Finances Pt. 6: Focus and Snowball Your Debt Away

Will your finances allow you to impact other people? Can you afford to take extra time off work to work at a habitat blitz? Can you afford to sponsor someone to go on a mission trip to build housing in third world countries? Can you afford to slide a waiter a $20 tip because you know they are struggling financially? If you are like most people…not right now you can’t. Maybe in the future you can. Here is the first thing to do “cut back and sell”. This is about getting out of debt so you can have money to impact others later on.

1. Cut spending
· Cut cable or satellite TV
· Access the internet from work or the library—cut the internet connection
· Cut out eating out—this is a major money drain. Learn to cook and enjoy building family relationships in the kitchen. This includes cutting out trips to Starbucks.
· Cut movie rental or going to the theatre
· Delay major purchases if possible. Do you want a new car or do you need to keep driving your old car?
· Don’t take vacations
· Don’t renew magazine subscriptions (until you are out of debt you can use the library)
· Don’t go nuts at birthdays and Christmas (this is extremely hard to do given what our culture teaches us).
· Keep wearing the clothes you have instead of buying new clothes.
· Cut out the extra features on your phone bill (call waiting, caller ID, etc).
· Cut out the cell phones (One phone and one phone line until you are out of debt).

2. Sell Stuff
· Have a garage sale. Have another garage sale. Then have another garage sale.
· Take books to used book stores and sell them.
· Take old clothes to consignment shops.
· If you have a car with a car payment then sell it and get something to make due with until you can afford something better. If you owe more on the car than it’s worth then sell it for what you can and get a small loan from a credit union or your local bank for the difference (Which is better owing $20,000 on a virtually new car that is only worth $15,000 or selling it for $15,000 buying a used car for $4000 and owing $9000? The answer is the later, because the $4000 car isn’t going to depreciate much more and you just cut your debt by $11,000!!).
· Sell anything you don’t use on a regular basis.

3. Increase your income.
· Get a better job.
· Work a second job.

4. Examine your housing situation
· Are you spending more than 25% of your take home pay on house payments?
· Do you have a two bedroom apartment for yourself?
· Can you live in a smaller apartment or a smaller house?
· Do you have a nicer house than your parents did at their age?
· Do you have a mortgage of fifteen years or less? If you don’t have at least 20% equity in your home you are paying PMI (Private Mortgage Insurance). If you financed close to 100% and have a thirty year note you won’t have 20% equity till you have been paying for 14 years. A fifteen year note gets you 20% equity in under five years and has you nearly paid off in that same 14 years.

5. Focus
· This isn’t going to take forever.
· The more you focus and the deeper you cut the sooner you will be out of debt.

So the first thing extra you can do after the debt snowball is in actuality five things. It can be summed up in one phrase “cut back and sell”. So what you ask is the second thing you can do to get out of debt when you are way, way in over your head? You negotiate. This is tough! If you are so far behind you cannot cover all your minimum payments you have no alternative than to negotiate some of your debt. The collectors have been calling you. Now it is your turn to call them.

First, you have to know what your situation really is. If you have done your budget you know your situation better than they do. Keep it that way. They will try to do your budget for you and show you how to spend your money and pay them first. Don’t do it. All that is under discussion is the amount of your budget that you have allocated to debt reduction. Now don’t think you can skimp out on all your debts by saying, "I only have $100 a month to spend on my debts so won’t you please write it off."

At this point the debt collectors could have a pretty good idea what you make and who you owe. You aren’t going to be pulling the wool over their eyes. You have to be truthful. You have to prioritize your debt. The house payment, the utilities, and the car payment come before the credit cards and the student loans. You don’t stop paying those other loans. You pay what you can and you tell them what you can pay. Then you ask to have your interest frozen or your rate reduced. When they say “no” you ask them this, “Do you have the authority to freeze the interest or reduce the rate?” They will then avoid the question and start asking you other questions. Do not answer. Get their attention. Interrupt them. Then ask them the question again, “Do you have the authority to freeze the interest or reduce the interest rate.” Does the person you are talking to have the authority to lower your minimum payment so that you aren’t piling up more late fees? You have got to keep hammering them until you are sure you are dealing with someone who can do those things. Talking to the first person to answer the phone usually gets you no where.

You may have to hang up. You may need to yell, cry, vent; you may need to scream at the sky…before you call back. It may take days or weeks to get a company to agree to a lower payment. You have got to be persistent. You owe them all the money they say you do. You signed up for all those late fees and interest rates when you got the card. It was and is your fault. That doesn’t mean they aren’t gouging you. You can get some traction with them by your persistence and you showing them you are really trying to get your life back on track.

Now do this for the other five credit cards you have. You will be exhausted. You will learn a lot about these companies through this process. You will learn a lot about yourself through this process. Eventually, through the negotiation and the two extra steps you will start gaining some traction. It may take months, but it will come.

Now is the time to take a look at what you have been saving. Remember that ten percent we have been paying ourselves? The ten percent after the tithe…you have been saving it haven’t you? Well here’s what we are going to do with it. First off we aren’t going to spend all of it. We are just going to spend part of it. Keep $500 to $1000 back for emergencies (not Christmas or birthdays, EMERGENCIES) and use the rest as a negotiation tool.

Imagine that after three months you have $828 saved up. If you keep $500 in your savings account you have $328 to negotiate with. Let’s say you have a credit card you are late on and the balance is $517. You have been calling and calling trying to get them to lower the payment or the rate but they won’t budge. Now you are going to offer them the $328 as payment in full. Maybe they say yes. Maybe they say no. IF they say yes get it in writing! Have them fax it to Kinko’s. Have them pop it in the mail. Don’t send the money till you get it in writing that they are going to take it as payment in full. If they won’t take it as payment in full go on to the next group you owe. Chances are someone will take the $328. Chances are they will give you credit for more than $328. Chances are you will have to get it in writing or they will forget that conversation took place.

So now you have the debt snowball rolling, you are “cutting back and selling,” and you are negotiating with your creditors. You are taking control! Then the washing machine goes out. What do you do? Well remember that $500 you have? You aren’t going to spend $500 on a new washing machine. You are going to have yours repaired. You are going to the scratch and dent and you are buying the cheapest washer that will clean your clothes. OR you are going to use the laundry mat. OR you are going to be doing laundry at a friend’s house and giving them a couple of bucks. Then you are going to go back to what you were doing before. You are tithing, you are paying yourself first, you are prioritizing your spending, you are working your debt snowball, you are cutting back and selling, and you are negotiating.

Remember this whole time you are also communicating with your spouse, kids, etc. about the plan and about what you are doing and why you are doing it. Your are forgiving yourself and those around you for the financial mistakes you have made in the past and the ones you continue to make as you overcome your bad habits. You are celebrating the milestones of paying off each debt and re-creating your life. You are taking control of your life so your relationships can thrive. You are using your money to reinforce the highest and best use of your life. You are on your way to the efficient life!