How To Pay Off Debt? – Part 2 – You Need Structure

Why is an Emergency Fund Important?

One night back in 2013, I got poked in the eye at martial arts practice (Judo for those familiar).  I visited the local hospital emergency room to get it checked out.  The visit lasted a total of about 15 minutes from when I walked in the door to when I walked out.  The Doctor prescribed me some eye drops for pain and diagnosed me with a corneal abrasion.  I got a bill a couple weeks later for $900.  I wasn’t always in the position to easily handle a sudden large bill like this, but on this occasion, I paid it without thinking twice.  I do my best to keep an emergency fund for situations like this.  I can not fully express the importance of having some money that is reserved exclusively for emergencies… but I’ll try.

In his book The Total Money Makeover , Dave Ramsey outlines a process for people to pay off debt and get control of their finances.  One of the first steps he asks of the reader is to get together $1,000 for emergencies.  Before reading this book I had never really heard anybody explain in detail why emergency money was important other than saving for a ‘rainy day’.  We all know emergencies happen but according to this article from CNBC’s website just under 4 in 10 Americans had enough cash on hand to deal with a $1000 emergency in 2021.  On this topic, Ramsey makes a lot of sense.  Emergencies involve sudden visits to the doctor because of injury/illness, the car breaks down and walking/riding the bus aren’t options due to distance and/or time, the toilet is clogged at home and only a plumber can fix it etc.  When I think about emergencies while trying to pay off debt, I think about things that threaten basic needs.  We want a cash buffer in place so that these things don’t derail our progress towards becoming debt free.

When I was paying off debt while serving in the military, I didn’t have an emergency fund or a budget.  I calculated what I would have to pay every month on each bill based on my initial salary when I first joined the service.  That number would have me pay everything off in 5 years or 60 months.  It only took 3 years because I intentionally didn’t factor in pay raises.  As I earned more money I stepped on the accelerator to get out of debt as quickly as possible.  However, not having an emergency fund or a budget was risky in hindsight.  Being in the military, I was guaranteed a paycheck every 1st and 15th of the month for 5 years as long as I didn’t do anything incredibly stupid.  If I had a medical emergency I could go to the hospital free of charge on base.  If I had gotten married and my wife got pregnant, that pregnancy would have been covered by military healthcare.  I also would have gotten a stipend for housing.  I never had any really big emergencies pop up while I was serving in the military. If something had happened, there were many supports/buffers in place because of the nature of being contractually obligated to the US Government.

Most people will not be in this scenario.  Lots of people probably don’t have healthcare.  Lots of people work a job where the hours may not be guaranteed and your income may fluctuate.  That $1,000  acts as a buffer between you and sudden events that will most certainly pop up while you are trying to dig yourself out of a financial hole.  The story about getting poked in the eye is so important because having the emergency money at that time meant that I didn’t lose any momentum in my life.  I didn’t stress out about the bill. I just paid for it and kept going.  

When you are trying to get out of debt, one of the biggest things you need in the beginning is momentum.  Cutting expenses way back, altering your lifestyle, and working multiple jobs are all going to be hard.  They’re all going to require energy.  What you don’t need in the early phases is an emergency knocking you deeper into that debt hole and making your situation feel even more precarious.  Some of us haven’t seen $1000 in our bank account at one time in years (maybe never in some cases).  For many people, having that much cash on hand feels like you have to go out and spend it.  Giving in to that urge is what gets us into debt.  It’s going to take real mental and physical energy to fight that urge and focus on the numbers.  

• Speaking of The Numbers – When I was paying off debt while in the Military I set up autopay in my checking account on the 1st/15th.  Those were the days I got paid.  The money I owed creditors would automatically come out of my bank account and go straight to creditors via e-check the day after I got paid.  This eliminated any temptation to make dumb choices with that money or invent ‘emergencies’ that weren’t actually urgent needs.  Every month I got a statement from the people I was paying off.  I kept the statements in a file so I could watch the numbers fall every month.  This was a way of motivating myself to stay on the path.  To keep making the short term sacrifice for my long term freedom.
  
