Frugal Living Podcast: Frugal Rules
In this episode of Frugal Living, host Jim Markus talks with John Schmoll, the founder of FrugalRules.com. You can listen to Frugal Living with Jim Markus here, on Apple Podcasts, on Spotify, on Amazon, on Anchor.fm, or anywhere you go to find podcasts.
In This Post
Starting Below the Bottom
John Schmoll starts by explaining that growing up, he had never been taught about money. As a result, when he got to college, he started treating credit cards like free money to finance a life he couldn’t actually afford. Two credit cards turned into four by the end of the first semester. Two years later he had $25,000 in credit card debt.
He explains that he was at the point of bankruptcy but literally couldn’t afford to file for it.
Getting Started and Getting Help
Schmoll explains that his journey out of debt started with getting help from credit counselors who were able to consolidate his debt and reduce his interest rate. Rely on their expertise and let them negotiate for you, he says, but he also warns that you should do your due diligence about who you work with as some disreputable people will pose as those trying to help you, and you could end up deeper in debt.
His credit counselor introduced him to the idea of giving every dollar a purpose and looking at expenses individually rather than thinking of financial goals in broad terms, like having to cut monthly spending in half. He explains that by focusing on one area that he could make cuts to each month, he was able to adapt to a more sustainable lifestyle. This approach builds momentum and confidence, which are crucial to success.
Read a Transcript from This Episode
Literally, I could not afford to file for bankruptcy.
This is Frugal Living. It’s unusual to meet someone who can describe their life as a perfect story arc. So this week’s interview is a rare treat. It’s the story of someone’s journey from near financial ruin to financial expertise, including the most important steps along the way. My guest this week is the founder of Frugal Rules, an online resource center for frugal-minded people. He’s incredibly knowledgeable about this kind of stuff. And that wasn’t always the case.
My name is John Schmoll. I am the founder of FrugalRules.com
And Frugal Rules is just kind of a huge resource for people with exactly this interest of the people who listen to this podcast. Like we talk about ways to save money, ways to invest, the smart ways we can save money, and where it makes sense to splurge, so we can save more in the long run. But specifically what I wanted to talk to you about was saving strategies. We’ve talked to a few different people in the past couple seasons now about early retirement, about how to consider budgeting in their lives, but it seems like you have a pretty unique set of knowledge here. And I’d just love to hear tips you’ve got, first, on ways to save.
Sure, of course. So for those that don’t know my story or about the site, I grew up not being taught about money and got to college. I went to school at Kansas State University and uh, go Wildcats. And my first week there, I discovered credit cards. It was still at the time where credit card companies could be on campus and they’d hand out, you know, free Frisbees, water bottles, what have you. And I knew nothing about credit cards at all whatsoever. And I ended up with two in my first week and I thought they were free money. And you know, I’m a college student. I worked the front desk in my res hall, so I wasn’t making really any money. I was making enough to go out and have fun on the weekends. Those two quickly turned into four credit cards by the end of my first semester. And I was using those to finance the kind of life I wanted, but I couldn’t afford. And so I transferred in at end of my sophomore year. So I had two and a half years left at K State. And over those two and a half years, I racked up nearly 25 grand in credit card debt. And at the same time, I was also utilizing student loan money to do that. So I graduated college with 50 grand in debt. And within the first year of my graduating, I was at a place where I didn’t know where to go. I didn’t know where to turn. I was getting hounded by creditors, turned over to collections, and I was at the brink of bankruptcy. And literally, I could not afford to file for bankruptcy. I can’t remember the exact amount. It was several hundred dollars, I believe at the time, to file. And I went to a roommate and asked him if he would loan me the money to file for bankruptcy. And thankfully he showed me some tough love. And he said basically, “You’re in this situation because of your own doing,” and I didn’t like hearing it, but that really was that one seed that really started my growth. And he connected me with consumer credit counseling. It was an agency I worked with and they got me on a plan, consolidated my credit cards, lowered my rates from like low to mid twenties… So I think the highest one out of the four was 4 or 5%. And the first thing the lady that I worked with did was got me on a budget. And I had heard my parents talk about budgeting when I was a kid and my parents would always… My experience with it was my parents would joke if they had $50 left over at the end of the month, they wondered who they didn’t pay. So my parents spent and budgeting was a foreign concept to me. And that was when I was introduced