So you want out of teaching? Scratch that. You feel like your life will end if you have to teach for the rest of your career, but you see no way out financially. Maybe you have a spouse who works or another source of income, but you continue to teach because of a budget gap of $500. Or maybe $1000. What if you could earn extra money, pay off some bills, and between those two things close that gap? “But I don’t want to drive for Lyft or Uber,” you say. “And I do NOT want to open an in-home child care center or trade teaching for another rat race. I just want to retire, or stay home with my kids, or not have to teach.” You get the picture.
So get creative. Here are some ideas to get your income-creating ideas flowing. Not all of them will work for everyone, of course. However, there might be a gem in here to get you started. Or a gem that gives you exactly the idea you need to put your own unique talents to use and start your journey to freedom.
Extra space? Rent a room to a student
Have a spare bedroom or two? Enjoy meeting new people and learning about foreign cultures? Everyone has heard about AirBNB, and that’s one option. But there are others that no one seems to know about. For example, you could look into home stays for English Language Learners. Schools such as ELS language school, American Language Academy, and others have locations in over 40 US cities. Many of their students prefer staying with an English speaking person or family to further practice their developing skills. With only 1 spare bedroom, you could earn between $400-$600 per month. Also, don’t assume that there isn’t an English school near you just because you’ve never heard of it. My husband works only 10 minutes from an English school, and I lived here for 5 years before I knew that.
Use skills you already have to offer group classes
Use your special expertise and teaching skills to start a small educational or entertainment business – one that can grow. This is my personal favorite because it can be so many different things. I’m a foreign language teacher, so I offer enrichment Spanish classes at preschools. In a good location, I can bring in $400/month with minimal overhead and only about 8 hours of work. You could also offer group tutoring, ceramics painting, knitting or crocheting lessons, or computer instruction in your own home. Good with cars? Teach a basic car care class for women. Coach folks who want to improve their public speaking. If you use your imagination, the sky is the limit on this one. Just remember to begin with the end in mind. If you want to make money (and that is at least part of the goal, right?), you’ve got to structure it so you can earn some bucks. In other words, no one-on-one tutoring unless you are charging over $60/hr.
Love pets? Try pet sitting, dog walking, or doggie drop-ins. I never knew that there were people who would watch your pet in their own home until I was desperately searching for a kennel at the last minute. And as a pet owner, I’d much rather have my dog stay with a reliable person than shut in a dog run at a kennel. Sumiko, who has been hosting with rover.com since May of 2015, says, “The best part of hosting is getting to sample every breed imaginable as your pet, the companionship/playtime, and income. We’ve had some challenges with high energy dogs such as muddying the yard when it’s rained a while, dogs hopping baby gates in the house…but it’s not constant and you can restrict breeds, size…” Since the normal charge is over $20/night per pet, people who commit to building their clientele, can make over $1000/month once they are established.
Visiting the elderly
Not a fan of pets, but love people? Many people are looking for someone to stop in and check on an elderly relative or help them prepare a simple meal. Here, word of mouth is king, so talk to some folks you know at different houses of worship. They often know some people who need a helping hand, but not really nursing assistance yet – and they are more likely to trust you if you have a mutual friend. Alternately, you could contact senior centers or support groups for caregivers. The bonus here is that if you don’t want to pay for childcare, but your kids are reasonably well behaved, many older people see having children around as a bonus, not a drawback. Just be sure to spell out exactly what the expectations are and what you are comfortable doing beforehand. Light housekeeping? Help preparing meals? Or just a friendly person to chat with? Don’t be pressured into doing more than you are capable of. If you won’t give medications, state that up front and stick to your guns.
Search Engine Evaluation and other tasks
Work in search engine evaluation. Search engines use algorithms to rank the results they bring up. However, they also need actual humans to check those rankings. Leapforce, Appen, and other companies use people who can work from home to do just that. While it’s not a job with room for advancement, it is something that could be worked into an income of over $1000 per month. Some companies require that you pass a test, which by all accounts is challenging, but not impossible, if you have carefully studied the test materials. Another caution is that like any job that requires you to use your brain, there is a learning curve, and you will need to give yourself time to get to higher levels of earning.