  I treated debt just like I treated the wars in Iraq and Afghanistan that I was training for at the time:  I’m Going to Combat!  Either way I was a soldier preparing myself to achieve victory on the battlefield.  From a financial standpoint, debt was my enemy.  Watching those numbers decrease on those statements every month was a way of reminding myself why I was making sacrifices everyday.  My position would have been even stronger with an emergency fund and a budget.

You can start paying off debt without getting $1000 together but the sense of demoralization is going to be intense when something pops up that you have to address and you don’t have the money for it.  You’ll have to pause your momentum in order to address it.  Once you get that debt free ball rolling, you want to keep it moving!  (Dave Ramsey’s Book and Podcast is not only great for strategy but it’s a good kick in the ass for staying motivated!  He’s stern but I believe it comes from a place of wanting to help people.)

Debt is Not an Option

Learn to live purely on cash.  For now, cut up the credit cards and scrap any plans for a new mortgage or auto loan.  If you have kids planning to attend college in the next few years it’s time to begin a new project called ‘Pay For College As You GO’.  I’ll talk more about this in a future post but there are companies like Starbucks who pay for their employees to attend college and there’s also the United States Military.  There’s also community college, trade school, the fire department, and law enforcement.  Taking an alternative route for education/skill acquisition is not an insignificant decision but neither is taking on 10’s of thousands of dollars of debt for college.  Getting a degree/skills/education does not have to be a straight line.  Giving yourself options to take on more debt is a recipe for ending up right back in the same situation you’re in now.  I’m not saying you can never use a credit card again or take out a loan again.  I’m saying you need to go through the process of self-discipline that comes with paying off debt before ever looking at debt as an option again.

If I was always intentional and disciplined with my money I would have never ended up in credit card debt.  If I had stopped to create a sincere vision for my life, I would not have gotten a car loan.  In order to develop the patience to say ‘no’ to things you can’t currently afford, you have to cut off any form of debt as an option to solve problems.  In order to develop the creativity and agency required to navigate the world without debt you must eliminate it as an option.

You might be deep in credit card debt and concerned about rebuilding your credit score.  First off, paying off the cards will do wonders for your credit score.  Second, you can use a debit card for everything you would typically use a credit card for (hotels, rental cars, flights).  I use a credit card for online purchases as an extra layer of protection against fraud but I pay the balance immediately as I’ve budgeted the cash before I swipe the card.  Also, if you’re concerned about continuing to utilize whatever points system may be attached to your credit cards, screw points for now!  Racking up travel and cash back points is for people who have the discipline to never allow a balance to be carried on their credit cards in the first place.  People who have the discipline, organization, and self awareness to use credit cards wisely can take advantage of points.  

Side note on Credit Card Rewards programs – Even if you are disciplined with money and you use credit card points, I think you should try to think about what makes those points systems possible.  I’m not 100% sure of this but I suspect that it’s people paying huge interest fees on balances they carry that then creates the excess funds for credit card companies to offer incentives for people that are disciplined with their cards to have travel and cash back rewards.  Basically, I think the rewards are fueled by people who are drowning in debt.  I’m not telling people not to use rewards but I think it’s a marketing tool that credit card companies use to draw in undisciplined consumers.

The moral of the story is this: allowing yourself to have debt as an option when you are trying to get out of debt is like being an alcoholic in a 12-step recovery program and hanging out at bars once a week.  It’s a recipe for relapse.

After paying off all my debts, my credit score went into the 700’s.  It’s been sitting in the high 700’s for 6-7 years now and the only reason it’s not higher is because I only have one line of credit.  Basically, if I had more lines of credit/debt, I’d be deemed more credit worthy?!  The credit score system very much reminds me of the credit card rewards system in the sense that it seems like a marketing strategy to get more people to use a system of debt.  

