There are a couple of things that could derail my plan, the first being unexpected expenses that will require me to re-fund my emergency fund any time money is used for emergencies. And I know they happen. Just a few months ago, we had to cough up an auto insurance deductible. I expect appliance repairs will come around at some point also. Our truck needed a new $100 plus sales tax battery unexpectedly just this month.

We’re at a point where we still don’t have the funds to fully fund any repair and maintenance categories in our budget. Frankly I’d rather not anyway. I’d rather just have a larger emergency fund for those kinds of things, but that’s just me.

I’ve been reading a book that I’m find quite eye-opening when it comes to organization and planning, and I’ve decided there’s definitely a point where we reach diminishing returns on our investment in pre-planning and over-organizing everything, including finances. A Perfect Mess is all about how some disorder and mess can benefit our lives… I agree.

For example, my husband has been working a lot of overtime lately. We could have taken all that extra money and paid it toward our debts to get out of debt a few months earlier. Instead, we chose to spend some of it. He bought me a gift (a Nook from Barnes & Noble) and signed us up for the state handgun safety class so we could apply for our carry permits this year.

I’m not sure I’m quite ready to carry a gun around with me :), but he wants us to have our permits so we at least have the option.

We’ve gone out to eat a few more times than usual lately, and we’ve bought a few more things for the house.

I’m only spending what we have, not banking on future overtime. I don’t plan to get in the habit of overspending.

The thing is, the overtime has given us something to enjoy without impacting our debt payoff plans at all.

It really can be hard to decide what to do with extra money you come into. Sometimes, you just need to stick to your existing plan and treat the extra money as your chance to relax.

To start with, we cut off our satellite TV service. We installed an antenna we already owned and hooked it into our digital TV. I subscribed to Netflix and had them send me the free disk so I could stream it through my Wii. Since I won’t be letting my internet go unless I’m desperate, I figure I should make the most out of it.

We’re saving $40 a month and spending an additional $9.82 a month. That’s not a bad bargain, and the Netflix setup is amazing.

I cut my grocery budget from $110 a week to $90 a week. So we’re saving $80 a month.

Just these two cuts have given me an extra $110 a month to pay on debt. That kind of money adds up. It also means I can go from paying just over the minimum payment on the Amex to $250 a month. That’s $1,000 every 4 months!

I will certainly be on the lookout for more ways to cut. I want out from under some of these monthly bills, especially the debt payments.

Have you ever made drastic cuts to pay more toward your debt?

I said the following at one point here on the site, and it turned out to be so true. Although my rates haven’t changed, more than one of my friend’s credit cards had favorable rates that were supposedly "locked in" and which subsequently jumped nearly 20%. Therefore, despite the lower interest rate, American Express remains the focus of my debt payoff plan. Once it is gone, I will start work on another debt. (Which will either be my RV or my home.)

The thing is, I would like to pay off the camper before the American Express bill because the interest rate is so much more favorable. However, with the current state of the economy and the ever-changing nature of credit card agreements, I worry that my American Express credit card terms will change drastically and unexpectedly and I’ll lose that lovely 3.99% interest rate until the balance is paid off….

I have friends who are dealing with unscrupulous credit card companies right now and I have little faith in them myself these days. My biggest fear is that before the new credit card agreement rules go into effect later in the year, many credit card companies might try to take advantage of as many loopholes in the credit card agreements as possible to keep from having customers locked in with very favorable terms long-term.

After having my husband’s car die a horrible death a couple of weeks ago and having to buy another one (because my husband is/was positive this car could not be fixed for less than it would cost to buy another car) it occurred to me that I might just be going about my debt snowball all wrong.

First, let me say that we replaced the dead car with a more expensive car, at $8,990 plus tax, title, etc. The loan ended up at $10,589. However, we got a 2008 automobile that still has warranty, and we’ve agreed that our goal is to make this car last 10 years, so we can get it paid off in 5 years (if it takes that long, and it might) and have 5 more years to save for another car.

Several things about this purchase bothered me though, and the main one was my husband’s inability to separate out the fact that affording payments does not mean you can afford the loan.

The thing is, when you have a spouse who believes you’re able to afford something just because you can make the payment, you really have to watch out when you start paying off debt.

As one payment falls to the debt snowball, I worry that my husband will want to buy something else to take its place. (History shows a track record for this and I’m not one to argue with history.)

I’m sure I’m not the only person trying to deal with a somewhat uncooperative spouse who just doesn’t seem to get it.

I’ve discovered that there might be a way around the fighting and worrying. It’s less like a row of falling dominoes and more like the collapse of a house of cards, but it just might work.

