A week ago we were watching over the house of some friends who were traveling out of the country. They live in an apartment with plants on the balcony – a little lime bush, some cilantro, basil, mint, some roses, aloe, a cherry tomato plant, and a few others. A mini garden bringing some nature into their yard-less existence. My main assignment was to keep them watered. In the absence of a hose bib due to apartment living, I was left trekking back and forth from the kitchen sink to the balcony with their watering can. As my repeated trips wore a path down on their carpet, it got me thinking about that watering can.
When paying off your debt, your watering can is the amount of money you make. It’s filled up every week, or every two weeks, as you work and eventually take home your paycheck. The water doesn’t just sit in the can though, you pour it out as you pay for all your living expenses including fixed expenses like rent or mortgage, utilities, food, gas, and phone/internet, as well as debt payments like student loans, car payments, and credit card balances. If you’re saving money for retirement or a future expense, that needs some water too. Each of those is like one of those plants on the balcony, or like a bucket, because that’s what I happened to draw in the illustration below:
Now Baby Step 2 outlined in this post describes the debt snowball – we need to line up our debts in order of smallest balance to largest, paying minimum payments on all except the smallest – that one we throw everything else we have into. It’s like putting just a small splash of water in each bucket, except one of them, the smallest one, gets every last drop in the water can. You go back and forth to the kitchen sink and refill until it’s full, and gone from your life.
No simultaneous saving!
When we paid off our debt, we made sure to closely follow the Ramsey plan, which meant NO SAVING MONEY while paying off debt. No vacation savings, no house savings, no car savings, no retirement/401K contributions even though it meant foregoing the company match that we both had (100% up to 5% for me, and similar for her). Why not continue saving during the debt payoff period?
The more buckets you have, the longer they will take to fill! That limited water can only fill so many buckets. If you’ve prioritized ridding your life of debt, why keep it around longer by trying to save money at the same time? It’s like adding additional buckets and just distributing the water further. For us, this meant discontinuing all the various “savings” efforts we were doing while still in debt. We had 4 or 5 little buckets going, as mentioned above – vacations, house, car, 401k. We temporarily stopped all of them and focused just on the debt. This was what we understood as normal behavior – adding a bit of money each month into a big bank savings account for a future purchase paying 0.01% interest while simultaneously keeping a balance on student loans cost us from 4-6% interest, a car loan at 3%, and a series of credit cards at 15-22%. Makes total sense right?
This was one of many eye-opening moments in our personal finance journey. How can you supervise the construction of complicated buildings, or track and analyze data from power-generating facilities around the country, yet come up so short when it comes to your personal finances? No education, and no training on the subject, is surely a factor. Our hope is this blog and our experience can help others going through the same situation to get to their eye-opening moment even sooner!
And, worst case, even if that fails, just know I am an excellent tender of plants if you need a hand while on your next vacation…