The debt anchor
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.
You got this!