You are probably tired of living in debt, wondering how and when you are going to start paying off debt, to be able to achieve financial freedom, live carefree when it comes to money and travel places.
Dave Ramsey the author of the best seller Total Money Makeover has been educating many on paying off debt for a long time, providing many with this financial independence.
Turns out winning the lottery isn’t the only way to live a great financial life.
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Ok, back to financial freedom, becoming debt free is a sure way to financial independence, it is totally doable with a little discipline, patience & gazelle intensity.
There are many success stories of Dave Ramsey’s snowball method from many individuals as well as families.
In this article we will cover the first 3 steps to your debt free journey; establishing an emergency fund and how start paying off debt.
Before you start paying off debt, you need emergency savings set aside to act as a safety net when life throws at you that wasn’t expected.
You get the idea, basically anything that is unplanned.
Without an emergency fund, the alternative will be credit card debt or loans to pay for these unforeseen expenses.
Then life continues to be a vicious circle accumulating more and more debt as emergencies arrive at our doorstep.
This will be expanded later ideally to be 3, 6-8 months worth of expenses.
It is recommended to keep your emergency funds in a checking account (separate of your current checking), or a Money Market Savings account.
Either of these accounts would allow for check writing, which is important to have for any emergency that arises.
Let’s explore some ways to get this $ 1,000 set aside.
Start a list (spreadsheet), and list items along with the estimated resale value of each item. It is a good idea to go room by room in order to prevent overload.
If you aren’t sure the value of the products, you look them up on your phone in places such as; Craigslist, let go, and similar buy/sell apps.
This can give you a good idea of demand for your products, and value of the products.
The above mentioned apps are where you can list your products for sale, along with online marketplaces such as Ebay.
- Make a list of your debts (minus mortgage) smallest to largest
- Make minimum payments on all debts except for smallest
- Pay as much as possible on smallest debt each month
- Once that smallest is paid off, use that money to pay off the next smallest.
- Then you move on to your next smallest debt, and aggressively pay that one off, and continue on until the largest is paid.
- The reason this works is it helps you build momentum paying off the easier smaller ones.
- This is where you need to do everything you can to get that extra money, including the budgeting we talked about previously, and any additional sources of income, if needed.
- Making extra payments on debt is a good strategy to get out of debt faster. However you need to do it correctly, so you do not waste any of your hard earned money.
- Experts say that you need to make sure that any extra payments you make go directly to reducing the principal, because this will ultimately reduce the amount of money you pay on interest of the said debt.
- When you just make extra payments, you are not lowering your interest, you are just paying it early, but if you pay directly to principal, then your interest will reduce. Does it make sense? I took me a long time to figure this out, so i was kind of annoyed at how much money i wasted this way.
- For example, you owe $ 20,000 on your principal balance, your interest is not included in that amount. You make regular payments of $200, $ 180 goes to principal and $20 goes to interest.
Your balance is at $20920. Then you make an extra payment, it all goes to interest. Your principal balance stays the same, you just pay the interest on the loan earlier. Do you get the point?
- Paying Interest is how the banks make their money – their charge to you for using their money. The longer you hold on to the debt, the more interest you pay. The faster you pay the debt, the less interest you pay. Of course it is easier said than done.
- The best way to do is make the actual payment, then wait a few days, make the extra payment. The second payment will go to the principal.
- Some companies require that you call them after you have made the payment to specify that you would like the second payment to go to principal and not to interest. Check with your creditors on that.
Aggressively paying off debt is scary, but staying in the comfort of debt is scarier. It becomes easier with each payment you make. You can do it, you are on your way to build wealth.
- A part of Dave Ramsey’s philosophy is about becoming aware of our money habits, then doing something about them.
- You might have anxiety about making the extra payments, but you get more comfort when seeing lots of money in your bank account.
- You could create a little security blanket. When doing your zero budget, leave $ 100 to cover any emergency. When not used, simply roll it over to the next pay period.
- Ease yourself into it by paying half the amount and putting the other half into savings. It slowly grows your savings.
- Many of us were taught that having debt was the way to go, letting someone own and take your money. It took me a long to understand that, but once i did, it got so much easier to pay off debt.
The second tip is to lower some of your typical expenses such as; monthly car payments, electricity, phone, internet, TV, money spent on groceries and rent/mortgage.
The $200 savings can be applied to build that $1,000 emergency fund.
Install in a programmable thermostat. Depending on where you live, you can even out the temperature in your home, to save money.
- Adjust your water heater in the warmer months.
- Line dry your clothes during warmer months instead of using the dryer.
Consider moving to another apartment that will cost less, and again, those savings can go towards building the $1,000 nest.
Never move to a bad neighborhood for the sake of saving. Never compromise your security.
Ramsey refers to this tip as the beans and rice. You will need to cut your grocery/food budget to make room for more money towards your debt payment.
Create a weekly menu
- Consult your family members about a weekly or biweekly menu.
- It saves you a lot of time and money.
- You can go about it two ways. You can plan your menu from your available grocery items;
- Or you can your shopping depending on what is on your menu plan.
The sacrifices above may be tough at first; to drive a cheaper different car, move out of your apartment, or part ways with some of your old stuff collecting dust.
The reward of knowing you have $1,000+ set aside for emergencies will far outweigh the discomfort.
This way, you know when the Recreation funds are gone from the envelope, no more going to the Movies.
Sinking fund is money set aside every month for the expected expenses. Things like birthdays, Christmas, Easter, car maintenance etc
Many times schools give short notice on upcoming stuff. Put away a small amount you can afford. It covers everything that school asks for.
Field trips, book fairs, teachers’ gifts, birthday parties for classmates and school supplies at the beginning of the academic year.
It is also wise to include the children in budget meetings, asking for their input on what they may need for school.
For random things that kids need. Explain the things to them that they do not to buy everything they think they need.
If they do not understand that, they will run into problems. You can not plan for something you don’t even know they are going to need.
Do you have a challenge budgeting for stuff like reserving daycare places for your kid, clothes, hair cuts, tools, and oil change because they are so sporadic.
You could put away a certain amount of money per week for non expected bills.
Use any left over money at the end of the month, to pay off debt or roll it into your savings account.
This will keep you from dipping into your emergency fund, help you find balance with your budget, while have the freedom to adjust easily.
- While your aggressively paying off debt, your discover that your are expecting. Babies are a blessing, they mostly bring joy to the family, but i am going to just say it, they are really expensive.
- Much like the emergency fund, begin building your stork fund to anticipate all these baby & delivery expenses. Otherwise, your emergency fund will be raided.
- After mom, baby and other family members are settled in, the family budget is adjusted to accommodate the new baby demands; slowly go back to debt snowball.
There are many people and families that have used the snowball method, to get out of debt and become debt free.
You do not have to follow Dave’s snowball method to the dot, customize it to what suits your situation best.
- It took them a little longer to become debt free, but they eventually made it. I am still on my debt free journey, it is tough, requires commitment but it is really worth it.
Keep the frugal habits after you have paid off your loans. Keep saving your money. If you continue to practice frugal habits, you won’t be put in a debt situation ever again.