One of the goals of living a frugal lifestyle is to avoid going into debt. Unfortunately, I have accumulated some debt over the past couple of years (my wife became disabled and is not able to work), but I also have a plan to get out, or I should say, Dave Ramsey has a plan to help me get out of debt.
I don't really have much in the way of credit card debt. I have about $450 to pay off on a Home Depot card, and I have to pay off about $500 on a secured Visa card I have with my credit union. Other than that, my main expenses are ongoing medical bills due to my wife's medical condition, with most of that going to prescription drugs.
You might be familiar with Dave Ramsey. He hosts a radio show and also has a web site which promotes his Financial Peace University. Dave says no matter how much money you make, you can pay off your debt and eventually become debt-free.
I read over Dave's web site and I have listened to his show many times. Dave promotes what he calls the "debt snowball", in which he says you make a list of your debts, pay off the smallest one first while making minimum monthly payments on the other debts and then roll that payment into the payment you need to make on the next-highest debt...and so on.
My first order of business is to list my debts. I'm not going to list all of my wife's medical bills because that would make our list here unruly. Instead, I'm going to list debts that are bit more pressing because they carry interest and penalties. Here goes:
Car $15,000
Student Loan $4,500
Back federal taxes $2,600
Back state taxes $2,100
Secured Visa Card $500
Home Depot Card $350
These numbers are approximate, but you get the idea. According to Dave Ramsey's "debt snowball" method, I should make more than the minimum monthly payment on the Home Depot card first. My minimum monthly payment on that card is $17, so I'm going to pay more than that amount. I'll make $50 payments on the card every payday until I get it paid off. That should take about 4 ½ months. After that is paid off, I can apply the same payments to the next highest card, which is the secured Visa card. The other debts will have the minimum monthly payments applied, so my monthly payment plan will look like this:
Car: $350
Student Loan: $50
Back federal taxes: $50
Back state taxes: $100
Secured Visa: $20
Home Depot: $100
Once the Home Depot card is paid off, I will begin paying $120 per month to the secured Visa card account. So, by applying the "debt snowball" method, my payment schedule until I am virtually debt free (not counting monthly household expenses) will look like this:
Home Depot: 4 ½ months until paid off
Secured Visa: paid off 3 ½ months after Home Depot card at $120 per month
Back state taxes: paid off 11 months after secured Visa card at $220 per month
Back federal taxes: paid off 6 months after back state taxes at $270 per month
Car payment: paid off about 21 months after back state taxes at $620 per month
Using this "debt snowball" method, it should take me just under 4 years to become debt-free, assuming that I do not add any additional debt and I stick to this plan. While 4 years sounds like a long time, I must remember that it took me years to get into debt, and it will take time to dig myself out. Besides, I'm currently scheduled to be making car payments for the next 6 years. Paying off that car two years early will certainly feel good, and save me hundreds of dollars in interest payments. Also, by the time I am done I will have eliminated $720 of debt payments per month. An extra $720 per month in my pocket...or better yet...invested, sure sounds great. These amounts are rounded off and to some degree are estimates, but you get the idea.
Living frugally will help me stick to this plan, and go a long way toward helping me achieve my goal of being totally debt-free within the next five years.
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I attended Dave Ramsey's Financial Peace University, tuition for which was a Christmas gift from a friend who also attended. Very worthwhile, although I have not followed it as well as I should.
Dave recommends that you FIRST save up $1000 in an emergency fund, so that anything that happens (life does happen!) can be covered without using credit. THEN do the debt snowball. Maybe you already have this emergency fund saved, but for those that don't, the emergency fund is the first thing. Otherwise you will get derailed because things happen all the time - as you know! Dave suggests that you might need to find something to sell to get the $1,000, since it can be very hard to lay your hands on $1,000 if you are in debt anyway!
That's a good point. I am still working on saving up that initial $500 to $1,000 in emergency savings. I did have an emergency fund, but my wife suddenly became disabled and well, that was an emergency. We used our emergency fund for living expenses for awhile, but depleted it after a few months.