Wednesday, January 14, 2009

Mini Debt Revamp

I've become a little obsessed about our debt. More than anything I want to pay it off but at the expense of what? It's important to have a life while we are going through this journey. Since it's going to take quite a bit to pay it off I have revamped the plan a little.

Originally we were going to put $1200 to $1400 per month on the debt - Gazelle Intense to borrow a Dave Ramsey term. That pretty much represented all of our extra money. That didn't leave much for anything else above minimum expenses every month. It's important to have a life at the same time as meeting our goals. I figured a little bit of money saved was better than being miserable and not being prepared for an emergency.

I've decided to put $200 per month in savings and the rest between $1000 and $1200 on the debt. Leaving a little wiggle room for some fun - an occasional movie, new clothing, etc. Those two months a year where the hubs is paid three times will still see an increase to savings and debt. That is still more than the minimum payments and will still accelerate our debt payoff. This will afford us to be able to have a savings in the event of an emergency so we don't have to stop everything to pay for an emergency.

Lot's of people recommend placing $1000 in savings and putting all extra money on debt. When there is an emergency that uses up the $1000 you temporarily stop funneling money to the debt and build your $1000 emergency back up. I understand why this idea is sound when it comes to interest credit card companies charge etc. I just feel better knowing that I am building a savings even if it takes me a few months longer to pay off the consumer debt.

It's still important to recognize a need from a want. The hubs and I had taken $1000 of our stimulus money from last year and placed it in a 7 month CD. It matured on Monday and we used more than half of it to buy new tires for my car which was in desperate need. Yesterday the hubs and I ordered a Wii Fit which we had wanted to get for the family for a Christmas gift but had run out of money. We know we will use this in our efforts to lose weight and have family fun. The rest is sitting in our savings account.

We are also focusing on smaller goals in regards to our debt. The higher interest cosumer debt is the debt I'm really interested in getting rid of as quickly as possible. If I think about smaller chunks it makes the entire picture manageable. The consumer debt represents 69% of our total debt. Of that consumer debt, 29% is high interest in the form of credit cards. So far I have paid off one credit card this month and am on track to pay off another.

For the next few months our focus is getting our personal loan paid down so we can refinance to a lower minimum payment. That savings will be funneled towards the credit card with the lowest balance until all credit cards and then our personal loan is paid off. By the time that happends we should have over $5000 in savings barring no emergencies.

One of the things I have come to understand in this situation is to find out what works best for you. If something isn't working, tweak it until it is. One persons debt reduction plan is different from another persons debt reduction plan. This will probably not be the last time I tweak our plan but I do feel good about the change I made.

This goal of minimum savings every month means we will be prepared for Christmas and will not have to stop all of our debt reduction efforts just to pay for gifts like we did this past holiday season. It's not a license to be too generous but it takes the pressure off . After we reach our goal of being debt free we will also be that much closer to our emergency fund goals then starting from scratch.

You can certainly have a plan but you can't live in a bubble. Life happens and I believe these changes will help us deal when it does.

1 comment:

Escape Brooklyn said...

I totally get wanting to build up some savings while also paying down debt. It's so motivating to see money accumulating. If you're just paying everything towards your debt it can start to feel hopeless/neverending after a while! Like, what do I have to show for all this hard work? (Besides eventually being debt-free, of course!)