Beating Broke

Personal Finance from the Broke Perspective

How to Get Out and Stay Out of Debt

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As a nation, we’re individually mired in debt.  Achieving financial freedom is strange to many people because they accept that they will always have a mortgage and a car payment, but many also accept that they will always have student loans and credit card balances.  They argue that life is just too expensive, and there is no way they can make it through without credit.  However, there is a simple way to get out and stay out of debt.

Why Gazelle Intensity Doesn’t Always Work

If you’re deep in debt, you may want to follow the Dave Ramsey approach and become gazelle intense, funneling all of your extra money into your debt snowball, even if it means that you’re neglecting other categories of your budget like your house and car repair fund and your retirement.

How to get out of debt and stay out of debt
Photo via flickr Mhorr Gazelle (Nanger dama mhorr) © by 5of7

While gazelle intensity works great if you only have a small amount to pay off, say $10,000 to $15,000, many people are far deeper in the whole than that, and it’s very difficult to remain gazelle intense for years.  Gazelle intensity is meant to be a sprint, ideally for less than a year, not several years if you’re heavily mired in debt.

In addition, while it’s easier to neglect certain categories in your budget for a year or less, doing so for longer will cause problems.  Your car will need repairs over the course of several years.  Your home will need repairs which may be minor, or unfortunately, major.  But because you’ve been funneling everything into your debt snowball, you may not have enough money to pay for a repair in full, so your only choice may be to pay on credit and negate your progress.  How discouraging is that?

A Simpler, Slower Way to Get Out of Debt

These days I’m all about moderation, even for those who have significant debt.  There is a simple way to achieve financial freedom—quit accruing new debt.

The only way to do this is to make sure that you have a realistic budget and money set aside for emergencies and irregular expenses.  Put away the credit cards so going further into debt isn’t an option.

Paying Down Debt

Then, pay the minimum on all of your debts and don’t reduce that number as the minimum payments go down.  Let’s say between all of your debts, your minimum monthly payment total is $1,365.  A year from now, since you haven’t accrued any new debt and the balances are going down, your minimum monthly payment might have dropped to $1,290.  Don’t reduce your minimum monthly debt repayment.  Instead, readjust your payments so that you’re paying the minimum payment on all bills except the smallest one.  On the smallest one, pay the additional $75 that is the difference between your minimum monthly payment last year and your minimum monthly payments this year.

Sure, it’s hard not to want to pay more than the minimum monthly payment that you started with in the beginning, but the idea isn’t too pay all the debt down immediately.  The idea is to continue to budget and fund all of the necessary categories so that you can achieve financial freedom.

Setting a Realistic Budget

So, you’ll take a realistic look at your expenses.  If you have a home worth $200,000, you’ll set aside at least 1% of that price a year in a repair fund (approximately $166 a month).

If your car is old, you’ll set aside a reasonable amount monthly for repairs and maintenance—maybe $200 a month.  And if your car has over 150,000 miles, it may be time to set aside a monthly amount to buy a new car in a few years—with cash.

How to Get Out of Debt
Photo via idpinthat.com

Determine an amount that you want to set aside monthly for an emergency fund, and then just keep adding to that fund whether you have an emergency or not.  Some time, you will have a major emergency, and you’ll be glad that you have a full funded emergency fund so you can pay in cash, not credit.

Getting and staying out of debt requires that you stop using credit and that you have a budget that considers all of your true expenses for the year.  While this process make take longer, it also assures that you will achieve financial freedom.

Which approach do you take to get out of debt?  What would you advise others who are deeply in debt?

The Importance of Fixing Things Sooner Rather than Later

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A few years ago, my brakes started making noise whenever I pushed the brake pedal.  I procrastinated quite a while before I took the car into the shop because I didn’t have the money for the repair.  However, because I waited so long, the brakes had worn down to the rotors, so my repair was much more expensive than it would have been had I come in right away.

But Wait! I Hadn’t Learned the Lesson Yet!

You would think I’d have learned my lesson, but no, I haven’t.

We own a minivan that is 11.5 years old and has 167,000 miles on it.  A while ago, one of the back sliding door handles broke, so we could no longer use it from the outside.  No worries.  We simply herded all the kids in through the other side door.  Was it a pain?  Just a little bit, but we didn’t want to spend $200 to $300 on a door handle repair when we had so many other pressing expenses.

But, then the other sliding door broke.  The wire coil started to fray, so we couldn’t open the door.  The repair for the outer wire coil?  A cool $900 to $1,000.  Ouch.

