Tuesday, June 6, 2017

How We Got Out of Debt

A little while back I posted about how we had taken Dave Ramsey's Financial Peace University class and were working to get out of debt. Well, on March 10, 2017, two years after we started the class, we paid off the remainder of our debt. It wasn't easy! But we did it. Almost every bit of extra cash we had flowing in (bonuses, raises, tax returns, etc.) went toward our loans. 

I'm not typically comfortable talking about money in a public setting, but this has helped us so much that I wanted to share how we did it. 


This right here was THE best feeling!
Dave Ramsey suggests first putting 1000 into a savings account as emergency money. Well, we already had more than this amount in our savings account so we started off a little ahead. We were able to jump right into tackling our debt. 

Before I talk about the debt snowball, I'm going to talk a little about our budget. The class gives you access to all of the materials you need to budget and plan your finances. I took the time to make a budget book for us to refer to each week. Some people prefer an app (like the Every Dollar app) or an Excel spreadsheet, but I like things on paper. I printed out a years worth of the "Monthly Cash Flow Plan" which is the budgeting tool that Dave suggests using. The notebook also included monthly tabs with a calendar spread and a "cash flow plan" for each week, our Debt Snowball form, our expense schedule (what date things were scheduled to come out each month - almost all of our bills are automatic withdrawal.), and our short term and long term goals. (Remember, I'm an organization freak, so this works out perfect for us.)


We tried budgeting by month, but for us it is waaaay easier to look at our finances on a weekly basis. We get paid on opposite weeks so this works out great for us. If you have paychecks coming in every 2 weeks, then you could budget every 2 weeks (we are going to start doing every 2 weeks since I'm not working as much now.)

Each week we sat down and filled out our budget. This would include only what was coming out that week. We set a budget for groceries and restaurants and used the "envelope system" for those. We would try to only use cash for these things but sometimes we would end up having to use the card (we've gotten really bad about this lately - #confessions). We would add in extra expenses for that week such as diapers, hair appointment, etc. If we were ever spending more than we had coming in, we would try to cut back somewhere. If our income was greater than our expenses that week, we would apply this toward our debt. Budgeting weekly made it very easy to keep a close eye on what was coming in, what was going out, and how much extra we were able to pay toward debt. 
*Something else to note - the goal for your budget is for every dollar to be accounted for. When you subtract your expenses from your income the total should be zero. However, we would typically leave a small buffer just in case something unexpected came up. 

Now, on to the debt snowball - 
Step 2 of his plan is to pay off your debt using the snowball effect. You can either start by paying off the loan with the least amount owed, or you can pay off the one with the highest interest rate. Here's how it works:

We decided to start with the least amount owed and tackle it from there.  Here's what our debt snowball form looked like. We still had payments on both of our cars and my student loan. A total of $33,458.53 before interest!

We had a small personal loan that we had just finished paying off so we took the money that we had been paying toward that ($200/month) and applied it to my car payment of $250/month which totaled $450/month.

We actually finished paying off my car and started working on David's car before the 9-week class was over. (There were some people who even paid their house off before the class was over! Amazing!)

As you can see below, David's car payment was $225/month. We applied the $450 that we were paying toward my car to this amount which gave us a total of $675. We found that we were bringing in a little extra each month that wasn't accounted for on our Cash Flow Plan so we set a goal to pay an extra $325/month toward our debt. 

Another bonus: both of our car loans were through our bank (Redstone Federal Credit Union) so we were able to schedule payments that would come out automatically on the same day each month, which made it easy to budget for. We were also able to split up these payments so that we weren't paying the $675 all at one time. This also made it super easy to make our extra payments. All we had to do was log in and transfer money straight from our checking account to the loan.

I can't remember when exactly we got David's car paid off, but once we did we took the $1000 we were paying toward his car per month and applied it to the $352 student loan payment. Our goal was to pay $1352/month toward my student loan (I'm not sure where the extra $5 came from in that total below.)

We got a bit behind schedule when I was pregnant with Audrey. We decided to put some of this money into savings to prepare for her arrival and my [mostly unpaid] maternity leave. Because of this, I guess we had fallen into bad habits by not budgeting as well as we had before and spending more than we should. Even after I went back to work, we didn't tackle the loan like we should have. We were still making extra payments here and there but we weren't paying the full amount that should have been paid per the Debt Snowball.

Starting the beginning of this year we decided to jump on it and finally be rid of this pesky loan. Our goal was be debt free by the end of May. We took every single bit of extra income including bonuses, overtime and our federal tax return and had it paid off by the middle of March!

What an amazing feeling that was! We've moved onto the next step which is building a 3-6 month emergency fund/saving for a down payment on a house. 

If you have heard about the Dave Ramsey classes but don't know if it's worth it, I would say YES, it is absolutely worth it. Contact me if you have any questions or need help finding a class near you! I would be happy to answer any questions you have! 



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