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Dealing With Roadblocks to Debt Freedom

September 22, 2014 Wise Dollar Debt 22 comments

Good day, friends! Today is our next post in our series on how to make and keep a plan for successfully reaching debt freedom. Last time, we talked about making a?personalized plan?for your road to becoming debt free.

Today, we’ll talk about overcoming potential road blocks. A journey to debt free often takes at least one year, and often two to five years or more to reach.? Anyone who’s ever worked to reach a long-term goal knows that many bumps can crop up along the way to deter you from reaching that long-term goal, so today we’ll talk about how to overcome some of those road blocks and help make sure you cross the finish line to debt freedom.

Overconfidence in Your Debt Freedom Plan

Sometimes, when working a plan to become debt free, overconfidence can crop up and derail your payoff efforts. This overconfidence comes in thoughts such as “I’m doing GREAT! I’m in a much better place than I was six months ago, so it’s okay to charge a few hundred dollars and pick up that new TV. I’ll be able to pay it off quickly.”

If you’re working through your debt freedom plan and having thoughts like this come up, it’s time to remember the vital step of correcting your mindset regarding your debt and your plan. It’s time to remember that the right attitude is what will get you success and is just as important as the individual steps you’ll take to become debt free. The perspective has to be one of overcoming your debt,?not succumbing to it. If your goal is to become debt free, the debt has to become your enemy, not just a friend who you’re going to stop seeing for a bit.

Dealing With Debt Fatigue

When your debt-free journey is going to take awhile, it’s easy to get tired, emotionally, of dealing with the problem, even if you are making progress. Many people reach the point where they are sick and tired of making budgets, limiting spending and looking at spreadsheets, and they’re ready to dump the whole plan by the wayside. This is completely understandable: paying off debt?is hard work! So how does one combat debt fatigue?

First, remind yourself of the reasons you started this journey in the first place. Have a list of motivational “whys” close by so that you have the motivation to keep on going. Second, go to others for support, whether it be your spouse, a trusted friend, or like-minded people you find in the blogging world. Most of the people I know in real life have very little interest in discussing money and financial independence with me: they just don’t find it exciting, so the blogging world has been instrumental in helping me stick with our plan for debt freedom.

A third option for dealing with debt fatigue is to set up a reward system. Put little, inexpensive rewards in place for each milestone you reach toward debt freedom. Those milestones can be whatever motivates you: getting another thousand of debt paid off, sticking with your monthly budget, or completing a no-spend challenge – anything that works to help keep you motivated and on track. The goal is to make debt payoff more fun and thus, help to eliminate debt fatigue.

Letting Money Have too Much Power

This roadblock can also work to hinder your goal to reach debt freedom. On our own journey to debt freedom, I realized recently that I was letting money have so much power that I didn’t even want to spend $7.50 in gas to go see a free event with my family. We went, at my husband’s insistence, and had an absolute blast. That was when I realized that my eagerness to reach debt freedom was sucking the energy and the life right out of me. I had been giving money too much power and had forgotten that money is here to serve us, not the other way around.

Dealing with roadblocks on your way to achieving debt freedom is inevitable, but overcoming those roadblocks is possible with a little work, so don’t let those roadblocks hold you back from the wealth you know you can achieve.

What roadblocks have you encountered when working to reach long-term goals? What are your best tips for overcoming roadblocks? How do you overcome debt fatigue?

Photo courtesy of:?Jayel Aheram

The First Steps to Getting Back on Track Financially

September 17, 2014 Wise Dollar Budgeting, Debt 7 comments

Many of us have been there. You?re up to your eyeballs in debt or you don?t know how you?re going to make ends meet come month end. Regardless of what the particular situation is, you?re wanting to get back on track financially but just don?t know where to start.

The first key, generally speaking, is not to panic ? while financial trouble can be stressful, it won?t stay that way forever if you?re committed to changing. If you put together a smart game plan and focus on making good decisions going forward, you will likely be able to get back on track and focus on positive growth.

