how to save

One of the key things about building a house is having money saved up to pay for the down payments for the lot and the construction loan. If you live in an area with conservative architecture, you may need even more cash on hand to land a loan to build your dream home. So you need cash; lots of it.

There are many ways to get there, but we did it the old-fashioned way: (1) saving over many (more than 20) years and (2) eliminating credit card debt.

Right out of college, with our first jobs, we made two key decisions: (1) to pay off our credit cards and (2) to save money to buy the things we wanted. Loans for a house and cars (one car loan at a time) were acceptable; any other debt was not. These were our golden rules.

Paying off credit cards and keeping them paid off (that is, not carrying a balance) is critical. Credit cards are the debbil! The interest draw can be massive, and the temptation of instant gratification is too tempting. Many years ago I had an former punk rocker IT buddy who idolized Bukowski. One time, over margaritas, he accused me and the little lady of being in bed with "The Man" because we owned a house, had two nice cars, and had nice stuff. In his eyes, we had sold our souls to corporate America while the little people, including he and his girlfriend, suffered in a dilapitated 500 square foot garage apartment. "Wait a minute!" I yelped. "Do you realize that you and yours make as much money as me and mine?" The difference? Massive credit card debt. Much of his take home pay was going to interest charges on his cards. He was stunned. To his (ahem...) credit, he began paying down his cards and getting his finances in control.

To save up money for the things we wanted, we created a savings account with an associated spreadsheet to track our "funds". Not mutual funds but categories of money in the savings account. One "fund" was straight-up savings (in the hope of using that money as a down payment for a house), one was for buying a horse, one was for supporting my music habit, one for donations, one for a new car, and one for travel. Each month, we would assign a certain amount of money to each of these funds in the spreadsheet and then move the money into the savings account. Because this happened every month, it was automatic. We didn't learn to live on the greater amount of money: we just didn't see it in our day-to-day lives. If we had an emergency expenditure come up one month, we could suspend the allocations that month and then pick it up again the next month.

We started this savings account of funds in July of 1991 by putting in $400 a month (I know this for a fact because we still have and update this spreadsheet). As we got raises or bonuses through the years, we allocated half to savings and the other half to various funds. The number of funds changed over time as our needs changed (for example, we had a wedding fund at one point; we added a book fund, an art fund, Christmas fund). For the car fund, we always take a certain amount for the cars, whether that was for a payment or, when the car was paid, saving for the next car. We could use the car fund to pay for unexpected repairs and as a healthy downpayment for the next car.

Over time, as various funds grew, the balance as a whole grew. Ten years later we had some serious money in the fund. Once we had that nest egg, we could borrow money from ourselves (from other funds) to pay for something we wanted or needed now. For example, we could self-finance an auto purchase, so we could pay cash for a car and then pay ourselves (our fund) back off. Ditto on other fund purchases.

This approach requires self control, but by keeping money out of the general spending pool, we weren't able to expand our lifestyle to eat up every dollar we made. As the bride's father would tell us, you tend to live on what you make. If you make twice as much, you tend to live in a nicer house, drive a nicer car, eat nicer food...

Also in the spreadsheet is an estimate of our net worth. This included not only the savings fund described above, but also the value of our 401Ks (you should always top those babies out, especially if your employer matches your contributions [that's an immediate 100% rise in value] and you should always put money in regardless of what the market is doing). Our investments are in index funds: low fees and perform just as good if not better than managed funds.

It was fun to see the net worth increase each month and each year (less fun to see it decrease...). The plot below (I've carved off the monetary value for obvious reasons) shows the growth of our net worth over time:

The neat thing here is that although there have been a few bumps in the road, for most part, the trend is up. The rate of increase changes, and sometimes it's flat or goes down, but the overall trend is up. Again, a key thing here is to keep putting money in no matter what's going on with the market. We kept putting money in after the Dot Com Crisis and the Banking Crisis. This is where you are buying low. When the market comes back, your assets roar. The big inflection point in the curve above represents the Banking Crisis; however, note that our net worth flatlined and did not go down. The reason it didn't go down it because we continued to put money into our 401Ks and whatnot, just as we did before. When the market comes back (and it always seems to come back...), the value rises at a pretty good clip (in large part because we bought low during the bust).

So there you have it. A way to eliminate credit card debt and save money. It works for us. Maybe it will work for you!

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