a retirement account, just enough to receive the full employer match. I had no credit card debt and made more than the minimum payment on my student loans. I had a small savings account, paid my bills, and avoided taking on debt, but I lacked a financial plan. I had no strategy for paying off my loans and had no future financial plans beyond just paying my bills.
About 15 months after my college graduation, my mom suddenly and unexpectedly passed away. We were very close and her death threw me for a loop. My emotional and mental health suffered. What followed were three exceedingly difficult years. During this time, I decided to go back to school to be an elementary school teacher. I was accepted to a Masters in Teaching program at the University of Washington. However, I ended up needing surgery shortly after beginning the program. After surgery, I received the devastating news that it was unlikely I would ever be able to get pregnant without significant fertility assistance – if I was able to conceive at all. As I had always wanted a family, this news was hard to bear. Still emotionally fragile from the loss of my mom, I went into an emotional tailspin.
Graduate school was very expensive and added significantly to my student loan debt. Although I was working part-time, medical bills began piling up and I found myself ignoring my financial situation. The credit card was the easiest way to make my problems disappear while I desperately tried to focus on school. After about 6 months, I realized it was not financially feasible for me to remain in school at that time. I was granted a one-year leave of absence from school and returned to working full-time. Although I had not technically dropped out, I felt like a drop-out and a failure. (I have a streak of perfectionism and very high expectations of myself!)
My emotional and mental health were completely eroded at this point. Between feeling like a failure and dealing with my mom’s death as well as the news of likely fertility problems, I was a mess. I found out that I am an emotional spender. I never splurged on really expensive things, but I made a lot of little purchases that added up over time. My uncontrolled spending and apathy towards handling my finances combined into a perfect financial storm. I racked up close to $20,000 in credit card debt in a very short period of time.
I was not making smart choices in any area of my life. In early 2010, I found out I was pregnant with my medical miracle baby boy. By late 2010, I found myself homeless with a newborn baby and staying with friends and relatives. When I had found out I was pregnant, I began making changes. After returning to work from an unpaid maternity leave, I managed to rent a small efficiency studio apartment. The efficiency studio consisted of one room, a bathroom, and a teeny-tiny kitchen with a small sink, a two-burner stove, and a mini fridge. Three months later, I had my rock bottom moment.
Lesson 1: Don’t be an Ostrich
Ignoring your financial problems and acting like an ostrich putting its head in the sand will only make your situation worse. Wishful thinking is not a money management strategy. I know from experience that it is so easy to ignore the rising balances on credit cards, the dwindling (or non-existent) savings account, and the cash that disappears faster than you can stash it in your wallet. However, ignoring your money management and debt problems will not magically make them go away. In fact, ignoring the problem is guaranteed to cost you additional money as you thoughtlessly spend, squandering money on consumerism and on interest payments. It can be overwhelming and seriously intimidating to take charge of your finances, but the rewards are worth it! The hardest part is getting started – from there you take it one step at a time.
Lesson 2: Take Baby Steps
My biggest lesson in money management has been that I need to take baby steps. I did not overcome my financial mess through making just one change. I could not change my spending and money management habits overnight – I had to take it one step at a time and I recommend this approach to anyone just getting started. Begin by organizing your financial papers and getting an overview of your current accounts, balances, interest rates, and recurring bills. Set up a system to track your spending and then create a budget. If you are like me and find budgeting overwhelming at first, then don’t focus as much on long term goals or try to change cold turkey. Instead, set multiple short-term goals. Maybe put $100 extra per month towards your debt, or start transferring $25 every paycheck straight into savings. Go from eating out three times a week to eating out only twice a week. Every couple of months reevaluate where you are and where you want to be.
When setting your goals, really get to know yourself. Maybe you could go cold turkey and switch from buying your lunch every day to brown bagging it daily. But, maybe you can’t resist the latest bestseller or are a compulsive clothes shopper. Allow yourself some small luxuries, but slowly rein them in until they are in line with a spending level that fits within your income and financial goals. It will be easier to stick to your changes long-term if they are made gradually and realistically.
Fast Forward to Now
It has been almost 6 years since my rock bottom moment. I am still a single mom and have a wonderfully funny and happy little boy who is the light of my life. I paid off all of my credit card debt, bought and paid off a car, and bought a house. I also returned to school and earned my MBA. I do still have some student loan debt. As a single income household living on one modest salary and paying the high cost of childcare, I still have to manage my money carefully, but I am able to meet my current needs and am planning for the future.
I am glad that I experienced my rock bottom moment and had a serious financial wake-up call. If I had not hit rock bottom, I may have continued drifting financially. The benefit of getting serious about my finances is that I now have a financial plan. I still create a monthly budget and track my spending. I believe in being intentional with my finances. I have a limited supply of money and unlimited choices of how to use that money. Each choice I make involves trade-offs. My philosophy is to find the way to maximize my money such that I use money in ways that add real value to my life and limit using money in ways that do not add value to my life. My emergency savings account adds value to my life because it provides security and peace of mind. Saving money for retirement adds value to my life because it also provides peace of mind and allows me to dream of the day that I can retire. I don’t spend a lot of money on clothes or electronics because I prefer to spend money on travel and restaurants. My financial plan provides security and direction for my financial life.
Have you experienced a financial rock bottom moment? What financial lessons did you learn? If you have a financial plan, do you think it has saved you from having a rock bottom moment?
I’d love to hear your experiences and lessons. Please share in the comments section.