One of the big keys to fixing your financial life is looking at it from a rational perspective, instead of an emotional one. Financial trouble can be a hard thing to deal with, but it?s most certainly not impossible to overcome. You have a certain amount of money that you bring in as income, and a certain amount you have to spend in expenses. Once you find a way to make the income outweigh the expenses, you can start to put your financial life back on track.

Get Back on Track By Assessing the Situation

In order to successfully get things back on track, you need to first know exactly what the problem is that you are dealing with. 🙂 ?Take some time to organize all of your financial records from the last few months, and see how they look. You can even ask yourself questions, such as:

What is the average amount of money you are spending on a monthly basis?
How much do you bring in each month?
What things can you cut without missing it?

One important element of this analysis is figuring out how much debt you currently have. By knowing where you stand in relation to debt, you can start to formulate a debt reduction plan for paying it off over time if that?s the issue you?re needing to address. By going through this exercise you can discern where you have the money that can be thrown at things like any credit card debt or putting towards savings. The key to remember is that even though it might be small amounts now, you want to develop that discipline of moving forward.

Building a Budget

Once you have taken an overview of the situation, the next step to getting back on track financially is establishing a budget. Your income is hopefully somewhat consistent from month to month depending on your salary, so you don?t need to think too much about that side of the equation.

When working on your budget, you want to revisit some places where you might be spending money unnecessarily and try to reduce those areas. There are many examples of this from cutting subscriptions or memberships you?re not using to reducing cell phone bills to cutting your grocery spending. The amounts might seem small on their own, but added up they can begin to build something substantial.

Establish an Emergency Fund

One of the most stressful things about living with financial trouble is that you feel like your back is always up against the wall because you have no reserve or savings to fall back on. When building your budget, try to account for a portion of your monthly spending to go into an emergency fund. You don?t necessarily need to have a particular purpose for this money, other than to sit in your account and act as a safety net in the event of something happening.

What I found that worked best when first establishing my first emergency fund was to give myself a goal. That first goal was $250 put away. Once I hit that goal, I didn?t stop, but doubled it to $500 and went on from there. The point is to give yourself something to shoot for that will motivate you to go reach it. It might feel that the money is just sitting there doing nothing. I get that, I felt that way as well at first. That?s the wrong view to take though. Emergencies happen and the last thing you want is to have something pop up that will throw you off track. Having that safety net will help protect against that.

What are some suggestions you?d give to someone trying to get back on track financially? What is the first thing you?d cut? What kept you motivated when you faced financial trouble?

Photo courtesy of: Les Chatfield

*This post was featured on Penny Thots and Loans & Lifestyle

Get Out of Debt: Your Personalized Plan

August 11, 2014 Wise Dollar Debt 19 comments

Greetings, Wise Dollar friends! If you’ve been following along with our monthly series on how to get out of debt, you’ll know that we started with a post on the importance of having the right attitude regarding your journey to debt free.?We followed that up last month with a post on?assessing your financial situation.?At this point, you should have a good idea about what your debt and asset situation is, and a clear understand of what kind of mindset you’ll need in order to make your journey to being debt free successful.

Today, we’re going to talk about the importance of formulating a plan for getting out of debt. Yep, here’s where the fun work begins. No sarcasm here; getting out of debt truly can be fun. Once you formulate your plan and start seeing those debt numbers go down, you will indeed be having more fun than a day at a Disney theme park could ever bring you. 🙂

Get Out of Debt – Your Plan, Your Way

One quick Internet search and it becomes crystal clear: there are many, many ways to pay off debt. This is why customization of your get out of debt plan is so vitally important. Only you know what makes you motivated to keep striving for a goal and what causes you to want to give up.

For instance, two popular methods of debt repayment are the Debt Snowball and the Debt Avalanche. The Debt Snowball works by paying off your debts in order from smallest to largest. Financially, the snowball is not usually the best way to go, but emotionally, seeing those debts crossed off the “I owe” list faster brings huge emotional wins, which often encourages a person to keep on that journey to debt freedom.

