One of my favorite parts of blogging is my readers. I’m so appreciative and grateful for all of your comments and engagement on Daily Money Shot. It’s what keeps me wanting to do better. I especially enjoy hearing from my readers via email.
Last week, one of my readers, Krista, contacted me asking for help. She desperately wants to pay off debt and start having kids. I encourage both of these! However, in her email, she stated that she was unsure if she was doing the right things to get on track to pay off her debt by the time she’s 30 and to start planning for a family. After analyzing her situation based on the information she provided, my unprofessional opinion is that she is doing the right things. With a little tweaking, I think both of her dreams can come true.
The facts
Krista brings many positives to the table. First, she’s young–she’s only 25. This means that by getting things under control now, she’ll have a long, happy debt free future. Second, she has the motivation to get out of debt. Motivation is essential. Without motivation, her goals will fall flat. Third, she is already aware of her debt. I firmly believe that the first action step towards paying off debt is to know exactly how much debt you have. She’s already added it up! She knows what she’s in for. Fourth, and most importantly, she has goals–to be debt free, to have children, to save money. Establishing goals is key. You need to know what you’re working towards. Haphazardly paying off debt or saving without a purpose gives you the latitude to be lazy.
Other factors at play: Krista and her husband each work full-time and Krista even has a part-time job. They have a budget. They are contributing to savings. They don’t seem to be behind on any bills. They get paid every week, so bills are paid weekly rather than twice a month.
There are some negatives to the situation. Obviously, they have debt. $30,000 worth. But $30K is not huge, especially when you take into consideration the fact that it’s car loans, student loans and some credit cards. When I first started to pay down my debt, I had over $30K just in credit cards! So $30K really isn’t too bad. She also admits to frivolously spending on things like snacks at the gas station, going out to lunch and buying unnecessary items at Wal-Mart. But, on the plus side, at least she knows that she’s doing it. Now it’s just a matter of getting it under control.
I don’t think this is a hopeless situation. In fact, I think paying off her debts and planning for a family is entirely possible before she turns 30 (which is her target date). However, I do think she needs a plan.
The plan
Please bear in mind that I am in no way, shape or form a certified financial planner so the plan detailed below is based entirely on my own experiences and knowledge accumulated while I was paying off my debt.
The first step I would suggest to Krista is for her to list out all of her debts. The list could look something like this:
- Car #1–$10,000
- Car #2–$10,000
- Student loans–$8000
- Credit card #1–$1000
- Credit card #2–$600
- Credit card #3–$$400
After the list is created, I recommend that Krista develop a structured plan to pay off the debts. Dave Ramsey suggests paying off debts from smallest to largest, and snowballing each payment into the next. I highly recommend this method. It provides small psychological victories and, once a debt is paid, it frees up money for the next debt payment with very little work. This is primarily what I used but I also did something else. I rounded up all my other payments to the nearest whole dollar figure. So, if I had a payment that was $97.43, I’d pay $100. That way, I still felt like I was paying more on all of my debts even if it wasn’t enough to make a huge difference. Again, it was more a matter of the psychological victory than anything else.
The next step I suggest is that Krista and her husband revisit their budget. Together. A debt repayment plan isn’t going to work if she and her husband aren’t working as a team. By developing a budget as a team, they’ll each know where their money is going and how much they have to spend on certain items; no one can plead ignorance. This is the time to figure out which expenses can be lowered, which are fixed and/or nonnegotiable and which ones aren’t accurately accounted for. This is the time where they’ll figure out how much money is being spent on snacks and unneeded items. This is the time where they’ll decide how much money they have for groceries, gas, personal items, and dining out.
After expenses are cut or revised and a working, mutually agreed upon budget is set, add that extra money to the debt snowball (definitely check out Dave Ramsey’s website for his explanation of this). To speed up the snowball, use Krista’s part-time income. Their budget should be based on just their full-time incomes; the part-time income, at this point, is best used to pay down debt. It’ll be hard at the beginning but totally worth it in the end. Additionally, I suggest that they use the majority of the money they’re putting into savings currently towards their debt repayment.
