This post is a follow up to my last post all about financial organization. When I finished that one, I felt like the story wasn’t finished and I just had to talk about managing debt. If you haven’t read that post yet, go do so because you’re going to need some of the pieces from that post to help you manage your debt. To give you a quick recap, here’s the main points from that post:
- I shared how to analyze your bank account.
- I described how to review that analysis you do and determine what’s coming in and what’s coming out.
- I told you how important it is to create a bill review and payment schedule.
- I mentioned how much more efficient it is to have everything you need to pay bills in one place.
- I gave you a few tips for dealing with the stubs you get in the mail.
This post is going to talk briefly about some of those pieces but is more of a continuation of what to do next. It’s about managing debt. Before I keep going, I need to share you my thoughts on that word “managing”. When I started to think about debt, this word came to mind, but I don’t think it’s the right word. Let me give you an example so you get an understanding of where I’m coming from.
A restaurant typically has a front-of-the-house manager and a back-of-the-house manager. These roles might be combined, but ultimately there is one person or a team of people that manage that restaurant. Anything from making sure the customers are happy to having enough supplies on hand to knowing how many people you can serve per night. That manager role is always going to be there. A restaurant can run without a manager, but not very well. With debt, it should not always be there. The goal with debt is to make it go away…hence, my problem with the word “managing” when we’re talking about debt.
Dave Ramsey would tell you there is no such thing as managing debt. You’re either in debt, or you’re out. While I’m still in debt, there’s not much left. Dave taught me a TON when I first stated the process of getting out of debt. I listened to his podcast (three hours per day) and soaked up every single thing him and his team said. His strategy made sense and my gosh, it worked! But my husband and I felt like his way of getting out of debt was a little too strict. We still wanted to see and go out with friends from time to time and we still wanted to take a long weekend away every now and then. So what we practice now is what I call Dave Ramsey-esque. It works for us and that is what matters. What works for us may not work for you. The biggest thing I want you to take away from this post is that you need to develop a plan to become financially free on your own terms.
Now for those tips! Below are the things we did when we first started to get out of debt (and still do today). These tips have allowed us to pay off a significant amount of debt, live a little and save a lot.
Look at the Analysis of Your Bank Account
This step I talked about in the last post but I think it’s important to mention again. Reviewing your bank account allows you to get a visual picture of where you are spending your money. For us, we reviewed every transaction for 30 days and found that “Eating Out” was the largest category. We were eating out at restaurants or getting takeout more than half the days in a week. When I noticed this, I actually did the math. We could cut that spending in half if we started cooking at home.
When you look at your bank accounts, what category floats to the top for you? It may not be “Eating Out” but it could be “Clothing & Accessories”. That was another tough one for me. I mean, I like shoes. I can’t help but seeing a cute pair of sandals or sneakers and wanting them. You might be the same way. If not, there’s something else. Each of us has different spending habits so our bank accounts will never look the same. That is why you need to do this analysis.
Another question to ask yourself as you do this is whether you’re saving anything each month. At first, we couldn’t save anything because we were living paycheck to paycheck. It was too hard to save because we had so much debt. Don’t worry so much about making changes yet, just get this information ready and at your finger tips.
Make a List of All Your Debt
You can use paper and pencil or a spreadsheet – the choice is yours but you must write them all down. We used a spreadsheet because I like to geeky out a little bit and use formulas to deduct the payment every time I put something toward the debt. The formula calculated all that for me so it was less work on my part but it allowed me to get a better idea when the debt would go away.
That’s the key with debt, it’s something that you owe and will eventually (hopefully) go away when you pay it off. Things like your mortgage, a car loan, a credit card, medical bills or anything that is somewhat temporary should be classified as debt. Other bills that you have like your electricity, cell phone, cable and internet, these aren’t necessarily debt because they’ll always be there, month after month. Unless, of course, you decide to cut the cord and say buh-bye to the boob tube.
When you do go to write out all your debts, you want to write down the Payee, the minimum amount owed each month, the total payoff amount and the interest rate. Here’s where Dave Ramsey would tell you to forget about the interest rate. He’s right to a certain extent, but sometimes it’s nice to know that interest rate because that might be a factor when you get to the next step. We took into account the interest rate because that made a difference in the ultimate payoff amount.
