This is part of a series of interviews with people who are either working to improve their financial situation or who have already reached their goals. This week’s interview is with Michael, who writes MKL’s Muse. He writes about life and “The Shedding of Innocent Stuff”, which is an effort take a hard look at the things that have made their way into his life.

Could you tell us something about yourself?
I am 40 years old, my wife is 39. I work as a Quality Assurance Engineer. My wife is a stay at home mom. We live in the San Francisco Bay Area and we have three children, ages 12 to 7. We own our house free and clear, we have no consumer debt and we manage to make do on a single middle to high five figure income, which, believe me, can be a struggle in an area like the Bay Area, but it is doable with planning and a little creativity.

In what way have you turned your financial life around? (Or what are you working on changing?)
Much of our married life has had the benefit of having a secondary “savings account” of sorts that was comprised of stock options and Employee Stock Purchase Plan shares I was able to accumulate over a ten year period. In many ways, this was both a blessing and a curse. The blessing was that it was a large chunk of money that we could frequently draw from to provide some nice things in life. The bad side of that is that we became much too dependent on it, and we spent far more that we made for a few years. Ultimately, we decided to liquidate the stock account, pay down all debt, establish a true emergency fund in cash, make concrete commitments to retirement savings as a percentage of gross income, and set up college savings plans for our children. Most importantly, we determined to live on a budget and, no matter what, ensure each month that we lived on less than we brought home in pay.

Can you give a little bit of background on your story? What were things like for you pre-change?
We definitely had a blessing that many people did not or do not have, and there is no question that we were able to take advantage of an amazing period of time. I worked for a Silicon Valley technology company from 1991 until 2001. During that period of time the stock price for the company rose nearly 180 times the price of the first share I ever purchased. Back in 1995, I realized that the stock had gone up enough in value that I could take some of it, sell it off, and pay off all the consumer debt I had incurred. Having done that, we then hunkered down and kept purchasing shares, both thorough stock options grants as they vested, and through an Employee Stock Purchase Plan that allowed me to put in 10% of my gross earnings towards buying stocks. By 1999, we had enough shares to make a very large down payment on a house (75%). We decided to take out a small mortgage so that we could get the tax benefit and keep as many shares in play as possible, but still be in a position where we felt we could always afford our house payment. This seemed very logical as the stock price kept going up and up.

However, in March of 2000, the stock reached its peak, and then started dropping. By January of 2001, it had dropped nearly 60% off its peak value. What’s more, the economy in Silicon Valley got to be really tough, and a lot of people dealt with job layoffs and career restructuring. I was one of them. After being laid off twice in two years, I decided to go back to school and complete my bachelor’s degree. The stocks I still had would see us through for two years as well as pay for the completion of my degree. For several years after that, we would draw down a bit from the stocks as we needed them.

How much progress have you made?
In 2007, I finally sat down and did some projections, and I realized that, at the rate we were going, we were going to run out of the stock funds, and then what would we do? That was when I decided to really take a hard look at how we were living and how we were spending our money. By sitting down and really looking, we realized that we were wasting money left and right, and we were using the stocks that we had as a crutch. We also realized that, while we were able to make our house payments, we really didn’t have enough money to save for longer term goals. While we still had the chance to do so, we determined to use the last of our stock shares (which for eight years had not recovered the 60% loss that they had dropped from at their peak) to pay off our house so we could own it free and clear, and whatever was left over would go towards setting up college savings accounts for our kids. It may sound like a totally obvious move now, but it was really hard for us to make that break with the past.

Since making that final payment, we decided to make sure that we took that old house payment and, instead of paying that money to a mortgage company, we pay ourselves by way of funding two ROTH IRA’s to their maximum levels, getting the match from my company’s 401K and contributing to college funds for our three kids.

