1 Year Ago Today We Made Our First Debt Snowball Payment

Today marks the official one year mark since starting our debt snowball plan - we made our first payment last March 3, 2008. Our progress has been above average paying off $19,000.

Since it's spring break for my kids I am taking them to Camp Nickelodeon at the Mall of America to celebrate a little.

But our work is not over! We're working hard to kill a consolidation loan by June. I hate this loan since we've been paying $400 a month for the last two and a half years - I HATE IT! When that baby is paid off and that extra monthly cash flow is freed up it will be like getting close to a 30% raise. We're working our own stimulus plan!

Debt Snowball Update

We're still pluggin' away at our goal to be debt free. It has has been close enough to a year so here's another update.

Debt Snowball Progress

	February 29, 2008	February14, 2009	Change
Total Debt	$182,890.00	$163,971.00	($18,919.00)
Mortgage	$138,489.00	$135,813.00	($2,676.00)
Consumer	$44,401.00	$28,120.00	($16,281.00)
Number of Debts	12	3	-9

A footnote about the Consumer Loan balance: Right now we are banking our extra payments into savings so the balance is current IF we made a lump sum payment right today. We're banking until June or so and then we'll make the final payment on our next debt which is $6,100 right now.

Be Ready to Start a Debt Snowball Plan

What's the process for getting the snowball rolling toward paying off consumer debt?

Before starting a debt snowball plan there needs to be a short term plan for getting ready to pay off debt. The idea itself of being totally debt free is exciting and provides a rush of transforming motivation for any one willing to see the dream. Yet, once the idea settles in, there is also an awesome sense of urgency that could lead to premature action in the way of foolishly allocating money toward debt when it is needed elsewhere. I believe certain requirements need to be met before applying extra toward paying off personal debt otherwise being in debt continues on as an endless, fruitless cycle of trying to get out of debt. I think these are the essential steps:

1. Stop, stop, stop, stop using debt to fund life. Cut up the credit cards - all of them. There is no need to have a credit card for emergencies. In a time of great want the definition of "emergency" changes too easily. At the very least, keep one credit card, place it in a large bowl of water and place the bowl in the freezer. Next time you want to use your credit card, think deep about your needs, wants, and emergencies as you watch the ice melt.

2. Create a zero-based spending plan. In other words, create a budget on paper that allocates every penny before it is actually spent. I've read advice that says to track what you spend for 30 days, then you'll know where it all goes, and then you are better able to create a budget. I disagree. It's a waste of time. I'll be doing more posts on this topic but essentially budgets are never set in stone. A personal budget is fluid and the bottom line changes from month to month. Create the budget first and work it for three months, that will give you an idea of what you're spending and create great habits for running the budget as you begin a debt snowball.

3. Sell something and apply the money to step 4 or 5. This is not an official step in Dave Ramsey's plan even though he does suggest selling stuff. I am making it a step because is proves commitment and of course it creates cash. Most households have something that can be sold on ebay or in a garage sale. Also, what about the car you are making payments on (sorry, that might have stung)?

4. Get current on all past due bills. Past due bills like utilities, phone, etc are vicious enemies of any debt snowball plan. In essence they are debts but they're probably small enough to catch up on in a month or two. If they would take longer than that then perhaps these past due bills need to be placed in the debt snowball plan (as the first items to get paid down).

5. Save $1,000 for a savings account as fast as you can. This is Baby Step 1 in Dave Ramsey' s plan. This is a short term reserve so that you don't have to use a credit card. This may take a while but with the prior three steps in place first saving $1,000 will happen sooner than later. Sell more stuff to achieve this step.

For my family this process took about two months but if you're starting totally from scratch it's plausible that it could take six months or even a year. We already had a zero based spending plan in place, we just needed to pay more attention to it. We cut up our credit cards two years prior as well. Oh, I also sold $1,500 worth of stuff on Craigslist for steps 4 and 5.

The three years prior to starting our debt snowball plan I believed the only answer to our problems was to make more money. I decided to let go of that thought while my wife and I went through Financial Peace University in January 2008. I realized that the drain on our finances had to do with not having the above requirements in place.

