Every home(stead) deserves to be financially healthy. Finances are one of the leading causes of divorce, and being at risk of losing everything due to a layoff or injury is a reality for most homes. One of the surest ways to be financially healthy is to pay off debt.
I’m a big fan of Dave Ramsey, and working on my own debt snowball, projected to finish this spring. Dave Ramsey recommends paying down all debt after saving $1000 for emergencies to ensure the emergency doesn’t require further debt. I personally like having a bit more than $1000 because some car repairs and such unfortunately cost more. Either way, your emergency fund is still going to be relatively small for now.
Now, someone reading this — yeah, you — may try to argue that debt can be good. Credit scores and airline miles and all that. Well that’s all great, but do you actually pay your debt off every month and use the points or miles? Do your minimum payments (not including mortgage) use only a very tiny percentage of your income? Are you saving or have you already saved 3-6 months of emergency funds, have a plan for retirement, and will you have your house paid off before you retire? If you’ve got all that in place, be my guest. Get those airline miles for your business trips. If not, stop arguing with me.
I know I’m not in a place where I want to be adding any more debt or dealing with the monthly payments. I am using the debt snowball method. That brings me to the point of this post: how to pay down your debt so you can experience greater financial security and free up income for more important things.
Make a Budget
This simply means that you tell your money where to go. I like using Dave Ramsey’s budget forms because they’re thorough and easy to use. Make it every month. It’s best if both spouses are on board. Even if one does most of it and the other just okays it or makes sure that what they need to buy is budgeted, it’s helpful. Making and doing your best to stick to a budget will make you feel more in charge of your money and you won’t be left wondering where it disappear to at the end of the month. Give it a few months to get really comfortable with it.
Track Your Spending
Numbers on paper mean nothing if you don’t stick to them. Use bank statements or an app to compare what you spend to what you budget and to help you stay within the budget. This will help show you where your budget needs to be adjusted, where you can trim down spending, and what you’re doing well at.
Put as Much Towards Debt as Possible
Trim down the food budget with more homemade meals, switch from cable to Netflix/Hulu/Amazon Primes, consider a different cell phone plan, or buy only a couple clothes you love instead of going on huge shopping sprees but then only wearing a few favorites.
Sell stuff. Go through and minimize and organize in every room in the house. Downsize enough to get rid of your storage unit. You’d be surprised how much you can make utilizing local buy/sell/trade groups on Facebook, on OfferUp, on Craigslist, and even on Ebay.
Get a better job, a second job, or a side hustle or increase income.
Whatever it is, just do everything you can to pay as much beyond the minimum payments as possible.
Choose Your Method
There are a few methods for paying off debt, so you’ll want to choose the best for you.
For every method you’re going to want to list out every single debt you have except your mortgage. It’s going to be the last debt you focus on.
List the name of the debt (ex: VISA ending 1234, student loan 1, Ford loan), the amount left owing, the interest rate, and the minimum payment.
1. Debt Avalanche
In a debt avalanche, you’ll list your debts by interest rate, and start by paying off the highest interest debt first regardless of the balance. You will pay minimum payments on the rest. When the highest interest debt is paid off, you’ll take what you were paying towards that and apply it to the next highest debt in addition to the minimum payment you were already paying on it. This process with continue until every debt is paid.
The biggest benefit of this method is that you’ll pay the least over the long run because you’re getting rid of high interest on your debts. The downside is that it can take awhile with nothing getting paid off because your high interest debts may also have high balances. That can feel very discouraging.
2. Debt Snowball
This is Dave Ramsey’s recommended method, and I like it too.
In a debt snowball you’ll list the debts in order of balance, smallest to largest. Only pay attention to interest if you have two with a similar balance; then pay the higher interest first.
Once you pay the smallest off, you’ll focus everything you were paying towards that on the next one plus its minimum payment, just like you do with the debt avalanche.
The neat thing is that you get small victories quickly, and by the time you get to your big debts you will see it paying down in large chunks every month.
Let me give you an example. Say you have four debts. I’m throwing out numbers here, so don’t quibble with anything that you think is “inaccurate.” (i.e. Student debt would never have that interest rate!)
MasterCard ending 1234 $1000 12% $25
Car Loan $5000 7% $200
VISA ending 5678 $6500 10% $80
Student Loan $8000 8% $150
You determine you can pay $250 a month to the Mastercard. Bam, four-ish months and it’s gone. Now you’re paying $450 to your car loan. Ten or so months and done on a loan that probably had three years left. Now you have $530 for your VISA, which has probably made its way to about $5000 in the last fifteen months. You’ll knock it out of the park in a year or less. Now you have a whopping $680 to put to your student loan each month. It’s going to disappear in no more than about a year too. In just over three years you’ve paid off over $20,000 in debt and have nearly $700 a month to put towards a 3-6 months savings account. This all assumes, that you’ve had no raises, no tax returns, and you could only wiggle an extra $225 out of your budget.
Bam. Out of debt.
How freeing would that feel? How much nicer would be it be invest that money in some mutual funds and be gaining interest rather than paying interest?
Now if you save for things and pay in cash, you don’t even have to worry about your credit because you aren’t using debt. Although it’s a little harder for you to find them, there are companies that will loan you a mortgage based on you proving your financial capability. You may also have to put deposits down on things you want, like a new phone plan. However, there’s usually there’s a provision for the company to credit it back to you as you prove your reliability in making payments. And you’ve just ensured that you have hundreds of dollars freed up in your budget for just those things.
If you don’t want to do it that way, then you can of course choose to occasionally buy something on a card and pay it off every month. Your credit won’t be as good as if you carried a balance, but it’ll still be good enough to get you into a mortgage or start a new phone plan without a deposit. I just want you to realize that you don’t have to have credit in your life. If you choose to, please do so responsibly. Don’t put yourself in a position where you’ll lose everything if you lose your job and take a few months to find a new on. Don’t put yourself in a position where you’ll destroy your credit if you miss a couple of paychecks because you broke your foot or lost a loved one and had to take time off.
What do you think? Are you going to sit down, make a budget, and start knocking off your debts today? You’ll be glad you did.