Mar 03 2010

Part 2: Some thoughts and suggestions for my friend in debt

See part 1, part 2, part 3, part 4, part 5, part 6 and part 7.

In my last post, we met my friend Courtney and heard about her debt story and her plans to get out of it.

I am not a financial advisor of any sort. I’m just a gal with a blog and an opinion. So Courtney (and anyone else out there) keep that in mind, k?

First, I want to commend Courtney for seeing the need to get out of debt and taking steps to get there. It won’t be an easy journey, but it will be worth it!

I suggested that Courtney and her hubby read Dave Ramsey’s The Total Money Makeover. It’s a highly positive book and I think the getting-out-of-debt advice is solid. It’s also helpful to listen to his radio program which is available on his web site.

I’d like to encourage her to follow Dave’s baby steps. To start out, I hope Courtney gets that baby emergency fund of at least $1,000 in the bank as soon as possible — even before the sale of her house. Honestly, even a little more might be beneficial since it will take awhile to get to the full emergency fund step. For Courtney’s situation, I would suggest $5,000 to start out (or even more if it makes you more comfortable) so that you’ll have a little breathing room in case of job loss, insurance claim or other financial setback.

That way, you won’t need to resort to your credit cards if something pops up. Remember, even while you’re building up your savings, you’ll still be paying the minimum on your debts so they will start to move in the right direction.

Then, start your debt snowball. List your debts from smallest to largest. Here are Courtney’s:

  • Kohl’s: $395.20
  • Discover: $537.16
  • Capital One: $725.45
  • Menard’s: $2,100
  • Visa: $2,530.82
  • Signature loan: $2,729.23
  • Discover #2: $3,500
  • Dodge: $3,295.40
  • Toyota: $11,503.06
  • Sallie Mae: $27,379.43
  • Total: $54,695.75

You might notice I listed the Dodge a notch below a credit card, even though the credit card has a slightly higher balance. I think when the balances are so close, it’s better to pay down a credit card vs. a fixed loan like a car. Especially since Courtney wants this credit card debt outta here fast!

I have a feeling she’ll be able to wipe out those first cards pretty fast. As she ticks away each card, she can then apply the minimum payment and all of her extra money to the next card on the list. It really does snowball and builds momentum like nothing else!

I suggested that she call each card company and ask for a better interest rate. She was told that her credit score was just too good, and that they couldn’t. Oh, typical of them to be jerks.

I’m proud that Courtney lowered her cell phone plan and saved an extra $22/month by doing so. Call your cable/internet provider and see if they can lower your plan in some way, but canceling it outright might be a little rough.

Next, since they don’t have a precise budget just yet, I suggested that she simply track her spending so she can get a baseline for what’s reasonable. Mint.com is an excellent tool to track your spending if you’re using debit cards. I’m assuming Courtney is banishing her credit cards from her wallet and not using them anymore — so debit cards and cold hard cash it is for you, missy!

Finally, Courtney mentioned how she enjoys buying stuff. I’d like to challenge you to sell anything you’d be willing to part with. For one thing, it’ll help with your pending move, and for another — it’s extra cash for your debt snowball! Ebay it, list it on craigslist, or hold one of the season’s first yard sales.

Courtney — do you think selling $500 worth of stuff is within reach?  If so, that’s half of your baby emergency fund right there!

Stay out of stores unless you have a true purpose. Consider shopping thrift stores. I know Bloomington thrift stores aren’t all that great, but sometimes good deals pop up!

You can take a post-it note and wrap it around your debit card. Keep an inspirational tidbit on the post-it so you’ll be reminded of your goals each time you shop.

You can do this, Courtney! And ya know what — I think you can do it faster than five years. You’ll be surprised how fast things start moving once you get going! YAY!



9 Responses to “Part 2: Some thoughts and suggestions for my friend in debt”

  1. Finding the motivation is half the battle, she’s already shown an open and willing attitude by emailing you for help.

    I, too, have a problem with coveting. If you do find yourself in a store, Courtney, I’ve found that something that really helps me is to carry it around with me in the cart, and at the end of my store voyage, I ask myself if I really need it, it’s a lot easier to answer ‘no’ if I’ve had some time to think about it.

    A word of warning about thrift stores— sometimes it’s easy for me to think I can go overboard in thrift stores because I’m in a thrift store, and then I end up with a bunch of stuff I don’t really need, having spent money that could have been better spent elsewhere. I love thrift stores, I shop there the majority of the time these days, but it’s easy to develop that frame of mind if you’re not vigilant about it, at least at first.

    GOOD LUCK! It may seem overwhelming at first, but it is certainly doable, especially if you start with baby steps and work your way to the big stuff. Also, Kacie, I love your idea about the inspirational message wrapped around a debit card, I’m gonna have to try that :D

  2. Yeah Whit — I’ve gotta be careful in thrift stores, too. It’s easy to spend too much there! So for shopping-lovers at thrift stores, be sure to set a max dollar limit, and be content with leaving with nothing.

  3. I do think Dave’s plan is smart, but I’ve always disagreed with his suggestion to pay off larger balances first. I know for some people it can keep you motivated, but when I was working the snowball, I focused on higher interest debts first, especially if you have VERY high interest debt like store credit cards.
    .-= Karen´s last blog ..Endlessly waiting =-.

  4. Thanks so much! Yes, I have already sold $144 worth of old text books and wedding books on amazon.com! I was really surprised at how quickly things sold–I listed 27 books and have sold 15 in less than 2 months! I have a HUGE stack of things to sell in a garage sale my friend will be having at the end of this month. She’s being super sweet and letting us use her basement to store all of our “unnecessary” items. Cleaning the house out to move gave me A LOT of motivation to get rid of things and really was a visual image of how careless we’ve been with money!

  5. Karen — I think you meant SMALLER balances first — despite interest rate.

    I think that it’s ok to target all credit cards first- – and go smallest amt. to largest since credit cards are a whole ‘nother story when you compare them to student or car loans.

  6. Great post! I’m a big Dave Ramsey fan, and we have tried to start implementing some of his tips. We have our baby emergency fund and are chipping away at our credit card. It started off at $6,000 but we have it down to $2,000 now. I should make about $550 from a consignment sale and will put that all toward the card balance, as much as I’d like to use it for doing things around the house!

    We do have one other credit card, but it’s an 18-month no-interest card, so we are just paying a set amount in order to pay it off before the 18 months are up.

    Can’t wait to be debt-free (less the mortgage)! Our biggest debt is my husband’s car so it seems kind of daunting sometimes!
    .-= Christi´s last blog ..Birthday on the Cheap =-.

  7. Courtney, good for you.. for the friend who’s being “super sweet,” I hope you’ll take her out to dinner, buy her flowers and/or some other nice thing — just to say thank you. I’m sure she would appreciate it.
    .-= Cindy Brick´s last blog ..Hijacked! =-.

  8. I confess I am not sure how things work in the States living in Europe and such.
    But if I would want to reduce creditcard depts the first thing I would do is to call my bank to talk about a loan to cover my creditcard depts.

    I know it sounds kind of insane to get a loan to pay depts off but over here the intrest rates of a bank loan are a lot lower than those for Creditcards. It might be so in the States too. Even if the banks intrest rates are only 2 or 3 percent less it would help a lot with the amount we are talking about.

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Hey! I'm Kacie, wife to Shane and mother to Jonathan (7), Vivienne (5) and Amelia (2) . I write about my family's finance: how we save money, improve our spending, and plan for the future.

I hope I can inspire and encourage you to improve your situation. See disclosure.

I'm adopting a much slower-paced posting schedule, and treating this as a hobby blog now.

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