How we plan to pay off $107k in debt in 3 years!
Okay, so at this point you should know a little bit about us (if not, check out our bio posts for Ryan and Alyssa) and what we want to do with JustAnotherDollar. Chapter 1 introduced our financial situation as a couple and if you’ve read it, you know it’s not pretty at the moment, but we’ve got a plan that will change that soon! Our total of $107,614.32 in debt is split over three categories, and the and the breakdown might surprise you! According to Bloomberg, we actually fall just below the average American family in total debt, which takes our breath away! source: Do you have more debt than the average American?
- Student Loans : $76,656.94 @ 5.99% interest
- Credit Cards : $15,884.91 @ 12.99% interest
- Car Loans : $15,072.47 @ 4.99% interest
The bad news is when we moved to Colorado, Alyssa took a temporary job until she could find something permanent back in her field. This resulted in us taking a $25,000/year pay cut for the first couple months of 2017. We expect this to be very temporary, but the perfect job has not presented itself as of January. The minimum monthly payments on all that debt add up to $1,776, that’s 35% of our take home pay; more than we pay in rent and utilities each month! With our current $82,000 income and a stripped-down budget (more info to follow soon), we will be able to pay an additional $505/month above our minimum payments. This will allow us to start making progress on the high interest credit card balances which will mean more of our monthly payments will go toward principal. If neither of us got a raise, it would take us almost NINE YEARS to become debt free. We plan to do it in less than three with a few key strategies.
There are several approaches we will be using to get out of debt as fast as we can while still loving the life we have.
- Earn More – Top priority is to get back to at least the $110,000/year income we left in Minnesota. Now that we have our spending and habits in check, any increase in income will be put straight to debt repayment. I saw it mentioned recently “you can’t save your way out of debt, you need an income.” I’ll try better to remember my sources going forward, remember we’re still learning!
- Stick to the budget – We’ll go through our budget with all of you soon in a Feature Topic post. The key to getting fired up and accelerate our debt-free process will be to use as much of our income as possible toward repayment. We have also stopped carrying most of our credit/debit cards on us unless we’re planning a purchase; can’t swipe a card that’s at home.
- Immediate Debt Payments – One strategy that has proven effective for me to not spend money is to not have it. Whenever I realize I’ve got disposable income in my checking account, whether from cutting expenses or making extra income, I send in an extra debt payment before I have a chance to spend it.
- Communicate often – Whether you’re looking at multiple years of tight budgets or not, it’s critical to stay on the same page with your partner. We will be having weekly meetings to discuss our budget and make adjustments where necessary. Seeing each other sacrifice on a daily basis will keep the fire lit under us and make our debt free date come even sooner than planned.
We will not be following any specific method to paying down our debts. As of now, our plan is for me to take out my $2,048 car loan and $14,651 credit cards as fast as possible. When Alyssa regains her income, she will aggressively pay down her car loan. I’m shooting for September, 2017 for us to be down to the student loans.
I’ve just finished prepping our tax returns for 2016, and it appears we’ll get around $4,000 in refunds. Generally, I recommend lowering withholding by increasing exemptions on the W-4 form filed with your employer, but in this case I’m relieved to have the refund as we’d have probably spent it all throughout the year. With the refund, Alyssa will pay off her credit card and I will be finishing off my car loan (over a year early!); I borrowed about $13,000 at the beginning of 2013 and the car is still worth about $8,000 today. With the car loan out of the way, I will be able to put almost $1,800/month toward the credit cards.
As a part of our debt-free journey, we’ve committed to maintaining our streamlined lifestyle until we finish, regardless of income. Any raises, bonuses, or side-hustle income will be applied straight to whatever debt is next. Our plan for after we become debt free is to save aggressively for our first home, so Alyssa can get the Corgi she’s always dreamed of.
What’s the most debt you or your family has paid off and how long did it take you? I look forward to hearing from you!