In my capacity as a financial planner for Financial Finesse, I recently met with a woman that I have seen for annual updates each of the last 5 years. Her story is one I'm happy to tell because of the progress she has made and how her life has evolved. When we had our first conversation years ago, she was going through a very long, messy and financially draining divorce. With some serious effort and focus, she has gone from having a negative net worth to being on track to consider retiring a bit earlier than she ever expected.
At our first meeting, we put together a simple budget and a net worth sheet. Both were, to put it mildly….UGLY! At age 35, she had far more in debts (mostly joint with her soon to be ex-husband, who had a gambling problem) than she had in assets. She had a negative monthly cash flow and she was using a credit card to fund some basic needs (groceries and gas for her car).
She and her husband managed to pay the minimums on all of her cards, but the balances kept increasing each month. As the situation deteriorated, her husband was uncooperative in regards to the divorce…not shocking. Our meeting helped her to prepare for their first mediation session, which ended up failing and eventually they engaged in a long, drawn out litigious divorce. He wanted to keep their house, but she saw no way for either of them to keep it and wanted it sold to allow them to part as amicably as possible and without the burden of maintaining a fairly large house.
He won in court, but as it turned out later on, he lost by winning. Along with the house, he was held responsible for about 75% of their joint debt. He was required to refinance the house within 3 years or sell it.
She took a different approach and completely downsized her lifestyle. She rented a small apartment in a lower cost part of town and had her two daughters share a room there, though they had separate bedrooms in their larger house. She traded in her luxury car for a no-frills model and declared a war on debt.
With those changes, she freed up about $700/month that she used to pay additional principal on her $20,000 part of the $80,000 total credit card debt. When she got a bonus, it went toward paying off that debt. She even got a second job as a waitress/bartender on her no-kids weekends. Within a year, she had the debt nearly paid off, including her attorney's bills. She had nearly depleted her 401(k) to get through the divorce and the transition to her new life, but she felt like she was in a position to finally make progress.
The following year, she let me know that the debt was completely paid off as was her car, and she was saving aggressively for a down payment on a condo that she could call home even after the girls grew up and moved away. Her cash flow turned positive, her debts were eliminated and now she was making the maximum ($18,000) contribution to her 401(k). A year after that, she learned that her twin daughters had earned academic scholarships to their college of choice so there was not going to be a huge drain on her finances to fund education. We ran a retirement projection and at age 40 (just a mere 5 years from the "financial train wreck" that I met), she is on track to retire at age 62 with 80% of today's income.
The day we met, she assumed she'd have to work until age 97 to have any semblance of quality of life during retirement. But the divorce taught her that she needs very little in the way of material possessions to make her happy. She completely downsized her life from a 5 bedroom, 3 bathroom house in a beautiful upscale community to a small 2 bedroom, 2 bathroom condo in a nice (but not upscale) neighborhood. She drives an "old ugly car" (her words, not mine!) and is laser focused on her ability to live debt free and save aggressively.
She made specific, targeted and conscious choices to change her lifestyle from one of being a consumer to one of being a saver. A very difficult period of life taught her what her core values were and she has come a very long way in 5 years. I can't wait to see what next year's update looks like…
So that's a nice story—but what's in it for you? If you are one of those people (like many in America today) who are living a high cost, high consumption lifestyle, ask yourself how much of your happiness is attributed to that lifestyle and how much of your angst is attributed to it. Downsizing your lifestyle may actually downsize your stress.
Challenge yourself to find 2 or 3 changes you can make to put your financial life in a better place 5 years from now. Are you up to the challenge? (And for this challenge, you don't need to dump ice over your head…)