The Simple Dollar (3 page)

If you find yourself in this type of situation, move your focus from fixing your finances to fixing your relationship. Take some time to carefully evaluate the entire state of your relationship. Communicate calmly with your partner—don’t let emotions run the day. Seek
counseling and build a relationship based on trust where you both feel safe expressing your viewpoints and are able to work through disagreements in a rational and healthy fashion.

Without that, you will not be able to work together for a brighter future.

If you’re ready to make changes, and your partner is on board as well, you’re already ahead of the game. The next step is to minimize the amount you pay each year in interest on your debts. After all, the less money you lose to your debtors without actually reducing your debt, the better.

The first step is to simply make a list of every debt you owe. On that list, record several pieces of information for each debt: the name of the person or company you owe money to, how much money you still owe, what the interest rate on that debt is, your most recent monthly payment amount, your account number, and the telephone number of the person or business you owe.

Next, move through that list of debtors and call each one. Explain your situation—you’re attempting to set up a debt repayment plan because you’re worried about your financial future—and request a reduction in the interest rate of your debt. If the first person you talk to won’t do this, request to speak to their supervisor and repeat your case.

Some people argue against this approach because there is some risk that the business may reduce your credit limit or close your account. To that argument, I say, “Who cares?” After all, your goal here is to
repay the debt
, not to merely free up some room so that you can charge it up again.

Once you’ve directly reduced your interest rates, it’s time to look at indirect methods. Set up a meeting with a representative of your local credit union and see whether or not they have a loan package that will enable you to consolidate some of those debts. Consider transferring balances from high-interest credit cards to lower-interest ones (this can usually be done with a phone call to the company holding your lower-interest card).

One suggestion: Do
not
borrow money from family or friends to pay off high-interest debts. Borrowing money from people you love puts a completely new dynamic on the relationship, adding a lender-borrower relationship to the mix. Now, ask yourself, do you love the businesses you owe money to? Do you enjoy the bills they send you, requesting money? Is that a dynamic you want to add to your relationship with your friend or loved one, where they’re trying to decide how to ask you to start repaying that debt, while you’re feeling resentment when they ask you for repayment? Don’t mix loved ones and debts—they just don’t mix.

At this point, you’ve made some significant progress toward minimizing the amount you’re going to pay in interest. Your monthly minimum payments should be lower than before as well. Now comes the hard part—buckling down and paying off the debts.

The next step is to assemble a debt repayment plan, which is far easier than it sounds. Remember the list of debts you made before, when you were attempting to reduce your rates? Make it again with all the debts you have now and their current interest rates. This is the backbone of your debt repayment plan.

There are two common ways to build this plan. One method is to pay off the debts in order of their balance, from smallest to largest. This is often referred to as the “debt snowball” and is popularized by personal finance pundits such as Dave Ramsey. The advantage of this plan is that it lets you feel the thrill of victory over debt as soon as possible, since the easiest debt to pay off is the one with the lowest balance.

On the other hand, the method that minimizes the total amount of dollars you’ll pay out is to pay off the debts in order of their interest rates, from largest to smallest. The largest interest rate debts are the ones that are eating up more of your money, so paying them off first means that you’ll end up, over the long run, paying less in interest. However, this plan can sometimes leave you with long periods without the thrill of eliminating a debt—it’s psychologically more challenging.

Whichever route you choose, set up your debt repayment plan by listing the debts in that order. Then, each month, make the minimum payment on each debt except for the top one. For that top debt,
throw everything you can at it
. You should strive to make at least a
triple
payment on that bill at the top of your list at a minimum. Set a goal for each month—how much can you consistently pay on that bill? Treat
that
amount as the minimum payment on that top bill.

When you manage to pay off a bill, cross that bill off the top of your list and celebrate a little! Then get down to business on the next bill. Add the payment you were consistently making on the previous bill to the minimum payment on this new top bill—that’s your new minimum payment! Strive to make it each month.

The question many people ask is
how can I possibly make more than the minimum payments when I was not really making them before?
You’ll have to make some choices along the way. Those choices, however, are often less painful than people initially think they will be. Stay tuned—
Chapter 8
, “Frugality as Framework,” will explain all about it.

Over the years, I’ve had the chance to talk to many readers who felt they were drowning in their debt. They were simply overwhelmed with the amounts they owed, and it felt hopeless. Even after coming up with a debt repayment plan and ensuring that their interest rates were low, they still felt as though they were climbing Mount Everest without a rope.

To those people, I say, “
Get a rope
.” What do I mean by that? What I mean is, give yourself a big boost on your debt repayment plan right out of the gate.

