How to quickly pay off debt. Stories from our first year on the path to financial independence and becoming the Dirtbag Millionaire. Inspiration from Peter Drucker, Scott Adams, Mr Money Mustache, Dave Ramsey and many friends. How to achieve financial independence after 40.
This is the second post in our Crushing Consumer Debt series. Read the rest of the series:
The Dirtbag Millionaire: How To Live The Life Of Your Dreams
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“That which gets measured gets done.” -Peter Drucker
We are nearing the end of our first year on our journey towards financial independence (we are thinking of calling it “Expedition FI.” What do you think?) and it’s time to crack a beer, sit down and talk about how far we have come this year. It’s been a pretty darn good one. We went from being $38,000 deep in our consumer debt to crushing $22,000 leaving only our van loan and mortgage to deal with in 2018! (Well, honestly, the mortgage is going to take longer, but that’s another story) So, grab a cold one, and pull a camp chair up around the campfire, we can wait until you get back. Got one? Good! Let’s begin.
At the start of the new year, 2017, I created three systems that would guide me through the year. Inspired by this post from traipsingabout.com where Dakota references Scott Adams (of Dilbert fame) quote: “Goals are for losers. Systems are for winners,” It made sense. Rather than talking about what I wanted to do, why not create a framework that supported how I was going to do it!? It’s like spraying about your new project at the crag and how you wished you could send it. You’re going to need a training plan to achieve that climbing project and you’re going to need a training plan to tick your life goals as well.
My systems are:
1) Start this blog (goal: to write more in 2017. If you would like to start your own blog, I highly recommend signing up with Bluehost. You can be up and running in minutes through my affiliate link.)
2) Adopt a slow-carb diet (to lose weight. It worked! Check out my Check out my Kill The Dad Bod post for details!)
3) Start paying attention to where our money is going by using Mint. (to eliminate our credit card debt we had been carrying since our wedding nearly ten years ago! This worked too! See our very first See our very first Dirtbag Millionaire post from when we zeroed our credit card debt!)
2017 In Review:
Looking back at our January statements, we had almost $10,000 in credit card debt, $10,000 in student loans and a van loan from buying our Sprinter the past October (another $18k!). Just by beginning to pay attention I was able to prioritize our spending, trim and cut enough unnecessary expenses, throw everything at the debt and had the credit card zeroed out by our April statement. (That’s $10,000 paid off in four months. On a teacher’s salary!) Peter Drucker’s quote echoed through my mind often that spring. “That which gets measured gets done.” We are living proof that sometimes it just takes waking up and paying attention to what is happening in our financial life to turn the ship around and quickly pay off debt.
During this time I was also introduced to Mr. Money Mustache! Pete’s blog galvanized my thinking about our finances. Now, instead of just getting out of debt so that we could save for our retirement sometime when we are old, we could start down this patch of creating wealth now and retire sometime in the next ten years! Of course, saving up a million dollars on a teacher’s salary is going to be challenge. That is why, starting in 2018, we are also looking into other investments such as starting businesses and looking seriously at real estate.
So, by spring time, I had zeroed out our $10,000 in credit card debt and was learning a lot about personal finance, early retirement and face punching from Mr Money Mustache. Over spring break we spent an amazing week down in Canyonland country climbing at Indian Creek, canyoneering with the kids and ticking a life-list climb of Castleton Tower. We were joined by our two good friend, Eric and Leah. We had talked about finances over the winter and, as a gift, Eric and Leah brought an extra copy of Dave Ramsey’s book Total Money Makeover. I devoured Dave’s book over the course of the week. I had heard of Dave Ramsey through an early episode of the Choose FI Podcast .(recommended!) I love Dave’s book even though, at the time I read it, I had already progressed through many of his steps. His call to middle America to wake up, get out of debt and begin leading a stress-free life could be considered the bedrock on which the FI mountain is settled and is the first path many find on their financial journey.
