The System that busted a cap in the ass of $126k worth of debt | SIXbirds Financial
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The System that busted a cap in the ass of $126k worth of debt

May 24, 2013 8 Comments

imagesCAEQ10NRI estimate I’ve lost over $700,000 in my lifetime through systematic ass-hattery. Thinking about it too long sends a shockwave into my spleen that feels like it’s going to erupt out of my forehead.

When I clawed out from $126,000 worth of debt in 22 months I knew it would be through developing a system. The problem was: I sucked at developing financial systems. This is the same reason so many affluent households have huge incomes yet are completely stressed by money. Or, worse yet — convinced they are good at managing money when in fact they could be easily performing at 20X their current level. The most powerful thing a person can achieve is full freedom.

If you are reading this and have a bank account, you are involved in a complex financial system. If you do not have your own financial system, then you are paying into another system that is designed to optimize its own utility — not yours. I hate to say it, but today is the day to get financially savvy for about 175,000 reasons that don’t involve a single dime. In short, do not feed somebody else’s machine. I am begging you to create your own.

I will walk you though exactly the process I developed over time in order to deal with a barrage of debt that was spread out among 18 sources. In 22 months, I reduced my debt load by $126,000 through a series of actions that anybody with a source of income can do. I used a combination of income streams (job, windfall sales, small business), so it obviously assumes that you have access to $126,000 in 22 months, and that you’re willing to hustle a lot harder than your peers. A significant portion (perhaps $30k) of this was accomplished by selling a large portion of my accumulated net worth, usually at a loss, while dedicating about 80% of my post-fixed cost regular pay and most of my side hustling income (scrap yards, moving biz, dumpster flips) to paying down debt.

I was simultaneously going through a divorce at the time and feeding shovel loads of cash into this failure like a forest fire in August. But, this is a completely different post.

This system was customized for me and my goals/capacity, but the same ideas can work for anybody with a varying set of mathmatically proven results. What I discovered is that this same system works for investing/saving as well, because we are essentially machining an engine that has one byproduct: YOUR ACCUMULATED CASH. What you do with the byproduct is up to you. I got so good at following this, that I could predict to the day and hour when I would eliminate a debt. I have to tell you, that is a powerful feeling for somebody who spent 30+ years using the zen method of finance. There is tremendous power in just knowing — even when it’s just knowing you’re totally screwed. At least you are now in a strategic position to do something and understand what’s happening to you.

Which machine do you want to operate? YOUR ACCUMULATED CASH or YOUR ACCUMULATED DEBT

If you don’t decide, somebody will decide for you.

I’ve shared this with several people (maybe a dozen), and it’s worked with varying success usually because of the builders’ own commitment level, but in all instances it totally depended on how much energy went into designing the system. Some people simply cannot see beyond lunchtime, and so this set of principles will not work for them. It’s painful to say, but these hard working people will simply become assets in a much larger machine. This is what I refer to as “free-range slavery.”

But, I have seen this set of simple practices pull people from the brink of bankruptcy as well as send a whole family on 3-week vacation to foreign countries (that one was particularly satisfying). In one instance, just sitting down with a friend with a notebook, a cell phone, and a computer and going line by horrible line saved his marriage. Even though this couple was deep into hostile financial territory, his wife broke down crying from the relief of actually having a plan and appreciated that the person she loved was willing to own their future. This is the type of help that you are not going to get from a Certified Financial Planner because you don’t have enough investable assets. Who needs more help? Somebody with a net worth of $350,000 or somebody with a net worth of -$200,000? There are millions of people suffering this very moment from Financial Dumbassery who actually make a tidy income. Widespread Financial Independence is the greatest force for good on the planet. Period.

So, bottom line: what do you want your machine to do? The real overarching key, however, is that it’s YOUR machine and not the machine made by somebody with a single byproduct: YOUR ACCUMULATED DEBT. Don’t forget that your spending is another’s income.

