Debt paydown strategy?

[Disneyglobegirl]

Wow! What a great thread! We just started the process of paying off our credit cards. I've been doing the snowball method without really realizing it - LOL Anyway I plan to go to the library to pick up a couple of the books that were mentioned here to help us -At first this is really all over whelming but it really does help to see how well this has worked for others!


I do have a question though - I was able to transfer about $10,000 of cc debt to a 0% card for the life of the debt. We have a couple other CC that we are in the process of paying off. If all goes well those should be paid by Dec. After those are paid would it be in my best interest to pay the 0% off card before we tackle the car loan or should we be putting the extra toward our car loan first since that one is at 4%? What would you do? Thanks!

 

[arizonacolbys]

The first thing Dave's book will tell you is to get out of the leases ASAP and not buy the bigger house at all. While I love his books, sometimes life demands that you put your debt pay off on hold while you get other areas of your life straigtened out. We're looking to get a bigger home too. His book says you should live cheaply and save, save, save to buy a house with cash (no loan), but we are 29 and 33, if we wait to buy a home, that means we have to wait to have kids and we just don't have that kind of time. Our new house payment will be at the 25% of our take home pay that he recomends and we'll have plenty of money to pay down our other debts in no time flat, so I'm ignoring him on paying cash for the house.

My point is, that while these books have great ideas on how to get your finances under control, you don't have to follow them word for word. True, following them to the letter will result in a family getting in a much better position faster, but sometimes you need to look at the bigger picture.

Good luck!

Thanks for the info! Our reasons sound similar to yours - we're 27 & 28 & would like to possibly start a family in the next couple years. We would definitely need a bigger house to do that. I'd probably be 50 by the time I could pay cash for the house we want. I agree that some people can great some great advice from these books, but I won't be following all of it to the letter.

 

[poohj80]

After those are paid would it be in my best interest to pay the 0% off card before we tackle the car loan or should we be putting the extra toward our car loan first since that one is at 4%? What would you do? Thanks!

Tackle the car loan! If you have 0% for the life then pay down everything that is earning interest first. This is what I'm doing. I had a student loan at 8 % and transferred to a CC at 1% for the life. Now I don't get the tax credit for student loan interest but am saving much more than that with the lower interest rate.

I also agree that some of these plans are helpful to a point. We have decided we don't want to live in poverty just to get our debts paid off a little bit earlier. We still live comfortabley and still travel when we want while also snowballing our debts. No, we aren't getting out of debt as quick as possible but life is for living!

 

[Debbie Jean]

Check them out at the library, you say? The thought never crossed my mind! I was prepared to spend the money to purchase one or both. Money I don't really have to spare, mind you! Yet another reason I need to find these books!

Guess the kids and I will be making a trip to the library tomorrow!

As another librarian I would encourage everyone to get out and use your library! Books, magazines, newspapers, DVD's, etc., etc. etc.!
It's definitely a money saver

 

[Disneyglobegirl]

Tackle the car loan! If you have 0% for the life then pay down everything that is earning interest first. This is what I'm doing. I had a student loan at 8 % and transferred to a CC at 1% for the life. Now I don't get the tax credit for student loan interest but am saving much more than that with the lower interest rate.

I also agree that some of these plans are helpful to a point. We have decided we don't want to live in poverty just to get our debts paid off a little bit earlier. We still live comfortabley and still travel when we want while also snowballing our debts. No, we aren't getting out of debt as quick as possible but life is for living!

Thanks poohj80 - That was what I was thinking too but just wanted another opinion on which debt to pay first. I have to agree with your "life is for living" quote - When we made out our budget to payoff our debt we also made it a point to include a few things we enjoy - DH enjoys golf so he will get a set amount each month to golf - we decided to stop going out to eat so much but we will still enjoy a meal out a couple times a month instead of a couple times a week. We also included a family allowance to go to a movie( our local theater is only $2.50 for new movies) or rent movies once a week - so while we are not cutting everything out we are trying to get a set amount towards the debt while still enjoying life

 

[ForTheLoveofDisney]

snipped. . .I do have a question though - I was able to transfer about $10,000 of cc debt to a 0% card for the life of the debt. We have a couple other CC that we are in the process of paying off. If all goes well those should be paid by Dec. After those are paid would it be in my best interest to pay the 0% off card before we tackle the car loan or should we be putting the extra toward our car loan first since that one is at 4%? What would you do? Thanks!

