This is a question that a few people have asked me. "How is closing all of your credit cards and paying off all of your debt affecting your credit score?....Doesn't it hurt it?".
Well, so far it really hasn't done much to our credit score as we still have a mortgage. We had a great (I Love Debt) score when we started this program and I am sure that as time goes by and we have no credit sitting out there, it will go down. How sad that our credit score is based on how much credit and debt we have out there and not on how much we DON'T have? Your FICO score is based on having debt and making regular payments to the bank, not how wealthy you are, or your ability to repay a loan.
However, we are not worried. Why? Because we will NEVER take out another loan besides a mortgage and we will have no problem with that. That is your goal with doing this program: pay off your debt and never have any again!! How sweet is that?
What about a new car? New furniture? We are planning to drive our cars for as long as we can and until that time, we have a "Car Replacement" fund in our budget and a "Furniture Replacement" fund. We just keep building it up and someday when we need a new car (or should I say slightly used car) or some new furniture we will hand over cash. And, we hear that paying with cash can sometimes get you a nice deal!
So, if you are truly wanting to become and stay debt free...don't worry about that dumb I Love Debt (FICO) score!
Click here for a video about driving free cars for life
Wednesday, March 10, 2010
Baby Step Two....
Sorry it has taken me so long to get to this post....
So, we have done our budget (remember, we do this every time we get a paycheck so we can adjust things but plan for a month at a time), have our envelopes ready, taken the credit cards out of the wallet, and are ready to start this Debt Snowball thing full swing.
The one thing about Baby Step Two that may people don't get when I talk to them is the concept of paying your smallest debt off first even if the interest is lower than your higher debt. People want to get rid of that high interest debt, but doing it this way keeps your motivation going strong! Dave says that financial success is 80% behavior and 20% know how. You see things happening. One small debt gets paid off, so you take that money and pay off the next one and so on and so on. Get it...Debt Snowball!
Now, that being said..we did not exactly follow that rule. Yes, it is true! Terrible, isn't it? Haha With our tax return and my husband's incentive pay, we had a good chunk of money after we set aside our $1000 emergency fund. So, we first paid off a small credit card balance we had and then decided to tackle our car loan (both cars are on one loan). This was definitely not our smallest debt, but we paid it off in our second month. What a feeling!!! However, I was a bit stressed about the cars "going under" now that they were paid for. But, so far...so good. (knocking on wood vigorously!) We were lucky to be able to get that loan out of the way, but I do recommend doing it Dave's way. I can see how checking those debt amounts off can keep you going.
Once we had that paid off, we concentrated on a few medical bills by taking money out of our pay checks and putting it in our HSA (Health Savings Account) tax free, then paid the medical bills out of the HSA. Then we finalized our debt payment with my student loans. It was hard being on this budget at first, but we got used to it and it felt good to not be wasting all of that money and getting to a point where do don't owe anybody!
We started our Total Money Makeover in March of 2009 and made our last payment July 31, 2009. I still can't believe we did it in five months, but we did and we are proud! You need to stick to it. Don't give up. Like Dave Ramsey says: this is guaranteed to work, if you DO it. And, you can.
I was lucky enough that I didn't have to get a job, but I did save money by using coupons, selling items and just determining what our wants and needs truly were.
It does really help to sit down and itemize what you are going to spend that month. Don't just say, "I have X amount of money this month" and try to make it last. Write it down. How much goes towards groceries, entertainment, gas, debt, giving, etc. By keeping track of it, you can see where adjustments need to be made.
Soon I will show you my fancy envelope system that I currently use....
Here is our debt snowball!
So, we have done our budget (remember, we do this every time we get a paycheck so we can adjust things but plan for a month at a time), have our envelopes ready, taken the credit cards out of the wallet, and are ready to start this Debt Snowball thing full swing.
The one thing about Baby Step Two that may people don't get when I talk to them is the concept of paying your smallest debt off first even if the interest is lower than your higher debt. People want to get rid of that high interest debt, but doing it this way keeps your motivation going strong! Dave says that financial success is 80% behavior and 20% know how. You see things happening. One small debt gets paid off, so you take that money and pay off the next one and so on and so on. Get it...Debt Snowball!
Now, that being said..we did not exactly follow that rule. Yes, it is true! Terrible, isn't it? Haha With our tax return and my husband's incentive pay, we had a good chunk of money after we set aside our $1000 emergency fund. So, we first paid off a small credit card balance we had and then decided to tackle our car loan (both cars are on one loan). This was definitely not our smallest debt, but we paid it off in our second month. What a feeling!!! However, I was a bit stressed about the cars "going under" now that they were paid for. But, so far...so good. (knocking on wood vigorously!) We were lucky to be able to get that loan out of the way, but I do recommend doing it Dave's way. I can see how checking those debt amounts off can keep you going.
Once we had that paid off, we concentrated on a few medical bills by taking money out of our pay checks and putting it in our HSA (Health Savings Account) tax free, then paid the medical bills out of the HSA. Then we finalized our debt payment with my student loans. It was hard being on this budget at first, but we got used to it and it felt good to not be wasting all of that money and getting to a point where do don't owe anybody!
We started our Total Money Makeover in March of 2009 and made our last payment July 31, 2009. I still can't believe we did it in five months, but we did and we are proud! You need to stick to it. Don't give up. Like Dave Ramsey says: this is guaranteed to work, if you DO it. And, you can.
I was lucky enough that I didn't have to get a job, but I did save money by using coupons, selling items and just determining what our wants and needs truly were.
It does really help to sit down and itemize what you are going to spend that month. Don't just say, "I have X amount of money this month" and try to make it last. Write it down. How much goes towards groceries, entertainment, gas, debt, giving, etc. By keeping track of it, you can see where adjustments need to be made.
Soon I will show you my fancy envelope system that I currently use....
| Debt | Balance | Min. Payment | ||
| Credit Card 1 | $505.27 | $20.00 | ||
| Medical 1 | $1,170.00 | $65.00 | ||
| Credit Card 2 | $1,268.46 | $40.00 | ||
| Student 1 | $1,444.32 | $50.00 | ||
| Credit Card 3 | $2,030.43 | $50.00 | ||
| Medical 2 | $2,440.00 | $175.00 | ||
| Student 2 | $3,039.14 | $54.32 | ||
| Auto | $12,797.97 | $780.44 | ||
| Total | $24,695.59 | $1,234.76 |
Subscribe to:
Posts (Atom)