Looking out for that debt snowball! Debt destruction!
So I am not by any means a frugal fellow, but I try to cut costs where possible so that I can pay off my debt. Debt destruction baby! I didn’t really start paying attention to my networth and debt until June of 2014. This is 2 years after I was out of fellowship and I definitely did not follow The White Coat Investor’s moto of live like a resident for a few years post training. This is why I am a HENRY and not quite financially free yet. Still, starting in 2014 I started paying off debt more aggressively. At least monitoring it and improving my financial state. Debt destruction once and for all!
Identify the problem
So how am I doing it and what have I done to get here. Well first I started by identifying each debt, the amount, and the interest rates. I had 8 different loans (not including a mortgage) that varied from such things as my wife and my own student loans, a private loan, two car loans, and a loan for our mattress. Yes a loan for my mattress. Silly I agree but the car loans and the mattress were at zero percent so I who cares. Take out the cash and deal with it later. Its free money right? Plus the mattress was quite comfrotable. We also had those pesky school loans and while mine is low (3.1%) I was surprised to find out that my wife’s were at 5.4% and 6.8%- craziness! So I started to get to work.
How to pay off debt?
So I was going to pay things off but first I had to decide in what order. Do I pay the low amounts first and build a debt snowball (I think that is what Steve Ramsey calls it). Where you pay off little loans, feel good about it, and then pay off bigger and bigger loans. Or do I pay off the highest interest loans first. This would make the most sense as I would save more in interest over the long haul. I suspect the right answer is to pay off the high interest loans first, but I maintain you can do what feels right. Just make sure you do something. I decided to pay down the smallest debt first and work my way up to the school debt. I liked seeing the actual number of debts and lenders I had to deal with monthly get smaller and smaller.
So how did I come up with the cash for the debt payoff? Well I am not a truly frugal individual living like Mr. Money Mustache, but I was able to organize my expenses starting from monthly bills, groceries, restaurants, travel, etc. I then cut out unnecessary expenses such as cable, house cleaning, expensive restaurants, and other things that did not lead to increased happiness. With that money (albeit it was a small amount) I would pay off more monthly expenses. Then anytime I received a tax return or bonus from work, it went straight to the debt. It worked and we did not buy any new toys or take any big vacations at that time. We did, however, have to do In Vitro Fertilization to have our son. An unexpected and expensive surprise.
How did we do?
Within the first 6 months we paid of $13,827. Not too bad with some minor changes. By month 11 we were down from 8 to 5 debts. I paid down the 0% loans off first as they were the smallest. Once I paid our cars down we were able to decrease the collision coverage on the cars, a few hundred dollars more saved per year. (An added benefit of not having a car loan). So at that point we just had some private loans and school loans.
A month later, one other debt was gone. Within 12 months of starting we had gone from 8 debts to 4 and had paid off $44,377 total. So I guess Steve Ramsey was right about the snowball effect. The snowball continued and by month 18 we were down to just our student debts and had paid off a total of $74,150. Not too bad considering at the same time we had started to fund our backdoor Roth IRA’s for a total of $11,000 a piece. From the day I started tracking our expenses and became serious about debt payment, we increased our net worth by over $96,000 in just 18 months.
2016 and beyond
Starting in 2016 we were down to just student debt (still a substantial chunk of cash) and a mortgage. Not a bad start but we have a ways to go. Now the goal is to get rid of the student debt. Seven months later and my wife’s debt is now gone. My consolidated student loan remains and our new mortgage since buying a new home. I am glad to know we are on the right track. (A side note, I monitored the interest I paid on these debts for a year and I have spent $6,351 on interest. If this is not enough to convince you to pay off debt, then I don’t know what will.)
So how is your debt payment process going? What is your plan to pay off debt?Follow me on social media!