Tuesday, June 3, 2014

Our Debt-Free Journey (So Far)

No, we are not living debt-free -- yet.  But, we're well on our way!

If you haven't taken financial freedom guru Dave Ramsey's "Financial Peace University" course, let me urge you to do such.  He has a book, and that's great reading too.  But personally, I find it much more inspiring to attend the classes.  It's like church.  We have the Bible we can read and study at home, but sometimes we need the fellowship and strength of others from church to help motivate us. Google him.

Eric and I were happy to learn the other was a "ramseyite" when we first met, because we didn't have to worry about "converting" each other.  Aside of the mortgage, we (he) had a business cc and I had lots of medical debt.

Here is the program and how we've done it so far.

PRE-STEP PREP:  When we first got married, we sat down and wrote our monthly budget projections.  I know a couple where the husband writes out the budget and then gives it to the wife, who line-item vetoes or approves things.  However, she knows if she wants more in one place it has to be cut from somewhere else.  However you decide to work it, the important thing is to both be on board.  Otherwise, it simply won't work.  Include specific things like tithes, hair cuts, clothing, groceries, each of your children's birthdays, car registration renewals, Netflix, eating out, entertainment, vacation, etc. For things paid annually or semi-annually, determine how much per month you will need to save in order to pay it on time when the time comes.

After you figure out your monthly budget, determine your monthly income.  If your income exceeds your monthly expenses - YAY!  If not, well, start crunching numbers and cutting things you don't actually need or use.

Anything extra goes towards step 1.

Step 1:  Start a $1,000 emergency fund. (We find it best to keep this in a separate savings account.)  If you already have this money, great - move to step 2!  If you don't have it, do whatever you can to get it quickly.  Pick up a part-time, short term job.  Deliver pizzas, mow lawns, tend kids,  give hair cuts, etc.  Sell something (or things) of value you no longer need.  Do not move to step 2 until you have this $1000.

This is for EMERGENCIES only (not because you forgot to buy your sister a wedding shower gift).  Of course, if you must dip into it, it must be paid back asap before the next emergency hits.

Step 2: Once you have your emergency fund set up, you can really hone in on that monthly budget and start living it.  In this step, you will list out all of your debts, excluding your mortgage. List them according to lowest balance first and work on paying that one off as quickly as possible.  Don't worry about the rate, unless there are 2 with the same balance.  Then pay the higher interest one off first.  The reason you pay the lowest balance off first is because (like dieting) you will be more prone to stay with your plan when you see quick results.  Once you pay off that, take that monthly amount and apply it towards the next lowest debt and so on.  This is what Dave calls the "Debt Snowball".

Do not move to Step 3 until you have all of your debt (excluding your mortgage) paid off.  We are still working on some old medical bills, etc.  But I am excited when I can cross another one off my list.  I have about $3000 left in medical debt.

Step 3: 3 - 6 Months in Savings. Since we are still in step 2, I can only tell you what this step is.  Take your $1,000 emergency fund and turn it into an emergency fund you could live off of if you HAD to for 3-6 months if you lost your income.  Again, this money is for emergencies only.

Step 4: After you build up your emergency fund, it's time to start taking your monthly excess (which you now have since you are almost debt free!) and start putting 15% of your income into some sort of 401K, IRA, Roth, etc.

Step 5: College Funding for Children. Start Saving now!

Step 6: Payoff mortgage early by throwing all of your extra money towards your mortgage.

Step 7: (Finally!) Build wealth and give!

I know this is one of my longer blog-posts, so kudos to you if you are still with me. Here are just a few more tips.

Use the envelope system.  Dave Ramsay recommends this and both Eric and I have been doing it for the past few years. Basically, for each item on your monthly budget, you create an envelope.  On payday, pull out enough cash to fund your envelopes.  (This might take a while to get used to the quantities of each denomination you'll need, but handling the money and being your own banker is a fun job too!)  Add the appropriate amount to each envelope.  When the time comes to pay that bill, you now have enough money for it!  Once you become savvy at the envelope system, you may decide to go virtual once again, as we recently did.  If so, may I recommend {{mvelopes.com}} I really love their website and having the app on my phone as well!  I always know how much of the money in my account is dedicated to which budget item (envelope) and it helps us not to overspend.

