Financial Tip Friday: Strategies for Paying Off Debt

Financial Tip Friday: Strategies for Paying Off Debt

This post is an updated version of one I wrote over a year ago. I thought it would be a good edition for Financial Tip Friday.

I have talked about my journey into debt and some assets that I have. Now I want to discuss some strategies to get out of debt. Now this is a work in progress, but hopefully it will provide a blueprint as I move forward.

So I am only in the early stages of paying off this debt, but as I mentioned I have already taken a big chunk out of it.  I read a lot of personal finance blogs and finance stuff in general so I have attempted to take the advice they give and modify it to my own situation (each person’s situation is fundamentally different).  I also am a fan of Dave Ramsey.  I don’t get into his religious stuff too much, but I respect where he comes from.  I also disagree with him on a couple of the baby steps, but I will explain that as I go on b/c I have modified them to my situation.

First strategy and it is really a simple one: Budget! For me this is still a work in progress. My wife hates talking about money.  I enjoy talking about it.  She doesn’t necessarily want to have a formal budget where every dollar is allocated.  I do.  We have to somewhere meet in the middle and I think we are starting too, but it is a slow process.  To provide some data for myself I signed up to Mint.com.  I love Mint.  It is great.  You can track your spending with credit cards, checking and savings accounts, investments, etc. It can really give you an idea of where your money is going at the end of the month.  I need to do a better job on another account, but that is for another post at another time.

Second strategy: I cut up all of the credit cards except for one, which I keep in a difficult and hidden place in case we need it.  You never know with emergencies.  I hate credit card debt.  I want it gone. I want to be free.  My goal is to be cc free and never go back by the end of 2015 (we have accomplished this already)!

Third strategy: I teach a lot of extra classes and take whatever side gigs (e.g. advising, etc) so I can get extra money to pay this debt off quicker. This has really curtailed my writing and my research.  However, now that I am tenured and married I feel like I have to focus on different aspects of my life.  I want to buy a house, maybe have children, be debt free, travel with my spouse and enjoy life a bit.  I have been working so much that I really didn’t relax.  I am trying to do a bit more of that (after some of this debt is paid off).  My first priority is to take care of my family.  My research comes second and doing research, while it may give me a bigger name in my field, doesn’t put money in my pockets.  And I don’t take summers off.  I work, teach, advise, and scrape together whatever I can to accelerate the debt payoff.  Most professors do this anyway, even though the general public thinks we do nothing but eat bon bons and sit on our butts all summer.

Fourth strategy: This is where the Dave Ramsey stuff comes in.  Dave Ramsey argues that the key to paying off debt is his baby steps (and I agree for the most part).  I will discuss this in a more extended post on how I disagree with Dave somewhat.

Baby Step 1: Accumulate a $1000 emergency fund as fast as possible

Baby Step 2: List all your debts smallest to largest.  Pay minimum payments on all the debts except the smallest one and attack that with as much money as you can throw at it.  When that debt is done take the money you were paying on that and then pay on the next debt and so forth until all your debt is paid.

Baby Step 3: Save 3-6 months of an emergency fund.

Baby Step 4: Save 15% of your income for retirement (not including the company match)

Baby Step 5: Fund your children’s college education

Baby Step 6: Pay off the house

Baby Step 7: Build Wealth and Give!

Fifth Strategy: I have already accomplished the first baby step. I have my miniature emergency fund. However, I am also increasing that emergency fund to include three months of expenses just in case. Yes, I know this goes against the gospel of Dave Ramsey, but with past experience I want a little bit of cushion. However, I am going to put that emergency fund in a place that I can’t get at it unless it is a true emergency. Past experience tells me that I am sometimes tempted and break my own rules by accessing extra money and not spending on just debt.

Sixth Strategy: Breaking up my debt into smaller bites. One of the reasons Dave Ramsey recommends people pay off debts, smallest to largest first, instead of highest interest rate first is because of the momentum. People who get quick wins (e.g. paying off really small debts) are more apt to buy into the system and continue to grind and pay off debt. Well, my debt is divided amongst two large accounts. To get to pay off the debt quicker I am mentally breaking my debt into smaller slices (haven’t decided how big yet) and working on paying off those slices. I think my strategy is to save, in a separate savings account not tied to my emergency fund, money that would meet each slice. Then I take that money and immediately pay part of that debt. The more I do that I think the more wins I have.  The more traction I can get.

Seventh Strategy: Set a larger goal to be totally debt free (except my mortgage). I like to set goals. I don’t always accomplish them, but I like long-term goals because it keeps me accountable.

Eighth Strategy: Share my progress with others. I want to go on this journey with others. Keep each other accountable. Talk about what is working and what isn’t working. Call it a self-help group, but I hope I will hear from other readers periodically to discuss how they are doing.

This isn’t a full proof plan and I am sure I will adjust it depending on different circumstances, but I at least just want a plan. Planning isn’t a bad thing. It has saved me on more than one occasion.

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