The hardest part of money management is just getting started. Once you have some momentum, it’s easier to make the right choices. Kay has been reading personal finance blogs for almost a year now, and she knows that she needs to make some changes, but she doesn’t know how to begin. She writes:
I want to get serious about being good with my money, but I don’t know where to start. I never developed good financial habits, and now I’m paying for it. I was married to a man who was also bad with money, and I’ve only been on my own for six years, but I continued those same bad habits. I’m 39, have no savings and about $28,000 in debt.
Next May, I will lose half of my child support when my son graduates from high school, and the rest the following May when my daughter graduates. Because of that, I feel like I should focus on getting rid of the debt, so I have less money going out. But if I don’t have emergency savings, then there’s no way to keep from incurring more debt. Of course, I don’t have any money saved for retirement, etc., which is another worry.
Basically, I have a list full of high-priority financial needs, but trying to do everything at once is going to get me exactly nowhere. (I know, because I’ve been trying and failing since last summer!) I did cut up my credit cards, but that’s about as far as I’ve got. Help!
It’s tough to get started because it seems like there’s too many things to do. Which choice is best? Should Kay eliminate debt first? Save for retirement? Build her savings?
Here’s the secret: There’s no one right answer. Some choices are better than others, it’s true, but the best way to take control of your finances is to do something. Action beats inaction. Taking any step in the right direction will help Kay move closer to financial stability.
All the same, some options may be better than others. As important as I think retirement savings is, I wouldn’t start there. Better to get the now under control first and then worry about the future. In Kay’s position, I would focus on three things:
Reduce expenses
Kay doesn’t mention what her expenses are, but if she’s like most people, she’s probably spending more than she needs in a variety of ways. When I was getting out of debt, I found that cutting expenses one at a time helped to create a better cash flow, giving me some breathing room.
I didn’t try to slash everything, but picked one expense after another. I:
- Reduced my cable bill.
- Cut my landline
- Canceled magazine subscriptions.
- Put myself on a budget for books and dining out.
Each of us spends differently. When you decide to get your finances under control, you need to examine your own spending patterns to find the areas you can cut. Focus on one item. Once you’ve trimmed that, look for another. This gets easier with time.
Build savings
As Kay boosts her cash flow by cutting expenses, she should use this extra money to save. Even when you’re struggling with money, it’s vital to set aside for future emergencies. If you can only afford to save $25 per month, then save $25. If you can afford to save $100, then save $100. Just get in the habit.
For many people, the best way to learn to save is by making the process automatic. I also found it necessary to create barriers so that it wasn’t possible to withdraw this money on a whim. In both cases, I recommend opening a savings account at a different bank from where you hold your regular checking account.
In my case, that meant opening a savings account at an online bank. I used ING Direct, but there are many other excellent options. It doesn’t matter which one you choose. Don’t overthink it; you can always change your mind later. Create a link between your existing checking account and your new online savings account. Set the new account to pull $20 or $50 or $100 a month automatically. Treat this like any other bill. Use this money for emergencies only.
Tackle debt
After reducing expenses and building an emergency fund of $500 or $1000, the third step is to make a plan for tackling debt. For me, that meant drafting a spending plan:
My spending plan prioritized my debts and helped me allocate future raises and bonuses. Your plan will be different. It might be more elaborate or less elaborate than mine. The important thing is to establish one.
If you’re struggling with debt, I highly recommend Dave Ramsey’s debt snowball strategy. Here’s how it works:
- Order your debts from lowest balance to highest balance.
- Designate a certain amount of money to pay toward debts each month.
- Pay the minimum payment on all debts except the one with the lowest balance.
- Throw every other penny at the debt with the lowest balance.
- When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.
Because it emphasizes paying down low-balance debt as quickly as possible, the debt snowball provides quick wins. Those who’ve never been in debt frown at this strategy because it costs a little more than starting with high-interest debt. But as somebody who fought debt demons in the past, I’m here to say that the psychological boost from the debt snowball is worth the extra pennies.
Conclusion
If, like Kay, you’re struggling to get started with smart money management, then break the task into smaller pieces. Don’t let yourself be overwhelmed. Reduce expenses, build savings, and tackle debt. Yes, it’s important to save for retirement. But I believe that you need to start with the basics, to staunch the bleeding and heal the wounds before you begin gathering strength to face tomorrow.
In other words, don’t worry about a Roth IRA or a 401(k) at the beginning. Focus on building a strong financial foundation so that you can meet the needs of today — and next year. Once you’ve accomplished this, attack retirement savings with vigor.
What advice can you offer Kay? How did you get things turned around? What were your first steps?
For more on this subject, check out my recent article about where we’re starting from. Photo by Jurassic Jim.
This article is about Ask the Readers, Basics, Debt
While all options are important, I am going to go with what J.D. said: emergency savings first, then debt, THEN retirement. Also, if you are about to lose major sources of income for you, I would start looking now for ways to replace it or at least supplement your income in another way. As not fun as it may sound, a second job (if you don’t already have one) is probably something that you need to consider.
