You might be wondering why carrying a debt load is such a big issue.  After all, it’s normal in our society to owe money on student loans, a car or two, a house, and other purchases.  But, there are two really important reasons why you should pay off all of your debt as fast as you can manage.

Reason # 1

You need to be able to support your family in case of emergency.  Have you ever thought about what you would do if your family suddenly had to endure a medical crisis, a job loss, or another emergency?  How would you make all of your monthly debt payments?  Would you have to declare bankruptcy?  It was scary for us to answer that question.  We definitely wouldn’t be able to make our monthly student loan / credit card payment if we had an emergency situation.  We had to take an honest look at the financial position we were in and make some changes, fast.

Maybe you think reason # 1 doesn’t apply to you.  Let’s say you have enough in savings to cover your monthly debt payments for a while in case of emergency.  However, reason # 2 applies to everyone in debt.

Reason # 2

You want to retire someday, or have a college fund for your children, or save for another cause.  Have you ever thought about how much you could save if you invested your total debt payment each month instead of throwing your money away?  I know that if my husband and I invested our total monthly student loan payment amount for 30 years at 12% interest, we’d be doing quite well!  There is an article entitled, “Top 10 Most Ridiculous Payments” on Dave Ramsey’s website.  In it, people in Dave’s online “My Total Money Makeover” community listed their highest debt payment.  Dave’s staff then informed them how much money they would have in 30 years if they invested that money at a 12% interest rate.  One person and her family were paying $1,150 monthly for a leased car that would have added up to $4,059,402 in 30 years if invested!  Check out the article here: http://www.daveramsey.com/article/top-10-most-ridiculous-payments/lifeandmoney_debt/. 

How much money are you throwing away each month? 

*Go to www.daveramsey.com for financial help.  I highly recommend reading Dave’s book, The Total Money Makeover.

I’ve often written about how my husband and I are using the envelope system for managing our money.  Some readers have probably heard of this system before, whereas others may not have any idea what it is about.  People who use this money management strategy pay for almost everything in cash.  The only purchases that are not paid for in cash are bill or debt payments set up on automatic withdrawal or paid online.  The money for clothing, toiletries, cosmetics, household expenses, pet expenses, groceries, gas, etc. is withdrawn from the bank each pay period and divided up into separate envelopes – one for each category.  When the money from an envelope (such as household expenses) is gone, no more purchases can be made from that category during the month (or current pay period).  When I first heard of this system, I thought it was simplistic and for people who didn’t know how to manage their money.  I now realize I didn’t know how to manage my money!  Using the envelope system has helped keep my husband and I from overspending, and now we are well on our way to getting out of debt.

Before we started using the envelope system, we weren’t budgeting properly and ended up spending way too much money on certain categories every month at the expense of the other categories.  For example, we were spending too much money on going out to eat and then would complain that we didn’t have enough groceries or couldn’t buy light bulbs for the house, etc.  We have decided to cut out eating at restaurants (unless we take the money out of our "date" envelope or save money for it in our "fun with friends" envelope) in order to save money and pay off debt.  If your family loves trips to a restaurant and completely cutting this from your budget is unrealistic for you (there is no point in cutting it out and then spending the money anyway), then put a set amount (say $60) in your restaurant envelope for each month.  Once your restaurant envelope is empty, you cannot go out to eat until the next month when you have restaurant money again.  I love the envelope system.  I can actually watch our emergency fund grow and also know how much we’ve spent on hair, or groceries, or the dog in a given month.  Using this system has really helped us stretch the money that we do have.  Every time we are paid from work, we fill out a paycheck allocation spreadsheet.  We type in our tithe and bill payments first, and then decide which categories to spend the rest of our money in until there is no more money left.  I then write down how much money we will take out of the bank for each category, and what we would like for change for that category. 

