Okay, so you’ve done the previous six steps. What’s next? If you downloaded the budget, you will see that it has a certain percentage of income that should go to each debt category. For example, housing is 38%. Keep in mind that the 38% represents mortgage, interest, taxes, upkeep, insurance, utilities, and other items like pool or lawn services. You must stay to those percentages. If there is no way that your current home expenses fit within that percentage, you might want to sell it. It might be your dream home but your dream home is driving you to the poor house. Downsize your home or rent a home or an apartment. You don’t want to be house poor. Meaning the majority of your money is going towards your home.
The same applies for your car(s). If your payment and associated expenses are too high and do not fall within the recommended percentages, then sell the car(s). Buy a good used car. If you have two cars, go down to one car. If you live in an area that has great public transportation, take that instead. No, taxis are not public transportation. Public transportation include buses, subways, commuter trains, etc. If you can, ride a bicycle to work. Consider carpooling. Again, be creative and find ways to save.
After you enter your monthly amounts in the budget, you might find that some of your expenses are higher than the recommended percentages. This results in a deficit or more expenses than income. What do you do? First, look at each expense and see what you can cut out. If you have cable TV and/or satellite TV, cut those out. If you have someone coming and cutting your lawn or cleaning your pool, cut those out. Some of you might not have those items, maybe you are eating out or ordering pizza, or buying a Starbucks coffee every day or going for drinks after work several times a week, cut those expenses out. The other things you can cut out are internet service, newspaper and magazine subscriptions, etc. Put on your thinking cap and you’ll see what you don’t really need. Review the entries on your 30-day notebook and you might just find some other items to cut out. You need to adjust your budget so that at the end you have a zero balance. If you have a surplus, apply the surplus to your debt repayment.
If you are able to transfer you credit card balances to a card with a lower interest rate, do so. Yes, even it means getting a new card. This is ONLY if for you to have a lower interest rate and NOT for you to get more in debt. In fact, after you transfer the balances, take out your scissors and preform that surgery again on this card. You might be saying, “Wait, I cut-up my card with the lower rate. What do I do now?” Don’t worry, most card companies will allow you to transfer the balances. You don’t need the actual card, just the card number and that’s on your statement or you can log into your account online or call the company. Keep in mind that credit card companies charge you a fee to transfer balances.
If you’ve done all this and you’re still showing a negative balance at the end of the month or more bills than money, it’s time to sell stuff you no longer need. You can have a garage sale. You can sell your items on eBay or Craiglist. You could even put your items up for sale in your local newspaper. The other option is take on a second job. Start delivering the newspaper or pizza. Take on some babysitting. Again, get creative. If you are a two-income family, have you evaluated how much that second job is costing you? Consider, the cost of the clothes, the dry-cleaning, the gas, the car repairs, parking, the eating out, or if you have children, the cost of day care. Add all those items up and see if the contribution of that second income is significant. If it isn’t, should you really continue to work? If it’s only giving you a few more dollars a month after you take out all the costs associated with it, is it worth it?
Let’s get down to attacking that debt. In step 3, you made a list of all your debt. The reason you put down the contact information is because you might have to write the company and address your situation with them. Let them know that you want to pay them back but you have limited funds. Be willing to provide them with a copy of your spending plan. Ask for a lower interest rate or for them to stop adding on the interest, penalties, and late fees. Tell them you have this amount to pay them each month and that is all you can afford to pay them. Be pleasant about it and let them know you want to work with them to repay your debt. Show them how you plan to pay them off. This is called your repayment plan. Let’s say you owe them $500. You can afford to pay them $50 per month because you are going to be paying the minimum on the other debt. Your budget will reflect all your expenses.
Here’s how it works:
You are going to create a Debt List. You may also download it from the Resources section or do it by manually. To do it manually, take two sheets piece of paper and make four columns on each sheet. At the top of one paper, label it My Debt or What I Owe or whatever name you want. It’s your sheet. Label the second sheet My Sorted Debt.
Next, label both sheets as follows: the first column “Company and Address”. Label the second column “Amount Owed”. Then, label the third column “Interest Rate”. Finally, label the fourth column “Minimum Payment.”
On the sheet that you have NOT labeled “sorted”, fill-in the information for each consumer debt that you have, including student loans, payday loans, and loans from friends and family. So that you won’t leave any debt off of you list, make sure you have your most current statements available when you do your list. Now, look at your list and find the debt with the highest interest rate. Copy all the information for this debt onto your My Sorted Debt sheet. Go back to your unsorted list and find the next highest interest debt. Then, copy that onto your My Sorted Debt. Repeat this steps until you have all your debts listed from highest interest rate to lowest interest rate.
