June 16, 2014 by The Perfectly Imperfect One
Let’s take a little break from coupon talk for a minute and let’s discuss getting out of debt. One way to get out of debt is to reduce your cost of groceries and household supplies is by couponing and then using the money you used to spend on groceries and applying it to your debt. So, couponing is a great way to reduce your debt as well.
So, for debt reduction I began reading about how to pay off debt and the different ways in which to do it. Suze Orman suggests one way to get out of debt and Dave Ramsey suggests another way. Suze says to get out of debt to take the total amount of debt and break it down by interest rate and begin paying off the highest interest rate items first. This is a wonderful way in which to reduce your debt, and the way in which I used to pay off my debt, it works, and if you can do it that way you should, but I have found some problems with it, sadly enough most of my debt was high interest and high balance and I would put so much effort into trying to pay down the debt on the highest interest item first, but I would still not see any changes in my debt getting reduced. The idea behind paying off the high interest items first is because you would pay less over time because the highest interest rate will charge more per month and year.
The problem I found was that often times my lowest interest rate would have a smaller balance than my highest interest rated item, although most of my interest rates were all pretty high.
After reading one of Dave’s books, I have learned that I like the way he works and thinks and it works for me! Dave Ramsey has a different approach to paying off debt. The first step in Dave’s plan is to organize your bills and make your money work for you. What this means, is by not having any money left over after you plan out your bill payments each month. So what you do is write down all your expenses, rent/mortgage, food, clothing, credit cards (seperately), all other bills like electric, gas, internet, phones etc. ALL YOUR BILLS! You can and should also figure out other expenses that are not monthly but more annually that you might need to save up for usually, things like tires or other car repairs, christmas gifts, and even your emergency fund (which I will now explain).
Dave Ramsey says you begin your debt reduction plan by starting an emergency fund of $1,000.00 so that once you begin paying on your debt you already have a little safety net for security. Once your debt is all paid off you will then build your emergency fund to include the amount you would need to survive for 3-6 months.
Dave uses the envelope method to sort out bills each month meaning each bill gets an envelope and the amount of the bill goes into the envelope, this includes groceries and other things like that, that way you only have that amount to spend on groceries, household items, clothing etc.
Once you have your emergency fund you will begin paying off the smallest debt you have, whether it be a credit card bill, hospital bill or anything else with a minimum payment and an outstanding debt. One you will do to plan this out is at the begining of every month (or shortly beforehand) you will take all your bills and list the minimum payment amount due that month and you will figure out how much money you have left after all minimum payments are paid, including groceries and other living expenses, even a little fun money, consider it all bills and things you need every month.
Once you have that left over money (on paper first) you will take the extra money and put it towards the lowest balanced debt you have, no matter the interest rate. So if your lowest balanced debt is $200 and you have an extra $10 after making the minimum payment of $12 you will add the $10 to the $12 and make a $22 payment. This means that you will still make all your other minimum payments a month and every extra penny you have goes towards the lowest balance. If you sell something, like you have a garage sale or you sell something online, you take that extra money and you put it towards that smallest debt until that debt is paid off.
Then you move on to the next smallest debt, but this time you will make the minimum payment due, plus the minimum payment from the other debt that you just paid off, and you will add any extra money to this debt until it is paid off. For example, if your next bill has a minimum balance of $300, a minimum payment of $15 you will pay the $15, plus the $12 from the last bill and whatever extra money you have, say it is still $10. So the $300 balance will get a payment of $37 instead of the initial $15, so that is more than double the original payment. You will continue to do this every month until all your debt is paid off and you have your 3-6 month or more emergency fund in place. (This includes your car, house, college planning savings for your kids, and even your retirement).
This is the snowball debt reduction plan. Dave says “If you will live like no one else, later you can live like no one else!”, to me this means that if you can live pay check to pay check with no money left over, or live a life of poverty, by going without things you “want”, you will be out of debt and in a shorter time than you can even imagine you will be living it up and you will be going on luxery vacations that you pay cash for and driving vehicles that are newer and nicer and you will have paid cash for them because you planned and you struggled and suffered and drove a piece of crap paid off car to get yourself ahead.
Dave is a very smart man, and I can tell you that his advise is not hoowey or bunk or whatever, if you follow his advise you can get yourself out of debt. If you follow Dave’s advise and you pay off the smallest debt first you will feel a sense of accomplishment because you will see your progress, you will watch your smallest debt go away and you will watch the higher debts dwindle down each month by making larger payments on them without missing a monthly payment, without being late, and without the worry that you won’t make it.
I do want to tell you that we do not follow Dave’s advise to the letter, we had to work things out for ourselves, but we are making progress, wonderful progress actually, debt is getting paid off. We are doing what we need to do, and we never go without. I also wanted to add that when we got our tax refund this year it was the kick/jump start we needed to pay off debt because we used it to begin our debt reduction plan rather than buying things we wanted, even though we really wanted to buy things we wanted, we acted responsible and did the……adult! thing and put it towards debt. Yep, I said it, we acted like adults 😛
The things is, it is all basic, if you want to get out of debt you have to put your wants aside, you have to want to get out of debt and you will have to want to be able to do whatever you want. Sometimes you have to go through struggles and hardships in order to be where you want to be. Sometimes you have to even sell your possessions in order to pay things off, sometimes you have to work 2 or 3 or 4 jobs to get where you want as fast as you can, but the light is there, it is dim at first, but it does brighten each and every time you do your budget each month and even more so when you pay one thing off. It isn’t going to happen over night, but progress will be made, you just have to stick to it 🙂
I leave you with this last Dave quote:
Are you following Dave’s advise? How is it going? Are you doing another debt reduction plan? Tell us about it!