Definately look for the books Financial Peace and/or The Total Money Makeover by Dave Ramsey at your local library.

Basically, what Dave would say (and what we've done per his advice) is pay no attention to the interest rates and put your debts in order of smallest to largest and pay in that order.

Here's how Dave says it in his book The Total Money Makeover on pages 111 and 114 paragraphs 1-3,

The way we pay off the debt is called the Debt Snowball. The Debt Snaowball process is simple to understand but will require truckloads of effort. Remember what my pastor soaid: "it isn't complicated, but it is difficult." We have discussed that personal finance is 80 percent behavior and 20 percent head knowledge. The Debt Snowball is designed the way it is because we are more concerned with modifying behavior than correct mathematics. (You'll see what I mean shortly.) Being a certified nerd, I always used to start with making the math work. I have learned that the math does need to work but sometimes motivation is more important than math. This is one of those times.
The Debt Snowball method requires you to list all your debts in order of smallest payoff balance to largest. List all your debts except your home; we will get to that in another step. List all your debts-even loans from Mom and Dad or medical debts that have zero interest. I don't care if there is interest or not. I don't care if some have 24 percent interest and others 4 percent. List the debts smallest to largest! If you were so fabulous with math, you wouldn't have debt, so try this my way. The only time to pay off a larger debt sooner than a smaller one is some kind of big-time emergency such as owing the IRS and having them come after you, or in situations where where will be foreclosure if you don't pay it off. Otherwise, don't argue about it; just list the debts smallest to largest.
The reason we list smallest to largest is to have some quick wins. This is the "behavior modification over math" part I referred to earlier. Face it, if you go on a diet and lose weight the first week, you will stay on that diet. If you go on a diet and gain weight or go six weeks with no visible progress, you will quit. When training salespeople, I try to get them a sale or two quickly because that fires them up. When you start the Debt Snowball and in the first few days pay off a couple of little debts, trust me, it lights your fire. I don't care if you have a master's degree in psychology; you need quick wins to get fired up. And getting fired up is superimportant.

Sorry, if that was so long. Some people would say that this is the wrong way to do it and maybe it is for them but it has worked for us and several others right here on these boards.
When we were looking at $26,000 in debt and not knowing where to start to get rid of it and feeling helpless and feeling like debt was just our lot in life we found Dave. What we were doing was not working and things were only getting worse. Dave made sense to us and his plans is easy to follow whether it "makes sense" or not, it works. I figured, what we're doing now is not getting us anywhere. His advice is basically free and what did I have to lose? I didn't have to "buy into" anything and I went to the Library and got his book (for free) and I listen to his radio program locally on the AM station (but you can also hear it for free everyday daily from 2-5pm broadcast from his website).
I'm apologize if I seem a bit overzealous about the guy but when something makes this much difference in your life you tend to want to tell others about. I'm sure other people will tell you different things and that is fine too. This is what worked for us and if you're like us and didn't know where to start this is a good place. I guess that's all I'm trying to say. It's a good place to start.

Thanks for listening to me ramble on and on. I'm usually pretty quiet on the boards.

 

[Disneyglobegirl]

Definately look for the books Financial Peace and/or The Total Money Makeover by Dave Ramsey at your local library.

Basically, what Dave would say (and what we've done per his advice) is pay no attention to the interest rates and put your debts in order of smallest to largest and pay in that order.

Here's how Dave says it in his book The Total Money Makeover on pages 111 and 114 paragraphs 1-3,

Sorry, if that was so long. Some people would say that this is the wrong way to do it and maybe it is for them but it has worked for us and several others right here on these boards.
When we were looking at $26,000 in debt and not knowing where to start to get rid of it and feeling helpless and feeling like debt was just our lot in life we found Dave. What we were doing was not working and things were only getting worse. Dave made sense to us and his plans is easy to follow whether it "makes sense" or not, it works. I figured, what we're doing now is not getting us anywhere. His advice is basically free and what did I have to lose? I didn't have to "buy into" anything and I went to the Library and got his book (for free) and I listen to his radio program locally on the AM station (but you can also hear it for free everyday daily from 2-5pm broadcast from his website).
I'm apologize if I seem a bit overzealous about the guy but when something makes this much difference in your life you tend to want to tell others about. I'm sure other people will tell you different things and that is fine too. This is what worked for us and if you're like us and didn't know where to start this is a good place. I guess that's all I'm trying to say. It's a good place to start.

