Here's where my wife and I were when we started.
Debts:
Car loan No. 1 - Balance owed: $18,879 ($464 monthly payment)
Car loan No. 2 - Balance owed: $8,997 ($306 monthly payment)
Student loan - Balance owed: $6,406 ($108 monthly payment)
Property loan - Balance owed: $12,156 ($406 monthly payment)
Total: $46,438 ($1,284 monthly payment)
Luckily, we have been disciplined enough during our marriage to avoid the high-interest credit card debt. If you are starting with high-interest credit card debt, then eliminating that debt will be your priority because the interest rate works against you. Here are the steps we followed:
Evaluate the vehicles you drive and consider alternatives.
In my case, car loan No. 1 was for a nice truck I was driving at the time. I loved it, and I loved everything about owning a truck. However, my primary use for the truck was for commuting to work. I rarely used it for what trucks are made for. I determined that for the one time per year that I needed a truck I could simply rent one -- and save thousands of dollars. Hence, I traded in my late-model Chevy Silverado Crew Cab for a used late-model Honda Accord. The car cost about $5,000 less than what I owed on the truck, so I got a smaller loan on the car. On trade-in, my truck had about $2,500 in negative equity, but it was partly offset with sales tax credits. At the end of the day, I swapped my $19,000 truck loan for a $15,000 car loan, saving $4,000. The Honda also saved me about $100 a month in gas. Because the monthly payment on the new car loan was about $225 less than my truck payment, I was able to put a total of $325 toward my other debts.
Raid the savings accounts, but leave some emergency cash.
When I began this process, I had $10,000 in savings. (These were nonretirement savings -- leave retirement savings alone.) I took $9,000 (leaving $1,000 in savings for emergencies) and immediately paid off car loan No. 2. I don't know why I didn't do this sooner because the interest I was earning on my savings was not anywhere near the $306 monthly payment on the car. This should have been a no-brainer.
Debts:
Car loan No. 1 - Balance owed: $18,879 ($464 monthly payment)
Car loan No. 2 - Balance owed: $8,997 ($306 monthly payment)
Student loan - Balance owed: $6,406 ($108 monthly payment)
Property loan - Balance owed: $12,156 ($406 monthly payment)
Total: $46,438 ($1,284 monthly payment)
Luckily, we have been disciplined enough during our marriage to avoid the high-interest credit card debt. If you are starting with high-interest credit card debt, then eliminating that debt will be your priority because the interest rate works against you. Here are the steps we followed:
Evaluate the vehicles you drive and consider alternatives.
In my case, car loan No. 1 was for a nice truck I was driving at the time. I loved it, and I loved everything about owning a truck. However, my primary use for the truck was for commuting to work. I rarely used it for what trucks are made for. I determined that for the one time per year that I needed a truck I could simply rent one -- and save thousands of dollars. Hence, I traded in my late-model Chevy Silverado Crew Cab for a used late-model Honda Accord. The car cost about $5,000 less than what I owed on the truck, so I got a smaller loan on the car. On trade-in, my truck had about $2,500 in negative equity, but it was partly offset with sales tax credits. At the end of the day, I swapped my $19,000 truck loan for a $15,000 car loan, saving $4,000. The Honda also saved me about $100 a month in gas. Because the monthly payment on the new car loan was about $225 less than my truck payment, I was able to put a total of $325 toward my other debts.
Raid the savings accounts, but leave some emergency cash.
When I began this process, I had $10,000 in savings. (These were nonretirement savings -- leave retirement savings alone.) I took $9,000 (leaving $1,000 in savings for emergencies) and immediately paid off car loan No. 2. I don't know why I didn't do this sooner because the interest I was earning on my savings was not anywhere near the $306 monthly payment on the car. This should have been a no-brainer.
Free up some additional monthly cash.
There are many areas you can examine to come up with additional monthly cash. First, I noted that for a few consecutive years, I had been receiving a tax refund of around $3,000 (which is about $250 a month), so I modified my employer's W-4 tax form to reduce the federal income tax withholding on my paychecks and stop paying that extra $250/month to the government. Additionally, I temporarily reduced my 401(k) contributions during my get-out-of-debt campaign. (Ten months later, I'm debt-free and can catch up on my contributions.) Reducing my withholding tax and 401(k) contributions netted me $450 a month, which went straight to debt payments. My wife and I also found several areas in our budget where we could trim $10 here and $20 there -- or an additional $100 per month.
