Paper walls, sushi on revolving tables, delicate décor inspired by nature, purposeful placement of stones, crowded metro trains stacking people tightly like sardines in a can; I am watching HGTV’s The Outdoor Room, and the hosts are working on redesigning the back of someone’s corner-yard into a tea room garden inspired by Kyoto, Japan. For those of you who do not know, Japan holds a special place in my heart. It is where Paul and I met, and where we both aspire to return to because of the connection we felt there with the people and the culture.
Watching shows like this just fuels our fire to become debt-free. Freeing up our paychecks to spend on things other than what we’ve already purchased in the past is like opening up a bottle of perfume to allow it to breathe, diffuse, and live. Dreams become more tangible when given the financial space to develop.
The Accumulation of Debt
Before getting together, Paul and I each had our individual debts. I had student loan debt and Paul had debt from purchasing a Mustang after finishing his service in the Navy. Then about a year after we moved in, we created some small debt together: Paul bought me an engagement ring and financed part of it at 0% interest for 12 months.
When Paul and I first got engaged, we agreed that I should head-up the finances—a task I clearly excel at and enjoy. Just a few months in though, I was dumbfounded as to where some of our money was going. It wasn’t as if we didn’t have money to do the things we wanted to, or to save consistently each month, or to set aside for retirement, which is perhaps why it took me so long to sit down and find the problem. One day I took a deeper look at our excel spreadsheet, and highlighted the debt payments we were making in red, discovering the leak in the process: $950 each month was headed out the door to paying off debt! It was unbelievable to me that I, a frugal person by heart, and Paul, someone who loathes owing other people money, could be paying almost $1,000 a month to debt! The three debts that took up three individual lines on our excel budget—my student loans (1.25% interest), his mustang car payment (6.5% interest), and my engagement ring (0% interest for 12 months)—had seemed manageable with small monthly payments that both of us had accelerated and had also seemed completely unrelated. After all, one was for education, one was for driving around, and one was a token of our love. But after adding them all together, the relationship became quite clear: they are all money we have to pay back to someone, someday. We were now together, and $25,000 in debt.
Debt Attack Strategy
Even though the debts seemed more manageable when they were individual debts and not all added into one pot, and even though we created more debt when we got together, having two paychecks and half the bills really set our debt payment into motion. In fact, sitting down and adding up all of these individual debts really sobered us up.
Shortly after getting engaged, Paul and I purchased a home. We used $7,000 of the $8,000 first time homebuyer’s credit to put towards the mustang loan, and put $1,000 into our emergency savings account. Paul had been paying extra each month on his car since he purchased it, so we continued his usual payment. We paid twice the monthly minimum payment on my engagement ring. Also, I had been overpaying on my student loans since first graduating, so we continued with that payment as well.
As of right now, Paul and I have paid cash for our wedding, our last car payment is in July (hurrah—two more months to go!!!), and we have paid off my engagement ring before the interest kicked in. Aside from what we paid for our wedding, that is about $17,000 worth of debt we have paid down since focusing our efforts in the summer of 2009. This has increased our monthly cash flow by $700. Wow! We now only have the rest of my student loans to pay, which are approximately $8,000 @ 1.25% interest, and our mortgage.
Our Next Radical Move to Debt Freedom
It is tempting for us to not pay down the student loan debt quickly and to keep it around as if it were a ‘pet’ (as Dave Ramsey likes to say; sometimes I feel like Sallie Mae is my 5-year old daughter). Most financial experts would tell us to use our money for better things because the interest rate is only 1.25%. However, the $7,600 is still debt that we will owe Sallie Mae (or the government, who has purchased a significant portion of Sallie Mae’s student loans) one day or another, so we would rather pay it off now that we are capable and can do so instead of saving it for a future date when God—literally—only knows where and what we will be doing. After going back to the excel spreadsheet and checking into our accounts, we have to the conclusion that our savings account and the amount owed on my student loans will intersect sometime in August. And it is at this intersection that we will write Sallie Mae one final check, and clear my name of all student loans. Hurrah!
One of our concerns with doing this, of course, was the depletion of our emergency savings fund. In fact, it’s not even completely built back up from having to purchase another car. But I recently sold the stock I had invested in US Steel when the stock market was down, and made a profit of $1500. That money plus the principal is waiting on the sidelines in a money market fund, and I will keep it there until we have our emergency savings back up to at least three quarters of the way full. On top of this, our other security to fall back on is our Roth IRAs, which we can tap the principal amount of money we’ve invested without any penalty if there is an absolute emergency. We will of course use this only if there is an utter emergency because we cannot make catch-up contributions once we are ready to pay back our IRAs. In other words, if I were to take out $3,000 for an emergency, this year I can still only contribute $5,000, not $8,000. But having this as a back-up makes us feel all the more confident that we are doing the right thing. As a third option, if we get into trouble, we can take a cash advance out of our credit cards, then transfer that balance to a zero percent transfer offer on another credit card and pay it off before the interest rate begins. This is not a desirable option, as we are trying to get out of debt, not back into debt, but it is a financial safety net for us.
So, debt freedom, here we come. And who knows where this will take us next. Sushi, anyone?