It takes intensity. The light at the end of the tunnel is not a train. Completely eliminating the debts that drain us can be done. It can be done in two or three years, but it takes intensity. Proverbs 6:5 says to free yourself from the hand of the hunter like a gazelle. Committing to destroy debt means sitting down with your spouse and saying for the next 12-24 months we are going to attack our debt with every available dollar. The way Dave Ramsey puts it: “Live like no one else, so you can live like no one else.”
Intensity is important enough for me to mention that if you are in the middle of a crisis of some kind, marital, medical or otherwise or if you are facing the fact that you or your spouse have addictive spending issues, you need to address these first. These other demons will affect your ability to maintain intensity or any type of plan.
The financial plan you have put together should create room in the budget for you to begin to attack what you owe. Intensity means you might even consider looking for extra sources of income temporarily so that you can wield more debt reducing power. I have to warn you, most of this advice is bad, if you do not go at it with all you have in you. If you aren’t determined to be free, just keep making your payments. If you are just going to borrow more money later, just keep making your payments. But if you are ready to live differently, then get your game face on and let’s go! Besides, how’s that current plan working for you? If your friends don’t think you are weird for some of this, then you aren’t doing it right, but don’t listen to them. They are broke. Ready? Let’s go!!
First, Stop the bleeding…
To get out of debt, you cannot borrow more money. I know that sounds obvious, but the cards have to go. So, what happens when the car blows up while trying to dig our way out? As soon as you make such a commitment and start to make progress toward being debt free, something will happen that will throw you off your game and discourage you, especially if you have no way to pay for it and have to borrow more money. So what do you do?
The first thing you have to do is build a small emergency fund. The key word here is emergency! Put $1000 in a savings account that you can get to it easily.
If the transmission falls out you have a way to deal with the situation without going into debt. Don’t have it? I know. Use extra money, and sell stuff. Have a garage sale, sell some stuff and get there as quick as you can. I did this by trading a whole life insurance policy for term insurance and collecting the cash value. Once you get it, don’t touch it unless it’s an emergency. A new iPod doesn’t count.
Don’t hold anything sacred on the selling stuff. Even the cars might need to go in favor of a cheaper one. If your selling stuff tops a grand take the extra and dump it on your smallest balance. You might even be able to clean up some small bills this way.
The Attack Begins…
Attention math wiz: some of this won’t make mathematical sense. Don’t try to out math this approach. It is a behavioral approach designed to help us to stick with it.
With some emergency cash for security and a spending plan you will know how much money you have extra to attack with. How long it will take you to dig out of debt depends on the size of your shovel, and how deep your hole. The next step is to list all of your debts smallest balance to largest balance excluding the mortgage. Don’t worry about interest rate. Don’t consolidate either. You would be surprised how good it feels when you eliminate the first couple of debts. If this happens quickly, you are more likely feel like you are making progress and stick to your plan. Big loans lumped together will take a lot longer to defeat.
Once you have your attack schedule, take all the extra money you have each month and put it all on the smallest balance and pay just the minimum payment on all the others. When the smallest debt is finished off, you add the minimum payment from the smallest, and the extra money to the next one and keep going. As you go, the balances get bigger so does your financial power of attack.
Medical bill 1: $180
Medical bill 2: $250
Best Buy Card: $300 min payment: $30
Visa 1: $1500 min payment $80
Car 1: $10000 min payment $250
Car 2: $14000 min payment $300
Total Debt: $26,230 Payments: $660
Say for example you have enough cash from garage sales and ebay to take care of the medical bills, and then month to month you have $150 extra dollars to attack with. Your first month you would add the $150 to the $30 for best buy, and pay it off in two months. Then you have $180 to attack visa with and add to the minimum payment of $80, so that you are paying $260 a month on visa. This would take about six months to eliminate, etc. etc.
The car debts in this example could be eliminated by selling them, and replacing them with two $4000 cars with lower payments. That would cut $24000 worth of car debt to $8000. This might also lower your car payments and give you more pay off power. It will also greatly shorten the time it will take to get out of debt.
I know what you are thinking, no one wants to drive a $4000 car forever. We are talking about a debt breaking strategy. In our example, there is $660 a month in payments. When these are crushed $660 a month could be saved for 10 months added to the $4000 trade in and you could pay cash for a $10000 car. Cars are one of our biggest money pits. In fact they are probably a whole other article.
For now, let’s just focus on getting free. If you followed our example through, you would have a budget, $1000 in savings, and some extra cash to attack your debts with. Let’s say you now have $250 to attack with because both cars have been reduced, it would take far less than two years to completely eliminate the remaining $9500 in debt. What could you do with an extra $660 a month? Depending on your situation that amount might even be greater, or it might get soaked up in expenses you already have, but you would be free to spend it on your families needs and not on supporting Visa’s latest multimillion dollar office building or TV ad campaign.
The step I am describing continues until you have eliminated all of your debts except for the mortgage. You could attack that too, but I believe there are some other things that have greater priority. There is no such thing as good debt, but at least in theory your home is appreciating while you pay it down. I apologize in advance for how directive and straight forward this article is, but it is the only to explain the attack. Let me suggest a couple more principles for staying on track and speeding up the process.
- All of this assumes you are giving to your church in your budget.
- Stop contributing to your retirement account until you complete this. It makes no sense to be investing for 12% retirement while paying Visa 28%. This is a temporary step to speed up debt elimination. It is also bad advice if you are not committed to this and being debt free forever.
- Sell your “Wal*Mart” stock or any extra money not invested in a retirement account where penalties would be involved.
- Do not borrow against your retirement. Do not cash out retirement accounts. The penalties are too great.
- You might have to move or temporarily lower your lifestyle in order to make headway.
- Budget your holiday spending, make gifts, re-gift, pay cash for Christmas.
- Put off expensive vacations until you are done. Spend the money on the debt instead.
Remember you are looking for ways to get free. It might mean making sacrifices of time, lifestyle, energy, vacation, etc. This step is meant to be temporary, not a way to live. You shouldn’t work 80 hours a week forever or always drive a car that is barely better than walking. You are looking for freedom. Think about what you would be able to do, when you no longer owe anyone anything. That is where our journey will take us next. For now, we are breaking the bonds that keep us from serving our Lord and Savior with freedom and peace.
- Develop a spending plan, spending every dollar on paper before the month begins.
- Put away $1000 for emergencies
- List and attack all of your debts paying them off smallest to largest by balance rolling the minimum payment from the previous debt to the new one until you are debt free except for the mortgage.