Fixing Things
Fix it now!

So, we started opening the driver’s side door and reaching around to open the side door with the outside broken handle by using the inside handle.  By now, we were starting to feel a bit, um, special, I’ll say, because of our unusual way to open the door.  Still, we put off the repair because we had other expenses like a $210 garage door repair and a $90 air conditioning tune up along with a $900 deposit for braces for our son.

All was okay until the inside door handle broke.  Now, the only way the kids can get in and out of the car is through the front doors.  The special meter has gone up enormously, and even the kids are talking about how embarrassed the are to get in and out of the car.  Now that the repair is inevitable, I called the shop to find out the repair will likely be $400 to $500 because they’ll have to remove the door and replace both the inside and outside door handle.

Lesson learned.  When a repair is needed, make the repair.  If you don’t, you’ll likely end up paying more in the future.

How to Get the Money Together

If your budget is tight like ours is, there are ways to get the money together to make a smaller repair immediately so you don’t have to pay more for a larger repair later:

Raid your emergency fund.  This is the easiest.  If you have an emergency fund, use the money and then rebuild the emergency fund as quickly as possible.

Have a pantry challenge for a week.  We spend approximately $150 to $200 a week for groceries.  By taking just one week to eat only what we have in the house and not going to the grocery store, we could have had the money for the handle repair before it got worse.  Lesson learned.

Sell stuff.  Everyone has stuff around the house that they don’t need or don’t use.  Sell things at second hand stores, sports resale stores, or eBay or Facebook.  You’ll be surprised how quickly the money will add up.

Do you procrastinate on repairs because your budget is tight?  If so, like us, has that rationale ended up costing you more money?

Living on a Tight Budget: Should Groceries Be the First Place You Cut?

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If you’re like me, the last few years, you may have felt that you’re simply treading water when it comes to income and expenses.  It seems every time our income goes up, our expenses go up, and I’m not talking about lifestyle inflation but rather insurance premiums and deductibles, etc.

Like many people, I try to cut corners to make our money stretch as far as I can.  I’ve certainly had times a few years ago when I bought the cheapest groceries that I could find by using coupons and sales, even though the food was processed and not that good for my body.

I rationalized that I was being frugal, and, I’ll admit it, I was proud of myself.  Never mind that we were eating casseroles that we didn’t really like made with processed foods or that the leftovers often went to waste because we didn’t want to eat the meal again.  Never mind that both my husband and I had cholesterol well over 200 even though we were in our thirties.

Change in Eating Habits

However, over the last few years, my opinions on grocery shopping, the foods we eat, and how to save money have changed. I still like to save money (and I still need to in order to make our budget stretch), but now I do it differently, and I feed my family differently.  A few years ago, I went Paleo.  I dropped a lot of weight, and my cholesterol level settled around 155, even though I was a few years older. True, our grocery budget went up, but not by as much as I expected.  I learned ways to buy healthy food at a reasonable price.

Where Else Can You Cut Besides Groceries?

Should you Cut groceries first?
Where would you cut first?

Sometimes, especially when money is tight, groceries seem like an easy place to cut.  Convenience foods bought with coupons can be had for a steal.  Take a look around Pinterest, and you’ll find many posts of bloggers touting how little they spend for groceries.

But is this a good thing?  I know groceries are typically one of the largest monthly expenses for a family, but should this automatically be the place we look first to reduce our budget?  After all, there is great truth in the adage, “Pay your farmer now, or pay the doctor later.  In fact, “Americans spend nearly 20% of their income on healthcare costs, while on average spending 10% of their income on food. . .Considering the age-old adage, ‘an ounce of prevention is worth a pound of cure’ may be the first step to attempt to reduce healthcare spending—and the key place to start is food consumption.  If you start to consider your diet a form of preventative health care, you might start rethinking your daily meals” (University of New Hampshire).

Take a look at your budget.  If you don’t automatically slash your grocery budget, where else can you cut expenses?

If you don’t short change your body healthy foods, you’ll save thousands on health care later on.  Meanwhile, why not consider dropping your smartphone and getting a “dumb” phone?  (Yes, I still have a flip phone for emergencies that we bought 10 years ago.)  Can you drive your current vehicle a little longer so you don’t need to have a new car loan?  Can you drop cable?  Do you have subscriptions you’re paying for but you don’t use?  Likely, there are several lifestyle choices you can make to cut your expenses without compromising the quality of food you can buy and eat.

Do you cut other expenses so you can continue to buy quality foods, or do you prefer to slash your grocery budget?