Don’t pay off your smallest debt first. Pay off the debt with the longest term first (with the possible exception of your home loan, depending on how much benefit you see from the tax-deductible interest).

By choosing to pay off the debt with the longest term, you eliminate the worry that freed up cash will be diverted from your debt snowball and used to make another payment for something your spouse wants to buy.

Without true cooperation from your spouse, it’s unlikely you’ll ever be truly debt free, but that doesn’t mean you can’t try. I certainly intend to do my best at it!

In the future, I will be able to spend less time worrying about what will happen when we get some of our debts paid off and we have cash available to make bigger extra payments.

Until now, my strategy has been to pay off some relatively short-term debts that should be paid off within the next year or so. However, I’m already hearing rumblings from my husband about that boat he wants to upgrade to—and how wonderful it would be if we had just a little extra money so he could make the payments.

Since I have no intention of letting this happen (if he really wants it, he’ll have to find a way to start saving for it!), I have begun to rethink my debt payoff strategy.

My camper has a higher interest rate than many of my other debts and a relatively low payment (about 1.1% of the principal). I intend to start putting any extra payments I can make toward it, instead of the other shorter-term, higher payment credit card (about 2% of the balance).

This way, I stop the “we have enough for a new payment” problem before it even becomes a problem.

Unlike with a traditional debt snowball, where you use freed up cash to pay extra on other debts in a rollover fashion, where your debts begin to fall like dominoes, this method will pay off your debts with the shortest terms on their regular schedule. This means that you’ll see more debts fall at about the same time.

Basically, I can put off the obvious freeing up of cash by saving on future interest, reducing the term of the debt by paying more principal each month, and having several debts paid off at around the same time frame. Paying extra on the camper loan should allow me to knock down 4 loans at about the same time.

I also believe this will give my husband the encouragement to save that he needs when we finally have free cash, because he will be able to “see” how possible it will be to save for a large purchase when we have so much cash freed up.

That’s the plan, anyway.

This might reduce the motivational boost I would get from paying off smaller debts faster, but it just might get me significantly closer to my goal of paying off as much debt as possible without having to worry about my husband eyeing the extra cash!

Today, I feel good about the decision, but last night, I really struggled.

My problem is in defining at what point I should stop throwing every extra cent I have at my debt so that I can live a reasonably balanced life, buying what I need and occasionally, what I want.

Yes, you could take your lunch to work every day and save a ton of money. But do you have to, just because you’ve decided to live a cash based life and get completely out of debt?

Should you feel guilty if you buy lunch with cash that you could have spent on paying down debt?

If you broke your camera and needed a replacement, should you not buy the camera because you could use that money to reduce your debt even further?

Besides, can’t one consider a family camera a necessity these days? If you want photographs of your family, you’re not going to find them cheaper at a photographers studio than those you’ve taken on your own!

Last night I finally decided that there are limits to my dedication. I want to pay as much as possible on my debts, but only after deciding on a reasonable amount to reserve for family use.

These “rewards” for staying within budget and paying down debt at the predetermined rate I’ve set are deserved and necessary to my future momentum.

Deserved because I am dedicated, but I don’t know if I can sacrifice all the joys that come with living within a fixed budget and knowing you have some extra money to play with every so often.

Necessary because if I continue to adjust my debt payments every time I have a few extra dollars, I worry that I’ll burn myself out of never spending any of that extra money on things that can make life a little easier or more enjoyable now.

This month, I spent $99.99 on a camera, and reserved $75 for the family and extra entertainment this month. (I include dining out in that category also.) As for debts, I chose to pay my normal debt payments, which is the budgeted amount I previously set for paying down my debts.

So, ultimately, I decided to stick with my budget and use my extra money for other things, because if I had been outside my budget this month, I would not have had this extra money.

What about you? Do you think I made the right decision? Do rewards help or hurt your progress to get debt free and live a cash life?

No matter what decision you ultimately make, you’ve had to make a tough choice.

These are actually quite minor choices when compared to the choice I’m talking about today.

I’ve been struggling with the problem of how to decide what’s most important to me and my family: pay down debt or save for emergencies.

I realize how important it is to have a substantial emergency fund to tide you over when you’re trying to get out of debt. But I want to make the most financially beneficial decision I can make for my family, and one pat answer doesn’t seem to fit all situations.

Assuming you’re disciplined enough to follow through on any particular plan you make, you have options other than the standard idea of saving up $1,000 before you start paying off debt (Dave Ramsey’s famous “baby step 1”).

Assuming you have $1,000 of credit available for use in an emergency, and assuming your interest rates on the cards where you’re carrying a balance are on the high side, you can save plenty of interest by paying off debt before you start saving up an emergency fund.