Thanks for listening to me ramble on and on. I'm usually pretty quiet on the boards.

Thank you for posting the paragraph from the book Forthelove of disney! I am heading to the library this afternoon to go check out the book and read it this weekend!! It really does make sence to pay the smallest first and go from there. I am one of those people that need to see results right now! I will definately read the book and get started! Thanks

 

[ForTheLoveofDisney]

Thanks poohj80 - That was what I was thinking too but just wanted another opinion on which debt to pay first. I have to agree with your "life is for living" quote - When we made out our budget to payoff our debt we also made it a point to include a few things we enjoy - DH enjoys golf so he will get a set amount each month to golf - we decided to stop going out to eat so much but we will still enjoy a meal out a couple times a month instead of a couple times a week. We also included a family allowance to go to a movie( our local theater is only $2.50 for new movies) or rent movies once a week - so while we are not cutting everything out we are trying to get a set amount towards the debt while still enjoying life

Just want to add one more thing that goes with your quote. We definately live. We don't deprive ourselves, we just budget for it. We give ourselves blow money everyweek and we can spend that any way we want w/out explanation. We also like to eat out (we just do it much less) and we also like to go on vacation. But what we do differently now (than before) is budget for them on a written budget. We give every dollar a name before we spend it. See, if you deprive yourselves too much you'll just give up and walk away and not do anything. I guess it's kind of like Weight Watchers, they don't say you can't have the chocolate cake, just that you need to account for it and possibly do it in smaller portions.

HTH

 

[Chicago526]

I think Dave also said that if you have two debts of nearly the same amount, then you should go after the higher interest rate one first. So if you cc debt is about the same as your car loan, do the car loan first since the cc debt is 0% interest. You can also find debt calculators that will help you figure the amount of time it will take to pay off a credit card and interest savings. You can play around with that and it will help you figure out which debt you should pay off first to save the most interest.

If you are already "gazelle intense" and have already succesfully paid off a lot of your debt, I see no reason to re-order the Debt Snowball list a little to help save you some money.

 

[nowellsl]

Just want to add one more thing that goes with your quote. We definately live. We don't deprive ourselves, we just budget for it. We give ourselves blow money everyweek and we can spend that any way we want w/out explanation. We also like to eat out (we just do it much less) and we also like to go on vacation. But what we do differently now (than before) is budget for them on a written budget. We give every dollar a name before we spend it. See, if you deprive yourselves too much you'll just give up and walk away and not do anything. I guess it's kind of like Weight Watchers, they don't say you can't have the chocolate cake, just that you need to account for it and possibly do it in smaller portions.

HTH

This is what Elizabeth Warren recommends in her book All Your Worth. It's a pretty good book as well.

 

[disnutt]

:
On being debt free!! Wow, you really were Gazelle Intense!!

Again, way to go disnutt!! I'll be listening for your yell, "I'm DEBT FREE!!" on Dave.

Thanks ForTheLoveofDisney!

It was a struggle, we both took on extra work to make some more $ but it was really worth it when I did my online payoffs this morning. If my hubby can get home in time we're going to try to call Dave to see if we can yell! Otherwise, we'll try next week.

We have a modest salary- above the median but not much. I'm looking at our new July budget and don't even know what to do with all the extra from not having bills other than housing/food/utilities. I feel really rich!!!

It's hard but it feels great when it's over. Keep up the good work!

 

[Chicago526]

WOW WOW WOW WOW WOW!!!!

I just did our budget!

We have about $8500 in credit card debt. DFi finaly gave me his month earnings and expenses (our finances are still separate). So for the first time I've been able to work up a budget using our combined income, expenses and debt.