to giving every dollar a purpose. She sat me down and went over how much I made, where I was spending, and ways to cut back. And most people in that situation, they really have to take a fire hydrant approach and rein everything in. I had no other choice and it was difficult to do, but one thing that she really nailed down for me was, or drilled down for me, was the need to start looking at expenses individually and not, “OK, well, you have to cut your spending by half.” Because so often, and I see this with readers all the time, they say, “Well, I know I need to start saving, but I can’t cut back in 10 areas all at once. It’s too overwhelming.” And I take it as, the saying is eat an elephant one bite at a time. And so what I encourage readers to do, and what I found over time and in my own journey was identify one thing for that month or two weeks or whatever time period you want to set and see how I can cut back on that. And I like the month mentality. And if it’s something that I can live without, or it’s something that I can rein in, and I’m OK with that, then that’s savings that I’ve netted. And I can continue living that lifestyle of that one thing and then move onto something else, while still keeping that savings from the first thing. And over time, taking that approach, you’re going to build momentum and confidence that, you know what, maybe I don’t need a $250 a month cable plan. I can live with a streaming service that’s a fifth of that and it’s not so overwhelming and I can do it. And so, so much I find saving comes down to confidence and believing that even that small savings of say $20 a month, that that will do something for you. It’s not just that $20, it’s that culmination of all these different things that you’re netting yourself several hundred dollars a month in savings, which really, that can be life-saving, life-changing money if you manage it correctly and wisely.
And it sounds like you have, I mean, that’s a pretty big turnaround. I know many of us graduate with student loans, but to have $25,000 of essentially toxic debt on top of that is staggering. That’s a huge blow to step out into the working world, knowing that you’re hindered in these two different ways. I worked in mortgages for a little while, and when we were evaluating people’s credit reports to see if they’d qualify for a mortgage, a student loan or a mortgage, we’d consider these good debt, it’s good to have a student loan. I mean, it’s not ideal, but of the type of debt that you have, it says you use this money to go to college to further your education. And you’ve probably set aside 20 years to pay this back. Credit card debt is the opposite of that, where it fluctuates. And more importantly, it’s going to go up. If you make the minimum payment, it’s just going to get worse. When you talk about cutting down spending, saving $20 here, $20 there, it seems like the biggest impact that would make in a credit card debt situation would be on paying down those debts first.
Yeah, that’s exactly what I did was anything, any savings, any extra money that I could come into went towards that debt. And even though, like I said, the highest interest rate was at like 5%, that was knocking it down. So I was paying more towards the principal and saving on interest. And I hawked my high school class ring and my TV. And it was just anything that I could get to knock that down and get rid of it, because it literally was like a piano on the chest.
It’s almost like dealing with insurance. Half the battle is having to make that call and talk to someone about something where you have no power or control. You mentioned, and I remember this, it was the same at my college, I went to Michigan State. And when I was there, “Free Frisbee if you sign up for credit card!” I turned it down at the time, and I’m happy I did. But I also remember when I graduated, I had no credit at all. There was no credit history. I asked for a loan to buy a car. And they said, “No, but you can have a credit card.” And I remember thinking, this is insane. How bizarre of a world is it that you’re willing to give me a credit card, but not a loan for a car to get to a job. But to get back to this, this isn’t something we talk about a lot on the podcast, but it is a really helpful tool to have available, credit counseling. I don’t know if everyone realizes this is available when you’re in that situation. As far as I understand, and you know more about this than I do, they will call your creditors and they’ll negotiate rates. And those are two things that you can do yourself. But if you don’t know how to do this, let them do it. If they can negotiate your rate down from 18 or 24% down to 5%, $10 a month is nothing. The amount of money they just saved you with that one call is huge.
Exactly. Yeah. And there are some scamming companies out there, for sure, and they’ll make wild, crazy promises. Those are the ones that you want to run from. You want to go to… The one that I work with was a nonprofit agency and was recommended to me. And so, you know, if you’re ever in a situation like this, do your due diligence and don’t fall for the promises, because at the end of the day, if you manage your money wisely, your credit score will return. And ultimately, in that situation, your credit score isn’t the issue. Your issue was killing the debts and then moving on to living a financially wise life.
