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Resolution: Pay Off Debts/Grow Savings January 8, 2011

Posted by Sindy in Uncategorized.
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Now this resolution is more for you readers instead of myself. I don’t have much in the way of debts (at least right now), but I do want to grow my savings, so this can apply to me too.

First off, there is a book that I would HIGHLY recommend to anyone with financial difficulties or financial dreams: The Richest Man in Babylon (you can find it super cheap at Half.com). Now, as you read it, remember that it’s teaching useful financial lessons by telling stories about people living in ancient Babylon (I have no idea if any of the stories have any base in real events, but the lessons ring true), so just put yourself in the stories and imagine that these lessons are happening to you.

Here’s one of the basic lessons from the book that can/should be applied to conquering debt:
1. Stop the debt from growing in the first place. (I know, there are many people who can’t even survive without their debt growing, but consider long and hard your purchases – Do you really NEED soda pop, fast food, cable, etc.?)
2. Next consider how much you can honestly and truly afford to pay towards those debts. For example: You make so much money, and let’s say that you figure out that you can barely squeeze your absolute needs into 70% of that. Got that? You can honestly, with a boat load of sacrifices, live on only 70% of your income.
3. Start saving! – If you can live on 70% of your income, start putting 10% of your income into a savings account. Got that? So that 80% that’s hereby claimed.
4. Now, list all your debts and the minimum you need to pay on each. Calculate which holds how much percentage of your entire debt. So, to make a simple example let’s say someone has a mortgage payment of $900/month (okay, so I don’t know anyone who pays that little, but this is just an example), and they have a credit card payment of $100/month (that figure’s more realistic). So, your mortgage is 90% of your debt, and the credit card is 10%.
5. Now take that 20% (or however much you’ve calculated is left over after your minimum expenses plus the 10% savings) and divide that amount into the percentages associated with your debts. So in our example, 90% of it would go to your mortgage, and 10% would go to your credit card.
6. Now here’s a super important part – Talk to your debt holders (the people you owe money to)! Especially if the calculated about is less than the monthly minimum they’ve specified. Nearly all debt holders are willing to work with you if it means they WILL eventually get their money (instead of ending up with a dead-beat who forecloses on their debts). Of course, there may be some who are hard-nosed about it, but that’s okay. Just readjust your calculation to take that into consideration. Make sure to tell them exactly what’s going on including how much of your total debt they hold, and what your plan is.
7. Finally for the implementing. Each month pay the calculated and agreed percentage to each debt. As soon as the smallest debt is paid off then apply the amount you were paying on that one to the next larger debt! Got it? So in our example, let’s say you’ve paid off your credit card debt (I know, if that’s the minimum on a credit card then it’s going to take like 13,000 years to pay it off, but this is just the example – perhaps instead you owe $300 to your Aunt Mildred). Now add that $100/month to the mortgage to end up with $1,000/month.

But wait! There’s a step #8: When it’s all paid off and you are swimming in debt-free paradise, see if you can’t continue that lifestyle of living on only 70% of your income and start applying that extra 20% to future purchases, investments, or savings. Can you imagine paying $20,000 up front for your dream car instead of paying $30,000 over time because of interest?!

One more note: Let’s say you only have one debt (like a mortgage) to start with, or you can use this method as encouragement, here’s a fun little chart that we use at our house (as you can see, we’re about half-way).

Mom's Mortgage Chart

We learned about this at a financial lecture at a local college. The idea is simple: Make a simple chart where one square represents a certain amount of money (on our chart, one square equals $100 dollars). You can easily make it in an Excel spreadsheet. Then, for each $100 dollars you pay off your debt just put a little sticker on the square. Really easy and really fun, and a great way to get the whole family involved. It’s even more fun when you start adding extra money towards paying it off.

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Comments»

1. Zachary - January 9, 2011

I love this book…it is one I have been reading for years…and following for…well off and on.

Sindy - January 9, 2011

I know the feeling. I need to re-read it, and apply it better. I turned some of the sayings in it into wall art and put it next to the door.


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