In this post, I'll walk you through exactly how I'm going to pay off $7,000 in debt. You'll learn how you can prioritize and pay down your debt with the exact same strategy and ultimately learn how to get out of debt.
How to Get Out of Debt
I’m officially married now! Krista and I had an awesome wedding and are so glad to unite our families.
As I’m sure you know, weddings can be expensive. Very expensive.
Ours was not expensive compared to the average wedding today by any means, but in total, we probably spent around $8,000.
We paid everything we could as we went, but the final piece of the wedding was our food, drinks, and the restaurant. Our final bill for all of that was $3,800.
I keep a 0% interest credit card always available for things like this. So, I put the cost of the restaurant on to my 0% interest credit card for now.
On top of the wedding cost, I’ve been hit with a lot of expenses this month.
Our washing machine at over 10 years old was starting to rock the house during the spin cycle so it was time to retire it.
The washing machine was about $400 so I just went ahead and paid for that since Lowes wasn’t running any specials.
Our kitchen appliances were also getting very old and definitely on their last leg. We got some great scratch and dent deals at JC Penny for the kitchen appliances. They are sweet LG stainless steel kitchen appliances. All for $2,400 due to a small dent in the fridge and the fact that the series were floor models and being replaced by the new line.
I’m talking about everything. Refrigerator, stove, microwave, and dishwasher. Boom! Now, that’s a good deal!
We got even more of a discount by paying on a JC Penny credit card at 0% for 18 months! I paid most of it off with a bonus I just got, so at this point, I owe about $700 on all of the appliances.
Next big expense: Taxes…
I hate taxes just like everyone else. This year I had a bit more income than I expected so I owed. I owe about $300 to the IRS federal taxes and $2300 to Ohio. Ouch…
Yeah, it hurts...
So here is where I stand:
- $3,800 Final Wedding Bill on 0% Interest Credit Card
- $700 Appliances on 0% Interest JC Penny Credit Card
- $300 Federal Taxes (IRS will charge interest for delayed payments)
- $2,300 Ohio Taxes (Ohio will charge interest for delayed payments)
So, why am I telling you all this? I’m telling you about it because of how common an experience this is for most people.
We’re moving along just fine and then we are hit with a bunch of expenses all at once. You know the old saying when it rains it pours. Well, it’s pouring on me at the moment.
I have to figure out what’s the best method to pay off these expenses. So, I’m going to show you how I’m going to do it and what the logic is behind my plan and financial decisions so that hopefully it can help you out the next time the rain pours on you.
Best of all, you can use this exact same strategy to on your own to learn how to get out of debt.
So let’s do this. Let’s figure out an actionable plan to pay this off using the best financial logic we can!
Should I Pay Off My Expenses With My Emergency Fund?
I have an emergency fund. I have about $20,000 in it currently.
Instead of letting that money sit in my bank collecting pretty much 0% interest, I invested it in the stock market. In fact, that’s what I used to create the Badass Stock Portfolio.
It’s grown a lot. In 2017 it grew by 69%.
The issue I face is, should I take money that is growing to pay off debts that currently have 0% interest or at least very little interest on the Ohio taxes balance.
At this point, I think it makes more sense to hold off on spending out of the emergency fund and let it continue growing since the cost of owing the money is nearly 0% and the money in the emergency fund is growing at a much higher rate.
Could I Pay It Off With Monthly Cash Flow?
My second option is to pay it off with extra cash I have this month.
Taking a look at my budget I see that my total cash income this month is: $3,670.
I also see that my total cash expenses this month are: $2,327.
That leaves: $1,343.
I have $1,343 left over this month I could pay towards those big expenses. That won’t pay it off immediately, but it’s enough that I can create a plan to eliminate these expenses.
Creating a Plan to Payoff the Expenses
To leave some wiggle room in my budget, I’m going to assign $1,000 per month towards these expenses.
I’m also going to use the classic snowball method to pay down these expenses as fast as possible.
First, I’ll need to sort them from lowest to highest balance. (Yes some people sort by interest rate, but these rates are very low or 0% and I love the power of the psychological win when paying off individual accounts faster.)
Sorted by lowest to highest balance here are my expenses:
- $300 - Federal Taxes
- $700 - Appliances on 0% Interest JC Penny Credit Card
- $2,300 Ohio Taxes
- $3,800 Final Wedding Bill on 0% Interest Credit Card
Next, I need to figure out what is the minimum I want to pay on each expense monthly to avoid causing fees or being below minimum payments.
- Federal Taxes - $200
- JC Penny - $200
- Ohio Taxes - $200
- Wedding - $200
So my Focus Debt in the beginning is going to be Federal Taxes. In other words, I’m going to pay minimums on everything else and then put all remaining money towards the Focus Debt.
Now, I’m going to create a monthly plan to pay down this debt:
- Focus Debt - Federal Taxes - $300 Payment - Remaining Balance $0
- JC Penny - $300 Payment - Remaining Balance: $400
- Ohio Taxes - $200 Payment - Remaining Balance: $2,100
- Wedding - $200 Payment - Remaining Balance: $3,600
- Focus Debt - JC Penny - $400 Payment - Remaining Balance: $0
- Ohio Taxes - $400 Payment - Remaining Balance: $1,700
- Wedding - $200 Payment - Remaining Balance: $3,400
- Focus Debt - Ohio Taxes - $800 Payment - Remaining Balance: $900
- Wedding - $200 Payment - Remaining Balance: $3,200
- Focus Debt - Ohio Taxes - $800 Payment - Remaining Balance: $100
- Wedding - $200 Payment - Remaining Balance: $3,000
- Focus Debt - Ohio Taxes - $100 Payment - Remaining Balance: $0
- Wedding - $900 Payment - Remaining Balance: $2,100
- Focus Debt - Wedding - $1000 Payment - Remaining Balance: $1,100
- Focus Debt - Wedding - $1000 Payment - Remaining Balance: $100
- Focus Debt - Wedding - $100 Payment - Remaining Balance: $0
Anybody can do this. This works for $1,000 of debt, to $100,000 and more. A plan takes the stress out of the process, so you know how and when you are going to pay it.
If you have any debt of your own or some large unexpected expenses. Try using this method to create your own plan and pay down that debt!
Check out this post to learn more about how to get out debt.
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CREATOR OF LET'S AUTOMATE YOUR MONEY WITH MY LOVELY WIFE KRISTA