Money Matters!

When I listed out all our debt on a spreadsheet (including credit cards, medical bills, and bank loans), I figured we didn’t have a “snowball’s chance in Hell” of paying off any debt early and the thought that we could live debt-free someday never even entered my mind …

Then I read about the snowball. It makes perfect sense to me.

This simple concept has got the hubby and I very charged up about our financial future and we’re finally working together on our financial situation. This process is not a quick fix; it may take up to 2-3 years to complete the debt snowball depending on how much debt you have. Here’s an overview on how to start your own debt snowball:

• Make sure you’ve established an emergency fund (ours is $1,000). The emergency fund is extremely important in the debt snowball. You need a buffer between your finances and unplanned expenses so you won’t have to create more debt by charging a car repair or new water heater.
• List all your debt from smallest to largest balance, regardless of interest rate.
• List the minimum monthly payment and balance for each debt.
• Pay the most you can on the first, or smallest, debt on your list while making only the minimum payment on the remaining debts on the list.
• Once you have the first debt paid off, take the amount you were paying on it, add that amount to the minimum payment of the next debt on the list and pay that amount until that debt is paid off.
• Keep doing this until you’ve paid off everything except the mortgage.

I understand listing debts in ascending order by balance instead of interest rate may not be the best way to payoff debt mathematically, but mentally, it works. For example, I’ve setup folders for each of our creditors to keep statements and correspondence organized. I keep all the folders in an expanding file pocket. Once a debt is paid off, that creditor’s file is removed from the expanding file pocket and goes off to live in a permanent file in the desk never to be heard of again. I can see the folders in the desk growing which keeps me focused on the goal. In other words, our payoffs are paying off by giving us motivation.

To keep track of our debt snowball, I’ve been using Mr. Peanut’s Debt Snowball Calculator. It’s an Excel spreadsheet you can use to input your creditors, interest rates, monthly payments and balances then see how quickly you can pay off all your debt.

I cannot stress to you how important it is to establish an emergency fund before you start the snowball. We just started the snowball this month, and we’ve already dipped into the emergency fund twice. The first week of the month, we got our water bill in the mail and realized we had a bad leak. We had to pay a plumber to come out and replace a water line. A few days later, our water heater died and we had to buy a new one. Even though we had these problems and depleted the emergency fund by nearly $500, it felt good to be able to pay cash for the repairs instead of creating more debt. Since JW got paid from his part-time job last week, we’ve been able to build back the emergency fund and have managed to send 4 creditor’s files to never-never land; February isn’t even over yet!

Remember, if you use the emergency fund money, put the debt snowball on hold by making minimum payments on everything until you build the emergency fund back up to $1000. Once the emergency fund is back up to $1000, then start the snowball rolling again.

I guess we do have a “snowball’s chance” after all…

When I decided to list out all our debt back in November, 2007, I was sick at the thoughts of how long it would take to get out of this deep hole we’d dug for ourselves.

One of the first actions you must take to become debt-free is to STOP BORROWING MONEY!

Borrowing money and using credit cards only makes the hole deeper. I picture us with our shovels digging and digging, hoping to maybe find some buried treasure or unclaimed lottery ticket down there that will magically lift us out of the hole. It doesn’t work that way. In the past, I’ve used the “hole digging” analogy when talking to one of my family members about addiction; telling them that they can’t get out of the hole if they just keep digging deeper - that they need to put down the shovel and start climbing out of there. What I never realized when talking to her was that we were doing the same thing, only we were not addicted to drugs, but addicted to “stuff.”  We grew accustomed to the ease of buying stuff we “needed” on credit instead of waiting and saving until we could pay cash.

There, I said it. No more denial.  Enough is enough.

I suppose for many people, you’re enticed by new gadgets, new styles, new “stuff” and knowing that you can “own” the latest and greatest “stuff” with the quick swipe of a card makes you feel special.  It’s just way too easy to fall into a “zero interest, same-as-cash” trance and before you know it, you’ve got lots of “stuff” and a ton of bills.

From an article on the MSN Money site regarding same-as-cash payment plans:  “A lot of times people are using these no-interest, buy-now-pay-later deals for things they don’t have to have,” she says. “A lot of it is old-fashioned going back and quantifying what is a need and what is a want. If it’s a want, it needs to wait; it needs to be saved for. 

“Most people very rarely ever pay it off within that year period,” says Trish Lynch, of ClearPoint Financial Solutions, based in Richmond, Va. “Usually, they get that year with interest free.” Then, unbeknownst to many consumers, the finance company applies interest retroactively, effective from the date of purchase or delivery, she adds.

This “buy now, pay later” mentality equates in reality to “buy now, pay much more later” especially if you don’t pay it off before time is up.  Most people don’t.  And, when you consider some of the pitfalls of these plans, they’re even more dangerous.  Some plans will apply interest before the zero interest term is up if your payment is late or if you miss a payment.

