Debt Snowball — Create a Payoff Avalanche

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Debt is something we often deceive ourselves about. While I was in college, the common thought was it is totally fine for me to take out these student loans because after I graduate, I will have a better job and be able to pay them off. We tend to optimistically think our financial situation will be better in the future. The reality is, incurring debt today is spending tomorrow’s money. If we can’t afford to pay cash for it now, we likely won’t be able to pay it off in the future either.Unfortunately, debt is a reality for most of us. Buying a home, financing a car, affording an education generally require taking out loans. So, how do we best and most efficiently pay them off? Dave Ramsey‘s Debt Snowball is a great way to do this. Here is Dave’s explanation of the debt snowball:

“The idea of the snowball is simple: pay minimum payments on all of your debts except for the smallest one. Then, attack that one with gazelle intensity! Every extra dollar you can get your hands on should be thrown at that smallest debt until it is gone. Then, you attack the second one. Every time you pay a debt off, you add its old minimum payment to your next debt payments. So, as the snowball rolls over, it picks up more snow.”

You see, a lot of paying off our debts is staying motivated and having wins a long the way. So, here is how to do it (as outlined by the Financial Peace University manual):

1. List your debts in order, from the smallest balance to the largest. Don’t be concerned with interest rates, unless two debts have a similar payoff balance.

2. As you start eliminating debts, you’ll start to build some serious momentum. These quick wins will keep you motivated, so you’ll be able to stay on track.

Try it for a couple of months.

Budget–did you just cringe?

Hearing the word budget makes some of us cringe and feel claustrophobic. If this is your reaction, then it is time to shift your paradigm from budgeting to cash flow planning.

Cash flow refers to the money that flows in (and out) of your life. How will you plan to orchestrate this flow? Here are a couple of good tips to cash flow planning.

• Where is your money currently flowing to? It is hard to make a viable plan if you don’t even know where you are currently spending. Track your spending for at least one month. The easiest way to do this is carrying around a little notebook with you to record your purchases.
• Now that you know where your money is flowing too you can begin to pool your money into areas—car payment, house payment, insurance, groceries, entertainment. Where are you spending too much? Where can you guide the money to? This step helps you plan the cash flowing into your life—where will it go and what will it be spent on?
• Every dollar has a name. This is important! Scenario: You figure your paycheck and have $50 left over. Sweet! So, you put that in your wallet for a rainy day and a week down the road all that is left is $2.53. What happened? You didn’t have a plan for that $50 so it flowed out of your wallet. Every dollar that comes into your life should have a name to it—groceries, allowance, savings, etc. If you end up with money left over after allocating your income into spending categories, then have a plan before hand of where that should go. For example, if you decided any extra money you received was going to go into your travel fund, then that $50 would have automatically gone there and you would have been closer to meeting your vacation goal than if you just put it in your wallet. Give each dollar a name and a place to go.
• Flow in > Flow out or income > spending. When your income is greater than your spending it means what? You’re saving money!!!! Great job. Set your budget up to make this possible.

Looking for a good, free budgeting too? Log into your WebBranch and click on MoneyDesktop. MoneyDesktop has a great budgeting tool that allows you to set your categories and amounts. Then, as you spend from your checking it automatically fills in your budget data and color codes it to show if you’re within your budget, getting close to meeting it, or going over. There is a short video to watch that can explain how to do this. Here is also a link to show you some steps to create your budget in MoneyDesktop: http://moneydesktop.zendesk.com/entries/20457573-the-budgets-app.

Relating with Money – are you a free spirit or a nerd?

Let’s be honest, money is a factor in our relationships. How we deal with money affects our marriages and our families. Dave Ramsey’s “Relating with Money” session really makes a lot of sense. Dave describes that in most families you have your free spirits and your nerds; in their natural state these groups are usually at odds with each other. Nerds are those who enjoy budgeting and enforcing the budget. They seek security and (let’s just be honest) control. The free spirits are those who enjoy life, don’t like to be bound down by budgets and for the most part lives life as it comes. As Dave says, “The nerd likes doing the budget because it gives them control, and they feel like they are taking care of loved ones. The free spirit feels controlled by the nerd doing this, not cared for, and can appear irresponsible to the nerd.” Is this sounding a little familiar? Which group do you identify with?

