I‘m currently working on the chapter in Organized Simplicity that explains the connection between being debt-free and living simply.  For me, it’s been a good reminder why it was so important to my husband and I to get rid of our debt back when we were doing so, and of the bondage that debt brings to a family that wants to escape the rat race and live counter-culturally.

Even small amounts of debt means paying for the past and not living in the now or preparing for the future.

Today is not about guilt trips or explanations of why debt is bad.  I could go on and on (and on) about why I think debt is such a ball and chain, but for now, I’d rather give you some helpful information on the how of getting out of debt.

If you’re like me a few years ago, you want to get out of debt, but you just don’t know how.  You look at the numbers and the APR of your credit card, and they don’t add up.  I remember doing some basic number crunching in order to discover that if I paid the minimum on our credit cards, we’d — well, never pay them off in our lifetime.  Even paying just a bit more than the minimum would take 73 years.

You can’t play by their rules. You’ve gotta outsmart them if you want to take back your money and put it towards your family’s needs and wants.

The Debt Snowball

I absolutely did not invent this concept, and neither did most financial gurus out there today.  It’s an obvious concept, and it’s been around awhile.  Dave Ramsey advocates using the “debt snowball” for getting out of debt in his Baby Step 2, and that’s what my husband and I did.  Mary Hunt also suggests this method, and I’m sure many others do, too.

But it’s really a straight-forward, common sense way to pay off your debt without going insane.  Here’s how it works.

1.  List your debts, smallest to largest.

Grab all your paperwork, and total every single thing you owe, down to the penny.  Exclude your first home mortgage for now.  Don’t look at the minimum payment due, the interest rate, or the due dates right now.  Just look at those total numbers.  Then  make a simple list of those numbers and the name of the debt, smallest and largest.

Here’s an example of the McSimple’s list:

Gap: $127.14
Home Depot: $477.92
Texaco: $532.09
Citibank: $2,481.35
Bank of America: $17,802.66
Sallie Mae: $56,248.12

These numbers are apropos for the average American family.  The McSimples owe a total of $77,669.28 in debt, not including their mortgage.

2.  Now create a record of the other details.

Using Excel, an online financial tool, or pen and paper (all are fine), list your debt’s interest rate, minimum owed, and the date of the next payment due.  Keep this separate from your main list, because you don’t want that list to get muddled with fine print.  But it’s important to have a clear idea of what you’re really looking at behind these numbers.

Here’s some of the McSimple’s minimum monthly payments and interest rates:

Gap: $15 @ 14.29 %
Home Depot: $30 @ 9.99 %
Texaco: $10 @ 6.79 %
Citibank: $113 @ 24.99 %
Bank of America: $203 @ 6.5 %
Sallie Mae: $375 @ 4.9 %

3.  Create your monthly budget.

I’ve written quite a bit about how to create a zero-based, monthly budget for your family’s finances, and now is a time when that budget will really come in handy.  If you haven’t yet done so, make a budget for this month.  It may take some time, but it’s gotta happen in order to see the real picture.

Include all your debt’s minimum owed in this monthly budget. If you’ve got a debt payment due this month, then it needs to be paid, so list it as a line item in your budget.  It’s part of the total of your household’s necessities.

Total your monthly income and expenses.  If your income is larger than your expenses, that’s good.

Without all the nitty gritty, here are the McSimple’s totals:

Income:    $3,405
Expenses:    $3,957.18

Unfortunately, the McSimples are the situation many, many families face regularly — their expenses are higher than their income.  It might sound obvious, but the only two options are to either increase the income side, or to decrease the expense side.  Jane McSimple can sell some items on eBay and Craigslist this month, and they can cut down on their grocery and eating out allotments, so thankfully, the scale is now tipped.

Now their numbers are:

Income:  $3,672
Expenses:  $3,543.09

It might be hard to see the trees from the forest, but you need to take the time to find ways to cut expenses or increase income.  It’s not easy, I know.  But it’s gotta happen.  Your budget won’t work otherwise, and you’ll continue in the debt spiral.