You may be in for a bit of a rough patch until you adapt. Getting this under control is going to take some major life adjustments and those take time and effort. When you get your finances under control, it will be completely worth it though. So take a breath, step back, and figure out a way to start working your way through. If you keep after it, it will work out in the end!
loading....
I felt the same way as Kay – between student loans and credit cards I had over $75000 in debt. Very overwhelming. Here’s what worked for me:
1. Direct Deposit of $100 into savings straight from my paycheck. I never saw it and so it wasn’t missed. I choose to save my emergency fund and pay down debt at the same time. Because my monthly costs got cut, I have been able to pay for any minor emergencies out of pocket in cash so it’s worked out. If I had kids, I might have chosen to focus on savings first.
2. Created budget in Excel and for two months logged all of my spending. Also set up online bill pay for everything possible. After two months, I tweaked my budget where needed, creating categories and payment goals. This is when I finally starting living within my means.
3. Cut back on unnecessary expenses. Seeing my set bills and anticipated necessary spending compared to my income made me realize just how little spending money I really had for anything not completely necessary. I give myself a $20 a week allowance for anything that’s not a fixed expense. That has to cover meals out, entertainment, clothing, gifts. So I really have to plan my month out and hope that friends don’t mind not spending money to hang out. This has been the hardest part of the whole system and has required a lot of behavioral changes.
4. Set up the Debt Snowball for my creditors. I prioritized credit cards over student loans so my snowball goes from lowest balance credit card to highest, lowest balance student loan to highest. I really got a big high when I paid off the first one – psychologically it’s a huge impact. Just not getting the bills in the mail is awesome. I’ve since eliminated a car payment, two small credit cards and have only one card to go until I just have student loans left.
5. Took responsibility. For a long time, I stuck my head in the sand and grumbled about how unfair it all was. But in the end I finally had to own that it was all a result of decisions that I had made myself. It was a bitter pill to swallow, but it gave me the gumption to take action.
It’s been a year and half and my income hasn’t changed, but I have managed to pay off over $10,000 in debt. I still have a loooong way to go, but I know it can be done.
loading....
Even if it seems like Mt. Everest now, you totally can do it. The trick is baby steps. First, you need to figure out where all the leaks are. Are you spending too much, or are you just not earning enough for the basic expenses? If you are tossing money at home decorations or lattes or other non-essentials, then it’s easier to find ways to cut back on spending. If you are having trouble with just covering utilities and rent, then the challenge will be about increasing income. (I should point out that there are a ton of great posts here about both of those topics!)
If you are spending too much, then there are a lot of ways to tackle it, but the best way is figure out lower cost replacements. For example, instead of cable television, can you get used to Netflix or the public library? Instead of buying something any time you want, set a manageable figure in the budget, and stick to that amount. You can shift the shopping impulse over to how well you can stretch the amount you have to spend, and get the same feeling of reward you’d get from just buying anything. (It’s actually more rewarding, b/c you know you aren’t racking up debt. BTW, don’t forget to keep in mind irregular stuff like hair cuts, birthday gifts, etc.
If you aren’t earning enough to cover the basics, it’s a little harder, especially in this economy. Without specifics, the general idea is a three prong approach. Can you reduce consumption of costly utilities (i.e. gas, electric?) Can you find a way to increase income, either through an additional job or through selling off belongings that you don’t need? Or can you reduce the monthly bills? (i.e. eliminate a phone line, move to a smaller house/apartment) If you can’t get to a point where you have enough to pay bills and put aside a small amount for a baby emergency fund, then you can’t expect to make progress.
I’d start by trying to get things under control with your current budget, and then after that, start the adjustments to get ready for the decreases in child support, unless you realize that you can begin right away to live on the lower budget you’ll have in two years. As for the emergency fund, definitely include that in the budget, even if it’s only $10 or $20 a month. When you start actively putting that money aside, it’s easier to survive the inevitable budget “surprises” that pop up.
If you have a bad moment and overspend, or something crops up that you weren’t expecting to have to pay for, learn not to beat yourself up. If you were walking to someplace good, and you tripped, you’d never say “Oh well, forget it, I might as well go home.” You’d just get back up, dust yourself off, and keep going on. Everyone makes mistakes, and the trick is to stop obsessing over having made them, and just look at the positive of what you are able to do NOW to fix the situation.
I know it seems impossible, but it CAN be done! I am in the middle of a very similar journey myself, and I have to tell you that once you get past the first few steps, it gets a LOT easier, and a lot more fun!
Good luck!
loading....
I’d echo Kate’s point #2 above — track the spending. I used to feel like there was no money left for saving, but after I wrote down every cent I spent for a month, I found lots of wasted money that could be applied to savings and/or debt. Paying off debt (and even working towards paying it off) and having at least a small emergency fund feels great.
loading....
All great tips! My problem hasn’t been the saving part, that I can do, it’s the dipping in to the savings when needed, and little by little, I have no more savings. I like the idea of using a completely different bank for the savings account. Any other suggestions for someone like me?
loading....
First, congrats on cutting up the cards – that’s a bigger step than you know. Second, have you also cancelled any recurring payments that are billed to the cards so that you’ve really stopped charging?
