We racked up $70k in consumer debt after I was laid off while pregnant. We’re using Dave Ramsey’s Debt Snowball method to pay off our debt – with a few amendments to make it more sustainable a.k.a. healthier!
Today might be a little bit of a noisy episode. We’ve got a little bit of activity going on in my house because both my husband and my daughter are home, but they’re the quiet ones actually. The ones making noise are the neighbours ripping off the roof of their garage. So, you will hear bird songs, you will hear banging, you will hear cats and things! But considering you’ve put up with crickets and all sorts of things, I’m thinking if you’re still here it’s going to be okay. We’re just going to roll with it.
In episode 8 we’re looking at how we, being my husband and I, used Dave Ramsey’s ‘Debt Snowball method’ to pay off almost $70,000 of consumer debt in a healthy way. There’s the kicker, because this is the Creating Healthy Wealth in Motherhood podcast isn’t it!
How did we do that?
Let’s start by recapping what consumer debt is, in case you are unclear. Consumer debt is things like credit cards, personal loans, store cards, laybys. Anything where you’re paying it off and incurring interest (and sometimes not). Things like a car loan – they’re typically unsecured and have varying amounts of interest, but they depreciate quickly. It’s not like when you’re buying a house. You are supposed to be buying an asset that is appreciating and is going up in value, and it is what you are borrowing against. But a credit card or a store card is all unsecured and its consumer debt – used to buy things that are depreciating in value. Sometimes it’s called dumb debt and [that term is] a bit ouchy sometimes because sometimes you’ve got to create this kind of debt to survive. And this happens to be how we got into so much consumer debt because it was about survival.
I was going to talk a little bit about our debt story later and introduce Dave Ramsey, but I think it’s probably appropriate to go into that debt story now. Because you’re probably wondering how did you get into $70K of consumer debt through survival? If you do or do not know I will recap. I was made redundant when I was pregnant. And this redundancy combined with some poor spending habits caused the accumulation of some pretty high consumer debt levels. Both my husband and I had high incomes at the time, in the six figures, and we didn’t really have any constraints or restraints. Because we weren’t saving for a house at the time, we didn't have a mortgage to pay off. At the time both of us had pretty poor financial educations, and we hadn’t taken responsibility for improving our financial educations yet. And I say that because I don’t want to blame anyone for my poor financial education. I’m not going to blame the schooling system, I’m not going to blame my parents, I’m not going to blame anybody because I am an intelligent adult and I chose not to learn more about this subject. I believe it’s always been my responsibility and always has been. Although I wouldn’t tell you the same about how I’m educating my daughter – it might sound hypocritical, but we’ll get to that.
Our attitudes and our mindsets towards money and debt were very different than they are now. And that caused us to be in quite a bad situation with consumer debt. $70,000 New Zealand dollars, when you’ve gone down to one income and you’re having a baby, is not a great place to be in as you can probably imagine.
Actually, Ruth at The Happy Saver did a podcast episode on my debt story called Consumer Debt Be Gone and I will follow with a link in the show notes. She tells about how this all came about. So, if you’re interested in hearing more about my debt story then please do listen to that episode of The Happy Saver. It’s episode 21 and it’s called Consumer Debt Be Gone.
Let’s talk about Dave Ramsey. Who is Dave Ramsey? I actually discovered Dave Ramsey through a book that I read at the beginning of my financial awakening (I guess you could call it!) This was back in 2015, 2016. I read the Total Money Makeover and I thought ‘oh my gosh, he just makes it sound so simple, how to get out of debt and get on top of your money situation. He’s a USA based guy. Remembering that their health and education and tax systems are quite different. A little bit different to ours here in NZ. But the principles he teaches can be applied in the same way. He’s actually quite evangelistic, but for some people that can be really motivating. It was really motivating for me in the beginning but once I got control of things I kind of moved on. The thing about Dave Ramsey is that he has been around for a while and therefore can provide loads of support and resources for people who are looking to get out of debt and get on top of their money situations. He’s got something called a Financial Peace University where you can learn his principles. I think that people teach them locally so you can go to an in-person class, or you can do it online. He’s got books, podcasts and there are Facebook groups you can join. So, it’s a really good place to start. I know I do have some listeners out there who already do follow Dave Ramsey. A lot of his views and principles I do agree with and support and they really have helped me a lot. But as with anything we like to adapt.