Go through your home, room by room, with a discriminating eye. Look for things that you don’t use—or rarely use. Start with your closets, your junk-collecting areas, and your collections. Go through these items and ask yourself, honestly, if these items are adding genuine value to your life—or if they’re just representing memories that you hold in your heart and your head, regardless of what items are filling your closet.

I’ll use myself as an example. Once upon a time, I avidly played several trading card games, and I played with enough skill to amass a large collection of these. Yet, as time went on, I found that I really wasn’t enjoying this enormous collection I had amassed. I’d look at them on occasion, but mostly I just enjoyed spending time with friends. My cards would go untouched for months, but I kept them because of the memories.

I realized, though, that the memories come from within me, not from collected items that I barely looked at. I might get a smile from the memories brought about by looking at them on occasion, but I could get that same good feeling from meeting and chatting with an old friend or keeping tabs with those friends on message boards or on Facebook. It was the camaraderie and the stories that I enjoyed, not a closet full of stuff.

So, I spent a week going through that collection. I sorted it, determined the items that had significant individual value, and sold almost all of them.

I applied the same philosophy to our DVD collection and our book collection and our video game collection. We sold stuff on eBay, at consignment shops, at used stores, and directly to people. Just like that, some of our debts went up in smoke, and we suddenly felt in control of our situation for the first time in a long time.

Try this approach with the items you possess. The unwanted, unnecessary purchases of your past can often serve as a wonderful rope to help pull you up to a new place in your life.

What would you do if you found a $50 bill lying in the street? Would you go off and spend it on something frivolous? Or would you quietly stick it in your pocket, knowing that it has the power to push you a little bit further toward your dreams of debt freedom?

Many people would choose the former strategy, arguing that it’s
just
fifty dollars. That type of attitude
is exactly the type of attitude that leads to a lack of control over one’s life. If you spend every dollar you find, you’re completely at the mercy of the unexpected in life, as great opportunities will pass you by and bad situations will bring you to your knees.

The alternate strategy is to allow yourself money with which to have fun each month, but when extra money comes in, treat it as a way to get ahead with your long-term plans. This strategy is often referred to as
snowflaking
, perhaps in reference to the “debt snowball” concept.

These “snowflakes”—the little money you find here and there in your life—are applied to your debt repayment plans, helping you to make a little bit more of a payment each month. That $50 bill found in the parking lot becomes an extra $50 on your next debt payment, perhaps giving you just enough to pay off that debt a month earlier than expected.

There are many ways to snowflake. Recycle aluminum cans once every few months and apply that money toward your debts. Ride public transportation once a week and apply the $3 you saved in gas toward your debt repayment plan. Keep all the change and small bills you accumulate in a jar; then cash that in twice a year and use that amount to whack away at your debt. You can even go big with this and start a part-time job solely for debt repayment—a big snowflake, indeed.

The goal is simple—just use the little opportunities life gives you to get rid of that debt faster, which opens the door to even bigger opportunities.

If you remember one thing about debt repayment, it’s this: The reason to pay down and eliminate your debts is that it opens up a great deal of personal freedom in your life—freedom to change careers, freedom to try new things, and freedom to take advantage of opportunities. These freedoms are essential to the ideas covered in the rest of this book.

Debt is the opposite of freedom—it reduces your opportunities and leaves you with a sense that your life is out of your control. You
can’t
lose your job. You
can’t
make a career change. You
can’t
move to a different city. You
can’t
say no when your boss demands more overtime.

Here are five steps you can take today to get started on repaying your debt:

1. Schedule a talk with your partner or spouse.
   None of this matters if you’re not on the same page and working toward the same goals. During this talk, allow things to be an open book—no hiding secret plans, no hiding financial mistakes. Instead, strive to find out your real financial state and discover the goals that you have in common.
   
2. Make a list of all your debts.
   Simply cataloging all of one’s debts goes a long way toward making the situation real and tangible. This will likely involve digging through statements, checking websites, and perhaps making a phone call or two.
   
3. Think about the stuff you own that’s unnecessary.
   Ask yourself if you really use some of the items you have or if you keep them around solely for sentimental reasons. If it’s for sentiment, ask yourself if the memories exist in that item or if they exist in your heart.
   
4. Make a list of the things you hope to accomplish in life.
   What five big things do you hope for in your life over the next five years? Once you’ve got those down on paper, ask yourself what needs to happen for those things to be achieved. You’ll likely find that these things you dream of are much, much easier to accomplish if you eliminate your debts.
   
5. Recognize that it’s not hopeless.
   Many people feel overwhelmed by their debt load—I know I certainly did for a number of years. It’s not hopeless—nothing ever is. Just stop, take a deep breath, and start looking through your entire life situation with a careful eye. You might just be surprised at what you’ll find.