It can be said that a little debt never hurt anyone. And that there’s even such a thing as “good” debt. But big debt generally means big problems. The stress of dealing with debt can cause both emotional and physical problems, including headaches, insomnia, ulcers, high blood pressure and heart problems. What can you do if you’re struggling with big debt? Here are the stories of four people and how they tamed the debt monster.
$140,000 in debt
Our first story is of a couple that was faced with a mountain of $140,000 in debt. Yet, they were able to eradicate it in less than three years. How did they do this? They would be the first to admit it took hard work, dedication, good fortune and perseverance. While they were required to make numerous sacrifices they didn’t starve themselves or make their lives miserable. Where did all this debt come from? It came from student loans.
The good and bad news is that the husband lost his job. However, he received severance pay and when he got a new job was able to use the money to begin paying down the couple’s debt. They then used the money in his savings account along with his new paycheck to pay off $15,386 in debt.
Their next step was to develop a budget where they could live on his salary alone and use all of her monthly paychecks to pay down their debt. In addition, they minimized their monthly expenses as much as possible and used all unexpected income to make additional payments. They cashed out his investments and then used their emergency fund to do a final payoff.
$150,000 – mostly in business debt
Our second story is of a couple that became $150,000 in debt mostly because they lost two businesses. It took them five years to pay off this debt but they were able to do it using a combination of tactics. First, the wife became a mad coupon clipper. Her favorite websites were Southern Savers and Money Saving Mom. The stores she chose were CVS, Target, and Harris Teeter.
Second, they stopped going into debt. They cut up their credit cards so there was no way they could create any more debt. There were some instances such as unexpected medical expenses where they did have to pay them off over time. Plus, they had a bigger tax bill one year and had to pay it off over the following 12 months. But the important thing is that they saw their debt slowly and steadily going down. They had learned the important lesson that you cannot pay off debt while you are continuing to go into debt.
Third, they followed the advice of Dave Ramsey and snowballed their debts. This meant first paying down the debt that had the smallest balance while continuing to pay the minimum amounts on their other debts. The minute they paid off the debt with the smallest balance, they went to work on the next one and threw all of their extra money at it. They did stay flexible with some of their spending. For example, they sent their kids to a three-day-a-week private school and even bought season passes to a nearby amusement park. Beyond this, their only vacations consisted of staying at a beach condo owned by a family member or by going on vacation with other members of their family.
Another tactic this couple used was to have two separate banks. They had one for everyday spending and a second for savings and sinking funds. Before when they had just one account they found it was more difficult to save money, as the “extra” money they had earmarked for paying off debt would somehow shrink. Now, they put enough to cover their living expenses in an account at their main bank and the rest into their secondary account at a different bank. This helped them save more money each month.
They say the most important lesson they learned is that if the couple agrees to pay off debt it may take longer but it is better than trying to pay it off faster where one of the two is a bureaucratic tyrant.
Paying off $18,500 in debt
This story may not seem as dramatic as the two previous ones but debt is much like art in that it’s all in the eye of the beholder. We’re sure that the $18,500 that this couple had in debt was just as scary to them as was the $150,000 that couple #2 had in debt. The wife admitted that they were this much in debt mostly because of her. So how did she fix things?
Her first step was to create a spreadsheet to review all of her debts. She then created a list of her monthly fixed expenses and developed a spending plan. Her next step was to create a “debt snowball.” This meant ordering her debts from the one with the smallest balance to the largest and then scheduling payments to the smallest debt until she had paid if off while continuing to make the minimum payments on her other debts. She would then move on to the debt with the next smallest balance and concentrate on paying it off. Think that debt snowballing might work for you. Watch this Dave Ramsey video to learn more about this strategy for becoming debt free.
This woman initially believed that it would take her 18 months to pay off everything. But she got lucky and received a sizable bonus and was able put $1000 in savings and used the rest to retire her last debt.
Two important things this woman learned about paying off debt is that you should allow yourself a certain amount of money for fun out of each paycheck to help stay happy and motivated. She paid off all of her bills as soon as she received a paycheck including her debt and then viewed whatever she had left in her account as “fun” money. This is what kept her from overspending. Second, she learned that if she had a small setback such as a vet bill or car repair bill to not that eat into her debt snowball or to get her down.
Over $14,000 in debt and no savings
Our fourth story is of a woman who became debt-free after owing more than $14,000 in debt and with no savings. She felt her financial life was totally out of order and didn’t know how to fix it.
In this case, the woman had a full-time job that paid $37,072 a year plus bonuses and side jobs that totaled $5000. This came out to be an average of $3496 a month or about $42,000 a year.
The way she chose to get rid of this debt was to first pay off her credit card debts because they had the highest interest rate and were unsecured debts, which made them riskier. In addition, they had the smallest balances, which made it easier for her to start small and then work her way up. In addition, she created a four-step program for becoming debt-free. Her first step was to create a tough but attainable timeline. In her case it was to become debt free by December 2012.
Her second step was to learn where her money was going and where she could make the necessary sacrifices. This amounted to living on about two thirds of her income, which was definitely rough in the beginning. She viewed her budget as a spending plan that gave her more control over where her money went. She actually learned to love living below her means. What did she have to give up? She had to give up her cable TV, vacations and traveling, dining out at restaurants, movies, a gym membership, and visits to tanning salons. As tough as this was, she soon learned that those activities had delayed her time and production and kept her from reaching the debt-free position she wanted to achieve.
Step three for this woman was to create more income. She spent a good deal of time marketing herself and her skills to increase her income. She had already cut back on her expenses as much as she felt she could so now was the time to maximize her earnings. She did this by freelance writing in her spare time, which added more than $500 per month to her income.
Finally, her step four was learning how to stay motivated and to celebrate even her small wins. To become debt-free is not a sprint. It’s more of a marathon. But as she learned, if you celebrate the small “wins” this can help keep you going. She also learned that while there are also awesome financial tools available, the biggest and most important tool in her financial arsenal was herself – her determination and discipline.