Keep in mind that credit can be a wonderful thing. When used strategically, it can literally unlock a piece of potential that will positively impact the entire outcome of your family’s future. There are hundreds of fantastic ways to use leverege. But, if you don’t know what you’re doing, it can destroy you literally within days. You should be HYPER aware of how, why, and when you use credit. There is nothing at all cavalier about debt, and I have formed a deep hatred for companies that are thriving on the backs of easy, ubiquitous access to toxic financial instruments. This is also a completely different rant that I’ll save for now. But, let’s get real, these are all your decisions and it’s now your responsibility to re-examine and optimize your financial situation — even if you’re doing well.

Just as an aside, if much of your net worth is locked in “assets” that don’t produce income and are subject to depreciation (kitchen appliances, furniture, motorcycles, etc), I’m willing to bet my next paycheck that you’re not actually worth as much as you think. If you don’t believe me, just throw your sofa bed up on ebay for a $1, no reserve auction and see what happens. Generally, only income-producing assets can be accurately valued, and other static assets like gold or collectibles don’t really increase in value but become more expensive because of degraded currency.

Surprisingly, it’s not that difficult to dramatically enhance your net worth once you spend the necessary time to train yourself on yourself. Here’s how I did it:

1. Measurement. [Cashflow I]

Essential. Without knowing what you take in and how much goes out within a specific period (this is cashflow), you have no basis to even begin to think about financial independence. I get it. Nobody likes talking on the phone with people they are indebted to, but you’ve got to do it right now. I mean — stop reading this stupid blog post, and go round up every piece of financial data you need: balances, income, expenses, interest rates. I’ll wait.

Okay. Now that you know all the current balances on everything plus interest rates, we can organize them into one document. If you suck at spreadsheets — don’t worry. I did all of this in a notebook, which I found very therapeutic. This technique doesn’t matter as much as finding out the relevant information and capturing it in your favorite format. My wife used 3 x 5 cards to accomplish a similar result, and it worked beautifully — one card for every account with every piece of information recorded through time.

Without measuring your baseline, you have absolutely no idea what you’re doing. You cannot manage a single thing or even form a single strategy. Nowadays, when I want to crunch numbers I can estimate things fairly accurately, but do not do this in the beginning. You must get every single piece of relevant information gathered no matter how crappy it is to do it.

2. Set your calendar. [Cashflow II]

Cashflow is essential to fixing your asshat strategy, and I believe this to be an extraordinarily underserved piece of personal finance because people are always under time pressure. Predatory financing works because of the TIME ELEMENT. Interest works because of time, yet too many people are running behind or just barely on time. This is not an accident, my friends! This is an essential piece of your machinery.

In fact, I would say that this is THE LINCHPIN of strategy because with proper cashflow, people (just like businesses) can survive in extremis for extended periods and still remain completely viable. They can afford to take bigger risks for bigger payoffs, and they can be creative. The topic of cashflow is fascinating to me, and it wasn’t until I got a good practical knowledge on this topic until I felt like I could achieve all of my financial goals. Today, I sit here writing this in peace because I know that on June 30, 2018 I will never be forced to work another job and neither will my wife. So long as I follow my plan.

Cashflow is only one piece of accounting, but — again, I believe it’s underserved in personal finance because it’s a bit more abstract than other concepts like equity, liabilities, assets, income, expenses, etc. There’s a myth that says, optimize income & reduce expenses and you’ll be okay. What’s missing is a key component of time. If you can manipulate WHEN things happen, you will always win.

The word “flow” is key. I imagine a bucket (an open account). The top is open and water is flowing into it (income). SOMEWHERE on the side of the bucket is a spigot that is open (expenses). Nothing is catching the water coming out of the spigot — it is heading into the ocean and gone forever (sunk cost). Underneath your bucket is a giant catchment system that catches anything that overflows from the top of the bucket (the spigot extends outside of the catchment). This is your wealth accumulation.