When you write down your debts, remember to order them by smallest total amount due to largest amount due. This allows you to work the snowball. What’s the snowball? It’s a Dave Ramsey term that I learned and LOVED! What you do is pay the minimum due on all your debts, except for your smallest. That smallest debt you put as much as you can the month to expedite the payoff. Once you get it paid off, pretend it’s still there and add that amount you put toward it to the minimum on the next smallest bill. Doing this helps to expedite the payoffs and let me tell ya, IT WORKS!
Total the Minimums for Each Debt
Adding all this up might sound like a lot of work, but it’s necessary. You need to take this step so you can compare the total of all the minimums to the amount of income you having coming in every single month. Do you have a deficit (you owe more than what your income is)? Or do you have an excess? We had a deficit and let me tell ya…IT WAS HARD!!! Eventually we got to a point where we had an excess, but it took awhile. Once you learn which you have, you need to make some decisions.
If you have a deficit…
First, take a breath. When we noticed this, I cried. Like, for a really long time. When I came up for air and was back to reality, I realized it was going to be an uphill battle. We looked back at our bank account analysis and made some tough decisions. What could we reduce spending on? What could we cut out entirely? The food we were getting from restaurants or takeout needed to be dramatically reduced and that’s exactly what we did. Instead of eating out three or four times a week, we started getting takeout every two weeks on payday. It was like a little treat for ourselves. When we made this change, we noticed a lot more money in our pockets.
The thing to keep in mind if you have a deficit is your wants versus your needs. You don’t need that new pair of shoes if your existing ones still do the job. You may want them, but you know the minute you get them, they’re probably going to be out of season anyway. You don’t need to get fast food on your way from one place to another but you know you’re going to want something so you can pack a snack that you bought at the market. Ask yourself some hard questions and make some decisions that are ultimately going to benefit you later on down the road.
If you have an excess…
If you review your analysis and realize you have an excess, smile and be proud because you’re doing better than you may have thought. Yippee!! Don’t celebrate too much, though. How much extra do you have? If it’s enough to pay all your debts, while working the snowball, and pay your normal monthly expenses AND you still have a little bit extra, pay yourself a bit. No, I don’t mean take that extra and go shopping. I mean take that extra and save a little. The first savings goal you want to get to is your emergency fund of $1000.
An emergency fund is crucial to have. What if you’re paying your debt and your monthly expenses and all of a sudden your car dies and needs work? Do you have the money to pay for those repairs? If you have an emergency fund, you do! Once we got to that first tier, we let it sit and focused on paying off those debts. When we honed in on them, they quickly went away. This left us with more wiggle room to build up our savings even more, start our retirement funds and put some money away for some projects we want to do on the house.
Speaking of projects…
One of the things Dave will tell you is to not do any major renovations or projects while you’re in the process of paying of debt. This is one of those things that my husband and I thought was just too strict. If we’re paying off debt, it would be YEARS before we could do something big. Instead, we waited until we had that wiggle room and started to save for some of these projects. We have a log of all the things we want to do in our home and tackle them by priority. The kitchen needs to be remodeled, the driveway needs to be resurfaced and then there are odds and ends that come up because, well, life happens. There was even a time when our furnace, our oil tank and our hot water heater all went at the same time. It was a nightmare and that emergency fund wasn’t going to cut it. Saving even just five dollars each pay check can add up quickly and allowed us to work on these projects.
Find Accountability Buddies
The last piece of advice I want to give you when you’re getting yourself out of debt is to find a support system. Get together with people that are also trying to get out of debt so you can keep each other on track and not stray from your ultimate goal – FINANCIAL FREEDOM! When you look for people to put into this group, make sure you choose wisely.
You want the friends that will give you some tough love when you need it – “Susie, you do not need that pair of shoes right now. You need to pay your credit card bill.”.
You also want the friends that will cheer you on – “Ted, you’re doing great! I know it’s tough right now, but think about what’s down the road for you? You’ve got this!”
Your accountability buddies are there to help you get out of debt and stay out of debt.