At the beginning of our journey, we had $10,684.01 in credit card debt and $60,228 in loan debt. Please note that we aren’t perfect and sometimes we’re a little dumb. We racked up ~$10k more in credit card debt (after paying off the initial balance 😑) and we even bought an RV that added…wait for it… $50,000 to our loan amounts. What the F**K?!

Listen,  we got over our stupidity and are now sharing our knowledge to hopefully encourage others to work on their finances and credit health.

Borrowing too much money and being unable to pay it back is a serious problem in our country. Excessive debt affects more things than just your pockets.

Bad credit history can prevent you from getting:

• Jobs
• Certifications
• Security clearances
• Cars
• Houses
• Ahead in life…

Today’s post will be about all things credit. By the end you’ll hopefully understand what it is, how it’s scored and also how it’s reported. (Also read our Ultimate Credit Repair Guide)

But wait there’s more!

I’ll even give you tips on how to build (or repair) your credit health and how to use credit wisely.

P.S. Do me a favor:

Stop paying these “credit repair companies”! Nothing against them personally, but they’re crooks because you can do everything yourself. Trust me I’m debt free and we both increased our credit scores 100+ points in months.

Let’s begin friends!

What is Credit?

Credit is simply your ability to borrow money. The money you owe is called debt and you HAVE to pay it back. Car loans, mortgages, credit cards and student loans are all a form of “borrowing”. The goal is to limit the amount you borrow and to pay your obligations on time and early if possible to avoid paying large amounts of interest .

Your Credit Score

I absolutely love discussing credit scores because people can see how their poor money habits translate to a rating. Of course you could just check your bank account because it’s probably empty if you have poor money habits (ha!). You can check you credit score easily and for FREE by creating an account with Credit Sesame!

All joking aside, credit scores are a numerical rating that show lenders how reliable you are at repaying your debt(s).

Here is a visual of the credit score range:

Since there are multiple credit scoring models, generally, a good credit score is anything above 700. However, a good credit score varies by lender and credit bureau.

Speaking of credit bureaus, the big 3 are: Equifax, Transunion and Experian. Credit bureaus collect information relevant to a person’s credit habits and history, and they use this information to assign a credit score.

Here is a visual of what your credit score is made up of:

How to Improve Your Credit Score

To build a good credit score, you’ll need to:

• Pay on or before the due date
• NEVER skip a payment
• Keep your credit balances low, ideally 30% or less
• Limit applying for and opening new credit accounts (Disclaimer: you should NEVER open new credit accounts while you’re in the process of cleaning up a prior mess)

Read our detailed post on How to Increase Your Credit Score On Your Own!

If you’ve struggled with maintaining your credit cards or getting approved for one in the past, try a secured credit card with your local bank. With a secured credit card, your maximum credit limit will be determined by the amount of the security deposit you provide, your income, and creditworthiness.

Have a good credit score? Congratulations, you’ll have lower interest rates, increased borrowing options, and you’ll save money (which is the best part)! 🙌🏽

Have a bad credit score? Unfortunately, you’ll tend to have higher interest rates, less or even no options to choose from and you’ll lose money on all of the fees and interest you’re giving away. 😭

Your Credit Report

A credit report is a document that describes an individual’s history of borrowing money and repaying what they owe.

When was the last time you looked at your credit report? Has it been a month, year, or never? You should review it at least once a year to check for errors or evidence of fraud and to verify your creditworthiness (we check ours monthly).

How to easily Obtain your Credit Report

The big 3 credit bureaus offer a free report online, go to www.annualcreditreport.com and follow the directions. Be wary of other websites that advertise free credit reports! The site above is a proven source for obtaining your official credit reports from Equifax, Experian and Transunion.

To view and track your credit scores throughout the year I suggest the following:

1. Check your scores for FREE with Credit Sesame
2. Your Bank (i.e. Wells Fargo)
3. Your credit card apps (American Express, Discover, Visa, etc)

Just keep in mind that the scores shown on 2nd party sites are estimates and can be off by 10 to 30 points in either direction.

What’s Next?

We’re working on a follow-up to this post that discusses how to read your credit report and how to correct any mistakes that you may find. We’re also going to be discussing credit cards and loans in more detail. You’ll be able to find that post here.

