You now know WHY I am getting out of debt, but the tricky part is figuring out HOW to get out of debt. Thankfully, other people have figured out some good plans to follow and you can adapt those to your life. When we had our epiphany about how bad our debt situation really was, I went online and did some research. This led to me checking out Dave Ramsey’s Total Money Makeover and reading it cover to cover in about 48 hours. I don’t think Dave Ramsey the person is for everyone – he inserts religion into everything and he and I certainly do not have the same political beliefs – but his plan is a good one.
The Baby Steps
The Total Money Makeover outlines seven baby steps to financial wealth (with my paraphrasing):
- Save $1000 for a mini emergency fund.
- Get out of debt using the Debt Snowball.
- Save 3-6 months of your expenses for a true emergency fund.
- Invest 15% of your income for retirement.
- Invest in college for your children.
- Pay off your mortgage.
- Invest and build wealth.
We are currently on Step 2, obviously. And will be for awhile. We have so much student loan debt that I may have to tweak this a bit so that we aren’t waiting 5 years before we get to steps 3-5.
What We’ve Done
- We started budgeting.
We started this in August and used August as a “practice month” before we really started the plan. We sat down and figured out our budget for August. We listed our income and we listed our expenses. And we found that our expenses were more than our income. We were living beyond our means and had no idea we were even doing it.
I thought this one would hurt, but it actually felt great. We gave up our YMCA membership. We gave up our house-cleaner (okay, this one hurt). We cut cable tv. We gave up our Audible subscription. We stopped eating out. We stopped buying things we didn’t need. We haven’t turned our air-conditioning on in two weeks.
Ben volunteered to give up his planning period and teach an extra class. We switched to a higher deductible health insurance plan. We stopped contributing so much to our retirement. We stopped contributing so much to Evan’s college fund. These will come later. Four years from now, I’m maxing out my retirement contributions and I’m funding Evan’s college as quickly as possible. Right now, we are spread too thin to do it all and we needed to free up this money.
We use cash for our everyday expenses.Actual paper money cash. We take it out every pay day. When it’s gone it’s gone. Some weeks, like this one, our pantry is looking pretty sad by the end of those two weeks. But we are not starving. And we are learning how to live within the budget.
- We refined our budgeting.
Ben and I get paid bi-weekly on the same day. We learned that a monthly budget was difficult for us and that a bi-weekly budget worked better. It takes a little more effort since different things get paid in different weeks, but it works for us. Each pay period’s budget is unique. We work off of a template, but we add in the random things we need to for each pay period (for example, this next period it is a haircut for Ben and Evan’s school pictures).
It took us 6 weeks, but we have our emergency fund. And while were saving this, we had to spend $300 on car repairs AND WE DIDN’T HAVE TO PUT IT ON A CREDIT CARD. Our credit cards WERE our emergency fund. Now we have a real one. $1000 isn’t going to cover you if you lose your job or have a serious medical problem, but it will get you out of a lot of life’s unexpected twists and turns, like car repairs. Since we saved it, we haven’t had to touch it. Since we plan our two-week budgets with so much detail, not much surprises us.
- We started our Debt Snowball.
Now, this one did hurt. We listed all of our debts out and put them into three categories. Category A is our credit cards, car payment, and two student loans that I really want to get rid of. Category B is Ben’s student loans. Category C are my student loans. Dave Ramsey says you list them all out and put them in order from smallest to biggest. We did it this way because of some quirks in our own personal financial situation and because it makes it more manageable. Dave Ramsey also says not to worry about interest rate, but if two cards had pretty similar balances and one had a higher interest rate, we swapped them to get rid of the higher interest rate first. We also made sure most of our credit card debt was on no-interest credit cards.
We pay minimum payments to everything except the smallest debt that we are currently focusing on. All of the extra money in our budget is applied to that debt. The great thing about the snowball is that you with each debt you eliminate, your snowball becomes bigger because you eliminated a minimum payment.
So far we have paid off two credit cards, almost $1200, in a month. We hope to eliminate one more this year and then two more early in 2015. Then the last few will take awhile because those are the bigger balances. But the reason you pay off the smaller ones first is because it gives you some quick victories. And let me tell you, these victories are both amazing and necessary. We give ourselves a little celebration with each goal we meet (usually pizza or an inexpensive meal out). And we cross it off our spreadsheet, which is also therapeutic. The debt becomes much more manageable when it is broken up this way.
What We Haven’t Done
- We didn’t cut up our credit cards.
It’s supposed to be therapeutic. And it is supposed to prevent you from ever using them again. But we just put them in a cabinet instead. I don’t think credit cards are evil. Evan and I have flown all over the country for free this year because of a couple of credit cards. We don’t use them now – we cash flow everything – but I think we have enough self-control to keep using them once we are out of debt. But, we need to pay them off every month!
- We didn’t give up everything.
We still pay for subscriptions to Netflix, Google Music, and Amazon Prime. We still went to Michigan in October. We are still going to Disney next week. We still get the occasional pizza. This is a long road for us and we will give up if we deprive ourselves of everything. But we cash flow everything we do now, which is the big change.
- We haven’t compromised our health.
We still eat well. We buy organic dairy, even though butter is $8. We still get our organic coop box every two weeks. We aren’t eating more processed food even though processed food is cheaper. I could go on for hours about how awful it is that it costs more to eat healthy, but that’s a discussion for another day. This was something I wasn’t willing to compromise.
We should eliminate all of the debt in Category A by mid-2016. This is a long time and hopefully it will speed up (it seems like things do speed up once you get going). We should be done with Ben’s student loans by February 2018. And we should be done with my student loans by October 2018. Of course, this assumes we don’t have any added expenses (like another kid in daycare) which is a big assumption.
So we are looking at a 4-year plan right now. Which is a very long road, but that’s only because of the massive student loan debt we have. I think most people can be debt-free a lot faster than us. And any extra money that comes our way – bonuses, tax returns, raises, etc. – goes straight into the snowball.
How Are We Feeling?
This takes a lot of focus and a lot of dedication. We have to have the self-discipline to say no to things. We have to go against our spontaneous-buyer tendencies. We have to have discussions about money ALL THE TIME.
But, being in control feels GREAT. We feel empowered. We feel like our goals are achievable. We love telling our money where to go instead of wondering where it went. As of the time of this writing, we have paid off $4,246.99 in just a few months.
We always assumed we would be debt free someday, but someday kept getting further and further off. Thinking about our future now, we can see a day when we have the money to do what we want. Four years is not an eternity. It’s high school, it’s college, it’s a presidential term – these fly by. I wish we could speed up the process, but I understand that we dug ourselves into this mess and we have to pull ourselves up slowly.
For inspiration, I listen to the Dave Ramsey Show podcast almost every day. Which sounds ridiculous but I really like hearing how other people are going through the same thing and I especially love the “debt free screams,” where people who have gotten out of debt come on and I get to hear the joy and the freedom in their voices. I don’t love everything about Dave Ramsey, but I think he is doing an amazing thing for people by offering advice and giving everyone a plan.
I’m not sure I am actually qualified to give advice, having been at this for only a few months. But, I’ll give it anyway.
- Check out The Total Money Makeover from the library. Seriously. It’s a game-changer.
- Talk to your spouse and make sure you are in this together. This won’t work if you are married and you try to take this on yourself.
- Really evaluate your spending and see where you can make cuts.
- Stop using your credit cards.
- Use cash so you can really feel your money leaving you.
I am happy to talk to anyone who is interested in getting debt free and needs some guidance. I would love to inspire a few of you to follow me on this path. Won’t it be fun if we all do it together?