Tuesday, November 7, 2017

Attacking the Debt: My Plan for Paying Off $390,000

Attacking the Debt: My Plan for Paying Off $390,000

The rich rule over the poor, and the borrower is slave to the lender. ~ Proverbs 22:7 (NIV)

Ouch! As I read that quote from Proverbs, I know exactly how it feels to be in debt and it's not fun. While I believed that my decisions were wise at the time, now that I have to pay it all back, I'm questioning my logic. Yes, I'm surviving but my lifestyle has and will continue to be affected until I can free myself from the shackles associated with personal loans.

In today's article, I want to begin a conversation about debt and share my plan for getting out. I would also like for this post to be a living document that I can update as my situation changes or as I learn more on the subject. In the end, I hope to look back at this time and celebrate how far we've come. While I may be telling my story, this can be a journey for us all.  

Background Story

Over the past year, I have had a number of personal situations arise that required a considerable amount of time, energy, patience, and money. To be honest, it has been an extremely challenging period of my life, but I believe that God will work it out and I'll be stronger, wiser, and better prepared for the mission (and blessings) that lay ahead. While the aforementioned circumstances go far beyond money, our finances do play a sizable role in our everyday life. As a result, I'll start by being transparent with my financial situation, but I anticipate that at some point the other lessons will find their way out as well. 

When I think about where I am in life, I know that I have been blessed. Unfortunately, even with a great job and salary, I still find myself living paycheck to paycheck. When it's possible, I try to save as much money as I can for a rainy day; however, it is an uncomfortable feeling when rainy day circumstances eat away at the financial cushion you once had. Even more unsettling is when you realize that the monetary support you expected to refill the coffers is either not coming or was far less than what you anticipated thereby leaving you feeling exposed and seriously vulnerable. Yeah, I'm feeling it!

In response to stress and anxiety, I almost always began by looking for ways to organize myself and my life. Since today we are talking about finances, I usually start the process by reviewing my budget and asking the following questions:

  • How much money will I bring in this month? 
  • What are my expenses? 
  • How much will I have left over? 
Based on the responses to those questions, I ultimately have to rethink my monthly purchasing decisions in order to stay within budget but also to start rebuilding my safety net.

Dave Ramsey's 7 Baby Steps to Financial Peace

Years ago, probably while going through another financial struggle, I found Dave Ramsey's book, Total Money Makeover. It was then that I was first introduced to the 7 Baby Steps to Financial Peace.

As I write that, I am once again reminded of how powerful our struggles can be.

"Adversity causes some men to break; others to break records." ~ William Arthur Ward

Don't get me wrong, I don't like feeling uncomfortable or going through tough times, but adversity, much like a cold shower, has a way of waking me up. I can either sit idly by and watch circumstances slap me around or I can pull myself together and start fighting back. The key, based on how I see the world now, is to embrace the struggle because it welds the power to improve us and help us reach our highest potential. When I get comfortable, I get lazy, fat, sluggish, and sloppy. When I struggle, I quickly drop what's unnecessary and focus on the goal. That explains why successful people and overall achievers adopt the saying, "Get comfortable being uncomfortable." It is through the intentional discomfort that we can finally realize our best selves.

Now that we know about the power of struggle, let's focus that energy on getting out of debt and then let's navigate our way toward building wealth. Here are the 7 Baby Steps to Financial Peace:
  • Baby Step 1: $1,000 cash in a beginner emergency fund
  • Baby Step 2: Use the debt snowball to pay off all your debt but the house
  • Baby Step 3: A fully funded emergency fund of 3 to 6 months of expenses
  • Baby Step 4: Invest 15% of your household income into retirement
  • Baby Step 5: Start saving for college
  • Baby Step 6: Pay off your home early
  • Baby Step 7: Build wealth and give generously
In today's article, I will start by focusing on Baby Steps 1 and 2. As I make progress, I will come back and update the post to reflect the remaining steps. 