Also, the creditor may play games with you by changing the remit to address which makes your payment late, then all that retroactive interest is applied.  I use online billpay through my bank and have payments sent automatically each month, but I’ve still had this happen before on more than one occasion since the original remit to address had been changed by the creditor, but I was unaware and didn’t change the account profile in my billpay.  So, it’s best to pay these types of debt online at the merchant’s website.  If that’s not possible, you’ll need to compare the address setup in your billpay with the statement to verify the remit to address every month or write a check and mail it in the return envelope provided by the creditor making sure to mail it at least 10 days before it’s due to avoid a late payment.

Credit cards and “same-as-cash” plans are huge profit centers - why else would there be several credit offers sitting in your mailbox next to your bills everyday when you get home?

We are creatures of habit.  Habits are hard to break.  But, taking the following actions is pinnacle to living debt-free and reaching financial freedom.

• Stop borrowing money
• Spend less than you earn
• Live within your means

Yes, it can be done…

The month of January was exceptional due to the number of ordered inspections I received and completed.  The inspections helped supplement the lack of sponsored blog posts available during January.  I did manage to earn $87 from from my blogs spending about 5 hours working on them. I also spent about 20 hours doing field inspection work during December earning an extra $477 for the month.

In total, I worked about 25 hours and earned an extra $564 for the month of January which averages out to about $22.50 per hour. This extra income, or “snow” will help greatly with our Debt Snowball efforts and put yet another dent in our debt…

Today is the first day of the rest of our lives.

Today we will begin a journey that will deliver us from the bondage of the debt we’ve created and lead us to financial peace.

Today, we implement the Debt Snowball. Today, we declare WAR on our debt!

Today is the first day of practicing Dave Ramsey’s Debt Snowball method of becoming debt free.  JW and I have both finished reading Dave Ramsey’s Financial Peace and listening to Dave Ramsey’s Total Money Makeover audiobook.  We have our very first budget, a.k.a monthly cash flow plan, in place. We’ve completed Baby Step number one which was to establish an emergency fund with a minimum of $1,000. Now, we’re officially starting Baby Step number two which is to payoff all debt using the debt snowball method. If you don’t know what the Debt Snowball method is, I’m working on a future post explaining how the Debt Snowball works.  Or, you could pickup a copy of Financial Peace by Dave Ramsey at the bookstore or on ebay.com.  I saved a couple of bucks by checking it out from the public library.

We are sick and tired of worrying and arguing and stressing about our debt, sick and tired of shuffling money around to pay this or that, and sick and tired of having our debt control our lives.

I am sick and tired of being sick and tired! We’re mad at this debt and we’re going to kick it’s A$$ together.

Unlike many people, I love math - always have. Unlike many people, I keep my checkbook balanced to the penny almost every day and typically spend less than 5 minutes per day reconciling using an Excel spreadsheet to track both uncleared and posted transactions. Some people loathe balancing their checkbook. My guess is, it’s probably because they wait too long between reconciliations.

Although balancing daily or even weekly takes some discipline, it doesn’t take a lot of time. As I said, I use Excel to record every transaction using a simple formula to calculate the running balance. The spreadsheet looks much like the paper checkbook register and with very little effort, you could create a similar spreadsheet for your own use.

I setup the spreadsheet so that it has two sections: one section on the left for cleared/posted transactions and one section on the right with outstanding transactions. The balance in the left section reflects the account balance up to the previous day’s posted transactions and the right section balance represents your actual balance taking into consideration those items which have not yet cleared/posted.

Click for larger image

With online banking, I’m able to download a text file containing transactions from a specified date or date range then I simply copy and paste that data into the left section’s posted transactions. Once these posted transactions are pasted into my spreadsheet, I then remove the duplicate entries from the right outstanding transactions section. This way, I can check my left section balance against the bank’s balance for the previous day, and the right section balance is the actual balance.

Keeping the checkbook balanced makes me feel good and it’s important, but I realize now that knowing exactly where our money goes is key in our plan to get out of debt. I’ve mastered knowing how much (or how little) money we have in the bank. Now, it’s time to nail down knowing where that money’s going. That scares me a bit; it might be like trying to nail Jello to a tree…

When creating our February Cash Flow Plan, the budgeted amounts for things like groceries, gas, and the like were basically a shot in the dark for us. We ballparked the amounts for these types of expense items that vary in cost from month to month. Because neither of us had any idea how much we spend for this, we basically just guessed. So, during February, we intend to keep notebooks to track spending so we’ll know more when it comes time to work on the March Cash Flow Plan.