This will take some tweeking, as we don't know our exact mortgage and utilities yet on the house we want to buy this summer (we are selling my condo and geting a 'real' house, as I like to call it!). But based on my estimates, in two years we should be able to pay off the credit cards and save $22,000!!!! One year to pay off the cards and save about $6000, and the following year we continue to save what we were in year one and save the payments we were making to the cards, for a total of $22,000! We'll be debt free except for the home and have our emergency fund! And that DOES NOT INCLUDE MY DFi'S OVERTIME PAY OR MY YEARLY BONUS!!!!! Those will go towards vacations.

Our budget still includes $200 a month play money, to spend on what ever we want that month (clothes for me, computer parts for him!

Once our emergency fund is fully funded, we'll put all that money towards paying off what's left on DFi's truck (at that point it won't be much) and then we tackle the house! Of course I'll need a new car during all of this, but I'll be buying a 1 or 2 year old used car, so that won't be too bad. In any event, we are much better off than I feared!

HOLY COW! I'm so happy!

Seriously, sit down and make a budget, you may be surprised!

 

[FamilyGuy]

Seriously, sit down and make a budget, you may be surprised!

The only things that suprise my when I do a budget is how much money we make, how much money we spend, and how we can never stick to a budget!

I admire reading about all of you because it has inspired me to make it a goal to pay of my credit cards! In total it is less than 10% of our total annual income, yet it seems to just go up and down, never actually getting paid off! So, I am using the entire paycheck I am getting today to pay off about over a third of my cc debt (it's an unusually large commision check).

I am thinking I should just close the accounts to avoid future temptation....

 

[Nik's Mom]

His book says you should live cheaply and save, save, save to buy a house with cash (no loan), but we are 29 and 33, if we wait to buy a home, that means we have to wait to have kids and we just don't have that kind of time. Our new house payment will be at the 25% of our take home pay that he recomends and we'll have plenty of money to pay down our other debts in no time flat, so I'm ignoring him on paying cash for the house.

Good luck!

Yikes! No one around here would be able to pay cash for their house. In L.A. County, the average home price is $500,000! House prices are outrageous. You are doing the right thing by buying now. Good luck on starting your family!

 

[geetey]

I don't have the books in front of me, so I can't quote Dave, but basically he says he *wishes* everyone would save up cash to buy their home, but that a 15 year mortgage for a home is the only type of debt he says is okay.

I don't want you think he is crazy. He just isn't going to say "Great Plan!" if you call him and say you want to buy a house/bigger house but you have ??? other type of debt. Dave wants to help you get OUT of debt, not into a bigger payment.

 

[melaniemiller2002]

Trust me, if there was a way we could afford to pay cash for a house, or even have a 15-year mortgage, we would. But the city I live in was just voted one of the top 3 fastest increasing real estate costs in the country. Home prices have increased 83% in just the past year or so. My grandfather bought his house about 3 years ago for $240,000 and it's now appraised at just over $600,000. Sigh. To get a decent, 3br, 2ba, 2 car gar in a middle of the road neighborhood, it will run you at least $350,000. It's ridiculous. What's so great about here? Well, all the Californians are flocking here in droves so there must be something about this place...........

Even with a household income of just over $100,000, we will barely be able to afford a 30 year mortgage on an "okay" house. Definitely not big enough to have kids of our own (my 2 stepkids live with my husband I...no kids for the two of us...yet).

Sometimes, I dream about going back to Texas where you can buy a house CHEAP, CHEAP....LOL. And I would still make around the same $$ as an RN there as I do here. Unfortunately, hubbie would get paid around $12/hour for the same thing he gets paid $21/hour here. Not to mention a huge, expensive custody battle if we tried to move the kids out of this state. So here we shall sit, renting until we figure out what to do. Maybe wait until the kids are grown, then move?

Dave's advice seemed really good....I perused through his book at the bookstore and am going to the library tomorrow to see if they have any copies. I have several of Suze Orman's and really enjoy her show on Saturday nights. She has a very no nonsense attitude about life and $$.

Melanie

 

[kathyseb]

OK, so we used the Snowball method and did not even know it. I thought it was something I came up with on my own.

I kept paying and paying on bills every month. Thousands of dollars going out each month. But when the bills came in the next month, I could barely see any results. This went on for a few years.

It really bothered me as I have a business degree.

So I decided that I needed to figure out what I was doing wrong.