Baby Step 1: $1,000 Cash for the Emergency Fund

Once again, I find myself at Baby Step 1. While I personally like having more than $1,000 set aside for emergencies, this is a great place to start. Looking at my current budget, I should be able to reach this goal by the end of the month. If I'm unable to get there by adjusting my spending, I do have a house full of things that I can sell. Come to think of it, getting rid of all those unused items sounds like a great idea regardless of my financial situation.

Baby Step 2: Use the Debt Snowball

This is where I see a great deal of time and resources being spent. While updating my budget for the month, I decided to bite the bullet and obtain a complete snapshot of my financial health. According to my records, I currently owe over $390,000.

"Whatcha talkin' bout, Willis?" 

Yeah, I know. Crazy right? With two mortgages, a number of student loans, and a few medical bills, this monstrosity makes me feel extremely uncomfortable. On the good side, I know the target number that I need to attack and I have a plan to bring things back under control.

"So, how does the Debt Snowball work?" You ask.

That is a really great question and I'll do my best to share the steps I'm taking to execute this strategy.

Make a List of the Debt

The first place I started was by visiting AnnualCreditReport.com to get a full view of my debt. I also went to each lender's website to confirm the balance, interest rates, and monthly payments. Outside of a few medical bills, everything was already captured and calculated within Mint.com.

Prioritize the List by Amount Owed

Once I have everything recorded, I then prioritize the list by the amount owed. The smallest debt gets listed first. While creating the list based on the interest rate makes sense, this particular strategy builds momentum by knocking off the debt as quickly as possible. There is something extremely motivating about crossing off completed items. The goal is to get it paid off, so taking whatever steps to build and maintain momentum is key. 

Pay All the Minimum Payments

Outside of the student loans and medical bills, I am already making monthly payments on all my bills. The goal this week is to get the student loan payments back down to a reasonable amount, as $1,300 a month is just not feasible right now. Additionally, I'll need to reach back out to the medical billing company to establish a monthly installment.

Put Extra Cash Toward the Smallest Debt

Once I have all my minimum payments being made, I will take any extra cash that I have left and apply it to the smallest debt. Let's say that I have $300 left over each month. Instead of stashing it under savings, that $300 goes directly toward the smallest debt. 

As a working example, let's say my lowest monthly installment is $25. When I combine $25 with the $300, it now becomes $325 towards knocking off the medical bill. 

Let's say that after two months, the first debt is paid in full. Now, I get to apply that freed up $325 towards the next debt on the list, which is $100 a month. 

As you can see, I now have $425 towards attacking the next debt. As I pay off each loan, the monthly installment gets rolled into a growing snowball of freed money. It just keeps growing and building until eventually I no longer have any more debt. It is important to remember that in Baby Step 2, we are attacking all the debt outside of my mortgages. We'll address mortgages later when I reach Baby Step 6.

Additional Thoughts

While I have put off attacking the debt for a long time, I can no longer afford to blindly over look these issues. I have come to learn that problems, and not just financial problems, do not magically disappear because we ignore them. No, issues go away when we face them head on and take the appropriate action to usher in a resolution.

Will it be Uncomfortable?

Absolutely, this type of change will require a sacrifice. To create more space, it may mean putting on hold any extra activities outside of what's necessary. Furthermore, it won't get fixed overnight. It took time to get into this hole and it will take time to get out. The best advice I can give as it relates to the discomfort associated with debt reduction is to simply "Grin and bare it." Remember, trouble won't last always. It may be difficult now, but doing what's hard will make life easier later on.

What About Emergencies?

The purpose of the Emergency Fund is to help cover any unexpected issues that may arise during the process. I personally feel uneasy about ONLY having an extra $1,000, but remember as we pay off the debt, we are freeing up more money. Should the time come that the Emergency Fund is not enough, we can put our debt reduction effort on hold long enough to address the issue. Additionally, if we ever go below the $1,000, make sure to replenish that fund before going back to Baby Step 2.

Well, that's about it for now. Thank you for taking the time to read and hopefully you'll join me on this journey. 

Until next time...

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Damond L. Nollan, M.B.A.

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