And I know state and county websites often have lists of resources like this available, but to transition this into kind of the next phase, both of your life and of the savings journey. Once you pay off $25,000 in credit card debt, how do you transition into saving, into creating your own wealth?
It’s not easy. And that’s a great question. And so it took me just over five years to kill my debt and the last year or so was with my wife, who I met after college. And so that helped kill off… So I went after my credit cards first and then my student loans. So making that transition is another one, like it’s just taking it one step at a time. And when I was working with the counselor, two of the things that she implemented with me was you need to save something every month. And she said, “I don’t care if it’s five or $10.” She said in the beginning, “It doesn’t matter.” It’s the philosophy, it’s that mindset that you’re creating, changing from a spender to a saver. And so she had me do that. And then the other thing she had me do was, “I want you to set aside money each month to spend on you.” It doesn’t matter what it is, something that you can do to escape, I guess, for lack of better terms, that burden that you’re dealing with and just enjoy life. And so that was something that I started, both. It was $10 a month in the beginning. And again, it’s that seeing that even just that tiny little amount, that’s where you need to start. And so often I hear from readers, “Well, you know $20 a month isn’t going to do anything.” They’re missing the point. It’s that mindset, that lifestyle of I don’t want to be beholden to someone else and I want to start creating my wealth. It’s taking that one step in front of another and just doing that, because over time, and I see it a lot with readers and creating their emergency funds. They hear, well, I need three to six months. There’s no way on earth that I’m going to be able to do that. So I tell them, “OK, set a goal of $250, then hit that, then go to 500, then go to a thousand.” Because hitting each one of those is again going to create that momentum and that confidence that you can do more and look for other ways. So making that transition is just really committing to it and taking it one day at a time and realizing that, OK, right now it’s only going to mean five or $10 a month, but who knows where you’re going to be three months from now, six months from now at the end of the year.
I’ve heard this described as paying yourself first. And I liked that. I liked that because it’s easier sometimes to remember that our finances are essentially a business of one, or if you’re in a couple, a business of two. And remembering, like you said, to put money aside for yourself to enjoy, that’s a line item. You didn’t stop there. You turned your life around in a pretty big way. And once you started saving, what was your next step?
My next step was reining in my spending and looking for more opportunities to save, because my background was, you know, for so many years, I lived this way and making that switch of stopping spending just on frivolous junk doesn’t happen overnight. And so when it came down to that for me, the next shift was identifying every area in my life where I can cut back and use that for other needs. You know, we have three kids. And so that’s an easy, built-in way to do that because they have demands. They need to be fed and you need to be able to provide for them. And even beyond all of that, it becomes, at least became my desire, to break that cycle for them. As they see us, my wife and I manage our money, living that out in front of them and explaining, you know, obviously at their levels that they’re able to understand, communicate to them why we’re doing this, and why we’re not choosing to go out to eat on a Friday night. Going out to eat with five, even if you don’t go out for a three-course meal, it’s still easily $75 if it’s a sit-down restaurant. We’re doing that because we want to spend that $75 on going on a family vacation or being able to do something else as a family.
So how do you start that conversation with your kids? Is this a conversation where when they’re young enough, you have this conversation about allowances or about saving to buy that special thing? Or are they really involved with, you know, the financial planning of your household?
