Project Buy a House is an ongoing series that details my own road map to home ownership for my family and give lots of ideas that you can implement yourself.
It’s not for the impatient. This is the long game. We’ll be talking about improving credit scores, saving up a significant down payment, getting out of debt, and learning to live within our means. New posts go up on Mondays. I hope you’ll come along for the ride. Click the button above to get email notices of each new post in the series.
Our first big Project Buy a House goal is to pay off all debt, except student loans. We don’t have a mortgage or that would be another exception. The program we’re using is Mary Hunt’s Rapid Debt Repayment Plan, so that’s what I’m going to share with you. Other financial gurus have similar plans (like Dave Ramsey’s Debt Snowball.) I don’t think it matters what plan you use, just as long as you actually have one and you’re using it.
Regardless of how you plan to get out of debt, there is something you can do right now that doesn’t cost anything at all.
Stop using your credit cards.
I know that’s easier said than done, especially if you depend on your credit cards to get you through the month. Even if you can’t completely stop this month, cut back as much as you can while you work to bring your outgo to 80 or 90 percent of your income. (Remember the list you made a couple of weeks ago?)
If you don’t figure out a way to stop using those cards, all this work to pay off your debt is like baling yourself out with one hand while you’re pouring buckets of water into your boat with the other. Not good. So make a commitment now to wean yourself off of credit cards. Do what you have to do to make that happen. Lock them away somewhere. Cut them up. I don’t recommend canceling them, because that can wreck havoc on your credit score. Just stop using them.
Set a Deadline for Yourself
If you can’t just stop using your credit cards today, make a plan to stop using them at a set date in the future. Use the action plan for getting your outgo and income in line that you made two weeks ago and get on those side hustles we talked about last week. You can do this. It might not be easy, but you can stop using your credit cards. Think about how good that will feel!
Rapid Debt Repayment
Why don’t we start with making a list of what you owe, to whom, and how much. Debtproofliving.com (Mary Hunt’s Site) has a calculator you can access if you sign up for $3.99 a month (you also get her newsletter, Cheapskate Monthly, which I love.) Just input your debt information. If you don’t want to or can’t afford to sign up for that site, just use a piece of paper and a pen. Free, even if it isn’t quite as easy. List your credit cards, any loans (to banks or to individual people), your car note, outstanding medical bills. Any money you owe to any one.
An easy way to see what you owe and to who, in one shot, is to sign up for a free account at www.creditkarma.com. You’ll be able to see your credit score (it’s not your FICO, but it’s something to keep track of) weekly. Credit Karma has just started including your credit report on your dashboard. That’s free and easy access to your credit report. Credit Karma will tell you what you owe on each credit card and loan attached to your social security number, plus student loans, your mortgage, and give you access to your credit card where you can see things like medical bills, old debts that you never paid off, and that sort of thing.
Prioritize Your Debts
Now that you have this big list, you need to prioritize it. Here’s how we did that for our debt:
1. Any debt in good standing. It’s important to protect whatever is adding anything good to your credit score.
2. Your current credit cards, loans, and other debts.
3. Anyone who’s actively coming after you for payment.
4. Your old credit cards, loans, and other debts–maybe that you haven’t paid on for a long time and that no one is trying to collect on right now.
When we added all of that into the debt repayment calculator on Mary Hunt’s site, we put in everything from 1, 2, and 3. We plan to pay off everything in #4, but we’re prioritizing the other debts for now. We didn’t add in student loans, which won’t come due until late next year. If we had a car payment, we’d have added that loan. We wouldn’t have added in our mortgage.
Here’s the fun part
To get out of debt faster than you might even think possible, you take these steps.
1. Make the minimum monthly payments on each of your credit bills.
2. When one of your credit accounts is paid off, roll that minimum payment into the next one.
3. When the second credit account is paid off, roll everything you were paying on that account to the third one.
4. And so on.
I’m going to sound like a broken record, but the $3.99 for access to the calculator on Mary Hunt’s site is so worth it. Even if you just pay for one month, use the calculator, print out your repayment plan, and then cancel. There’s a trick to organizing your debts so that you pay them off in an order that saves you the most money. I don’t know about you, but I don’t have the math skills to figure that out on my own. It’s well worth the $3.99 to make sure I’m doing it right.
Here’s Why This Plan is So Important
According to my Debt Proof Living calculator on the site, we owe $4,194.50 (that’s all of our debt, outside of student loans.) If we made the regular minimum monthly payments, it would take us more than 20 years and nearly $6,500 in interest to pay all of them off.
That means we’d pay off our debt, if we never used our cards again, right around the time Ruby turns the big 3-o.
Using the plan, we’ll be have those debts paid off by May 2015–that’s 240 months early! And we’ll pay less than $400 in interest on those debts.
Instead of paying those bills off when we’re in our 60s (!), we’ll have them paid off in less than a year.
Wow, right? It’s like putting getting out of debt on turbo drive.
Our monthly payments come to about $450 a month. When we’ve paid off those debts, we’ll use that money to pay off the debts that fell into #4 above. By then, we’ll have to start paying on our student loans and that’s where that money will go. That’s a post for another day, though.
There is something deeply satisfying about seeing your debt reduce in big chunks. I think in our society, we’re so used to owing money. There is little to no stigma attached to being in debt. It’s expected. But it isn’t necessary. And life without it, I am quite certain, will be very sweet.
I don’t know about you, but there are lots of things I’d rather do with $450 a month than pay off debts. Like saving it toward a down payment on a house!
If you need more help understanding the Rapid Debt Repayment Plan, you can read Mary Hunt’s book Debt-Proof Living, which has lots of information.
Stop using your credit cards.
If you can’t stop today, make a concrete plan (with a deadline) for stopping in the near future.
Make a list of all the debts you owe.
Prioritize your debt list.
Make a plan for using the Rabid Debt Repayment system to pay your debts off quickly.
If you need help with that, sign up at Debt Proof Living and use Mary Hunt’s Rapid Debt Repayment Plan calculator. (It comes with a $3.99 per month subscription to her site.)
Remind yourself as often as needed that you absolutely can do this.
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