Could you share some of your strategies and successes when it came to paying off your debt? I don't have a mortgage at this point in my life but want to have a solid plan for that and retirement savings!
Hey friend - here are some quick thoughts. I am a big fan of both Dave Ramsey and Susie Orman and our strategies are a combination of them.
Let me share a little backstory for perspective. About 12 years ago our church put on a Session of Dave Ramses’s Financial Peace University. We signed up and the pre-class homework had us compile all our bills and debt into one spreadsheet.
At this point, we had just been married a few years. We had no kids and we both had pretty well-paying jobs. We both paid bills but largely kept our finances separate.
When we pulled all our bills together - we were in for some big and nasty surprises. Some of the things we found out included:
- We had over $100,000 in debt, excluding our mortgage.
- We were paying all our bills on time and had good credit scores, but we were spending more than we earned each paycheck
- We had little to no savings
We were literally one check away from a very very big problem - and we didn’t even know it. It was scary, embarrassing and it made us make some immediate changes.
Here are some of the things we did right away. I will admit we kept these up for a few years and slipped on some of them, but they did help us get on track.
- Compile a list of all your expenses and spend some time really looking at them. Keep in mind that where you spend your money, communicates what you value. One of our biggest expenses back then? Eating out - we probably spent 1/3 of our “disposable” income on restaurants. Was that really what we valued?
- Be a team - if you are in a relationship and share expenses - it is critical you and your partner are on the same team. $ problems cause many breakups and divorces. Communication and commitment are critical here. Jennifer and I never really talked about it before this and that is part of why we got in trouble. Now we make financial decisions together and it makes everything so much easier.
- Build an emergency fund. Start with $500. Put this is savings and use it for true emergencies. (Once you pay your debt off, you should raise this to $2,000)
- Decide what you can cut out - we cut eating out to once per week. We cancelled Netflix, audible and 4 or 5 other monthly expenses like cable and saved hundreds of $$. Use 100% of these savings to build your emergency fund. Once that is at $500, use this $ to pay down debt.
- Take your debt list and make a plan to pay each one down. Focus on one at a time until it is gone then go on to the next. We ranked them by interest rate and size, trying to kill off as many as we could, as quickly as we could. Once you pay off a debt, use 100% of this money to pay off your next debt item. This will “snowball” over time and eventually will get quite big.
- Find ways to make additional $. This could be selling things you aren’t using or getting a second job. Be creative. Perhaps you can paint someone’s house in exchange for something you need. The point is to find a way to make that pay off process faster.
- Carefully consider if / how you use credit cards. This was (and honestly still is) a challenge for us. We went cash only for 2 years, using the Dave Ramsey envelope process. It worked wonders for us. Once we got out of chronic debt, we slipped on this.
- Look at any predictable expenses you have and build a plan for paying them. We have several like our car tags, HOA fees and property tax. I put $ from every check away for these. I have it automated and never think about it and when the bills come up, I always have the $.
Following this process - we were able to pay off about ½ our debt in 2 years. Then Josi was born and we decided we wanted Jennifer to be a stay at home mom. The truth is - had she stayed at her job, we probably could have paid off our debts faster, but we decided this was the best choice for our family. We could not have made that decision with 100k in debt.
In the spirit of full disclosure - selling our family farm, which we inherited was what allowed us to pay off our house. Otherwise, that was on schedule to be paid off in 5-6 years.
Long story short - I really like Financial Peace University. It helped us address some big issues before they kicked our butt. You may want to check it out too. Now on to the next chapter.
Good luck :)