For the final post in this series I just wanted to talk about what to do when all the debt is gone.
First of all, you need to think about the future. Dave Ramsey suggests continuing to save until you have 3 to 6 months worth of income in savings. This will cover you if you lose your job unexpectedly.
After that it is time to think about retirement. You should be able to max out an IRA at this point. If your job gives matching contributions for a 401K contribute the maximum amount.
If you are fully funding the retirement accounts each month then you can think about saving for a house, or kid’s college, etc.
I have also made it very clear to everyone that once my debt is paid off the first thing I am going to save for is a trip to Disney. I ran the numbers recently and by the time we are done paying off our debt we will have $1600 coming in free and clear each month. In two months we would be able to have enough money for a great vacation. (We don’t pay that much in debt each month but we do have two kids in daycare and they will be out by that time.)
So, once you start really working at it you will see your debt clearing up and many possibilities for the future. I hope if you are not already using the steps in Back to Basics that you will start soon!! I hope you have enjoyed this series!! Thanks for reading!
Showing posts with label Back to Basics. Show all posts
Showing posts with label Back to Basics. Show all posts
Tuesday, September 16, 2008
Tuesday, September 2, 2008
Back to Basics Part 6 Does it Matter How You Snowball?
If you are just finding the Back to Basics series you can find all of the posts in the series by clicking on “Back to Basics” in the sidebar. So far we have discussed tracking our money, finding money in our budgets, saving for an emergency fund, and things to do before you start repaying your debt.
The next item up for discussion is the Debt Snowball. This can be quite controversial. There are diehards on both sides of the coin. I will give you a brief synopsis of what each “side” is, and which to choose based on your personality.
The Dave Ramsey Method
For either method you will need to be able to list all of your debts. For this one list them in order from smallest debt to largest debt. You don’t need to worry about the interest rate. So, let’s say your first debt on the list is a hospital bill for $150. You are paying all the minimums on all of your other debt until it is that one’s turn on the list. So, all cards are being paid at the minimum but on this debt you happen to have “found” $150 a month in your budget so month one of your snowball you pay this bill and it is gone… poof!! Next month you start to pay your gas card. You owe $500, your minimum payment was $15 a month, but NOW you have the $150 of “found” money so you start paying $165 per month. Once the gas card is paid off you take that $165 and add it to the next debt on the list.
Who is this for?
This is for the person who needs to see progress to stay motivated. By paying off the smallest debts first you feel a sense of accomplishment. As you are able to cross more and more debts off the list you get even more motivated and start selling baseball cards and other junk to add the money to your debt payoff.
The Dave Ramsey Doesn’t Know Math Method.
Obviously the way to save yourself money on interest is to pay the debt with the highest interest rate off first. Now, I still would pay of things like hospital bills first because if you don’t they will be sent to collections. So any bills like that I would still pay immediately. But, let’s say you don’t have any of those. You have a car payment of $500 a month and you accepted an interest rate of 13% on that car. This is your highest interest rate and you still owe $20,000 on the car…. Ouch. So, you add your $150 of found money to the car payment and are now paying $650 a month. When you finally pay off this car you go to the next highest interest rate 10% on a credit card which now only has a balance of $1000. So you are paying $650 plus whatever your minimum payment was. This method will get you out of debt a little faster and will save you a little money. But, like I said, it may not be for your personality.
Who is this for?
This is for individuals who have strong will power. Even though you will not see a lot of progress at first you are able to keep in mind at all times that in the end you will save yourself some money and time. But, how much? I can tell you exactly….
Here are my debt stats paid off using both methods, however I had to change my interest rates on a few items because believe it or not my debt lines up smallest debt has highest interest and my largest debt has the lowest rate. (In other words if I didn’t change the interest rates they would both be equal.
Dave Ramsey Method
Debt will be paid off in 61 months.
Total interest paid $7163
Dave Ramsey Doesn’t Know Math Method (I got that term from Five Cent Nickel)
Debt will be paid off in 61 months
Interest paid $7100
So with the more mentally draining second method I only save $63 in interest. That is enough for me to say I will go with the more motivating technique.