I like to know what my goal is before I start action (with one exception, start automatic savings TODAY. Start with a modest amount, but don’t put it off for even one more day). Ask yourself how much debt do you want gone? How much do you want to have saved? Then make a plan that shows what it will take to achieve those goals in the timeframe you choose. If you determine that your goals aren’t realistic then you figure out what _is_ achievable and put that plan into action.
I would approach your problem by making a plan that covers the next couple of years since you’ll have many changes to both your income and expense. You’ll want to plan both for the reduction to income from loss of child support and for changes to your expense (either up or down) due to children moving out, or going to college, or getting a job and contributing to the household.
When I’ve helped my sisters, this is the approach we’ve taken, using data from the previous three months:
1. Determine your actual monthly income, your net paycheck and child support and any other sources you’ve got.
2. Determine your actual monthly cash outflows and spending – all your spending (including things charged to the credit cards) as well as your debt payments.
3. Compare the two numbers, and if your cash outflows are more than your income (this is common, hence the debt) the first step of your plan is figuring out how to reverse it.
4. Make your plan: You can cut spending or increase income. That’s it – those are your ONLY two choices – though you can, of course, do both.
5. Once you’ve got more coming in than going out (and maybe you’re already there) then the surplus goes to debt and savings. Use JD’s specific methods of identifying which expenses you can lose, snowballing debt and saving. His article really nails how to do this.
Not everyone will agree with my next piece of advice, but I highly recommend that you include your children in your planning. They’re nearly adults and you want to help them learn to make good financial choices. It might be painful to share that you’re uncertain about some of your own choices, you might be concerned they’ll share the info with their father, or you might want to protect them from worrying about the household finances, but any changes you make will affect them and if they’re included in the planning they’ll have a better understanding of what you’re trying to achieve.
Spending the time making your plan might feel stressful because you’re facing your problem head-on, or boring because you hate paperwork, but it could also feel empowering because you’re taking control of your finances. I guarantee, though, that when you meet your first savings goal or pay off the first debt, the only thing you’ll feel is elation.
loading....
I would add another step – Multiple streams of income. The only way to have true financial freedom is not to be tied to one income. Create multiple through outside jobs, investments and you will be able to “walk away” from one if you do not like the direction it is going.
loading....
I agree with reading Total Money Makeover. It lays out the steps so nicely. Your Money or Your Life is great motivation, if you need any more.
My income is down significantly this year, so I had to face the music and make a budget. It’s one of those things you don’t want to do initially, but it is so nice! It gets easy to find places to save money to put to debt, and it gives you a concrete understanding of how much money you really need for the future.
loading....
Do your research and take in all the advice you can, but don’t be afraid to make mistakes. Like JD said, you need to act and making mistakes is a good indicator that you’re at least moving forward on your need to turn your finances around. No one can make a 180 overnight and hit every target the next day. Make some simple goals to start out with and figure out what steps you need to take to achieve them. It’s easy to over analyze things and second guess yourself, so realize when you’re doing it and make a conscious effort to stop.
I think the number one way to get where you want to be is to trust yourself, right or wrong. If you don’t trust yourself, you’ll always just be dabbling. Recognize your mistakes as you go, correct them, and get on with life. The more times you do that, the easier it will be to trust yourself.
@Tracy – If you find yourself raiding the cookie jar too often, you might consider putting your long-term savings in CDs where you’ll incur a large penalty for drawing from them. If you don’t need any of your savings any time soon, you can stick the whole lump sum in one, long term CD. That should be an effective barrier to touching it. If you want some more flexibility, some people like to do what’s called a CD ladder. When you do this, you split up your money into whatever lumps you see fit, and then put one pile in a 3 month CD, the next pile in a 6 month CD, next in 1 year, so on and so forth. Each time one matures, if you don’t need the money for something, you simply reinvest it. This way, you know you will have access to a portion of your money every 3 months penalty, and then more every 6 months, etc. Something to consider.
loading....
I completely agree with everything in this post. Furthermore, once you pay off your smallest debt, it’s one less bill! You’ll feel better already!
Regarding #5 above, I have two suggestions: You won’t spend your savings if a) you’ve sacrificed to save it or b) you can visualize what it’s going to be used for in the future. For a), I would develop a healthy sense of guilt. Just think of the little things you sacrificed to save your money, and now you’re spending it on (fill in the blank). With regards to b), think about goal-oriented saving. I like JD’s suggestion of creating sub-accounts for things like vacation saving. Even if this is an emergency fund, you should look at the money as “this is worth x months of living expenses if I lose my job.” I hope these suggestions are helpful!
loading....
Cut your expenses to the bone (no indulging your children even though I know it’s hard), get an extra job (the benefit of your children being old enough that they don’t need you there all the time), and put every extra cent toward debt. Hold your nose and do this as long as you can realizing that having less of a life now will mean infinitely less stress later.
loading....