You have 4 jobs at this point that you must complete as if your life depended on it (in this order):
— Turn the spigot off (stop paying everything temporarily in order to accumulate some money)
— Move the spigot as far up the bucket as possible (set your calendar; this is the amount of time before the money starts to flow out again)
— Open the spigot back up as close to the “closed” position you can without going to jail (reduce every single expense as tight as humanly possible)
— Dump as much water as fast as you can into your bucket so that it overflows into your catchment system

Here’s a diagram (my apologies to all diagrams everywhere):

Scanned from a Xerox multifunction device (2)

What we want to do by “setting our calendar” is move the spigot up toward the top of the bucket and then restrict the outward flow as much as possible. There are A LOT of blogs dedicated almost solely to the idea of restricting the outward flow. Anytime you see the word “frugal” in a blog post, this is what they’re talking about. Mr. Money Mustache is the best source for integrating this into your lifestyle, but this is only one piece of the puzzle to Financial Independence especially if you’re coming from behind. A lot of people are doing great because they’ve had the element of time on their side since they were teenagers. But, if that’s not you – you’ve got roughly double the amount of work to do in less time than somebody who started on the right path.

You can’t unmake your past. You can only move forward.

I do not conform my investment cycle to my income cycle. Instead, I have created a cashflow cycle that conforms with my goals which favors investment which is weekly. Consider that there are 12 monthly cycles in the year but 52 weeks, which does not equal 12 * 4 = 48. If you did nothing else but change your payment cycle to your time, you would end up making a full month’s payment extra on everything. This is why people sometimes pay bi-weekly on their mortgage and save tens of thousands of dollars in interest cost and payoff years in advance of their mortgage. This is the easiest tweak in the world that will put money in your pocket starting tomorrow.

This scheme is essentially “pay yourself first” which isn’t actually as easy as it sounds in practice if you are chasing expenses around constantly. I remember reading “pay yourself first” and thought that was hilarious. With what? I would think. Now, I totally get it.

If you pay yourself first, you MUST restrict the flow of expenses because there’s no more juice to drink.

This is why I automate and shift money out of accounts very rapidly. If I get paid $10,000 on the first of the month, my system automatically allocates everything I’m expecting into different accounts so that my primary income asset account (checking account) is almost always near zero. If I open my checking account and see a large balance, I know I’m doing something wrong, and need to manually zero it out into a variety of other accounts that meet my financial goals.

My “expense bucket” is dripping away weekly in a completely different account. I have another bucket for cost anomalies (some people call this “emergency funding”), that I treat like a credit card. If there is something unexpected, I pay it usually through this fund then repay it from a different account in the next cycle. It’s not a problem, it’s just that I will not be able to accelerate my growth for that period. If it’s consistently a problem, then I’ll either budget for it, hack it, or stomp its guts out. Just depends on what’s going on.

WARNING: What I talk about next is financially risky — I did it and accepted the risk.

To get out of the crazy loop of being behind the cashflow curve (which is expensive), I stopped paying my debts for at least one full cycle — some of them more. I called each creditor and explained that I would not be making a payment for X amount of payments or paid at a significantly reduced level. Yes, it hurt my credit report, but the bounce back from paying down debt (debt to income ratio) seemed to outweigh any negative effect from going 30-60 days late on payment. In almost all instances, however, I was able to negotiate a temporary solution with my creditor.

3. Automate everything. Set up as many accounts as necessary (I actively use 5).

Once you have a firm grip on the flow of expenses and income, and have made it conform to YOUR schedule you can easily see exactly the mechanics of your own personalized money machine. If you’re really good at this and dedicate all your God-given OCD juice to this, you will open a line item for every detail (yes, I budget the $3.90 Donut run every Saturday). If you’re struggling to keep up, then bucket similar expenses, and you’ll be 95% of the way there.

I automate everything that is possible to automate. I bank with USAA which is phenomenal, but I’ve had accounts with ING, Wells Fargo, Navy Federal Credit Union, and Chase. Without a doubt, the bigger banks totally suck, so I’d urge you to get your money into an online account like ING or a local credit union (yet another post in itself). Make sure they’ve got great online tools which are now standard, and after thousands of transactions over many years, I have never had one single problem with USAA.

Back in the debt killing days, my only focus was getting out from under crushing expenses. Anything outside that focus became secondary.

4. Use a calculator.

Honestly, this calculator is the best/most powerful debt reduction tool ever. You don’t have to use it for “snowball” elimination either (start with smallest balance first). You can put any balance in there in any order you choose — meaning, you can do part snowball, part highest interest, etc, but the key to any elimination strategy is rolling one debt expense to the next. Without the rollover, you are not accelerating. This is a simple concept that you must adhere to, otherwise you’re completely screwed.

