It really started with one of those major life changes: divorce. Until then, I had a minor amount of debt on my credit cards, as they were handy to pay for small business expenses or travel. After the separation, expenses stared popping up, and I, on what was left of my income after child and spousal support payments, wasn’t adequately prepared sometimes. A car repair bill, my ex’s hospital bill, a flight or two, you get the idea. It wasn’t long before my debt had crept up on me and was now approaching $7,000 in consumer credit card debt and another $2,500 for my ex’s hospital bill, which I had agreed to pay. I needed to turn things around or I would face a situation with my personal finances in which I would be relying on credit cards to make ends meet.
Before you say, “Big Deal! That was under $10k, that’s nothing”, let me explain something. I’ve been there before. I went through Chapter 7, the big bankruptcy, years ago. I knew better then too, and was in over my head to the tune of more than $50k that time. Rather than head down that same path that happened years ago, I took action to prevent a similar fate. I did not have creditors calling me this time around, and wasn’t late on a single payment. My credit was fine; I just knew I was heading down a slippery slope. When confronting a debt problem, most people don’t know where to begin.
First, I created a budget and analyzed how much I could trim from my spending. Realizing I could use additional income, I found several ways to make money online. With my new budget, and increase in income, I was ready to tackle my debt.
Different ideas abound, but one that I found that works and motivates you to continue paying down debt is Dave Ramsey’s Debt Snowball Plan. In this plan, you pay off the smallest debts first, and then apply the payments you were making on the smallest debt to the next smallest, and so on. As you see debts becoming satisfied, you’ll gain satisfaction in knowing that you are getting out of debt. This motivates you to keep going. I modified the Debt Snowball Plan, in that I also combined it with reorganizing my debts so that I was paying the least in interest as possible.
Here’s what I did. $400 on Credit Card 1 and at a high rate, was my first payoff. $450 on Credit Card 2 also with a high rate, was 2nd. I transferred a balance of $3,000 from Credit Card 3 to Credit Card 4 at a much lower interest rate, for a total of $6,150. The hospital bill of $2,500 agreed to take payments of $200 a month, at no interest, so I only paid the minimum there, from a health savings account to keep it tax advantaged, and worked to pay down the $6,150 as quickly as possible. With about $700 a month to be able to put toward paying off debt, my debts were paid for in about a year and I felt great!
Ramsey, Dave. (2009). Get Out of Debt with the Debt Snowball Plan.