Like Tracy (#5), I had the problem of dipping into my savings here and there, so I would see the balance either fall or stay the same. For a long time, I could never make headway. Three things really helped me change, and now I’ve more than doubled my savings in just six months! This is what I did:
1) Thanks to J.D.’s recommendation, I read Your Money or Your Life back in November…it was such a great book because I had a real paradigm shift. Without realizing it, I was trying to keep up with the spending habits of those around me. That book helped me realize that the things I have are just things (or Stuff, as J.D. puts it). Now I always try to think about every purchase and ask myself, is this item worth the life energy I’ve used to earn the money I will need for it? I’ve also been very dedicated to tracking my spending since the beginning of the year. It’s given me a lot of important data, which has helped me be much smarter with my money.
2) Last December, I opened an online savings account. It takes a few days for money to transfer, so it really deters me from taking any out of the account. So far, I haven’t touched any of it! I chose FNBO Direct and I like it.
3) I read a personal finance book for women by David Bach, and he explained the whole idea of automatic savings. He calls it, “Pay yourself first.” It’s so basic, I know, but the way he described the issue caused a lightbulb to click on in my brain. Right away, I started an automatic transfer from my checking to my savings the day after I get paid, and I try to look at it as just another bill. The trick is to figure out what, exactly, is the right amount to save each month. Making it automatic really is the key, in my opinion.
loading....
I’m with Linear Girl on involving the kids. If they’re both finishing high school, they must be in the 16-19 range, so they’re old enough to start working their own jobs. It’s up to you whether you want to ask them to start paying rent once they finish HS, or otherwise chip into the household expenses if they’re still living there, but those are options.
As for the kids, here are a couple thoughts:
1) Try to impart some of the money lessons you’ve learned from this and other financial management websites so they can start to learn good money habits now.
2) Encourage them to find jobs they can balance with school, and start saving for a few goals (e.g., college, emergency funds). My parents pretty much took my savings when I finished HS and put them in investments and CDs for me, and I am supremely grateful that my emergency fund is already there for me. When you’re a kid, that minimum wage job goes a lot farther because you don’t have rent, groceries, medical insurance, car insurance, loan debt, etc … It’s a great time to start saving.
3) Discuss their college plans – if they want to go to college, they should do everything they can to get scholarships or pay for it themselves so they don’t start off life in debt. If they’re not financially prepared for college or don’t have an overwhelming dream that would require a college degree, maybe they should put it off a bit while they build up some savings and get some life experience. This is off-topic, but I think a lot of kids these days go off to college when they’re too young to truly benefit from the experience.
loading....
We had over $55,000 in debt (about half in student loans and the other half cc debt) which we paid off in just over a year using Ramsey’s Total Money Makeover plan (which worked great for us).
We also tracked our spending with Quicken and that help us figure out where we could cut (mostly we cut eating out and entertainment and I cut clothes shopping and Mr. Sam reduced Home Depot spending) and we created a spending plan and put us on an allowance. We are still on an allowance, although not as strict, and when our allowance money is gone we stop spending.
Having a small emergency fund (the $500 or $1000) that Ramsey recommends is key because something will come up and you can’t get out of debt if you have to put your emergencies back on your credit card. I would cut up/freeze your credit card and switch either to cash or debit (we went with debit as its easier to track).
Kids, I assume that part of your debt problem is due to being a single parent, You need to start teaching your kids good habits too. They should be working for allowance money and saving for college, etc.
We continued contributing to retirement during our debt pay down but only because we figured out how to do both (pay off debt and save) at the same time, boy was that a fun year (not!).
You also might want to start a fiscal fitness journal in the forum section and post your income/expenses/budget, you’ll get some great feedback from the folks
Good luck!
loading....
Great ideas. Personally I don’t follow the debt snowball to a T because I will never save any money that way. I know I could pay off debt more quickly that way but I need to save money because of health issues that occassionaly take me off work. So what I do is put 4% of my paycheck ino my 401K every week. Eventually I want to bring that nukber up to 20%. I reevaluate every six months to see what I can afford to put in.
Secondly, I put 5 bucks into my savings every week and also deposit any windfall or or gift money into it as well. My savings, checking and money market accounts are all at different banks to avoid ‘dipping.’ I specifically told my (savings) bank not give me an ATM or Debit card so I cannot steal from myself. I have written down a thorough budget and what I can realisticly pay each month and at what date I want the debt to be gone.
I am a full time college student with a long term reliable part time job. I have increased my income by selling (garage sale, closeouts etc..) merchandise on ebay, amazon and craigslist. I also donate plasma and volunteer to work on holidays for extra money. All of this ‘extra’ money is applied either to savings or debt. I sometimes take 5 or 10 bucks of it and do something fun for myself. This makes life so much less stressful when I am not well enough to work every shift.
loading....
Sounds like Kay will soon be an empty-nester (no more kids living in the home). If this is the case, the biggest expense she probably has is her home, which at the moment is probably a three-bedroom. Kay will need to down-size, even though her instinct might be to keep the home to provide a place for her children to visit. My suggestion to dramtically reduce her costs and make her dollar stretch further is to rent a one-plus-one bedroom apartment. Put a futon in the “plus-one” so that if the kids need a place to crash overnight, it is there, but it is not their room that they can live in.
Emotionally this might be tough, but fiscally, it is probably the easiest way to dramatically reduce her costs and enable her to start allocating money towards savings and debt-reduction.
loading....
