photo by Faeryan

Regardless of which side of the fence you sit on when it comes to how to implement a debt snowball, there is one thing we can all agree on–it is highly motivating to see debt balances falling.  So much so that when you have to put the snowball on ice it can be a bit demoralizing.

Murphy Has Set Up Shop at Our House

Over the weekend I mentioned all the things that have gone wrong over the past few weeks, and the various hits to our emergency fund.  Fortunately, the emergency fund was there to cover these expenses so we didn’t have to turn to credit cards, or try to cash flow them by completely rearranging our budget.  Unfortunately, we will now have to put debt repayment on the back burner while we rebuild our emergency fund.  I’m just not comfortable living with a reduced emergency fund and throwing every extra penny at debt.  With a reduced emergency fund the next rash of emergencies could deplete our savings entirely and force us to once again turn to credit cards.

Here are some of the steps we’ll use over the next few weeks to get the emergency fund back up to our $3,000 goal:

1. Pay only minimum payments on credit cards. Instead of piling anything extra on debt, we’ll be diverting it to savings in the short term.  After attacking debt so aggressively the last few months this will prove difficult.
2. Snowflake any extra money into savings rather than towards debt.  I normally take any found money (snowflakes) and apply them directly to the debt snowball as they are received to boost the amount going towards debt repayment each month.  Now, I’ll pile up those snowflakes in savings.
3. When the emergency fund balance reaches $3,000 we will turn our attention back to our debt reduction plan.  I’m not sure how long it will take to get the emergency fund back to a fully funded status.  Thankfully, we didn’t have to dip too far, and I have a couple payments due for some freelance writing work I’ve completed recently–that should help.

Flipping the Switch

I believe this exercise is actually good for us (not that I want more visits from Murphy).  When we are finally debt free we will need to flip the mental switch to savings rather than debt repayment, without increasing our spending.  Sure, we might add back a few small expenses that we’ve eliminated to become debt free, but for the most part our budget won’t change much.  Shifting from debt paying to savings mode and back again should help us get comfortable with both styles of living on less than we make.

I write a lot about our goal of becoming debt free because at the present time it is my family’s number one financial priority.  A number of my recent posts have been centered around the mechanics of getting out of debt, such as sharing strategies for repaying debt faster, earning extra income, to snowball or not snowball, etc.  One aspect I haven’t covered much is the “why.”  Why do I want to be debt free?  Before embarking on any personal improvement project, financial or otherwise, it is important to identify the “why.”  When motivation starts to fade along the way revisiting the “why” can often fire you back up to the level of inspiration you felt day one.

Identifying the “Why”

A couple of my favorite blogs recently shared their motivation for getting out of debt, and the motivations of their readers.  I agree with many of their points, but wanted to identify my own and record them here.

Financial Security for My Family.  Long-time readers know that nearly 100% of my motivation is derived from my wife and kids.  I’ve worked bad jobs, worked side jobs and worked several jobs at once to support my family.  I’m not a martyr - just a Dad who cares far more about the security of his wife and kids than his own well-being.  I recognize that carrying around debt has somewhat reduced my ability to provide additional security for my kids’ futures.  I’ve had to scale back college savings, and a few other financial goals for my kids while paying down debt.  It’s hard not to play the “what if” game.  What if we were debt free?  How much more would we have in college savings?  How many more memories could we have created on family vacations?  Playing “what if” isn’t very healthy.  The past cannot be changed, but the path of our financial futures is certainly within our control.

I want to save more so I can give it away.  That sounds like a strange statement, doesn’t it?  What I mean is that over the last couple years there have been several opportunities for us to help a neighbor, family member, and even a stranger or two, but we have had to pass because the majority of our earnings is going to debt reduction.  I long for the day when I can help others, financially.  I want my children to be givers, and I want to set the example.  However, I also believe charity starts at home.  Until my own financial house is in order it makes little sense to try to help others in a significant way.

Reduce stress.   Debt has a way of eating away at you.  When I was deeper in debt than I am now, and before I had a real plan to get out, my debt balance was the last thing I thought about before falling asleep.  And falling asleep was harder to do back then.  I can’t help but wonder if the increased cases of depression, suicide and anxiety disorders aren’t directly attributable to the increased amount of debt we carry as a society.  I’ve heard stories of people taking their lives to escape the bondage of debt, and it is always such a sad reminder of the chains debt can have on our lives.

Simplifying our financial life.  Having payments means more to keep up with each month, and I’m trying to eliminate the number of things to worry about for a more simple existence.  If you have a balance on five credit cards, a mortgage, a car payment, and a department store account you have eight debt payments to keep up with each month.  Sure, they can be automated, but they still have to be recorded, balanced and tracked each month.

One of my favorite lines from the movie Forrest Gump is when Forrest tells the story of Lieutenant Dan investing their shrimp boat money in “some kind of fruit company” (which we know to be Apple Computers), and then told him “we don’t  have to worry about money no more.” Gump replied, “That’s good.  One less thing.”  Gump lived out the remainder of his life in a beautiful debt-free family home caring for his wife and son and not worrying a bit about money.  What an enviable lifestyle!