After a few hours of work and some heated discussion our very first budget is complete. At one point, I threatened to knock out my husband’s teeth, but we decided there wasn’t enough in the budget to cover the dental expense, so I had to hold back. LOL! (That did happen, but we were both joking, so please don’t call the police…)

I think birthing my children was easier than starting a budget…

Seriously, I’m exaggerating a bit - it wasn’t that difficult and it didn’t involve an episiotomy. Actually, it feels pretty good to have an idea of where our money is going, or should go, for the month of February. I used the outline from Dave Ramsey’s Financial Peace book called the Monthly Cash Flow Plan. That sounds a lot more exciting than The Monthly Budget, right? It’s a very simple, fill-in-the-blank form that you can modify as you see fit. The idea with Ramsey’s budgeting tool is to have your monthly income equal the budgeted amount so that you either give, save, invest or apply to debt all of your monthly take-home pay based on your financial situation.

I did find a website where you can download Excel versions of all the forms, so I saved lots of time not recreating the wheel. Here, you can find links to download the Income Worksheet, Monthly Cash Flow Worksheet, and the Debt Snowball Worksheet (more on that later) amongst others. I did stumble upon Mr. Peanut’s version of the Debt Snowball Calculator downloadable in Excel format - pretty slick; this is the one I’m using. Now that we have a budget established, we should be able to sit down at the end of this month for a half-hour or so to plan the budget for March.

I’ll discuss more on Ramsey’s Debt Snowball concept in future posts - it’s a common sense approach to knock out debt quickly, but you must be committed to do so. No, not committed to an insane asylum as some might think, just committed to the task at hand - eliminating debt, once and for all.

In getting a handle on our credit card debt, I began to wonder exactly how much interest we’re paying versus how much we could save by paying more each month. Compound interest really adds up if you only pay the minimum balance on your credit card and it’s tough to calculate the interest you would pay or save, so I began looking for a formula. What I found was better than a formula for my spreadsheet - I found a free online loan cost calculator that outputs the cost, or interest, of your debt based your input of the balance, monthly payment, and interest rate.

A balance of just $5,000 at 15% will cost you $421 in interest if you manage to pay it off within a year. But that requires monthly payments of $451. Reduce your monthly payment to $106, and it will take you six years to pay off that loan. And you’ll be forking over $2,633 in interest payments. You’ve just increased your purchase price by 52%.

This is a nifty little tool that can help you get a handle on your finances. I found it very useful - it was just what I was looking for - so I thought I’d share. The SmartMoney website has a ton of other financial planning calculators, so get busy…

Er-a, it’s payday, ho-hum…

Payday has become just another day. It’s a day when I take one deposit and split it up into several smaller pieces and forward them on to others so that they can have their payday. It’s a little discouraging at times, but I know one day I’ll be able to save or invest the majority of my paycheck instead of spending it to pay bills.

Right now, we’re trying to save some money from each paycheck to build an emergency fund. Did you know that many financial advisors advocate building an emergency fund of at least 3 months, but preferably 6 months of your expenses? I know it seems like a monumental task to be able to save that much, but according to them it can be done. Even though I have doubts regarding our saving habits, or lack thereof, I believe it can be done! The key to saving money is to pay yourself first!

In order to pay yourself first, you should develop a budget and stick to it. If you go over budget in one area, then you need to cut back somewhere else. Do you know of a successful business that runs without a monthly budget? I don’t. Why should the most important business of all - your personal finance - run every month without a budget? It shouldn’t. You should know where your money is going especially if you find yourself with too much month left at the end of the money…
It’s common sense, but most people don’t do budgets. They figure they don’t have the time or the knowledge or whatever, blah, blah, blah excuse they can come up with not to do a budget. We’ve consistently had too much month left at the end of our money, so we’ve made the conscious decision to take control of our money. We work hard for the money we’re paid and that money should work hard for us as well.

I’m learning so much from reading Dave Ramsey’s, Financial Peace - it’s changing my way of thinking. I’m mad at this debt and want to kick it right square in the booty! I’m excited about getting on the right track to financial independence and I want to teach my children to make their money work for them as well. Get this book and read it!

The month of December turned out decent considering I took the last 2 weeks off for Christmas. I managed to squeak out $138.12 from my blogs spending about 10 hours working on them. I also spent about 10 hours doing field inspection work during December earning an extra $190 for the month.

In total, I worked about 20 hours and earned an extra $328.12 for the month of December which averages out to about $16.40 per hour. It’s not a fortune, but the extra income will put yet another dent in our debt…

This is one year where I hope the New Year’s resolutions we make will come to pass. Our main goal this year is to knock out as much debt as possible; I’ll keep you posted on our progress and things we learn on the journey toward financial independence.

We’ve already taken one major step toward becoming debt-free and we are both excited about the challenge we’re taking on. We’re hoping to become more knowledgeable about investing, more disciplined regarding spending habits as well as saving habits, and more comfortable living within our budget.

If there’s one thing I’ve realized, it is that you have to take control of your own situation; you have to take control of your money or it will take control of you!