In the meantime, if you’d like to know more about debt payoff methods, check out this post.

Listen I am not encouraging people to borrow money, but if you ARE going to borrow you should at least have all of the information you need. I believe in using credit responsibly, I get back $50 to $100 a month by buying things with my CC instead of cash. However, there was a time that I used my CC because I simply did not have any cash to my name and that is definitely not the right way to manage things.

I hope you enjoyed this post as much as I did writing it.  

Until next time, $tay wealthy my friends <3

— Dannie

If you are anything like us then you probably only want to know what is the best way to pay off debt. In part 3 of our series, we’ll be covering two of the most well-known methods: the Debt Avalanche and the Debt Snowball. We’re also including a secret 3rd method that doesn’t get mentioned very often. (Following these methods helped us become debt free!)

Avalanche Method

In the debt avalanche method, you pay off debts in order of highest interest rate to lowest interest rate, regardless of the balance.

This method is all about the math. In the long run, it can save you the most money by paying off the debts with the highest interest rates first.

During this process, you make the minimum payment on each of your debts except for the debt with the highest interest rate. Put all of your extra money towards that specific debt. Once that debt is gone, you move to the next highest interest rate and repeat the process until everything is paid off.

Do you only have large debts ($1,000+)? With the avalanche approach, you’ll have to wait longer to get the emotional pat on the back that you get after paying off a debt.

Why I love this method: I love saving money…

THE END.

In all seriousness, the way my brains works, I don’t actually care if I spend months chipping away at a large debt with huge interest. Are you also very emotional about money? If so, this method may not be best for you.

Dave Ramsey doesn’t like this method either because he doesn’t believe it is motivating enough to push you through to the finale!

Let’s use Amy & Eric as an example. They owe a combined $41,000 in debt to various creditors. They have decided that they can comfortably afford to put $1,500 towards their debt payments each month.

*Amy & Eric’s debts reorganized according to the debt avalanche method:

Snowball Method

In the debt snowball method, you attack your debts in order of smallest balance to largest balance, regardless of interest.

When you use this method, you make the minimum payment on each of your debts except the debt with the lowest balance. Put all of your extra money towards that debt until it’s paid off. Then, rinse and repeat the process until all of your debts disappear!

This method is more about the psychology of paying off your debts rather than the actual math. Each time you pay off a debt, you get an emotional boost that motivates you to continue the process.

Instead of looking at your debt as one large sum, you see it as a combination of various small amounts. This makes the idea of debt freedom seem more attainable. It ultimately causes your mindset to shift from “I can’t win” to “I can definitely do this”.

*Amy & Eric’s debts reorganized according to the debt snowball method:

Our Secret 3rd Method

Credit cards make up the bulk of the debt in most debt payoff plans. If you find yourself in this category, there is another method you can consider:

Arranging your credit cards in order of highest credit utilization.

Credit utilization is the percentage of your credit that is being used at any given time. You can calculate it by dividing your current balance by your total credit limit ($2,750 bal/$5,000 limit = 55% utilization).

You should strive to keep your credit utilization below 30%. Decreasing your credit utilization has a serious positive impact on your overall credit score because utilization is one of the main factors used to calculate it.

Using this third method will also help you stay motivated because your credit score will begin to increase very quickly. Our scores shot up from the low 600s to well over 750 by taking this approach!

So, what is the best way to pay off debt?

In our experience, we used a combination of all of these methods. We figured out that the best method to use is whichever method works best for your particular situation. At the end of the day, you need to do what works best for you and will keep you motivated throughout the process. Sticking to your financial plan is ultimately most important and any of these methods will help you achieve this goal!

***

In the final part of our series we will be talking about Understanding Your Credit Scores. You’ll learn what your credit score is, what is used to calculate it, and what affects it the most.

— Dannie

INFOGRAPHIC

We created the infographic below so that you can share it with friends or save it to use as a quick reference for yourself!

Here are 5 simple steps to help you create a monthly budget in less than 20 minutes.

In Part 1 of this series, we talked to you about Assessing Your Financial Situation. Doing everything that we mentioned in that post will allow you to complete steps 1 – 3 in the budget creation process.

