Define Your Budget
Setting goals is essential to living a successful life, and this is especially true when it comes to paying down your debt! If you want to find financial freedom, you have to define (and refine) your budget.
Setting goals is essential to living a successful life, and this is especially true when it comes to paying down your debt! If you want to find financial freedom, you have to define (and refine) your budget.
Lately I’ve been sharing how I paid off a massive amount of debt in two months. One of the key parts of this is to understand impulse buying.
So today I encourage you to really sit with this post. Grab a pen and paper, it ends with homework. đ
Many financial gurus will tell you to avoid credit cards, even those that offer incentives. I totally get where they’re coming from, BUT credit cards can be a great way to help you actually get OUT of debt!
Finding legit ways to make extra money can be tricky, but it’s important if you’re on a mission to get out of debt. That’s why today we’re going to go over the extra income ideas I used to pay down $10,000 in two months!
If you want to maximize your tax refund this year, there’s ONE guideline to follow: stop seeing it as “free money”!
Paying down debt can go such a long way to living a better, healthier life. Less debt means less stress, but it also means less time spent having to find ways to make sure the bills are paid each month.
There advice on how best to find financial freedom is conflicting to say the least, so I hate to throw one more wrench your way, buuuut…
In January 2016, our household debt totaled over $200,000.
Now you might think that someone with nearly $200,000 of debt must have a serious spending problem. That or a very nice house, a fancy car, perhaps an addiction to the smell of burning money… SOMETHING, right?
Nope.
All we have to show for our debt is an 8 year old mini-van, a 130 year old fixer-upper of a home, and two college degrees that between us cost $150,000.
Grand total: $208,892.49
Our Lowes and Furniture Row bills are (were) the only credit card debt we had. We used both when we purchased our house so that we could purchase some much needed appliances and furniture. Fortunately they both offered zero percent interest for a set amount of time, but still – $4,600 in credit card debt is a huge chunk of change to carry around.
Meanwhile, my husband and I both have a LOT of student loan debt. Despite both of us working while in college, we fell into the trap of taking out way more than we should have.
Looking back, there’s certainly a part of me that wishes I’d gone to community college. Instead, I spent all four years at a private school that cost me about $36,000/year. My husband did go to a community college first, but was still persuaded to take out a lot of student loans to help support himself while in school.
Nearly $150,000 in student loan debt and together our jobs net us $33,000/year (after daycare is factored out…)
Well, our first step was to take a look at our budget and figure out where the majority of our money was going. We were paying $1,600/month towards our debt but the overall total was only decreasing by $1,100. Once we figured out why and how that was happening, we were able to change things up to make a more significant dent in our debt.
So Step 1 isâŚ.
Some financial gurus recommend you snowball your money. The “snowball method” is when you pay off the smallest debts first, get a âhighâ from paying off a bill entirely, then roll that payment towards paying off the next smallest debt.
Hereâs my problem with that:
Letâs say you owe one credit card $2,000 with 0% interest for three years and another credit card is owed $4,000 with 24.9% interest.
You have $300 to put towards your debt each month. If you put $170 towards the first debt and only $130 towards the second, it will take you a year to pay off that first card.
Meanwhile, in that year, youâve put $1,560 towards that second card but have only paid it down by about $500 â thatâs not even a third!!
So with the snowball method, youâve put $3,600 towards your debt but at the end of one year, you will still owe over $3,500. That balance will now take you another 14 months to pay off and cost you even more.
Snowball method: Pay $300 for 26 months, $6,000 of debt = $7,800
So what if you reversed it and paid the minimum due on the zero interest and the rest towards the second card?
Youâd be looking at $70 towards the first card, $230 towards the second.
In the first year, you would put $2,760 towards your second card, $2,070 of which would be towards the principal.
In the end, paying based on interest rates, you would be free of these two debts in less than two years.
Paying based on interest rates: Pay $300 for 24 months, $6,000 of debt = Â $7,200
So not only would you save yourself nearly $600, but youâd also have an additional $300/month two months sooner.
Now I will say that the snowball method has been proven to work for many people. It can be an effective way to motivate yourself to pay down those debts. But depending on your financial situation, you might be paying quite a high price for that motivation.
So for today, the first thing to do to get started towards paying down $10k like I did is to look at your budget (create a budget if you don’t have one!) and list out every debt you owe, the APR on it, and what youâre currently paying each month.
Having a good grasp on your financial situation is the very first step to improving it.
What debt causes YOU the most anxiety?
Is this the debt with the highest APR, the highest balance, or both?
If at any time youâre confused, feeling overwhelmed, or just need clarification on one of my tips, please do not hesitate to e-mail me. I love to hear from my readers almost as much as I love to help them!