Welcome to part two of the debt free journey series. If you have made it this far, you know the background story of the debt that my husband and I have. Don’t forget to check out Our Debt Story if you missed it as well as the introduction to the series. Today, we will discuss our debt free plan.
We have been following this plan since June of 2014 when we began to get out of debt. I feel like having a clear plan is the difference between success and failure when becoming debt free. A plan gives you detailed instructions and something to look forward to. We are able to measure our progress because we know when we reach our goals and milestones. Initially, we called this our five-year plan. Life has thrown some curve balls our way that will probably set us back a year or two, but that is perfectly fine. Plans can be adjusted. I will outline the main components of our debt free plan below.
We have an emergency fund of $1,300 that we only touch in the case of an emergency. Emergencies do not consist of needing to purchase clothing or items that we forgot to put in the budget. This fund is for true emergencies like a visit to the hospital or loss of income. We keep this money in a savings account that we can access if we need it, but a little less accessible than a checking account.
Next, we budget and track every penny that we spend. At the beginning of each month, we allocate funds that we actually have (no forecasting) to categories in our budget. I start with tithes and monthly bills, then I move to our debt section. Last, I fund the spending money and miscellaneous categories. If we have any additional income throughout the month, this money is sent directly to our debt category. As we spend money and pay bills throughout the month, we subtract those funds from our budget. This way the budget shows us exactly how much money we have left in each category. Any money left over in any category at the end of the month gets sent by check to the debt that we are working on at that time.
Our debt is paid using the debt snowball method. This means that we pay our debts the way that a snowball rolling down a huge mountain would look. It starts off small at the top, but as it rolls down the mountain it gains more snow and become larger and larger.
To get started, we listed our debts from smallest to largest on paper. Then, we put the minimum payment beside each one. In the beginning, you just pay all minimum payments. As you pay off the smallest debt completely, you would take the minimum payment that you were paying to the smallest debt and add it to the minimum payment for the next debt each month. Eventually, you will have a pretty large snowball payment each month.
The last thing that I want to talk about today is sinking funds. We use sinking funds for things that we know are going to happen. Take oil changes for example. We know that both of our cars will need oil changes eventually so we have the money for these oil changes sitting in a category of our budget waiting for the time to come. We do the same for car registrations, medical co-pays, and birthday presents just to name a few. Sinking funds do not happen over night. A set sum of money can be budgeted to sinking funds each month and eventually the full amount will be available for use.
I know that this plan may sound a bit tedious to some people, but we are committed to eliminating our debt so we don’t mind. One big thing that has helped us stick to this plan is living on last month’s income. Any income that we have in September will be used for October bills. This is how we are able to budget a full month at one time.
Do not get discouraged on your journey to becoming debt free. Your journey will not look like mine. Just relax and find a fun way to track your process as well as a plan that works for your family. The journey will be long, but the reward will be amazing.
Come back next week to see how much debt we have paid off so far. Good luck on your own debt free journey.