This is something I'm pretty proud of and wanted to share. It's also incredibly personal, and I'm more than a little nervous sharing, but maybe it will encourage or inspire someone having their own financial struggles. This started out as a ridiculously long post, so I ended up splitting it into a series. Be sure to check out Part 2 and Part 3!
Last week, my husband paid off his student loan.
Two months ago, we sold (and thereby paid off) our car - replacing it with an older vehicle with no monthly payments. Months before that, we paid off our only credit card bill which had slowly been amassing since my husband was originally laid off more than two years ago. Like a LOT of people out there, we've been following the advice of Dave Ramsey and working on our "debt snowball." We've tried this before, and failed, but this time we're actually succeeding. So what's the difference? I don't know. I guess we were tired of living in our ignorance - and tired of the weight of our debt. We're very fortunate in that our only debt was this:
- mortgage (covered by our renters)
- my student loans
- Husband's student loans
- car loan
- 1 credit card
All in all, not including the mortgage, it added up to less than $35,000 when we first started this time. I know there are people out there with tens of thousands of dollars more in debt, but I really do believe in this plan, benefit in no way by endorsing it, and believe this can help anyone who truly sticks with it.
So what is a debt snowball? Essentially, you pay minimum payments on all your bills, except your smallest debt. Throw everything you can at it to get it paid off ASAP. Once that's taken care of, you add whatever was going toward that small debt to whatever you're paying monthly toward the next smallest debt, and so on. Super simple, right? So why did we fail before?
We weren't looking at the big picture. This time, we actually read Dave's book "The Total Money Makeover." He's a pretty no-nonsense guy. We created a budget, and quit hoarding our savings. That last part seems a little counter-intuitive, right? We were holding on to THOUSANDS of dollars in our savings, while also holding on to THOUSANDS of dollars of credit card debt. We had more than enough to pay off our credit card, but we didn't because we wanted the cash for "just in case." It was our emergency fund, and we were paying way too much money in interest on the credit card debt to justify it. So that was our first step - we paid off the credit card. It was such a relief, I hate that we didn't do it sooner!
Our credit card was part of a vicious cycle. We'd put a few hundred toward it, then something would come up and we'd put a few hundred back on it. We were never getting ahead - and yet we had the means to. So now we were left with just a car loan, student loans and our mortgage.
We were fortunate to still have a little money left in our emergency fund. Dave recommends starting with (or working towards) $1000 in the beginning. Remember, it's more important to pay off debt than to hoard your money and rack up more debt in the process.
Before working toward paying off more debt, we really needed to work out a budget. We used the free printables available on Dave's website. Once you start accounting for where all your money is going, it really is an eye opener. We felt like we were scraping by on next to nothing, but the reality was that a lot of our money was being spent pretty frivolously. Every dollar became assigned a specific task - bills, groceries, gas, etc. It's actually pretty freeing to know exactly how much you have to spend on things. We found there was actually money in the budget to *gasp* buy clothes for the kids and even new makeup for me. These had been things I would feel guilty about getting before because I was never sure if we would need the money for something more important. Suddenly, with a budget, we were attacking our debt AND buying fun new things (within reason, of course).
Do you use a budget? Please share some tips on how you stay on track, or get back on track. With a baby on the way, I know there will be times I'll be tempted to "cheat" and buy cute new things we don't really need!