Thank you for coming back for the third part of Financial Freedom. For those of you who waited long enough I am so thankful to you for your patience. This post is overdue. I had wanted to post this up a while ago however, other things took precedence.
But, I am glad to say that FINALLY the post you all have been waiting for is here. How to Get Out of Debt! In my last post I covered the topic of building an emergency fund. I mentioned why it was important, what an emergency fund is, and what it is not. Assuming that you all have either established your emergency fund or have begun saving for it, it is safe to say that we can now talk about getting out of debt. As I mentioned before I took a course called Financial Peace University and it rocked my world. For the first time the topic of finances started making sense.
The course is taught by Dave Ramsey. Dave Ramsey has educated others all over the world on the issue of dumbing debt. He is good at teaching how to get rid of debt and his methods work. Please understand that this post along with Dave Ramsey’s teachings is not about how to get rid of your debt quickly. It is not about paying off the loan with the highest interest rate. That method works for some and if it does then stick to it. However, Dave Ramsey’s methods is all about changing behavior. For those who take his course you know that it is mostly about taking baby steps. The majority of people who take his course don’t understand the first things bout the financial world so, he developed a strategy that would give people power of their finances while taking steps that avoid frustration so that others can stay committed to their plan. This strategy works because it allows the individual to see change gradually and it doesn’t overwhelm the individual who is trying to get rid of debt.
First thing first. Dave Ramsey wants you to be aware of how much debt you have. He asks that you add up all your credit cards, car payments, medical bills, student loans…ETC. Do not forget about student loans. This is a debt! For some reason people forget that this is a debt. Now, after you have added up everything he suggests that you take the debt with the lowest amount owed and that you start to pay it off. This means that if your minimum payment is 25 dollars on your lowest amount owed on your credit card then each month you will set aside 25 dollars to pay of your card.
Once you paid off this card and cut it up, then the 25 dollars a month you were paying before will get added to the next debt. So, the next debt is to pay off your car payments. So you pay the minimum and then you add 25 dollars extra to that minimum. This is called the snow ball effect. Again, this may not be the quickest way to get rid of you debt, as your debt with higher interest rates will be growing. However, this is the way to change your behavior, it is the way to get used to handling your money, and it is the way that allows you to see progress in a tangible and non- overwhelming way. You will continue to do this with all your debts. Once the car is paid off this will free up money for your next payment on your next debt owed. You will then be able to start paying off your next debt and you will add to the minimum of the next debt the previous minimums you were paying on your other debts. See below:
Breakdown of Monthly Payments
Walmart Credit Card - $25.00 /month – OVER TIME THIS IS PAID OFF
Car Payment $133.00 / month – OVER TIME THIS IS PAID OFF
TIME TO PAY THIS: Medical Bills $50.00/month
25.00 + 133.00 + 50.00
Of course if there is a need that you must take care of like paying back the IRS then you need to handle that first and maybe hold off on the medical bills. Your budget will never be the same you will always have to adjust it.
Dave Ramsey suggests that you also get a buddy who can keep you accountable. Preferably a buddy who can challenge you. You do not want the friend who will say “well, you can always pay that off later let’s go shopping!” NO! You want a buddy that can look at your budget, see your needs, and play with the numbers so that every month your budget pans out. You may also want to get a buddy who not only will challenge you but, can also be flexible. You do not need a person who will overwhelm you and lead you to failure. Remember this is about behavior. Behavioral changes do not happen overnight. This is a slow process. If you get someone who will remind you of how HARD this is then you most likely will not stick to your financial plan.
Now, I know I wrote a lot about budgets yet we did not go over how to make a zero based budget. This is important because this will help you with your plan of dumping debt. Please go to the Dave Ramsey website and down load his tools for a zero based budget. This will rock your world! I know because it is rocking mine!
Thank you again for stopping by. If this post touched your heart, challenged you, or motived you please share it on facebook. Also if you want to chat please visit my Contact Me page and check me out via social media or email.