So, there you have it. Your next step is to begin the debt snowball. You may think since this is going to take a while you need to stop reading the Back to Basics series. However, next week I will tell you how to get your debt paid off even faster.
I used the Dave Ramsey Debt Snowball Calculator to get my results. This is something I purchased from his website.
The next item up for discussion is the Debt Snowball. This can be quite controversial. There are diehards on both sides of the coin. I will give you a brief synopsis of what each “side” is, and which to choose based on your personality.
The Dave Ramsey Method
For either method you will need to be able to list all of your debts. For this one list them in order from smallest debt to largest debt. You don’t need to worry about the interest rate. So, let’s say your first debt on the list is a hospital bill for $150. You are paying all the minimums on all of your other debt until it is that one’s turn on the list. So, all cards are being paid at the minimum but on this debt you happen to have “found” $150 a month in your budget so month one of your snowball you pay this bill and it is gone… poof!! Next month you start to pay your gas card. You owe $500, your minimum payment was $15 a month, but NOW you have the $150 of “found” money so you start paying $165 per month. Once the gas card is paid off you take that $165 and add it to the next debt on the list.
Who is this for?
This is for the person who needs to see progress to stay motivated. By paying off the smallest debts first you feel a sense of accomplishment. As you are able to cross more and more debts off the list you get even more motivated and start selling baseball cards and other junk to add the money to your debt payoff.
The Dave Ramsey Doesn’t Know Math Method.
Obviously the way to save yourself money on interest is to pay the debt with the highest interest rate off first. Now, I still would pay of things like hospital bills first because if you don’t they will be sent to collections. So any bills like that I would still pay immediately. But, let’s say you don’t have any of those. You have a car payment of $500 a month and you accepted an interest rate of 13% on that car. This is your highest interest rate and you still owe $20,000 on the car…. Ouch. So, you add your $150 of found money to the car payment and are now paying $650 a month. When you finally pay off this car you go to the next highest interest rate 10% on a credit card which now only has a balance of $1000. So you are paying $650 plus whatever your minimum payment was. This method will get you out of debt a little faster and will save you a little money. But, like I said, it may not be for your personality.
Who is this for?
This is for individuals who have strong will power. Even though you will not see a lot of progress at first you are able to keep in mind at all times that in the end you will save yourself some money and time. But, how much? I can tell you exactly….
Here are my debt stats paid off using both methods, however I had to change my interest rates on a few items because believe it or not my debt lines up smallest debt has highest interest and my largest debt has the lowest rate. (In other words if I didn’t change the interest rates they would both be equal.
Dave Ramsey Method
Debt will be paid off in 61 months.
Total interest paid $7163
Dave Ramsey Doesn’t Know Math Method (I got that term from Five Cent Nickel)
Debt will be paid off in 61 months
Interest paid $7100
So with the more mentally draining second method I only save $63 in interest. That is enough for me to say I will go with the more motivating technique.
So, there you have it. Your next step is to begin the debt snowball. You may think since this is going to take a while you need to stop reading the Back to Basics series. However, next week I will tell you how to get your debt paid off even faster.
I used the Dave Ramsey Debt Snowball Calculator to get my results. This is something I purchased from his website.
Tuesday, August 26, 2008
Back to Basics Post 5 Before the Snowball Rolls
If you are just finding the Back to Basics series you can find all of the posts in the series by clicking on “Back to Basics” in the sidebar. So far we have discussed tracking our money, finding money in our budgets and saving for an emergency fund.
Today’s topic is what to do before you begin the debt snowball. Now that you have $1000 in an emergency fund you are ready to begin paying off your debt. But, how good is your budget?
