Our Personal Debt Plan

 As you have read, my family is carrying debt, lots of debt.  While some may scoff, to us at least, $110,000 is a mountain of debt especially against less than a $70k gross salary per year.  We could have remained in the fetal position, but instead we got angry.  In fact, we got angry enough for us to want to break the status quo and to finally decide that enough is enough.  Basically, our pain of seeing the bills pile up outweighed our numbness to our financial situation.  Two months ago, I never would have dreamed of this blog and I never would have dreamed that we would actually have a solid plan to rid our lives of the bondage of debt!

 Our debt is easy to analyze:

44% mortgage

23% auto loan debt

18% credit card debt

4% medical expenses debt

.6% personal loan debt

.53% department store charge cards

Our average monthly bills (minimum payments) comes to @ $1800, against a rough $4200 take home pay.  Now that doesn’t seem bad, does it?  Not at all.  Now let’s add the actual necessities for the month:

Food $650, Daycare $200, Gas $520, Satellite TV $70, Car repairs $50, Eating out $175, Car insurance $50, Home Insurance $35, Property taxes $66, Electricity $260, Water $60, Cell and home phones $90, web hosting $15 (I have two other websites that I run), Internet access $10 (yeah, I am stuck in dial up hell), and our student loans ($28k are currently in forbearance).

 
OK, now our monthly bill total is more or less $4,050.  Fine, we are still ahead of our take home pay of $4200.  Given a normal “fudge factor”, this is close to the break even point.  This is too close and approximately 50% of our pay is going straight into debt.

 Step One

We created an emergency fund.  Out target is a minimum of $1k.  While Dave Ramsey advocates getting this fund in place and then attacking your bills, we simply can not afford to do it.  We are already behind on every credit card bill, most of the department store bills, and medical expenses.  A grand will not cover any major types of events, such as things that have happened to us in the past:  blown transmission (my current car’s transmission is slipping) or the such.  A grand will also not even come close to covering any type of major illness.  Our emergency fund is in place to help us catch the smaller problems that pop up from time to time such as doctor office visits, etc.  Although our emergency fund is not being created “The Dave Ramsey Way”, we are working on it.

 Step Two

It is important for both spouses to be on the same page.  With only one spouse on board, no plan will ever work.  My wife and I sat down and wrote out all of our bills and the minimums for each.  In this list, we found it important to also include those bills and debts that are easily forgotten:  charitable donations, land taxes, car insurance, home insurance, life insurance, and car repairs to name a few.  Once we had the list written out, the wow factor was high, but this is achievable. 

 Step Three

The snowball plan as advocated by Dave Ramsey and others is a solid principle to follow.  Basically, you pay all of your bills to remain current (get current first if you are not there).  If you have any money left over, apply those funds to a targeted bill.  Once your targeted bill is paid off, take the money that would have gone to that bill plus the original remainder and re-target to a different bill.  For example, our initial target will be our personal loan.  The interest rate on this loan is 9.75%, which is not the highest interest rate that we have.  The primary reason we chose the personal loan as our first target is because we only owe $675 on this bill.  This bill will be paid in full this month due to our snowball effect.  Once paid in full, we now have an additional $197 per month to apply to our next target.  The debt snowball is a proven method for eliminating debt.  This principle is the backbone of 99% of the “methods” out there.

 Step Four

Once the snowball has eliminated our unsecured debt, we will be going after the two auto loans and then our mortgage.  At the same time, we will begin saving towards having a minimum of 6 months of expenses saved.  While the emergency plan is extremely important in the beginning to prevent unexpected expenses from de-railing you, the total amount that you end up in your savings account will ultimately make or break you.  For example, I have two co-workers that have been injured within the past year.  One man was out of work for almost four months with no short term disability and no money coming in the entire time.  The second man has been out of work for almost that amount of time and is still looking at missing a minimum of another three months.  This man does not have short term disability either.  If either would have had 6 months of expenses in their savings accounts, this tidal wave in life would have been reduced to a mere ripple.  Getting out of debt is the primary goal; however, getting to the point of total self sufficiency is the ultimate end game objective. 

 Our debt elimination plan will not happen over night.  We have no delusions of grandeur.  Nor will this will not be an easy journey to navigate.  By consistently plugging away and not losing sight of our goals, we will be successful.  If you are drowning in debt like we are, we invite you along for the journey.  Together we can all become debt free and self sufficient.  There is nobody that is doomed to an entire life of financial bondage, it is a decision that you must make.

Our next topic will be frugal living.  I have the draft written and still need to tweak it somewhat, but be looking for it coming out soon!