10 pounds down 32 pounds to go!

Tuesday, March 03, 2009

how come you're not rich?

My response to Lauren's comment got so long I made it a post. The how I got out of debt story, by me. It's really long so, uhm, skip it if you don't give a shit about getting out of debt.

In theory you're supposed to write down everything you spend for a month and then look at it and be appalled. I did it a little bit differently, I added up all my bills and compared it to my paycheck which was relatively stable. It looked awful so the first thing I did was cut off my phone. A big important step is deciding what is and is not a necessity for you. The land line phone was not a necessity for me. I didn't have a home phone or internet for years. I used the library and my cellphone (which I kept for driving safety because I took a lot of long trips in crappy cars). Step two, drive a crappy car. You do not need a new car, not ever, I'm talking to you! You want it and that's ok as long as you can honestly afford it but it's totally a waste of money*.

Another non necessity is cable, I never had cable so I didn't have to cut that but I did keep netflix because it's cheap and I wanted to have something to do that was just for fun. Netflix was not a necessity, fun is not a necessity, but I decided that it was money well spent for me in my life. I also got a lot of movies from the library, and books obviously. I set up a grocery budget and I clipped coupons, and I never ate out, ever. I made a decision that financial freedom was worth more than new clothes and books and pizza...a huge thing was bottled drinks which seem so small in the moment, water or iced tea costs a dollar or more and so does a box of 50 tea bags...you do the math.

I tracked all my spending on a spread sheet, everything, and I used a checkbook register to keep track of spending on my discover card. The books say to always use cash and divide your budget money in to envelopes, if you have a serious plastic problem that's the way to go. I forced myself to pay off the discover card bill every month come hell or high interest so that was a good enough motivator for me but it's probably best to start with real money to get the hang of it. It can be really hard to stop spending. Like it's really hard to stop eating crap. You want it, you deserve it, it's just the one time...NO. The buck has to stop somewhere. If I really needed something I bought it used but it was rare that I spent money on things when I was still trying to really cut my debt.

The above is all about the outgoings and it's pretty simple, stop spending money on shit you don't need. The next of amy's principles of getting out of debt is making more money. I know, it's frickin' rocket science my approach but simple isn't always easy. My first summer of debt crushing I got a part time job. Every cent went to debt. Another way to make money is to sell your stuff. I sold a lot of my school books online, as well as movies and cds (half.com is a great place to sell and buy used items). I didn't have enough things I didn't need to have a proper yard sale but I did sell specific things to specific people. i.e. my extra iron to my old boss' son.

When you have your spending under control and you're pulling in as much money as you can, then you look at your debts. Do you have high interest cards, a low interest student loan (if such a thing exists anymore), make a list with all the information: balance, rate, any special terms. I used to get the no interest or low interest offers on cards I already had all the time. If you have an offer like that which beats your current terms this is the time to call your creditors and say make me a deal. Most people get credit card offers every day and the bank does not want to lose you. You have to be ready to walk though so only play hardball if you have a good alternative. It's not great for your credit score to open or close a lot of accounts but if you only have one card and their rate is insane, it's probably worth applying for a new card (preferably with benefits of some kind).

All of that takes time so begin by paying down the highest interest card while you work on moving things around. Many folks say paying off the smallest balance first is a good motivator but the math doesn't always work that way. Whichever method you chose, throw as much money as you can toward that card while paying the minimums on every thing else. When you have paid off one card or loan or whatever, you take every cent you were paying toward card 1 and add it to the minimum you were paying on the next debt. They call it a snow ball because the payment grows as each debt gets knocked down so by the last card you're putting a lot of money toward it and it's gone really fast.

And what do you do with the now paid off cards? Nothing. If it's too tempting to have them at hand, put them in a safe or the freezer in a block of ice. If the card is new or has a really low limit, cancel the bastard. If the card was your first card DO NOT CLOSE IT. Your credit history (however corrupt the system) depends on having actual history and if you close your older cards your history is permanently shortened. I have my oldest card in my wallet for the few times that somewhere I need to shop doesn't take discover. If you're trying to work on your credit report you want to keep an eye on the old card and use it once in a while and pay it off immediately...just so they don't close it on you. While you have a balance you are your banks best friend...when you owe them nothing they HATE you so don't expect favors from someone you aren't paying through the nose.

There is some debate about having an emergency fund while you're doing the debt snowball. An emergency fund is a cash account that has as much money as you might need in an emergency. A real emergency, not a shoe sale emergency. The idea is that if your car breaks down or you need a plane ticket home or whatever, you aren't adding to your debt to survive the emergency. I operated without an emergency fund and it was fine. I personally saw it as six on one side half a dozen on the other. My personal credit problem came from buying necessities and not plasma tvs so it was easier to halt unnecessary spending than most folks with a spending problem. For a lot of people putting a rental car on their credit cards because their car broke down is a slippery slope into armani and coach handbags. I accepted the risk that I would have to use credit if something very unexpected came up because I didn't want to look at money in the bank that wasn't paying down my debt.

Nothing ever did come up that I considered an emergency. Much like the expensive health insurance I had to have in case something happened. Nothing ever did happen so I switched to cheaper high deductible insurance that would only be valuable in a true emergency. Another thing to keep in mind above and beyond getting out of debt is maxing out your benefits at work. At my old, old job we had a 401(k) (cough) with an employer match (see, most of that money wasn't mine anyway...) health benefits, insurance benefits and fitness benefits. They actually gave employees money to use for fitness equipment. I bought a bike, a stair stepper, and about 10 fitness dvd's and I was one of only a few people in the whole company that used that benefit. Take advantage of your benefits to the fullest there is no reason not to.

*a word from your sponsor about value. It's foolish to assume that you will never have to buy something while you're getting out of debt or ever after. Frugal is about making good decisions, spending your money wisely. I.E. A good used car not only saves you money driving off the lot, you save on car insurance and registration tax too. Of course, you may have to pay for more repairs sooner on an older car but you won't be worrying over every scratch and bump in the road as does one who paid 5 grand more for a warrantee. As with all things, one must do their research. I do not advocate buying the cheapest thing in all situations. I used to work with someone who had way more debt than me and a very stupid husband who had what some call a poor mentality. Poor folks think rich folks buy what they want when they want it all the time, like a Paris Hilton. This is not true of most people who manage their money well. People who manage their money well research their purchases and make careful decisions. The couple of which I speak wanted a couch, they went to the cheapest store and bought a brand new couch, they were having a baby so one day at walmart he decided he had to have a digital camera for the baby, soon after on another spur of the moment walmart trip they bought a computer. When all was said and done they had a camera that wouldn't work with any computer on earth, a computer that couldn't hook up to the internet and a couch that became broken after three months. Buying the cheapest thing isn't always the smartest thing to do, save the money and do the research and buy something worth the money.

1 comment:

Lauren said...

Thank you for your information.