The Debt Avalanche requires that you pay off the highest interest loans first. On paper, you’ll still see the same list of debts you’ve always seen, but the numbers will be getting smaller. From a purely mathematical standpoint, getting rid of the highest interest loans first will allow you to become debt free quicker – provided you can avoid discouragement from not seeing those debts crossed off quicker like you do with the snowball method.

The take-away here is that you need to discover a plan that will allow you to be the most successful in your debt payoff journey, and customize it to your specific income, payment and debt situation. Once you discover that plan, feel free to modify it when necessary based on changes in your financial situation as well. Regularly assessing what works and what doesn’t is key to taking your debt payoff plan through to the finish line.

Your “Get Out of Debt” Budget

Spend tracking and budgeting are crucial to your debt payoff plan. Those two steps will help you to find all extra money possible to put toward debt repayment. So, the first thing you need to do in this process is to commit to tracking all spending.? This will help you to discover any financial leaks that might be punching a hole in your plan to become debt free. Second, you need to make a……budget.

Don’t panic: although budgets often conjure up images of balls and chains, I’m here to change your views on budgeting. You see, what budgeting, and spend tracking, truly offer you is FREEDOM.

How?

By giving you a crystal clear picture of your spending habits, and allowing you to then make future spending decisions based on what means the most to you. With budgeting and spend tracking, you can see that you’ve been spending a lot more than you thought at happy hour, and you can take that $500 a month you’ve been spending on happy hour and put it towards that home you’d like to purchase. Or that trip to Australia. Or that early retirement fund.

Budgeting and spend tracking, as a part of a complete debt payoff plan, allows you to manage your money in a way that ensures you are spending it on the things that mean the most to you.

So, when you make your budget, the plan is to make a line item for every bill you owe each month, for any savings funds, and then put extra toward debt. This is called a zero-sum budget. A zero-sum budget ensure each dollar that comes into your account has a place and a purpose, like this:

Joe’s Monthly Income: $3,000

Mortgage pmt:??????????????? $1,000

Gasoline:????????????????????????? $100

Groceries:??????????????????????? $200

Entertainment:????????????? $200

Clothing:???????????????????????? $50

Utilities:????????????????????????? $125

Insurance:???????????????????? $75

Gifts:?????????????????????????????? $35

Pet Costs:????????????????????? $30

Home repairs:??????????? $40

Visa minimum:????????? $210

Mastercard min.:????? $175

Student loan min.:??? $85

401K:?????????????????????????? $150

Emergency fund:??????? $50

Total needed each month:? $2,525

Okay, so our fictitious consumer, Joe, has an income of $3,000 a month and monthly expenses totaling $2,525 a month.? This leaves an extra $475 floating around in Joe’s budget. In a zero-sum budget world, Joe would take every dime of this $475 and put it toward his debt in the manner he’s deemed most efficient for his personal and emotional needs. That extra $475 a month will allow Joe to put an extra $5,700 a year toward his debt, not including the massive amounts of interest he’ll save in the process.

By having a plan,?a personalized plan,?Joe will be able to knock out his debt much, much quicker than he would have by simply making the minimum payments. And this fast track to debt free was all made possible by a simple budgeting and spend tracking plan that was customized to fit Joe’s specific personality and situation.

Do you have a budget and spend tracking system in place for your money? If so, how has it worked for you? When you’ve paid off debt, do you attack the lowest balance or highest interest rate first?

Photo courtesy of:??Free Digital Photos

Assessing Your Financial Situation: The Road to Debt Free

July 14, 2014 Wise Dollar Budgeting, Debt 24 comments

Hey, friends, are you looking to improve your financial situation?? If you’ve been following along, you’ll know that this is our third post on the hows and whys of Debt Reduction and Elimination.? Part 1 can be found here, and part two, which discusses attitude rules for debt elimination, can be found by clicking on the preceding link.

