“You can’t spend more than you make, you’re not in Congress!” - Dave Ramsey
At the beginning of every year many of us make “New Year’s Resolutions.” We set personal goals and promise ourselves we will take the necessary steps to improve our life and our situation, for example:
• Lose weight
• Stop smoking
• Get out of debt
I’ve made these resolutions myself. Sometimes they stick and sometimes they don’t. I’m going to talk to you today about trying to get out of debt, why it didn’t work for me before and the debt snowball method that I am using now.
Back in 2009, I decided that I needed to get out of debt. I started reading and watching financial gurus like Suze Orman, David Bach, and Dave Ramsey, and learning all about personal finance. I paid off my credit cards, leaving only my student loan and mortgage. It felt good to be making progress. Unfortunately, it didn’t really stick.
You see,
I cheated by refinancing my townhouse and pulling out some extra money to pay down that credit card debt. Hindsight being 20/20 says that it was a horrible idea. My house payment is now nearly half of my monthly take-home pay, and I consider myself lucky at this point not to be underwater or in foreclosure. I guess I learned the hard way that moving money around is not the same as paying off debt.
Sadly, I only stayed out of debt for a few months and then life happened. Car and home repairs, trips, busted computers, etc., etc. and out came the credit card. This is what happens when you don’t have an emergency fund or the discipline to really stop charging (or saying no).
In 2010, I resolved not to make any resolutions and I sank deeper into debt.
Now In 2011, I resolve to clean up my mess.
I started listening to Dave Ramsey’s show on the radio again and revisited the 7 “Baby Steps” of his Total Money Makeover plan.
They are, in order:
1 Quickly put $1,000 in the bank as a baby emergency fund ($500 if you make <20K)
2 Pay off debt (other than the house) using the debt snowball
3 Build up the emergency fund to 3 to 6 months of expenses
4 Invest 15% of household income into retirement accounts such as 401(k) or Roth IRA
5 Save for college
6 Pay off home early, and
7 Build wealth and give
I am now in Babystep 2 and more determined than ever to get out of this hole I dug for myself. Earlier this month I met with a financial counselor, who helped me set up my budget and figure out the snowball. I am also using a computer program called YNAB (it stands for you need a budget) to track every expense in the zero-based budget. Debt reduction, like dieting, seems to work better when you have to write it all down and be accountable. I called a family meeting where I showed them the budget and shared the plan I set up with the financial guy. We are finding ways to put more towards debt repayment and savings, even if it is only $50 per month. Cable TV is getting cut and we have to stay out of restaurants.
We’re cutting our costs for food, utilities and other expenses. I consider myself pretty frugal. Our car (named Chewy after the grumbling Star Wars character) is 19 years old, so I don’t have a car payment. We buy stuff used and shop at Aldi’s and Sam’s Club. Unfortunately, my expenses are high, and it still seems like there is too much month left at the end of the money. It is hard work, but the good news is that if I can make it stick this time, I could be completely out of debt, including my house, in about 12 years using the debt snowball plan. This cuts my mortgage payment time roughly in half!
Here is how the debt snowball works…. You set up your zero-based monthly budget where you allocate every incoming dollar, including an extra amount for debt repayment. You list your debts smallest to largest, adding the extra funds (say $100) towards paying off the smallest debt first and when that one is paid off, the money that was going there is rolled into the payment of your next debt on the list…. And so on until you are attacking your mortgage with hundreds (and in some cases, thousands) of extra dollars every month.
Here’s an example: A family has a monthly obligation of $1,800 of debt repayment every month.
• $1,500 mortgage payment (on a $175,000 balance) [third $1900]
• $100 to Visa ($4,000 owed @15%) [second $400]
• $200 to a school loan (owe $1000) [first $300]
By assigning an extra $100 a month to debt repayment, they pay the school loan $300/month first until it is paid off and then add an additional $300 that was going to Sallie Mae to the Visa bill (sending them $400/month)… and when that is paid off, it gives them an extra $400 to pay on the mortgage every month (increasing their mortgage payment from $1500 to $1900/month).
You can gain some serious momentum in paying off the total debt and by paying off the little debts first; you have some wins along the way to keep you motivated, which is very important. Then you get to burn your mortgage! I’m very hopeful and determined to make my debt snowball plan work.
I’m now in a differentmindset and my family is supportive. I don’t mind eating rice and beans and beans and rice for a couple of years so I can scrimp and save to get that emergency fund in place so I can cut up my credit cards.
I want my financial freedom.
“When you find yourself in a hole, stop digging!”
... but alas, I'm broke now and working my debt snowball so those beautiful gold coins will have to wait.