(Insert YOUR idea here)
No, that wasn’t just a place-holder that I forgot to delete. It’s a reminder that your ability to think of side hustles or earn extra income is limited only by your imagination. So have we got you thinking that it might actually be possible for you to make the leap out of education? There is a lot to think about, and a lot of ways it can go wrong. If you want to make the switch out of teaching, but you are terrified to make the leap, click here for our free guide to the 4 biggest mistakes people make when leaving the classroom, and how to avoid each one.
In a recent post, I mentioned cutting expenses by adding one frugal habit every month or so. The example I gave was reducing Starbucks trips from daily to once or twice a week. The more I thought about it, the more I realized there was something else there important enough to write about. It’s the idea of making your “splurges” special.
This sounds kind of weird because splurges, by definition, are special. They are a special treat we give ourselves. Originally, the meaning was something a little over the top, something luxurious or costly. The trouble is that for whatever reason, whether it is advertising that encourages us to indulge more often, or the stress of daily life, many of us have “splurge-spread.” What should be a special treat has become something that we do almost every day. We still tell ourselves it’s our little splurge. But it has become a part of our routine.
That’s what happened to me with my Diet Dr. Pepper habit. When I was little I rarely drank soft drinks, even though I loved them. Then when I was out on my own, I started to have my beloved Diet Dr. Pepper more and more often. I wasn’t a coffee drinker, so I’d drink a DDP for my morning caffeine fix. At first, it was just when I hadn’t slept well and needed a pick-me-up. But pretty soon, it was a daily thing. If I forgot my DDP, my day wasn’t going to be a good one. Then, I started having one in the afternoon. I realized I was headed for a two-a-day habit. And it wasn’t something special. It was normal.
So I’ve started to cut back on my soft drinks. (My tastes have changed with maturity and now I’m more of a Coke person.) It’s taken me a long time, but now I drink 2-3 a week instead of 1-2 a day. Here’s the thing, though. My Cokes have become special again. Instead of it ruining my day if I don’t get a soft drink, when I DO get one, it’s a splurge. It FEELS special again. I really savor the bubbles and the sweetness. I notice how good it tastes.
Now soft drinks aren’t super expensive, so it’s not really about the money in that case. It’s about my quality of life. And even though it might seem crazy, having fewer splurges has actually improved my happiness. When I have a Coke, it is a choice, not a habit. And oh my gosh, how I enjoy it. Before, I just took it for granted.
But what if part of it IS the money? What if the habit you decide to change can add $20 a week or more to your bottom line, and make you happier in the process? That would be sweet, right?
So give it some thought. Is there a “splurge” in your life that you don’t even notice anymore? Is it something that could either save you money or could become something special again instead of just part of your daily routine? Try reducing – not eliminating – it. And see what happens. You might find that you like it even better when it is truly a splurge.
And whatever you do – or don’t do – on this front, remember I believe in you. You got this!
We all love our families – that’s a given. Usually, everything we do is for them in one way or another. Cook food – yup. Earn money – yup. Go to Disney – yup. Pretty much everything is meant for their benefit, either directly or indirectly. And yet, many of us don’t do the one thing that could prevent their lives from being a living hell in the time when they most need us.
Why? Because it is boring, mundane thing that seems like a useless hassle. I mean, we’re not planning to die. Yes. You read that correctly. This is something that we complete in case we die, in which case, they will be the very last act of love that we can ever do for our kids, or spouse, or whoever we leave behind. And it is indeed boring and a huge hassle. But not nearly as much of a hassle as our family will deal with if we die without it. So let’s take a quick look at the most boring thing you can do to show your family you love them: life insurance
Repeat after me: portable, 10-12 times annual income, guaranteed level term life. OK that’s all you need to know. Next topic.
Portable
Just kidding – kind of. Those three things are literally all you need to know, but you might like a little more detail than that, so here it goes. Your life insurance needs to be portable – in other words, it shouldn’t be tied to your employer. A lot of employers provide some life insurance, and if it’s free, great. But do NOT count on that. There’s a simple reason why.