So, for example:

Groceries: $120 (6 twenties)

Emergency Fund: $161.63 (3 fifties, 1 ten, 1 loonie, 2 quarters, 1 dime, 3 pennies)

I then write the bill and coin amounts we would like to withdraw from the bank onto a “bank withdrawal sheet” to make it easy for the teller.  After withdrawing the money from the bank, I put all of the amounts into their proper envelope.  Below is a blank copy of the bank withdrawal sheet as an example.

Then, every time we are running errands and need to spend money from a certain budget category, we simply take the envelope we need with us.  We then put the receipt in the proper envelope to track expenses.

Voila!  That is the envelope system for cash management.  It is easy to use, and it will help you whip your finances into shape. 

Do you have a money management strategy? 

For financial help, go to www.daveramsey.com

If you’ve ever listened to Dave Ramsey’s radio show or read one of his books, you have heard him mention the term, “stupid tax.”  He coined this term to describe the stupid things people do with money.  If you’ve ever gotten a $30 parking ticket while buying a $5 coffee, or had the interest go up on your credit card because you were late on a couple payments, or loaned money to a friend who never paid you back, then you have paid stupid tax.  Andy and I signed up for a huge stupid tax one year ago, and our very last payment for it is coming out of yesterday’s paycheck.

JJ Photography - Trust me, you don't want to pay this guy!

We are so excited that we would throw a party to celebrate if it wouldn’t break our budget!  Our stupid tax story started when Andy entered his name in a draw for a “free” 14 day gym membership.  Of course, he received a phone call shortly thereafter to tell him he’d won and to come in to find out more (I think everybody else received the exact same phone call, because we found out later, this gym offers their 14 day trial membership to anyone).  He went in to check things out and fell in love with the gym.  He brought me in to see it, and before we knew it, we were sitting down with a rep. to sign contracts for a gym membership.  The problem was that this gym does not publish any of their membership prices and information.  That should have been warning light one, and it concerned me, but we signed up anyway.  And they were running a promotion at the time where you would get a deal on 3 personal training sessions a week with your gym membership and you would compete against other people who were trying to lose weight to possibly win a trip for two to Mexico.  Andy and I wanted to lose weight at the time.  We had gained weight after my first miscarriage.  We both had sort of snapped afterwards and stopped any sort of physical activity.  So, here we were, financing a two-year gym membership and 3 months of personal training sessions that we would pay for over the course of a year.  We walked out of there not knowing what were signing or how much we would really be paying.  (Yes, we know this was dumb, that’s why it’s called stupid tax!!!) 

We soon figured out we were paying $275.08 a month to this gym!  Yikes!  We joked that we could have leased a car for that price!  And there were literally weeks we almost didn’t have enough food to eat and one time I ran out of gas while driving the car because we could barely afford our gym payment plus all of our student loan payments.  Every experience we had with the gym was awful, and they also tried to take extra money out of our account on more than one occasion.  We finally said we wanted to cancel our membership, and the woman in charge of membership basically laughed in our faces and said there was no way we could cancel.  We were very persistent until we finally had a meeting scheduled with the gym’s owner, who decided we could cancel our membership.  Our membership payments ended in June, but our personal training payments continued until now.  However, a couple weeks ago, the gym withdrew over $120 from our account for a membership yearly fee that we did not owe them.  After arguing with them again, they agreed to refund it.  It has been a nightmare for us, but we’re glad it happened over something small like a gym membership rather than a car or a house.  What a relief it is to have this stupid tax gone!!! 

Through our experience, we learned some very important lessons:

1.  Debt is bad – stay away from debt at all costs.  If you have to finance something, it means you can't afford it.  If you really want to buy it, save up for it in cash.

2.  Never EVER sign a document you don’t understand.  If the other person has to sit there for hours until you understand what you are signing, so be it. 

*There are some really interesting stupid tax stories on Dave Ramsey’s website.  Check them out here:  http://www.daveramsey.com/articles/article-list/category/lifeandmoney_stupidtax_user_generated/

Do you have a stupid tax story?  If so, what did you learn from your financial mistake?