4.  Create your debt snowball plan.

Take any extra money, and throw it at your debt.  It’s that simple.  It’s not easy, but it’s simple.

Don’t add any more to your savings (and Ramsey would tell you to take all but $1,000 of your savings and add it to the amount you can use in the snowball), and don’t beef up your eating out line item.  Give you and your husband a little bit of free spending money so you don’t lose your mind, but we’re talking $20 per person per month, not $400.

Here are more of the details behind what you should do.  Continue paying the minimum on all but the first debt listed — add all your extra money, and make a huge payment on that first debt. For the McSimple’s, they now have $128.91 extra in their budget.  They can add that to their $15 minimum payment to Gap, which means they have $143.91 available for that bill.

And great news — that amount is more than the debt’s total!  They can completely pay off Gap this month, with $16.77 remaining.  That goes to Home Depot, which will get a payment of $46.77.

Gap is gone, so Home Depot moves to the top of the list.  For simplicity, let’s pretend like the McSimples have the same amount extra in their budget the next month — $128.91.  This now is thrown at Home Depot, along with its minimum balance and what was formerly used to pay off Gap.  That was $15.  So now, they can pay $128.91 + $30 + $15, which equals $173.91.

Without adding monthly interest (just to make it simple here), the McSimples now owe $431.15 to Home Depot this month.  By making their snowball payment, the balance will be $257.24.  Not bad.  If they can use an extra $128.91 to pay Home Depot the following two months, they’ll wipe that debt out, too, plus extra now to attack Texaco.

Important: Many people prefer to pay off debt in order of interest rate, not total owed.  If the McSimple’s did this, they’d start with Citibank, then Gap, Home Depot, and so on.  Mathematically, they’ll pay less this way, so technically, this isn’t a bad idea.  But this isn’t all about the numbers, here, ironically — there’s psychology at play, too. It’s a huge rush to pay off a debt completely, and the momentum built will energize you to stick with this plan.  In fact, you’ll probably be more jazzed about finding ways to increase your debt snowball if you see that with just a hundred bucks more, you could pay something off completely.  With a total of almost $2,500 owed to Citibank, it might not feel as productive to the McSimples to throw $130 bucks to that debt as it would to Gap, which would wipe out that debt completely.  But, personal finance is just that—personal—so either way is okay.

5.  Find extra snowflakes.

Make it a game to find extra money for paying off your debt.  Have a garage sale.  Babysit your neighbor’s kids.  Clip coupons.  Do whatever you can to increase the income side of the equation and decrease the expenses side of the equation.

This site has shared lots of ways you can reduce your expenses, including sticking with thrift store shopping, batch cooking, line drying your clothes, and making your home greener.  There are many more ways, too.

And don’t toss out the idea that loose change doesn’t matter.  It does.  Even small amounts of cash really do add up, so use it to take control of your debt, instead of letting the debt company’s silly games run you over.

If they will let you make as many payments per month as you want, then do it.  It was borderline fun to make a $5 payment here, a $17 payment there on my school loan.  I could watch the balance drop daily — and therefore, the total amount of interest owed.  It was great.

Photo by Aussie Gall

The takeaway

Yes, it might take a long time.  It won’t be easy, and it takes sacrifice. I understand the relief of going out to eat instead of cooking, or having a date at the movie theater with your hubby.

But this lifestyle change isn’t permanent—the sooner you pay off your debt, the sooner you can enjoy restaurants again. Channel your anger at the debt, not at yourself. Be encouraged that becoming debt-free can be done.

You might find that those things you used to spent money on, instead of paying off debt, just aren’t that tantalizing anymore. You’re okay without your $4 daiy latte.  The semi-annual sale at the mall doesn’t seem as important as it once did.

You know what? This is part of simple living. Living according to your priorities, on terms that matter to you.  Not letting the world tell you how to live.  Being a grown-up, and letting money do its job—to be a tool for your family.