Finances, Part Three

Now that you have some tools and have hopefully had a chance to check them out for a couple of days we need to put those tools to work.  The first thing I suggest is making a list of all of the things you spend money on each month.

Here is a list of things you might have on your list: Groceries, Rent/Mortgage, Car Payment, Insurance, Fuel, Lawn Service, Cable, Cell Phone, Internet, Public Transportation, Tithe, Clothes, Eating Out, School Supplies, Books, Coffee, Credit Card payments, etc.

Write it ALL down.  Your next step is to separate things that are necessary from that which is nice to have.  For instance, you need to pay your rent/mortgage each month, but you don’t NEED cable television.  This is a really hard step.  We can come up with all sorts of reasons why we just can’t live without things that are not necessary.

The key to getting yourself out of debt is to sacrifice.  This will be hard because you don’t get into debt by sacrificing.  So, this will require you to shift the way you approach your life.  If you are married or engaged to be married this will be difficult if not impossible if your spouse or fiance is not completely on board.

So, cut out the cable, lose the iPhone or Blackberry, and get your kids to mow the grass and you are home free…not so fast.  Now you need to get your debts in order.  It is not enough to just say, “Well, I have 2 credit cards and a car loan.”  You need to write down your outstanding balance, minimum payment, and interest rate.

Take this information and enter it into this handy calculator from Bankrate.com.  By now you should be sufficiently shocked into believing that you really need to get a hold of your finances.  Take a deep breath and keep plugging away.

Now, let’s crank up the heat: Take your savings (NOT YOUR RETIREMENT ACCOUNT, just normal cash savings) and use it to start paying off your debt.  Hold at least $1,000 back for emergencies and use the rest to start attacking your debt.  Start with the cards or debts with the lowest dollar amount.

If you have $4,000 in the bank and 3 credit cards ($1000, $2,500, and $3,000 sitting on each card), you should take $1,000 and hold it back for emergencies leaving $3,000 to pay off debt.  (Don’t worry you will be putting the money back as soon as you get out of debt!)  So you would pay off the $1,000 and most of the $2,500 leaving you with only $3,500 in debt.  (Cutting it almost in 1/2 all at once.)

Then using the money you were spending on things you didn’t need you will apply all of that money toward the new debt.  As well as the money you used to spend on the minimum payment for the first debt.  So, if you spent $150 a month on Cable and had a monthly payment of $25 on the first credit card, then you could add that $175 to the minimum payment you are already paying on your next smallest debt payment.

This is called the debt-snowball method.  Dave Ramsey has really made this popular, however, this technique has been around for many, many years.  As each debt is paid off you have more money each month to put toward the larger debt.  Simple sounding, much more difficult in its execution if you are not committed.

Tomorrow we will talk about selling all of your stuff and what to do with that shiny new car you just bought.