This article is part three of a series I’m writing explaining exactly how my family and I paid off over $90,000 of consumer debt in less than two years.
In the previous article I explained how my family and I started our debt snowball by quickly eliminating over $18,000 of debt (completely paying off three accounts) with proceeds from the sale of common stock I had acquired through my company’s employee stock purchase program.
Only one month into our debt snowball repayment plan we had made considerable progress in paying off our debt.
However, it came at the expense of cashing out our last non-retirement savings account (with the exception of about $1,000 we kept in our savings account as a “baby” emergency fund).
The easy part was over. In order to pay off our remaining debt we would need to focus our attention on energy efficiency, tight budgeting, lots of overtime, and the sale of a few personal items.
The table above shows exactly how much debt we had at this point in our lives. We still owed over $71,400 but it was a lot better than the original $90,415 we started with the month before.
We were committed to paying off our debt, but even with a monthly take home pay of about $5,400 we still had a long row to hoe!
The Family Budgeting Process:
Dave Ramsey (the inspiration behind my decision to become debt free) refers to budgets as the dreaded “B-Word”. No one likes doing personal budgets and when we hear of somebody referring to their “budget”, we often conjure up biased thoughts about how the person must be “poor” or “low class”.
The Budgeting Myth: Ironically, author Thomas Stanley of “Millionaire Next Door” fame noted an interesting trend among the millionaires he studied in his landmark 1998 book. Through closely examining the personal finance habits of hundreds of actual millionaires, he discovered that more than half of the families surveyed do a written budget each month. Do you still think budgets are for poor people?
In the beginning, it was difficult to agree on how much to spend on various budget items each month. This is part of the growing process but as the months went by, and we “tweaked” our monthly budgets, they became more practical and easier to stick to.
We used what’s called a “zero based budget” to account for every single dollar we expected to receive each month utilizing the free budget forms on Dave Ramsey’s website. We reduced the amount of money we spent on food, shelter, utilities, transportation, and other regular expenses to the bare minimum; plus, we paid the minimums on all other debts focusing every extra dollar we had on the next debt in our debt snowball list.
We reduced our utility bills (phone, electricity, cable, Internet, etc.) by using these services more efficiently.
- We utilized some of the energy savings techniques I wrote about in a previous article to save on our electricity and heating bills reducing our electricity bill from $300 to about $225. A Savings of $75per month.
- We canceled our home phone service saving us $34per month.
- We called the cable company to cancel our “premium” service and they graciously offered to bill us their new user introductory price for the next 6 months which saved us about $300.
Through carefully cutting back our expenses, and then sticking to our “strict” budget, we were able to squeeze an extra $2,000 per month out of our monthly take home pay of about $5,400.
This money went directly to the 401k loan I had assumed to cover the negative equity we had in our leased Toyota 4Runner when we traded it in on our 2002 Volvo S40 (we still own this car today eight years later).
On April 5, 2004 we mailed in the final payment to my 401k company to pay off the outstanding balance on my 401k loan.
It was our first “real” win in our journey to become debt free. We paid off a debt using money we worked hard and budgeted for without using money we already had set aside.
The next debt on our list we wanted to pay off was Student Loan #2. Yes I know, we didn’t exactly pay off our debts smallest to largest, but you can read more about that here if you want.
Over the next few months we continued to do a written budget with each one getting easier to do and stick with. Now that we were on a budget and had cut back our monthly savings, we actually felt like we got a huge raise. In reality we were just spending less.
We were happy with the progress we were making through our budget, but I still felt we could do better.
To demonstrate to my family how committed I was to getting out of debt, I decided to put my “prized” motorcycle up for sale to raise more money for our debt snowball.
To read the next post in this series, click here.