In this post we discuss “The Big Three” of consumer debt: credit card debt, student loans and car loans We outline what you can do today in order to get control of your finances, crush consumer debt and start building wealth.
This is the fourth post in our Crushing Consumer Debt series. Read more at:
Crushing Consumer Debt: The Three Systems Of A Good Defense
How We Paid Off $20,000 in Six Months
The Dirtbag Millionaire: How To Live The Life Of Your Dreams
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It Was Not Looking Good
Two years ago we sat down as a couple to take a hard look at our finances. Specifically, we were looking at whether or not one of us would be able to stay home to raise our second child or whether we would both have to work. The story being told from the spreadsheet we had created was grim. Once we totalled up our outlays (mortgage, loan payments, insurence, groceries, etc) and put them up against my salary we were losing money every month!
My salary alone could not stack up to the monthly bills. We were getting ever further into debt via our credit card even as we bled ourselves dry financially to pay down the debt we already had. We were trapped in a vicious cycle and, at this rate, we would never get out of debt. There were some hard conversations that spring that led us to eventually finding childcare for Squirt 2 and both going to work.
We were financial ignoramuses in those days. We weren’t quite sure how much was coming in and how much was going out. If we had excess, we spent it going out or buying a new rope for climbing or a new couch for basecamp. (Though, in our defense, the old couch was bought at a local Savers and always smelled a little like college dorm room. Eww!) It took paying attention and writing down our money ins and outs (income and expenses for those of you just learning) to realize the state we were in. Starting from that first, dismal, spreadsheet we began learning and identifying the biggest culprits in preventng us from being able to crush consumer debt. What we call “The Big Three”
Further Reading: Crushing Consumer Debt: How We Paid Off $20,000 In Six Months!
Consumer Debt Is Like Backpacking:
Bear with me a moment as we set up this metaphor. In backpacking, you have to load up everything you might need for your time in the wilderness, sling it up on your back and go for a walk. Almost everyone brings too much their first time out. I remember packing in extra jackets, jeans, shoes, (even though I was already wearing these!) and way too much food because “What if? Right?” Because of this weight, what should have been a pleasurable walk into beautiful scenery devolves into a sweaty, chest heaving, muscle cramping slog. Pictures of yourself lying down in beautiful alpine meadows become blisters, pulled muscles, and any exuse to put down the giant brick you have strapped to yourself and forget about for a bit while you rest.
As we get more comfortable striking out from the trailhead and heading out into the wild, our increasing experience and wisdom begins to lighten the load. We leave the extraneous things behind and carry only what we need. However, certain gear must be packed and there are three items that tend to create the most weight on your back: a tent, a sleeping bag and a backpack. These are known as “The Big Three” and are the most important to trim down if you want to achieve your vision of going lightly into the woods.
So too with your financial journey. Unless you had a wise mentor, perhaps a parent, or an older friend, (or a smart, savvy website like this one) you probably have taken on more weight than you can comfortably carry. Your back must bear the strain of your financial burden and life begins to resemble those first few hikes and all the misery they contained. Rather than realizing the dreams you had made for this life of yours, you are now stuck somewhere on the uphill trail, nursing the financial equivalent of a popped blister or twisted ankle, ready to chuck your financial backpack into the woods and walk away.
But, I have good news for you friends!
Just as experience teaches you how to lighten your backpacking load, so too can you lighten your financial burden. Much as you began to cut weight by creating a gear list (budget), leaving things at home rather than taking them with you (unnecessary shopping) and creating and using multi-use items (life hacks!) you can trim the fat from your financial burden and hold on to more of your little green employees.
However, there are certain payments that cannot be ignored, left at home or not paid. (Such as insurance, mortgage, etc) and there are three of those payments that eat up a considerable amount of your hard earned cash. These are The Big Three.
The Big Three:
And here we come to the meat of our tale today. The Big Three are, of course: credit card debt, student loans and your car payments. These are the three biggies that you can work to change to your advantage, to lighten your financial burden and begin to crush consumer debt. The Big Three are going to be harder to shift and adjust because they represent the core of your debt. (we will touch on mortgage/rent later) Let’s look at each of them in turn and then discuss how you can crush consumer debt and lighten your financial load.
Read about our credit card story at this post: The First Step On The Trail To Financial Independence. Out of all of our debt, our credit cards were the very worst for us. With interest rates at 20+%, the high interest that credit cards carry is a freaking joke. These little pieces of plastic are the cannonballs in your backpack. Read more about the debt snowball/debt avalanche in our post: The Dirtbag Millionaire: How To Live The Life Of Your Dreams. Your credit card(s) are probably the highest interest rate debt you have so you must do whatever it takes to crush this debt first! See below for step by step action that you can take in removing credit card debt for good!
The bane of the modern worker is the residual debt from their time spent in higher education. Based on current and projected college tuition schedules I am thankful that I am not trying to navigate college these days. (And I’m hopeful for what the future holds for our girls as I believe that this higher ed. bubble will burst and there will be ever more options for them as they grow to be college age.)
