If you’ve been here before, you know that during this journey, we were living in Israel — a country with a high cost of living and relatively low salaries. Just about everyone in Israel lives in “minus” — aka debt.
Our minus, including checking account overdraft, credit card debts, and a personal loan to my parents, had grown to the staggering sum of $30,000.
We finally got real about our financial irresponsibility in January, and by March, we had reeled in our spending, increased our income and managed to put aside $1,000 into a baby emergency fund. Now it was time to really roll up our sleeves and knock out that $30K in debt.
To do this, we had been following the Dave Ramsey plan. Now, you need to know that we are an Orthodox Jewish family, and Dave is an evangelical Christian. He sees his teaching about personal finance as part of his “ministry”, so it probably goes without saying that not everything Dave teaches fits into our family’s belief system. His common sense approach to financial freedom, however, made so much sense to us, that we decided to give it a try.
According to Dave Ramsey’s Total Money Make-Over, once you are current on all your bills and you have a $1,000 baby emergency fund (Baby Step 1), you move on to Baby Step 2: Paying off all your debt except for your mortgage. You are supposed to do this by using his “debt snowball system”, which works like this:
You list all of your debts on a piece of paper — or an Excel chart, if you’re geeky like me — from the smallest to the largest balance due, without regard to interest rate. Then you pay only the minimums on all the debts except for the smallest one, while you attack that little one with everything you have. As soon as that debt is paid off, you cross it off the list (this is amazingly gratifying) and apply the amount you had been paying on it to the next smallest one. You keep working your way down the list, building up momentum as you go — hence the term ‘snowball’.
In case you are wondering, the reason Dave tells you to pay your smallest debt first is because he wants you to get that taste of success as quickly as possible. Yes, mathematically, it may save you a few pennies to pay off the debts with the highest interest rate first. But as Dave always says (and I’m paraphrasing here), ‘This isn’t about your math skills. This is about your behavior. If it was solely about math, you wouldn’t be in this position in the first place!’
Just like Dave told us to do, we listed out our debts and started attacking that littlest one with a vengeance. After just one month of “working” our snowball, we had paid off the first debt (a few hundred shekel on a credit card) and were half way done with the second one (a few thousand shekel on another credit card). We were pumped.up! Yes, the austerity of the budget was difficult, but we were so thrilled with our traction, that we keep moving forward.
Around this same time, I discovered that I had a CD (certificate of deposit) from my first job in Israel, which was coming due. Called a “keren hishtalmut”, this account had funds that I had contributed, along with a match from my employer. After nearly seven years of earning interest, the fund was now worth almost $5,000! The fact that I was totally unaware that I even had this account speaks volumes to our total financial disorganization pre-DR.
As for what to do with this account, we turned to Dave Ramsey. He recommends that you to cash in any savings accounts and/or non-retirement mutual funds in order to pay down debt … as long as you are totally committed to NEVER EVER EVER going into debt again. We knew we were committed, but we didn’t want to “take the easy way out”. We wanted — needed, even! — to sweat a little bit more on this journey.
So we decided to keep working the debt snowball by cutting out expenses and increasing our income, while I made arrangements to have those funds released in a few months — enough time to let us really work up a good paying-off-debt sweat!
To further complicate our lives, we had decided to move back to the U.S. and were planning to leave in July. So, while we were working furiously to get out of debt, we were also trying to figure out all the logistics of an intercontinental move — which, by the way, we had committed to cash flowing since incurring new debt was no longer an option for us.
The weeks cruised along and so did our debt snowball. I loved calling the credit card companies to make extra payments, which I did as soon as the money hit our bank account. 500 NIS (~$125) here, 1000 NIS there. The people on the other end of the line were always so incredulous, “But you just paid us last week? You know, you don’t have to make another payment until next month, right?”
Over the first three months of our debt snowball, we paid off approximately $5000. We were averaging well over $1,300 a month in debt repayment — definitely enough sweat equity for us to feel comfortably cashing in that CD.
Once the $5,000 hit our checking account at the end of May, we wiped out two more debts on the same day. Now all that remained in our debt snowball was our checking account overdraft (roughly $3,000) and the $16,500 we owed my parents for our van. (See how that loan had foolishly come to be in part 1 of our financial saga.)
With our move-to-America date rapidly approaching, we started selling off electronics and big furniture items we didn’t want to move. The cost of transcontinental shipping was so high, that it didn’t pay to ship anything that would be cheaper to replace States-side, unless it had sentimental value. As we sold televisions and microwaves, futons and rocking chairs, I used some of the money to pay down our remaining debt and squirreled away the rest so we could pay cash to our movers.
By July 1st, 2008, we had paid off all our debt, except for our van, which was up for sale; and we had set aside a couple thousand dollars to cash-flow the cost of our move.
Two days before we left Israel, we finally found a buyer for our Kia and he agreed to our ‘absolute lowest we can go’ price of $16,000. We could finally clear that loan to my parents!
If you had told me six months earlier that this would be possible — that we would be totally debt free (other than our mortgage), I would have whipped out a calculator to prove you wrong. To this day, I’m still not even sure how we did it – because the numbers just don’t seem to make sense. We were making so little and paying off so much.
Yes, the biggest chunk of that came from selling our van and cashing in a savings account, but we had worked really, really hard to cover the rest of our debt and cash flow our several thousand dollar transcontinental move. I was — and still am — so proud of what we accomplished!
…But I also knew we were only just beginning our journey. Dave Ramsey’s plan has 7 steps to financial freedom, and we’d only worked the first two.
Stay tuned next week when I tell you about Baby Step 3 — fully funding an emergency fund with three to six months of expenses. Here’s a little teaser for you: It took us twice as long and a couple of major life changes along the way to finish Step 3 as it did Step 2.
This series is now completed. You can read all of it here: