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7.09.2008

$50,000 to $0: How We Did It

(Grab a cup of tea; this is a long one! I'm answering the questions about how we paid off our debt as a Works-For-Me-Wednesday post.)

Thanks for all the congratulations on paying off our debt! Several asked how we did it. It began when, a little less then a year into our marriage, our church hosted a Money Wise Workshop*, given by Tom Werth (now on staff at CrossWay Community Church in Kenosha, WI). At the time, ironically enough, Aaron had just lost his job, so we couldn't begin to apply much of the information until a few months later when he had full time work again. Still, we gained a conviction that being debt-free wasn't just preferable but biblical, and we learned some practical tips to send us toward that goal.

We had a credit card balance from our honeymoon, a handful of student loans (mine were consolidated, Aaron's weren't), and two car loans, all adding up to about $50,000, as best as I can remember. We didn't have a large income at all; that year, our combined earnings were about $45,000. I share that to encourage you that it can be done, even without a huge cash flow.

As our first step, we set up a thorough budget, based on our income after taxes and giving to our local church. We cut out just about every extra - clothes, eating out, etc. During that time, we asked our family, in lieu of regular birthday and Christmas gifts, to give us gift cards to favorite stores and restaurants; that helped to give us little splurges that we couldn't otherwise afford. We did what we could to keep our living expenses to a minimum (affordable rent on a small apartment; the most basic phone plan; no internet at home - we used the library; a strict grocery budget that sometimes meant we ate nothing but eggs, pancakes, and pasta at the end of the month).

Once the budget was in place, we asked some financially-sound friends to help us make a plan to pay off our various loans. They gave us some advice that actually went counter to some of the conventional wisdom but that worked well for us. For instance, one recommended that we pay our credit card off before starting any "emergency fund" type savings; his reasoning was that the interest rates on a savings account were so much lower than the interest we were paying on our debt that we would actually lose money by saving. So we paid off our credit card first, as quickly as we could, then started an emergency fund (the standard 3-months-worth of living expenses) to save for things like car repairs, job loss, etc. Another friend (and a CPA to boot) recommended that, rather than following the course of paying off the loan with the highest interest rate first, we pay the loans off essentially from smallest to largest. This had a huge impact, because we were able to quickly escalate payments on each loan.

Here's how that worked: Aaron had one small student loan (about $1000, I think) for which we only paid about $10 per month. We paid up on that as much as we could and were able to pay it off fairly quickly. Now, we rolled that $10 a month into the payment for the next loan, another small student loan on which we owed $30 per month. That one was paid off fairly quickly, too, and it motivated us quite a bit to see the progress of having two fewer bills to pay. We added $40 per month (the combined amounts from the two loans now paid off) to a car payment, meaning we paid something like $190 per month instead of the required $150. It took a while longer, but after we paid off that car, the snowball effect of the cumulative payments really took off. By adding the now freed up $190 per month to our other car payment (which was set at $175), we paid that car off in half the time of the 5-year term of the loan. At that point, we turned to tackle our two largest student loans (originally about $13,000 and $20,000 respectively). Again, adding all the previous payments no longer owed to the monthly payment on those loans (one at a time), we paid about $450-500 per month toward the first loan, and eventually about $1000 per month toward the second loan. We couldn't always make the big payments (like at Christmas-time, when we had extra expenses in the form of travel and gifts), but we paid as much as we could every month, and the effect was enormous!

During that whole process, we used any unexpected windfalls to pay whatever loan we were targeting at the time; tax refunds, Christmas bonuses, and the like took big bites out of those loans. We started out paying off our loans with very slow, small steps, but eventually we could take long strides and pay down debt quickly. When we began, our debt seemed insurmountable and I felt we'd never be done with it; but it only took five years!

As our income increased over time (although we still make a very moderate living) and our debt decreased, we were able to build non-essentials back into the budget, although we still keep those to a minimum (i.e. $50 per month for clothing, $60 per month for eating out). We don't buy things unless we have cash in the bank for them, and we use debit for most purchases. The only occasional exception is travel; we might put part of a vacation on credit, but we determine to pay off the balance within a month or two at the most. Once we take on a mortgage, we'll have to tighten the budget again, but now we know we can do it, by God's grace. We certainly couldn't have stewarded our finances this way without help, and I hope that by sharing these details some of you are helped, too!

*It looks like you can download the seminar audio and workbook for this workshop from our related church, Covenant Life, here.

11 comments:

Playful Professional said...

I think trying to live debt-free is one of the best goals ever. My husband and I aren't particularly frugal, but we only buy what we can afford. Doing this, we're hoping to come out of law school with no debt and a little bit of savings. Congrats on getting out of debt. It's a great step.

taralynn819 said...

We did this too. Took up a budget in January of this year (after reading Larry Burkett's budgeting for young couples book). I had $11,000 in student loans at that time and my hubby had about $2,500. We will be completely debt free at the beginning of next month, when we make our final $1000 payment on the last of our loans. And we've got our downpayment for a house (24K and growing!) but just need to figure out where to live/buy. Definitely don't want to buy here in the DC/Maryland area since cost of living is so high, but in the meantime we're looking! Great job on your debt-slashing! I can't WAIT for next month! Whew!

Heather said...

Wow! You are amazing and inspiring!! Thanks so much for sharing your story!

gracechild said...

this is my second WOW! that's some amazing stuff. Coming newly to the US, (less than 2 years now) I got quickly sucked into the "borrow to live" style & you've given some good advise that'll hopefully help me get out of debt. thanks

Alex & Jill said...

This is similar to how we paid off big debt, years back. Except you guys are hard-core, no eating out, etc.. :) Also, the fact that large things like your cars are paid off is amazing! Makes me want to start living on a budget again! :)

jskell911 said...

I just wanted to offer even more congratulations! What dilligence you two had!

GLouise said...

Good for you guys!!! I think your friends' advice is most excellent.

A website helpful to me is www.stretcher.com, with special focus on one-income living, but the tips can be applied to anyone.

I have also gotten addicted to coupon clipping (using only coupons of products I would normally buy anyway). The best is pairing a coupon with the store's 'loss leaders' of the week. Practically free stuff!

OK- I now officially sound very dull and boring!!

Vacant Uterus said...

Thanks so much for posting this, Andrea! Sarge and I have some debt we'd like to get out from under and we have a VERY modest income, especially now that I am staying at home. I was really interested to read about your "snowballing payments." I have never read about that before but it seems to make so much sense. After your first post, Sarge and talked a little about what you had written; I'm interested to see what he thinks about this one. :-) Thanks for sharing!

Camille said...

I just finished reading your whole entire blog and I was completely blessed and TOTALLY encouraged by you. Especially one of your first posts. I think I might link to it on my blog... which is http://wileywomb.wordpress.com/... please comment!! I will be sharing more of my story soon here.

Camille said...

oh yah, and i forgot to mention my husband and i were in chicago last year and even went to naperville one night!! crazy!! my gf moved down there about 5 years ago and we were there to visit her. she lived in elburn for awhile too...

The Broken Man said...

Wow, that's an inspiration - we are trying to clear debt so that I can become a priest in 3 years time. It's very slow going....

The Broken Man

http://theblogofabrokenman.blogspot.com/