Let’s talk about money.
Money can be tricky to manage on your own. Add your significant other to the mix and it becomes significantly more complicated (get it? I’m so punny!).
I’m going to share how my husband, Steve, and I manage our finances. I’m going to get into the nitty-gritty details. In this post (Part 1), I’ll share:
- where we learned about money,
- the difference between good debt and bad debt, and
- how we mopped up my credit card debt in the early days of our relationship.
In Managing Money as a Couple Part 21, I explain:
- how we make purchase decisions,
- how we split expenses,
- how we automate savings and bill payment,
- and much more!
Let’s dive in!
Our Money History
Talking about money is considered taboo, so most people aren’t taught how to manage money, let alone how to manage it when in a relationship. Steve and I are no different. Our parents never sat us down to explain how money worked. We learned through observation.
My parents constantly fought about money. They fought about it before they got divorced and they fought about it even more afterwards. Post-divorce, I saw my mom’s struggle with money. She was good with money, she just had too little of it. It was a constant point of stress for her. My dad, in stark contrast, had lots of money but was terrible at managing it.
Steve’s parents didn’t teach him much about money either. They never talked about it. Steve’s only money memory is shopping with his grandfather for a washer and dryer. His grandpa paid for the appliances in cash and said to Steve “Never buy anything you can’t pay for in cash.” This is what informed Steve’s entire approach to money management.
My Credit Card Debt
It’s common for couples to start having serious conversations about finances once they begin sharing expenses. Steve and I were no exception. We started to talk about money when we moved in together.
Steve was moving into my apartment, so he asked how I managed expenses since he would be contributing to them. I replied “I don’t know, I just put everything on my credit cards.”
Steve: “Ok, but what are your expenses? How much are you spending on a monthly basis?”
Me: “I don’t know.” I said casually, because I really didn’t know. Did it matter? I was getting the sense from him that it did.
Steve: “Are you paying off your credit cards, or are you carrying a balance?” He was almost afraid to ask.
Me: “I pay them off with every pay cheque…” He seemed relieved. But then I continued “…but I never pay them off completely – there’s always a balance.”
Steve: “How much do you owe on your credit cards?”
Me: “In total? I have no idea. Maybe $10,000.”
If Steve were a cartoon character, his eyes would have bulged out of his head and his jaw would have hit the floor.
Good Debt vs Bad Debt
Good debt is a loan that has the potential to increase your net worth2 (mortgage, student loans).
Bad debt involves borrowing money to purchase depreciating assets3 (car loans, credit card debt, lines of credit, or my personal fave, the “12-easy payments” style plan from furniture stores).
Credit card debt is bad debt4.
How Did I Accumulate So Much Credit Card Debt?
I’d maxed out my credit cards before I met Steve while I was studying abroad in Paris during my undergraduate degree. Every time I approached the maximum limit on my credit card, the card company automatically increased the limit (without asking if I wanted the increases). At first, my cards collectively had a maximum available balance of $1,500, but by the time my travels were over, it had been increased to $10,000.
As a grown-up in my current stage of life, $10,000 doesn’t seem like a lot of money. But as a student making an intern’s salary over a decade ago, $10,000 in credit card debt at 20% interest, with zero dollars in savings, was a LOT. I’d been carrying that debt for a couple of years, so I’d wasted a lot of money on interest charges (almost $100/month over two years = $2,400).
And while I don’t regret a single penny I spent (well, except for the interest payments), I do acknowledge that it wasn’t the most responsible thing I’d ever done.
My Finances BEFORE
I didn’t love having credit card debt, but it didn’t bother me either. I was accustomed to operating on debt. My life was running on student loans so credit card debt seemed like the same thing to me. I didn’t understand good debt vs bad debt. Good debt (student loans). Bad debt (credit card).
I had no savings. I didn’t think there was any point in saving money until I was debt free. But I had no plan to become debt free.
Whenever I got paid, I took my entire pay cheque and dumped on my credit cards. I’d have no money left in my bank account so I’d use my credit cards again to cover my expenses. It was a bad loop.
This is when Steve showed up on the scene.
We needed to mop up my financial mess before we merged our finances. He didn’t want to be saddled with my debt (fairly), and I was newly motivated to clean it up.
Team Building Activity: Cleaning Up My Debt and Learning to Save
Our team building activity started with this:
Steve: “Nelly, this is not OK.”
And it ended with this:
*I had a well-paying internship at Blackberry, back in its heyday when it was called Research In Motion.
**I had to choose an amount that was higher than the minimum payment on my credit cards, but low enough that it wouldn’t impact my ability to pay for my other expenses. The idea was to stop relying on my credit cards for my daily expenses. I picked a number and adjusted it up and down until I hit the sweet spot (explained below).
