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I am in total disbelief that we managed to crush $18,690 in debt in just a few months. It is such an amazing feeling, but unfortunately we still have a lot more to go. I will tell you exactly how we did it so you can do it too!
First: Research and Develop a Plan
For motivation, I re-read Dave Ramsey’s book, The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness . If you don’t like to read, do not fret. You can obviously skip this step and jump right into your debt payoff plan, but I highly recommend that you try this. This book is loaded with real-life success stories. And most importantly, you’ll learn about the “7 Baby Steps” to financial freedom. It.Just.Works. Trust me on this!
I will summarize the Baby Steps here in case you decide to forego the book. You can also find these steps in greater detail on Dave Ramsey’s website.
Now, in full disclosure, I am not following the 7-Steps to a tee. Remember, I’m going to tell you exactly what I did to put a huge dent in my debt. Develop a written action plan that works for you. This is what is working for me.
Second: Build a Small-ish Emergency Fund
After reading the book, we were motivated to instantly begin working on baby step number one. We set a target emergency fund balance of $1,500. I sometimes have work-related expenses pop up (I get reimbursed for this), so I padded the emergency account with a little extra. Only access these funds for a true emergency (auto repair, appliance repair or replacement, healthcare deductible, etc.). If you do utilize this money, you need to replenish it as soon as possible.
We built our emergency fund by living extremely frugally on a No Spend Challenge. We cut out ALL extras for a month. It was eye-opening to see how wasteful we can sometimes be with our money.
We also cut out a ton of unnecessary expenses from our regular monthly budget. Read more specifics on how we saved $4,300 instantly.
Don’t worry if you can’t reach your goal in a month, just start working toward it! With discipline, you’ll be there before you know it!
Third: Debt Snowball
We learned about the debt snowball method in Dave Ramsey’s book. It’s genius, guys. You make a list of all consumer debt in order of smallest to largest balance. Begin chipping away at the smallest debt until it’s gone, while making minimum payments on the rest. Once the smallest is gone, apply that payment amount to the next, and so on. This method works for us because you feel instant gratification.
We had so many small things we were paying on, it just felt crippling to meet the minimums every month. We started out with a total of 15 consumer accounts (credit cards, consumer loans, etc.). We were able to eliminate 8 of these in one month! Crazy right?! (Those pesky little department store cards…grrr.)
To clarify, we built our emergency fund in one month, then started the debt snowball the following month.
Fourth: Refinancing High Interest Rate Loans
This was the largest chunk of debt eliminated from our budget. Okay, in all fairness, this was technically just shifting debt from one account to another. Hear me out.
We had an unsecured consumer loan which we took a few years ago to replace the roof. The interest rate was 12.4%. Since we had enough equity in our vehicle, we used it as collateral to refinance this debt. It saved us over $300 on our monthly payments! Our bank also allowed 90 days until the first new payment is due–this gave us an extra $900 to apply to other debt over the next three months, which quickly eliminated yet another pesky credit card.
Now before you begin sending me hate mail, the reason I’m including this method here is because it allows us to use that $300 monthly savings to send our snowball payments into overdrive! And we were able to pay off one more credit account quickly. It allowed us to keep the momentum!
Since this is still debt, it also goes on our debt snowball list and will be paid in order (smallest balance to largest).
Fifth: Put Retirement Savings on Pause
This is where Dave Ramsey and I differ. I plan to continue saving for retirement while paying off debt. But, I am putting it on hold for a few months. Fortunately, we began saving for retirement via payroll withholdings a long time ago. Since we haven’t been as disciplined with debt, we put our retirement saving on pause for a few months so that we could eliminate a few more debt items quickly.
Now that we eliminated a few more monthly payments, I am going to continue saving in my retirement account while chipping away at the remaining debt. Seeing my retirement balance continue to grow further motivates me to continue to improve my financial situation (i.e. pay off more debt)!
Keep the Momentum!
After implementing this plan, we have paid off almost half of our consumer debt over just a few months. The rest of it will probably not happen as fast since the remaining accounts have larger balances. But I’m not giving up! We will continue using the methods above to knock out our debt as quickly as possible.
I plan to try a few more No Spend Challenges, and also eliminate more waste from our monthly budget to keep the plan moving full speed. If you can’t commit to a no-spend month, try a week at a time. You’ll be surprised how much you will save!
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