Let’s say you are seriously ill. Like, sick enough you can’t work anymore and you leave your job. If your only life insurance is through your employer, it is gone, too. “Well, no worries, I’ll just get life insurance someplace else.” But will you? Will you qualify? Will you be able to pay for higher premiums? Or will you be out of luck just when you need life insurance the most?
That is why life insurance needs to be portable. It means more hassle when you get it because you will probably have to get a mini-physical and you’ll have to research it yourself to get the best rate. (Hint: apply with several companies because different insurance companies rate things way differently. Slightly elevated cholesterol numbers might not be a big rate changer with one company, but could jack prices way up with another.)
10-12 times annual income
When buying insurance, you should shoot for 10-12 times your annual income. For example, if you make $50,000/year, you should have between $500,000 and $600,000 in coverage. If you make $150,000/year, you should have between $5 million and $6 million in coverage. It sounds like a lot, doesn’t it? But here is the reason.
You should have enough insurance that you could invest it and the income would replace your income. Usually, 10-12 times your income, if invested well, will do that. That will allow your family to survive without your income, even if your kids are very young. They would never have to worry about the money running out.
Guaranteed level term life insurance
Next up, term life. For people not in the insurance industry or who are not financial geeks like me, (I really get into this stuff!) insurance can seem totally incomprehensible. But there are only two things you really need to know about the type of insurance to buy. First, buy term life insurance. Secondly, your insurance agent is going to give you 500,000 reasons that I’m wrong and you should buy some other kind of insurance. But don’t listen. I’m right. They are making commission. If you are ready to trust me on that, you can quit reading now. If you want a little more information on why I say those things, read on.
Term Life vs. Whole Life
There are basically two types of life insurance – term life and whole life – with some sub-categories. Term life insurance is just that. It is insurance that you buy for a certain period of time, usually a term of 10, 15, 20, or 30 years. If you die during the term, it pays out. If not, it doesn’t.
Whole life is life insurance that never expires (as long as you are paying the premiums) with a savings component built into it. It will cover you your entire life, you can borrow against it, and it actually has a savings component, so that its cash value accumulates. “Hold on just a second, Jill,” you may be saying. “That sounds like a WAY better deal. Why on earth would anyone go with a chintzy term life that expires when whole life offers all these benefits?”
What is insurance for?
And the answer to that question lies in what insurance actually does for us. What is life insurance for? Well, it is to ensure that anyone who is depending on us financially isn’t left in a big mess if we die. Kids, spouse, anyone who needs your income – that’s who life insurance is for. And it’s purpose – its SINGLE, SOLITARY PURPOSE is to provide for dependents.
It is not intended to be a savings account, an investment, or a bank to borrow from. It’s just to make sure that your family isn’t totally screwed if you die. And all those other bells and whistles? What do they hurt? Well, they cost money – a LOT of money. And they don’t do any of those extra things well.
Why your insurance agent desperately wants you to choose whole life
Whole life insurance can cost 10 times what term life does. I don’t know about you, but I’m not eager to pay ten times as much for anything that doesn’t provide a super-benefit. And one of the reasons that it costs so much is related to the second thing you need to know: your insurance agent is going to be convinced you are making a huge mistake if you don’t get whole life or some type of insurance other than guaranteed level term life. One of the reasons it costs so much more is that your insurance agent is going to receive a much, much bigger commission if he sells you that.
Now, I’m not dissing on insurance agents. Most of them have been trained to believe that whole life is really the way to go. Their company has a huge incentive to convince them to sell more expensive policies, but that doesn’t mean they are right. However, because they have been trained to believe it, they are going to give you 500,000 reasons that they are right and I am wrong. So no matter what arguments they throw at you, you just pat them on their little head and buy guaranteed term life. Then take the extra money that you WOULD have spent on whole life, and use it to get your financial life in order. Pay down debt, get that emergency fund in place, and invest the extra. If you do those things, it’s almost guaranteed that you will be better off by buying guaranteed level term life. If you take the extra and go to Disney? Well, then I can’t promise you anything.
