Wednesday, January 6, 2016

Debt Snowball

First let me just say that I'm a little embarrassed to show my debt snowball.  We used our credit cards to pay for home expenses, travel expenses, and every day expenses that we probably could have done without. After reading Marie Kondos "The Life-Changing Magic of Tidying Up" I realized how much stuff/excess I already have and that buying more "stuff" will not make me happier. It also made me realize that I should only buy things that will fulfill a purpose but that will also make me happy. A recent example for me was buying a much needed pair of pants. But instead of just buying the cheapest pair of pants I could find I bought a pair of pants that were a little more expensive but I knew I liked them and would wear them because they fit well and were comfortable. So instead of just buying a pair of pants that I might get rid of in a year I bought a pair that would last me longer and that I would enjoy wearing. So part of baby step two will be cutting out unnecessary spending and being happy with what I currently own. It doesn't mean I can't buy things I need or want it just means that I will be pickier about what I buy, same goes for my husband since he also has wants and needs. I factored some personal spending into our budget.

Now for the debt snowball:


As you can see we have a long way to go but I like breaking it down into smaller goals.
Card #1 paid off in 2 months
Card #2 paid off 6 months after Card #1
Card #3 paid off 3 months after Card #2
Card #4 paid off 5 months after Card #3
Card #5 paid off 5 months after Card #4

By looking at it this way the goal seems much easier to accomplish. I plan on celebrating/rewarding each small victory by allowing ourselves to either buy something we have been wanting within reason or by going out to eat somewhere nice but without cutting into our debt repayment money. That way we feel like we are accomplishing our goals. I will update our progress on a monthly basis and see what has been working and what needs to be adjusted. I also plan on paying additional payments when we get extra money or we don't spend all of our budgeted money for the month. If we stick to this plan we will have our credit cards paid off by October 2017 or 21 months.

Introduction

I started this blog to keep track of my journey to debt freedom and building wealth.  To do this I'm using Dave Ramsey's Baby Steps.  Baby Step #1 is to save $1000 for emergencies. I've had this goal accomplished for a long time. Now that I've graduated pharmacy school and have a wonderful job earning money it is time for our family to complete Baby Step #2 "Pay off all debt but the house".

I'm going to modify Baby Step 2 to "Pay off all debt but the house and my student loans". The reason being that I can qualify for student loan forgiveness if I pay my loan on time for 10 years using the income based repayment plan which is capped at 15% of our income and the remaining balance will be forgiven tax free.  I'll still end up paying back more than I borrowed and the amount forgiven will end up being equivalent to the interest they charge me, which is insanely high. Pharmacy School was not cheap, along the lines of what some people pay for medical school, but it was worth going into debt. There is no way I could have paid for it without student loans.  My undergraduate degree was paid for with scholarships and our hard earned money.

In order to accomplish Baby Step #2 I created a budget using mvelopes and used undebit.it to create our debt snowball. I've always used a budget but with my new job we updated our budget to include my income.  Although it might seem like it would be a no Brainer that my entire income could be used to pay for debt we actually need some of my income to pay for every day expenses. While completing my degree I used my loans to pay for childcare for our 3 year old so that is an expense that will come out of my income and daycare here is not cheap. We also just purchased a bigger home because we were able to buy a house in a great school district with a nice piece of land for an awesome price.  Where we were living was not terrible but my husband wanted a better school for our children. Other homes in our new neighborhood are 1.5-2× the price we paid for our house and we have a nice flat space for our children to run around outside and a house that is in great working order.  Plus we plan on having more kids in the not so distant future and now have space for them in this house. We plan on keeping this house for the long haul. We actually weren't planning on buying a house but the opportunity presented itself and we couldn't pass it up. Our new mortgage could also be paid for with just my husband's income if we needed. Now that we have a new budget I can see how much we have left over to budget for debt repayment.  I'll use that amount for our debt snowball and anytime we get extra money I'll use it to pay down debt.

Obviously we made some not so smart money choices along the way but we're going to change that now. First we will work on paying or credit card debt. Then we will pay off our car early. This blog will help me keep track of my goal to complete this part of baby step two since it will take about 2 yrs to accomplish. I figured it would keep me motivated, honest and maybe help a few people along the way.

Next up the debt snowball.