However, that said, there are some things to take into consideration.

1. A cash emergency fund can be used in situations where credit might not.

Say you need to rush your dog to the veterinarian after he’s hit by a car. Your local vet is cheaper and closer, but he doesn’t take credit. A cash emergency fund might be the thing that gets your dog the care he needs for a price you won’t mind paying in the long term. This situation might be a stretch, but then again, I live in a rural area and I know several vets who don’t take credit cards and who need to be paid when services are rendered. The closest “big” city is an hour away.

The way I’ve found to get around this is to make use of the cash I have put aside for my budgeted irregular expenses. Although this cash is technically already assigned a task, in a pinch, it gives me cash reserves to tap into in the event of an emergency where only cash will do.

2. If you can’t repay the emergency expenditure quickly, your emergency will end up costing you interest, which you could have been paying toward your debt.

In simple terms, if you save up an emergency fund in an account that compounds daily at a 1% annual interest rate instead of paying on a debt that compounds daily at a reasonable 7% annual interest rate, you’ve lost 6% of your money to interest payments.

However, if you then have to charge something on a credit card because of a true emergency and it takes you 6 months to repay the money, your emergency has cost you 3.5% more than it would have if you’d paid cash.

Here’s what it looks like in dollars, roughly.

$1000 in the bank + $10 interest earned if you save a cash emergency fund

$1000 less debt + $70 interest saved if you pay debt first

$1000 debt + $35 interest paid if you have an emergency that would have used all your emergency funds and you’re able to repay within 6 months. If it takes you 12 months, you’ll pay $70 interest.

However, if you don’t have a card with a relatively low interest rate, there’s another possible downside. The interest paid on a card with a relatively high rate could be damagingly high.

You could get into a cycle of debt that takes many more months to pay off than you might ever have saved by paying debt before saving for emergencies.

If you pay late, you could be subject to high penalties, usually starting around $39, and your interest rate could jump even higher.

Net savings by choosing to pay off debt instead of saving for emergencies

Here’s a summary of the financial impact of one choice over the other.

Best case

The best case assumes you have no emergencies while you’re paying off your debt.

Pay off debt: Net worth up by $1,070

Save for emergencies: Net worth up by $1,010

Worst case

The worst case assumes you have an emergency that uses your entire “fund” and that you take 12 months to repay your emergency charge.

Pay off debt: Net worth down by $70

Save for emergencies: Net worth up by $10

Somewhere in the middle

Somewhere in the middle assumes you take 6 months to pay off your emergency charge.

Pay off debt: Net worth down by $35

Save for emergencies: Net worth up by $10

My decision

All that said, I made my decision not long after I’d decided to pay off my debt as quickly as possible. I chose to put as much of my discretionary funds toward paying off debt as soon as possible. My irregular expenses savings remains my only cash reserves at the moment, and although I rethink the issue every month or so, just to be sure nothing’s changed that might impact my decision, I believe I’ve made the right choice for me for the time being.

Truly, it’s somewhat of a gamble, but the payoff of getting out of debt sooner than I would have otherwise seems worth the risk to me.

Have you had to make a similar decision? What did you decide? Comments or questions are always welcome.

Why aren’t interest rates and amounts owed the most important factors?

First, interest rates and amounts owed do exclusively determine the amount of money you’ll ultimately be paying back. Time is a factor, but not in the same sense that interest rates and money owed are.

If you want to payoff your debt in a way that saves you the most money over the long term, based on your current situation, you need to choose to pay off your debts with the highest interest rates first. A higher interest rate means you pay back more dollar for dollar on a debt. If you owe $1,000 at a 10% interest rate, your monthly interest payment (using simple interest) is about $8.33. If you owe $1,000 at an 18% interest rate, your monthly interest payment is about $15. This is a simple way to decide what comes first in your debt payoff.

If you’re more interested in the motivational aspects of paying off debts quickly, you can start with the smaller amounts first and work your way up to the larger debts. This gives you a boost every time you pay something off, inspiring you to keep at it.

However, sometimes other issues come into play when you start working on your debt payoff plan. In fact, you should always consider other factors in your decision-making.

My problem

I have several smaller debts with low interest rates. I also have a few with larger balances that have higher interest rates.

My ideal plan would have been to pay off debt in a way that saves me the most money. I like money and I especially like it when I can keep as much of it as possible in my pockets.

My debts

The thing is, I would like to pay off the camper before the American Express bill because the interest rate is so much more favorable. However, with the current state of the economy and the ever-changing nature of credit card agreements, I worry that my American Express credit card terms will change drastically and unexpectedly and I’ll lose that lovely 3.99% interest rate until the balance is paid off. Then, depending on how high the rate jumps, any savings I could have accumulated by paying on the 8% debt first would be lost in a matter of months.