Now, take a look at the Sorted list. You are going to attack the first debt on there, the highest interest rate. You are going to concentrate on paying that card off first. Take the money from that garage sale or from whenever you sold your items or that second job and apply some of it to that first debt. Pay the minimum on the other cards/debt while you pay this one off. Don’t put all of the extra money towards that first debt. Only use about 90% of the extra money on it. The reason you don’t want to put all of it towards that credit card debt is because you want to start building an emergency fund. Put the 10% in your emergency savings account. Your initial goal is to save $1,000 for emergencies.
When you have an emergency fund, you can use it to pay for emergencies such as a car repair, appliance repair or replacement, etc. You will use the money in this fund to pay for that emergency instead of putting it on a credit card. Any extra income that comes in should be split between paying off that first debt and saving towards your emergency fund. Always remember to put some money in your emergency fund. Eventually, your emergency fund should have anywhere from eight to twelve months of living expenses in it. Why so much you might ask. The reason for this amount is because you might lose your job and you need an emergency fund to see you through those months without income. Lord willing, you will find another job before you exhaust your emergency fund.
After the first debt is paid off, you will take the money you were paying on first card/debt and apply it to the next card/debt with the next highest interest rate. You are going to snowball your payments. Why do I say snowball? When you build a snowball you start with a small amount of snow, roll it around more snow and it starts getting larger. The more snow the larger the snowball. This is what you are going to do with your debt payment. You are going to start small and as each card gets paid-off, you are going to take the amount you were paying on the other debt and apply it to the next highest interest debt.
You are going to be building momentum as you payoff each debt. The debts will be easier to payoff as you start adding more money towards its payment. The key is to not despair. You will pay all that debt off if you keep at it and do not incur more debt. It is going to take time. Remember, after the second debt is paid off, you will take the money you were paying on first and second cards/debt and apply it to the next card/debt with the next highest interest rate. Each time you payoff a debt, you’ll move onto the next debt and apply the money you were paying on the previous debt along with the minimum payment you were paying on the current debt. Eventually all your debt will be paid off.
For example: Let’s say you have a debt with a balance of $500. You can afford to pay $50 a month on that debt. For simplicity sake, let’s say there’s no interest. In ten months, you will pay-off that debt. That’s $500/50=10 Your next card has a balance of $1000. You could only afford the minimum payment of $10 before. Now, you will take the $50 from the first debt add it to the $10 you’re paying on the second debt. Your new payment toward that debt will be $60. In roughly 16 and a half months, again for simplicity will assume no interest, you will pay that off. The next debt is $2000. Your payment before was $20. Take the $60 from the other two debts and add it to the $20. Your new payment will be $80 towards that debt. You’re going to be attacking that $2000 with an $80 payment each month. Sometimes more, if you get a little extra money.
Once you pay all of your debt off, you need to start saving for buying your home. If you already have a home, then you want to start prepaying on it. I can tell you from personal experience that prepaying is wonderful. We paid our home off in 11 years. Do not despair you will pay all that debt off. It is going to take time.
Some things to remember about home buying are (1) you want to obtain a low interest rate; (2) you want to get a 15 year loan as opposed to a 30 year loan; (3) you want to avoid balloon loans, adjustable rate mortgages and interest only loans. The best way to buy a home or a car or anything else is with cash. How do you do that? Simply by saving and avoiding debt. The earlier you start saving and avoiding debt, the more money you will have. Live below you means, but make sure you cover your needs.
Another thing that you need to consider doing is using coupons. Believe it or not you can save a substantial amount of money by using coupons. Some stores have days when they double the coupon. Take advantage of those items. Also, avoid eating out. Take your lunch to work. You’ll have a healthier lunch and definitely a healthier budget.
Imagine going to a car dealership or a home builder and saying I want that car or that home and when they start talking about the financing saying, “I won’t need financing. I plan to pay cash. I will give you X dollars for it”. Negotiate, with vendors. Walk into a store with cash and tell the salesperson you will pay X dollars for that item. If they can’t do it, ask for their manager or supervisor and see if he or she can. If they can’t, ask them who is authorized to give it to me for this price? It does not hurt if you pull out five Bens and tell the vendor, I’ll pay you $500 for this washer, dryer, or whatever. The item might be marked $800. However, they might be willingly to negotiate. It they’re not, walk out and try another store.
I hope this post helps you on your way towards financial freedom. Post a comment and let me know what you think or if there’s something that you don’t understand. Heck, point out any typos I might have made. May God bless you and help you to succeed. Remember He owns it all and we are only His stewards.