So, what is this Snowball Method? The Snowball Method of paying off debt and getting financially free is part of Dave Ramsey’s ‘Baby Steps Programme’ which are basically simple steps to taking control of your money. The debt snowball is baby step two. Baby step one, you basically save $1000 for an emergency fund. It’s the very first thing that you do. $1000 in cash for the emergency fund. Then you move onto baby step two, which is about paying off all of your debt except for your house if you have a mortgage. There’s about 7 of these baby steps and to make it simple and digestible and to not make it so overwhelming and for you to think I can see a path to financial freedom here.
I’ll just run through the steps briefly if you’re not familiar. Baby step one, save $1000 for your emergency fund. Baby step two, pay off all of your debt except the house using the debt snowball. Baby step three, save 3 – 6 months of expenses in a fully-funded emergency fund, that’s the next level emergency fund. Baby step four is to invest 15% of your household income in your retirement. Baby step five is you save for your children’s college or university fund. Baby step six is to pay off your home early. And then baby step seven is you build your wealth and you give at the same time.
So, we followed baby step one and put away $1000. It was the very first thing we did, have that cash and that made us feel great. Because we’d been living with such a negative mindset about money for so long, we didn’t actually have cash, we just had credit cards. So, having actual cash was a really good start and made us feel really great. What we did then was list all of our debts, big to small, just list them all out, and we got a really good understanding of what those debts were. When you list them out it can be a little bit overwhelming depending on your situation. I think we had about 15 different debts, so we had credit cards, store cards, there were things like paying off an iPhone on our Vodafone account for both of us, had personal loans from the bank, personal loans from another lender, and it was all quite overwhelming, to be honest. So, listing them out, although it was a big step and very revealing, at least we knew. Part of that process was how much do we owe exactly? What is the interest rate on this, what is the terms, how often do we need to pay? We were on top of all of our payments but just having them listed out helped. You line up all these debts on an excel spreadsheet and put the smallest at the top, and the largest at the bottom. When I found out we had so many, and even though Dave doesn’t recommend it, I did consolidate a few of them into one line. And this was because my headspace wasn’t good. I felt that mentally I could handle it better if I had fewer debts to worry about. So, I did consolidate quite a few of those debts into one personal loan. And that meant it was definitely tidier.
So, going back to Dave’s snowball method, the idea is you pay off the minimum of the smallest loans, the bare minimum, then you pay as much as you can on the biggest loan. You go and figure out how to get more money. You might choose to work more, pick up another job, create another income stream, you might choose to sell some stuff, you might choose to lower your expenses or you might choose to call on some debts that are owed to you. Who knows? He recommends doing everything you can to create as much money so that you can pay off as much as possible off that biggest debt while paying the minimum on all the rest. They’re all up to date and they’re all being paid and that’s great.
Where I hacked this, is I did not go out and get an extra job. I’d been made redundant, right? I haven’t worked full time since then and I don’t intend to work full time again. That’s one thing I chose not to do. Instead, I sold a lot of stuff I wasn’t using, reduced expenses, really got on top of our spending and reigned it in quite significantly. This is how we came across the money to pay more off our biggest loan. And as the smaller debts were paid off like the store cards – I remember putting the store cards and the credit cards in the freezer! So, I couldn’t use them, I deleted them from my online sources, so I couldn’t use them online. And as they were paid off, we would close them.
Once you’ve paid off a debt, you’re supposed to take that minimum payment that you were paying off the small loans with and shift that money onto the next one down. This is where the snowball thing comes into it. You pay off the first small loan and then take the payment that you were putting into that and put it into the next smallest loan on the list. And so, on and so on until you pay them off. Sometimes we did that, sometimes we didn’t because we did go through a period where we thought this is unsustainable, and we literally cannot manage, this is driving us crazy and we’re feeling deprived and pretty miserable. So, we would actually take the debt repayments down. That’s one way that I made it healthier for motherhood. Dave Ramsey would probably disagree, but he’s not the one living in my shoes. He’s not the one who got postnatal depression. He’s not the one who suffered from burnout. And that sort of thing. You have to make these decisions based on your own situation and your family needs etc.
Where we’re at now is actually that we only have one loan left to pay. It’s the last one. We’re down to under $20K of consumer debt now. This is over the course of about three and a half years, we’ve paid about $50 thousand off with me working part-time. So that’s been really encouraging.
It’s probably important to talk about how I felt about the debt when we first had it and why I decided to go down the route. I knew we had to get rid of it. Because some people are quite happy to live with a level of debt, but for me, it caused too much anxiety. I was feeling really overwhelmed by it. I was experiencing feelings of losing control. Once I was made redundant, I didn’t have that buffer anymore, I couldn’t ignore my crappy money behaviour anymore. I felt really ashamed of myself for the situation I’d gotten myself into, and I felt guilty for the unchecked spending that I had been doing, I felt really childish well as at that point I was almost 40 and I hadn’t sorted my money crap out and it was embarrassing. I did feel really negative feelings about my debt. And literally, it was like the party is over sister! I was pregnant and I had no job and I wondered what I was going to do now? It came to a screeching halt. That was pretty awful.