Cut $1,000 out of your annual budget!  I read an article about a man who wanted to cut $1,000 from their annual budget.  He challenged himself to cut out $100 per month, for ten months.  He started scrutinizing everything.  Inspired by his challenge, I started looking at my bills online and remembered that my wireless cellphone plan offers discounts to students (Yay! I'm a student and we have a college son!).  Also, my husband's current contract with the state qualifies him for a discount.  Granted, the discounts aren't huge, but after adding them all in today, we are looking to save about $25 a month on our cell phone bill.  (We already dropped $50 a month back in March when we re-did our plan!)  We cut our digital cable long ago and this past year we cut the LAN line.  We also cut out our personal "allowances" for the time being, as well as eating out for the next three months.  Don't leave any stone unturned when looking for ways to eliminate debt. You can read more about his $1000 challenge {{HERE}}

Cut your grocery bill in half (without clipping coupons).  I read these helpful articles and we are changing the way we do food around here!  {{From a former couponer}}  AND  {{Stockpile and Save}} AND {{Storing Produce in Jars}}  Of course, you can also check out places like Bountiful Baskets and Zaycon meats.

Negotiate Old Debt:  About five years ago I had a very large medical bill.  Every time they'd call and want me to make a payment, I would say, "I'm sorry.  I cannot afford that." It wasn't like I had elective surgery or something.  This was a much needed procedure.  Anyway, as time went on, they would continue to call, and I'd continue saying I could not afford the minimum amount they wanted.  Once a lady asked me, "Well, what do you think you could pay today?"  I said, "Zero.  I have $7 left in my checking account until my next pay day.  I'm a single working mom who is also full time in school.  I will not be able to afford to pay this debt off until I can afford to feed my family without losing a nights sleep." (All true back then.)  She then put me on hold to talk to her "supervisor".  She came back on and said, "Due to your circumstances, we would be willing to settle your account for $75.  Do you think you could pay $25 on your next paycheck and $50 on the one after that?"  I was elated.  That was settling for pennies on the dollar!  Even though it would make the next two pay periods very strenuous, it turned my highest debt into my lowest and it was a relief to have it paid off.  Don't be afraid to negotiate.

Free or Nearly Free Entertainment.  This is one I'm particularly good at.  I love scouring the internet for free or nearly free activities for kids, especially during the summer.  I've also created a FB "Summer Fun" group page for other moms w/ littles in my area.  We share events (summer reading programs, free splash pad hours, kids bowl free days, etc.) and I've even created a few events of my own (trail & picnic, sidewalk chalk day, etc.), all for free and have invited others to join us. An afternoon at the park is a much bigger deal to kids when their friends come too.  Also check for Free Movies (or concerts) in the park for the whole family, free weekends at national parks (like President's day), and festivals nearby that are free or nearly free.  Check out {{Macaroni Kid}} for more free events.   Also they have lots of freebies at local chains like Chick-Fil-A, Krispy Kreme, etc.  So, check out their events calenders too!

Online Yard Sales.  These are big here.  Local neighborhoods with a FB group "Online Yardsale" page.  List a photo of your item and how much you are asking. This has been much success for me in clearing out our storage unit and throwing a little extra money toward our debts!  Some neighborhoods even host "Nickel Auctions" or "Nickel Nights".  (A last ditch effort to sell your stuff before hauling it off to the D.I. or Goodwill stores.)

The Budget is NOT Set in Stone.  The hubs and I work out a new budget every month.  Many amounts stay the same, however others do not.  As we pay off this debt or that, we continue the debt snowball and scrutinize other ways to save.  Sometimes payments go up and other times down.

Use it up, wear it out. Make it do, or do without!  

As we continue working to becoming debt free, I'm sure more challenges will come our way.  But the thing I love most about this program, is my husband and I never argue over money.  Never.  We are both on the same page and I can't wait to move on to the next step!!!

I'm sure there are other ways to save money.  Please share your ideas in the comments!


Puphigirl said...

I have been trying to do the snowball debt payoff. I need to focus on getting that $1000 emergency fund. I do have a Dave Ramsey book, but I have not yet read it. So I plan to read that soon.

Heather said...

Hi there! My name is Heather and I was just wondering if you would be able to answer my question about your blog! If you could email me at Lifesabanquet1(at)gmail(dot)com I would greatly appreciate it!

Herman Thompson said...

The journey to living debt free is never an easy one, so I'm proud of you for braving up to take on that challenge. Dave Ramsey is a great financial adviser, and I know a few people who has taken his advice and came out debt free. I wish you luck with your journey, Emma. Seeing how motivated you are, I'm sure you will attain your goal sooner than you think. All the best to you! :)

Herman Thompson @ AccountAbility Plus