Bailout For Me

First off I need to get my traffic back up so I figure a post using "Bailout" would get me placed back into some google searches. HA!

A good friend (he likes it when I call him good) told me yesterday that I need to adjust my debt snowball because I haven't factored in a bailout. With a bailout I'll be 100% debt free in a few months possibly. I think that is what he is hoping for for himself (he is also motivated more by trash talk than encouraging words.)

Another good friend a few weeks back made a comment to me that ironically, people who aren't paying off debt may end up being the ones who suffer the least while the US economy works through its current dismal state.

NO Bailout for me! NO Bailout for you! Create your own plan to get out of debt!

Debt Snowball / FPU Update

Before I get right back at it I probably should offer an excuse for my absence. I haven't posted at all since September 2nd and the last post on my family's progress on our debt snowball plan was June 26th. Really? Well things are always much more complex than a single answer so I don't have something as simple an as excuse like "I hate blogging". Rather, I've been focused on three areas: 1) Family, 2) Work, and 3) Sleep.

Debt Snowball Progress

	February 29, 2008	December 4, 2008	Change
Total Debt	$182,890.00	$168,347.00	($14,543.00)
Mortgage	$138,489.00	$136,440.00	($2,049.00)
Consumer	$44,401.00	$31,907.00	($12,494.00)
Number of Debts	12	3	-9

On the consumer debt side of things we're down to two items, the second mortgage and a personal loan. The amount of the personal loan is $6,847 and we're applying over $1,000 per month to pay it down. I have a goal to get it paid off in April 2009 by finding some more money to throw at it. The money will come from budget cutting and a tax refund.

After the personal loan is gone we'll have the second mortgage to content with. With the balance still at $25,000 we'll be working on paying it off over the next two years. Rather than applying our entire debt snowball payment to the second I'd like to take some of it and start on babystep three - cash savings to cover 3 to 6 months of expenses. With the economy the way it is I really feel the desire to have much more in savings. The great thing is, for the first time since deciding eight years ago to have my wife Carla be a full-time stay at home mother, we're finally in a spot to be able to save any money what so ever. I've made no decisions on this because all I care about right now is kicking that personal loan out of our house. I'm a tired of living with it.

The plan is to keep working the plan. Keep working, keep giving, and keep shrinking debt.

Debt Snowball Update

Haven't blogged much lately because I am working the part time job and the kids are home for the summer. But, I am happy to report that with our most recent debt snowball payment we have now paid off $10,000 of debt since starting our snowball back in Feb 2008. This is total debt including mortgage but just over $8,000 is consumer. Things keep rolling. We now have $750 a month getting applied to the next item on the list.

Maintaining the monthly cash flow plan (budget) has been the key. We have our income spent on paper each month before we spend it for real. I check things out once or twice a week and make adjustments when needed. Food and gas expenses have definitely gone up and so has home repairs, entertainment, and our giving (because we want it to.) No worries though, we've just cut back in other areas for the summer (i.e. a good budget allows us to capture and redirect the higher amounts that would go to the heat bill in the winter, etc.)

Debt Snowball Status Update

The $840 per month we've been paying toward 9 debts is now being directed to just 3 debts - it will be 2 debts on June 15th when we kick our dentist (bill) out of our house. Since Feb 2 we've paid off $6,500 of debt and saved up $1,000 for an emergency fund. The small balances are essentially gone and now we need to dig into the next balance, which is much larger at $8,800. This will take us until April 2009 to pay off.

The money to pay down the debt came from:
1. Monthly Budget
2. Tax refunds and rebates
3. Selling stuff

I have started working part time. It's been three weeks now. I got my first check today and it went straight to debt.

We're going to increase our monthly giving budget. This money will come from reducing the debt snowball payment. On paper the snowball end date will extend a bit but I am not going to fret.

My oldest son got glasses. We paid cash. We had the money in the bank one week before we needed it.

The budget shows we're over spending in some areas but I'll get it under control.

FPU Update: Debt Snowball Stimulated

The Federal Government made an electronic deposit to my bank account this morning - the economic stimulus rebate. Today I am going to stimulate my debt snowball. Two thousand four hundred dollars of consumer debt will be stimulated to oblivion.

