This is a guest post from Jamie over at PaidTwice.  She has some good things to say in this article, I suggest you take some notes :)  In case you were wondering, I’m at historic Lambeau Field in Green Bay, WI.

I’ve been thinking and talking about getting out of debt for a long time. Especially about getting out of the credit card debt we’d accumulated during my husband’s layoff.  When our second child was born last October I got to a point where I realized that if we weren’t paying out so much of our take home pay to our debtload, life could be significantly better. 

We pay over $700 in minimum payments to debt each month (not including our mortgage) and ~$120 of those minimums were to our credit card. I knew that the credit card was not the only debt we needed to address.  Instead of floating along and just doing what we needed to do to get by,  I needed to take charge of our finances in a more significant way.  I knew that our income was enough for a family of four to live a modest yet comfortable lifestyle where everything wasn’t a struggle, but we weren’t doing that. I set out to take a hard look at our financial situation and find ways we could improve it.

There were 3 main steps I took in putting our financial house in order: gathering, planning, and executing.

Gathering.  I gathered up all the information I had about our current financial picture.  This included documentation of all of our debt, bank information, balances, and our retirement accounts.  I made a comprehensive list of all our assets and liabilities, including interest rates, fees associated with bank and retirement accounts, and minimum payments to debt.  It was an eye opener.  For example, the interest rate my husband’s student loan charged, I just paid the minimum every month and was done with it. The fee charged by my IRA brokerage was something I hadn’t even thought about.

Planning.  I decided on a plan to reduce debt called the debt snowball method.  It begins by paying minimum payments to all the debts but the one with the highest interest.  That highest interest debt (our credit card) would get all the extra money we could come up with every month to reduce it the fastest.  Once that was paid off, all the money I had been paying to the credit card would be applied to the next highest interest debt, and so on.  I  used a snowball calculator (link: http://www.whatsthecost.com/snowball.aspx?country=us) to determine how much we needed to be able to pay to debt reduction to get out of debt in a reasonable amount of time.  I was amazed to discover that by applying just slightly more a month to paying down debt than we had already been doing, we could eliminate not only our credit card debt, but our student loans and car loan debt as well by December 2010!  Since my student loan wasn’t due to be paid off until 2017, this was remarkable to me.  2010 really didn’t seem all that far off.  Once I had a plan to address the debt, I looked at savings and retirement.  I decided on a $1000 emergency fund. I planned an account for each child’s college education, and another for long-term savings.  I also researched retirement funds and decided to move our IRAs to Vanguard to eliminate the high annual fees I was paying.  I also brainstormed ways we could bring in some temporary extra revenue, from selling our possessions that we aren’t using to taking surveys online, and designated all of this side income would be used to snowball our debt.  Finally I started a blog so I could talk to myself about all this stuff and stay motivated.
 
Executing.  The biggest step was establishing a budget.  I had always had a bare bones budget with a list of bills and due dates and a general goal for grocery spending, but never anything formalized that accounted for every dollar of our income.  To make this plan work, I needed every dollar to work for me.  I did this using PearBudget (link: http://www.pearbudget.com), but one could use any of a number of budgeting programs out there.  I established a budget with an aggressive debt reduction plan.  I designated our current savings account as our emergency fund and set a goal of funding it to $1000.  Then I created three savings accounts at ING Direct, one for my son’s college savings, one for my daughter’s college savings, and one for long term expenses.  I made a plan of depositing $25 a month to each of these new accounts until our debt reduction was complete.  I also had a yard sale and applied the profits to paying down our credit card. I put everything that didn’t sell on Craigslist.  Every time I sold something, I paid that amount to my credit card.  I also received a new credit card that has a 0% interest for 12 months balance transfer offer so that I could pay off the credit card debt that much faster.  Finally, I started the process to transfer my IRA to Vanguard.

Overall, since I took charge of our financial situation, things have been on a steady path of improvement.  We’re still in a whole lot of debt but there is light at the end of the tunnel.  July’s budget actually ended up in a surplus, and with that we were able to get our emergency fund to $865!  Once it is $1000 all surpluses will help us pay down our debt even faster.  Just having the plan and the process of carrying it out has really improved our outlook, and establishing overall goals for our finances in general has really made a difference in how we treat money.  There are bumps in the road but we’re continually moving forward.  December 2010, here we come!