It turned out, once I really examined the situation, I found that the problem was I was applying all of our extra money to all of our bills.

This meant that we had no money left to live on until next payday.
It was so simple, but took me a few years to stop and try and figure it out.

So I wrote down all of our credit cards, their balances and their interest rate.

It was my New Years resolution in 99 to be debt free by 1-1-00.

When I charted the balances out I saw that I had balances on two really high cards. Like Ayres or Sears.

I paid $50 on every card and concentrated on the Ayres and Sears cards. Within two months I had them paid off. Now I could see progress.

After I got done with those two high interest cards, then I started on the lowest balance one. Kept paying $50 on every card other than the one I was working on paying off.

I took my credit cards out of my purse. Once I got one paid off, I put that one back in my wallet. No matter what, I forced myself to pay that one card off every month. So no new debt.

It is a wonderful feeling to be debt free. It takes displine. But you know, you will be surprised at how much money you have when you have no credit card bills.

Oh by the way, I did not reach my goal of 1-1-00. But I did not let that defeat me. I kept working at it and we became debt free in September of 2000. So we only have the house and the DVC payment plus all of the normal bills.

 

[MrsPete]

WOW WOW WOW WOW WOW!!!!

I just did our budget! . . . I've been able to work up a budget using our combined income, expenses and debt. . . . This will take some tweeking . . . Seriously, sit down and make a budget, you may be surprised!

Chicago, You're in a good position to start off your financial married life well -- just stick to your plan. I'll give you one piece of advice: Get your finances into good shape BEFORE you have children. With children you have so many more expenses, and it's much more difficult to get out of debt. You have the opportunity to avoid that.

 

[MrsPete]

Trust me, if there was a way we could afford to pay cash for a house, or even have a 15-year mortgage, we would.

Point #1: I don't think saving 100% of the cost of a first home is realistic for most people. While you're saving, you have to live somewhere; that rent money is wasted. And while you're saving, the cost of the house you want is increasing.

Point #2: I think some people who can't afford a house really mean they can't afford the house they want (in other words, they aren't willing to buy a starter house). For example, I have a friend who's my age -- 39 -- who constantly complains that she hates renting but can't afford a house. Why? She can't afford to buy what she wants: She will ONLY consider 3 bedroom, 2-story houses with upscale kitchens (must have an island, granite countertops, and an eat-in area); though she has no children, she sees a living room and a den as must-haves. She will only look at houses with 2-car garages, and she wants a pool (or space to add a pool). She said my first house was "nice", but she made it clear that it wouldn't have been enough for her because she was "raised to expect the finer things in life" (her favorite excuse for overspending). My new, paid-for house doesn't have all the things she "demands", and she can't understand that PAID-FOR is way better than DREAM HOUSE.

Point #3: When we were first married, didn't have much money, and had our first mortgage, we chose a 30-year mortgage with a no-prepayment penalty . . . BUT we paid it on a 15-year schedule. Every single month we included an extra payment that went straight to the principle. It made a huge difference.

We chose to do this because, being newlyweds, we didn't know what the future would bring. We knew that at that point we could afford to pay on a 15-year schedule; however, if we'd been surprised with twins, for example, I would've quit my job. Daycare x2 would've been too much. So we retained the possibility of "dropping back" to a 30-year schedule.

Because we were disciplined to think of the mortgage as "really" the 15-year amount, it worked well for us.

 

[MrsPete]

CONGRATULATIONS! Sometimes you do feel like you're somehow "missing out" at times but the truth is, it is only temporary it's not for the rest of your life, and in the long run the payoff at the end will be great. I mean, think about it for a minute. How much money do you really need to make, how hard do you have to kill yourself when you have No Credit Card payments, No Student Loan payments, No Car Payments, No Mortgage payment? It's thoughts like these that keep me going and we're almost there!

You're exactly right. I know because I'm there! No mortgage, no credit cards balances (never had those), no car payments . . . instead, I see my retirement account and my children's college accounts adding up! Work hard to get to the place that YOU can keep YOUR money -- all of it, and you'll have an amazing amount, even if you don't have a high income.

The hard work to get there is temporary, but -- assuming you maintain your debt-free status -- the security is permanant.