If you are like me, I was changing my budget daily when I first started…. “oh yeah, we have $20 in prescriptions each month”, or “Oh, I forgot that we buy dog food every other month.” So, you probably know that there are some things you have forgotten about. Another thing that was lacking in my budget was a plan for yearly expenses. For us, those expenses are car license plates and our real estate taxes. The grand total for all of this is around $2400 annually. So for us this means we need to save $200 per month to be able to afford these expenses when the time comes without wrecking our budget. I also decided that for things like hair cuts, oil changes, stamps, clothing, etc. I would budget another $65 a month. If we don’t use this money one month we will save it to use the next month. If it runs out then we just have to wait until we have enough to cover the expense.
Now, it is one thing to save all this money up, but how do you keep track? If you don’t keep track you will inevitably spend money that is meant for a specific purpose. Well, I created a Money file in MS Money that handles this for me. I got the idea from Trent at the Simple Dollar. He set up an ING account and created “sub-accounts” for this type of saving. You don’t have to use ING to do this. All you really need is a plain old savings account and a spreadsheet. First, decide what you want to sub-account for. In my case I have one called “irregular expenses”, another called “lump sum” (our $2400 above) , “hospital savings” (money left over from our hospital bills from the baby), “lease money” (we are holding on to a large sum of money owed for paying out our car lease and can’t get anyone to tell us who to pay!!) and “holding for bill pay”.
Each month we get three separate pay checks between my husband and me. I use the “holding for bill pay” to save extra money. This way I know it will not accidentally get spend, AND I have a specific place to put it and track it. So those are my sub-accounts. You will choose your own. If you don’t have any lump sum payments each year great, more cash to go toward your debt. But, I am sure we can all use some money for “irregular expenses”.
A side note. At this time do NOT save for things like vacations or a new TV (unless your old one is really about to die) we are only saving for necessities. All of our extra money we want going toward paying down debt. Got it?
Next week we will finally discuss the debt snowball!!
Today’s topic is what to do before you begin the debt snowball. Now that you have $1000 in an emergency fund you are ready to begin paying off your debt. But, how good is your budget?
If you are like me, I was changing my budget daily when I first started…. “oh yeah, we have $20 in prescriptions each month”, or “Oh, I forgot that we buy dog food every other month.” So, you probably know that there are some things you have forgotten about. Another thing that was lacking in my budget was a plan for yearly expenses. For us, those expenses are car license plates and our real estate taxes. The grand total for all of this is around $2400 annually. So for us this means we need to save $200 per month to be able to afford these expenses when the time comes without wrecking our budget. I also decided that for things like hair cuts, oil changes, stamps, clothing, etc. I would budget another $65 a month. If we don’t use this money one month we will save it to use the next month. If it runs out then we just have to wait until we have enough to cover the expense.
Now, it is one thing to save all this money up, but how do you keep track? If you don’t keep track you will inevitably spend money that is meant for a specific purpose. Well, I created a Money file in MS Money that handles this for me. I got the idea from Trent at the Simple Dollar. He set up an ING account and created “sub-accounts” for this type of saving. You don’t have to use ING to do this. All you really need is a plain old savings account and a spreadsheet. First, decide what you want to sub-account for. In my case I have one called “irregular expenses”, another called “lump sum” (our $2400 above) , “hospital savings” (money left over from our hospital bills from the baby), “lease money” (we are holding on to a large sum of money owed for paying out our car lease and can’t get anyone to tell us who to pay!!) and “holding for bill pay”.
Each month we get three separate pay checks between my husband and me. I use the “holding for bill pay” to save extra money. This way I know it will not accidentally get spend, AND I have a specific place to put it and track it. So those are my sub-accounts. You will choose your own. If you don’t have any lump sum payments each year great, more cash to go toward your debt. But, I am sure we can all use some money for “irregular expenses”.
A side note. At this time do NOT save for things like vacations or a new TV (unless your old one is really about to die) we are only saving for necessities. All of our extra money we want going toward paying down debt. Got it?
Next week we will finally discuss the debt snowball!!
Tuesday, August 19, 2008
Back to Basics Post 4 What to do with Found Money
If you have been following along with this series you should have a good idea of where you money is going each week. Last week, we also talked about some ways to “find” money to help get you out of debt. Today we will talk about what to do with that money.
