Monthly Archives: January 2011

How I Got Out Of Debt

It’s been a while since I’ve written about how my wife and I paid off our consumer debt.  I thought new readers (and folks who have been around for years) might benefit from a retelling of our story.

Back in April of 2005, my wife and I decided that it was time to get out of debt.  We had a total of just over $11,500 in consumer debt, consisting of credit card debt and two automobile payments.  It took us a little over 10 months to completely pay off our debts.  Here’s how we did it –

1.  We stopped using our credit cards.  We didn’t cut them up or freeze them – we just stopped using them.

2.  We opened an online savings account and established our mini-emergency fund of $1000.  This was the amount suggested by several of my favorite debt reduction specialists, including one of my favorites, Dave Ramsey.  (Dave rocks!)

3.  We listed our account balances from smallest to largest.  The interest rates on our accounts were all roughly equal, so it didn’t really matter which account we focused on first. So…

4.  We made minimum payments to all of the accounts – and an extra payment to the account at the top of our list.

5.  We paid off our first account.

6.  We used the amount that had been going into the first account and applied it to the payment on our second account.

7.  We paid off our second account.

8.  We used the amount that had been going into the first account and the second account and applied it to the payment on our third account.

9.  We continued this process until all of our debt was gone!

That’s it.  That’s how we got out of debt.  Along the way, we had to dip into our emergency fund (on a couple of occasions, if memory serves) – which slowed our progress.  We also used micro-payments (small, extra payments made throughout the billing cycle) to reduce our balances and interest.  The main thing we did, however, was stay committed.  We had a goal – we focused on that goal – and we reached that goal.

There are dozens of methods for debt reduction – but debt reduction success really comes down to one thing: commitment.

It’s been several years since we worried about consumer debt.  Now, we’re working on our (new as of last February) mortgage.   We’ll use the same commitment to reach this goal.  It will take a little longer, but we’ll make it.

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Firmly Standing On The Middle Ground

As I sat down tonight to work on our budget for February – using the awesome You Need A Budget – I noticed something:  I stand rather firmly on the middle ground.  Allow me to explain –

There are some folks who choose to live without television.  There are some folks who pay for every possible channel.

I have basic satellite service, with no premium channels.

There are some folks who do just fine without cell phone service.  There are some folks who have the very latest in cell phone technology – and the most expensive data plans to match.

I have a basic cell phone with a family share plan.

There are some folks who make everything they eat from scratch.  There are some folks who eat out – for every meal.

I carefully shop sales for groceries, but I eat out once or twice a week.

There are some folks who buy all of their clothing from thrift stores – and some who make their own.  There are some folks who wear nothing but designer clothes – and buy all of it brand new, on sale or not.

I buy new clothing that is comfortable, affordable, and durable.

I think you can see what I’m getting at.  When it comes to making choices about convenience goods and services, I’m not quite ready to give them up, but I don’t want to spend a whole lot on them, either.

Personal money management is really about finding balances.  We balance wants vs needs, time vs convenience, today’s desires vs tomorrow’s dreams, practical vs fun, even smart vs foolish.

This is an inexact science.  There are those who would analyze my budget – and wonder how in the world I could miss so many opportunities to save.  At the same time, I think that there are those who would look at it – and consider me thrifty.

I’ll probably never be a truly “frugal” person.  I prefer the convenience of certain products and services.  At the same time, I don’t think I’ll ever be defined as a “spendthrift” either.  Instead, I think I’ll always be firmly standing on the middle ground.

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Achieving Financial Goals – The Process Remains The Same

I do not like distractions.  When I am working on an article, I don’t want to listen to music.  When I am watching television, I do not want to hear the noise of the dish washer.  My mind is of the proverbial “one-track” variety.  Multitasking is not for me.

When it comes to the management of our finances, I find things work best when I’m focused – intensely focused – on either one goal – or a few, very closely related goals.

For instance, let’s assume my goal is to be debt free.  Well, I might have two credit card debts, a car payment, and a student loan.  Each of these debts are part of my debt repayment plan – but my main goal is to be debt free.

I will be focused on achieving that goal.  Along the way, the actual plan that I put in place may call for some actions not directly related to debt reduction (say, saving up for an emergency fund), but my goal – and my focus – will remain the same.

I use the following process:

Identify goal.

Establish time frame.

Create plan.

Implement plan.

Anticipate obstacles.

Remain resolute.

Accomplish goal.

Repeat for next goal.

I’ll use the “to be debt free” goal as an example.

Identify goal – to be debt free

Establish time frame – two years

Create plan – budget, emergency fund, pay lowest balance first, roll payments from paid-off debts into existing debts, etc.

Implement plan – follow through, communicate with spouse, weekly budget analysis

Anticipate obstacles – miscellaneous expenses, job-loss, friends that overspend

Remain resolute – reflect on progress, redouble efforts when facing setbacks, find encouragement from like-minded

Accomplish goal – share good news, celebrate, enjoy

Repeat for next goal – don’t stop, think big, educate self

Over and over, I find myself returning to this tried-and-true process.  When I’m feeling overwhelmed, thinking about saving for retirement, increasing income, managing investments, and the dozens of other financial management areas of my life – I stop.  I go back to my process.  I break each area down into a manageable goal, put a plan together to achieve that goal, and implement that plan.

Obviously, there will be times when goals (and thus planning) will, in a sense, overlap.  For instance, I currently have a goal of saving enough money to buy a newer automobile for my wife.  Well, that goal overlaps with my goal of maximizing retirement account contributions.  Both of these goals are important, but I’m not a big fan of dividing my focus.  So, for the first six months of this year, my focus will be on saving enough money to buy a newer automobile for my wife – and the last six months will be on maximizing retirement account contributions.

Now, I realize that I could focus on both goals at the same time, but that’s just not how my mind works.  Instead of putting $200 in savings for the newer automobile, and $200 in my Roth IRA, I’d rather put the full $400 in savings, thus focusing on just one of the two goals.  Then, six months from now, I’ll turn my attention towards retirement and put the full $400 in the Roth IRA.

Why?  I don’t really know why this works so well for me, but it does.  After nearly six years of tracking my finances, I look back and see that I always accomplish more when I am focused on time-based goals.  I just do.

When it comes to paying off the mortgage, that’s a very long-range goal – and overlaps several, much shorter-range goals.  This is my one goal that doesn’t fit neatly into my process, just because it’s so big and will take such a long time to accomplish.  Right now, paying off the mortgage isn’t at the tip-top of my priorities list, but one day it will be.  When that day comes, I’ll laser-focus on it – and pay the thing off.

(Please note, I still send extra towards my mortgage each month, but I do so as a part of my regular budget.  I have yet to turn my full attention towards our mortgage debt.  That day, to be sure, is coming.  Right now, however, increasing our cash reserves is a priority.)

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