I know the feeling.
It’s Friday, you just got paid, so you start thinking about plans for dinners out and maybe a movie, or some cool weekend adventure. Suddenly you get that sinking feeling in your gut when you think about the stack of bills and payment due notices awaiting you. It’s like a slap in the face.
So what to do?
Do I go on about my life and pay the minimum, just so I have some spending money in the account? Do I wise up and pay off a larger chunk and risk my spending money? Should I just go ahead and pay it all off and hope I have enough until next payday?
I’ve tried all of these, and each has its own benefit, but you have to time it just right.
This way to debt freedom!
My first step was as simple as a click of a button.
Everything leading up to the click was a carefully orchestrated concert of balances and a notepad full of scribbled math, all to ensure there’s enough money for our survival of the coming weeks.
I should note by saying that we were by no means drowning in debt or living paycheck to paycheck. Given our current saving/spending trends, we were able to live comfortably, eat out a few times a month, have enough food stashed away in the fridge and pantry to get us through the week, etc. I just wanted out of this debt hell hole.
So what’s the issue?
The debt was hanging over me like a dark cloud. Several credit cards, car payments, school loans. On top of that, our recurring monthly’s like cell phones, insurance, gas, food, childcare, etc.
I’d finally had enough and decided minimum payments weren’t going to work. Forget putting small dents in the debt, I needed to make this sucker explode!
What I did next:
I first wanted to ensure I had a few things in line before getting knee-deep into debt freedom:
1) Established an emergency fund of about 1 month’s payment.
2) Paid my small recurring bills
3) Talk to my wife about plans on what we were about to get into.
4) Made sure I knew about all commitments I had coming up. (Food, housing, childcare, etc).
5) Remain optimistic!
I’d been making just above the minimum payments on larger debt accounts for almost a year, and to be honest, I wasn’t seeing much progress. whenever I paid $150 toward one bill, I’d see a $55 interest charge the next month. So, with $95 going toward the actual balance versus the whole $150, it was going to take a while.
After ensuring all other investments were okay, emergency fund was at 1 month’s worth of pay, regular savings was good, any other investments were sitting well, I went for it.
I began by paying large amounts toward the debt and zeroing it out. Each click was scary as hell, but ultimately better than the last. I dipped into my regular savings a bit to make sure I zeroed out these balances.
I thought about it a lot, and almost didn’t go through with putting so much money toward these payments, but I knew I could make it up later, and I wouldn’t have to worry about these interest payments eating me alive.
Before I knew it, I’d paid off nearly $15,000 of combined debt within a matter of 20 minutes. No more $55 interest charges, $30 interest charges, emails and calls for upcoming payments, and whatever else was spiking up the debt.
It took communication, some math, and courage to go through with it, and to be completely honest, I was very uncomfortable pulling money from my savings, but after I did it, it felt damn great!
Was I sad to see a portion of my savings go down? Of course! But as I sat back and thought about it, I was getting nowhere saving money that I still owed. I wasn’t doing myself any favors by paying myself first and not taking care of the recurring debt. It was the all the debt I was holding off paying that was killing me.
Other ways to get out of debt quickly
I’m not sure if the method I used has a name, I’ll just call it the “Debt Tidal Wave”.
So if the Debt Tidal Wave isn’t for you, have no fear, you have options!
Debt Snowball Method
Simply put, you pay off your smallest amounts of debt first. Once you pay off a balance, roll that amount into the next payment. While you’re directing most of the payments toward your smaller bills, continue making minimum payments on your larger bills, until you can roll all the money into the largest one.
For example, say you have 4 credit card bills, each with the following balances:
a)$5000, b)$3000, c)$1000, d)$500
If you only have $350 per month to contribute to paying these bills, start with the smallest one. Pay $250 toward the debt “d” and split the remaining $100 amongst the other 3 (minimum payments may vary).
In 2 months, you’ll no longer have debt “d” and will be able to roll over $250 plus whatever you were originally contributing, toward debt “c”.
Debt Avalanche Method
Similar to the Debt Snowball above, but this time, you’re paying off your highest interest rate debt first. As you can see from my story above, interest rates can really mess with the hard earned money you’re putting toward your debt. So, if you’ve got some balances with unusually high debt, rearrange the priority and pay those off first to avoid those high interest charges.
Doesn’t matter your method, just get started!
Whenever I find myself in these situations, first I think about how I got myself into it, how it’ll affect my family, and how I can teach my kids about my trial and error. Avoid high spending and live within your means.
Remember, unless you’re going for an awesome points return with your credit card and paying off the balances at the end of the month, you’re helping nobody but the credit card companies get richer.