Here's how other people are spending their stimulus money.

Pay Down Debt With Tax Rebate

A week or so ago I posted a poll asking people what their plans are for the tax rebate coming in May (if you're eligible). Thirteen responses and 74% said they'd pay down personal debt. Two said they'd save it and one person said they're going to buy something. I thought those were results were pretty encouraging.

I love straight talk. Wisdom that lovingly smacks me right between the eyes. I need it. I came across an article the other day that I classify as straight talk on what one should do with their tax rebate.

Using rebate to pay down debt might rescue economy.

It starts out:

If you're like me, you might be a little confused about what we should do to jump-start a dangerously weak economy.

Here's what the federal government suggests: Spend!

But this is what many personal financial experts and economists recommend: Save!

There are always choices:

A White House fact sheet says the checks are designed to "stimulate consumer spending."

But some economists say the best thing we can do is to save those rebate checks and pay down debt.

"We are spending like there's no tomorrow," Michigan State University economist Charles Ballard told me.

A sociological phenomenon?

"It's almost beyond economics," Ballard said of our spending habit.

"It's more like a sociological phenomenon in which we have this desperate desire to consume, consume, consume."

Ballard says we need a more balanced mix of spending and saving so we don't end up owing our financial souls to our Chinese financiers.

Oh it is so much more than that!!!

FPU 10: From Fruition to Tuition

Retirement Planning and College Funding were the topics of this session. Ramsey spent 60% of the time walking through the basics of different types of tax-favored retirement plan options such as IRAs, 401(k)s, Roth IRAs, etc. True to his style, Ramsey is a teacher first and foremost and he covered the basics. I liked his approach at explaining retirement plans. I believe the illustrations helped my wife, which brings us both closer together in our financial planning language and communication. Essentially all retirement funding tools act as coats that wrap around long-term investments such as mutual funds. They get their names from their specific location in IRS tax code. For example, a 401k comes from section 401, subsection k. A Roth IRA is actually in the same rule section as a traditional IRA but with a few twists - that came from a US Senator with the last name of Roth. I love history. The other 40% of the sessions covered the same types of basics for college funding vehicles.

Retirement and College Planning are Baby Steps 4 and 5 respectively. Ramsey proposes that 15% of your income should be going toward retirement investments and then after that, whatever it takes, and whatever you have left over should go toward college planning. But first, this is key, baby steps 1, 2, and 3 must be completed in full. This one, at first, is hard to swallow - none of your household income is to be invested for retirement or college until after steps 1-3 are fully funded. This is not too hard for me to accept because I have not been funding retirement nor college. It's a tad harder to swallow if perhaps you are funding a 401(k) at work and your employer is contributing matching funds up to a certain percentage. Setting aside the current tax benefits of investing pre-tax money, the match is the most attractive element of the 401k - its a 100% return, it's free money. Nevertheless, Ramsey, with his Gazelle intensity mantra, advises to stop all funding to retirement so as to attack the emergency fund and debt snowball.

I am not compelled to argue against Ramsey's idea on simple mathematics - frankly, I believe depending on the right mix of assumptions, one could make a very strong mathematical case for either approach. What is most difficult for people to accept I think is related to the "feels like factor." It just feels wrong to not take advantage of an employer match which produces a 100% return. It seems contrary to common sense. Is Ramsey's no-holds-barred approach foolish? I don't think so. Given the fact that most people are so scattered financially and many statistics speak to the disarray, Ramsey's approach brings on intense focus. How badly do you want to get out of debt first?

I am not funding retirement. I want to. I should be. I also have four children and I should be setting something aside for their future education. But I am not. I could be splitting up the amount I am over funding my debt snowball and applying some toward retirement. Should I be? I just talked to a co-worker the other day who hinted at my foolishness. No matter what, I should be saving some for retirement - hands down, not saving is not an option. Here's the bottom line for me: If I were not committed to attacking my debt and I didn't have a plan to be debt free in less than two years, I would be investing more toward retirement. What it comes down to is how committed you are to getting out of debt. Ramsey doesn't suggest taking your sweet time. He says run away from debt with gazelle intensity. Three years from now I'll then switch to running with gazelle intensity by investing heavily toward retirement and college. I'll be 41 years old and by 65 there will be enough money, and I will be in a position to help all my children as they work themselves through college.

