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How to Pay Down Debt in 2017

When I look back at my twenties, one of the goals I'm most proud of accomplishing is paying off my student loans. Paying off debt is kind of a classic PowerSheets goal: it takes planning, little-by-little progress, perseverance when it seems like you're not getting anywhere, and a strong connection to your "why." That last one is especially important because it's easy to lose heart when you're slogging through the often long and tedious process.

For me, in addition to reducing the amount I'd spend in interest over my lifetime, the real WHY of paying off my debt was to move one step closer to financial freedom—because when you're financially free, you have more independence, more security, and more options in almost every part of your life.

If you're facing down debt, whether student loans, credit card, a car payment, or a mortgage, what's your WHY to get rid of it forever?

Got your why? Good! I also wanted to share a few of the tips and techniques we used as we paid off student loans, car payments, and our mortgage (ongoing!)

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1. Stick to a budget. Without a doubt, following a budget is the number one reason we were able to make progress on our goals. Without giving every dollar a name, we easily would have frittered away money we could have been putting toward our payments.

2. Schedule payments in advance. Sign up online for a monthly auto-debit for each of your accounts so that you’re never late with or forget a payment. Make it automatic – you won’t miss it as much as you think.

3. Feel the pinch. Every time our budget expanded, we chose to allocate the extra dollars toward debt reduction. Raise at work? Going toward debt. Bonus? Going toward debt. Sometimes in the last few years we looked at each other and were like, why do we feel poor?? But then we reminded ourselves that we were living at a lower standard of living by CHOICE. If you’re paying off debt and are not feeling the pinch in your lifestyle, you almost certainly have room to cut back and increase your payments.

4. Get a little crazy. My sister is working with "gazelle intensity" to pay off student loans from her physical therapy degree, and to help reach her goal faster, she started picking up PT shifts at a local hospital on the weekends in addition to her full-time job during the week. Does she love giving up that free time? No way! But for a season, she's willing to trade freedom now for much greater freedom in the future. Consider working extra hours, starting a side hustle, downsizing to one car, or something else "extreme" in the name of moving the needle a little faster.

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5. Pay more than the minimum amount. If you’re feeling the pinch you are likely already doing this, but it’s worth stating again: pay more than the regular monthly amount. At times, we were paying more than twelve times the required monthly payment on certain debts using the debt snowball. Which leads us to...

6. Roll the snowball. The debt snowball is simple, but it is by far the most important technique we used to pay off our debt early. The basic idea is to pay the minimum amount on all of your debts except one and then throw all of your other available resources at that one. Once that debt is paid, immediately move the payment for that debt toward another and so on until all of the debts are paid. Dave Ramsey suggests starting with the debt with the smallest dollar amount and moving toward the largest dollar amount; other experts recommend starting with the debt with the highest interest rate and moving toward the lowest interest rate or considering the taxability. We used a combination of these strategies. As long as you’re working aggressively toward your goal, I don’t think you can go wrong.

7. Track your progress. I kept a Google Doc spreadsheet that listed our debts, the current amount we paid per month on each, the outstanding total of each, and the month the last full payment was scheduled. Every time a payment processed, I’d go in and update the spreadsheet. It was extremely motivating to see everything shrink over time!

I would love to hear: Is paying off debt one of your PowerSheets goals? Where are you in the process? Are you using the debt snowball?

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How to Track Your Spending

Earlier this month we tackled how to build a budget. For those of you who tried a budget for the first time, how has it been going? Budgeting is a skill that can take a while to perfect, so if you feel like you way overspent in one category while underspending in another, don't get discouraged - just look at the month of data you now have, and move forward with greater clarity in the months to come!

Once you have a budget (the amount you're planning to spend in each category, as well as amounts you'd like to give away, save, or invest), you need to figure out a system for tracking it (since that's the key to following it!). The good news is that there are many ways to do this, and almost certainly one that will be a good fit for you! I'm going to run down a few of my favorites today, but would love to hear from y'all in the comments.

A custom Google Doc | This is the system I use, and warning: it might seem a little insane on first glance. But if you use very little cash, don't mind a little upkeep, and LOVE data, it might be the right fit for you! The basic premise is that the amount in your budget accrues each day, which is a neat way of feeling like your budget is growing, not shrinking!

