Now that we have discussed gathering your information for your written budget and gone through how our family manages our budget, I thought I would share the path we took to start paying down our debt.
Step 1: Save $1000 for your Emergency Fund Step 2: Pay off your debts using the Debt Snowball (lowest $$ amount debt first)
- Step 3: Put 3-6 months expenses in savings
- Step 4: Invest 15% of income in Roth IRAs and pre-tax retirement
Step 5: College funding for children
- Step 6: Pay off home early
- Step 7: Build wealth and give
My husband and I, in the beginning, decided to follow these steps to the letter.
Baby Step 1: Save $1000 for your Emergency Fund
Once we got our budget written out, we did everything we could to get that $1000 saved up. I struggled with the idea of putting $1000 straight into savings, especially now that we realized how much debt we actually had. I struggled with it for a long time, always wanting to pull the money out and use it.
Looking back, this is probably the step I am most grateful for. There are definitely times when we have had things come up. If we didn’t have the Emergency Fund, we would have fallen right back in to the credit card trap. It’s not a huge amount of money, but enough for a little peace and security while we carried out the rest of the journey.
Baby Step 2: Pay off our debt using the Debt Snowball
This is a pretty basic theory. Write down all the debt you have, from smallest to largest. Tackle the smallest debt first. This one seems to cause a lot of controversy, due to the fact that he doesn’t recommend paying off the debt with the highest interest rate first. I can 100% understand why people feel like this is bad advice, however, we still chose to pay off our smallest debt.
We needed a “quick win”. We needed to physically cross a debt off our list and see our journey progressing. If we had tackled a larger debt first, it may have felt like spitting into the wind. Similar to a weight loss goal, do you think you would stick with it more if you started with a 5 pound weight loss goal rather than 100 pounds? Some people definitely have the willpower to do it in a way that makes more financial sense for them, but make the choice for your family that will keep you motivated.
We finally paid off the last of our debts in December of 2011. Almost 4 years on the nose from when we started. For the most part, every extra penny we could squeak out of our budget went to whichever bill we were paying off at the time. We would pay the minimum payments on our other bills while trying to hammer out our “bill of choice”. We definitely took trips down Distraction Lane, what with having two babies and all. A trip to Vegas here, a very necessary upgrade in cars there. We were not a beans and rice type budgeting family, we did choose to spend a little money frivolously now and then.
Here’s where we chose to do things a little differently. We chose to start funding our children’s college education funds last March. The program we wanted to get involved in was changing its terms and conditions for 2011 and we significantly benefited from getting in before the change. This definitely bumped us back a little as far as paying off our debts, but we felt that the return in our investment would be worth it.
I honestly felt like it was easier to pay off our bills than decide where we wanted to go next. When you have something specific to pay off, it’s easy to decide where your money will go. After that, it feels like there are 275 different things that need/want your money. Retirement, extra life insurance, more college funding. What’s a frugal family to do? The next post in this series will be all about where we have decided to go next in our journey, including our decisions for our retirement, saving for large purchases and what in the world to do with our house.
Please ask questions. This is a HUGE topic. I can only touch on so much in one post without getting overwhelming, especially since everyone’s situation is so different.
What is your biggest challenge in budgeting? What has been your greatest success?
In case you missed it:
- Creating and Sticking to a Budget: Our Story
- Creating and Sticking to a Budget: Gathering your information
- Creating and Sticking to a Budget: Our “Zero-Based Budget”