"We buy things that we don't need, with money we don't have, to impress people we don't like." -Anonymous
In August of 2011, I was buried in approximately $50,000 worth of debt—yes, 50!! I had accumulated about $22,000 in student loan debt between studying abroad in Paris, France and staying in college for one extra semester. Then, a few months after graduation my piece-of-crap of a car broke down and, in all of my 24-year-old wisdom, I replaced it with a $27,000 “pre-owned” (read: used) car.
The semester in Paris was one of the best experiences of my entire life, and I wouldn’t trade it for the world. The money that I spent living and learning there was well-spent and, to this day, unregretted. I probably could’ve splurged a little less and saved $1,000 or so, but the trips around Europe and days spent tasting the cities’ finest cuisine and touring the most famous landmarks is forever fondly in my memory, and that is irreplaceable!
The $27,000 car, however, was a huge over spend. In my defense, I did pay a [very] small down payment, and I traded in my clunker to shave a little bit off of that price. But the majority of that purchase was covered in a one big car loan. Oh, and never mind the $2,000 or so charged to my credit card every month that I “paid off,” just to charge back up again! Looking back, I could’ve done a lot of things differently, for example, purchased a cheaper car! But lessons do tend to stick with you longer when you learn them the hard way...
In October 2013, one of my best friends in the world told me that her and her husband would be totally debt free in less than 6 months—no car loans, student loans, credit cards, nothing! I was flabbergasted. I had always known this debt-free concept existed in theory, and I studied and worked in Finance, so I knew that the interest on my loans was working aggressively against me, but everyone I knew had a car and student loan, it was normal, it’s what being middle class entailed. But Anna proved me wrong; she showed me the light, and I’ve never looked back!
Okay, so maybe I looked back a few times, and messed up a lot, and broke my budget more times than I can count… But I had my eye on the prize! And I’m happy to say that 16 months after Anna slapped some sense into me, I have paid off almost $50,000 in debt and am 100% debt free! It definitely wasn’t easy, but it definitely wasn’t as difficult as I thought it would be and was more than worth it! And with a little bit of perseverance I’m sure you can do it too!
Here’s what I did:
1. Get Inspired. A wise financial guru named DaveRamsey has a famous “debt free” plan called the “Debt Snowball,” which Anna strictly followed, and I loosely followed, on our debt free journeys. Dave has a book and Podcast that you can listen to to keep you motivated and on track, even when that Prada bag is calling your name! There are other financial experts out there, but Dave’s debt plan is simple and to the point, and especially if you have no financial training I recommend you get plugged into him ASAP!
2. Create A Mini-Emergency Fund. Get a cushion of money, which can cover your basic expenses and debt payments, in the bank right now. Dave recommends $1,000, but Anna saved less because she and her husband had two incomes and low living expenses, and I saved more—a month’s worth of expenses—because I’m basically my only financial hope. Depending on your risk tolerance and level of responsibilities, save an amount that feels right to you. This is not going to be your forever emergency fund, so don’t spend a year saving $10,000. This is just money to fall back on in case the furnace breaks while you’re attacking your debt.
3. Create a Budget. For some reason no one likes this word. It seems to have a negative connotation with lots of people that I talk to; I think it makes people feel restricted and contained. I almost changed it to say “Spending Plan,” but then I decided against it because honestly, if you have anywhere near the amount of debt I had, you do need to be restricted and contained!
Creating a budget, based on what you actually bring in and spend every month (and not on some fallacy of what you want to bring in and spend!) will provide insight into your spending habits, and help you determine what amount you must pay (to bills, insurance, debtors, etc.) each month, and what amount you are regularly wasting on your favorite expensive habit(s). It will also help you to determine how much money you can take from those habits, and put towards paying off your debt instead.
A few tips for budget creation:
- List everything – from bills to tips at restaurants, if you don’t include it, you aren't being real with yourself.
- Categorize – separate your budget into sections such as “Bills,” “Restaurants,” “Clothes,” so that you can see exactly where the overspending is happening.
- Be paycheck based – Make your budget reflect your pay periods versus a weekly or monthly basis. This way, you’re not having to drastically change and recalculate your amounts every month, and your income will always be consistent per budget period.
- Use Excel. It just makes life so much easier!
4. Control Yourself. Review your budget and, if you haven’t already, set limits on your frivolous spending. Once you realize that you’re spending $150 per month at Starbucks, or $200 downloading music on iTunes, the required cut-backs should be easy to identify. If you’re pretty good at managing your money and don’t run into any huge over spends (or even if you do), you’ll need to think of creative ways to cut back and get your extra debt money.
A few of my simple tricks:
- Space out your hair appointments – Get your hair highlighted/cut/colored every six weeks? Try a subtler hue and going every 8 weeks instead.
- Make your coffee at home – I used this during my debt payoff, and saved almost $100 a month!
- Buy in bulk – anything from laundry detergent to steaks can be bought in bulk on Amazon or at Costco, and can save you a ton of money!
- Use Cash – It is scientifically proven that handing over a $20 bill is three (or so) times as painful as swiping that plastic!
- Make money – Don’t already have a side hustle? This may be the encouragement you need to get one started!
5. List Your Loans. This is really as simple as it sounds. Log into every credit card account that you own, scavenge through your recycling bin for that last student loan statement, and contact your lenders via phone or email if you have to—yes, even call your mom! Determine exactly how much money you owe and to whom you owe it. Make a nice little list and then organize the loan amounts from smallest to largest (again, Excel: a saving grace). If you have two loan amounts that are within $1,000 of each other, list the loan with the higher interest rate first.
SN: If you don’t know your interest rates, you should!
6. Pay More Than You Owe. Now’s the time to take all of that extra cash you saved (or earned!) in Step 4 and apply it towards your debt. Continue to pay your normal payments as they come due, but put everything extra that you saved or reallocated to your debt in your budget planning process, towards paying off your smallest loan.
The idea here is, your smallest loan is likely to be nominal, and you will be able to pay it off quite quickly. Well, guess what you do next month, when that $100 loan is all paid off? You take the money that normally went to that monthly loan payment and put it towards your next biggest debt instead! Then, after only one month in, you've already paid off a loan, and doubled one of your other loan payments!
This is the genius behind the debt snowball. By the time you’re a year into it, your largest loan will be all that’s left, and all the payments you used to put towards all of these other loans, will now go towards your largest loan, a payment of two, three, or four times the size of the required monthly payment! Pretty exciting stuff!
7. Check In. Modify, update, and revise your budget often. When you pay off a loan, keep track of where you’re going to put that money next month. If you start a side hustle, have a garage sale, or get a bonus or raise at work, account for that money as income and mindfully decide which debt to put it toward. If you get on the right track and feel like you could make more cutbacks, change your budget to reflect that. Monitoring your progress will allow you to visually see your debts shrink and your goals become reality!
If you have any questions about this process, want some more inspiring frugal tips, or would like a free copy of my own personal budget spreadsheet, leave a comment below or contact me directly!
Good luck with your Snowball!