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Financial Bliss- where to put extra money
You’ve worked hard to create a balanced budget and as I mentioned in my last Financial Bliss post- you have an extra $5 (or more) to apply to one of your debts.You should make a list (or a spreadsheet if you are savvy) of all your debts, what you owe on them (write down the interest rate you pay on them too- we won’t get into that now but its info you’ll need for another time/post) and the minimum monthly payment amount. Put them in order of amount owed. Now take that extra $5 and apply it the debt with the least amount owed. [Side Note- if you are paying more than the minimum payment on your other debts- stop it! Put all “extra” money in one lump sum and put it on the debt with the least amount owed like I stated above.] This is called the debt snowball (per Dave Ramsey). Basically, your new monthly payment is the original amount plus $5 and you pay this continuously until the debt is paid in full. Say the original amount was $25/month and your extra $5 upped it to a monthly payment of $30 and after 4 months you paid the debt off.
Grab that written list of debts and cross that debt off. Doesn’t that feel great?! Now you can go out and blow the $30 each month- I’M KIDDING!!!!
DO NOT BLOW THAT $30! Instead, refer to the next debt listed and take its original amount and add $30 to it- this is now your new monthly payment. You will continue to pay this amount until this debt is paid in full and you can cross it off your list. You then take that amount you were applying to debt #2 and put it with the original amount you were paying to debt #3 and make that your new monthly payment for debt #3 until it is paid in full.See where the snowball approach comes in? You are paying off debt, not affecting your budget in a negative way, rolling one payment into another creating a bigger payment that will knock down your debt like an avalanche.
[Side note: there are debt calculators on Dave’s site that help you to see just how quickly you can pay this debt down.]
The debt snowball can help you get out of debt quicker but the key component is that you do not incur more debt. In order to become debt-free you must quit bringing in new debt. The popular phrase is that you need to “perform plastic surgery”- you need to cut up the credit cards. For me, quitting using the card was not enough- I’d be good for awhile and then pick it up again and charge it when I thought it was “necessary”. I know of people that have recommended freezing your credit cards in blocks of ice and hiding them in your fridge to stop you from the temptation. Sigh. Its useless- if you really want to use the card you’ll give yourself an excuse to stick that lump in the sink and pour boiling water over it (or if you want to make a purchase online or by phone- all you need to do is get out last month’s statement and you have the info you need). If you are tempted by credit cards then you must forever rid yourself from that temptation and cut it up. Destroy it, plain and simple.
I am the first to admit that I have no middle ground with credit cards. I will also tell you that I find no redeeming quality in credit cards. None. I don’t care if you are one of those people who spend it on the credit card and then go home and immediately write a check for that exact amount to the credit card company- cut out the middle man and pay in cash! I can just about guarantee you that you will find you aren’t willing to spend as much if you have to watch yourself fork over the actual cash money to do so. You say you need a credit card for emergencies or for vacations etc. etc. Hello, I made those same statements and believed I meant every last one of them. But temptation was too great. I do believe there are people out there who actually keep a credit card for emergency purposes only- but I don’t personally know them and have never heard from them, so it’s the same as the leprechaun with me- never seen one or spoke to one so I’m a bit “iffy” on whether they exist or not!
Bottom line- if you carry a balance on a credit card from month to month and/or have never paid off the balance in full- ever- since you got the card—you need to get rid of it. Remember- NO NEW DEBT!
Incredibly enough- our little family of 5 has managed to survive for over two years without a single credit card. We’ve survived doctor bills (child in a cast & stitches plus the ER visit), car breakdowns and even the brink of financial ruin (I’m being positive here- we aren’t quite past that one yet- but we will be!). We’ve gone on vacation, reserved hotels and managed to live for over 24 months without a single one.
There is life beyond credit cards.
So now we’ve covered creating a realistic balanced budget and beginning to pay down debt. But what if you are on the brink like us- what if the information I’m giving you is making you say “it’s too late”.
It is not too late my friend.
Stay tuned.
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4:19 PM, 2008-Feb-6 .. Posted by RRSDH and I have been on the Dave Ramsey plan for a year now. I have to admit the "carrying cash" idea is hard for me. We have had to tweak, and adjust his ideas to work for us. We have not used plastic for a year now. What makes us scream is that our home is on a 30 year note and we have been in our house for 12 years IF we would have know what we know now our home would be paid off in 3 years. UG !!! Oh well, we just keep moving forward.
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