February 2009

First of all, give yourself a hand! You have made the conscious decision that debt is something you don’t want. And, to be honest, that means you are gonna be ABNORMAL cuz it seems that normal in America is to have debt — so kudos to you!

However, before you think about getting out of debt, you really need to have $1000 in the bank for emergencies. After all, if you are paying off your credit cards and the A/C goes out, you really don’t want to have to run up more debt to pay for it, right? So, do what you can to build up that amount in savings. Sell things, get a second job, babysit, mow lawns…..whatever you can do. Maybe you even have an extra $50/month in your budget right now — toss that into savings. Once you hit $1000, then, and only then, should you worry about really getting out of debt.

So, what if you have MORE than $1000 in the bank and/or in investments? Sell or cash it in until you have $1000 only and use that to pay down debt. After all, what is the point of saving at a lower interest rate than what you are paying out towards debts? You will be able to rebuild these amounts once you are debt free — I promise you.

So now, you are wondering….where in the heck do I even start? Gather up all of your loans, credit cards and other debtors and be sure to have the payee name, amount owed and monthly payment. At this time, we are NOT going to include your mortgage as a debt, OK? What we are going to do is what Dave Ramsey refers to as DEBT SNOWBALL. I’ll explain it below.

First thing to do is to list all of your debts in order from the LEAST OWED down to the MOST OWED. Next to each debtor name and debt total, indicate the MINIMUM payment required. Do not worry about your interest rates.

Look at the one you owe the least to. Can you maybe afford an extra $25.00 from the budget you created previously? If so, increase the minimum payment on the lowest debt amount. Make that payment every month (or more frequently if you can swing it) and continue with minimum payments to the other debtors.

Now, when that smallest debt is paid off, you are going to ROLL the payment you were making on that in with the payment on the next smallest debt, thus resulting in a little larger monthly payment. You will continue to do this as you pay off your debts, rolling a smaller payment into a larger one and larger one until you are making huge payments and your debt is paid in full….kind of like a snowball that starts small and gets larger.

What if I can’t afford even to make the minimum payments? If you can’t afford even those payments, you will need to call to see what you can arrange with each debtor. However, try as hard as you can to make those minimums. Sometimes they can reduce your minimum payment or interest rates, but they will require a certain amount to be paid each month, so you will need to be sure to make those payments. Get any arrangements that they agree to in writing. I also can’t stress enough to make these payments ON TIME. Paying off the debt is half of the battle….you have to do it on time as well.

Another way to get out of debt is to get a 2nd job (if you can find one) and/or sell things. I posted about Craigslist previously. I recommend to try to sell things to raise some cash and pay off your debts that way as well. Do the same things to get your debt paid down that I mentioned above when you are trying to save your $1000.

Dave Ramsey also recommends that if you can have your debt paid off in two years or less, to temporarily suspend 401(k) contributions. Use the additional money to pay off your debt and then begin your contributions after you are debt free. However, if you are not comfortable doing this, then you shouldn’t. You have to do what works for you. For us, suspending has worked well and we will be able to sign back up again once we are debt free.

The one thing I will say is that I am NOT a financial expert, nor am I claiming to be one. I am not telling you that you must do what I have mentioned. I am not responsible for any tax issues you may encounter with surrendering investments and you should consult a qualified professional if you have any questions surrounding these types of transactions. I am just sharing what I learned from Total Money Makeover by Dave Ramsey and what worked for us.

If you really, truly want to get out of debt, the one thing I can say is that doing what I have typed above can and will work. We started our debt reduction in November 2007 and by Christmas of this year, we should be out of debt. The total we will have paid off will be in excess of $36,000.

We DID sell investments and reduce our savings. We DID cease our 401(k) contributions. We sold things. I started clipping coupons and finding more ways to save money. It is working for us. So, I KNOW it can work for you too!!!