Having options.   I mentioned working in dead end jobs and toxic work environments because I simply didn’t have a choice.  I had payments to make and mouths to feed.  But what if I had not had those payments?  It is a lot easier to walk away from a bad job when you don’t owe anyone money. How many people do you know (yourself included) who are just going through the motions at their job because they can’t afford to quit?  Just think of all that unrealized potential bottled up thanks to credit card payments.  I want to be free to live out the rest of my life energy applying it to a cause I truly believe in, and doing something that I truly enjoy.

If you are working towards debt freedom, have you identified your “why?”

I’m way off the pace to accomplish my 52 books in 52 weeks campaign, but sometimes life just gets in the way of our plans.  No big deal.  Considering I only read five books all of last year it didn’t take much to out-produce last year’s totals.

I recently picked up a copy of Debt is Slavery:  and 9 Other Things I Wish My Dad Had Taught Me About Money by Michael Mihalik.  There were a couple things that intrigued me about this book.  First, I like the title, because I hate the idea of being a slave to anything, especially debt.  I also liked the parenting reference because I often wonder myself what things I could do to better prepare my kids for handling their own finances some day.  I thoroughly enjoyed the book.  It’s short - a weekend read for me at only 123 pages, but it is packed with good information.

Debt is Slavery, My Favorite Chapters

Introduction

I thought the introduction of this book was very well done as it provides some background information on both the author and the history of money.  Mihalik’s father passed away when he was just 13, which explains the subtitle of the book.  Like most of us raised by a struggling single parent, or by two parents that were bad money role models,  Mahalik made some bad choices early on borrowing heavy debt loads while in college and immediately thereafter.  It reminds me of my own story of borrowing money to finish school, and then borrowing money to pay for various life expenses when I was newly married because we were living beyond our means.

The introduction also includes an excellent section on how to select a teacher for the world of finance.  Two basic questions are really the key to this section:  Have they done what they are teaching?  Do they have your best interests at heart?  If the answer is no to either of these questions you ought to move on.

Chapter 2:  Time May Not Be Money, but Money Definitely is Time

I think the technique of converting purchases into hours worked is a great one.  Let’s assume you bring home $12.50 an hour from your current job.   A new Nintendo Wii game just released and retails for $49.99.  Are you willing to work half a day at your job to pay for a video game?  The seriousness of that question grows as you consider larger, more expensive purchases.  Let’s say your local bike shop has an awesome deal on a mountain bike you’ve had your eye on–$600 and you can ride it home from the store.  Earning $12.50 an hour it would take you over 40 hours to pay for that bicycle.  That is a week’s worth of full time employment.  There are only 52 weeks in a year.  Are you sure you want to give up one of them for a new bike?  So you see how converting the price of something to hours worked can be an effective strategy to weed out the needs from the wants.

Chapter 6:  Don’t Sell Your Soul for a Salary

I sold my soul for a salary for a long time (and not a very good salary, I might add!).  I worked for a credit card processing company, and I just hated my job.  It was a toxic environment, I didn’t believe in the work I was doing, and I was all-around miserable.  Why was I there?  Because I thought at the time it would lead to something better - more money, more perks, etc.  In this chapter Mihalik looks at the various reasons why we choose the jobs we do, and why we stay there when things go bad.  Lesson learned:  Do not choose a company/profession/position for the money–choose it because it is something you love to do.  And if you find yourself working in a job you hate, find a way to change and fast.

Chapter 9: Save 50 Percent of Your Salary

I’ve written about the 50 Percent Savings Plan before, and when thinking about it I find myself wishing I had a time machine to go back and start the plan in my twenties.  At the moment I’m devoting a large portion of my earnings to debt repayment, so saving half of my income is not feasible.  However, I fully intend to save 50% when I’m debt free.  For every year I accumulate half of my earnings I’ll earn one year of financial freedom, without a change in lifestyle.  Pretty cool idea!

Conclusion

Debt is Slavery was a short, enjoyable read with tons of nuggets of wisdom on repaying debt, living frugally, and finding financial freedom.  At around $10 on Amazon.com I consider it a steal.  It’s going on the bookshelf at home, which is rare for most books I read.  I typically send them back out into circulation via eBay, or just check them out at the library.  But not this one–it’s a keeper.

I caught a great post at Moolanomy last week that described the five stages of financial health.   The first stage, which Pinyo labeled “The Debt Spiral,” is an especially tough one to move beyond.  Over the last few months of writing about personal finances I’ve received several emails from readers with variations of the same problem–credit card debt is suffocating them.  Most of the messages go something like this:

We are making minimum payments, but don’t have enough cash to live off and to ‘float’ until the end of the month we have to use credit cards again.  When I get my next statement the balance, including a few new charges and interest, is right back up to where it was last month, or higher!

I’ve been on this hamster wheel myself and it is not a fun place to be.