But my agent says I will lose all my money if I buy term life and don’t die
Not really. Let’s go back to why we are buying insurance and fill in a little more detail. You buy insurance (of any kind) to transfer the financial risk of losing something from us to another entity. What’s the financial risk if your house burns down? You will have to pay for another house. What is the financial risk that is covered by health insurance? The need to pay medical bills if you are sick. What is the financial risk of dying? Your family will lose the benefits of your labor and the money it might have earned.
So when your agent tells you that you will have wasted your money if you buy term life and don’t die, he is referring to the small amount of cash value you would build up if you had whole life. But remember, you are not paying to build up cash value. You are paying to make sure that whether you die or not, your family is financially protected. If you don’t die, your family is protected – by YOU. Your income, your work, your effort. If you do die, however, your family is protected from financial devastation by the insurance. You got what you paid for either way – a family that is financially safe.
Just do it
So those are the only three things you absolutely have to know before buying life insurance. There are a ton of other boring details that geeks like me just love. If you want to know everything about insurance, you can check out any of these links. This one is great to find out if you actually need insurance. But if not, now you know the basics.
PS Do me a favor. If this post moves you toward getting life insurance, please post below letting me know. It would make me really happy to know you have taken the time to make sure that your family will be OK if anything should ever happen to you. If you don’t know where to start, check out this page of independent insurance agents. I don’t make money from you clicking on this link – now or ever. But being an insurance affiliate is big money, so be careful out there. Some web sites prioritize their profit over your best interests.
Whew! This is the point where you are really getting a handle on this whole personal finance thing. You have paid off all debt except your house, so you should have some significant wiggle room between your income and your expenses. You are starting to see yourself as a winner in the money game, and it’s true! Now it’s time for the final step of your financial foundation: 3-6 months worth of expenses in a safe savings account.
Why do you need that much in savings?
Now that you have extra money every month, isn’t it enough to just avoid debt and pay cash for your splurges? Well, having 0 debt does put you miles ahead of the average American, you’re right. But you’re still a few hundred yards away from the short-term financial stability finish-line. So don’t stop running quite yet.
The next and final step for short-term stability is having 3-6 months of expenses in an easily accessible savings account. This is your emergency savings in case life suddenly gets a little too real. I hope that this step is a complete waste of your time. And for a lot of you, it will be. But the truth is that some of us will face an unexpected job loss, a short-term disability, a seriously ill child, or any of a hundred other things that can turn your life upside down. And for those, this will be one of the most important things you can do to make the hardest time of your life a tiny bit easier.
Three to six months’ savings won’t protect you from every tragedy that exists, but it will cover the vast majority of them. And even more important, if the tragedy is even worse, it will give you some time to get your sanity back after the initial shock. It gives you breathing space while you grieve. It allows you to concentrate on the people who need you, instead of “How on earth am I going to pay the bills next week?” Having that buffer savings is a favor that you will NEVER regret doing for yourself if the unthinkable happens.
How do I get my savings to that level?
This should be pretty easy. You have been paying off debt at a rapid rate by really throwing every extra penny at the debt you have. Well, now you can splurge a little to celebrate that accomplishment. (And by splurge, I mean a weekend get-away or a special but smallish new shiny thing – NOT a cruise around the world or a Ferrari!) And after the splurge, that extra money in your budget that you used to send to the credit card company or whatever creditor you were paying off should immediately head toward the nearest savings account. Just take the money that you were already putting toward debt repayment and send it to savings.
Where do I keep my savings?
The big thing here is that this is an EMERGENCY fund. In case of emergency, you don’t want to have to do something super complicated to get your money. So just put it in a money market account or a savings account. “But Jill,” you say, “This is gonna be a chunk of cash. Wouldn’t it be better to earn a little something on it?”
NO. No it wouldn’t.
And this is why. That’s not its purpose This is not money that is intended to earn interest. It’s money that is going to save your butt if something bad happens. You will invest in the next step. You will invest for the rest of your life. The money you invest will make you rich. But this emergency savings is not investment money. It’s “in case of emergency” money.
Don’t be penny wise and pound foolish with this money. Just put it somewhere safe!
What if I’m a spender and don’t trust myself to keep it?
