A Man in Debt is so far a Slave

It may be cheesy to use a quote as a blog post title, but maybe Ralph Waldo Emerson was on to something.

I don't think I would understand how liberating it is to be out of debt* if I hadn't "unexpectedly" found myself $6,000 in the red.

For people with student loans, $6,000 may not seem like much, but I didn't earn this debt by attending a university and getting a degree. Nope. I was just dumb.

Looking at you, online shopping and poor impulse control.

When I was trying to buy a house, I researched how to build my credit. Every article I read told me to get a credit card and use it each month. When I went to speak with a banker about setting up a credit card, she told me that I didn't qualify for their credit cards and could only acquire a secured card. She also told me that it's better to carry a small balance so that it "registers" in the system that I'm actually using the card. She warned that if I paid it off in full before the system tracks the usage, I wasn't going to build my credit. Don't do that. That's incorrect. Always pay it off in full.

Needless to say, I got a "real" credit card, ended up in real debt, then made more bad decisions and ended up in even more debt. In November of 2015 I had officially owned my home one year, had a $600 per month job, was about to leave my fiance, and had a ton of debt.

I knew I had a lot of work ahead of me, and while I loved my job, I had to find something else if I wanted to pay off my debt, eat, and pay my bills. While I was on a weight loss kick, I didn't think foregoing food and utilities was going to solve my problems in the long run.

There are a lot of different strategies for paying off debt. While I was bemoaning my financial situation, my BFF (and by that I mean Best Financial Friend) Lizzy talked to me about the Snowball Method. The Snowball Method basically says that you should make the minimum payment on everything except your smallest debt.** Your smallest debt then gets all your extra money. Once it is paid off, you use all the money that was going to your smallest debt to pay off your next smallest. In this way you gain momentum. You get that quick reward from paying off a small debt, and can use that quick gratification to continue. Lizzy, like we all are, is a fan of instant gratification. The Debt Snowball works for her, it works for lots of people, and especially if all your debt has about the same interest rate, it makes a ton of sense.

But that seemed really dumb to me given that some of my debt had a 29.99% interest rate and some of it had no interest at all.

Then I looked in to the Debt Avalanche. The Debt Avalanche made more sense in my situation because you pay off the debt with the highest interest rate first, then work your way down. 

The first step to getting out of debt, regardless of what method you choose, is by figuring out who you owe, how much, when its due, and the minimum payment (and if you like the Debt Avalanche the interest rate).

Go forth, fellow millennial! Gather up all your bills, sit down, and make that list. Organize them by amount owed, interest rate, due date, alphabetically, whatever makes you happy. Have your List of Debt handy for the next post.

*Currently the only debt I have is my mortgage. Many financial advisers are under the impression that a mortgage is an unavoidable debt to owning a home, so for the time being, we're going to use that definition as well.

**There's actually quite a bit more to Dave Ramsey's financial strategy and I'll go in to that in a later post.