First, if you have not already done so you must pledge to STOP CREATING NEW DEBT. Until you have done this, you can go no further. You cannot fix your finances if you continue to add to your debt. End of story. Taking the plunge can be hard and it really is a mind set. However, once you do this things will only begin to get better.
Now, the first thing we are going to do with this “found” money is begin an emergency fund. You should aim to save $1000 because that will cover most things that can go wrong. Some examples might be an unexpected trip to the emergency room, a car problem, or needing to have an appliance repaired.
All extra money each month should go to this purpose and this purpose only. Here is why. Once you have an emergency fund you will no longer be forced to use credit in an emergency. The problem I always had was that I would pay off my $2000 credit card balance, then my car would need repairs and I would immediately add $1000 right back to it. So, for the time being, pay only the minimums on all debt and save up to $1000.
The next logical step for anyone who has heard of Dave Ramsey is to begin a Debt Snowball, but that is NOT what we will discuss next week. I think there is one more thing to do first…. To be continued!
First, if you have not already done so you must pledge to STOP CREATING NEW DEBT. Until you have done this, you can go no further. You cannot fix your finances if you continue to add to your debt. End of story. Taking the plunge can be hard and it really is a mind set. However, once you do this things will only begin to get better.
Now, the first thing we are going to do with this “found” money is begin an emergency fund. You should aim to save $1000 because that will cover most things that can go wrong. Some examples might be an unexpected trip to the emergency room, a car problem, or needing to have an appliance repaired.
All extra money each month should go to this purpose and this purpose only. Here is why. Once you have an emergency fund you will no longer be forced to use credit in an emergency. The problem I always had was that I would pay off my $2000 credit card balance, then my car would need repairs and I would immediately add $1000 right back to it. So, for the time being, pay only the minimums on all debt and save up to $1000.
The next logical step for anyone who has heard of Dave Ramsey is to begin a Debt Snowball, but that is NOT what we will discuss next week. I think there is one more thing to do first…. To be continued!
Tuesday, August 12, 2008
Back to Basics Post 3 Finding Money
We started out our Back to Basics series talking about what your goals were for your money. Last week we set up a budget so we could begin tracking expenses. If you have these two steps down you are actually doing pretty good.
Chances are when you made up your budget last week you subtracted expenses from your income and came up with a positive figure. It may have been in the hundreds of dollars… you were probably thinking, “I should have X amount of dollars still in the bank each month!” Since it has only been a week since you started tracking, here is the secret…. You are spending that money each month too, you just haven’t caught yourself yet.
When I first made up my budget, I was coming up with an extra $300 a month. I knew it was going somewhere but I didn’t know where. Tracking helped me with that and it also helped me “find” some money.
So, how do you “find” money? Well, how much you can find depends on how upset you are about your finances. I was really upset. The first thing I did was to look at my monthly bills and see what could go. Early on (before even beginning budgeting) I cut out the premium cable channels. Later, I bundled our cable, internet and phone service and saved us about $80 a month. Next came our cell phones. If you are paying for internet at home and you very likely have access at work too WHY do you have it on your cell? That saved me $30 a month. (My husband doesn’t know it yet, but he is about to start saving the same $30 a month)
We are very dedicated to getting our finances under control. Currently we do not eat out, rent videos, go to the movies, or take vacations. And, YES, our lives are tolerable. We have video games at home and a few DVD sets that we watch quite often.
DO THIS: Now that you have started a list of your expenses, go back through and find some things that are not really necessary. Cut them out or cut back and you will have some of that money back in the budget for more important things.
Next week we will renew our promise to STOP CREATING NEW DEBT and talk about how to use that newly found money.
Chances are when you made up your budget last week you subtracted expenses from your income and came up with a positive figure. It may have been in the hundreds of dollars… you were probably thinking, “I should have X amount of dollars still in the bank each month!” Since it has only been a week since you started tracking, here is the secret…. You are spending that money each month too, you just haven’t caught yourself yet.
