Advanced Personal Finance

It’s been a long time since my wife and I were in debt. Right now, the only debt we have is our mortgage. For some reason, a recent post at Paid Twice made me pause and take a look back on our debt history. As in many of her posts, she talks about how she made a ’snowflake’ payment to her credit card.  (For those who don’t know, ’snowflaking’ is a term popularized by Dave Ramsey.  My understanding of the term is to send in any small amount of money available to pay debts, usually credit card debt.)

When I read stuff like the Paid Twice post (and there are lots of people in the same situation she is judging by my RSS reader), I get a feeling beyond sympathy. I can easily see why people ignore their debts and never total them up. I can see why people pretend bills don’t exist and simply don’t pay them.

When you have tens of thousands of dollars in debt, it seems so pathetically small when you send a $50 additional payment. Funny thing is, I don’t remember it feeling this way when we were in that situation.

How we got out of debt

Years ago, when we owed money on credit cards, student loans, and a car loan and were working to pay them off, I knew nothing of Dave Ramsey’s ’snowball’ technique. I’d never heard of Suze Orman or any of the rest. This is what we did.

• We prioritized. Nothing novel here. We wrote down what we owed to whom. Then we ordered the list according to what was costing us the most money in interest. Not surprisingly, it was credit cards. We decided to pay them first.

• We sent a bit more than the minimum to the highest priority debt. The rest got the minimum payment. It’s been a long time, but I remember the additional amount being pretty trivial - maybe $100 a month. As a percentage of the debt, it was a soul-crushingly small amount. But we didn’t despair because…

• We applied any large amounts of money toward the debt. We sent every cent of our tax refund straight to the debt. Any work bonuses went to it. When I left the Army, I had leave saved up, so I was being paid by two different jobs for a month. This one was huge. Anyone voluntarily changing jobs can easily apply the same technique. It made a world of difference.

• We kept at it. We were disciplined and relentless. Getting out of debt was our mission. We didn’t live like misers or never take a vacation, but we made the debt first priority until it was gone.

What I learned from our debt journey

• Ignoring the problem won’t make it go away. You owe this money. You will pay it - it’s only a question of when and how much it’s going to cost you.

• Commit to a plan. Use whatever method you like - pay your highest debt first; pay the smallest balance first; whatever. I don’t care. But decide on a plan. Later, if it’s not working for you, change it.

• Get everyone on board. My wife was a key motivator and player in this. The entire family must understand the objective and how you’re going to achieve it.

• Don’t make the problem worse. You cannot buy a new car on credit. Don’t charge something you cannot pay off right then. Don’t go deeper into debt.

Nothing I’ve written here is novel. It’s just our story. We made it out of the hole. We’re on the other side. If you’re in debt like I was, don’t give up. You can do it.

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This entry was posted on Thursday, October 11th, 2007 at 7:56 am and is filed under Credit. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.