Let’s see, looking at our local institution of higher learning we see that CU Boulder (a state school) is offering you a year’s tuition for the low low cost of $30,180! (Holy shit! Really!? That’s more than my yearly salary until recent years!) So a state school kid can expect to come out of a four year program having paid (or owed) $120,720! Running this through a simple loan calculator, assuming you financed the whole thing and had an interest rate similar to mine of 8% then you are paying out $1,464.67 of your hard earned dollars every month for the next ten years! Now, hopefully you are not financing your (or your kids’) whole ride through college but still. That’s a lot of dang money!
Car Loan Payment:
I have always carried a car loan. We currently owe $16k on our Sprinter van that we bought and financed. Why? Because I was told that is how it is supposed to be. Cars are expensive after all and, as long as you can make the monthly payment you can afford it right? WARNING!!! Any time you hear yourself or someone else make this statement you should drop everything and immediately run for the door. This kind of thinking is exactly what leads to our financial ruin under a mountain of consumer debt.
I am making a stand and saying that I will never again take on a car loan. Never. Ever. If I cannot afford to pay cash for a vehicle I want I will wait. I will take the bus, ride a bike or buy a used piece of crap like my first car that I bought for $200 and drove all over New England to go rock and ice climbing. That Toyota Camry got me everywhere and I gave it to my little brother later who drove it for years until it died. Old cars rock!
To be 100% honest, the vehicles are something we are still getting a handle on. We delayed paying down our van loan because, right now, putting money into Vanguard’s VTSAX is making way more than the 4% we are paying in interest to the loan. We plan to shift gears in 2018 though and crush the van loan ASAP. You can learn from our mistakes by buying a good used car, paying cash and staying away from car loans!
What about your mortgage?
We will keep this short because the discussion of rent vs buy is far too long to tackle today in this post. Stay tuned for more but suffice to say, we decided to buy and have a mortgage on Basecamp (our house’s nickname). Lucky for us, we bought at the beginning of the 2006 decline and got a screaming deal on our house. We knew we wanted to be part of the community here in the Front Range and that we wanted a neighborhood for our kids to grow up in.
Now, here is your plan to crush consumer debt. Take a deep breath and wade in.
If you have outstanding debt DO THIS:
(This is going to hurt a little, but your future self will thank you)
- Read our post on The Three Systems Of A Good Defense. If you do not change your spending habits, the rest of this guide will be for naught as you will be right back in the same place in a year or so. Resolve to get off the debt treadmill (spend, save to payoff, payoff, repeat) so you can get on the journey to Financial Independence.
- Stop using your credit cards right now. Cut it up if you have to a-la Dave Ramsey. I left mine at home during the time we were crushing our credit card balance. Get the ability to spend on it out of your control. Go online and switch anything that is automatically paid for with your card over to your debit card or elimintate it altogether. (That $50 subscription to Alpinist could be $50 towards your next credit card bill)
- Do not buy anything. You are in a debt emergency. You do not go out to eat, you do not buy a cup of coffee, you do not buy the cute stuffy, and you do not purchase a bottle of water because you are thirsty. (Bring a water bottle with you everywhere, you probably already have like, a million of them) Use your Dirtbag superpowers and reduce your expenses like it was that summer when you roadtripped forever and had no income. Stretch it out.
- Pay cash for any necessary expenses. (these are food and bills, nothing else)
- Pay the minimum payment on all debt that is not your credit card and:
- Put everything left over into crushing your credit card debt. Get that balance down to zero, cancel the account and then throw the card away. Once you have reestablished your finances and have a healthy emergency fund we can talk about using credit cards the right way. But not now. You won’t be using it anymore. Chuck it.
- If you have non-retirement investments, consider liquidating some to get out of debt. Your $10,000 investment making 8% (if you are smart and using a low-cost index fund such as Vanguard’s VTSAX or, more likely, less if you are holding single stock as I was) will never get ahead of $10,000 of credit card debt at 20%. We sold off shares of single stock to help polish off our credit card and student loan debt. This is a bit of a bold move (and could be considered downright dumb depending on who you talk to) and you should certainly look at what the stock market is doing and have your systems and mindset in the right place before selling off assets to pay off debt. You certainly do not want to sell your investments at a loss unless you are truly desperate. You should also evaluate your tax scenario to ensure that you are not pushing yourself into a higher tax bracket. IMPORTANT: I am not a financial advisor, nor do I play one on the internet. I can help by sharing my own experiences, but this is not to be entered into lightly. Do your own research on this one. Seriously, I am just a regular guy trying to figure this out, just like you so do your due diligence!
- Move to your next highest percentage debt (most likely one of the other Big Three) and repeat the process. It should be easier now because all the money you were sending to the credit card is freed up to pay down the next debt.
- Do this again and again until all your debt is GONE.
- You should now be skipping amongst the proverbial meadows with little to no weight at all. You will have changed your habits for the better and you should now have a windfall of cash each month with which to buy real assets. (We recommend a low-cost, total market index fund a-la VTSAX from Vanguard. More on this in a later post.) Very soon you should see your net worth skyrocket. Your path to FI begins now.
I certainly hope this helps put you on the right track to crush consumer debt so you can build wealth. It all starts with lightening your financial weight. After all, we all want you to be out there skipping through the alpine meadows with us. It’s awesome out here.
See you out there,
What are your systems and strategies for crushing consumer debt? How will you take the next step towards getting out from under that heavy weight and lighten your financial load? Share it with us in the comments below.