So, in August of 2011, I was buried in approximately $50,000
worth of debt—yes, 50!! I had accumulated about $22,000 in student loan debt
between studying abroad in Paris, France and staying in college for one extra
semester. Then, a few months after graduation my piece-of-crap of a car broke
down and, in all of my 24 year old wisdom, I replaced it with a $27,000
“pre-owned” (read: used) car.
The semester in Paris was one of the best experiences of my
entire life, and I wouldn’t trade it for the world. The money that I spent
living and learning there was well-spent and, to this day, unregretted. I
probably could’ve splurged a little less and saved $1,000 or so, but the trips
around Europe and days spent tasting the cities’ finest cuisine and touring the
most famous landmarks is forever fondly in my memory, and that is
irreplaceable!
The $27,000 car, however, was a huge over spend. In my
defense, I did pay a [very] small down payment, and I traded in my clunker to
shave a little bit off of that price. But the majority of that purchase was
covered in a one big car loan. Oh, and never mind the $2,000 or so charged to
my credit card every month that I “paid off,” just to charge back up again!
Looking back, I could’ve done a lot of things differently, for example,
purchased a cheaper car! But lessons do tend to stick with you longer when you
learn them the hard way...
In October 2013, one of my best friends in the world
told me that her and her husband would be totally debt free in less than 6
months—no car loans, student loans, credit cards, nothing! I was flabbergasted.
I had always known this debt-free concept existed in theory, and I studied and
worked in Finance, so I knew that the interest on my loans was working
aggressively against me, but everyone I knew had a car and student loan, it was
normal, it’s what being middle class entailed. But Anna proved me wrong; she
showed me the light, and I’ve never looked back!
Okay, so maybe I looked back a few times, and messed up a
lot, and broke my budget more times than I can count… But I had my eye on the
prize! And I’m happy to say that 16 months after Anna slapped some sense into
me, I have paid off almost $50,000 in debt and am 100% debt free! It definitely
wasn’t easy, but it definitely wasn’t as difficult as I thought it would be and was more than worth it! And with a little bit of perseverance I’m sure you can do it too!
Here’s what I did:
1. Get Inspired. A wise financial guru named DaveRamsey has a famous “debt free” plan called the “Debt Snowball,” which Anna
strictly followed, and I loosely followed, on our debt free journeys. Dave has
a book and Podcast that you can listen to to keep you motivated and on track, even
when that Prada bag is calling your name! There are other financial experts out
there, but Dave’s debt plan is simple and to the point, and especially if you
have no financial training I recommend you get plugged into him ASAP!
2. Create A Mini-Emergency Fund. Get a cushion of money,
which can cover your basic expenses and debt payments, in the bank right now.
Dave recommends $1,000, but Anna saved less because she and her husband had two
incomes and low living expenses, and I saved more—a month’s worth of
expenses—because I’m basically my only financial hope. Depending on your risk
tolerance and level of responsibilities, save an amount that feels right to
you. This is not going to be your forever emergency fund, so don’t spend a year
saving $10,000. This is just money to fall back on in case the furnace breaks
while you’re attacking your debt.
3. Create a Budget. For some reason no one likes
this word. It seems to have a negative connotation with lots of people that I
talk to; I think it makes people feel restricted and contained. I almost
changed it to say “Spending Plan,” but then I decided against it because
honestly, if you have anywhere near the amount of debt I had, you do need to be
restricted and contained!
Creating a budget, based on what you
actually bring in and spend every month (and not on some fallacy of what you
want to bring in and spend!) will provide insight into your spending habits,
and help you determine what amount you must pay (to bills, insurance, debtors,
etc.) each month, and what amount you are regularly wasting on your favorite
expensive habit(s). It will also help
you to determine how much money you can take from those habits, and put towards
paying off your debt instead.
A few tips for budget creation:
1)
List everything – from bills to tips at restaurants,
if you don’t include it, you aren't being real with yourself.
2)
Categorize – separate your budget into sections
such as “Bills,” “Restaurants,” “Clothes,” so that you can see exactly where
the overspending is happening.
3)
Be paycheck based – Make your budget reflect
your pay periods versus a weekly or monthly basis. This way, you’re not having
to drastically change and recalculate your amounts every month, and your income
will always be consistent per budget period.
4)
Use Excel. It just makes life so much easier!
4. Control Yourself. Review your budget and, if you
haven’t already, set limits on your frivolous spending. Once you realize that
you’re spending $150 per month at Starbucks, or $200 downloading music on
iTunes, the required cut-backs should be easy to identify. If you’re pretty
good at managing your money and don’t run into any huge over spends (or even if
you do), you’ll need to think of creative ways to cut back and get your extra
debt money.
A few of my simple tricks:
1)
Space out your hair appointments – Get your hair
highlighted/cut/colored every six weeks? Try a subtler hue and going every 8
weeks instead.
2)
Make your coffee at home – I used this during my
debt payoff, and saved almost $100 a month!
3)
Buy in bulk – anything from laundry detergent to
steaks can be bought in bulk on Amazon or at Costco, and can save you a ton of money!
4)
Use Cash – It is scientifically proven that
handing over a $20 bill is three (or so) times as painful as swiping that
plastic!
5)
Make money – Don’t already have a side hustle?
This may be the encouragement you need to get one started!
5. List Your Loans. This is really as simple as it
sounds. Log into every credit card account that you own, scavenge through your
recycling bin for that last student loan statement, and contact your lenders
via phone or email if you have to—yes, even call your mom! Determine exactly
how much money you owe and to whom you owe it. Make a nice little list and then
organize the loan amounts from smallest to largest (again, Excel: a saving
grace). If you have two loan amounts
that are within $1,000 of each other, list the loan with the higher interest
rate first.
SN: If you don’t know your interest rates,
you should!
6. Pay More Than You Owe. Now’s the time to take
all of that extra cash you saved (or earned!) in Step 4 and apply it towards
your debt. Continue to pay your normal payments as they come due, but put everything
extra that you saved or reallocated to your debt in your budget planning
process, towards paying off your smallest loan.
The idea here is, your smallest loan is
likely to be nominal, and you will be able to pay it off quite quickly. Well,
guess what you do next month, when that $100 loan is all paid off? You take the
money that normally went to that monthly loan payment and put it towards your
next biggest debt instead! Then, after only one month in, you've already paid
off a loan, and doubled one of your other loan payments!
This is the genius behind the debt
snowball. By the time you’re a year into it, your largest loan will be all
that’s left, and all the payments you used to put towards all of these other
loans, will now go towards your largest loan, a payment of two, three, or four
times the size of the required monthly payment! Pretty exciting stuff!
7. Check In. Modify, update, and revise your budget
often. When you pay off a loan, keep track of where you’re going to put that
money next month. If you start a side hustle, have a garage sale, or get a
bonus or raise at work, account for that money as income and mindfully decide
which debt to put it toward. If you get on the right track and feel like you
could make more cutbacks, change your budget to reflect that. Monitoring your progress
will allow you to visually see your debts shrink and your goals become reality!
If you have any questions about this process, want some more
inspiring frugal tips, or would like a free copy of my own personal budget
spreadsheet, leave a comment below or contact me directly!
Good luck with your Snowball!
J.
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