How to Pay Off Debt and Build a Security Fund

Since it's still early in the year and New Year's Resolutions are being fine-tuned, I've decided to start a series on Money. My previous post on How to Make Money using Credit Cards got me thinking I could share more of my financial experiences in hopes of inspiring or helping you to achieve your financial goals as well. Back in 2015, one of my New Year's Resolutions was to start focusing on my financial goals and a small obsession was born.

I am not a financial guru or adviser. I am just someone who is more interested in finance than the average person and have been fairly successful in my financial journey thus far. This series is simply to share my story in hopes that someone else will be inspired or takeaway some good ideas.

I understand a lot of folks have a lot more debt than I did. If you have debt that far outweighs mine, know that this approach will still work it will just take a little longer! My approach to learning new things is to take away the pieces that work for me and leave the rest. I encourage you to do the same! You'll notice my debt free and security fund approach is basically Dave Ramsey's baby steps 1-3, but that's as far as I go with his method because I don't fully agree with the rest. Take what works for you and leave the rest.

A Little Background

I paid off all my debt in 2015 in right under a year and had a fully funded security account (6 months of expenses saved) by 2017. My parents diligently taught us that "debt steals your freedom" since we were old enough to understand what debt was...maybe even before! Thanks to this mindset, I have avoided debt like the plague for most of my life. I worked really hard in High School to get an academic scholarship and worked 30 hours per week while in college in order to graduate in December 2014 with $0 in student loans. I didn't fully understand then how incredible it would be to not have student loans following me into my late 20's and 30's. While I was in school however, I had accrued a small amount of debt. I had a small auto loan from upgrading my car which I used to commute to school out of town, a small medical bill from some heart tests, and was floating quite a bit on my credit card each month (not paying interest, but still floating). With school finally off my plate, my focus shifted to my finances.

When I get into something, I go all out. It's almost like I literally can't control myself and it becomes as obsession. I read tons of books, listened to podcasts, and watched countless YouTube videos on personal finance (I plan to share my favorite resources with you soon). And so the steps below for paying off debt and building a security fund are what I gleaned from absorbing the parts I liked and leaving the rest.

Step 1: Write Down your Why

Really take a moment to think about why you want to embark on this journey. This is what you will look back to when you are feeling discouraged, angry, or bored during this process.

What does your ideal lifestyle look like and how do your finances relate to it? Why do you want to payoff your debt and build a security fund? How will you feel when you are debt-free? How will you feel when you have a large security fund? Where do you want to be in 5-10 years? What about your current situation could prevent you from reaching these goals? What can you do to change that?

In short, for me financial freedom was and is my main motivating factor in this journey. Debt payoff and a security fund are simply steps toward financial freedom. It's no secret that money affects us in a profound way on a daily basis. Financial freedom means less stress, more possibilities, and magnifies a happy life. From a minimalist perspective, let go of the things that no longer serve you (debt) and add only the things that do (security fund).

Step 2: Make a Budget and Cut Everything Unnecessary

Making a budget is critical to the success of this project, but it doesn't have to be complicated!

  • First write down literally everything you spend your money on each month. What is the total?

  • Then write down how much income you have each month.

  • Next, subtract what you spend from what you make and you have your total for savings/debt payoff each month.

The purpose of this step is to free up just enough cash to get your snowball rolling.

Here's an Example Budget:

  • Rent $800

  • Renter's Insurance $30

  • Power $100

  • Water $60

  • Internet $65

  • Cable $120

  • Netflix $15

  • Hulu $15

  • Gas $80

  • Car Insurance $80

  • Cell Phone $60

  • Groceries $500

  • Takeout $250

  • Gym Membership $40

  • Nail Appointments $80

  • Hair Appointments $60

  • Clothes $50

  • Amazon $65

  • Misc. $100

  • Minimum Debt Payments ($300)

  • Total Spent: $2,870

  • Income: $2,500

  • Leftover for Saving/Debt Payoff: -$370 (which is the problem)

Here is where it gets fun...the goal is to take this budget and creatively remove/adjust literally everything you can. Here goes the example:

  • Rent $800 (Unless you're trying to get a roommate or move, this can stay the same $800)

  • Renter's Insurance $30 (You get a lower rate at $24.00 through a different provider)

  • Power $100 ($100, but you can mindfully turn off lights)

  • Water $60 ($60; unless you can mindfully use less)

  • Internet $65 (Call and say you want to cancel, they will offer a better rate $49)

  • Cable $120 (Cancel $0)

  • Netflix $15 ($15...I mean let's not be unreasonable)

  • Hulu $15 (Cancel $0)

  • Gas $80 ($80, but you can mindfully drive less)

  • Car Insurance $80 ($80, make sure you have the best plan/rate)

  • Cell Phone $60 ($60, make sure you have the best plan/rate)

  • Groceries $500 (Reduce to $400; shop smarter/make bulk meals)

  • Takeout $250 (Reduce to $100; $25 per week and eat the smart groceries)

  • Gym Membership $40 ($0 Cancel if you can workout at home; working out is a non-negotiable for me)

  • Nail Appointments $80 (Paint your own nails; see my post on this)

  • Hair Appointments $60 (Cut/Color your own hair if possible $10)

  • Clothes $50 (chances are you don't need any clothes $0)

  • Amazon $65 (chances are you don't need this stuff $0)

  • Misc. Unplanned $100 (Reduce to $50)

  • Minimum Debt Payments ($300)

  • Total Spent: $2,870 (New Total: $2,128)

  • Income: $2,500 ($2,500)

  • Leftover for Saving/Debt Payoff: -$370 (New Snowball Amount $372)

You've just freed up $372 per month to allocate to your project! Keep in mind this is just an example I made up. I understand every budget, expense, income, and non-negotiable will be different for everyone. Put some effort into creativity though! For instance, I canceled Netflix but I did find someone to share their Netflix login with me. I plan to share a more extensive list of ideas how to save more/make more soon.