To get the frivolous spending under control, I have two suggestions. The first is to add “fun” money into the budget (Dave R. calls it blow money. I don’t like this term. At all). I believe that each person deserves a few dollars each week to spend how he or she wants. Whether it’s for Starbucks or lottery tickets or gossip magazines, those few dollars help prevent frugal fatigue. At least it did for me. Knowing that I could buy a soda or a song or two from iTunes made me feel less deprived which made it easy to continue to pay down our debt. The second suggestion is to participate in a no spend challenge. Jeff from Sustainable Life Blog does this, and I have been doing it for almost 4 years. A no spend challenge is just that–you challenge yourself not to spend any unnecessary or unbudgeted money for an entire month. It really forces you to take a look at where your money is going which is extremely beneficial when you’re climbing out from a mountain of debt.
But what about savings?
It was hard for me to save and pay down debt. If I put money into savings, I would feel guilty that it wasn’t going towards debt. If I put money on debt, I would feel guilty that I wasn’t saving. In my mind, it’s pretty much an all or nothing situation. But my mind isn’t necessarily normal and it doesn’t have to be that way for Krista and her husband.
To achieve their savings goal, I first suggest establishing the $20 emergency fund. Then I suggest that they follow the Dave Ramsey suggestion of the $1000 baby emergency fund (there’s a reason it’s baby step #1). Suspend all debt snowball payments until that $1000 is saved; this shouldn’t be too hard if they use Krista’s part-time income, cut back a few expenses and determine if they have anything to sell. Doing this accomplishes two things: it gives them a cushion just in case and it proves to them that they can save money. Again, it’s the psychological victories to keep up the momentum.
The final suggestion I have for Krista and her husband to work towards their savings goal is to set up an automatic savings withdrawal for every payday. In other words, on each payday, have a recurring payment automatically withdrawn from their paychecks and deposited into a savings account. They don’t have to do any extra work to deposit the money and, if the budget is developed without that money in the account, they’ll never miss it. Let’s say they use $25 a week. That’s probably one meal out; most people can live without that. That means each month, they’ll save $100 (before interest) just by making that one small change. For me, having a concrete amount that I was saving was more satisfying than just depositing a random, arbitrary “whatever is left over”. I also needed to have it automatically withdrawn or it was too easy to find another purpose for it.
I think that Krista and her husband are going to be very successful and I believe that they’ll get out of debt way before they turn 30. There are many positive aspects to their situation and their debt isn’t that bad. It’s going to take hard work and commitment but I believe that they’re dedicated and motivated enough to get this done.
Do you have any suggestions for Krista that I might have missed?
This is all really good advice. My issues are the psychological ones. If I cant see the balances going down for my debt I feel like I’m just wasting my time. I have to ask, though, why begin with a $20 emergency fund? That seems almost not even worth it.
I actually explain the $20 emergency fund in a separate post. It’s more the psychological concept than then amount. If you can save $20, then it builds the confidence that you can save money which leads you to believe that you can save more. Additionally, in a pinch, having $20 is better than having nothing at all (or having to rely on a credit card)
I always have like the smallest-first snowball theory, but I think in her case, depending on what her credit card balances and interest rates are, that she start on those no matter what the balance. That is, if she has a card with $5,000 but one of her car loans is only $2,000 I would start on that card before the car no matter what.
I say this because with the student loans and car loans you are (typically) locked in to a fixed interest rate (and payment!) but with credit cards all it takes is a policy change at the credit card company or them to decide one day that your debt-to-income ratio is too large and then they can make your interest rate skyrocket, or make your minimum payment unbearable. So yeah, smallest-to-largest is great, but I’d always suggest getting the damn cards paid off before anything else.
Good luck to Krista and her “new” family!
Mike
Thanks for your input, Mike! I agree…nothing is as satisfying as getting rid of those credit cards!
Just try the $20 Method every month
then sooner or later you’ll have your debt payed off!