I’ve Paid For This Twice Already…

Archive for the ‘debt reduction’ Category

Reality can be a scary thing.

When we started seriously trying to get out of debt, one of the first things we needed to do was really figure out how much of a mess we were in.  We had to look at our actual debts and their amounts, what we actually spent each month, and try to reconcile all that with the money we had coming in.  I’m almost embarrassed to admit that when we decided to really get serious about this, I honestly had no idea how much we owed in student loans and only a vague guess as to the interest rates we were paying.

I just knew what the minimum payments were, and that we’d be paying them for a long time yet.

You may be visiting this blog today for the first time, or the thousandth time, or somewhere in between.  As the state of the economy strikes more and more unrest and fear in the heart of the average person, I’ve seen a big upswing in visitors who find my blog by searching for something relating to getting out of debt.  And then yesterday one of my very dear friends talked to me about her desire to get out of debt, and what she could do to improve things and get rid of her debt for good.  So I thought today was a great chance to talk about the first steps in getting out of debt and turning your financial life around.  Once you’ve realized something has to give, here are some ideas on how to move forward and start making a difference.  Facing reality and being ready to move forward can be summed up, for me into two basic steps:  Where you are and How to improve it.

1.  Figure out where you are.

• Make a list of EVERYTHING you owe. All your debts. You can ignore the house (first mortgage) if you choose to after you list it, but put it there.

• Keep track of EVERYTHING you spend for an entire month. Everything. And everything that comes in on the income side as well.  Don’t leave out incidentals, list everything.  From the stop for lunch to the insurance payment to the school pictures for your kids, keep track of every single penny.

• You can’t get anywhere if you don’t know where you’re starting from.

2.  Figure out how to improve it.

• Create a budget. Budgets are hard to do at first, but it is really key. It may take adjusting and changing over time, but it needs to be at least tried. I like pearbudget.com/spreadsheet (the free downloadable spreadsheet part) to create it, but you can even just do it on a piece of paper. THEN, you look at what comes in, what goes out, cut what goes out that you can (don’t go insanely crazy but also, be kind of hard on yourself and see what you can do), and revise your budget. Make it as tight as comfortable, and then -

• Everything left over goes to debt. All the extra money goes to debt. Pick the debt you target first (from your list), pay minimum on everything else, and SMACK DOWN the target debt.  You can determine which debt to target first by considering the different snowball plans, which was popularized by Dave Ramsey.  Whatever order you choose, keep paying everything extra you can to the target debt.  You can save them up in little increments, known as snowflakes – every little bit counts.

Hopefully, facing reality will spur you into action and start you on the road to debt freedom.  Don’t be discouraged by the situation you’re in – it can be scary, daunting, even sickening at times – but by facing reality you’ve taken the first step towards improving it.  You can’t get where you’re going if you don’t know where you are.

If you haven’t been reading this blog from the beginning, when you read my recent Tell All Tuesday posts, you may have some similar feelings to what I have had in the past when I first started reading personal finance blogs.  When I first started working hard to get out of debt, I would read posts from people who paid hundreds or thousands extra on their debt each month, and although I would be happy for them and feel inspired by their progress, at the same time, I would think “Well, I can’t do that, so what’s the point?”

When I started this blog, and a significant commitment to debt reduction, I was barely paying the minimum required to debt each month.  And my goal was to simply pay $100 over the $810.41 required just to meet the minimum payments each month.  This was June 2007, and even with only paying around $100 over that required minimum, over time, I calculated that we should be able to pay off a little over $36,000 in debt in about 3 1/2 years.  By only paying $100 over that initial minimum required payment per month, every month.  I would read about people paying enormous amounts to debt at a time, but I would reassure myself that it can be done with small amounts too, as long as I just kept at it.

The key was consistency.  Even just a small amount extra than what was required, done month to month, eventually added up to a big difference.  What began as $100 extra a month became $300 extra a month once the credit card was paid off, without adding another penny to the amount we were paying.  Of course, other factors changed too, and we now pay a lot more extra to debt each month than I could have initially imagined.   That has been an exercise in patience and perseverance – working hard to find small ways to boost our incomes, and then grabbing onto opportunities we created.  I won’t pretend that it has all been skill, but it hasn’t all been luck, either. The longer we focused on debt reduction and made it a priority, the more we were able to find opportunities to increase the amount we paid to debt.  I started out selling things on Craigslist and taking online surveys, and ended up at this point working two more part time jobs than I was when I started.  Being open to opportunity has helped a lot.

But even if we had never significantly increased our income, and I was still only paying a little over $900 to debt total each month – we still would be able to pay off $36,000 in debt in about 3 1/2 years.  Which really isn’t as long a time as one might think.   Whatever your situation, however much extra you can put towards debt, just keep at it.  Little by little, mountains do move.