***The “leftover” bucket was my net income MINUS my credit card repayment and savings contributions ($1,600 – $385 – $50 = $1,165). I used this money to pay my other expenses, like rent, groceries, car insurance, gas, clothes, eating out, etc. It’s important to know what your other expenses are and how much you need to cover them. I did the math and knew $1,165 from each pay cheque was enough to cover those expenses, leaving me with a bit extra. I got into the habit of running this amount down to zero by the time my next pay cheque came around. If I ran out of money, it meant I couldn’t go out with friends or go shopping until my next pay cheque. Figuring out the sweet spot: If I ended up with too much extra money too frequently, or if I ran out of money too often, I adjusted my savings and credit card payments up or down until I got to a comfortable place.
My Budget Explained
Steve suggested I make a budget in order to plan exactly how I was going to become credit card debt free. The budget above is what I used. Seeing that I could be free from credit card debt in a year and a half was incredibly motivating. I liked having an end in sight: May 1, 2006.
It also helped that Steve said “The goal isn’t to be perfect about sticking to this budget. Things will come up that will require you to make some changes (a friend’s wedding, unexpected car repairs, etc). The goal is to have a plan and to follow it as best as you can.”
I could do that.
Steve’s original suggestion didn’t include a savings bucket. I added it because I figured (i) $50 from each pay cheque was not going to make a big difference to my credit card balance, and (ii) seeing my savings grow would motivate me to stay on plan.
I was right. Putting money in my savings accounts was something I looked forward to doing each pay day.
I had two credit cards:
In addition to creating and following my budget, I took a few extra steps to reduce my debt load, which everyone with credit card debt should do:
- Ask for a reduction in your interest rate. I called both companies and asked to have my interest rate reduced. PC said no, but MBNA agreed to a 3% reduction.5
- Ask about balance transfer promotions. Some credit card companies have promotional interest rates on balance transfers. MBNA was promoting a 1% interest rate on any balance transfers for the first 6 months following the transfer. I took advantage of this.
- Transfer your credit card balance to a card with the lowest interest rate. Since I knew it was going to take me some time to pay off my entire credit card balance, and since MBNA had a promotion on balance transfers, I transferred the balance from my PC card to my MBNA card (after I had the interest rate reduced, of course). This was easy and only took a few phone calls. The promotion was for 6 months, but I knew I wouldn’t have my card paid off in full yet by the end of the 6 months, but I still wanted to benefit of the lower interest rate after the 6 month promo expired.
- Don’t just pay the minimum. Credit card companies want you to pay interest – that’s one of the ways they make money – they want you to carry a balance FOREVER. For this reason, the minimum balance they require you to pay is so low that it will never result in you paying off your balance. You should always pay more than the minimum required if you want to pay off your credit cards in full someday. This is why, when choosing my credit card payment amount in my budget spreadsheet, I made sure to choose an amount that was significantly higher than the required minimum payment.
Our Finances AFTER
A year and a half later, I was free from credit card debt. It felt great! Steve was happy about it too.
Running up that kind of credit card debt was a mistake, but it was a valuable one. I’m the type of person who learns best from making big mistakes, and this money mistake was one I’ve never repeated since.
Since then, Steve and I have merged our finances.
We’ve developed some great financial habits. We pay off our credit cards completely at the end of each month to avoid interest charges, our savings is growing steadily, we’ve set aside money for retirement, and we’re still able to spend on fun things.
Sure, we spend a bit too much from time to time (whether on vacations, overdoing gift-buying at Christmas, or on an unexpected car repair) but we always tighten our belts afterwards to get back on track.
Like Steve said, the goal isn’t perfection. The goal is to have a plan and to follow it as best as you can.
- Clean up your bad debt mess before merging your finances with your partner.
- Understand your total credit card debt. Calculate the actual number.
- Make a plan for paying it off. Spreadsheets are a great tool for this. Knowing you could be debt free by a specific date is encouraging.
- Negotiate deals with your credit card companies (lower interest rate, balance transfer promos).
- Put a little into savings. It’s a good habit to build, and seeing your savings grow is motivation to keep going, even if it grows slowly.
- Leave enough money for your other expense, or else you’ll just run up the credit card again (defeating the purpose of this whole exercise).
- And lastly, be kind to yourself. Making mistakes is how we learn. You don’t need to be perfect about your budget – just do your best – forgive yourself if you deviate from your plan and then gently get back on track.
Finally, I’ll leave you with this quote from one of my new favourite writers:
“Your outcomes are a lagging measure of your habits. Your net worth is a lagging measure of your financial habits.”James Clear, author of New York Times #1 Bestselling Book, Atomic Habits
That’s All For Today
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Bye for now!
- Part 2 can be found here. Subscribe to my blog so you don’t miss any future posts!
- From Investopedia.
- From Investopedia.
- Just because it’s bad debt, it doesn’t mean you can’t have it. You just need to be careful. Debt is ok, you just need to be smart about it and you need to be able to afford it. Just because a mortgage is considered good debt, it doesn’t mean taking on a huge mortgage that overextends you is a good idea.
- Over the years I’ve called to make this request a few more times – the interest rate on my MBNA credit card is currently 6.99%. PC continues to refuse to reduce it.