Three Tools to Climb out of Debt

For almost a year now my family has been paying down our debts. It hasn’t been easy and we have a long way to go but we have learned some things along the way. The things that we have learned allowed us to pay of over $25,000.00 last year. Don’t sweat the small debts. Attack Them!!!

Where do we start?

If you are like us you are so far in debt that its hard to find your way out. Don’t panic I will show you how we started the climb out of debt. Does it get easier? Yes, a year later and I feel like I have more control over my finances than I have ever had. Their are really three tools you will need to climb out of debt.

The First Tool – Zero Sum Written Budget

I won’t go into a tone of detail about the Zero Sum Written Budget because I wrote a full article about it a little while back. If you want to know more check out the article “Budget: The power to change your financial life”

A Zero Sum Budget simply means that you spend all of your money for the month on paper before you get paid. This allows you to see where every dollar is going. Budgeting also helps you to take control of your spending.

A lot of the peace and confidence we have about our finances has been achieved through budgeting. If you are freaking out or worrying about how to make ends meet this is the best tool for you.

Some words of warning about budgeting.

Budgeting is easier for some than it is for others. For us it had a steep learning curve. It takes about 3-6 budget cycles to really get the hang of it. We get paid every other week so our budget cycle is two weeks. When we started we tried a monthly cycle but found that things were slipping through the cracks.

You will miss things in your budget and thats okay. Early on I remember forgetting about K’s school pictures one budget cycle. This took the nice neat budget that we had produced a week earlier and seriously screwed it up. In the end we had to pull money from other categories and choose a lesser photo package to make it work. What we did not do is turn to our credit cards to pay for the pictures.

The Second Tool – The $1,000.00 Emergency fund

If the budget gives you the feeling of control over your money the the emergency fund gives you confidence and strengthens your peace. I am pulling this one straight out of the Dave Ramsey playbook. If you don’t know who Dave is it might be time to find out. Most of what we talk about on comes from Dave and his Radio program or his book “The Total Money Makeover”

The Idea behind the emergency fund is simple. You save up $1K to help you in the event of a minor emergency. Is $1K enough of an emergency fund forever? No it is not but it will get you started and give you a little comfort. It took us about three months to establish our emergency fund. We elected to put our emergency fund in a money market account in a bank across town. Why? because If we needed it we would have to drive all the way there the whole time asking ourselves is this really an emergency?

You want your emergency fund to be liquid but not easily available. If you keep your emergency fund in the same account you use for all your banking it will slowly disappear. Don’t invest your emergency fund. Keep your fund in either a savings account of a money market account. The idea is that the money is there for you when you need it.

If you invest your fund with the idea that it will make money for you two things can happen. One, your investments could lose money. After 2008 we all know this is a possibility. The second is how quickly can you take money out when you need it. Most brokerages need at least 24-48 hours to process a sell order. Is that fast enough to pay for an emergency room visit?

Some words of advice about an emergency fund.

We have a monumental amount of debt. Because of this we know we will be paying it down over the course of 3-4 years. This is a long time to go with just a $1K emergency fund. We opted to up our emergency fund to $2K. The idea of the starter emergency fund is that it is enough to get you started but not enough to make you complacent. You will have the time and ability to fully fund your emergency fund after you have payed off all your debt.

The third tool – The debt Snowball

Yes, this is something that comes directly from Dave Ramsey but it works so well that we have to share it. There are many ideas and methods out there to pay off your debt but here is why we like the debt snowball method.

In the snowball method you list your debts smallest to largest regardless of intrest rate. You then make minimum payments on all of your debts and throw as much a you possibly can at the smallest debt. Once the smallest one is payed off your role what you were paying towards it to the next one on the list. That is called a turn over. As a snowball rolling down a hill picks up more snow it gets bigger and gains more momentum. In this method the amount of money you can throw at debt gets biger and biger each time the snowball turns over.

We love this method because it gives you a couple of quick wins. When we listed all our debts we had about 7 debts that were under $100.00 each. we killed those debts in a matter of weeks. These quick wins showed us that it was possible to pay off our debts. If we had listed our debts by highest interest rate our first debt would have been over $10,000.00. Thats a tough hill to climb right out of the gate.

Some words of advice about the debt snowball

The debt snowball is an amazing tool but don’t be afraid to shift things around a little. About six months into our Snowball Melissa was offered a deal on an auto loan that she had defaulted on. The deal cut the debt almost in half but would require us to pay it off in 4 payments. We looked at our budget and determined that it would be possible for us to do this. So for the next 4 months that debt moved to the front of the line. Once it was payed off we returned to the snowball.

Don’t lose faith

Climbing out of debt is not easy to do. It requires you to ask your self a lot of tough questions and often you won’t like the answer. Focus on what you will be able to do when you have no more debt. Would you like to travel? You can do that. Do you want to own a home? You can do that. Do you want your children to have a better future? You can do that. Being debt free opens up so many possibilities. Find out what that freedom means to you and grab hold of that. You will need it when you are standing in the store debating on whether or not to purchase that item you want.

4 thoughts on “Three Tools to Climb out of Debt

  1. I really think the emergency fund these days needs to be $2,000. For instance, our new transmission is costing $1,800. We raised the first half super quick then auto saved to finish off the e-fund. I guess now we’re back to square one? But thank heavens we had it.
    Your right about flexibility on which bill to pay but staying focused and motivated.

    1. Thanks for your feedback. After working to get out of debt for almost two years now I would have to agree. We put our Emergency fund in a money market account. This account required that you keep at least $1,000.00 in it or you were charged a minimum balance fee. We decided because of this we would put $2,000.00 in it. That simple choice made all of the difference during an extended period of underemployment. I would say that if your plan to pay off debt is going to take more than 24 months you should keep a larger emergency fund. The chances of you incurring a large emergency goes up dramatically after 24 months. Remember though the mission is to pay of debt as fast as you can, not to squirrel away money.

  2. I have paid off $34 of debt in the last year. It`s been a struggle and some of my cost cutting measures are embarrassing. In my former life I wouldn`t have considered them for a moment. I have taken in a lodger, this is worked out really well. In winter I get wrapped up in-doors and only put the heating on if there is someone else in the house and even at that I only heat one room ! I got rid of my BMW and bought a second hand 50cc motorbike, $7 per week in gas. I get a veggie box delivered every two weeks and this does me until the next one appears. I have negotiated with the phone company and pay $16 per month for free calls after 7pm and before 7am, all day Saturday and Sunday, unlimited internet. I have a prepaid mobile, which costs $20 per month. I clip my own dog, I cut my own grass. I go the the local beauty college to get my hair cut and colored. I make meals in bulk and freeze them. I mix the dog`s food with cut up spaghetti, it goes much further. I wash clothes in cold water and hang them outside to dry and I very seldom buy clothes or shoes and if I do I visit the charity shops !
    Nowadays I am more relaxed about money, my mortgage is down from $1150 per month to $620 per month. I don`t have to work extra shifts at the hospital (I`m and RN), in fact I can get away with two nights per week. The bank is always offering me credit and loans, the last time they did I asked the person who called if he considered these offers to be ethical, they haven`t called me for 4 months now. I am no longer the bank slave I once was and how good it feels !

    1. Thanks Linda. I know exactly what you are talking about. The further we get in our journey to pay off debt the more we realize just how much money we willingly part with for simple things. We estimate that the choice to hang dry cloths vs. use the coin operated dryer at our apartment saves us over $500.00/year.

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