Hopefully by going through the process of reducing costs, we’ve found some ways to reduce monthly expenses. I’m going to assume that we’ve reduced our costs by $500 a month. That may seem laughably high or laughably low to you depending on your situation. It’s just for illustration purposes. Regardless, executing our plan will be exactly the same.
I’m going to suggest a few things that will go against some of the common wisdom about getting out of debt. What we want to do is pay the monthly minimum for all of our various debts. Then write an extra check for $500, paying all of it toward the debt with the smallest outstanding balance. No, we’re not going to worry about interest rates, and we’re not going to spread the money around to various debts by increasing our monthly payments.
This will accomplish some important things. By paying off the smallest debt first, we will see some progress. If we just pay a little extra here or there, it seems like nothing is happening. But if we can eliminate one of those debts quickly, there is a sense of accomplishment. This is also where our reward kicks in, time for another brownie! Why write an extra check? For two reasons. First, it’s a representation of what we’re accomplishing. We can see every month that we are making progress. That will be important months down the line when this all becomes a bit of a drag. Second, we want to establish the habit of writing that extra check. Because when all the debt is gone, we’ll be writing a check to go into our savings account, or to the mutual fund company. The process of becoming wealthy starts in month one! We are writing an extra check toward our financial well being.
Paying off the smallest debt has an added benefit. We quickly eliminate a minimum monthly payment. Our $500 a month, becomes $525 (or whatever). We have even more money to pay toward the next biggest debt. By the time we get to the nasty last big one, we should have significantly more money to whittle it down.
Of course if there is a dramatic difference in interest rates, like the biggest one is 20% and all the others are under 10%, you might want to flip that around. But not if you’ll get discouraged and quit. Do what works for you.
So that’s it. Understand how you work, find places to reduce ongoing expenses, and pay them down one at a time, the smallest one first.
But what if that isn’t enough? You went from a $100,000 a year job to a $50,000 a year job after the recession. There just isn’t enough money. If that’s your situation, you are going to have to make some harder choices. It will require lifestyle changes. A two car family might become a one car family for awhile. Or a one car family becomes a buses and bicycle family, with a weekend car rental once a month. It might include part time work stocking shelves during the holidays.
Much of that will seem pretty dreary. But it’s about reframing and re-imagining. What if you always made $50,000? What would that lifestyle have looked like? That’s where you need to be for now. Ignore what you had, that’s not where you live now. Instead, focus on where you are, and again remind yourself that what is important in life is usually not about money. A day with the family at the beach is just as much fun as a day at Disneyland, but it costs $500 less.
Now as promised, links to help.
Free checking, free bill pay, and ATM fee rebates from First Internet Bank
https://www.firstib.com
Mercury often has among the lowest rates for car insurance
https://www.mercuryinsurance.com
Coupons for everything. Always check before you make a retail purchase
https://www.fatwallet.com
The FTC has a number of resources for getting out of debt
https://consumer.ftc.gov/articles/how-get-out-debt
There are a number of websites and blogs with ideas about living on the cheap. Here are a few:
http://www.frugalhomeliving.com
http://www.livingwellspendingless.com
http://www.livingrichlyonabudget.com
Good Luck! (and have a brownie).