In case you haven’t read Part 1 yet, you’ll need to:

Download Our Budget & Debt Tracking Spreadsheet!

1. Write down your TOTAL monthly income

2. Figure out what your monthly expenses are (Fixed, Variable, and Debts)

3. Calculate the difference between your income and expenses

The number that you get in step 3 will tell you what your spending habits currently are. A negative number means that you overspend and a positive number indicates that you should have extra money left over at the end of the month.

When you create a monthly budget (and actually follow it) you can dramatically increase the positive number that should be left when the month is over. You can do this easily by adjusting what you decide to spend your money on each month.

4. Revise Your Budget Items

After completing Step #2, you’ll be able to see exactly where your money is going each month. At this time, you’ll have to go through each section in your budget tracker and decide what is truly necessary.

If it isn’t essential, it needs to go!

Fixed Expenses

Look at what you have in your “Bills & Utilities” category. This section might be harder to revise because most of the items are probably essential for your everyday living. But, there might be some areas where you can cut out or reduce certain expenses. Read: How to Determine Budget Percentages

As a rule of thumb, housing costs (rent or mortgage) should be somewhere between 20 – 35% of your monthly income. If your costs are much higher than that, they can put a serious strain on your budget. Consider whether or not you can refinance your mortgage, renegotiate your rent or relocate altogether.

Your utility expenses (gas, electric, water, trash, telephone) should be in the 4 – 7% range. We cut a lot of unnecessary things out of this part of our own budget in this section. We canceled our cable subscription, lowered our internet speed, changed phone providers, canceled magazine subscriptions & various other things.

The lesson we learned was:

Variable Expenses

In all honesty, the amount that you typically spend on variable expenses is where you’ll most likely be able to cover the most ground.

This is due to the fact that YOU directly control the amounts that will be spent on the items in this category.

For instance:

If you currently spend a significant amount on groceries/eating out, make your budget a realistic amount and spend ONLY that. And by realistic, I mean don’t try to say that you’re budgeting $20 to feed your entire family for the month.

Rules of thumb: Food costs (at home and away) should be 15 – 30% of your take-home pay. Transportation costs (car payment, gas, insurance, repairs, or bus fare) should fall somewhere between 6 – 30%. Entertainment costs should be 2 – 6%.

Savings

Our financial journey started shortly after my mother passed away and we couldn’t afford plane tickets for her funeral. Statistically, 6 out of 10 people can’t afford a $500 unexpected expense and we were one of those 6 people. To help you avoid a similar situation, you should include saving for an emergency fund in your monthly budget.

Initially, save at least $1,000 and then increase that amount based on your particular circumstances. Do this BEFORE you start making extra payments on your debt!

A post shared by Dj & Dannie – Debt Free Couple (@penniestowealth) on Mar 21, 2018 at 6:28am PDT

Debt Repayment

A large part of your focus will go towards paying off any outstanding debts that you have. There are various strategies for paying off debt (like the ones we’ll cover in Part 3), but first, you have to make sure that you’re at least covering the minimum monthly payments for each debt before you start allocating extra money to pay them off faster.

Don’t rob Peter just to pay Paul.

5. Track Your Expenses Throughout the Month

During this process, keep in mind the fact that your budget is not the boss. YOU are telling your money where you want it to go, you’re just using the budget to give the directions.

At any time, you can make adjustments if you miscalculated what you need or if you simply budgeted too much in a category.

How will you know when your budget isn’t adding up?

You’ll have to keep track of what you’re spending throughout the month to see how your actual spending compares to what you’ve budgeted. We suggest using apps like Goodbudget or EveryDollar and inputting your actual totals into the spreadsheet that you downloaded from us at the end of each month.

Once this is done, you can compare the difference. If your end of month totals are higher than the budget then you spent too much. Either you were just being reckless with your spending or you misjudged what you actually needed to spend.

Your budget should be an on-going process. Don’t think that you can just create it and leave it the same forever.

Sit down & review your budget EVERY month. Put it on your calendar and set aside time for this because it is extremely important for your financial journey.

Keep your budget up to date and make adjustments whenever your income or expenses change.

