Getting Rich Slowly... very slowly

Tip of the hat to Get Rich Slowly, a good financial tips blog that is now boring to me, but is still useful to those that haven't yet taken the steps I'm about to discuss.

If there is one useful skill I learned in my first full time job, it is the creation of elaborate Microsoft Excel spreadsheets. This is a skill that doesn't come in handy too often, but when it's time for me to do some budgeting and financial planning, oh boy is it time for me to shine!

I started my budget spreadsheet in 2000 as a basic tracking tool for my earnings, utility usage, and my brand new car loan. In 2003, I got my first mortgage, so I threw the calculations in there to see how much principal and interest I was paying. The spreadsheet was an easy to use tool for tracking interesting financial transactions I was making.

Between 2002 and 2005, I spent way too much money on stuff. Collectibles, DVDs, CDs; I was a financially stable single guy (in 2002), so I bought whatever I wanted. If I had had then the budget spreadsheet I have now, I would have realized pretty quickly that my spending had exceeded my earnings, the first mistake in financial planning.

I staved off credit card debt disaster for most of those years by taking advantage of low interest balance transfers. I would juggle balances from one card to the next, always keeping my interest rates low. At some point I started tracking these balance transfers in the spreadsheet as well. But I still didn't catch the fact that the balances were growing faster than I was going to be able to handle.

It took until 2005 for it all to catch up with me. Suddenly, I found myself carrying balances on my high interest rate credit cards, making minimum payments each month. This was pretty distressing, as it should be, so I knew it was time to start taking advantage of those finely tuned spreadsheet skills to do more than just track data. I needed a plan.

The first step of the plan was to actually start actively tracking all of my expenses. Sure, the credit card statements each month do that for you, in a way, but there is nothing like tracking your spending yourself throughout a month to wake you up to what you are doing. When you realize you have spent over $500 on groceries in the first half of a month, you start thinking about what you are buying when next at the grocery store. The budget spreadsheet was the obvious place to keep all this information.

The second step was to take that expense tracking and develop a reasonable monthly spending budget, which had to allow for some debt payment above minimum payments. My original spending categories, which have evolved over time, were groceries, entertainment, fuel, my wants, pets, art expenses, eating out, the wife's wants, and incidentals (to cover things that just didn't fit anywhere else). Then, knowing how much extra debt pay-down I was going to do each month, I could develop a cascading debt payment plan.

A cascading debt payment plan is pretty straightforward in concept. Start by putting any extra money towards your highest interest debt; when that debt is paid off, take all that extra money, which now includes the minimum payments from the first debt, and put it towards the second highest interest debt; continue until not in debt. Now, try to make a flexible, useful spreadsheet out of that concept. It took me a while to add that feature.

With the spreadsheet in place, I started taking control of my finances and turning things around. It took three years of responsible, frugal spending to eliminate credit card debt from my spreadsheet. With less credit card debt came a better credit rating, and in late 2008 I was able to get an excellent interest rate on a secured line of credit, where all my debt is now carried (I must note that I do not consider my mortgage to be a debt). And it's not nearly as much debt as it used to be, although some recent unexpected life changes--complete with new expenses!--have pushed back my "no more debt" date by a full year to 2012.

The spreadsheet itself has never stopped growing and evolving. It now also tracks and predicts my income taxes, RRSP / pension earnings, savings (ha!), reward points, Total and Gross Debt Service Ratios, and many other silly things not worth mentioning. It's basically ridiculous! But I love it, and a day rarely goes by that I don't open it up and update it.

So, in summary, here are my top tips for financial stability (common sense FTW!):

1. Do not spend more money than you earn.

2. Track your spending to be sure.

3. Pay off your highest interest debts first.

And, I also have a couple more controversial tips, based on personal preference:

1. Don't bother with non-registered savings until you are out of debt, unless you can actually consistently get a better interest rate on the investment than you are paying on your debts. If you have a credit line, the unused portion is basically savings of a sort...

2. Do all of your spending on a credit card with a rewards program. You might as well get something bonus back for spending all that damn money each month. This obviously requires more spending discipline than sticking to cash/Interac for purchases.

Okay. Good post. I think it might be time for me to update my budget spreadsheet again...