Gather Little by Little

Proverbs 22:7 – The rich rule over the poor,
and the borrower is servant to the lender.

This article is part of the series How to Get Your Finances Under Control

God’s word (The Bible) has nothing good to say about debt. While debt or borrowing money isn’t a sin, scripture is pretty clear that borrowing is bad. This is called a Biblical principle.

Debt is risk, debt is stress. Step back for a minute and think about what stresses you most about your finances. Is it that you don’t make enough, that you spend too much, or is it due to your debt? Chances are, it’s your debt.

Step 6: Get out of debt is about eliminating debt. Preferably all debt, but definitely all debt with the exception of your home. I say this because in most cases your home is worth more than you owe on it, so even in a worst case scenario you can sell your home and not be in debt. Don’t include paying off your house here though, we’ll address that in a later step.

Get Rid of ALL your Credit Cards

Now that you have an emergency fund and a budget you no longer need credit cards (not that you needed them before, you just thought you did). The emergency fund will handle your emergencies, and your budget will keep you from overspending. Keeping credit cards is just an unnecessary temptation that will do nothing more than have you reading this series all over again. Most likely, credit cards are what caused you to read this series in the first place. I say this from first hand experience, we’ve been through this process a few times, including cutting them up…we didn’t fix our behavior the first couple of times.

We actually had a ceremonial shredding. The whole family gathered around the shredder, and each of us (yes including our kids) put the cards into the shredder. Once shredded, we had a little celebration by going out to dinner. This was a major step for us, it was the turning point where we took one of the first steps to being debt free. Celebrate your achievements, it’s important.

At this point, many of you are saying, “But glblguy , what if something comes up and I need money…an emergency?”. You have an emergency fund, and if something bigger than your emergency fund comes up, you will figure it out. I have had no credit cards for 8 months now and haven’t needed one yet. Prior to 8 months ago, I needed one every month to just pay the bills. “But what about the rewards I get like cash back and points?”. My Dad always said, nothing is free. The cost of these rewards is risk. 4% just isn’t worth the risk or headache.

Get Current on your debt

The very next thing you must do to start down the path of getting out of debt is get current with any creditors and on any late bills. If you are current, all the better.

Not being current can cause legal action, excess fees and higher interest rates. If you aren’t current, get current now. Use your emergency fund if you have to. Get a second job, do whatever you need to do. Then you can proceed.

Start a Debt Snowball

The best way to pay-off your debt is to use a debt snowball. While a debt snowball isn’t something I invented nor is it something that is new, it is something that a surprising number of people don’t know about. It’s also something that you can search on a find a great deal of information about.

A debt snowball involves listing out your debt in one of two ways:

1. In order of least balance to great balance. This is the method recommended by Dave Ramsey.
2. In order of interest rate. You list your debt off in order of highest rate to lowest rate.

In both cases you list your debt and order it based on the method. You pay the minimum balance on everything but the first debt and pay as much as you can on the first debt.

Once the first debt is payed off, you take the amount you were paying on the first debt and add that to the minimum amount on the next debt and start paying that amount and so on down the line. So your payment slowly grows like a snowball rolling down a hill.

The two types of Debt Snowballs

Both of these methods each have their own benefit, and which one you choose is really a personal choice. I am using method #1. Method #1 focuses more on behavior and method #2 more on math. Let me explain.

Method 1 argues that debt is 80% behavior and 20% math. Given this, if debt is payed off in least balance order to highest balance order you get quick “wins” when you quickly payoff your debt with the lowest balance.

The argument is pretty solid for a couple of reasons. How often have you looked at your highest balance debt and said to yourself, “There is no way I’ll ever pay that off” or “It will take me forever to pay that off, why bother“. Both of these often lead to nothing being done, as it seems hopeless. As for math, well if we were good at math, we most likely wouldn’t be in debt in the first place.

We’ve been using method 1 for about 8 months and have paid off 4 credit cards and our RV. Paying off debt that quickly has given us hope and momentum. It has given us confidence that we can make progress and that it won’t take forever.

Method 2 will allow you to pay off your debt and save money by paying less interest. The math behind this is pretty obvious, in that if you pay off your debt with higher interest first you will pay less interest in the long term. I am not going to show you the math, but trust me it will save you some money. Not a significant amount, but some.

I personally use method #1, as I firmly believe debt is mostly about behavior.

An Example

Here is an example of a debt snowball using Method 1:

Debt	Total Payoff Amount	Minimum Payment	Current Payment
Credit Card 1	4000.00	130.00	1000.00
Credit Card 2	9000.00	300.00	300.00
Car Loan	12,000.00	300.00	300.00

In this example, you would pay $1000.00 on Credit Card 1 until it was payed off and minimums on Credit Card 2 ($300.00) and Car Loan ($300.00). Once Credit Card 1 was paid off, you would begin paying $1300.00 on Credit Card 2 until it was paid off and minimums on the Car Loan, etc, etc.

Add these payments to your budget, don’t make the larger amount optional, make it a fixed line item in your budget. Stay focused, stay the course and make it your mission to get that debt payed off. Focus and determination will be your primary tools for making that snowball effective. Face that person in the mirror.

Where Do I Keep My Debt Snowball?

As with my other finance items, I keep mine in a spreadsheet, but a simple sheet of paper works just fine. I prefer the spreadsheet as I can quickly see my remaining balance, how long my snowball will take, and I can adjust the payments and see the immediate impact if I need to.

The important thing isn’t where you keep it, but that you do.

Tips for Getting Out of Debt Even Faster

The following are some tips for getting out of debt even faster:

• Call the credit card companies and get your rates reduced. If they refuse, call them back. I call Chase weekly.
• Make your minimum payments automatic. Use online billpay and make your minimum payments on all debts automatic. This will keep you from accidentally missing a payment. The additional amount you have from your snowball can either be made as a separate payment or added to the scheduled payment before it goes out.
• Do anything you can to get extra money to pay against your debt. Have a garage sale, save your change, get a side job, etc. Whenever you get extra income that’s not in your budget, pay against that first debt. I often make a payment weekly.
• Don’t spend your tax return or yearly bonus if you get one, pay against your debt. Sacrifice in the short term to gain in the long term.
• Move your debt to a lower rate card if you can. I know I get at least 5 0% interest rate offers each week. Be careful though, a lot of credit card companies charge a % on balance transfers, so try to find one that doesn’t.
• Eliminate unnecessary expenses and put the savings against your debt.

We currently put about 20-30% of our income towards paying debt, along with any additional funds we receive.

In Summary

Debt is like a dark cloud following you around. It keeps your money from growing, places strain on you finances and your life, and is highly disapproved of in God’s word. Make the decision today to Get Control of Your Finances by getting control of your debt. Eliminate it from your life, I doubt seriously you’ll ever look back and wish you hadn’t.

Continue to Step 6 3/4 – To Be Continued

Are you out of Debt? How did you get there? Disagree with anything I’ve said? I’d love to hear your perspective. How about additional tips for paying off your debt faster?