Late last week I made our car loan payment for this month, and with that, passed the 50% mark for paying off the non-mortgage debt we had as of June 2007.  That June was a landmark turning point for me, for I started this blog, and with that started seriously keeping track of how much debt we had, our progress we made towards paying it off.  At that time, we owed just shy of $36,500 split between a credit card, two student loans, and a car loan.  Then, my aim was just to get out of debt – I had no real aim or plan for staying out of debt after that.  It was enough for me just to aim at a life where this $36K+ was paid off and I could start from zero.

Now, a little more than a year later, we’ve passed the halfway point to that goal.  We’ve paid off over $18,000 in debt, including all of our credit card debt and the majority of my spouse’s student loan debt.  But instead of just setting my sights on paying off our current debt as the endpoint, I’ve expanded my goals to come up with and implement a plan for staying out of debt in the future – paying cash for cars, home improvements, and eventually paying off our home as well.  Hand in hand with that is a savings plan to provide for our family in good times and bad.

This journey has done more than help us to get out of debt.  It has made us more financially aware.  And that gives us the tools to make positive progress not just on debt elimination, but into the future.  Our lives past debt are looking pretty good.

With that, here is the summary of our progress so far:

Debt at start of blog (6/19/07) : $36,451.71

Current total as of 07/21/08: $18,007.78

Principal paid to date $18,443.93

For the first time, the principal paid to date exceeds the current total remaining.   Our NCN Network Chart shows 50.4% of debt paid off.  And with that, I refocus for the push to the finish line – I think we can beat that 13 month halfway mark. 

As I write this, it is still barely Tuesday, although it’ll already be Wednesday by the time most of you read it.  Earlier this afternoon, I made the minimum payment of $144.50 to my student loan, and a $1800 payment to my spouse’s student loan, to bring our percent of total debt eliminated since June 2007 to 49.99%.  I probably could not be closer to 50% eliminated if I had tried.  I knew it would be close, so I pored over our budget sheet and squeezed everything I could everywhere I could to put the maximum amount towards that loan this month.  I don’t at all feel like we fell short, for later this week I will make our car loan payment, which will firmly push us into 50% paid off territory. 

I was able to squeeze some extra money out of our budget because I have a small cushion in our emergency fund, so if I’ve underestimated our expenses for the rest of the month, I know I have access to money to cover it.  We’ve been fortunate enough to be able to put the vast majority of the income I earn solely to debt elimination, and come closer and closer to actually being able to live on just my spouse’s salary, which is our ultimate goal.  Not that I intend on not earning money in the future, but we want to be able to completely meet our budget just with my spouse’s salary so we have more flexibility.

The numbers break down as follows:

Debt at start of blog (6/19/07) : $36,451.71

Current total as of 07/15/08: $18,229.39

Principal paid to date: $18,222.32

Broken down into:

• Credit Card: PAID OFF 2/7/08

• Student loan (at 7%): $11,253.14 (made minimum$144.50 payment)

• Spouse student loan (at 9%): $4936.46 (made $1800 payment, including $437.59 budgeted minimum)

• Car loan (at 4%): $2039.79

NCN Network Chart:  49.99% paid off

Crossing that 50% threshold officially will feel, well, amazing I think.  I am already tingly thinking about it.  I might have to buzz by the bank Wednesday morning and drop off my payment. 

When I hit our bottom in 2003, I felt, in a word, desperate.  Our income was barely meeting our expenses, I kept moving around our credit card balances but never seemed to be able to make any progress, and I felt like I was spiraling deeper and deeper into financial insanity.  When my spouse and I vowed to not move our balance from card to card but do everything we could to pay things down and not use them again, I felt a little glimmer of hope in my heart, but I still felt trapped.  We were starting down the right path but we had a long way to go and very little room to spare.

Fast forward to June 2007.   We had made progress on reducing our credit card debt, but we’d added two children and a house to the mix, and although we hadn’t incurred any more credit card debt since 2003, desperate still basically summed up my feelings.   We still lived very close to the edge, and a list of our bills each month matched up against a summary of our income left very little wiggle room to spare.  This time, I vowed that not only would we eliminate our credit card debt, we would become proactive about doing so and in fact, we’d eliminate our car loan and student loans too.  I was looking for breathing room and I knew the less debt we had, the better we’d sleep at night.  I started this blog in hope of a better future, but also, out of desperation to find a better way.

Now, a year later, I made a realization this week as I was listening to an advertisement for home improvement supplies on the radio and thinking about the future for my family.   Although our situation is far from perfect,  I found myself thinking about possible home improvements we might make in the next few years and realized that I don’t live in desperation any longer.  I live now in a place of, in a word, choice.  The choices aren’t always easy, but I realized that I now feel like I have choices.  I choose to devote our financial energy to eliminating our debt, but instead of feeling like that is our only hope, I feel like it is our best choice.

Moving from desperation to choice.  Honestly, maybe the best realization our debt elimination journey has brought me to so far.  In fact, I am starting to really feel like we can not only eliminate our debt, we’ll be able to stay out of debt in the future if we choose to.  I’m starting to feel like our life has choices in it.  It always did, of course, but it used to be so obscured by panic it was hard to see.