Aaron and I had one of those defining moments in our marriage when we tabulated our debt and realized we owed $446,000. In even more shocking terms, we owed almost ½ million dollars.
I felt like I had a vice around my neck that was slowly choking the life out of me. I felt helpless and honestly kind of stupid.
I knew better, I knew how dangerous debt was. More then anything I was mad at myself. How could I have accumulated so much debt?
I literally went from $115,000 in debt to $446,000 overnight because like typically American’s we had to purchase a larger home when we got married. My little three bedroom house just wasn’t large enough for the four of us – stupid, stupid, stupid.
How could that number be real, what in the world had we done to put ourselves in such a horrible financial situation.
Hopefully you’ve never had this realization, but if you are like most American’s you have debt. It is literally a way of life.
I recently posted an article about how we paid off $293,000 worth of our $446,000. I thought it was a pretty good article, I got a lot of congratulations and felt like I had helped out a few people.
Later as I was talking to friends I realized that for many people, the problem wasn’t the debt itself, it was the issue of how to get started. Most people know they have an issue, they just don’t know how to help themselves.
This article is intended to give you a step by step plan to start your debt free journey.
So lets get started.
Are you scared to face your debt?
I don’t care how much money you make, you are most likely scared to face the number. Hopefully yours is significantly less then ours, but either way, you have to face your fears.
You have to know your debt levels to start the process.
1. The first step is to gather your financial records.
Your goal is to write down everything you owe. This includes all banking records, credit cards, store credit cards, car loans, IRS, student loans, personal loans, pay day lenders. . . . . You get the idea.
If you owe someone money you need to write it down.
I know for some people this may include old debt that you haven’t thought about in years.
Your lenders aren’t going to suddenly forget about you – you aren’t that special.
So pull out your statements and face the fact that you owe the money. If you are worried that you may be missing a debt I recommend pulling your credit report.
By federal law you are allowed one free credit report from each of the three major credit reporting companies. The free report will not give you your score, but it will provide a list of your current liabilities.
The only site that is legit is Annualcreditreport.com. Keep in mind that once you’ve got the report they will try and sell you credit monitoring and a copy of your score. Don’t waste your money. Your goal is to get out of debt, not add another payment to your list.
Your credit score is the least of your worries right now.
I recommend gathering the following information for every liability:
- Account Number
- Opening Balance
- Current Balance
- Monthly Payment
- Interest Rate
The goal is to know how much you owe,who you owe it too and how much you are paying per month in payments.
Once you have gathered all your financial records it is time to bite the bullet and see how much you owe.
Hopefully the number shocks you into taking action. I know it worked for us.
Once you know your debt the fun starts.
2. The second step is to plan your debt attack.
With this spreadsheet you can run various payment scenarios. The spreadsheet will calculate how quickly you can pay off the debt using the following strategies:
- Highest Interest Rate
- Lowest Interest Rate
- Debt Snowball
- Chose your own order
You can also see how quickly you can get out of debt based on making regular payments or adding a little bit of extra each month.
I loved using this spreadsheet. It really helped me focus my efforts and gave me a clear timeline on when I would have certain debts paid off. I know not everyone is an Excel geek like me, so if you have questions on how the spreadsheet works comment below or email me and I’ll walk you through the process.
I loved being able to test out various financial scenarios and figure out what would work best for us.
Ultimately I decided that the debt snowball was the best payment method for us.
The debt snowball works just like it sounds. You start by listing your debts smallest to largest. You make minimum payments on everything but the smallest debt. You throw everything you can at the smallest debt until it is paid off.
Once you have paid it off, you take the monthly amount you were paying towards your first debt, combine that amount with the minimum payment you were making on the second debt and then start paying the second debt off.
You continue down that path until you have paid off all of your debts.
There is a reason they call it a debt snowball. As you pay off your debts and add the money to your debt reduction pile your monthly payments begin to increase very quickly.
It is obvious – but the more money you put towards the debt the quicker you will pay everything off.
I’ve got a Masters in Business Administration and have managed the accounting for multiple companies over the last 15 years. I know that mathematically this route doesn’t always make sense. Mathematically speaking you should look at interest rates and a bunch of other factors and then decide what should be paid off first.
The mathematical approach is great in theory since you’ll be saving money by paying off the high interest loans first. And for some people that may work.
Why the Debt Snowball Works
Most people need the psychological boost that comes from making continual process. There is nothing like paying off one debt to make you realize that debt reduction is possible.
The feeling of victory that comes with each payment can’t be described – it has to be experienced.
There is nothing more satisfying then sending in a final payment to a debtor. I loved being able to write – “Final Payment” on the checks. I needed that sense of accomplishment to keep me going.
Every time I wrote those little words I was re-energized and fired up to accomplish even more.
Personal finance is about behavior, yes the numbers are important, but your behavior is what will set you apart.
Anyone can do these steps and feel like they’ve accomplished something.
You know your debt level and you have a plan to pay if off. You are going to use the debt snowball and everything is going to be butterflies and roses.
Can you feel the sarcasm seeping off the pages.
Honestly, you’ve done the two easy steps. The trick is shocking yourself enough to take the next step and then the step after that and then the step 2 years down the road when you are sick of living on beans and rice.
The next step is the most important one you will make.
3. The third step is setting up a budget and then keeping your budget.
If you’ve every tried to budget you know how hard this step actually is.
I’ve written three different posts on budgeting and recommend starting with them.
Once you set up your budget you have to make the choice to actually follow your budget.
You will literally have to recommit yourself to living by your budget pretty much every day. There isn’t a day that goes by when you won’t be temped to buy something. Food, clothing, entertainment, vacations it is all there for you to spend money on.
The decision to control your spending is what will set you apart from every other wanna-be.
You grit is what will set you apart.
– So now for the Ultimate Question –
Do you want to be debt free bad enough to sacrifice?
Are you willing to say no and cut your spending?
Are you strong enough?
I don’t know you, but I know you can do it. Your job is to prove me right!
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