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How I went from owing $57,000 to banking over 50% of my pay and on track to retire with over $1 million

"It's essential to surround yourself with folks that understand what you are trying to accomplish."

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Carmen Perez is the founder of Make Real Cents.
Photo by Wini Lao

In 2016, I lived paycheck to paycheck in a high-cost-of-living city with lousy credit and no money saved. I had no budget and little stashed away for retirement, and I spent every single cent I earned and then some. To top it all off, I had roughly $57,000 of debt consisting of student loans, medical bills, credit cards, auto loans, and some old charged-off accounts in collections.

Fast forward to 2021. I've become debt-free. My wife and I purchased a home and have since sold it. I changed careers and now save 54% of my take-home pay. If I never invested a single cent in retirement again, with compound interest and an average annual rate of return of 8% from the stock market, at 65, I'd have over $1.1 million.

So how did I do a complete 180 with my finances? Here are some simple steps that worked for me.

I got on a zero-based budget and paid cash whenever I could

I underestimated the power of a budget in the past. I had tried my hand at it a few times and failed miserably. That was until I stumbled across a budgeting method called "zero-based budgeting" in 2016.

With the zero-based budget method, you allocate every dollar of your take-home pay to a budgeting category before it hits your bank account. Instead of always wondering where my money goes at the end of the month, I've found that this budgeting method gives me a greater measure of control because I am actively putting my money where I need it most. 

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It took me at least 4 to 6 months of trying, tweaking, and failing to get my zero-based budget to a spot that worked best for me. I was able to cut back spending in some areas, including cutting cable, scaling back on dining out, and using points when I traveled. 

I put cash that I saved toward paying as much as possible towards my debt. I was able to prioritize the goals that were important to me by adding them as a line item to my budget, because in my mind those goals became just another bill I needed to pay. I also put every bonus, tax refund, and all side hustle money towards my debt during this time.

I utilized a method called the cash envelope system. With each paycheck, I withdrew cash for budget categories that were easy to use cash on, like food, and put them into an envelope with enough to cover expenses for a month. 

I've found that this strategy made me more intentional with my money and encouraged me to plan ahead. It helped me curb my habit of mindlessly swiping my debit card, too, because if I could pay cash, I left my debit card at home, which in turn helped me stick to my budget.

I created a plan that helped me pay off my debt

I wrote out a list of all my debts and organized them from highest balance to lowest balance noting the interest rate and minimum amount due. 

I paid as much money as possible towards the first debt on the list while paying the minimum on all the others until eventually that first debt was paid off. This took me over a year and a half to accomplish, in part because of one student loan that was in default that I was being sued for to the tune of $30,000. 

But over time, I was able to pay off that large loan, and I worked my way down the list until I officially became debt-free in September of 2018.

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I set firm financial boundaries for the first time 

Setting boundaries was one of the most significant changes I had to make when changing my approach to my finances. 

Before 2016, I would be the person at the bar who wouldn't think twice about buying a round of shots for the group, and I frequently went to brunch with friends. Meanwhile, I had no money saved and would cover a majority of these things on credit.

After I got serious about changing my finances, I let my friends and family know that things would be changing, and it was important to me that they support me in this endeavor.

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I asked that when I said no to something they would respect that, and they all got on board. I had a sit-down conversation with my then-girlfriend, now-wife, too, to let her know what was going on with my money situation. 

These conversations by no means were any fun. No matter how much I didn't want to do it, though, I knew talking was the very thing I needed to do in order to make progress.

Your community can have a tremendous impact on your personal finances. They can either help you get to the finish line or hold you back, so it's essential to surround yourself with folks that understand what you are trying to accomplish and that will help you along the way.

I made saving and investing my priority

Once I paid off all my debt, I kept the momentum going by changing the line item in my budget from "extra towards debt" to "extra towards savings." Now that a lot of money had been freed up because I no longer was making payments towards high-interest debt, I started to aggressively save as much money as possible.

I look at the trade-off between something I momentarily want now versus what the money could do if I invested it for my future. If the value add of the thing I want to buy isn't substantial, meaning I really don't want it enough or I don't really need it, I invest the cash instead. 

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This change in thinking has allowed me to max out my IRA for this year and last year, and I am currently on track to max out my 401(k) for the first time in my adult life. Every extra cent I earn, whether it is from a sponsored post on social media or a work bonus, is predominantly sent directly to my savings or retirement accounts.

I've made saving money a priority because I was not saving anything for the longest time. And while I admittedly feel a little behind with my retirement, I am making great strides towards leveling up my savings.

I keep my expenses low and avoid lifestyle inflation

One of the biggest changes I have made in my approach to my finances is moving away from a 'spend every cent of my paycheck' mentality. Even if I can afford something, it doesn't mean that it is actually the best choice for me and my bigger plans. 

For example, while my wife and I can afford a new car, last year we paid $12,000 cash for a used 2016 Jeep, so we didn't have to take on any additional debt. 

From when I moved to New York City in 2013 to where I am now, my rent has doubled over the course of eight years. I used to pay $900 a month for a room in a three-floor brownstone in Harlem with three other roommates. Now that I'm married with two dogs, we've increased our space and access to amenities, while keeping rent to under 30% of our take-home pay. 

Even if I can afford something, it doesn't mean that it is actually the best choice for me and my bigger plans. 

Ideally, we would like this expense to be under 25%, but since we have no debt and live in a high cost of living area, under 30% is reasonable for us. Living outside of the city since early 2019 has also allowed us to save a little on the cost of groceries and dining out. Ultimately, we can afford to pay double what we are paying in rent now, but we choose not to so we can invest and save as much as possible, while still living comfortably. 

Five years after I started tackling my debt, with a lot of trial and error, I'm now confident that if I never contribute another cent to my retirement, I will be able to retire at 65 over $1 million. 

There is this quote that I live by that says, "You are always one decision away from a totally different life." I've found that to be absolutely true when it comes to accomplishing financial goals. Ultimately, if I had to credit my financial transformation to one thing, it would be learning how to budget and understanding the importance of just taking things one small step at a time. 

Carmen Perez paid off $57,000 of debt in two years and nine months in 2018 and is the creator of Make Real Cents, a personal finance platform dedicated to helping people achieve financial independence and avoid the mistakes she made early on. After getting out of debt, paying for a wedding, and buying a home, Carmen began to save as much as she could in order to quit her job in finance to learn how to code. She has since switched careers into tech and has been featured in Forbes and The Skimm, and was a member of Business Insider's Money Council for 2020.

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