I used the free version of the Every Dollar app/website to track my spending and budget each month. You could just as easily keep an excel spreadsheet or a notepad on your phone. Whatever works for you!

Step 3: Start Your Security Fund

Inevitably during this process an unplanned expense will pop up. Planning ahead for this prevents your entire project from going off the rails when a minor setback occurs. You decide the magic number you feel comfortable with for your basic security fund. Many recommend $1,000 to start. $1000 is a small amount that would cover the most likely unplanned expenses (auto deductible, Doctor visit, flat tire, etc.).

I had already been a decent saver anyway so my beginning security fund was around $3,000 by default, not because I planned it that way. Whatever your number is, put it in a liquid savings account you can easily access for an unplanned expense. Use the monthly amount we freed up in the budget until you have your total saved.

The key here is to NOT touch this money unless you absolutely have to. If an unplanned expense does come up, use what is necessary to pay the expense and put it back immediately with the next round of savings.

Step 4: Find your Debt Payoff Number

Write down every single debt you owe (excluding your mortgage if applicable) and how much the payoff amount is for each. Now put these debts in order smallest to largest and keep this list somewhere easily accessible.

Here's an example:

Credit Card 1: $600

Medical Bill: $1000

Credit Card 2: $2,500

Credit Card 3: $3,000

Personal Loan: $10,000

Car Loan: $12,000

Total: $29,100

This is now your road map for this project. Don't let this step overwhelm you! Once you get the next step going things go faster and faster. I ended up owing right at $7,000.

Step 5: Debt Snowball

You'll continue to make the minimum payments on all of the debts each month. Then, use the extra money you freed up in your budget earlier to make a bulk payment on the principle of the smallest loan.

In our example, Credit Card 1 is our smallest amount at $600. So say the minimum payment is 39.00 and we freed up $372, we will make a payment of $411 on this card this month leaving a balance of $189. Next month, we will be able to pay it off and put the difference toward the medical bill. The following month, we will put our base of $372 plus the 39.00 minimum payment from Credit Card 1 (that is now paid off) onto the medical bill along with its minimum payment until the medical bill is paid off. Then we will use our base amount $372 plus the minimum payments from Credit Card 3 ($39) and the medical bill ($25) toward Credit Card 2 (Total of $436) until it is paid off. See as you pay off each amount, the snowball of how much more you can pay each month grows?

The logic behind the Debt Snowball method is that small wins accomplished by paying off the smallest debts first encourage you to keep going. By being able to mark items off the list early on in the project, you see that it is possible and that you can do it. This early encouragement helps you face the larger amounts later on. If you start with the bigger amounts that take longer, you're more likely to give up without a clear end in sight and no visible progress. There are a lot of folks who disagree with this method for logically sound reasons I won't go into, but it was the most encouraging method to me. The love I have for simplicity just cherished marking out the small debts and no longer thinking about them each month.

I started with my medical bill then moved on to my floating credit card, and finally paid off my car. This was a total $7,000 paid off in under a year on the part time income I had back then, which was a huge win for me!

Step 6: Complete Your Security Fund

Once your debt is paid off, you'll want to bolster your security fund. Using the budget you have fine-tuned at this point, take the total absolute minimum amount you can spend each month to survive and multiply that by how many months you want in security. Then start pouring the amount you have been using for the debt snowball each month into your Security Fund until it has reached a number you're comfortable with. For me, six months worth felt like a good amount.

In late 2018/early 2019, I found myself facing the possibility of being laid off. I can't even begin to explain how much better that situation feels when you have six months worth of expenses sitting right there in the bank if you need them. I knew if I did get laid off, I would have six months to find a new job. Thankfully, I found the perfect position before it came to that, but I will not take that feeling for granted.

Step 7: Set New Goals, Invest, Follow Dreams, etc.

Once you're debt-free and have the comfort of a security fund there can be this feeling of 'what now'? You've got this wad of cash every month you've been budgeting into debt and savings so where do you put it now?

This is a good time to go back to your 'why'. How do you feel now that you are debt-free and have a security fund? Have your goals changed in this process? What would you do next to grow toward the ideal lifestyle you wrote about? Would you want to save and invest to travel, open a business, buy a home, change jobs, have kids, explore new hobbies, retire early, etc.?

Keith and I started dating in 2017 shortly before my security fund was complete. When we moved in together, experiencing two incomes was absolutely mind-blowing to me. I had been accustomed to a strict budget on my income alone for so long it was like the heavens opened up and the angels were singing. The key was to spend around the same amount and save/invest the rest. So we lived in an apartment for two years and upgraded employment several times. Obviously, we indulged in many frivolous purchases along the way but the main goal of financial freedom has remained. In September 2019 we put a down payment on our amazing home and our focus is now shifting back to investing into 2020.

I genuinely hope you have been inspired by my experience. Money can be such a pain point for us (I know I can get really worked up about it) and I sincerely hope if you're feeling that you take a step toward financial freedom, even if it's just to write out your ideal lifestyle or try a budget. Take what works for you and leave the rest.

My financial journey started around the same time I discovered minimalism so the two combined have truly changed my life. I plan to share some of the crazy shit I've done to save/make money soon so stay posted!

A collage of photos for Heather Corinne's blog: Warm cup of coffee, yarn and gold scissors.