That’s a great question. And it really, I think, comes down to the age and the preparedness of your child. For us, what we started was just discussing things with our daughter, she’ll be 14 in September. So she’s our oldest. Just discussing things with her when she was two and three. And, you know, very remedially, very basic explaining, “You know, we’re not spending this, so we can spend it on this.” And we found that to be helpful and we pay our children allowances, but we do it a little differently. They each have chores to do around the house. Some are just expected to be a productive member of the house and others we pay them to do, but where we make it a little different is is that if you don’t do the dishes tonight, you’re getting docked that money from your allowance. And so we pay them $5 a week, and different times we’ll give them opportunities to earn more money, but they can earn that $5 a week, but there’ll be weeks where they’ll make less. And how we have them handle their money that they get is we have them split it up in three different categories. And 50% of their money has to go to savings. And 25% they have to give, so our church or homeless shelters, something like that. And then the other 25% they can use to spend on something that they want. So our two boys, we’ve got Legos all over the place, so that’s what they value spending their money on. And our daughter, we’ve learned that she likes hoarding the money and then finding something that she likes and spending it on that. And we have piggy banks that are sectioned that way, so we put that in weekly. And so we’re doing that to help them see the importance of paying themselves first, like you said, and putting that money aside, and then giving, and then being able to spend on what they want. And then another thing that we’ve just started this last year is my wife and I run our own business and we can pay our children income. And so our youngest son, he’s nine this year, and we’re not paying him because down the bunny trail, our CPA says really needs to be 10 to start. So anyway, our two oldest, we pay them, and we’ve been able to set aside a couple thousand dollars for them in a Roth IRA. And they love Disney, so it’s in Disney stock, and helping teach them about just very basics about investing.
That’s wonderful, and it transitions very nicely into something, again, I have much less experience in. Running a business has a lot of unique challenges for sure. You know, you’re going to have a lot of unique expenses that you wouldn’t have otherwise, but there’s a lot of opportunities. Understanding how to best position yourself as a business owner to pay as little in taxes as you can. And more importantly, what opportunities exist as a business owner to put your children in a better situation for their own retirement 50 years down the line. Where you’re starting a Roth IRA before they’re out of high school, that’s very unique. And it’s a wonderful idea. Can you tell me more about that and tell me other ways that you’re using your business to help you set your family up for success?
For sure. Yeah, the Roth IRA component was huge for us and it’s, you know, not really the amount of money that we’re doing to save ourselves. We really view it more so as helping just put some seeds there to help our children so they can learn and have that 50-plus years for that money to grow. Some other things you can do is a solo 401k. Since we don’t have employers, we don’t have the benefit of, you know, getting a 401k or 401k match. So that’s something that we’ve done. We’ve run our own business for just over 10 years now, and we first started with a SEP IRA and then learned through our CPA that we could save significantly more through a solo 401k. So we started that six or seven years ago, I want to say. And with that, you can put aside, I believe this year, the employee can set aside 19,000, give or take $500. And then as the employer, you can put aside 25% of the employee’s income. And so that’s massive if you’re doing that for two people. So we’re doing that. We also do an HSA account for our health insurance, because health insurance is a boondoggle when you have to buy it on your own, it’s nearly the cost of our mortgage. So this year, I want to say, it’s like 7,000 give or take five or under a thousand that you can put away in an HSA account.
HSAs are something I feel are completely underutilized. Can you walk me through what an HSA is and why you’re using it?
Sure. So an HSA is a health savings account. And what it is, it’s specifically for people that are in high-deductible healthcare plans. Our health insurance coverage is basically fire insurance. If my wife or I or one of our kids get some obscure cancer, it’s there for us. Other than that, everything is out of pocket. And so the HSA account is there to help supplement. So if I go the store and I need to buy Advil, I can use that money. So it’s pretax money. And when you use it for qualified expenses, it’s tax-free.
The one thing that I adore about an HSA, aside from it being, you know, not taxed when you deposit it, you can invest it, and you’re not taxed on the growth when you take it out, as long as it’s qualifying expenses. And the one thing we all share when we get older is medical bills. You know, when you have to pay for, you know, medical bills in retirement, you could take that out of your 401k or your IRA, or if you’ve been using an HSA through, you know, decades of your life, you can pull it out of there, just avoid the tax on it entirely. And I think that’s just an incredible thing that I don’t think enough people realize is an option. Frugal Living is brought to you by Brad’s Deals. That’s BradsDeals.com. Special thanks to John Schmoll, Sydney Smith, and H. Borkowski. I’m Jim Markus. Thanks for listening.
More about Frugal Living with Jim Markus
To hear more from John Schmoll, check out the latest episode of Frugal Living. Frugal Living is a podcast for smart consumers. How do you spend less and get more? The show, sponsored by Brad’s Deals, features interviews, stories, tips, and tricks. Jim Markus hosts season three, out now.
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