Ahhh, great question. If you are afraid that you will lack discpline to keep that money sacrosanct for a true emergency, then put it at a separate bank from where you keep your checking account. Maybe a bank where you don’t have your electronic login info memorized, so it’s a hassle to use it for an impulse buy. You just want to be able to get to it without TOO much trouble if you you should really need it.
How much savings?
Three months’ expenses? Six months’? Or somewhere in between?
And the answer: it depends. This is based on several parts of your personal situation.
The first issue to get an actual number for your monthly expenses. How much do you realistically spend on non-negotiable in a month? Include housing, utilities, gas, car maintenance, food, and other essentials. However, you can probably skip any frills like lunches out. Just add up what it would cost you to stay afloat for one month, bare bones. Once you have that number, we’ll figure where in the 3-6 month range you should aim.
How much stability do you need?
When I was single and childless, I was a risk-taker. I figured the worst that would happen is that I would move back in with family for a few months. Now that I have a family and live in a different city, I need more stability. It would be a tremendous disruption to pull my kids out of school. That not only means we couldn’t relocate on a whim. It also means I wouldn’t want them to know that we were having financial trouble. My kids are worriers, and it would be important for them to see our lifestyle going on more or less as they were used to before. So stability is a huge need for us at this point in our lives. We wouldn’t even want to cut too far into the extras unless it got pretty bad. This points us to the upper end of the range.
Next question: How stable is your income?
If your income is strongly commission based, or your company has a history of layoffs, you will want to shoot for six months of savings, maybe even more if you have a family. On the other hand, my husband and I are both in incredibly stable jobs. I’m a teacher with great evaluations and many years experience in this district. My husband is a lawyer for the state in which we live. Plus, we could live on either one of our incomes if we absolutely had to. This points us to a lower savings amount.
Last (and most important) question: What is your comfort level?
Don’t discount your own emotions. If having six months’ worth of expenses in savings just makes you feel better, then by all means do it. If the other two questions indicate that you could go with less, and you don’t lie awake at night worrying about it, cut it down to three.
For us, even though our jobs are so stable and we have extra in the budget, I grew up on a farm in the 1980’s. And even though we made it through, losing the only home I had ever known was a very realistic fear for me. So we stick with the 6 months plan.
Ok, so now you’ve got the final step in your foundation. Next week: building on that foundation to create financial independence.
I am a money mentor, not a financial planner. While I can provide good, general information, your situation is specific to you. Always do your own research or speak with a fee-only financial planner about your personal circumstances.
This post may contain affiliate links. When readers click on them to make a purchase, I earn a small commission. However, your trust is more important to me than any commission, so I only recommend tools and services that I believe can help my readers.
A Four-fifty What?
I’m a personal finance geek. I actually LOVE blogs and books and podcasts about budgeting and savings and planning for retirement. So I kind of freaked out when my sister asked if I’d ever heard of a 457 and I hadn’t. (She’s my little sister, and LOVES it when she knows more than I do – which of course, is quite rare! 😉 )
After looking into it, I realized that 1) it was a real thing, not a hoax, and 2) it could seriously change a teacher’s financial life.
So what is a 457(b)?
It’s a deferred-compensation plan. Yep. I know. That helps exactly not at all, doesn’t it? Ok, here’s the Cliff Notes version. You choose to have a portion of your money put aside before you ever see it. It comes out of your paycheck like taxes or insurance payments, and you just see a line item on your pay stub telling you that it got deducted. (Yeah, I know. So far, it sounds WAY less than enticing. But it gets SO much better.) Then it is put into an account for you, much like a retirement account. You can choose to take this account and draw from it whenever you leave that employer – here’s where it gets good – EVEN if you are not at retirement age.
Um, what’s the point?
So I imagine that you might be thinking, “Um, you want me to get excited about not getting my pay until years later? I could put it in a savings account of my own and at least have control of it. You’re not the brightest knife in the drawer, are you, Jill?”
But WAIT!!!!! This is important. They take this money out pre-tax and when you withdraw it, it will be taxed at your tax rate at that point. This means two very important things are happening. First, that money is going to grow tax-free until you need it. So you will be making money on what you would have otherwise already paid out in taxes. Sounding a little bit better? Second, when you withdraw it, it will be taxes at your current (at that point in time) tax rate, which could be significantly lower if you are no longer working.