What Ramsey didn't cover is what's the purpose of retirement. Why retire? What does it look like? How does your purpose in life change once you are retired? This is what I think about today and my definition or retirement is not "So I don't ever have to work again.", or "I'll be financially independent." Here are some great thoughts. Retirement is another phase of life where I'll be serving God, loving others, and glorifying Him. I am not sure of the exact details but God's sovereign watch will make everything clear over time.

Another bottom line for me: I have closed an open loop - I am directly investing in my retirement and my children's education funding by getting debt free in the next two years. It used to be, in my mind, that these goals were either mutually exclusive or all equally important.

In Case of an Emergency

My wife and I are happy with the progress we've made since enrolling in Financial Peace University. In the last 60 days we have saved $1,000 into a short term emergency fund and paid off $1,700 in debt above the minimum payments. We're excited too that this week we'll knock off another small outstanding debt in the amount of $560. To us our movement is a really big deal - 60 days ago my attitude was hopeless.

What happens if we have to dip into the $1,000 Emergency fund?

The plan is to replenish the fund as fast as possible. How? We'll stop over funding our debt snowball until the emergency fund is back to $1,000. Right now we're applying $485 per month toward the debt snowball, so if we had to clean out the fund, we'd be back in good shape very shortly. This is our immediate plan at least.

With four children, an older home, and greater than ten year old cars I want a better emergency plan. I am toying with the idea of building the fund by at least another $1,000 and then resuming the debt snowball over funding. I'm thinking.

Debt Snowball Calculator

Here is a fantastic tool to create your own plan:

Debt Snowball Calculator

Run the numbers!

What's it going to take for you to be debt free (except mortgage) in 3 years or less? Let me know.

Stressed Out By Maxed Out

Saturday nights, after the kids are bathed and tucked in, my wife and I tuck ourselves in, with the laptop, and catch a movie. This last weekend we borrowed Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders from Brandy.

As a rule I like documentaries. I liked Maxed Out. I am not going to review the whole flick here but make sure you check out the links below to some other reviews on the net. When you factor in the whole daylight savings spring ahead lose an hour of sleep thing, I lost probably four hours because this movie stressed me out. I disagree with all reviews that proclaim this movie is hilarious or entertaining - that's just mind boggling. I agree though with Brandy that its not too over the top to proclaim this movie is life changing.

I guess I wasn't expecting the anxiety but I realize it centered on my children. I lay stunned in bed driven by thoughts of how to help them from getting trapped by credit cards and debt as a whole. I'll settle down in the next couple of days and have a specific plan.

Maxed Out is required watching.

Trailers and Clips:
Maxed Out Website

Reviews:
Get Rich Slowly
Rotten Tomatoes
Metacritic
Washington Post

The Book:
Brandy shared her thoughts after having read the book.

Debt Snowball, The Kids Have Eyes and Ears

The kids are on board now with our family's mission to eliminate our debt, our frontal assault. I have not done any direct teaching with them which is usually my tendency. For now they've engaged themselves in the process. Could it be because my wife posted our snowball plan on the kitchen cupboard?

This week while driving to a child event:

Sarah: "Dad, you know this debt snowball thing? When you and Mom are done, can we go on a vacation to Disneyland."

Me: "That would be excellent, sweetie!"

Sarah: (In typical quick-thinking-strike-while-its-hot-she'll-be-in-sales fashion) "This summer?"

Man I wish! If I had a credit card I'd be tempted to charge it just for my sweetie.

While driving away from the window at McDonald's:

Josh: "Dad!! Did you just charge that? Did you just go into debt for Happy Meals?"

Me: "No son, I used the Debit card."

Josh: "Dad?! The card said Mastercard! Are you sure? I think you charged it."

Me: "No son, Debit means cash. There is cash in the bank to pay for that meal."

