Debt Reduction

September 1, 2010

We are now living in the present moment—no longer paying for an education from five years ago, or a car from three years ago, or a wedding from four months ago. The chains of past financial obligations and choices have been lifted: we are non-mortgage DEBT-FREE! Today is the day that we have reclaimed our paychecks, siphoning our hard-earned money into savings accounts and utility bills from the everyday living instead of to payment centers in weird places like El Paso, TX, Waterloo, IA and Urbandale, IA.

Let’s talk some numbers. For the last two years we were paying $950 each month towards servicing our combined $25,000 worth of debt. Of that $950, approximately $75 per month was in interest, or a penalty for the choices we had made. To recap, here is where we were in July 2009:

  • Student Loans: $10,000 at 1.25% interest
  • Car: $12,000 at 6.325% interest
  • Engagement Ring: $3,000 at 0% interest (if paid off within 12 months, which we did)

Our Personal Battles

We had our share of struggles over the last year. First of all, tightening our belts caused several arguments between us. Nothing earth shattering, but when you squeeze and squeeze, and squeeze your paychecks until you’re down to  counting quarters, nerves can get testy and there are bound to be a few disagreements. The good news is that it forced us to sit down and work as a couple on our finances and on a common goal, something that will surely help us throughout the rest of our lives together.

Some of the other issues we faced were having to pay for most of our wedding, replace a vehicle one month after purchasing our home ($3,500), having to purchase a refrigerator for our new home when we had mistakenly thought the previous owners were including theirs ($800), replacing three tires and having our car towed twice ($720), unexpected dentist surgery bill ($600)…in a word: Life. Yet we still met our goals within one year of setting them! We feel very blessed for this.

Our Strategy

Even before we came together and decided to wipe out all of our non-mortgage debt we individually made sure to overpay on each of our loans. When you are faced with the reality of 11 years worth of payments and $X amount of interest at the exit interview from your college, suddenly paying extra each month seems like a great idea. Since graduating college in 2005, I have been paying $250 on my student loans instead of the $117 minimum payment. Also, one year I wiped out a $2,500 loan, and the next year I wiped out a $6,000 loan (my original loan amount upon graduating was $36,000). Paul paid $400 on his car each month instead of the $360 minimum payment amount. Instead of making the minimum $55 payment on our engagement ring each month, we paid $300 to have it paid off in ten months in time for our wedding and before an interest rate set in.

When we decided to get serious about paying off all of our non-mortgage debt and doing so in a relatively short amount of time, we turned to some financial gurus. Our strategy that worked for us ended up being a hybrid of Dave Ramsey’s Debt Snowball and Suze Orman’s debt payment plans. After purchasing our home, we decided to put the $8,000 tax-free, first-time homebuyer credit towards Paul’s car loan because it carried the highest interest rate (Suze Orman’s plan). We made the highest overpayment to the engagement ring, our smallest debt, in order to pay it off in time for the wedding (something that was important to us in a wedding we were determined, and successful, in paying cash for). After we paid it off, we put that $300 towards the other two debts, which is more or less Dave Ramsey’s debt snowball concept.

Just like we found, whatever works for you and with whomever you share your finances with is most important, and oftentimes it is not just one concept or another.

Rewards and Splurges Along the Way

Something we were sure to do was to reward ourselves after each of the three debts were paid off. After we paid off our engagement ring, we treated ourselves to the Bistro Calais in Houston (a fantastic restaurant, albeit moderately pricey). After paying off the car, we had a wonderful dinner at Goode Company, another of our favorite restaurants.  Do you see a pattern? Now that we have paid off my student loans and reached our overall goal, we are going to choose another wonderful restaurant and treat ourselves again. Bon appétit!

Rewarding yourself when you pay off debts, and knowing that the reward is coming at the end of the tunnel can be a great motivator to get yourself in gear.

Moving Forward

Paul wants a flat screen t.v. mounted to our wall. I want to take a trip to Mexico and hike the ruins. It is great to dream, and even better to turn those dreams into goals that we will eventually realize. Moving forward from here, we are over the hump of debt and can now save money up ahead of time before purchasing anything. In fact, that is exactly what we plan to do: new funds are being started for the trips we want to make, the television for Paul, and the future cars we will have to purchase. Anything that we want to purchase from here on out will be paid for ahead of time, not after.

What is your own debt story? I’d love to hear about how you got into debt, where you are in your repayment, or how you became debt-free and how this has changed your life. Please email me at frugalconfessions [@] hotmail.com.