Hey everyone! Today I have a guest post for the third week of my debt payoff series (the other two posts were How I eliminated my debt in less than 1 year and How We Handled $32,000 in Student Loans). I asked readers and friends to submit guest posts regarding anything relating to their debt. Enjoy! If you would like to participate, please e-mail me at email@example.com.
Today’s post is about a reader’s debt and her plan to eliminate them. Also, don’t forget to read about my wonderful $38,000 student loan plan and what I’m doing to aggressively get rid of them.
It’s twice as hard getting out of debt without a plan than with one. So do yourself a favour and have a plan!
- List all of your debts
- Prioritize your debts (whether you want to tackle the highest interest rate first or lowest balance first, its up to you)
- Set your “Debt Free Date” and find out what your payment(s) would be
- Find a way to fit this into your budget (or you may have to adjust your date). You may have to make more money in order to do this if you are seriously committed to this date.
- Pay off your debt!
A lot of people just pay what they can afford to on their debt without ever knowing when it will be paid off (and if you’re only making the minimum payment it could be 10 years or more!) talk about discouraging! If you plan for particular day to be debt free you are more likely to work harder to get your debt paid off by that date.
How can you find out when you will be debt free? You can use an online calculator there’s a few available that can be found with a quick search.
For myself, I have just over $6K in debt at this moment and I would like to be debt free by the end of the year (11 months). According to the calculator I used it would take me $596.34 per month to pay off my debt in 11 months.
The online calculator I used calculated the payments to each card based on the avalanche method (highest interest rate first) and the minimum payment on the other balance(s). Whether you choose the avalanche or snowball (lowest balance method), be sure to make at least the minimum payment(s) on the debt that you’re not focusing on first (remember the list of priority in step 2) so that your credit history doesn’t take a beating.
Look at your budget
You then look at your budget and see if that amount works in your current budget. However, a word of caution … if you are looking to see if you have that amount left over in your budget every month, you may find that you don’t have that amount. That doesn’t mean it cannot be done.
What I do is that I take my income and subtract my fixed expenses, savings, and debt repayment BEFORE I look to see what’s left over to spend. I’m leaving myself about $300 a paycheque for my variable spending. That’s what’s left over after I take off all of my above expenditures. That may be a very low number for a lot of you. You have to look at your individual spending, BUT, I again caution you that if you don’t even try to live on less, you may never get out of debt or once you are out you will go back in. If you never control your spending and have a plan you may always stay in debt.
Here’s a really simplistic example: $2500 income – $1,000 (fixed expenses rent and bills) – $250 savings – $596.34 (debt repayment) = $653.66 left over for your variable costs per month. If you know 100% that this amount is not doable, then you will probably need to adjust your debt free date. Although, the longer you prolong debt repayment, the more likely you will be a victim of debt fatigue and will go on a spending spree. So, keep the date tight.
You can also make more money, but if the debt repayment amount is solely or mostly dependant on this extra income, you may still need to do some adjustments. Most of the time, extra money is variable and can change from month to month. I’m not saying not to make extra money if you can, it will just mean that your date free date can be sooner than you had originally anticipated, and that would be a welcome bonus indeed.
Getting out of debt isn’t easy, I’m still working on it, but with a plan, hard work and dedication, you too can have your debt free day!
Morgaine @ Morgaine and Money. I’m 32 years old, been blogging about personal finance since 2010 (with some hiatuses) as inspired by Gail Vaz-Oxlade and other pf bloggers to get out of debt and transform myself from spender to saver. Currently turning my $21K of debt into $21K of savings and hoping to buy a house in the near future. Follow me at http://morgaineandmoney.
What is your plan to get out of debt? What is your monthly amount that you are paying towards debt?
DC@Young Adult Money says
"Most of the time, extra money is variable and can change from month to month." I definitely agree with this and have seen my extra income vary widely month-to-month. I do think it's a great way to speed up debt repayment, though.
My recent post Peanuts, Crackers, or Cookies?
So true! I used to work at a job where I got a piece of my employer's commissions, this certainly helped speed up the process but I always made sure the budgeted amount went to my debt no matter what the bonus was.
We have cut most of the "extras" out of out budget. Once we did that, it was easy to pay our debts off. We started by paying off credit card debt then we moved onto our cars. Then we paid off Greg's student loans. Now that that is all over, we are focusing on saving and paying off our mortgage. I cannot wait to be completely debt free!
The "extras" is exactly why I recommended taking the savings and debt repayment off first. Once you take those off you may find you don't have as much money for those "extras" but once the debt is repaid and you have some savings, those extras will probably find a way to fit back into your budget 🙂 I definitely think its a major block to people not paying off debt, they just don't want to change their lifestyle.