The envelope system | Dave Ramsey fans will be very familiar with this one! It's perfect for people who are worried about overspending, because almost everything is paid for in cash, and once the cash in each category's envelope is gone, it's gone. You can read more about this strategy on the Dave Ramsey site, and read about our friend Nancy Ray's envelope system experience here.

The EveryDollar app | EveryDollar is an online budget app created by the Dave Ramsey team and is basically a digital version of the envelope system. I haven't used it personally, but my sister is a recent convert who is loving it, and our Marketing Director Amber also uses it (see her PowerSheets above)! The app is free for 15 days then $99 for a year.

You Need a Budget | Another online budget app with rave reviews is You Need a Budget, or YNAB. I love that not only do they have a great tool for tracking your spending, but it's guided by a strong personal finance philosophy based on four rules (give every dollar a job, embrace your true expenses, roll with the punches, and age your money). YNAB is free for 34 days, then $50 for a year.

Mint.com | Mint promises to bring everything from budgeting to bills together - your financial life, in one place that's easy to understand. Mint has been around for awhile, and seems to be the most polarizing of the sites I've listed here - people either love it or hate it. When I used it for a few months, I felt like I was going in more often than I'd like to correct its auto-categorization. Mint is free.

I'd love to hear: Have you found a system of expense tracking that works for you? What do you use?

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How to Build a Budget

Personal finance goals and questions come up so often in the PowerSheets Facebook Group that Jess and I thought it was high time we added a bit of this content into the blog schedule! And, lucky me, I'm the one who gets to write to you about it! (No, really: lucky me. I am extremely passionate about financial freedom, both in my own life and helping to equip others, so there is almost nothing else I'd rather write about!) To start, I thought I'd share a little bit about how to build a budget.

I have followed a written budget for eleven years now, and I can confidently say that it is the number one reason I feel at peace with my finances. I don’t worry about whether or not we’ll have enough money to pay our mortgage or insurance bill every month; I know we will. The headspace this surety frees up allows me to focus on my dreams and keeps me on track to reach my lifetime financial goals. There are few things better than that!

If the word budget sounds scary, shake off that fear and listen to this: a budget is not about denying yourself and cutting out everything fun, it's about making a plan. Dave Ramsey likes to say that budgeting is “telling your money where to go.” I like that image. A budget helps me be purposeful about how I spend and save instead of just closing my eyes and hoping. While there are many ways to track a budget (which we can chat about later!), building a budget is pretty standard. It’s all about two things — income and expenses — which make up your cash flow.

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1. Calculate your monthly net income (your gross income minus taxes). For most of us, this is simply our paycheck.

2. Add up all of your fixed expenses. Fixed expenses are difficult or impossible to change and are the same (or roughly the same) every month: rent, utilities, your electric bill, student loans, car loan(s), auto insurance, health insurance, etc.

3. Calculate your monthly contribution to your financial goals. Like the experts say, pay yourself first. Put money into an emergency fund, reduce debt with extra payments, save for a down payment, save for retirement, and/or feed an investment account. If it’s a priority for you, include charitable giving in this step. Whatever you do, do not skip this step! Treat your savings like any other budget line item, not as something optional if there’s money left over.

4. Add up all of your variable expenses. Like the name implies, these are things that are not externally set, so you could, for example, cut back here if you wanted to move faster toward your goals. Examples include groceries, dining out, clothing, entertainment, gifts, travel, gas, personal care, etc.

5. Put it all together. When you subtract your fixed expenses, your contributions to your financial goals, and your variable expenses from your net income, there are three possible outcomes: you’ll either have a surplus, you’ll break even, or you’ll have a deficit. If you come out with a surplus, you can either save more or spend more (assuming you’re already saving the recommended amounts!). If you break even, perfect! If you have a deficit, it’s time to take another look at your figures (most likely your variable expenses), and adjust numbers until you’re in the clear. By the time your budget is finished, you'll have a plan in hand, ready to be followed to financial freedom!

Easy to understand, a bit harder to follow in practice :) Your homework: walk through these steps, and start calculating! If you’ve never made a budget before and are unsure how much to allocate for certain categories, I’d suggest looking back through last month’s expenses (maybe on a credit or debit card statement) and estimating from there. It might take a few months to get the balance across categories just right.

For more, here's another post I wrote about what we take into consideration when making our yearly budget.

I'd love to hear any questions you might have about making a budget, or if there are other personal finance topics you'd like to chat about more!

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