Our Debt Free Journey Part 2: How We Ended Up Back In Debt

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Last week I told you how we got out of debt and why I don’t share our debt free journey often. I ended by telling you we ended up more than just out of debt we were 100% out of debt plus the mortgage and owned two rental homes as well.

I then ended my story with a cliff hanger (don’t you hate those! I do too but the whole story from start to finish was over 3000 words long, so I thought it merciful to split it up). I ended by telling you we ended up back into debt by paying stupid tax to the tune of 40,000+ dollars of new debt.

How one family went from debt free to in debt to debt free again and the lessons they learned from it.

Our huge mistake: How we made it worse, & how we became debt free again

The story of our huge mistake, starts at the beginning when we paid off debts and bought our $10,000 home and set out to renovate it.

We thought we were being wise paying off debts and figuring out how to pay off the mortgage too with two inheritances that in most parts of the country wouldn’t cover the cost of one home, let alone pay for three homes in full and pay off an additional $15,000 or so in debts too.

However, we neglected two well known steps of getting and staying debt free.

  1. Never stopping your car payment but instead paying it to yourself for vehicle replacement purposes
  2. Have a fully funded emergency fund of 3 to 6 months.

We were not woken up from the error of our ways until we were moved into our $10,000 home, and were waist high in renovating our $15,000 rental and had a budget set and money put aside for renovating our original home for rental purposes.

How we ended up with a third home before our original home was finished

Yes you read that right our original home was renovated after the $15,000 rental. A co-worker of my husband’s needed an inexpensive place to crash for a few months shortly after we had moved to our full renovated $10,000 home. He knew the poor condition of the home but was willing to pay for all holding costs and utilities anyways as that was cheaper than rent elsewhere. At the time he moved in we were waiting on my grandmother’s inheritance to arrive so we could have the money to renovate, so having him pay the holding costs in the mean time was a relief to us.

He was still renting the place when my inheritance from my grandmother came and so we set aside a realistic amount of money to make the house livable again, and realized we would have money leftover.

I prayed about what to do and really felt like a rental would be a good investment.  We had just $15,000 to spend and the foreclosure I wanted was close to $30,000 but the bank took our cash offer and we set out to fix the home.

Just a few months into those renovations, we discovered our HUGE MISTAKE .

Our awakening began one afternoon when my very old car died in a parking lot with 3 children in tow 45 minutes away from home.

The car would start, but it wouldn’t move out of park. I called a trusted mechanic and he said the fix was expensive and cost more than the value of my old car. I left the car abandoned in the parking lot over night and had a friend drive me home.

Now my first thought was, we will just survive with one vehicle until both remaining homes were renovated and rented. Then we will use the rent and save for a clunker.

My hubby was quick to remind me why I didn’t drive the van anymore. You see it had started stalling and requiring a strange jump start that required a glove and knowing just when to jump back. It had also had an episode where I was driving down the highway and its doors had started opening and closing by themselves while the alarm and horn started honking also unaided. It was not a family friendly vehicle anymore.

The van, like my car, had been given a “sorry folks it isn’t worth fixing” death sentence from our mechanic. Our plan had been to have my hubby drive it and hope it lasted until renovations were over and we were collecting rent money that we could save for a better clunker.

With a car that couldn’t stay stuck in a parking lot forever and another vehicle close to death my husband and I decided we would search Craigslist for a clunker that was safer than our family van . We were thinking we would get an idea of what a clunker would cost and then see if we could trim the renovation budget enough to pay cash for it.

But, thanks to the governments “cash for clunkers” program that year, the low priced clunkers were no where to be found, people were taking advantage of the program instead of privately selling them. We quickly discovered that there was no way we could trim enough out of the renovation budget to pay cash for a vehicle.

Our frustration over the whole situation led to a step that was insane but in the end it was a huge turning point for us that taught us a lesson about debt we will never forget.

We went to a dealership and drove 2 vehicles each 3 years old with low mileage off the lot, and let them go lift my car out of the parking lot, and take our surviving by a thread van. We did get very good deals on the vehicles we bought, this thrifty gal does know how to negotiate with a car dealer and we walked away paying less than Kelly Blue Book value on both vehicles,  but both of those vehicles came with a hefty monthly payment.

My husband and I had a plan, that was risky, stressful, and didn’t work. Take it from me, any plan made on no sleep is not a good plan.

We thought since we had no other debts, and we now had rental homes, we could use the money from the rental homes to pay off the vehicles faster and the money from the second job my husband had yet to quit to make the payments in the mean time.

Sure it meant he would be working a second job for a few years more but at least we would have decent vehicles that we could hold onto for years to come, since we tend to prefer to hold onto a vehicle until no one else wants it but the auto wrecker.

Once the vehicles were paid off we would set up a “vehicle replacement fund” like we should have done before and we would not have to have a car payment again.

The plan backfired.

We did manage to finish and rent both homes but one set of renters never paid on time if at all. Then my husband saw his chance to switch departments at the hospital to an area he had been wanting to try for a while. The switch  thankfully reduced his stress level, but it also reduced our pay as he wasn’t able to work his current second job around his new hours in his new department.