Its me! Thanks Michelle for posting this 🙂
I will be looking at the comments so if anyone has questions, I will answer them 🙂
Good guest post! Luckily, outside the mortgage, I'm debt free. However, your points were crucial for me in my quest, especially the point about building savings into your plan from the beginning. Without an emergency fund, you're just asking to keep taking on debt every time something goes wrong…and something ALWAYS goes wrong! 😉
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Exactly! At first I was just agressively tackling my debt, using every extra cent I had to pay it down. But I didn't account for emergencies, irregular expenses or even birthdays and Christmas! Saving is a crucial part of getting out of debt!
C The Writer says
For me, it's hard to have a "debt free date" or any kind of plan because I'm unemployed right now and will probably transition to minimum or just above minimum wage in an unstable, might-get-fired type of a job. So it's hard for me to plan ahead. My first goal is just to plug the leaky boat, as it were, and pay off the interest so it doesn't get any bigger. Right now it's growing and growing and I hate it.
Sorry to hear that, hopefully you find something soon. I would recommend saving up first so that you don't increase your debt and once you get a new job, pay down the debt as agressively as you can. I hope it works out!
KC @ genxfinance says
Nice. Knowing where you are currently when it comes to your finances is important so that you will know how to proceed. Nothing's easy. You got to work hard for it if you want to be debt-free.
My recent post Living without money, Is it really possible?
Definitely. Getting out of debt has been the hardest thing I've ever done. Bar none.
A lot of people I know just pay the minimum because they say that's what they can afford yet they have fancy smart phones and have fancy dinners at restaurants. There's no real motivation to eliminate debt. Sometimes the most powerful thing you can do is to be angry at your debt. That may be the motivation you need to live on less spending, fight for a promotion, or ace that in job interview!
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Agreed! You can't be serious about paying off your debt if you have to have the newest everything under the sun! Paying down debt means sacrifices right now but its totally worth it.
I also agree that once you take it seriously it will change your life. I'm currently on a shopping ban and worked hard to get a promotion at work so I can pay more to my debt 🙂
Great list, like having a payoff date is crucial. I use a calculator through CNN money, that helped me figure out how much money to throw at my debts each month. I, however, would change that date all the time, because I hated knowing it would take me X years to pay stuff off. YUCK!
That's the calculator I use too, I just didn't want to link to it without permission. Its a great tool 🙂
I admit that I've had to change the date too, mostly because I got married last year and I had to apply more money to savings than debt repayment last year. But if changing the date to closer is giving you the motivation to pay it off sooner, go for it!
Make sure you don't take on new debt in the process. That can derail any type of such plan.
Such a great tip! Yes, that is why I recommended to save during the process. If you don't save, any little (or large) thing can throw you completely off track.
The Norwegian Girl says
looks like a decent plan! I only have my student loan, and I`m still a student, so I won`t be start paying it down until January 2015. But! what I have planned, is that the month between I start working as a teacher, and until I start paying, I want to save up a lot of money, to do a big downpayment as a good start. And then I want to agressively pay down the debt. many people in norway use 20 years to pay down their student debt, but I have a completely different plan!
20 years! Wow! I can't imagine that at all. For government loans in Canada, they automatically set the payments up to be complted in just under 10 years. I paid mine off in 7 and that's with many years of just ignoring it.
Good for you on setting your own path! Good luck! 🙂
Other than our mortgage, we have round $20,000 in debt. This is mostly a student loan and a car loan, with a little bit of 0% interest credit card debt as well.
Honestly, it's hard to pay it down quickly. As a single income household earning around $50,000, there isn't much "extra" money to go towards debt repayment. The credit card will definitely be paid off before the zero interest period ends, and the interest rates on the other two loans are fairly low (3.75% on the car loan and 6.55% on the student loan). Any and all blog income I generate does go straight to debt reduction, though, so that helps pay it down.
My recent post Plan for the Future, But Live in the Moment
Its hard to suggest what to do without knowing your full finances. For me its definitely been a big personality shift from spending all my money then worrying about how I was going to pay off my debt or save to making those the priority. Sometimes there is no "extra" left over, but at least I know I'm working hard towards my goal.