When I first made up my budget, I was coming up with an extra $300 a month. I knew it was going somewhere but I didn’t know where. Tracking helped me with that and it also helped me “find” some money.
So, how do you “find” money? Well, how much you can find depends on how upset you are about your finances. I was really upset. The first thing I did was to look at my monthly bills and see what could go. Early on (before even beginning budgeting) I cut out the premium cable channels. Later, I bundled our cable, internet and phone service and saved us about $80 a month. Next came our cell phones. If you are paying for internet at home and you very likely have access at work too WHY do you have it on your cell? That saved me $30 a month. (My husband doesn’t know it yet, but he is about to start saving the same $30 a month)
We are very dedicated to getting our finances under control. Currently we do not eat out, rent videos, go to the movies, or take vacations. And, YES, our lives are tolerable. We have video games at home and a few DVD sets that we watch quite often.
DO THIS: Now that you have started a list of your expenses, go back through and find some things that are not really necessary. Cut them out or cut back and you will have some of that money back in the budget for more important things.
Next week we will renew our promise to STOP CREATING NEW DEBT and talk about how to use that newly found money.
Tuesday, August 5, 2008
Back to Basics Post 2 Tracking Your Cash
Last week we talked about what was upsetting you about your finances and what you wanted to get out of getting your money under control.
Now that you have some roughly defined goals, lets move on to step two. If you had a ton of money left over each month you wouldn’t be reading this. You wouldn’t need to. So, most of us are here because we are living paycheck to paycheck or perhaps worse… credit card statement to credit card statement.
The first thing you need to do is look at where your money is going. You may not be able to do this yet. If you have an online banking account where you can see exactly who got each of your hard earned dollars you may be able to look back and get an idea. If you don’t have this luxury you need to begin tracking your expenses. I am not going to tell you that you can’t go any further until you do this, but it will be hard to get a solid plan until you have done this for a few months.
DO THIS: Come up with a list of everything you “think” you spend in a month. Write each item down with the amount you spend on it. At the top write down your income too. Then add up everything you “think” you spend money on and subtract it from your income. Right now it does not matter if this number is positive, negative, or zero… we will get to that later. Guess what? You just created a budget!!!
The word budget is like the word diet. It has gotten a negative connotation. A diet is truly just what you eat. It doesn’t mean you are cutting calories. A budget is the same thing. It is just what you spend. It doesn’t have to mean you are cutting out all the fun stuff in life. But, you NEED to know where your money is going presently, so you can MAKE it go where you want it to go in the future.
This is not going to be set in stone… hope you didn’t use a pen. Keep this list around for the next few months. I promise you will be adding things to it that you didn’t realize you were spending on. The first month I had to buy dog food after I started my budget I freaked out because I had to take $30 out of the grocery budget for the pet food!! (We don’t have this expense every month.) This month my husband started a new medication that is $20 a month, so that had to be added. Next month when school starts again we will have to shell out $35 a month for school lunches. So, you will be adding to your list. That is okay, don’t freak out every time you do this. We will get your “budget” to a manageable point soon. Just keep tracking that cash flow!!
Next week we will talk about adding more money to the budget. It can be done!!
How are you doing so far? If you have any questions just ask. If you want me to try to help you with your budget please email me.
Now that you have some roughly defined goals, lets move on to step two. If you had a ton of money left over each month you wouldn’t be reading this. You wouldn’t need to. So, most of us are here because we are living paycheck to paycheck or perhaps worse… credit card statement to credit card statement.
The first thing you need to do is look at where your money is going. You may not be able to do this yet. If you have an online banking account where you can see exactly who got each of your hard earned dollars you may be able to look back and get an idea. If you don’t have this luxury you need to begin tracking your expenses. I am not going to tell you that you can’t go any further until you do this, but it will be hard to get a solid plan until you have done this for a few months.
DO THIS: Come up with a list of everything you “think” you spend in a month. Write each item down with the amount you spend on it. At the top write down your income too. Then add up everything you “think” you spend money on and subtract it from your income. Right now it does not matter if this number is positive, negative, or zero… we will get to that later. Guess what? You just created a budget!!!