With 1/2 the rent we planned to receive and less monthly income keeping the vehicles was too costly for our family. Every month we were juggling the budget to make the payments.

We fought over the solution, my husband figured new renters, and a second job that worked around his new job were all we needed to get back on track with our plan.

I however felt like our original home just wasn’t a good fit for renters. It was just too expensive to heat and cool for most of the families who rent in our area to afford on top of rent (if you haven’t guessed by the low housing prices yet we live in a somewhat low income town). I felt like we should sell it and use the money to pay off the vehicles and set up an emergency fund.

My husband felt like we shouldn’t use inheritance money to pay for vehicles that don’t  hold their value. I argued with him that the sale of the home would allow us to set ourselves up financially to be debt free for good and that had a value beyond money. It would give us more family time, and the ability to make financial decisions instead of having them made for us because of a payment owed.

Finally he agreed and we placed our now empty original home on the market. It took 9 months to sell, and in those 9 months God ingrained it on my husband’s and my own brain how painful it is to scrape money together to make payments on something you purchased when you were in a different income bracket.

You are never guaranteed to earn tomorrow what you do today, always leave plenty of wiggle room in your budget and savings for a negative change in income.

The day the check from the house sale cleared was the same day I paid both vehicles  in full. It was also the same day I drove down to the bank and set up an automatic withdrawal into a savings account each month that is labeled “future vehicles” for about 1/2 of what our monthly payments were, but still enough to get us nice enough vehicles when our current ones have to be driven, or towed to the wreckers.

Our lesson was learned. We were done with debt for good.

And so we began our journey of being debt free for good. It has been almost 2 years now since I paid off those vehicles and I feel blessed. My heart still hurts over the loss of my loved ones, but I think my relatives would be happy with what we have done with the financial legacy they left.

However being debt free doesn’t look or feel like I think a lot of people think it does.

Make sure to read the next installment where I share what being debt free looks and feels like for us and how it isn’t what I thought it would be nor how I think a lot of people think debt free living looks like.

Read our Debt Free Story From Beginning To End

  1. Why I rarely talk about our family’s journey to a debt free life.  Read why by clicking here
  2.  How we ended up back in debt again. Your here!
  3. What debt free living really looks like for our family. See what it looks like by clicking here
  4. 10 Debt Free Tools. Find tools to help you dig out of debt and stay out of debt by clicking here.
  5.  How One Family Stretch One Home Into Three: Becoming Debt Free & Creating Income. Read our latest update here.

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Comments

  1. The whole lessen sounds painful. It also sounds like our life! We aren’t debt-free yet, but working on it.

  2. Yikes! Wish I could say we haven’t made some incredibly stupid financial mistakes but we have. Both of us hope we have learned enough from our past errors that we will avoid them in the future. Really hope so, it has been hard, stressful and has taken years to dig out from.

  3. I find the debt free lifestyle is very American, coming from a Canadian. I love the idea but it’s not really realistic for us. My husband is a pastor on a low income and I stay home with our two kids (childcare is $70/day for two kids, I don’t want to work but even if I did — what’s the point?) beyond that, to own a home is $300,000 in our area for a 1000 sq foot home. For a family of 4 living on a $40,000 income to save up cash for a home would take… Forever. At this point we rent a basement apt and it will take about 4 years of saving and scrimping to get a 20% down payment.

    • I am actually a Canadian who has lived in America for the last 12 years. I don’t know where you live in Canada but I grew up on Vancouver Island and I agree housing prices are so much higher in Canada than most parts of the United States (although the Western State home prices are similar), and so is food, gas,clothing and basically almost every other area of a families budget than it is in the states. Debt free living including the house is certainly much harder in Canada with the higher cost of homes and other living expenses. However I think it is possible to live debt free (NOT including the house) on an average income in Canada although it does take more work and sacrifices than in the States (many of our friends back in Canada still only have 1 vehicle for their family & live in a condo instead of a single family home).Hang in there I know from when we lived in Canada how discouraging it felt to try and save a down payment that large when your month to month expenses are so high. Celebrate each minor step forward towards your goal even if it is just by saying out loud “YES $100 more saved” and sharing a high five with your hubby. (oh and while in Canada we did the Crown Ministry bible study for finances, and although American like Dave Ramsey, I think how it works fits better with the Canadian economics than Dave Ramsey’s plan does, if you haven’t heard about Crown Ministries you may want to check them out http://www.crown.org/ )

      • Thanks for the encouraging reply!! We live in Guelph, Ontario. We currently own our car (and have one!) sadly we have a $1900 line of credit from an emergency expense which sucks but that’s our only debt. Our plan is to buy a house with a basement we can rent out to help with our mortgage and pay it off sooner. It was very sweet of you to reply and I wish you best of luck as you continue your journey!!

        • Your welcome. I have been in Guelph once, my Aunt and Uncle live in Ontario. A basement suite is a great idea. One of our Canadian friends has done that with good success. I wish you best of luck knocking out the line of credit and getting back to saving for your home.

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