Today we’ll discuss another vital part of debt reduction and elimination: assessing your financial situation.

How to Determine Your Financial Situation

If you’re truly serious about improving your financial situation, it’s crucial that you start with an assessment of where you’re currently at financially.? Start by making two lists on a piece of paper or Excel spreadsheet.? One list will be titled “assets”.? This list will contain what you own.? It could look somewhat like this:

Assets

401k with Vanguard????????????????? $50, 194

Scotttrade Account??????????????????? $? 2, 604

Checking Account????????????????????? $????? 237

Savings Account???????????????????????? $????? 780

2007 Honda Civic????????????????????? $ 5, 800

Total Assets?? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? $59,615

After that, you’ll make a list of your “Liabilities”. ?? Liabilities are what you owe.? This list could look somewhat like this:

Liabilities

Mastercard ? ? ? ? ? ? ? ? ? ? ? ? ? ?? $7,394

Visa ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? $5, 237

Sears ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?? $ ?? 694

Car Loan ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? $3, 790

Student Loans ? ? ? ? ? ? ? ? ? ? ? ? ? ?? $9, 260

Total Liabilities???????????????????? $26, 375

Now it’s time to determine your “net worth”, which is, in essence, your assets minus your liabilities.? In the above case, the person has a net worth of? $33,240.? However, if you take out the 401k balance, which should likely be considered as untouchable if possible, the net worth drops down to -$16,954.??? Now, don’t panic if you find yourself coming up with a negative number here, even if it’s a huge negative number.? The reason for your assessment of your financial situation is so that you can determine what needs to be changed, and you can’t change anything if you don’t first know where you’re at.

Now that you have a clear picture of your assets and your liabilities, it’s time to make another list.? A list that tells you what you owe, to whom you owe, and what the monthly payment is, the interest rate is and the balance is.? Like this:

Lender?????????????????????????????? For What??????????????????????????????? Balance Owed??????????????? Current Payment??????????? Current Interest Rate

ABC Bank????????????????????????? Honda Civic????????????????????????? $3,790?????????????????????????????? $250????????????????????????????????? 5.65%

Capital One????????????????????? Mastercard??????????????????????????? $7,394??????????????????????????????? $150????????????????????????????????? 15.99%

Chase??????????????????????????????? Visa???????????????????????????????????????? $5,237????????????????????????????????? $110???????????????????????????????? 12.99%

Sears????????????????????????????????? credit card????????????????????????????? $? 694???????????????????????????????? $35?????????????????????????????????? 21.99%

Sallie Mae??????????????????????? student loan????????????????????????? $9,260???????????????????????????????? $60????????????????????????????????? 5.00%

Total balances/monthly payments: ????????????????? $26,375?????????????????????????? $605

Now you know what you owe and to whom, and you know what you have for assets, or cash available.? This mythical person doesn’t own a house, but if you did, you’d add housing costs/value in here too.

The next step in determining your financial situation is to determine your debt-to-income ratio.? Your debt-to-income ratio is simply your total monthly payment divided by your? income (Some use gross, some use net.? Mortgage companies will use your gross income, but it’s a safer and more logical option to use your net income).? So, if the debtor above made take home pay of $2, 000 a month, his/her debt-to-income ratio would be 32.5%.

There are many takes on what a “safe” debt-to-income ratio is, but the fact of the matter remains that the lower your debt-to-income ratio is, the better off financially you can be, provided you manage your money properly.? Most mortgage companies will allow for a max of 43% debt-to-income (DTI) ratio when assessing qualification for a mortgage loan.

What Do You Spend?

A good next step to add into this process is to write down what you spend each month.? This list will not only include the numbers relating to outstanding debt, but also the amounts you spend on other items such as transportation, phone, internet and energy costs, housing costs, grocery and entertainment costs, and so on.? If you have never written a budget before, you might want to start by going back through last month’s expenditures and writing them down from information gained on your checking account statement or credit card, so that you have a rough idea of monthly spending.

