Financial Fitness: Debt Free!

{via Instagram}

We are consumer debt free!

After eleven months, we have completed our second major financial goal:

• Goal One: Set up Emergency Savings Fund // Completed 


• Goal Two: Payoff Consumer Debt // Completed


• Goal Three: Payoff Student Loan Debt // In Progress

We have decided to stay living with my parents, and plan to continue our financial fitness efforts. I'll be posting an update of our next financial goals and steps shortly. For now, I'm going to bask in the satisfaction of reaching a major milestone!

Yippee!!

xo,

PJ

Financial Fitness: An Update

I'm happy to report that we are ahead of schedule with our debt payoff plan. Pending any major catastrophes, we will be consumer debt-free by April, exceeding our goal to have all unsecured debt paid off by May of 2012!

Here are is little chart to visualize the progress that we've made:

 If you're interested to see how we did it, reference blog posts one, two, three, and four.

Note: This is a series on the blog to share our path to financial fitness. We are no experts in personal finance. We are, however, on our way to becoming smart{er} consumers. 



xoxo,

PJ

Financial Fitness: Debt

As discussed here, when Hubby and I moved in with family, our focus was to pay off all of our consumer debt within our timeframe of 12 months. We set a specific dollar amount goal to have paid off by May of 2012. For this installment of "financial fitness", we're on to discussing our debt payoff plan.

Step One AKA “the eye-opener”: We took stock of all of our debts from various places including general credit card debt, department stores, medical statements, etc. We created a spreadsheet with all of our debts and included the following:

• The debt source {name of department store, credit card, etc.}


• Current balance


• Interest rate {if promotional rate, the date that the promotional rate ends}


• Minimum payment due

Step Two: We then organized our debt from smallest to biggest. We did not pay attention to the interest rate. This is a philosophy I was very skeptical about when we first started. I thought it would make the most sense to pay off higher interest rate debts first. However, it proved successful as we maintained our motivation to pay off debt. The results are fast, as it is easier to knock out the lower balance debts.

Here is an example of debts from least to greatest including balance, interest, and minimum payment amounts:

Debt	Balance	Interest	Minimum
One	$350.00	11.00%	$35.00
Two	$500.00	7.00%	$30.00
Three	$500.00	10.00%	$40.00
Four	$700.00	7.00%	$35.00
Five	$700.00	10.00%	$30.00
Six	$850.00	7.90%	$35.00
Seven	$4,000.00	9.99%	$30.00
Total Debt	$7,600.00		$235.00

Note: To add all the columns together, simply apply the "sum" formula to give a total for all selected columns.

Step Three: Now that debts are arranged from least to greatest, we tallied up the minimum payments for each card. Then, we took the amount that we set for debt payments from our budget, minus the minimum payments. This gave us the extra amount to apply to our debt. It ends up looking like this {this example uses the debt breakdown above}:

$900 {debt budget}

- $235 {minimum payments}

= $665 {extra debt payment}

Step Four: We then add the “extra” to the minimum payment of the first debt {the smallest debt}. Repeat every month to knock out debt from smallest to largest. This creates a “rolling” effect that accelerates the debt payment process.

An example of rolling debt payments:

Debt	Minimum	Extra	Revised
One	$35.00	665	$695.00
Two	$30.00	665 + 35	$730.00
Three	$40.00	665 + 30 + 35	$770.00

If “revised” amount is greater than debt owed, simply apply to the next debt. As debts are paid off, we continue to roll the minimum payments from the previous debt to achieve a greater revised payment for the current debt.

{Rinse. Repeat Step Four. Every Month.}

Note: This is a series on the blog to share our path to financial fitness. We are no experts in personal finance. We are, however, on our way to becoming smart{er} consumers.