I fully understand that some debts are emotional, but my advice is to eliminate highest interest first whenever you can stomach it because this is where you will see the greatest savings/return. When in doubt, let mathematics be your guide and remove as much emotion as possible.

There’s other great stuff in the Tools section of this blog, and more on the way.

5. Shrink your cashflow period. The shorter the better.

I am not unique at all. I like to see progress, so I carved up everything I owed and everything I made into daily amounts. For awhile, I even thought in terms of hours – then minutes. I knew exactly how much debt I was paying per period.

Many people think in terms of either pay periods (typically bi-weekly) or monthly. This is no good because there’s too much space in your financial attention, and I believe that shrinking your scope is incredibly enhancing to finishing what you need to get done TODAY. You need to wake up everyday and not wonder if you have money or think about what needs to be done today in terms of money. It needs to be already done. Anything outside the scope gets ignored then added later into the revised system (yes, you will continuously revise your system).

Just like you’ve probably developed a system for getting to work or getting anything else done, you need the exact same type of system for your debt killing. I had my cashflow cycle down to the day, so everyday I knew that I had exactly $11 coming to me for EVERYTHING that wasn’t automated. “Everything” included food, transportation, entertainment, and all anomolies. Everything else was automated, so that it didn’t exist. My $11 was taken in cash every morning because it was sitting next to my apartment keys and wallet that I had set out the night before.

Everything I didn’t use, went into a bucket for “whatever” money then I fished out the whatever money when I wanted to do something different. I was shocked at how good I got at not spending a single dollar once I figured out I could live just fine on $11 per day — even in Brooklyn, NY. Ultimately, I dropped it to $7.

6. Re-measure everything.

How do you know if your system is working or failing? You have to measure it again. Then again. Then apply a different measurement. You are trying to achieve Peak Learning.

Here’s the catch: you will be absolutely amazed, and you will be having a blast. The world of money is endlessly fascinating, and there is an infinite combinations of things to looks at. I still make dumbass mistakes, but I am constantly striving for learning through constant tweaking and hacking. That’s why I’m blogging.

Every month, make your phone calls again and write everything down as if starting over. The more you measure and re-measure the better off you will be.

7. Revise.

You absolutely must adapt or die. If you are not maintaining and tuning your machine, you will not find the perfect idle or the perfect racing package. There is always something you can do better. That’s why this world is so much fun. If you’re spending $4 per day on food, I’m betting you can get it to $2. If you’re getting 34 mpg on your commute, I’m betting you can get it to 50mpg. Or, I bet you can figure out how to spend nothing on commuting.

What might have made good sense a year ago, may be idiotic right now. How do you know without measuring, scheming, talking it out, and questioning all of your assumptions? This is completely essential for sustained growth. If you do not revise, you may make very costly mistakes along the way or may not capitalize on current opportunities. Think about your long-range vision. Get it fixed in your mind.

Now go for it.

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About the Author:

My goals in life are to not have a job and to work my ass off. I give your choice of virtual high five, cyber hug, or electronic fist bump for meaningful interaction.

Comments (8)

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  1. Identifying the small issues that add up is critical, as you point out. Great insight.

  2. cj says:

    I thought it was “pop” a cap in your ass? I learn something every day or at least every time I read a post over here. Seriously, I cannot believe I got to red this post for free. What an amazing bit of PF wisdom. Automating was the thing that got us of and running, but I have to reread this to get more from the other steps.

    • Patrick says:

      Hey CJ,

      Yeah, it could be “pop” I suppose — I guess it doesn’t come up in my day-to-day as much anymore.

      Thanks for the kind words!

  3. Amy Turner says:

    I totally agree that you need to review from time to time to check if your system is working. I do mine every few days and I find it is easier to spot flaws when you are so acquainted with the system you’re using. Great tips to follow:-)

  4. Life says:

    “Only those who will risk going too far can possibly find out how far one can go.” -T. S. Eliot

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