So, how do these polar opposites get along when it comes to budget time? Dave recommends the person with the natural budgeting skills can prepare the budget (this usually will be the nerd), but the budget prepared must be reviewed and approved by the other party (usually the free spirit). So, the budgeting session may go like this:

Nerd: Ok, so here is the monthly budget that I put together.

Free Spirit: This looks good, but I think we need another $20 to go into our entertainment fund.

Nerd: (Don’t freak out because they want to change the budget–remember you need their buy-in for it to be successful.) Alright, I guess we can decrease our savings by $20.

Obviously, this was simplified, but here are the key points:

• Nerd, you like to budget and do finances. The free spirit doesn’t, so don’t make this meeting too long and drawn out. Also, you have to be willing to compromise. Remember–relent control.
• Free spirit, you hate spending time on budgeting and finances because it takes soooo long and it usually turns into a fight. You too have to be willing to compromise by caring and giving your honest feedback–what will it take to make this budget work for both of you.
• Remember, you will not create the perfect budget in one sitting. It may take a couple of months of setting it, living it, revising it, then trying it. Be patient because the process is worth it.

Murphy’s Law: If anything can go wrong, it will…

Most of us have good intentions to save money and to follow a budget. Our plans may even work for a time until something goes wrong–you get a cavity, your washer breaks, or the car needs tires–these unexpected events turn into unexpected expenses that wreck our budgeting/saving plans and may even cause us to go into debt. That is why the first step to financial peace is establishing an emergency fund.

An emergency fund is money you set aside for the unexpected expenses that come in life. Having money set aside for emergencies helps you break the cycle of always living from paycheck to paycheck. Dave Ramsey claims that as you set money aside for emergencies the unexpected events decrease–thus having an emergency fund is “Murphy Repellant.”

$1,000 is the amount needed to fund your initial emergency fund ($500 if you make less than $20,000 annually). Financial Peace University encourages you to set this aside as fast as you can. Then as emergencies come, you can use the fund instead of relying on credit cards or budget breaking to bail you out. Keep your emergency fund in a separate account (it can’t be easy to access when you spent too much at the grocery store or find something on Amazon you just have to buy). A money market or dedicated savings accounts are great places to keep your emergency fund.

Have you tried this? If so, did it help? What was your experience. We’d like your feedback.

Useful financial tips

Over the next thirteen weeks of the Dave Ramsey Financial Peace University class you can visit BeehiveBlog to learn some financial pointers. Try them. Let us know how your experiences go or what you think about the tips. We like hearing your feedback.

Calling all Beehive Members who want to be more Financially Savvy…

Are you seeking useful financial information and help? The Financial Peace University Class is a perfect opportunity to learn about topics like paying off debt, saving, insurance, budgeting, money in relationships, etc.

Class starts February 1, 2012 and is held each Wednesday night through April 4, 2012.

Come to the intro class on February 1, 2012 at 6:30 p.m. to see what it is all about. The class is held at Beehive Federal Credit Union 1087 Erikson Dr. in Rexburg.

Have you taken the Financial Peace University Class? If so, let us know what you learned, changes you made because of it, etc. We’d love to hear from you!

Money Desktop – A new, free tool for you to help you manage your finances.

Watch this video to see what it is all about. You can access money desktop by logging into your web branch.

Stop, Study, and Start Over

Beehive (and all other financial institutions) is calling for your help. New legislation could change the way your credit union does business and the way you use your debit card.

To find out more, watch a video here.

Peek: 50th Annual Meeting

More to come soon.

50th Annual Meeting

Tomorrow, March 24, 2011, Beehive will hold it’s Fiftieth Annual Meeting.

Come join us at 6:30 p.m. at Madison High School for a potato bar and learn about how your credit union is doing.

Tickets are free, but must be picked up from a branch beforehand.

We hope to see you there!