So you say it can help me leave teaching?
So let’s say you want options.
Maybe you are ssssooooo close to retirement, but need a few hundred extra dollars a month to make it work.
Maybe you have already decided you don’t want to go back to teaching this fall, but you want a little extra cash cushion in case you don’t find a job right away.
Maybe you are thinking about having kids and you’d like to be able to take a couple of years off. Or you want to have another kid, but you don’t think you could afford the childcare for two (or more).
Maybe you’ve always wanted to start your own business and you’re thinking you might want a couple of years away from teaching to try that.
Or maybe you have always dreamed of just taking some time off and living overseas or traveling around the country in an RV while homeschooling your kids, (That idea absolutely makes my hair curl, but different strokes for different folks, you know?) or after the kids are gone to college (much less-terror inducing for me).
If the rest of your financial house is in order, a 457 could be a tool to get you to any of those dreams.
What a 457 allows you to do, is not collect your pay now, but collect it at any time in the future after you have left your current employer.
Show me the money
The 2022 limit is $20,500 per year, but people over 50 who have not maxed out their contributions can put in an extra $6500/year, for a total of $27,000/year. I realize that most of us can’t spare $27,000 a year (or even $20,500), but remember, this money is pre-tax. That means it’s still going to make a dent in your paycheck. However, the dent will be about 20-25% less that what’s going into your account. Depending on your particular tax situation, you could deposit $1000 into your account, and only see your take-home pay drop by $800.
And you don’t have to put the entire amount it. You could put $4000/year in. Over several years, that could add up to enough to allow you to take some time away from teaching or even to retire earlier than you thought.
What’s the catch?
This is the big one. You have to be a government employee (like a public school teacher, firefighter, or police officer) AND your employer has to offer the plan. Not all of them do. However, if your spouse is government employee, the 457 could apply to them, too.
Also, the employee has to actually leave the job at which they have the 457 account. It can’t be a leave of absence.
But here is the big issue, and why I recommend you do your own research or talk to a professional. Whatever money you put into a 457b and take out is money that isn’t available for retirement later. Given the state of teaching at the moment and how many teachers’ mental health is declining, that might not be your primary concern. But whatever choice you make, I want you to have thought through both short and long-term issues.
How the 457 (b) worked for us
When we realized we were really going to go all in on this crazy adventure and move to Norway, we started re-evaluating our finances. One part of that was for me to go back to work full time and stash my salary in savings. We opened a savings account with Huntington Bank (which honestly was a great bank to work with) and my salary was direct deposited in it to remove all temptation. We didn’t even have a check book because we didn’t want to be tempted to use that money without a really valid reason. It worked fine, but of course all of that money was taxed before it went into the account.
When we found out about the 457, I started investigating it hard core. I was all about it. However, my employer didn’t offer it as an option, even though it was one of the largest school districts in the state. However, my husband worked for the state government and upon some further checking, we found out he was eligible. It was quite a pain to get set up, and it took us several months. However, because we were living off of only one salary anyway, once he got the paperwork done, we chucked about 80% of his pay in the 457 and just lived off of my salary instead. That allowed us to put the maximum amount away before we moved. By my figures, that gave us an extra $6K or more than we would have had if we continued with the original set up.
How it could work for you
Let’s say you are wanting to leave teaching for a few years – or forever. You have dreams of moving overseas or starting a small business or staying home with the kids. Saving money in a 457 account could help you in a couple of ways.
First, it allows you to save more since you are saving pre-tax dollars. Unlike a 401K or the retirement account, you can receive the money at any time after leaving your employer. (Remember, you have to actually resign, not just take a leave of absence.)
Second, if you do leave teaching, your income will most likely go down. So when you pay taxes on it, you will pay a lower rate. Third, you get to decide when to withdraw the money. For example, if you start a small business, and you start making enough income that you don’t need to withdraw it, you don’t have to. It can continue to grow tax-free until you DO need it.
