“If you want something you’ve never had, you must be willing to do something you’ve never done” -Thomas Jefferson
Remember the first time you rode that roller coaster? It looked like it would fling you off at any moment. You weren’t sure you had enough life insurance to provide for your family because you were surely going to die that day – or so it seemed. We all know how that day ended up. You were scared out of your mind before and during the ride – but after it was all over – you realized it wasn’t that bad. Some of you even wanted to go on it again! Such is life – finances are scary because most of us don’t know as much as we should about money. Putting our head in the sand has cost us dearly in the past, and it’s clear the old way of doing things is not working. The time to change your financial future is now. So get in, close the door, and put on your harness because it may get bumpy. If you stick with it, I promise you will make it out safe and sound in the end!
Hopefully by now you have taken the steps in the budget article and identified your INCOME, MONTHLY NECESSARY EXPENSES, and DEBTS. If you missed it you can read it here, Budget Isn’t A Bad Word. You should have a good idea of where you are financially – as grim as it may seem. You may be in a place where it’s time to sell what you can to get out from under the crushing weight of your debt. Can you afford that car payment? How about the boat? Your level of financial insecurity will determine how drastic you need to get. Yard sales, Craigslist, Offer up, Ebay etc. are great ways to sell your stuff and bring in some much needed income.
The strategy we discussed earlier involves setting up an emergency savings. This emergency savings is only for that – emergencies. When you run out of fun money at the end of the month and you want to go to a movie… that does not constitute an emergency. An emergency savings should be your first priority so you can deal with life when it happens. Because it will happen. Your washer and vehicle will both break at the same time and having this savings will keep you from going father in debt. If you take money from it, your first priority next month will be to replenish it. After your saving is adequate, between $1,500 and $2k, you can start attacking your debts.
As discussed earlier, identify all of your debts. We will crush one debt at a time. I will leave it up to you to decide which debt to start on first. Again, it makes the most sense mathematically to pay off the credit card or debt with the highest interest rate first and then attack them down the line. However, it is possible your highest interest rate is also your largest debt. If this is the case, you may become discouraged halfway through and want to give up. If you have smaller debts, I personally would attack the small ones first and move up the line so I stay motivated. I know myself and I need to see progress to keep going with things. Determine the type of person you are and go with that strategy.
Below is a flow chart I created to show how your monthly debt attack should work in order from most important to least. Obviously yours may look different to include more or less debt but you get the idea. As you start, we attack one debt at a time. Make the minimum required payments on the others as you knock out the first one. After the first is eliminated, its time to move on to the next.
So as you can see, we put our money into our checking account and take out our monthly anticipated bills. After that, we attack our emergency savings. If your emergency savings isn’t fully funded, make minimum payments on all your debts until it is funded. After it is funded, we start on the debt.
I am a visual person and I need aids to stay motivated. Right now, my wife and I are paying off our house. In order to see the progress, I put a glass jar in our kitchen and filled it with marbles. Each marble represents $1,000 towards the total amount left on our house. Each month as we pay down the principle, I take out the corresponding amount of marbles so I can physically see the debt going down. You can do similar visual aids for your debts to stay motivated. Some people use thermometers that they color and put on their fridge. Either way, find what works for you. Ultimately, you want to get to a point where your flow chart is not focused on debts because you have paid them off! Below is a similar chart that my wife and I now use.
From the charts, you can see where I started to where I am now. Soon, I will be able to delete the “pay off house fund” because that is where the majority of my extra money goes now. That will be a fantastic day! It will happen for me because of the safeguards I have put in place and the vision I have for my family. You can be here too and it will not take as long as you think! With a clear strategy in place, you will see how quickly you can accomplish your goals.
Depending where you are on your journey, I want to add one section I did not previously write about. After you have paid off all your debts, except for your home, you need to increase your emergency fund. I recommend 6 months of living expenses in the event you lose your job or income. Other experts range from 3-8 months of expenses so I decided to fall on the 6th month mark for me to feel comfortable. That means if your monthly necessary bills are $2,000 a month, you need to save up $12,000 in your emergency savings so if you lose your job you can give yourself 6 months to replace the income. Make sense?
Again, if you have any questions or comments, please reach out to me. I am here for you and I am living proof this can be accomplished. You can get to a point where an unexpected vehicle repair does not need to go on a credit card. You can do it and I will be here for you!