When people hear that I paid off $300,000 in debt in three years and now have a debt-free lifestyle, the most common misperception is that I don’t have to spend a lot of money. They assume I live by the “rice and beans” philosophy, the one that makes you ashamed of eating out and splurging on yourself.
In reality, I like spending money, not hoarding it. I really enjoy shopping for designer clothes, eating out at least twice a week, and traveling frequently. I’ve been known to spend a pretty penny on K-Pop merchandise and live concerts.
And while I was paying off $72,000 in student loans, I learned that if I completely deprived myself of everything I loved spending my money on, continuing my debt-free journey wasn’t going to last very long. Finding the balance between living your best life and paying off draining debt like student loans is personal, but these three spending rules have helped me avoid the spiral of spending shame and encouraged me to pay off my debts faster. debts.
This is the second column in a 5 part series by Bernadette Joy. In “Mess to Million”, she shows that you don’t have to be perfect to get rich. To follow @nextadvisor on Instagram for updates and live Q&A with Bernadette.
Rule #1: Ask yourself, “This or that?”
“This or that” is the rule I attribute the most to helping me pay off $72,000 in student loans in less than a year after graduation. To implement this or that, you must define what is “this” and what is “that”. “This” refers to the thing you really want to buy right now.
“That” refers to the larger financial goal you are working towards. “That” could be paying off your debts, such as student loans, credit cards, a car bill, or personal loans. If you’re not focused on paying off your debt, “that” could be meeting your investment goals or buying your next home.
When you find yourself in a spending decision, you have to ask yourself: do you want to buy this item now, or do you want to achieve this more important goal more? This or that?
It sounds simple, but there are two tricks that need to be fulfilled for this rule to help you pay off your debts. The first trick is to use the amount you would have spent to pay off your debt. The second tip is that “it” must be focused, tangible and awesome for you. Just doing “that” means paying off your student loans isn’t very impressive.
For example, I love shopping for sneakers and shoes of all kinds, and it’s hard for me to pass up a good sale. (Trust me, I can always find a good sale.) However, while I was paying off my student loans, if I found myself wandering around the mall and finding a pair that I’d like to buy, I would wonder, “ Do I want this pair of shoes, or do I want to be debt free and quit my job within the next two years? Most of the time, I would choose the vision of quitting my day job over the short-term thrill of a new pair of shoes.
And so I made a real spending choice. I would pull out my phone and make a payment on my student loans for the exact amount the shoes would cost. If I could show you my transaction history from my now defunct student loan account, you would see many small amounts of earnings, each of which correlates to a time I chose this or that . By putting in that exact dollar amount of what I would have purchased, I not only mentally saved money, but took steps to reduce my debt.
Rule #2: The 5% Cash Back Challenge
Let’s be honest. Paying off debt isn’t the most exciting, so I wanted to find a way to make it more rewarding along the way. I remembered from my days in financial services that people love using their credit cards because of the rewards and points programs they offer. So I decided to create my own reward program to pay off my debts.
If you have a lot of debt, try breaking it down into smaller chunks, then promise to pay yourself back each time you take that step. For example, let’s say you have $10,000 in debt. For every $1,000 of debt you pay off, you can give yourself 5% or $50 to treat yourself to something nice if you hit your goal!
While many debt free experts say you should cut out anything unnecessary, I don’t believe paying off debt means you can’t heal yourself. I don’t drink a lot of coffee, but cutting bubble tea out of my life while paying off student loans was out of the question! Implementing the 5% cash back rule made me feel less guilty about spending money on unnecessary, but enjoyable purchases, while staying on track. I used this cash back not only for bubble tea, but also for clothes, gifts for friends or dessert. And sometimes I would stack my money to save for bigger purchases while paying off debt, like tickets to see a show. It gave me something to look forward to and helped me recognize my progress along the way, instead of glossing over what I’ve achieved so far.
Rule #3: Ask me, “Is that FIRE?”
While it’s hard to pay off debt, I’m going to boldly state that it’s just as hard, if not harder, to stay out of debt.
After paying off my student loans and mortgages, I felt guilty about making bigger purchases because I used to go without them while paying off my debt. And then for a while during the pandemic, I found myself going back to old spending habits and justifying purchases that I wasn’t spending so much on – because, hey, I’m out of debt now, n ‘is this not ? And this world feels crazy!
I find a new rule that works well for me now to keep balance. It is to ask myself: “Is this the FIRE?
Traditionally, the acronym of FIRE refers to “Financial Independence, Early Retirement”. But I personally changed the acronym to something more tangible in the present for me: “Financial independence, relax everyday”. What does this little word change do for me? It forces me to wonder if a potential purchase will help me become more financially independent in the future OR make me feel more relaxed today.
On the one hand, by asking myself “Is this the FIRE? has led me to focus more on investments that will appreciate in the long run: buying our next home and investing more in retirement accounts which are clearly helping me achieve financial freedom faster. On the other hand, it has also given me permission to buy things that don’t necessarily add up to financial independence, but definitely help me feel revived in the present.
Wondering if it’s FIRE also took away my guilt for buying things that my first-generation Asian parents would call “waste of money.” It’s been bit by bit, but now I shamelessly buy more expensive organic food, splurge on massages, and have no qualms about paying for therapy and coaching. These purchases reduce my anxiety and bring me closer to the health I need to enjoy the financial independence I plan to have in the future.
Rather than rigidity, I teach my students that an 80% pass rate on all my spending rules is fine.
In my role as a financial educator teaching thousands of people how to become debt free, I have discovered that where people are most reluctant to stick to their financial plans is the idea that it must be all or nothing. Either you stick to the rule 100% of the time, or not at all. I’ve always been a fan of the Pareto principle, or the 80-20 rule that says 80% of your success comes from 20% causes. It’s often applied in personal finance to say that you should focus on the 20% of factors that produce the best results.
But as a recovering perfectionist, I used that principle backwards to say that as a human being, I have the right to be a human being at least 20% of the time. This means for me that as long as I follow these rules 80% of the time, it makes it possible to break the rules once in a while without completely derailing my financial progress.
So yeah, sometimes shoes win and end up going home with me. I totally spent more than 5% of my stage goal to buy single tickets for BTS in concert. And did that Super Mario-themed denim jacket I love to wear give me financial independence or everyday relaxation? Of course not, but allowing me to not have to calculate every purchase at least 20% of the time and showing my students that you can still pay off your debts and earn your first million dollars in net worth is what makes the personal finances and life, so much more fun.
In my next Mess to Million article, I’ll share some of my personal tips on how to help your parents financially as a first-generation American.