Saturday, March 6, 2010

Financial Peace University Week 4: Dumping Debt

This was one of the most intense weeks ever in class!  The DVD was very inspiring and motivating.  At the end of the class, each of us were ready to go and conquer any and all debt!
This week's lesson: Dumping Debt!

Last week our class added up the total amount of debt (not including the home mortgage) that we had.  I was FLOORED.  The total came in at just under $460,000!!  Wow.  This lesson really hits home for a lot of people.

Imagine being DEBT FREE.  Dave teaches about how to do this, which is Baby Step #2 – Paying off all debt using the debt snowball.

Key points from this lesson:
  1. Being Gazelle Intense is the only way to conquer debt.  A lax attitude will not get you very far!!  As Dave Ramsey says, "YOU HAVE GOT TO KICK IT BABY!"
  2. Debt has only become accepted as normal in America in our generation.  Our great grandparents abhorred debt.  Our grandparents didn't like debt.  Our parents used debt for the big stuff (house and car), and we use debt for EVERYTHING.
  3. Make a commitment to never use credit cards again. This is the first and most important step to dumping debt. In class, we had people come up and cut up their cards.  It was very emotional, and liberating.
  4. Do not become slave to the FICO score. It seems that we will do anything to have a good credit score.  It really is an "I love debt score".  Some people claim that credit is the only way to: rent a car, get a mortgage, etc.  Dave says that there are other ways to accomplish these things.  A debit card has the same protection as a credit card.  And yes, you CAN get a mortgage without a FICO score.  Debt should never be the first way to accomplish anything.
  5. The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7
Baby Step 2 – The Debt Snowball I previously posted on this topic in detail, so click here to get the info.  Here is the short version of Baby Step #2, The Debt Snowball.
Here’s how the debt snowball works:
Step 1 – Make a list of all your debts, ranked in order from the highest balance to the smallest balance.
Step 2 – Beginning with the card with the smallest balance, pay as much as you can on that card while paying the minimums on the other cards.
Step 3 – Once the card with the smallest balance is paid off, take the amount you were paying towards that card and apply to the card with the next lowest balance.
Step 4 – Keep on paying them off until ALL the debts are paid off.

Steps to getting out of debt:

  1. Quit borrowing more money!! Commit right now to NEVER take out any more debt.
  2. Cut up your credit cards. This was hard for me!  Although I haven't used credit cards for several years, I have kept them for an emergency.  No more!
  3. Get an extra job. Even if it is temporary, the extra income can really accelerate the debt snowball.
  4. Sell stuff.  Plan a yard sale or put stuff on ebay.  Use the cash to pay toward your debt.
  5. Get the debt snowball rolling! Pay off the lowest debt first, then add the amount you were paying for that debt and roll it over to the next debt.
  6. The average person who applies these principles is DEBT FREE except for the house in 18-24 months!!!
Here is the Dave Ramsey Debt Snowball Form:

Debt Snowball Form

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  1. Don't believe everything he says without thought and investigation. A debit card does NOT provide the same protection as a credit card. When someone charges something on your credit card, you are in the power seat as the money hasn't been taken from you. With a debit card, you are out the money stolen until you convince the bank that it wasn't you who withdrew the money, and in the meantime, the money is not available to you to make your mortgage payment, electric bill payment, etc.

    There is no way Ramsey would convince me to quit using my credit cards. I've made too much money off them through the years with money back programs. I've never paid interest or fees to a credit card company. It's a sweet deal!

    It's interesting how he makes the banks sound like the culprits when it's really the credit card holders responsibility to handle the money flow in a way that benefits him/her. He's treating the symptom, not the core problem.

  2. I appreciate your comments! However, I must say that we disagree :) I too used to feel the same way about credit cards... Each year we got cash back in excess of $1,000.00 with not ever paying 1 cent of interest, or fees. I stopped using credit cards because
    I was OVERSPENDING. My husband was not on board at first. Like I said, we never paid one cent of any fees or interest. But, when we decided to only use our debit card, and cash, we felt like we got a huge raise. Research has shown that we spend 12-18% MORE when using a credit card (that does NOT include the interest). It simply isn't painful" to use a credit card. Using a debit card is somewhat more "painful", because the
    money is taken out of your account immediately. Using cash is very "painful" because you actually have it leave your grasp when you spend it. When we stopped using credit cards, yes, we lost our 1-2% cash back
    (which was well over $1,000 per year), BUT we actually SAVED about 20%. So, in reality, we got 18-19% back. That is a nice raise.

    You might want to check out this link from Visa's own website about the "zero liability" fraud protection:
    When my friend's debit card was compromised, with 24 hours she had every penny back in her account.
    I don't feel that Dave Ramsey makes the banks out to be the bad guys. He actually says that they are fabulous at marketing their product, which is debt. They are so good in fact, that people line up to buy their product (debt). You are absolutely right, it is the PERSON'S responsibility to be responsible with money, not the banks. So, if a person is deep in debt, why would they
    even consider continuing to use their credit cards? I agree completely with Ramsey to cut them up. Why continue digging a hole that gets deeper and deeper? Perhaps you are one of the few that doesn't carry credit card debt, which is great. That is how we were too. I am just saying that for us (and millions of Dave Ramsey listeners), this system has worked fantastic.