So, at the end of this exercise, you should know roughly what you’re spending each month, the amount of your assets, the amount of your liabilities, and your debt to income ratio.? In next month’s post on Debt Reduction and Elimination, we’ll discuss formulating a debt payoff plan.? Won’t you join us?

Have you assessed your financial situation by determining your assets, liabilities and DTI?? Were you surprised at the results? What dti would you be “comfortable” with in buying a new house?

Photo courtesy of:?Free Digital Photos

Debt Reduction and Elimination: Attitude Rules

June 16, 2014 Wise Dollar Debt 19 comments

As we expand on our series on Debt Reduction and Elimination (you can find part 1 here), the first thing we’re going to talk about is attitude.? John touched on this a little bit in the introductory post, but because attitude is so vitally important to the success of debt reduction and elimination, we’re including an entire post about it. 🙂

When my husband and I first started our real journey to get out of debt in January of 2013, it wasn’t by any means the first time we’d attempted to get out of debt.? Several times before in the course of our 17-year marriage we’d started getting out of debt, and even gotten out of debt on occasion, but we always ended up right back in the hole.? Why?? Because we didn’t have the right attitude about debt.

You see, in our minds, debt was okay as long as we could manage the payments, and while that is an important factor on some level, for us, we chose to view it as an excuse to spend money we didn’t have on things we didn’t need.? We had no emergency fund to speak of?and a ridiculously high debt-to-income ratio, all because we had a carefree attitude about our debt.? We didn’t view it as a potential problem.

In October of 2012, we made a move to another home, one in which we added more debt (but the payments were the same as our other house, so it was “okay”), and then added more consumer debt as we purchased things we needed for the new house.? It was at that point that we recognized that we were walking, from a financial standpoint, dangerously close to disaster.? One missed paycheck, and our house of cards would’ve come tumbling down quickly.

Something clicked, and we finally saw the dangers of our carefree attitude about debt.? We recognized that debt limited our choices: our choices about where we could work, live and what we could do in our free time.? We saw that we were, in fact, slaves to our debt, as John mentioned in the intro post for this series, and it terrified us.? And because we have four children, we also recognized that our attitude about debt had put them in a very precarious situation.? If the house of cards fell down, it wasn’t just my husband and I that would be affected, but our children too.

Debt Reduction Requries A Change of Attitude

So how did we change our attitudes about debt?? First, we came to recognize that a large amount of consumer debt really does make you a slave: to your lenders, your job, etc.? We didn’t want other people to be in control of how we spent our time and money, so we made the decision that we would work out a plan to eliminate our debt.

Second, we started to view our consumer debt as an enemy – an enemy that kept us from pursuing what we really wanted to in life.? This changed how we spent money.? We started to value our hard-earned money, and our time, more, and we didn’t want to give it all to our enemy: debt.? This in turn led to better spending decisions.

Third, we started to view ourselves as financially secure people.? This was vitally important, because when you’ve been broke all of your life, you tend to get comfortable and used to not having money.? When you get used to a lifestyle of being broke, it becomes very easy to shirk responsibility and convince yourself that it’s not your fault, you just don’t make enough, blah, blah, blah.? However, when you view yourself as a financial secure person who is wise with his/her money and time, it helps you to make spending decisions that allow you to move toward your financial goals.

If you truly want your debt reduction or financially secure/independent plan to succeed, it has to start with the right attitude.? If a better and more secure financial life is on your list of goals, take some time today to assess what your attitude about debt and money has been in the past, and choose to have a new attitude: one that is committed to reach your goals of being free of debt.

Do you have a carefree attitude about your debt?? Do you have debt and feel that, on some level, it enslaves you? If you’re debt free now, what did it take for your attitude to get in the “right” place to attack it?

Photo courtesy of: Free Digital Photos

This post was featured on The Value Geek and Budget for Health.

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