The Debt Snowball
Now, Dave recommends a debt payoff strategy he calls the debt payoff strategy he calls the debt snowball. The gist of this method is to attack your smallest debt first while still making minimum payments on everything else. As soon as you hit $0 on that first debt, you roll over the payment you were making into the next smallest debt. Once that next debt is paid off, you now have the payments you were making on the first two and roll them into paying down the next debt. You just keep going until all of your debt is gone!
The genius behind Dave’s plan is that it is a strong psychological motivator to avoid lifestyle creep and continue to pay off debt until it is gone. Along the way you get small psychological boosts each time you pay off another piece of debt. (DING! Medical bill gone, DING! credit card, DING! car loan) This is not to be underestimated. A little dopamine hit each time you crush another category of debt will keep you coming back for more every time. Kind of like that climbing project you keep returning to every weekend. If you weren’t making any progress at all, you wouldn’t keep making the same steep uphill approach to the cliff. But each time you figure out a new piece of beta or begin linking moves. Ohhh baby! Give me more!
However, this is not how we prioritized our debt.
The Debt Avalanche
In order to crush our consumer debt and pay off $20,000 in six months we adopted what I later found out is called the Debt Avalanche approach. I didn’t realize it at the time, I was just going by what made the most sense to me mathematically. But it appears that many others have had the same thought. (Just Google Debt Avalanche for more!) The biggest criticism I have of Dave’s Debt Snowball is that he ignores interest rate when paying down consumer debt.
The snowball approach advocates paying down small debt regardless of its interest rate. That means you might be aggressively paying down your $1000, 5% hospital bill while you are still accruing massive interest on your $10,000, 19.5% credit card loan!
This does not make mathematical sense, especially if you are looking at just a few, larger ticket debt items. (student loans, credit cards, car loans are the most common)
The Debt Avalanche advises that you attack your loan with the highest interest rate first. Get aggressive with that first loan and pay it down as fast as you can. Once it’s gone, shift and begin crushing the next one.
It’s like cragging at the warmup cliff. Crush one route, then move to the next, then the next until they are all done. By attacking the loan with the highest rate, you can potentially save thousands of dollars over your debt paydown period in avoided interest payments.
The downside of course is that you will not get those small doses of “Yippee!” by hitting the smaller milestones eliminating smaller debt. However, once you have sent that first big 19.5% credit card debt you are definitely going to feel like some sort of badass! For me, it was enough to see that credit card statement ticking ever smaller each month credit card statement ticking ever smaller each month until it was gone!
With the high interest credit card down, I focused my attention on my $10,000 student loan debt. I now had the extra money I wasn’t spending on the credit card each month to throw at this debt. However, being an older fellow, (Shout out to Gen X!) I also had another ace to play: Previous investments. In my 40+ years, I had accrued a few small liquid investments from inheritance and some stock dabbling. On his podcast, Dave Ramsey quips something like “Would you take on credit card debt to start investing?” The obvious answer is no because, in most markets, the interest rate on credit cards is way above what you would make on your investment. As someone who had been lucky enough to save up a bit over the years, I now had some investments that I could sell off to pay down the $10,000 of student loans. With a combination of debt avalanche boosted by selling off some of my investments, I had my student loan paid off by the time our summer road trip began. Now, this is one area where the emotional/psychological benefit outweighed the logical, mathematical outcome. I was on a roll after getting out of credit card debt and I wanted those student loans gone. And two months later, my student loans were a thing of the past.
Okay, thanks Jim, then on to the van loan right?
Wrong! We continued to make the minimum payments all year, paying down just over $2000 on the principal.
In another post I will talk about why we didn’t go right after the van loan (and why we still have have it to deal with in 2018), the shift we made over the summer and how it has set us up for 2018.
If our income is being constantly drained away by high interest debt, then we will NEVER be free.
Don’t let this happen to you. Crush your debt, find freedom and begin your journey to financial independence today!
What is your plan to begin getting out of debt and finding your freedom this year? Share your ideas in the comments below.