Good job with the extra income through your blog! 🙂
I'm all about motivation, and for us, we drew a debt thermometer on a chalk board and filled it in everytime we made a payment. We could see the amount we had left, and everytime we "found" extra money, we'd throw it at the debt. I like the idea of having a "debt free date", and I'd say write it in BIG NUMBERS and post somewhere to keep yourselves motivated 🙂
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That's a great idea for motivation! I just use tracking bars on my blog but the visualization helps for sure! I totally agree that if you keep your Debt Free Date in the front of your mind it will keep you motivated more to reach it 🙂
I used the debt snowball method when I had credit card debt. I like to see the small bills diappear. Regardless of the approach I think the debt free date is super important. For me it was the motivation I needed to stay on track
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I also used the snowball method, I thought it made it easier since a few of my debts could be paid off in a few months and then I could roll those payments into my larger debts. Whichever one people choose, I think its the commitment to be out of debt that's really going to be the difference.
I think having a debt free date motivates you to work even harder to beat your deadline. However, I wouldn't let it get you too discouraged if something happens to trip you up. It's easy to get discouraged, but keeping positive helps you not to give up.
My recent post What Do I Miss From My Days of Spending Too Much Money?
Yes, definitely. I've had a few set backs myself (lost a job, saved for a wedding, etc) and I've moved my Debt Free Date accordingly. You just don't want to move it so far into the future you get debt fatigue or say forget about having a date and then you will take longer or may never pay off the debt. For sure, the best thing is to dust yourself off, and reset the date!
Wayne @ YFF says
We are using the snowball method. Unfortunately, our amount of college loans is much, much higher than yours, so it will take us quite a while. We're getting there, though! We have already paid off one that is rolling into the next. It feels great to have those numbers decreasing instead of increasing!
My recent post Simple Ways to Save Money
Well, I started off with $21K in debt, some of it student loans, some of it consumer debt. Its taken me just under 3 years to get to this point ($5K left) so I can certainly understand how it can feel very overwhelming at this point. It may be helpful to break your Debt Free Dates into smaller goals like: Date first Debt will be paid, Date Second Debt Gone, etc. Or celebrate when you've paid off every $5K of debt. Every little bit that you put towards your debt gets you closer to being debt free. You'll get there one day if you just keep yourself motivated to get there 🙂
Totally agree about having a plan – it's crucial to success, whether you're cutting expenses, increasing income, or both. We were doing the snowball, but switched recently to the avalanche when we realized how much more interest we were paying on our bigger card. Congrats on your great achievements, Morgaine!
My recent post February 2013 Recap
Once I paid down my smallest 2 debts ($3,500 and $1,000) respectfully, I then focused on my debt with the highest interest rate (which also had the highest balance) $13,000 @ 29.9% (makes me cringe to even remember that!) It just allowed me to snowball those payments I was making to those other debts into the larger one and got it paid off sooner than if I still had those 2 other payments. Sometimes the logic of the numbers aren't worth going through the stress of all those extra debt payments. I definitely think everyone's gotta do what helps them sleep better at night 🙂
Aww, thanks so much 🙂
There are some things that I intentionally over budget for. Typical these are budget items that can be fairly variable as compared to other items that are more static. Gasoline are a great example of one item. Gas prices seem to have a wild swing swing lately. At the end of the month there is typically money left over which goes towards, you guessed it, debt repayment!
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That's an interesting method, for sure. I just have a set number in my budget that I put towards medical/dental, insurance, gifts and other things that might not happen every month (or some months might have a larger expenditure than others) and just take money out of that account when I need to. If this method is working for you and you've been working hard towards getting out of debt, than way to go! 🙂
Nick @ AYoungPro.com says
I had heard this same advice for years before I heeded it. After getting completely debt I have to agree that it is MUCH easier when you have a written plan. Not only is it a constant reminder when you see it, it also makes you feel terrible if you aren't meeting the goals you set for yourself. Win-Win!
You know what's funny, no one ever told me to have a plan to pay off debt until Gail Vaz-Oxlade and her show Til Debt Do us Part showed up. I was happy going along paying the minimums on all my debt never worrying about how much interest I'd pay or when I'd be debt free. In Canada, student loan minimum repayment is set at over 9 years! So, its easy to believe that you should be ok with taking that long to pay off debt. But Gail showed that with a plan in place it is possible to get out of debt much sooner than without one. I've just outlined the steps I've taken above and I hope it helps someone 🙂
If anyone has any questions for me you can send me an email at firstname.lastname@example.org or DM me at @morgainemoney on twitter 🙂
Jaden Allred says
"Most of the time, extra money is variable and can change from month to month." – I totally agree with this, but if you have a fixed monthly income, subtracting your monthly expenses (rent, gas, bills, food etc.) and whatever is left subtract that to your ideal monthly debt payment. If that doesn't work, then lower your debt payment so your extra money can accommodate it. Debt is like a math problem that needs an equation to be solved.