Evaluate other sources of income.
I found a class I could teach at a local college. The time commitment was about six hours a week. In 10 months, I earned $6,000, most of which I applied to pay off debt.
Prioritize debts and begin payment stacking.
When I paid off car loan No. 2, it eliminated a monthly payment of $306. I took that $306 in subsequent months and applied it to other loans. This is called "payment stacking." When I free up cash from other sources (such as in Step 3) and apply those dollars toward debt, I am including those dollars when I use the term "stacking." Thus, when I paid off car loan No. 2 and began payment stacking onto my student loan, it took only three months to pay it off. (The extra income from teaching helped here as well.) Usually you want to pay off the smallest debt first because that's the fastest route to freeing up a monthly payment that can then be "stacked" onto other debts. However, in my case I chose to first pay off car loan No. 2 since its monthly payment was almost three times my student loan -- which meant three times as much cash available for stacking.
Negotiations
A couple of years ago, I obtained a property loan wherein I had speculated on the price of a vacant lot, anticipating significant appreciation when a planned golf course would be put in. The development slowed and then sputtered out. In light of the economic circumstances surrounding that development, I was able to pressure the developer into settling the balance of this loan for less than what was owed. At the time, I had about $8,500 left on the loan, but I offered to pay $3,000 to settle it. After two months of negotiations, the developer agreed to the settlement. I eliminated $5,500 of additional debt. I had structured this particular debt through an LLC so this settlement did not impact my credit; however, most debt settlements will show up on your credit report and will adversely affect your credit. Be careful with these.
Continued, persistent discipline over time.
There are many areas you can examine to come up with additional monthly cash. First, I noted that for a few consecutive years, I had been receiving a tax refund of around $3,000 (which is about $250 a month), so I modified my employer's W-4 tax form to reduce the federal income tax withholding on my paychecks and stop paying that extra $250/month to the government. Additionally, I temporarily reduced my 401(k) contributions during my get-out-of-debt campaign. (Ten months later, I'm debt-free and can catch up on my contributions.) Reducing my withholding tax and 401(k) contributions netted me $450 a month, which went straight to debt payments. My wife and I also found several areas in our budget where we could trim $10 here and $20 there -- or an additional $100 per month.
Evaluate other sources of income.
I found a class I could teach at a local college. The time commitment was about six hours a week. In 10 months, I earned $6,000, most of which I applied to pay off debt.
Prioritize debts and begin payment stacking.
When I paid off car loan No. 2, it eliminated a monthly payment of $306. I took that $306 in subsequent months and applied it to other loans. This is called "payment stacking." When I free up cash from other sources (such as in Step 3) and apply those dollars toward debt, I am including those dollars when I use the term "stacking." Thus, when I paid off car loan No. 2 and began payment stacking onto my student loan, it took only three months to pay it off. (The extra income from teaching helped here as well.) Usually you want to pay off the smallest debt first because that's the fastest route to freeing up a monthly payment that can then be "stacked" onto other debts. However, in my case I chose to first pay off car loan No. 2 since its monthly payment was almost three times my student loan -- which meant three times as much cash available for stacking.
Negotiations
A couple of years ago, I obtained a property loan wherein I had speculated on the price of a vacant lot, anticipating significant appreciation when a planned golf course would be put in. The development slowed and then sputtered out. In light of the economic circumstances surrounding that development, I was able to pressure the developer into settling the balance of this loan for less than what was owed. At the time, I had about $8,500 left on the loan, but I offered to pay $3,000 to settle it. After two months of negotiations, the developer agreed to the settlement. I eliminated $5,500 of additional debt. I had structured this particular debt through an LLC so this settlement did not impact my credit; however, most debt settlements will show up on your credit report and will adversely affect your credit. Be careful with these.
Continued, persistent discipline over time.
These steps are simple, but they are not easy. Once you commit to get out of debt, you will have plenty of opportunities to take money away from your debt payment plan and spend it on something you want at the moment. Do not underestimate how much discipline this process will take. Once you or your spouse start making exceptions to your get-out-of-debt plan, it is amazing how quickly your plan unravels and falls apart. Commit to this fully (and do it in writing if you have to).
Freedom from debt is a very invigorating feeling, and it is a very strong step toward financial independence.
Freedom from debt is a very invigorating feeling, and it is a very strong step toward financial independence.
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