Sunday, May 31, 2015

Day 57: The Best Way to Destroy Debt - An Intro

All right! June is here. It's a new month and that means a new budget!

If you've been following this blog, you've come to realize that out of the many things I've written about, the most consistent has been money and budgeting. I firmly believe that regardless of our income, we are all stewards of the financial resources we do have and we have a responsibility to steward them well. So I set out early on in this blog to write about The Lisi Home of Budget Practices because The Wifey and I have been on a journey for over two years to get this stewardship thing down and I want to help people do the same.

Last week I wrote a small piece about the amount of debt young adults carry these days as it pertains to credit card debt. We all know that most of us just don't have credit card debt. The statistics on student loans reveal that this type of debt is also crippling. In fact, based on the stories of friends I know, student debt is a much bigger issue any other debt they carry.

So what do we do about it? Well, the following is a primer on Baby Step #2 in Dave Ramsey's Financial Peace University. It's called the Debt Snowball and the premise is very simple. What follow is basically taken right from him, so he deserves all the credit. I share it with no apology because we saw it work for us. We were able to pay off all debt within 15 months!!! This was definitely the most rewarding Baby Step we've experienced and I think it's because we don't have that sense of being a slave to anyone anymore.

So here's what you do:

List all your debts - credit card, car, student loans, whatever - in order of smallest to largest. The order should not be based on minimum payment or interest amount; focus solely on the total amount for each debt. Let's use an example. You have a credit card debt of $1000, a car loan of $10,000, and a student loan of $7000. The order is

  1. Credit Card - $1000 ($60)
  2. Student Loan - $7000 ($180)
  3. Car Loan - $10000 ($220)
Again, you do not care about interest rates. Trying to figure out all of that just complicates things and really gets in the way of what you're trying to accomplish, which is to have 0% interest on it all because you have no debt anymore! 

Now, in budgeting more effectively, you should hopefully have freed up a bit more money to tackle debt. Let's say you buttoned down a bit by not eating out as much and getting fewer haircuts and had an extra $200 a month you can apply toward debt. What do you do next?

Pay off smallest debt first. While still paying the minimum payments on the other debts, use the $200 to go toward the credit card debt. This means you're using $260 a month to kill that debt. You will have it paid off in just under four months and you will never have to worry about it again! This is the key. There's so much in the small wins and seeing progress quickly that motivates you to tackle the bigger challenges are ahead. Then what do you do?

Well, you'll have to wait until the next post or just go ahead and read Dave's post here.

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