I think your first priority should be creating a lifestyle where you spend less than you earn. If you’re starting out with debt, it just makes this change even harder. Making this one very significant change in your lifestyle is more important than having lots of personal finance knowledge. I think having the right mindset should be your first step.
The good news is, you’ve already been reading and gathering information for a year. You have plenty of knowledge, but continuing to learn reaffirms that knowledge and inspires you to stay on track. Good luck. I hope things turn for you!
loading....
All great suggestions for Kay. The hardest part will not so much be creating the plan, but living the plan. That’s why you want to make mini-milestones for yourself. It will take years for sure to work your plan, but once you devise the big picture, break it down into short-term goals — meaning 3-month intervals so you can review and feel the success.
Like I said, the hardest part will be sticking to it. Change is fun to imagine but difficult to live out. So you’ve got to see progress to feel motivated to continue.
loading....
My household does the Dave Ramsey plan with a few small tweaks. We saved about $3K before starting our snowball, we still contribute to 401K’s to get the matching contribution, and we have about $200 a month pulled out of our checks to go to savings. We felt like we needed to be saving for the just in cases because of the economy but are open to using those savings to pay off debts if things get better. I have worked pt jobs when I could get the hours and my husband works 60+ hours a week so he doesnt really need to. The great news about working alot is that you dont have time to spend money.
I definetely reccomend putting savings in a bank seperate from the one you use day to day. The debit card, checkbook, and one credit card that we kept open are all in the safe so we have to think twice before we use them. We both get a little blow money every month that goes for any fun purchases we want and eating out.
We are new at this but as newlyweds we felt that the best thing we could do for our future was get free of the debt. Putting a plan in place and regularly talking about the finances has completely eliminated most of the fighting that our other newlywed friends talk about having.
loading....
All good advice. The thing that wigs me out about the Ramsey plan is the $1000 in emergency fund. That seems…scary to me. Maybe because in one summer, we needed a new roof, had to deal with a downed tree, and once of us had emergency surgery. The emergency fund went – and then some. I’m trying to get to a good place on this one myself (own a house, which may mean more, but I have a very secure job, which may mean less.). We’re also in our 40s and want to save more for retirement. For now, we’re taking the approach of dividing the snowball – 1/3 to student loans (our only non-mortgage debt), 1/3 to retirement, 1/3 to savings.
loading....
Good luck Kay!
Personally, I was not able to change my spending habits until after I started tracking all my spending. (Kate’s #2)
loading....
I don’t think I saw this in any of the other comments, and maybe I’m just old-fashioned.
If her kids are going to be 18 soon, she will be losing child support but she will also have fewer expenses. If the kids are 18 and out of high school, they should be on their own or contributing to the household (this concept was also discussed by Dave Ramsey’s). If they are headed to college they should still be working to off-set their expenses.
loading....
I started trying to tackle my debt almost a year ago by reading anything I could get my hands on, but while enlightening didn’t help me get things under control right away. In January I made a modified debt snowball and have seen results but was frustrated by my lack of progress (I have made progress, but not enough). Last month I started using mint.com and I love it for showing exactly how much I’m spending on groceries for example. Now budgeting is easier and I can’t fool myself. My next step is to rein in the overspending I’m seeing from mint. I now have mutliple tools dealing with the problem, but I have had to add them slowly to for it to be effective. My point is that baby steps really help when tackling what for me has been a life long debt problem.
Good luck Kay!
I also listened to the Personal Finance Hour for the first time this week. It was great!
loading....
This is an interesting one. I can see the logic in creating a well filled savings account. The problem is it doesn’t really make financial sens.
Say at a point you have saved $2000 on an account that pays 3% interest. Meanwhile you also have a debt of several thousand dollars on which you have to pay 10%.
In this case, the savings account will hurt you bottom line. (You pay 7% to much interest on the first 2000 dollars of dept).
I would say get out of dept first using the snowball technique described in the article above. Although I would start with paying of the dept with the highest interest payments. Psychological you might want to start with the smallest dept but financially you want to start with the dept that is hurting you the most. (… and I believe, but I’m talking for my self here, that we come to this website for financial intelligence, not psychological and emotional intelligence)
Personally I get my psychological support from my CashFlow statement.
loading....
In response to Rob, the Ramsey SnowBall is set up smallest to largest debt and not by interest rate because when you pay off those first couple of debts you get quick positive feedback and you keep going. Ramsey preaches that personal finance is mostly emotional and not math. Mr. Sam lobbied hard for paying off our debts from highest to lowest but I won in the end since I was doing the heavy lifting on the project.
loading....
Tried and true advice once again! Kate hits it on the head…you can’t gain control of your money until you know exactly where it’s all going. Track your expenses…every penny! In my coaching, I usually tell clients to try telling their spouse, “Honey, I will be completely faithful to you 99% of the time!” Doesn’t work…don’t track 99% of your expenses; track every cent.
TIP: http://www.mint.com. Makes life REALLY easy to do this!
Only then can you effectively budget, cut things out you don’t need, and gain the confidence you desire with your money. We call this step “Gaining Financial Clarity” in our online coaching…because that is the first step!
loading....