So how does one begin to gain traction and actually reduce credit card debt without adding more to it?

Stop spending with credit cards.   Take a hard look at the expenses you’ve charged recently.  What things could you have lived without?  If these expenses were necessary items (food, gas, power bill, etc.), what other items could be cut from your monthly budget to make room for these expenses?  You are in a hole, and at some point the only way to move towards climbing out is to stop digging.  For the remainder of this plan to be successful you must adhere to this first step and vow to never swipe the card again.

Make two payments per month.  Credit card interest is charged on what’s known as the “average daily balance.”  If you add up your ending balance every day of the month and averaged it, that is the figure that is used to calculate how much interest you pay your card issuer.  One way to drive this figure lower is by making two half-payments each month, at roughly the half-way point in your billing cycle.

Ask for a lower rate.  Many personal finance books advise you to call up your card issuer and simply ask for a lower rate, which they report happens with predictable success.  I haven’t personally had that experience with credit card issuers.  And as a former employee of a credit card issuer I can tell you that approving rate reductions is not the norm.  However, there are a few things for you to consider before calling up your card issuer, in much the same way you would gather some numbers before asking your boss for a raise.

Are you a good customer?  I don’t mean you pay your bills on time, or pay off your balance as soon as the statement arrives, I mean are you a good customer from the bank or card issuer’s perspective.  Are you a profitable customer? Take a look at your last six months worth of statements.  How much interest have you paid?  If you frequently roll over a balance each month, carry a relatively high balance, and don’t have a record of late payments, you will likely have success negotiating a lower rate.  However, if you are habitually late, or do not carry a balance over from month to month it may be more difficult to convince the issuer that you are a profitable customer.

Double up.  If you are stuck with a particularly high rate, and the issuer refuses to lower it, try to double the amount you are required to pay.  Credit card companies aren’t dumb.  They know that by requiring you to pay only 2% of the balance you will be mostly treading water after the majority of that minimum payment is allocated to interest charges.  Pay more than the minimum as often as you can.

Get that fee waived.  Most issuers will remove a fee one or two times per year for good customers.  If you were nailed with a late fee last month, but have since made amends, you may have luck calling the card issuer and asking to have the fee reversed.  This will help bring your balance back down, but won’t lower the current month’s payment due.

Increase your income.   There are only so many tricks one can try to reduce their monthly credit card balances.  In the end, it is all about decreasing your expenses and increasing your income to free up more cash to be applied to debt.  Consider taking on a part time job, or asking for overtime at your full time job.  It isn’t fun being away from family to work extended hours, but it is only temporary.  Use every single penny that is earned from this additional work to pay down debts.

Available credit is not an invitation to charge.  After you’ve made some progress at eliminating debt card issuers will be on to your plan and start sending out teasers for balance transfers or convenience checks citing your available credit as a potential source of funds to remodel your home or take a cruise.  I know it seems tempting, but remember that promise you made in the first step and hold steady.  To run balances back up would undo all of your hard work put in up to this point.

Anyone who has carried a heavy load of debt is keenly aware of its ability to strain your budget and your relationships, but is it possible that being deep in debt has physical side effects as well? New research indicates that owing too much money causes physical stress that is detrimental to our overall health. Add this to the many reasons to make a plan to get out of debt.

Stating the Obvious

The number of families across America saddled with high levels of debt is both staggering, and troubling. Unfortunately, we’ve been part of that statistic since running up debt mostly attributed to my attempt to return to school and finish an undergraduate degree. Since that time getting out of debt has been our number one priority, but for others it hangs around as sort of reminder of past financial sins. Whatever the case, keeping debt around has many negative consequences, and not all of them are directly related to finances.

Limited Options, Missed Opportunities

One of the biggest reasons not to get into debt is because it has a way of limiting your options. At work, those deep in debt are many times forced to stay in a bad job because relocating is simply not an option when living paycheck to paycheck. At home, debt increases the incidents of money fights between couples, many times in front of their children, who ultimately suffer the most stress worrying about their parents’ relationship.

High levels of debt affect our ability to be givers, and many times forces us to pass on the opportunity to donate to a cause we believe in. Think back to when you were in debt, or maybe you are still struggling to climb out, as we are. How many times have you heard of a neighbor losing everything in a fire, or a local child struggling with a serious illness, and think - I sure would like to help them, financially, but I just can’t afford it. We can’t afford it because we are sending the money we would like to donate to banks and credit card companies.

Financial Peace

Now imagine for a moment that you are debt free, and you have that 6-month emergency fund in place, and you are saving for retirement and your kid’s college plans, and towards that next car you plan to buy with cash. You aren’t worried about paying the next utility bill, or insurance premium, or prescription refill. You are now able to quietly help those in your community when the time comes. Imagine if entire neighborhoods became debt free. Imagine an entire city. Dave Ramsey was right when he described debt freedom as “financial peace,” because it is this feeling of calm that enters your life that makes all the sacrifices to get there so worth it.

photo by pedrosimoes7