Debt can be scary, overwhelming, and suffocating. When you have higher amounts of debt, you can start to feel helpless, like you can never get ahead or claw your way out. My husband and I definitely felt this way a couple of years ago. Although we do not and have never had credit card debt, we both had car payments, student loan debt (which is a whole other beast in itself-but I’ll talk about that in a future blog!), and now a mortgage payment. It seemed like no matter what we did, we were never going to get those high loan payments paid off. However, in July 2014, we sat down, developed a plan, and from July 2014-July 2016 (just two years), we paid off $50,000 of debt. Even now I sometimes look back and cannot believe we were able to achieve that. Keep in mind, we were both still in school full time working on our Master’s Degrees. Although we were working full time as well, they were certainly not salaries to get excited about. There were moments of difficulty, but overall it is actually a very simple plan to follow. Below are the five steps we followed to work towards that ultimate goal of financial freedom.
1. Know Your Income and Expenses
This is probably the single-most important factor. It may sound simple, but many people do not fully know how much they make every month and how much they spend. Keep a monthly budget of what your income is (what you make), and what your expenses are (what you spend). It was very helpful for us to write down a list of all of our bills (i.e.: rent/mortgage, car payment, cell phone, gas, groceries, car insurance, dry cleaning bills, credit card payment, student loan payment, etc.) and create a budget in Excel so we can keep track every month. Make sure your expenses are lower than your income. If they are not, look to see what you can cut back on. Saving is key! It actually was easier for us to open three accounts: two checking accounts and one savings account. Our primary checking account is where our paychecks get deposited every month. We have a separate checking account that we call our “bill pay account;” every month we transfer our money for bills into the bill pay account so that we can accurately see how much we will have left over each month. This is a great way to make sure you don’t spend more than you make.
2. Delayed Gratification
Delayed gratification is a huge issue in our society. We live in a world where we want things instantly (i.e. the newest piece of technology, a response to a text right away). However, engaging in delayed gratification (waiting to get what you want until it is the right time/you can afford it) is one of the biggest ways we were successful in paying off so much debt so quickly. My husband and I have a certain budget for spending money for each of us and date night money for the month. Our spending money covers our wants (i.e. a new outfit, going out to eat with friends, etc), not our needs. Once the spending money is gone, so are the wants for that month. It can be challenging and a lifestyle change, but it really taught us to save our money for what we really want. The amount of your spending money should vary based on your budget, but we tried to keep it around $100 each (I know that seems low, but you can still have a lot of fun in a month for $100, and again, I want that delayed gratification of having our loans paid off so much more quickly). Short term, it is tough, but when I think about the fact that I saved over $10,000 in interest because we paid off our cars more quickly, it is totally worth it.
3. Start out Small
If you have a number of loans or credit card debt, it can be overwhelming and confusing as to where to start or which one to pay off first. First and foremost, always pay more than the minimum payment on your loans. Even if it is only $5 more, this will help you avoid higher interest costs. When trying to figure out which loan to pay off first, start out small. Pick your loan with the lowest balance and pay that off first. Then, roll that payment over to the next loan. For example, let’s say you have a credit card with a $2,000 balance, a car with a $12,000 balance, and $20,000 of student loan debt. You’ve figured out that after you pay your bills, set aside your spending money, and put a little money in savings every month, you have an extra $500 you can put towards bills. Pay the credit card bill first because it is the smallest. Let’s say your minimum credit card payment is $25 a month. You will now pay $525 a month on your credit card. After four months, your credit card is paid off (compared to the 7+years it would have taken you with a $25 payment, this is incredible!). Now, you can roll that $525 over to your car payment because you no longer have that credit card bill. Let’s say your minimum car payment was $275. Now that the credit card is paid off, you can pay $800 on your car, and so on. Pretty soon, you’ll realize your loans are getting paid off so much more quickly and you’re saving so much money on interest! #adulting!
4. Build Your Credit
Paying off debt is really important, and so is making sure you have great credit. Why is credit important? It shows people how responsible you are with your money and whether you will be a reliable borrower. Do you want to buy a house, rent an apartment, or buy a car? Those are just a few things you won’t be able to do with bad credit. Paying off your debts will inherently boost your credit because you’re decreasing your debts. However, there are other things you can do to make sure your credit increases. First, do not have too many revolving lines of credit (i.e. credit cards). Too many lines of credit (especially if they all have high balances) can hurt your credit. Secondly, build your credit by using your main credit card every month and paying the balance off every month. My husband and I use our credit card for necessities (i.e. gas and groceries) because those are things we know we need every month and have budgeted for. Charging that amount, paying it off every month, and not paying interest on it shows you can pay your debts every month, and soon you’ll see that credit score increasing. Our credit card also has cash back rewards, so because we use it every month for things we need and do not have to pay the credit card company interest as a result of paying it off every month, we actually MAKE money from our credit card. **An important side note: if you have a Bank of America credit card, you can get your FICO credit score free every month by logging into your Bank of America online account. This is a great feature and a great way to monitor your credit for free! Be sure to check the perks of your credit card!
5. Save for a Rainy Day
Last but not least, make sure you budget to put money in a savings account every month. It can be tempting to want to put this money on your loans, but it is important to have back up funds. Life can change in an instant, and the last thing you want to be is unprepared. Even if you are saving $20 a month, that is much better than setting aside nothing. This is also where delayed gratification comes in. Do you really want that $500 purse now, or do you want to be struggling in your 50’s or 60’s because you did not save money for retirement?
Debt is a nasty creature that can seemingly overwhelm us and take over our lives. However, it IS possible to manage it and get on the road to financial freedom. It took us 2 years to get my car, my husband’s car, and a good chunk of our student loans paid off. We still have some student loans to finish paying off, but it feels good to have come this far and know we are that much closer to financial freedom. I know you can get to that point too!
Until the next journey,