How do I feel now that we’ve gotten on top of things? I feel really empowered actually. I feel really, really empowered because I know that I can learn anything, maybe I didn’t know much about money before, but I know a lot about money now and I know how things work. Through this process, I not only know how to manage my own money, but I understand more about how the economy works, which is kind of comforting in the time that we’re in now as we are facing a recession because of the coronavirus fallout. I understand the decisions that the governments have to make, for their people and for their economies. I know how things work a lot more now. I feel a lot more clued up about things. And when you think about how childish I felt before, and how anxious and overwhelmed I felt, I feel much more in control now, definitely. And I feel like more of an adult to be honest. Definitely more empowered.
Again, in terms of making Dave Ramsey’s Snowball Method of debt repayment healthier for motherhood, you’ve got to consider your own situation. Can you work more without affecting your mental and physical health and your family? Is there another way to reduce your expenses? For example, with us we downsized our home, we moved to a much smaller and more affordable rental home. And it was a bit of a shock in the beginning, but we’ve grown to really love it. We downsized our lifestyle quite significantly and almost too much so though. As I talked about before, it wasn’t sustainable. We didn’t maintain the repayments level that Dave Ramsey suggests, because that wasn’t sustainable. We needed a little loosening of the belt so that we could breathe. And the other really big thing I did in particular, is I stopped religiously observing how my debt repayment was going. I used to have this incredible spreadsheet that showed the precise date when my debt would be paid off when our family would be totally debt-free. In the beginning, it was cool, we understood all the differences and changes we had made.
Anyway, I stopped this practice and I actually deleted 3 years off the end of my budget so that I couldn’t see when the debt repayment date was going to be. As all of my focus was going there instead of stopping and smelling the roses and realising how much I had learned. I was so much better with my money; I was credit card free! All of these things I was ignoring as I kept focusing on the future of the debt repayment and the date, I would be debt-free. It was time to stop that. I still review my debt and savings and investments at least on a monthly basis and I do it with my husband as well. So, we know what’s going on but we’re not completely all over it. It’s a little bit like we can review it in an aerial fashion. Drop over it with a helicopter and we can see and understand what’s going on but don’t have to have every cent and date worked out.
Using Dave Ramsey’s Debt Repayment Snowball Method really did help us and is one of the main reasons why we got on top of our debt, along with his total money makeover book. So, I really do recommend that. If you are in a situation and feeling overwhelmed, whether that’s consumer debt or mortgage debt or any kind of debt really, pick somebody up and find somebody that you resonate with who can help you work through the steps that it’s going to take to get on top of things.
Nowadays I don’t listen to Dave Ramsey’s podcasts or I’m not intending on doing a debt-free screen which is what people can do once they pay off their debt. We’ll do something else fun. But he gave me what I needed at the time and for that, I am eternally grateful.
So, how have you paid off debt in the past? What has worked in the past? Have you learned anything about how much money you can survive on? Do you need more, do you need less? How do you feel about your debt? These are all feelings and things you can explore to help you pay off your debt and save and invest in a really healthy way. One that really suits you and your family and your situation. Nobody’s situation is the same. And that is what I really think is going to help with the health of your debt repayment, is paying attention to what you need. You might feel guilty and shameful and all those terrible things, but you can, and you will get on top of it. There are so many resources out there to be able to reclaim and get on top of things and get control. All you need is the desire to do so. You can forget your past mistakes, they’re only mistakes if you don’t learn from them.
I’d love to hear your tips about how you pay off debt, or what things would you advise other people to avoid? Come into the Facebook group and let’s chat about it because everyone’s going through their own stuff. And particularly right now there will be people feeling nervous about their debt, and worried and concerned because perhaps there’s going to be a reduction in income in the coming months. So please share your tips and talk about your situation because people are listening, and people do feel the support and love. You can teach others by your experiences and that is pretty much why I share the details of my own debt so freely because I know there will be people out there in a maybe better, a maybe worse situation that maybe share the same types of feelings that I did and know that there is a way out. And it’s okay. If you’re listening to this, you’re on the way out! You are on the way out to be totally in control of things and on top of your own money.
I hope you got something out of this somewhat short episode, and please hit me up with your questions and comments in the Facebook group.