Josh: "How do you know how much cash is in the bank."

Me: "We keep a budget and watch it very closely.'

Josh: "What's a budget?"

On and on the conversation went until we pulled in the driveway. Josh is a thinker and invites my direct teaching - he's also a challenger and it helps keep me sharp. Our sit down McDonald's meal lasted 2.34859 seconds leaving me feeling guilty that I fed poison to my children again and dropped a $20 at the altar of ease.

Debt Snowball Plan

Yesterday I announced we're going XSTREAM with our plan to pay off debt. Until the debt is gone, we're going to be as tactically creative as possible and maneuver our way to debt freedom with, as Ramsey likes to say, gazelle intensity. I am just not messing around anymore.

The overall strategy is called The Debt Snowball:

• List all debts in ascending order from smallest balance to largest. This is the method's most distinctive feature, in that the order is determined by amount owed, not the rate of interest charged. However, if two debts are very close in amount owed, then the debt with the higher interest rate would be moved above in the list.
• Commit to pay the minimum payment on every debt.
• Determine how much extra can be applied towards the smallest debt.
• Pay the minimum payment plus the extra amount towards that smallest debt until it is paid off.
• Then, add the old minimum payment from the first debt to the extra amount, and apply the new sum to the second smallest debt.
• Repeat until all debts are paid in full.

In theory, by the time the final debts are reached, the extra amount paid toward the larger debts will grow quickly, similar to a snowball rolling downhill gathering more snow (thus the name).

I figure, in order to really speed away from our debt, the are prerequisites which we have all ready implemented: 1) Quit borrowing money, 2) Save the $1,000 for immediate cash reserves, 3) Create a zero based budget and following it monthly.

Here's our situation. But first, do you think I am nuts for sharing all this with you and the world on the internet? I figure, it's all public information anyways if bankruptcy ever happened. it makes it easier for you to feel free and hold me accountable at any given moment (you probably could have fun with that). So here's the shameful truth:

• $17,100 of consumer debt (i.e. credit cards, medical bills, etc.)
  
• $25,900 on a home equity loan.
  
• The debt snowball plan then is going after $43,000 total debt.
• The minimum payment is $840. Ouch!, that's insane but it's true. One of the best things about going through FPU is that reality wakes you up.
  

Our first leap toward gazelle intensity:

• Apply $485 extra each month from family budget. This makes the total monthly contribution to the plan to be $1,325.
• All gifts and other blessings in the way of unexpected cash inflow will go directly to the plan.

This plan will get us to debt freedom in Dec 2010. Yesterday I got this crazy idea that we'll increase the intensity and strive to be debt free a whole year earlier - this will really stretch us but force us to be insanely (and hopefully brilliantly) creative. It will be fun! For example:

1. I am strongly considering taking on another job. I would like to do something for the next 6-8 months. What's holding me back is the lost time with my family. I am not ready to leap into this one yet but I am dreaming about it.
2. Keep selling things.
   
3. Raise money. This is the one thing I think is completely insane. Ask people to chip in, to give me money to help me pay off my family's personal debt? Did you notice the little red widget on the top of the right side bar of this blog? I set an objective of $15,000 by Dec 31, 2008. Let's see what happens. This amount would take an entire year off the plan I described earlier. I do plan to "earn it" in sense. I am going to do the best I can to provide meaningful information on this blog. I am going to increase the intensity of the value of this blog. Yes, it's insane. I won't be constantly pleading for money. I am not even really asking for money right now. This is only a small part of my plan and it's an experiment.

I have to run. I sold something on Craigslist yesterday and I need to get it ready for the guy coming at 10:30. Another $400 to the plan!!!

FPU: xSTREAM tactics

I went crazy selling stuff to raise money for our immediate cash reserve fund of $1,000. That got me so pumped up that now I am going xSTREAM. I'm attacking our family debt with whatever it takes. I'll be posting more soon about my xSTREAM tactics and laying out my whole debt snowball plan.

As a preview, the whole plan begins with a challenge from my wife and a friend to be creative and pay off all our debt before December 2010. I am setting a goal. I want to see if we can do it a whole year earlier.