How do you feel about your financial situation right now? (Or how did you feel after reaching your goal?)
It’s interesting, I feel much more secure today without the “safety net” than I did when we had it. Looking back, I realized that we made some really bad decisions that, had we done something different, could have meant that we could have potentially had much more money today, but that’s the price we paid for just sort of stumbling along financially for so many years. Today, it’s all about purpose and having a concrete game plan, and now that that game plan is in place, it’s so much easier to see things with a longer view. We never really did that before.

What was the catalyst that caused you to take action?
I sat down in November of 2007 and thought about the mortgage we had (30 year fixed at 6%), and the fact that we still had 21 more years to pay on it. I did some math and looked to see how much interest we would pay on that loan. I then looked at a conservative estimate as to how much interest I could conceivably pay myself over the same time period using a few Vanguard Index funds and their to date annualized rates of return over the past couple of decades. The difference was staggering. That convinced me that, while I had the ability to pay off my mortgage with the stock shares that I had (remember, these shares I still held were 60% off their peak made 8 years earlier) I really should do it. Looking at how the market and economy has been this past year, I’m really glad that I did.

Did you have any setbacks? If so, how did you deal with them?
Not so much setbacks, but coming to the realization that there really is no perfect budget, and that every month throws you curve balls and challenges that you didn’t consider. The good news is that, with each month and each curve ball we deal with, it adds a little more knowledge to our monthly plan and allows us to make adjustment to the plan. The biggest adjustment we’ve made is in setting up what we call a “recurring bills escrow account”. Certain things are going to happen every year. We now calculate a rough monthly figure for all of the recurring items and we put money in the escrow account so that we can deal with them as they come.

What has been the hardest part of the process?
Having to explain to our kids that they will likely not be getting the latest, greatest, shiniest [fill in the blank] unless they save up for it. Our eldest child thinks we are the meanest parents in the world. That’s OK, I think down the road when he has enough money to cover college and do some of the things he really wants to do, he may just thank us for trying to instill some financial discipline. Or maybe not (LOL!).

The easiest?
Having the family meting each pay day where we decide how much money goes in which savings account. We love doing this and we do it as a family so that we can show the consistent savings and how it grows (lately it’s been shrinking, but that’s how the market works sometimes, and we are prepared to ride it out. We have faith it will continue to grow over the long term, and we do our best to keep a long term view). Because of this, we don’t have an automated process to make the deposits. We want to make sure it remains a conscious effort, so that we never take for granted what we are doing.

How long has it taken?
We have been on our present course for just under a year, but it has been a night and day difference. Prior to November 2007, we might as well have been stumbling through fog as far as our finances were concerned. Some things may still be foggy, but at least now we have some better headlights.

What will be your next step?
There are a number of projects I would like to do for our house, and now that we have no more payments, we’d like to start setting aside a little here and there so that we can tackle those projects when they come. We also have a long term goal that, once the kids are grown and finished with college, we’d like to serve a two year mission with our church. It would be great to be able to say, we have all our bases covered, and we’re ready to go wherever you would like to send us!

What’s the best financial advice you’ve received?
Someone asked me if I’d take out a second mortgage to invest in the stock market. When asked if I’d willingly do that, I said “no, of course not”. That’s when it was pointed out to me that my holding a bunch of stock shares like I did, while still having a home mortgage, was effectively the same thing. Also, sending $10,000 to a bank each year to avoid sending $4,000 to the government as a tax write-off was bad math. I’d never looked at it that way before, but it made a lot of sense.

What inspiration could you give to someone in a similar situation?
I’ve seen a number of people make both good decisions and bad decisions with the stock options they have received over the years. When you have all your net worth tied up in one stock, you have the potential for great reward on the upside, but there’s also a tremendous risk of loss on the downside. While I was fortunate to have the opportunity to use these stocks over the years to my benefit, I also realize I could have done so much better had I gotten on the ball with a budget, a game plan for diversifying my holdings and a realistic long term view. Take the long view, pledge to live on less than you make, and be prepared to take advantage of opportunities when they come your way.

Would you like to share your story? If you would like to be interviewed via email for a future article, please email me at c o m m e n t s (without the spaces) to let me know you’re interested.