HOW I Am Getting Out of Debt

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):

  1. Save $1000 for a mini emergency fund.
  2. Get out of debt using the Debt Snowball.
  3. Save 3-6 months of your expenses for a true emergency fund.
  4. Invest 15% of your income for retirement.
  5. Invest in college for your children.
  6. Pay off your mortgage.
  7. 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.

  • We eliminated expenses.

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.

  • We “found” more money.

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 started using cash.

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).

  • We saved $1000!

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.

Our Timeline

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.

My Advice

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?

15 thoughts on “HOW I Am Getting Out of Debt

  1. Maria @ A bookworm's life October 31, 2014 / 7:43 am

    I’m very lucky in that I haven’t had a significant debt problem so far, but I must say, I had a credit card that I abused a bit during my undergrad years and cutting it up after I paid it off was such an incredible feeling!
    It sounds like you have a solid plan to get out of debt; I’m a big fan of budgeting.

    Like

    • Michelle October 31, 2014 / 10:09 am

      We get our thrill from seeing the zero balance. There are some i will cancel but there are some i will keep. 🙂

      Like

  2. Emily October 31, 2014 / 9:23 am

    Just wanted to send some high fives your way – this is awesome. Huge congrats to you and Ben for the progress you’ve made so far, and the courage to share it for the benefit of helping and motivating others.

    I’ve obviously had to make a lot of lifestyle changes to my spending habits to finance my travel this year while I am in between jobs, and I agree with your thought that it feels liberating to cut back. I learned a lot about how consumerism is hard-wired into us in America and we waste so much money buying things we think will make us happy. I’ve cut out almost all shopping from my life this year (with the exception of books, but even that is much lower) and it is so liberating. Being on a strict budget and cutting out our impulse spending urges really can open your eyes about how much money we actually need to live healthy and comfortably on.

    Like

    • Michelle October 31, 2014 / 10:08 am

      We really do have a problem with consumption in this country. I am hoping that once we are able to spend our money again, we keep this new mentality of budgeting for things because i think it really makes you think hard about whether you really need it. I don’t even buy books anymore because (a) i have a million i still haven’t read and (b) i hace access to an excellent library system. 🙂

      Like

  3. Ronnica October 31, 2014 / 10:56 am

    You’re right, it’s a long journey, but doesn’t it feel so great to be on it? Dave Ramsey was my big starting point, too. I remember how awesome it felt to have that first $1000 in the bank…I had never really saved before! While I had to use it within the first 6 months, just having that discipline helped me handle unemployment, re-employment, and saving for my big move. Now that the move is over, I’m all about the debt snowball now! 4 more student loans to go!

    Like

    • Michelle November 3, 2014 / 1:16 pm

      Good luck!

      Like

  4. Linda October 31, 2014 / 3:00 pm

    Way to go! I’m also working on paying off my debt. It’s been a long time coming but I’ll be done in March 2015.

    Like

    • Michelle November 3, 2014 / 1:16 pm

      So close! Good luck!

      Like

  5. Anita October 31, 2014 / 4:21 pm

    I’m sending you a high five! I’m sure over the years we’ve handled our debt wrong. We purchased FL Prepaid college plans for our kids, paying monthly until the year of HS graduation, it has certainly helped and been nice for the girls. We’ve never considered car payments or our mtg bad debt, but I know many people see car payments negatively. We just like nice cars. Sadly now we have five and insurance for that many too. Three kids have seen us forgo many nice vacations and expensive toys, but we are now seeing that change after 24 years of marriage and nearly grown children.
    You’re on the right track and I’m so happy for you!!

    Like

    • Michelle November 3, 2014 / 1:16 pm

      I never thought a car payment was bad either until I realized how much money we could have if we didn’t have it. We aren’t doing FL Prepaid but we did start a college fund for E.

      Like

  6. Ann November 3, 2014 / 11:18 am

    Sounds like you are doing great! We didn’t have debt, but we weren’t saving any money, either, so we took a very similar approach to yours, but for saving instead of paying off debt. It’s been hard, but so rewarding to see our bank account grow.

    One thing that really helps is the zero-based budget. We struggled with the monthly budget, too (different pay periods) until I found YNAB (You Need a Budget). YNAB works very well with Dave Ramsey’s philosophy, but there’s one difference: YNAB teaches that you budget only the money you have. Their concept of “buffer” means that you basically work towards having a month of expenses so that you then send all of this month’s income to NEXT month — so that next month you budget for the actual dollars in your account. This has helped us greatly, since income can be somewhat variable. It is really nice to be able to budget an entire month at once — I can set everything on auto pay and not worry about the bank balance dipping too low.

    I’m also a user of credit cards for the cash back rewards — we put most of our expenses on a credit card and pay it in full each month. Since we have the money in hand already (since we only budget dollars in our possession), there’s no danger of relying on credit card float. I set each credit card to autopay on the due date — set it and forget it. Because of the way YNAB works, the dollars are deducted when the money is spent, not when the cc is paid.

    Like

    • Michelle November 3, 2014 / 1:14 pm

      This is interesting. I’ll have to check it out. The budget has been so helpful for us. We do keep some extra money in the checking account as a buffer just in case something goes wrong with the zero-based budget. But our income is very steady since we are both salaried.

      Like

  7. Erin November 10, 2014 / 10:13 pm

    Nice job on the major debt reduction in just a little bit of time! I absolutely love YNAB! It has truly changed my life in just the few months I’ve been using it. I’ve read Dave Ramsey and Suze Orman, and YNAB seems to work best for me. That’s the trick of it all-find what works for you. Again-well done on the debt reduction plan! Very inspiring 🙂

    Like

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