Not long ago, frivolous spending dominated my life. A new pair of shoes, dinner out with friends — it didn't matter. I spent every dollar as soon as I got it.
As you'd expect, that type of financial behavior carries you down a dangerous path. And sure enough, before I knew it, I was 27 and drowning in debt.
With no savings to my name — but plenty of responsibilities — I knew it was going to take drastic measures to save myself from the money mess I'd created.
Fortunately, my story has a happy ending. I figured out a way to better manage my money — with some help from an envelope.
Bankruptcy and bills: My $50K debt story
My finances weren't always a downright disaster. At 22, I was thriving as an office manager at a company near Watertown, Wis. I was making about $35,000, and I didn't have a lot of financial responsibility — until I got the real estate bug.
Since I'd spent my childhood in apartments, I'd always dreamt of owning a home. For fun, I started looking at properties — including a four-bedroom place that really struck me. Best of all, it could be all mine for a cool $125,000 — and no money down.
This was in 2004, when banks were giving out loans like lollipops. I ignored my parents' warnings, charging full steam ahead to become a homeowner.
Just one week later, I'd lose my job, when my employer went belly up. And to make pretty unfortunate matters worse, I had no emergency fund to fall back on. Even though I was able to collect unemployment, it wasn't enough.
After just four months of struggling to stay afloat and falling way behind on my $1,000 mortgage payments, I decided to sell my dream house through a short sale — for about $6,000 less than the purchase price — and moved into a tiny apartment.
From there, everything tumbled downward.
Even though I did land a new job, I never quite caught up from my short sale — and I certainly never learned to deprive myself of something I wanted. I routinely purchased $100 jeans. I bought rounds at the bar. I went on vacations. And somewhere along the line, my bills stopped getting paid.
My financial denial continued until 2007, when I gave birth to my daughter, Anya. My boyfriend back then wasn't exactly financially stable either, so providing for her fell largely on me. Around this time, my mindset started to shift: I realized that racking up debt and struggling to meet my obligations wasn't the lifestyle I wanted for my child.
It was time to face the music.
So I tallied up my debt. Between assorted credit cards, medical bills, student loans, and even some back-taxes, I owed a grand total of $50,000. I can't say I was shocked to learn this. What did hit me hard? The realization that, as my friends were accomplishing their goals, this big fat number was holding me back.
I tried watching my spending and setting up payment plans, but I just couldn't get ahead. Eventually, my monthly debt payments were greatly exceeding my income. I felt that I had no choice but to declare bankruptcy — which I did in 2009.
Left with just $5,000 of debt from back-taxes and student loans after the bankruptcy, I was determined not to waste an opportunity to wipe the slate clean — and set a good example for Anya.
A successful savings system is born
After the bankruptcy I finally started feeling better about my money. My bills were being paid — but I still wasn't making progress with saving. It wasn't until I met Tony, my now husband and an all-star saver, that things really took a turn for the better.
In our zeal to learn more about managing our money together, Tony and I became familiar with a budgeting system that recommends filling envelopes with a certain amount of cash allotted for each monthly expense, like food or clothes, and ceasing to spend once a given envelope is empty.
As a method for paying bills, this seemed impractical to me, since I prefer the convenience of using my debit card. But then I got an idea: Why not retool this into a system for saving?
At the time, building up our emergency fund to $1,000 was our number-one goal, so we tackled that with our first envelope. Every time that Tony and I got paid, we immediately withdrew 10 percent of our paychecks in cash and stuffed it in the envelope — before we paid our bills, grocery-shopped, or did anything else.
I was astonished at how quickly the money grew. Before I'd adopted the envelope system, my cash always seemed to slip away as soon as I got it. After just six weeks of stashing money into that envelope, we hit our goal of $1,000.
I felt so inspired that I couldn't help but wonder what else we could accomplish — and decided to expand this into a full-blown system for other savings goals.
Here's how it goes: On the front of an envelope, I indicate what we're saving for — whether it's a vacation or a new vacuum — and the amount we'd like to reach. On the back of the envelope, I keep a tally of our progress.
I also include a drawing of the goal on the front of the envelope. So the one for a house down payment has a picture of a happy little home. It's raining money, and my husband is standing outside, smiling with an umbrella. Visualizing my family achieving each goal is what empowers me to keep going.
I also began training myself to scale back on my spending. Before I throw away $4.50 on a cup of coffee, I'll ask myself: "Do I want this coffee more than a trip to Disney? Heck, no!" Then I'll take the $4.50 and put it into my vacation envelope.
I know financial planners might question my method, advising Tony and I to keep our savings in high-interest bank accounts. And we understand that concern, which is why we've been talking about moving our long-term savings from our household safe into CDs as a security measure.
But, overall, our system works, so I don't fret too much over missing out on interest. I'm encouraged to check in on our goals on a regular basis, and I can easily track our progress. I feel more inspired and in control of my money than ever before.
The proof? Since instilling the envelope method nine months ago, I've socked away close to $6,000 — and have no plans to stop anytime soon. Today, our envelopes include a Disney trip (goal: $2,500; balance: $300), adopting a puppy (goal: $1,450; balance: $120), buying a house (goal: $65,000; balance: $300), and saving for another child (goal: $4,000; balance: $200).
A more financially sound future — and family
For the first time in my life, I actually feel encouraged about retirement, thanks to inspiration from my savings system. Before, I felt like it was an unrealistic dream. Now retirement is a top priority that we'll focus on within the next year using IRAs.
It also feels great to say my current debt is nominal. Only about $800 remains of the original $2,000 student loan balance — and I plan to fully pay it off within the next few months. When it comes to credit cards, Tony and I owe only about $1,000 from our 2013 wedding.
I'm also using our savings system to teach Anya, now 6, good financial habits. She earns $3 a week in allowance, with the opportunity to earn an extra $3 for outstanding behavior. When payday comes, we sort her money into three zipper pouches: one for long-term savings, one for short-term savings, and one for charity.
She puts the largest amount in her long-term savings for college tuition or her first car. Then I let her choose how much she wants to designate for short-term fun — like a trip to the zoo or a little treat at Target. Last year she used her charity funds to buy Christmas presents for a needy child.
Teaching my daughter to work toward financial security at such a young age is nothing short of amazing. When you have kids, your whole life becomes geared toward shaping theirs into something better than what you had. Giving her these skills is perhaps the very best lesson I could pass on.
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