In response to Rob: in real life, money IS emotional for more people than for those that study the true “math” of it all.
and you lose your job. Or more simply, you get in a fender-bender and need $1,000 for the insurance deductible. Life doesn’t stop and wait for us to pay off debt, so get that CASH-CUSHION in place FIRST! Then as hiccups along your path to debt-free happen, you are not knocked off track!
I’ve seen too many people over the years kill themselves to use every penny to pay off debt, then when “life happens”, they have no money to deal with it.
Imagine taking an entire year (or more), and using every cent you have to pay off debt. You just made the final payment to good ol’ CHASE platinum (not a plug by any means
loading....
@Rob – The purpose of the savings account (aka Emergency Fund) isn’t to earn money, it’s to stop the need to use credit if an emergency comes up. The purpose of paying off the smallest debt first is to give one a sense of achievement and to renew the motivation for getting out of debt in the first place.
There isn’t a single thing wrong with doing it the way you spell out, if it works for you, but it just doesn’t work for a lot of people. I spent literally years listening to my Dad make your exact argument to my older sisters as their debt continued to pile up because they never had any savings and they never saw any results of paying off the debt. Finally I was old enough that they’d listen to me, I didn’t have the problems with debt that they’d had (I really did listen to Dad; we’re both very pragmatic), and I presented them with a new strategy and it worked. For almost anyone who is struggling with a lifetime of habits, the emergency fund and snowball strategies seem to work best.
loading....
Kay has blessed herself with the magnificent benefits that come to a person who bares her soul in a difficult situation. The article and the posts contain a wealth of outstanding ideas. And hopefully I’m about to add another.
Kay since you have another year (almost) of full child support, followed by another year of reduced support, and you know it’s coming to an end, try living without it now.
You will need to radically cut expenses, but you have a choice either to do it now while you have the support as a cushion, or next year when it will be cut in half. Live on your non-support income and use the support as your emergency fund until you can save up enough (from the unused support money) to have an actual fund.
Once you have a satisfactory emergency fund, apply the support money to reduce your debts. I fully agree with those who say that funding your retirement isn’t a priority right now. At 39 you still have at least 25 years to fund that, which will be that much easier when the debts are gone.
As to expense reduction, I second Micheal’s(#7) suggestion to develop multiple income streams. Fortunately your kids are at an age where child care isn’t an issue and you have the time that you didn’t when they were younger.
Aperson (#16) has the single best suggestion on expense reduction in downsizing your house. Soon you won’t need a 3-4 bedroom unit to house your kids, and given the state of real estate, it may take a year to sell, and by then your daughter will be out of high school. I don’t know how much equity you have in your house, but what ever you have will be more money to add to savings or pay off debt and that has to help.
Diana (#22) suggested having the kids work. Brilliant. It isn’t so common now, but that’s what teens did when I was growing up. You don’t necessarily have to charge them board as revenue, but perhaps you can sit down with them, explain your pending situation, and stress the necessity that they at least pay their own way. Gas, clothes, entertainment and even cell phones. What a great lesson it will be for them to pay these themselves and to learn early what it costs to do and have the things we want.
But I think you’re on the right path in that you’re asking and open to ideas.
loading....
Great ideas here J.D. I wouldn’t disagree at all as the debt snowball is the method my husband and I used to pay off our debt. I don’t know why soooooo many people get caught up in the simple mathematics of highest interest vs. lowest debt. What does it matter? We are all trying to get to the same place anyways….DEBT FREEDOM!!!
Thanks for your insight and keep up the good work!!!
loading....
You have to get to enjoy saving, not to see it as a negative. Try cutting out one big item and see if it is as painful as you worried it might be. For example, cut cable. If you end up being happy that you have more free time, you’ll soon be looking for other ways in which to “sacrifice.”
Rob
loading....
Excellent point Rob! She’ll need to detach from the idea that happiness is found in stuff. Happiness is what you do, not what you have.
loading....
About debt snowballs – credit card debt. I haven’t seen it mentioned anywhere on any financial blog (and I don’t have time to read many, so maybe it’s there somewhere…) but –
If you are in a situation where you can only pay the minimum payment per month on your credit card debt, then try to pay just $10 more above that each month. This has been pointed out by Suze Orman. Here’s an example:
If you owe $1,100 at 18.5%, and if you pay the minimum (say 1.7%) of your balance every month, and you never charge another item, it will take you 12 years and 6 months to pay off your debt. That’s a long time, plus you are paying about $1,400 in interest.
If you pay $10 more than the minimum each month, you will have reduced your payment period to 6 years and cut your total interest payment to $673.37.
(Just thought this info would be helpful to those desirous of paying down/off their credit card debt. You can go to bankrate.com & use their credit card calculator to see what the difference paying an extra $10 above your minimum would be, putting in your interest rate and balance. Have fun!)
loading....
Thanks so much for this post. I am in a similar situation and keep losing hope due to mistakes I keep making over and over. All these comments are helpful to know that if I take steps back, I can still get up and try again and that success is possible. Thanks!
loading....
Actually, timevalue.com has a user friendly credit card calulator, and I would recommend theirs over bankrate. It really is amazing at the different in interest payments alone that that extra $10 per month makes. (Ten dollars a month is only 35 cents a day).
loading....