***

With your newly created budget, you should be able to start having money leftover at the end of the month instead of realizing that you have money missing. This will put you in the perfect position to start aiming for your financial goals! Following a budget was a major part that helped us pay off $130,912 worth of debt and become debt free.

In Part 3 of our series we are going to cover “The Best Way To Pay Off Debt”. We’ll be talking about the difference between two of the most popular debt payoff methods.

Stay Wealthy!

— DJ

If you’ve read our story, then you know we started our financial journey shortly after Dj’s mother passed away and we realized we didn’t have enough money to get to the funeral. No one ever explained to us how important assessing your financial situation is.

This would have been a helpful thing for us to learn before getting married. We also didn’t have any good financial role models, so we figured everything out along the way. Now, we are finally at a point where we can share what we’ve learned! 🙂

Part 1 of this series will be all about assessing your financial situation. You can’t make a plan of action for your future if you don’t know where you currently are. This process will work for couples, singles, young and old!

We are going to make this extremely easy for you and just give you our budget tracker for free. All you have to do is download it and input your information into it.

Get Your FREE Budget & Debt Tracking Spreadsheet!

Now, let’s get started!

What you’ll need:

1.  Our Budget & Debt Tracker (I know you’re probably reading this on your phone but we’re about to do some major work)
2.  Login information for all of your bills and debts
3.  Pay stubs (if your pay varies, use a 6 month average of your pay)
4.  Partner (if applicable)
5.  Your favorite “Get to Work” playlist!

Determine Your Total Income

You’ll want to use your after-tax pay. This is where your pay stubs will come into play. Don’t forget to include ALL of your income from side gigs, social security, child support, allowances, etc.

In the income section of the tracker, put the monthly after-tax incomes for your household in the column labeled “budget“.

Identify All of Your Fixed Expenses

Fixed expenses are things that do not change from month to month. These expenses include (but are not limited to): housing costs, utilities, insurance, etc.

Remember, your billing statements will provide you with all of the information you need.

Input all of your bills & utilities under the “budget” section for that category.

The example below shows some information in parentheses for each item which is the (date-method of payment). Since all of our bills are on autopay it helps to know where and when the money will come out. You can do what makes your life easier.

Identify All of Your Variable Expenses

Variable expenses vary from month to month. These involve costs that you typically have direct control over such as food, gas, clothing, entertainment, etc.

If you use your debit or credit card for most of these expenses you can review your statements to determine a monthly average. (Some banks make this step easy and will actually allow you to generate an “expense report” online for FREE!)

For this step, it’s important for you to be honest and write the actual amount you normally spend instead of what you “think” you spend or “hope” to spend in the future.

Input all of your Variable Expenses under the “budget” section for that category.

Identify All of Your Debts

Although I believe that debts are a fixed expense (as in you should at least pay the required minimum each month) I know that most people feel these expenses are negotiable. So, for the time being, let’s keep them separate.

Student loans, credit cards, auto loans, personal loans, and taxes are all debts so be sure to identify the initial/current balance, interest rate (ex. 18%), monthly/minimum payment and payment date. These figures will come in handy when you’re creating your debt payoff plan.

Fill in all of  the Debt Payments sections shown below. I’d recommend that you put the debts in order of the lowest to highest balance.

Calculate the Difference Between Your Income & Expenses

If you’ve input everything in our spreadsheet, it will tell you how much you have leftover at the top of the page. As you can see in our example below, we have $1,189.72 leftover to throw to debt or savings.

Don’t worry, it’s perfectly okay if you’re currently overspending. We’ll work on creating and maintaining a monthly budget in Part 2 that allows you to win and increase your leftover money.

***

That’s it!!!

Not so bad, right?

If this is the first chance you’ve had to spend some time assessing your financial situation, you may be feeling a little like I was – overwhelmed.

But guess what? You just took the first step to getting on the right path to healthy money management habits and debt freedom! So, give yourself a pat on the back!!

Get ready, because your next steps start in Part 2: How to Create a Monthly Budget!

— Dannie

Were you surprised by how much (or how little) money you should have left at the end of the month? Let us know in the comments below and on social media. We’d love to hear from you!