I’m not sure how the shift happened, but sometime in the past month I decided that now is the time I’m finally getting out of debt. I don’t know why it’s hitting me so hard now, but it’s like I woke up one day just sick of paying so much of my income toward debt. I’m at a point in my career where I make a decent income. So why am I still this deep in debt? My conclusion is that I'm in this situation purely from lack of transparency and attention to what’s going on with finances in my own life. I spend a lot of time planning for work and spending my energy on other people. It’s time to turn inward and knock this out.
I would say about 90% of my debt is student loans. Mistake number 1: Going to a private university and taking out tons of loans for a bachelor’s degree. That could be a post of its own, but this post is about preparing to move forward, so I won’t go there right now.
When I first graduated from college and started working full-time, I began following Dave Ramsey’s program to get out of debt, and did actually pay off a credit card and a student loan payment. But my life circumstances drastically changed in the years that followed, I lost momentum and stopped paying close attention to my finances.
I know the program works, since it’s helped me before, so I’m getting back on it. This time I’ve decided to blog about my experiences to keep me accountable and hopefully help someone else who’s trying to dig out of debt.
Before you jump into Dave Ramsey’s baby steps, you have to do a little pre-work to get clear on where you stand financially. This part is intimidating, but I actually felt much more at peace and in control of my financial situation once I had this clarity.
Get Clear on Your Income/Expenses: Create a Budget
The first thing I did was create a budget. I’d created one before, and had a rough idea of my monthly bills, but haven’t actively tracked my spending in years. There are a lot of different approaches to making a budget (some people start with a template, so they know what categories to fill in), but here’s what I did:
Write down all known monthly payments that come out of your account. This includes, rent, utilities, debt payments, subscriptions (like Netflix or Spotify). I organized this on a spreadsheet in order of their due dates. There are apps for this, but I’m a little old school with my spreadsheets.
Figure out what you can cut. For me, I decided to cut my gym membership. I wasn’t using it, and have access to a gym at work if I want to do these these types of workouts. Note: I wouldn’t have cut this if I was actively using it, and if it was playing a key role in my physical/mental health.
Once a had my monthly expenses to a minimum, I split my bills according to my paycheck dates, so I knew how much of each paycheck was needed to cover the bills for that part of the month. I could then see how much of my paycheck I had leftover to spend/save/pay extra toward debt. I get paid an equal amount twice a month, so I subtracted the expenses for each pay period to see how much of each check I had left to put toward all other expenses/financial goals.
Allot money for each pay period to variable expenses. These are categories like food, gas, clothes, etc. Instead of separating each little category, I have all of this assigned in a single “Personal Expenses” category, which covers all of this. I started out with as little as possible in this section. I may have to raise it next month, but I’m trying to start low so I can put as much toward paying off debt as possible.
It may be helpful to split all of this out if you’re very new to budgeting to make sure you’re not spending all of your money on food, and then have no budgeted money to put gas in your car to get to work. Dave Ramsey suggests taking this money out as cash and using the envelope system (where you put budgeted money for each category in a separate envelope). The idea behind this is that it’s impossible to go over budget this way because there physically isn’t more money to spend in your envelopes (and let’s faced it—it’s much harder to let go of actual cash). But I purchase a lot online, so the cash approach doesn’t work well for me. You can still track categories with debit card purchases using an app like Mint.
List All Debt
This part is a necessary evil. It’s the part of the process where you get your head out of the sand. It was worse than I thought it was, but at least now I know what I’m dealing with. Remember to list ALL of your debt here. That includes, not only student loans and credit cards, but personal loans, medical bills…any debt you owe. Dave Ramsey suggests using the snowball method to pay off debts. So I listed my debts in order from smallest balance to largest. The idea behind this is to pay off the smallest amount first and then “snowball” the payment you were making toward the smallest debt into the next one, once you’ve paid it off. Using this method is usually the quickest way to see actual progress in paying off your debts, which can keep you motivated.
Please comment below if you've gone through this process and have any tips on paying off debt! I'm going to give weekly updates (might eventually go to monthly) to track progress and give any tips I learn in the process. I'm actually a few weeks in, so I need to catch up on posting.