If you can’t tell, I hate debt with all of my mind, body, and soul.  I think it’s one of the worst misery-inducing human inventions ever.  Yes, it can fuel business and drive economic growth but It’s essentially betting on the future which we can’t predict.  Why does this make sense to anyone?!

Why is Budgeting Essential?

When I first started boxing a few years ago, my movement was very inefficient.  Especially when sparring. My defensive movement was very spastic.  When trying to move my head to avoid punches, my whole body would jerk and my eyes would close.  I’m still fairly spazzy but over time, I’ve developed a style that’s more suited to my particular body and I’m more familiar with general principles in boxing.  This means I’m more efficient and able to adapt to different partners with different styles more easily than when I started.  Budgeting is a similar thing for our money.  Everyday we go out into the world or even open our phones, someone is trying to get us to spend money on their product or service.  Spending money is fine as long as those purchases are intentionally helping us build the life we want.  Just like I have to figure out how to use my body in boxing, I have to figure out what I want my life to look like so I can use money intentionally as a tool to build that life.  Money becomes a tool when every dollar has a job.

Most of us probably don’t budget.  If I spar in boxing and I don’t have a plan of approach, I’m betting on my general athleticism to keep me from getting beat up.  If I’m a great natural athlete, maybe I’m fine.  But if not, maybe I get knocked out.  In money, natural athleticism is like having lots of money:  when you have lots of money you can absorb more financial mistakes because you have a buffer.  However, my presumption if you’re reading this is that you aren’t swimming in cash.  Having a less than average to average household income and having no budget is like hopping in the boxing ring with a veteran who wants to hurt you and you have no plan, you’re going to get knocked out eventually.

A budget gives you a plan from which you can improvise when needed.  No, life is not predictable but it’s going to be easier to navigate unpredictable situations when you have a clear plan in place and you understand the future you are working towards.  When I was paying off debt I didn’t use a budget.  Yes, I got out of debt.  Yes, I had a large sum of cash saved when I left the service.  However, I could have been in an even stronger position if I had a dollar for dollar budget.  Remember, the idea with a budget is that it gives you a structure and a plan for your money.  That structure gives you a base to improvise from, when dealing with the unexpected.  Being in the Army gave me a lot of built-in structure.  I wasn’t going to get fired and lose my income.  I wasn’t going to come up short on the rent and end up homeless.  I wasn’t going to get hammered by an unexpected medical emergency and have a huge medical bill.  Not to mention how much time I spent in the field training and deployed overseas.  It’s a lot harder to spend money when you’re in the woods or deployed to Afghanistan.  The Army gave me a lot of built in guard rails but I could have had way more money saved and gotten out of debt even quicker if I had a budget.  I definitely left money on the table in that process.
Personally, I love using YNAB (You Need A Budget) for budgeting.  They’ve got a free 34-day trail with the app.  Dave Ramsey also has a budgeting app and you can always put together a good ole excel spreadsheet.  YNAB has a free budgeting course to help you understand how to set up categories and I’m sure if you google ‘how to create a budget’ there are probably tons of free videos, blogs, and podcasts that can explain the topic better than I can.  My job is primarily encouraging you to get on the road to financial stability by creating a budget and continuing to push yourself to stay the course.  I’ll let the experts teach you the specific details.

Words of Encouragement

So often people confuse the hard process of exercising self discipline as an encroachment on their own personal freedoms in life:

• We don’t want to deal with turning off the TV/Phone earlier so we can get to sleep sooner and wake up earlier to work out.
• We don’t want to do the journaling we need to do to start sorting out a difficult childhood so we can be better human beings in our current relationships.
• We don’t feel like coming home after work and going straight to the kitchen to start cooking so we don’t spend money unnecessarily and so that we don’t take in calories we don’t need.

We know that pushing ourselves in these ways will be good for us in the long term.  We should also accept that they’ll be difficult in the short term.  Short term discipline for long term freedom.  It’s only discipline when it’s hard to do.  Once it’s a habit and you’re reaping rewards, it ain’t hard no more.  Remind yourself of this when that little voice in your head is telling you that you don’t have to fight today.