How many people made themselves a promise at the close of 2016 that 2017 was going to be different? This was the year you would get your credit straight and dig yourself out of debt?
Our reason “WHY” we decided to create a budget
We made that promise to ourselves back in 2015. Our problem wasn’t our credit. But we had more debt then cash. And we were not putting away enough to make sure that our retirement was going to be the kind we were dreaming about. We wanted to do a lot of traveling. In the US and internationally. We didn’t want to “have to work”. And we didn’t want to be on a strict budget, dependent on Social Security (we have serious doubts as to whether there will be any money left in the system by the time we retire!)
To reach that goal, we went back to basics. We created a budget plan where more money was being allocated to first paying off debt, and then creating a somewhat aggressive savings plan. With bigger contributions to our 401k plans and we hired a personal financial planner to help us with the investing part (neither of us have that talent nor did we want to learn LOL!).
Do you need to create a debt reduction budget?
Its June 2017 now, half the year is gone. And have you been able to take any steps towards your New Years resolutions? In this article I want to give you a quick overview of how to get control over your debt and the steps to take to ELIMINATING it!
Getting started – The “Snowball Plan” Budget Plan
My partner is a big fan of Dave Ramsey and he decided to adopt the “snowball plan” which has worked very well for him. Unlike conventional thinking where you pay off the highest interest debt (which is what I did, but I have fewer outstanding debts then he did), in the “Snowball plan” you start off paying your smallest debts first.
I think it has a big psychological effect which makes this plan so successful. Every time he paid something off t he came home in such a great mood!
Here is the snowball debt elimination program broken down:
- Save $1000 and put that away for emergencies
- Make a list of debts small to large (don’t include your mortgage in the list)
- Start paying them off , starting with the smallest
A few “tweaks” we did to the Snowball debt elimination plan
Improved his credit
A few months prior to our resolution to get out of debt. I had added him as an authorized signer to several of my credit cards. His scores had been 590/ 597 / 615 when we started. We negotiated a few of the charge off accounts and got them removed and in 2016 we had his scores up to a 697 and the other 2 were low 700s. He had qualified for 2 or 3 credit cards on his own with good credit limits (over $15,000 each) and low interest rates.
But he still had the debt he had taken over when he got a divorce. So I first had him give me a list of all his credit cards with outstanding balances and interest rates. And I called them prior to him starting his big payoffs. I negotiated a lower interest rate and sometimes we could get it lowered for a few months and sometimes they would lower the rate permanently based on his new credit scores.
Consolidated debt to a lower interest credit cards
When he was down to the last 2 accounts I convinced him to pay them both off with 1 of his cards that was offering a 1.5% interest rate for 6 months. One of the cards that consolidated to this card was at 19% interest! YEAH goodbye!
We did the “credit card shuffle” a few more times and got everything paid off! Now we make it a point to pay off all credit cards at the end of the month. And if that isn’t possible, we don’t carry a balance for more than 3 months.
How we found the money to pay off the debt
Well in order to pay off debt, you need money! He worked some overtime, but things were going slowly. At that time I had a client looking for financing for a franchise. His credit was terrible, but he had a lot of money in the bank. I had to ask, since I needed to know where this money was coming from for his security deposit and he told me he and his wife were 6 figure earners in a direct sales company. (Later I found out direct sales is another way of saying MLM LOL) .
I was interested, but my dad had been in several MLMs that never went anywhere. So even though we looked at the opportunity. I talked us out of it and we didn’t sign up. My client was fine with that but he went ahead and referred 2 other people to me to help them get financing. So even though we didn’t join that company. I had the opportunity to speak with several people who were really successful in it. But wanted to have several ways of making money so they were taking the money they made in network marketing and buying into franchises.
Finding the “right” company depends on you!
My partner eventually joined them. But wasn’t successful in that company. I told him health and wellness really wasn’t our “thing” since we weren’t not health enthusiast! And not really looking to become one! So one chubby and 1 fat person telling you to follow this diet plan, well I just didn’t think it would go over well (hey, I was wrong… I just recently meet a family in a health and wellness company that were both heavy set and making 5 figures in their business). A lot of network marketing I feel must be mindset. My mindset was very negative while his was timid. So I think that’s why we failed.
But the fire was lit, and there are 1000’s of companies out there. After a bit of trial and error, we found the right home business for us. A company that helped people to buy services they were already using at a discounted rate (Click here if you want more information on the business opportunity). So as part of our debt reduction plan, we were always looking for ways to save money on our bills. We switched to their cell phone service (while still having TMobile – but a cheaper rate then what we got at the Tmobile store!) and when we had referred 5 people each to the service (not to join up for the network marketing opportunity!) our cell phone service become FREE (If you would like to see if we can help you reduce your bills too, click here) .
Since we live in Texas we also took advantage of the fact that we could switch our electricity company and we saved $45 a month during the fall/ winter months on our electricity bill (our house is all electric) In the summer it was around $25 since neither of us is here during the hottest part of day.
Long story short, we found a program that aligned with our interest and experiences. So selling ACN was pretty easy for us. We focused on only 3 of the programs they sell and we committed to putting the money earned towards paying off debt.
Final thoughts on budgets and debt elimination
Well that’s how we did it, and what our mindset was as we were working on getting out of debt. I’m proud to say the only debt we have now is Real Estate debt from some rental properties we own. And yes, we are working on paying off all the mortgages on them too and being truly debt free. Although most people don’t look at Real Estate debt as negative debt as long as it cash flows.
As you create your plan, whether you go with with the “snowball” plan or the more traditional pay off high interest debt first, or merge the two plans like we did. Some things you should always keep in mind is:
- Don’t take on new debt! Sometimes people see the closed accounts as a “pass” to go open new accounts. Get everything paid off and then decide what you want to do next. Take a few deep breaths of “debt free air” LOL.
When my partner paid off his debt as soon as he was done, he took some big deep breaths, swung his arms around and stretched with a HUGE smile on his face!
- Minimize your spending – when we joined ACN we didn’t just stop at reducing our cell phone bills and electricity. We dissected our spending to find where we were our money was going. Most of it was going up in entertainment cost. Whether it was a night out or inviting friends for a steak BBQ.
- If you have been working on your credit, call and reduce the interest rates. If you haven’t been working on your credit, you will see an increase in your credit score just because your available credit has increased! But if you truly want your financial house in order, work on your credit score while paying off debt.
- SAVE SAVE SAVE – make sure you have that $1000. in your emergency fund. But don’t stop there. How does your 401k look? How about setting up a Christmas savings account so that this year you don’t go into debt at Christmas time.
- If you are building your credit, consider a secured credit card like the Applied Bank® card that will allow you to add additional funds to your security deposit and thus increase your credit limit. That not only helps you with your credit, but when it becomes an unsecured credit card, they will send you your security deposit back! You can then put that money into your savings account!
- Avoid unnecessary spending. Look at your bank statement. Are they charging you monthly fees for not keeping their minimum balance? Go in and ask them to waive it or you will take your business elsewhere. Contact your friends and family to see if anyone belongs to a credit union. Credit unions are great for building credit and generally have low fees associated with their accounts.
- Don’t pay interest. Pay off your credit card at the end of the month. Yes this takes a lot of discipline, but its well worth the effort!