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We have zero debt. That’s because I don’t believe in debt, and I was lucky enough to marry someone who felt the same. To me debt is an evil vampire sucking you dry, not a pretty sparkly thing like the mainstream would have you believe. Debt is a result of a NOW society. Shiny new car, “I want it NOW!” Coach purse and Rayban sunglasses, “I want it NOW!” The latest and greatest new technology, “I want it NOW!” All the cute and quirky clothes from Modcloth, “I want it NOW (but sadly I must resist)!” I know this sounds like a cheesy commercial, but you get the point. The now mentality is the birthplace of debt. So the first step to overcoming debt is:
Change your mentality from “I want it now” to “I will work for what I have.”
Once you start working for everything you own, there is a strong possibility that you will want a little less, because things won’t be so readily available to you anymore. Materialism is poo people! You don’t need all the junk that clutters up your life, and ends up being the stock of your next yard sale. Materialism brings you a moment of happiness, and then a mountain of stress and overdue bills. Nothing you ever buy or spend your money on will make you happy (only Jesus can do that!). When you realize that, and nail it into your mind (then staple it and glue it down a bit), the temptation of materialism will lose its clutch on you.
Once you stop creating more debt by changing your mentality, it’s time to kill that evil vampire life sucking debt that is enslaving you. The second step to overcoming debt is:
Focus on eliminating your smallest debt first (while still paying the minimum on the rest), then use up that freed money to pay off your next smallest debt, and so on and so forth, until you can attack your biggest debt with the full force of your budget!
Forget any other money goals you have, and focus solely on eliminating your debt. I’m talking attack it Attila the Hun style. Show no mercy! “Hey want to go out to this fancy restaurant that just opened up?” “NO! MUST KILL DEBT!” Live as frugally as you can by implementing the things I talked about last week, and set aside as much money as you can in your budget to pay off your debt. You must sacrifice now in order to live freely later.
Ok, so you get to the point of having absolutely no more debt! Yay! Done, right? No. The third and final step to overcoming debt is:
Unless you put money back for the future, you will end up acquiring more debt to cover the cost of what you end up needing or wanting. I will go into greater detail about savings below, but before I get to that, I must expose the dirty hypocrite that I am…
I have no debt now, but I don’t believe it will always be that way unfortunately. That’s because like the rest of society I sometimes too fall under the NOW spell, but that’s only when it comes to a house. I’m not willing to wait for the 15 years, or however long it will take me, to save for a house. If you have the ability or patience to save all the money you need to buy or build a house then do it, but if you are like me, then save every little bit you possibly can until you can’t stand waiting any longer, then pay that sucker off as quickly as you can, dreaming of having no house payment or rent before your kids ever leave the house! I would gladly suffer a tight budget now to have such freedom later. I will forgive myself on this one though, because I would be paying rent to live somewhere else anyways.
What’s one of the number one tools for debt prevention? Savings. Once you have paid off your debt, or if you don’t have any, then it’s time to put a place in your budget for setting aside money for the future. This can be hard to do, because a lot of times if you have money, well… you want to spend it. How boring and unfun is it to just set money aside to be used later!? But how stressful is it to not have money for the things you need, and to be trapped under the weight and responsibility of debt. If you don’t have the money to save for a car one month, no big deal, but if you don’t have the money to make your car payment, that’s a different story. Savings=freedom, debt=slavery.
- Emergency Fund: When you are focusing on paying off your debt, you still need some money in the bank to cover the cost of emergencies, or else you can get yourself in quite the pickle. But once you have paid off your debt, then this is the first savings account you need to focus on building. The general rule is 3 to 6 months of your living expenses. This doesn’t mean your cable bill or going out to get your nails done, but the bare necessities.
- Retirement: This is the second most important savings account you could create. Nobody wants to have to work when they are old and feeble, but some old folks have no choice, because they didn’t save when they were younger. Give as much as your employer is willing to match, and then set up your own Roth IRA,(individual retirement account), because you will probably need more to cover your dentures and such. Read Dave Ramsey’s Roth IRA Starter Guide. He’s the man.
- A House: My biggest tip on saving for a house is to save as much as you possibly can for a down payment before you purchase one, and my second is don’t buy more house than you can afford (duh). Typically you have to save between 5 to 20 percent of the cost of a home in order to get a loan, but please don’t choose the easy tempting lower end of that, because you are impatient. If you save less than 20 percent you will have to pay lame-o mortgage insurance (blah!), and you will be stuck with a huge house payment. Figure out how much of a house payment you can afford with your current budget, and don’t forget to factor in house insurance and a large amount of wiggle room (don’t go for the maximum you can afford!), then calculate how big of a loan you can get. I like to use Bankrate’s Mortgage Calculator for this. If the type of house you want is going to cost more than that, then you will know the bare minimum you need to save. Another option is to save up and buy a cheap fixer upper as a starter home, as long as you know what you’re getting yourself into that is, then one day sell that for a profit and get something better. If you are going to have to get a loan, then I would recommend a 15 year fixed rate mortgage, because you will be forced to pay it off a lot quicker (what’s the likelihood that you would have enough self-control to make extra payments on a 30 year mortgage?), you will get a better interest rate, and you will pay a whole heck of a lot less interest on it. Getting a 30 year mortgage means you will be paying almost double the cost of your home, because of interest! Ridiculous!
- A Car: How long do you plan on driving your car? Until it doesn’t run anymore? Or until you’re bored with it? Figure out how long until you plan on replacing your current car, and how much you plan to spend on a new one, then divide that amount by the number of months. This will be how much you need to save every month. Can’t afford that? Then maybe you need to plan on driving your car a little longer, or go for something cheaper.
- An Education: The cost of going to college is mind blowing to me. It causes so many people to start their adult lives off in a mountain of debt. First off, you don’t need a four year degree to be successful in life nor does it mean you will be. I know plenty of people who have them and struggle to find a decent paying job, and even when they do, a large chunk of their paycheck will be used to pay off their student loans. If your dream job requires a degree then look into community colleges instead of some big fancy school, submit a FAFSA to see if you qualify for any grants, apply for as many scholarships as you possibly can, or work your hiney off at a part-time job to pay your way through school. If you are a parent hoping to send your child off to college, then set up a savings account specifically for it. Dave Ramsey, my financial role model, recommends setting up a 529 college savings funds or Coverdell ESAs (Education Savings Accounts) to save for your kids tuition. My husband and I plan to start saving for each child as soon as they are born.
- Vacations: We all want to enjoy the fruits of our labor, but if you don’t have the money for a vacation, then you’ve obviously spent your fruits somewhere else. If you can’t afford a vacation then fill up a plastic kiddy pool, sit back in a beach chair with your feet in the water, and sip on some Kool-aid, but whatever you do don’t go into debt over it. If you want something a little more than that, then save. This should only come after all the other important things to save for though.
- Other Crap You Want: Set aside spending money every month, and if something exceeds that allotted amount then save for it. Simple, easy, stress free.
There are a lot of people out there who equate socking money away as a lack of trust in God or materialistic, but the funny thing is that those people probably still buy all the things that I am talking about saving for, yeah, and those people are probably in debt. Buying things you don’t have the money for is materialistic, not working for it. God blessed you with the income you have, now use it wisely, because He also blessed you with a brain.