The word budget is like the word diet. It has gotten a negative connotation. A diet is truly just what you eat. It doesn’t mean you are cutting calories. A budget is the same thing. It is just what you spend. It doesn’t have to mean you are cutting out all the fun stuff in life. But, you NEED to know where your money is going presently, so you can MAKE it go where you want it to go in the future.
This is not going to be set in stone… hope you didn’t use a pen. Keep this list around for the next few months. I promise you will be adding things to it that you didn’t realize you were spending on. The first month I had to buy dog food after I started my budget I freaked out because I had to take $30 out of the grocery budget for the pet food!! (We don’t have this expense every month.) This month my husband started a new medication that is $20 a month, so that had to be added. Next month when school starts again we will have to shell out $35 a month for school lunches. So, you will be adding to your list. That is okay, don’t freak out every time you do this. We will get your “budget” to a manageable point soon. Just keep tracking that cash flow!!
Next week we will talk about adding more money to the budget. It can be done!!
How are you doing so far? If you have any questions just ask. If you want me to try to help you with your budget please email me.
Monday, July 28, 2008
Back to Basics Series- Getting Started Post 1
First let me say that I love almost every personal finance blog I come across. I love the how-to’s, the out of debtors, the still in debtors, even the bread recipes. However, for the newbie just getting their finances in order some folks are forgetting that there are still people who need the basics. This is for you!! Over the next eight weeks, I will be running a series called “Back to Basics”. I will go over the basics of money management. So check back each week, or better yet, SUBSCRIBE so you don’t miss anything.
Maybe you are reading this because you are in debt. Maybe you are not in debt but are sick and tired of living paycheck to paycheck. Getting out of debt and getting your finances in order takes a lot more than reading and planning. It truly is a new mindset. The first thing you need to do is clearly define WHY you want to get out of debt or get control of your finances.
DO THIS: Get an old notebook (DO NOT BUY A NEW ONE) or create a new file on your computer. Write down all the things you HATE about your current financial state. You can write things like, “I am tired of owing people money”, “ I hate living paycheck to paycheck”, or “I hate having to donate plasma to supplement my income”.
Now, think about why you want to get your finances in order (no more negatives here). What is the end goal of getting better control of your money? Being debt free? Going on a vacation? What is going to motivate you? (You are going to need a LOT of motivation)
The point of this exercise is to think about what upsets you about the present and what you want to see happen differently in the future.
One more thing before I go…. You must make one promise to yourself right now. You cannot go any further until you do this. STOP CREATING MORE DEBT. Now. Today. This very second. No more debt.
If this has you worried about how you are going to afford groceries you have a big problem. You need to start thinking right now about what items you can cut out. We will talk more about that next week.
Maybe you are reading this because you are in debt. Maybe you are not in debt but are sick and tired of living paycheck to paycheck. Getting out of debt and getting your finances in order takes a lot more than reading and planning. It truly is a new mindset. The first thing you need to do is clearly define WHY you want to get out of debt or get control of your finances.
DO THIS: Get an old notebook (DO NOT BUY A NEW ONE) or create a new file on your computer. Write down all the things you HATE about your current financial state. You can write things like, “I am tired of owing people money”, “ I hate living paycheck to paycheck”, or “I hate having to donate plasma to supplement my income”.
Now, think about why you want to get your finances in order (no more negatives here). What is the end goal of getting better control of your money? Being debt free? Going on a vacation? What is going to motivate you? (You are going to need a LOT of motivation)
The point of this exercise is to think about what upsets you about the present and what you want to see happen differently in the future.
One more thing before I go…. You must make one promise to yourself right now. You cannot go any further until you do this. STOP CREATING MORE DEBT. Now. Today. This very second. No more debt.
If this has you worried about how you are going to afford groceries you have a big problem. You need to start thinking right now about what items you can cut out. We will talk more about that next week.
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