I have friends who are dealing with unscrupulous credit card companies right now and I have little faith in them myself these days. My biggest fear is that before the new credit card agreement rules go into effect later in the year, many credit card companies might try to take advantage of as many loopholes in the credit card agreements as possible to keep from having customers locked in with very favorable terms long-term.

Maybe I’m overly cynical, but I don’t think so. Do you?

All the reasons I mention above are reasons in favor of taking your entire financial picture into account when you start laying out your debt repayment plan or your debt snowball.

Arrange your payoffs to suit you and your needs and don’t worry so much about following any particular person’s specific method for deciding on a debt payoff order. As long as you’re paying something down with the intention of paying it off, you’re making progress!

We traded in my car for $6,500 (which we had the cash to pay off (about $4400)). We got that trade-in credit against a $12,500 used truck that has about 39,000 miles and is in excellent condition. The reason I’m not all up in arms about the truck with my husband is because I can easily see it as something we can keep longer term, not to mention that we traded in my car for it instead of his. We’re now down to two vehicles. Since my actual gas costs for commuting to my job are reimbursed, I won’t be spending any additional money on gas even though I now drive a vehicle that gets significantly less efficient gas mileage than my previous car.

Money-wise, we ended up with an auto loan of $6,500 or so at 4.79%. There’s no prepayment penalty so we let them make the loan for the standard term they wanted to make it at which was 4 years. I don’t really care, since I’m going to pay it off early anyway, but I like that I still have the option if I want to take it, to pay off a higher interest debt first, because this payment of $148 each month is much less than what my car payment was.

I have to sit down and rework my plans for paying off my debt now, but with the lower payment related to the lower interest rate on my home and the lower auto payment (but still a payment), I will have cash available to put towards other debts.

When I do that, I’ll be sure to post here.

As for the truck, I like it. I’ve never been the primary driver for a truck before and it’s an interesting experience. 

The car I owned before was the only vehicle I had ever bought new. I wouldn’t recommend that to anyone, but I have to say, I did like the car and the whole newness of it when I got it. Buying a new car doesn’t make a lot of financial sense though. I’ve also never done a trade in for a vehicle either, because usually you can get $1000+ more for it by selling it yourself than you can by trading it in. In our case this time, we got lucky. The dealer where we got this truck was going out of business because he was having too much trouble getting loans for people wanting to buy automobiles from him. That’s something to keep in mind. Right now is a great time to buy an automobile, if you can get the money you need for it.

Back in the spring, I bought a couch. I’d like to claim I paid cash for it, but I can’t. I needed a couch quickly and I took the easy way out. I bought the couch on credit.

I did have sense enough to find a store running a “no interest until June 2009″ deal, so I haven’t paid any interest on the couch. However, the special “no payments” part of the deal almost caught me… I put off starting my monthly payments when I should have, and I’ve ended up having to pay higher monthly amounts to get me to paid off before the “no interest, no payments” period runs out.

I’ll make it in just under the wire. I owe $409.13 and have been paying regularly these days. My hope is to have a little extra left over from Christmas bonuses to pay it down faster (if I even get one with all the financial crises going on right now).

My plan is to take that $50 monthly amount I’m paying and put it toward my car payment. This will effectively start my debt snowball.

Technically, spring is probably when my debt payments are first going to snowball, but I’m thinking of it as having already started. I’ve packing my snowball and I’m getting ready to let it loose down the hill. As soon as that first payment is applied to something else, it will have officially begun to pick up speed.

I have my list of debts, in the order I want to pay them off.

Although many experts suggest either paying off higher interest debts first or debts with the lowest payments, I’ve come up with my own schedule, for my own reasons. For this to be successful, that’s what we all have to do—find something that works for each of us, giving us the most motivation. If you find that you’re more motivated by the thought of saving money you would have ended up paying as interest, by all means, you would want to list your debts in order of highest interest rate to lowest.

My choice of debt payoff order

1. JCPenney (couch) – 0% interest, but raises dramatically if the debt goes past a certain date
2. Auto Loan – 6.9%
3. Camper – 8.25%
4. American Express – 3.9%
5. Student Loan – 3.25%

I chose this schedule because it will get the snowball going the fastest. I already feel tons of motivation at the idea of paying off my car and knowing that payment amount will go toward paying off the camper. It’s exciting to dream about the day when I can actually make it happen.

Do you have a debt payoff schedule? How did you chose to rank your debts? I would love to know.