Just to clarify, I ment when the kids were out of High School. Once they are legal adults (and they will declare themselves as such, teens are like that
They should be taking care of or contributing to support themselves.
My family was poor, heck they’re still poor. My parents gave me the choice of getting a job to have spending money, be able to purchase my clothes or not have a job and not have spending money and be able to buy clothes when we could afford it (and what we could afford). They provided for my needs while I was underage.
loading....
Good post, J.D.
My advice to her is to set a goal, and stick with it. Break up the big goal into manageable chunks, and set timelines to keep you on track. Make up a real budget (not a guesstimate), and STICK WITH IT. Easier said than done. For me, I realized that I am in my early 20s, but going the way I was going would screw me up eventually. I like having my money to myself, not having to pay a big portion of my paycheck to Mastercard, and not being at the mercy of whatever I see at the mall. I needed to grow up. I am slowly but surely on the road to financial freedom.
I too canceled subscriptions that I did not use, I turn off lights when I leave the room to save a bit of my electricity bill, turn the heat down in the winter and wear a sweater, avoid temptations (like don’t go to mall), shop w. a shopping list, try to save on groceries wherever possible, eat out less (pack a lunch too), etc. Cut expenses and spend less.
I find the debt snowball method works well, and I am down to 1 credit card (my only debt). Little victories help keep you motivated.
An emergency fund is important too, for peace of mind.
I am considering getting a second job to eliminate debt faster – you should definitely consider that option.
Good luck!
loading....
If you consider getting out of debt in the same light as moving a heavy object, it is much more difficult to start that object moving from a standstill than to keep it moving. Kay is suffering from something like this as she is trying to motivate herself to start paying off her debt. It does no good to sit around and worry about what to do, or to lament your past mistakes. The time to take action is now, using the knowledge she has gained over the past year. Personally, it makes sense to me to begin with some combination of building an emergency fund and debt repayment depending on what she can afford. Even though neither debts nor savings will be at their desired level immediately, as you progress you will begin to feel some of the weight lifting – that is when the momentum begins to build.
loading....
Excellent point WP. The crucial point is to get something going even if it doesn’t solve the immediate problem, and even if the plan isn’t perfect. Worrying about it only makes things worse. Action is the antidote to anxiety.
loading....
Here’s a minor suggestion, and one that is more useful in today’s enconomy. Not only take into account how much you owe but how much your payments are. For most credit cards the payment is only 2% of the lone, but many other loans are fixed.
So, if you have a car payment that is $450 a month, and you only owe $150 on your credit cards it might be worth trying to get the car paid off as soon as you can so if lose your job you don’t have that large payment hanging over your head every month.
Another option is to take the debts with the largest payment and see if you can reduce them. I did that with my car loan and dropped the monthly payment by around $100 just because I got a much better interest rate.
Even so, when I was unemployed the car loan was the biggest payment I had every months outside of my home, and made things very tight. If I had more then a week of warning I would have probably sold the car to avoid the payment.
I guess what I’m saying is that you should take the payment size into account when decided how to pay your debts. This goes double if you’re unsure about your job (and who is sure of late).
loading....
@Kevin – “Action is the antidote to anxiety.” It’s worth repeating. Thanks.
It puts me in mind of a quote, Tom Stoppard I think, “Happiness is equilibrium; shift your weight.”
loading....
Linear Girl–thanks for the compliment! You didn’t do so bad yourself back at #28 with “The purpose of paying off the smallest debt first is to give one a sense of achievement and to renew the motivation for getting out of debt in the first place.” Don’t be suprised if it turns up in one of my future posts!
Theo–solid take on car payments. Even more with a big payment/low balance account. Eliminating $450/mo on a $4000 loan balance might be better than having an emergency fund. It would be a serious blow to lose a car that’s in the last year of payments. Paying it off would prevent this from happening as well as improve cash flow, a double benefit.
Of course if you’re in the first year of the loan and owe $15,000, paying it off won’t be possible or even desireable for most people. It all depends on the details of the situation.
loading....
Sell, Sell and Sell.
My income is good, but I need to see the results to keep me moving. I have cleaned out the closets, basement and piles of stuff to sell on craigslist or buyback sites for books. Sometimes I got $1 for a book or other times I got $45. Keep in mind any progress is still progress. My area is less cluttered and my ‘snowflakes’ have added $1200 to my debt snowball in 4 months.
Automate.
Instead of paying my debt bills monthly, I pay then weekly. The credit card interest is based off a daily percentage, any little bit I can decrease the balance, the better I am.
Destroy the cards.
Even if my card was not in my wallet, I found it and used it. This was not much, but it can add up. It was not until I completed cut up all the cc and saw that my checking balance was the ONLY way I could buy something. It was only then did I have to wait to buy things. It was the little things like buying gas for the car, it had to wait until payday instead of going on the cc.
loading....