This is ABSOLUTE BASIC information on a subject I had never really been familiar with. I have checked all this information with my accountant for accuracy, but I am NOT an accountant, and I could have missed something or messed something up. So – disclaimer alert – definitely consult your own accountant or tax professional before you jump into a 457.
If you were trying to swim across a lake with an anchor, and you weren’t sure you’d make it, what’s the first thing you would do? Drop the anchor, right?
Yet in personal finance, we often carry around a huge anchor for not just years, but decades. Sometimes we don’t even realize we’re carrying it because everyone else in our lives has always carried anchors, too. What’s that anchor?
Debt.
Yes. For many people, debt is an anchor that will absolutely prevent them from getting to where they want to go financially. Why? Because we spend a ton of money making payments. Think of every payment you have now or have had in your life. How much money would you have to work with every month if you didn’t have those payments to make?
“OK, Jill,” you say. “Sounds great. But if I knew how to do it, I probably would have already done it.” Yes, it’s easy to say, but not easy to do. But then again, teaching isn’t easy either, is it? And you’re KILLIN’ that! So I know you can do things that are tough. I know you’re not a quitter. And I know this is worth the effort.
Again, these are not my ideas, they were formulated by Dave Ramsey. But this is my personal take on the system he used.
Kill debt with emotion, not logic
In getting rid of debt, like most things in life, your emotion matters more than logic. So we’re going to put your debts in an order that will give you some quick wins and really allow you to see some fast progress. Make a list of your debts – credit cards, car loans, student loans, medical bills, loans from family and friends, payday loans, EVERYTHING except the house. Include the name of the debt, the total amount, and the minimum payment you have to make each month. Then put them in order from the smallest amount owed to the largest amount owed.
Dumping the Debt – smallest to largest
Once you have your $1000 emergency fund (for more on saving $1000, click here) and your list of debts, you continue paying minimum payments on all of your debts. But stop EVERYTHING else. Stop the money that goes into your retirement. Stop buying new clothes. And stop eating out. Get rid of everything that is not absolutely essential.
At the end of the pay period or month, you scrape up all that extra money you have and put it toward the first (smallest) debt on the list. With any luck, you’ll knock this one out right away. When you’ve paid off your first debt, you take that monthly payment and you put it toward the second debt on your list, along with ANY extra money you can find. (Check the couch cushions one more time. Raid the cup holder in your car!) Now you are making a bigger payment on that second debt each month, and it should disappear pretty quickly. You repeat this process until you have worked your way through every debt.
That “until” could be a big one. Like 2-3 years big. Two to three years that might feel like 2-3 decades. But what would it mean to you to have NO payments? NO car payment. NO credit card bills. NO student loan. What would your life look like if you paid your mortgage, utilities bills and were DONE? I’ll bet for most of us, it would be a lot different. A lot more joyful. A lot less stressful.
Would it be worth it to sacrifice – REALLY sacrifice for a while to give yourself options? To give yourself freedom?
Again, for those in the back – It’s emotion, not logic!
If you are a math geek, you are saying to yourself, “Lowest payoff to highest? NO WAY! If you put it in the order of lowest interest to highest,you’re going to save all that money you’re paying on high interest loans and you’ll pay it off so much faster.” Well, that’s a great theory, but it’s kind of like all those theories your education professors taught you that just flat don’t work in actual life.
Remember, paying off debt is not about the numbers. It is not about the logic. If it were, no one would ever get into debt. It’s totally against all logic to spend money you don’t have to buy things you almost never actually need! This is about emotion. And whatever extra interest you pay will be more than offset by your intensity as you start paying off debt and really feeling like this thing could actually happen.
In this case, the interest isn’t your problem. The principle is. Bad spending habits and spending more than you earn are. The interest is just a symptom.
So I’m going to ask you one more time, would it be worth it to sacrifice – REALLY sacrifice for a while to give yourself the option to continue teaching or do something else, like stay home with the kids or start a business. To give yourself the peace of mind that comes with knowing you have money in the bank to pay all of your bills? To sleep soundly without worrying that one small emergency will bring your entire financial house of cards tumbling down around you? If so, get that $1000 saved, and get your list made, and get on your way.
