Getting out of debt is simple in theory. Earn more than you’re spending. Use discretionary income to pay down debt. Become debt free. It’s that easy. No really it is.
That said, the path to executing those steps is often not easy; financially, emotionally, or otherwise. I’ve now been debt free longer than I was in debt so I rarely touch on the topic. Today, however, I thought I’d share the ways I got out of $28,000 student loan debt in 2.5 years.
Spend less than you make.
You have to start here. If you are living paycheck to paycheck, or worse, using a credit card to float from one meal to the next, you gotta get something figured out. Either cut your expenses (if you can) or take on a part-time job. The only way your debt can be paid down is by having a buffer.
Save some money.
Dave Ramsey says save $1,000 before you start aggressively paying off your debts. That’s cute and all, but it didn’t jive well for me. Paying off car loans is great, but liquidity, in my opinion, is greater. At one point I had $17,000 in the bank and only $15,000 in debt. Looking back, I wouldn’t have been so aggressive with saving money, but don’t feel bad if you want to work towards $5,000 in the bank before you really get serious.
Remember, a paid off student loan can’t put food on the table, but a healthy emergency fund will. Liquidity is king.
Decide how much you want to punch your debt in the face.
I made minimum payments for a few months after graduating. It wasn’t until I realized that only $20 of my $179 payment was actually reducing my student loan balance that I needed to get my stuff together. That meant over the course of a year I’d pay $2,148 to Sallie Mae, but only $240 of that actually improved my financial picture.
I got pissed. There was no way I was going to make minimum payments. So I started making double payments. I did that for about six months, then started making triple payments. As my income grew, I started paying $1,000/month to Sallie Mae. It wasn’t until a few months before my wedding that I decided I really wanted to kick Sallie Mae in the uterus.
Girl Ninja was debt free, and I didn’t want to be the one responsible for bringing debt to our marriage. In May 2010, I took $10,000 out of my savings account and paid Sallie Mae off for good.
Decide if you even want to be debt free.
One of the things that’s been fun for me lately is meeting PDITF readers when I travel. They often start sharing their financial situation with me shortly after we’ve shaken hands – kinda weird when you think about it since I’ve only known the person for 2 minutes.
It’s not uncommon for them to say something like “Well I have a car payment, but it’s only because my other car broke down and the dealership gave me an incredible deal on this car.” I typically stop them mid sentence because I get the sense they think I’m judging them.
Do I have a car payment?
Do I think they’re dumb for having a car payment?
Car loans aren’t my cup of tea, but who the heck am I to tell them they can’t afford one? If having a $150 car payment makes you sleep easier than writing a $10,000 check and paying cash, I have no problems with that.
Contrary to popular belief, you can be both financially stable AND have debt.
Paying off my debt WAS NOT a significant part of my personal finance journey. I thought it was at the time, but now that I’m a few years removed from the situation I can tell you it’s not. Paying off your debt is just one of the many challenges you’ll face.
Maintaining an emergency fund, saving for retirement, creating multiple streams of income, investing for the mid-term; the journey never ends. Paying off my debt was just one small drop in my massive personal finance bucket.
Hear this… You need to have personal finance goals outside of debt freedom.
That’s all I got.
How would your list differ from mine?
p.s. my favorite nail from yesterday: Sexy Beast