I’m glad so many responded to my post. Some of the comments were expected. First of all I need to explane I’m from the Netherlands and have no real life experience with credit card debt (other then the one I pay off the same month). So the emotional part is probably very different. (so any of my advice on emotional issues concerning credit cards should be discarded
)
Everyone should choose the style that they think is best for them. I guess my biggest point is to look at your cashflow. Debt can be good and bad depending on the purpose. Using your credit card to pay for a cup of coffee, I would consider bad dept. Taking a loan for a medical operation to save your life… I would say good debt (hey see it as an investment)
So it basically comes down to: “Don’t buy crap with money you don’t have yet”. For REAL emergencies you can still use your credit card and use it like you would with a savings account.
Am I making sens here?
It all about the total balance. 2000 in a savings account and 5000 in debt, is still a negative 3000. So why not take the cheap road and have only 3000 in debt? In the end… -3000 is -3000
loading....
I’m a big believer in breaking the debt habit..not just paying off debt. Emergency accounts are an important part of breaking the CC habit. Without savings, you’ll end up borrowing when something comes up, and you’ll continue to think of borrowing as a way of life.
But I have another idea for Tracy who spends her savings. If you are spending your savings for those little irregular, regular things…gifts, small home repairs, etc, try this:
What I did was set up two savings accounts. One is at ING –the real emergency account, with automatic withdrawal from my checking, for if I lose a job or something catestrophic happens. But I have another savings account in the bank, right next to the checking account. This money is SUPPOSED to be used. It’s there to pay for the everyday irregular stuff..like for car repairs, for extra travel expenses at the holidays, for buying yearbooks and senior pictures, for fixing the refrigerator, etc. I don’t feel guilty about using it, and I’m never tempted to go into the “real” emergency account.
I budget a certain amount to go into this Buffer account, so it will about break even or build up a little over a year. (Just start with something and adjust.) Then the rest of the money goes to debt snowball. Alternatively, some people choose to budget their expenses including the debt snowball, then “sweep” anything left over from staying under budget during the month into the savings account…and watch it grow.
loading....
Without any doubt, getting out of debt is THE key to financial freedom.
Think about it. In order to get out of debt, almost everyone needs to make adjustments to their lifestyle and spending habits, and once you are out of debt, saving is easy as pie.
Getting out of debt = freedom. Do it. Now.
loading....
I max out my 401K every year. If I did no other savings and had no other debt, is this good enough to retire on w/ SS in 30 years assuming a 4% rate of return?
loading....
@bulldog Gin Co. – This is a great question that so many people have. To answer it though, the biggest thing you must figure out is how much your lifestlye/expenses in retirement will be.
It sounds like you are in Accumulation phase of life, socking as much money away as possible which is great. What many are not realizing is the only way to know if it’s “enough” is to forecast, or try to predict what your “tomorrow” looks like and costs.
I run clients through a process of identifying exactly what their “today” is costing (i.e. budgeting), then have them look to the future and determine when their “tomorrow” is. For many, it’s retirement. Taking all their current expenses, we go down the list and do our best to predict (in today’s dollars), how these expenses will change.
(I have coaching software that does the factoring for inflation, taxes, etc.)
For example, $350 for a car payment today may not be in your “tomorrow” expenses. Just realize though that when visualizing how your “tomorrow” looks, some costs will go up…not everything goes down when you retire. Personally, I have my travel and dining out expenses increasing in my “tomorrow”.
This is the MOST IMPORTANT key to knowing if you have saved enough. THEN you play with potential rates of return, various withdrawal rates, etc.
One more point…I have clients answer the question, “Once you are financially independent (retired in your case), how much will you earn?” This is because many people plan to work at something, say a part-time job, opening a small business they’ve always dreamed about, etc. This plays a HUGE role in how much you need…and actually can dramatically reduce what you need.
Talk to your Financial Advisor…if you don’t have one, I’m happy to help. I coach people virtually anywhere, using this software that gives you an exact answer of WHAT you need to do to reach your goal.
Hope that helps!
loading....
@Paul – exactly! You reminded me of a thought I share with clients. If you had NO EXPENSES right now, would you be financially independent? Most look confused at first, but then realize how simple it really is…our living expenses are what dictates becoming financially independent (f.i.).
I could bring home $100 per month, and if I have no expenses, or debt, I’m F.I.
While I know this isn’t realistic, with car insurance, gas bills, phone bills, etc., sometimes it’s just important to know that our chosen lifestyle and spending is what determines whether we ever reach financial freedom or not.
Reducing expenses/debt at the same time you save/invest provides you a compounding effect. If you don’t make changes to your spending, and somehow just want to save more…you’d better EARN more. If I SPEND LESS, I immediately have more money to save.
Everyone always tells me they want to save more…but simply spending less can be much easier.
loading....
Rainy day fund is more important and the best thing to do is make saving a habit. When our finances are squeezed, cutting the expenses is more important. As mentioned this could be done on dinning out. Power consumption at home, Telephone bills etc., can also be reduced. Traveling in public transport can reduced our fuel bill a lot. There are a lot other things that can be in our control which has to be identified and controlled.
Also, our child’s education is more important and we cannot compromise on such factors but other expenses that our child do can be reduced.
Everyone in the family working in this regard will contribute to tackle this situation to the better of the family and the country.
King
loading....