Getting Out of Debt the Right Way

The following is a featured post:

If you’re in debt, you’ll probably be all too aware of the stress that goes with it. And, unfortunately, the bigger the debt the greater your stress is likely to be. It’s no wonder then, that so many people who feel as though they are trapped by debt, often turn to questionable and sometimes dangerous ways to try and alleviate their financial worries. This could mean anything from taking out additional loans to pay off existing debt, to turning to unlicensed lenders who charge excessive rates of interest.

These types of choices are ultimately very destructive to ones personal finance situation. They may help you to clear some of your debt in the short term, but in the long term you will most likely find yourself in more financial woe than you were before. So instead of panicking and making bad decisions, here are three good ways to start tackling your debt problems the right way

Sort Out Your Finances

Spring cleaning is a great way to freshen up your home and clear your mind. This is also a great principle when applied to your finances. Draw up a budget and identify where you can afford to make cutbacks. Consider taking on part time work. Get your personal finances in order and you’ll find it much easier to deal with your debt.

Making a Clean Break

Sometimes the best solution to debt is to simply make a clean break, and the best way to do this is by selling anything you have which could potentially be classified as an asset. If you have property, you should always consider the benefits of a reputable house buyer bureau.  Some companies can help you to sell your home quickly, even in a depressed market. Not only will this take away the stress of having to pay your mortgage, but you can then use the remainder to clear the rest of your outstanding debt.

How Do House Buyer Bureaus Work?

The reason house buyer bureaus are such a great resource for people who need to get out of debt is because they can guarantee that your property is sold within a pre-determined time frame. This means no more waiting around for someone to take an interest in your home, and no need to spend money making your property look attractive for potential buyers. A bureau will simply buy your home for an agreed upon price, thereby taking it off your hands and freeing up your finances for sorting out your debt, once and for all.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Pay Debt Away But Keep New Debt At Bay

One of the things I love most about being a personal finance blogger is reading stories about other people who have reduced or eliminated their debt.

Our debt is pretty simple:

  • A mortgage – We re-financed our original 30 year mortgage (set to pay off in 2037) with a 15-year mortgage in late 2011.  This will put us on pace to pay that off in 2026.
  • A student loan – My wife has one outstanding student loan.  It is a private loan with a rate lock of just over 2% and a payment under $100 per month.  It’d be nice to pay this off early but we’re not changing our current strategy to do so.  Additional cash flow would have to open up.
  • Credit cards – None.  We use credit cards simply to earn cash back rewards
  • Car – None. We have two cars, both fully paid off.

It’s great as I see a lot of bloggers write about paying down debt, paying off debt, or discussing their personal debt payment strategies.  For the most part, they’re usually pretty good.

However, there is one thing that I usually see left off, and that’s to have a ‘No New Debt’ provision, and a plan to reach it.

If you start off with $100,000 in debt, work hard, and pay off half of it, that’s awesome!  What if you have $10,000 in debt, and you pay it all off.  That’s great, too!

And, with most debt payment stories, that’s often the ‘end’, so to speak.

What it doesn’t address is to make sure that number never goes higher.  In other words, if you pay off half of that $100,000 debt, you should make sure to do everything possible to avoid having that number go higher.

If you pay your debt off, congrats, but resist the urge to go splurge, financing a new car, vacation, boat, or whatever that’s going to get you right back in debt.

In other words, here’s my debt payment plan that you should adjust every month.

  1. Calculate your starting debt
  2. Make your payments
  3. Calculate your new debt total (it should be lower now)
  4. Set the new debt total as your debt ceiling

That’s right, every month you need to make sure that you set a goal to make your current total your maximum.

What that means, though, is that your debt payment strategy should plan for this.  I have read many articles on whether it’s advisable to save or to have an emergency fund if you are paying off debt.  The answer, based on my advice is: It depends.

How?

Well, if you are in a position where you are risk of emergencies, then yes, you should have an emergency fund.  Do you drive an old car that’s prone to breakdowns?  Do you live in an old house with a furnace or boiler 15 years past it’s expected date?  If these or something like these are in place, then you need an emergency fund.  If you live in an apartment and drive a bike to work, you might not need this as much.

Same goes with savings goals.  If you buy a house and you know you’ll need a new roof in 5-10 years, then start saving along with paying debt.  Otherwise, when that roof goes and you’ve paid every dollar toward debt, you’re going to have nothing left to pay for that new roof.  As good as it is to have paid off more debt, you’ll be violating your debt ceiling’ rule.

That’s not good.

So, make sure your strategy is complete, and if you focus 100% on paying debt, you have the best of intentions but you’re leaving a blind spot, and just like with driving, those can lead to peril in the blink of an eye.

Readers, what is your strategy to pay away and keep new debt at bay?

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Answering Readers: Why Not Pay Off The Student Loan?

Last week I did a stroll down memory lane when it came to our debt and how it’s shrunk over the last four years.

A couple of readers (Bucksome and mbhunter) questioned why our current strategy is more focused on paying extra on the mortgage versus the outstanding student loan.

Great question!

Here goes:

  • Interest rate – The interest rate on the loan is fixed and is very affordable, somewhere just above 2%.  The first student loan was a variable interest rate, and though it dropped to around 4% by the time we’d paid it off, originally it was around 8%.  The current interest rate on the loan is well below that of the mortgage rate of 5.875%.
  • Payment amount – The monthly payment on the student loan is less than $100.  This is pretty easy to absorb into our monthly spending so it’s less of an incentive to knock off that payment than it would be if it were over that threshold.  The original loan we paid off in a hurry was $199, so that was nice to see go away.
  • Bang for the buck – I have a spreadsheet where I track the loan amortization, and I can fill in the extra payments we make along the way.  I can tell that applying extra on the mortgage takes quite a bit of interest off on the back end.
  • Long term goals – The student loan is a 15 year term loan.  It started in 2005, so even without any extra payments it would be finished in 2020.  One other goal I have, though (and it assumes we stay in our current house) is to have our mortgage paid off by the time our children start college. Since our oldest is two, that gives us about sixteen more years.  That would mean that we’d have to pay it off ten years early.

We still do pay extra on the student loan now and then.  A portion of our yearly tax refunds goes toward paying extra on our debt, and I’ll typically split it about 75-25 with the lower amount going toward the student loan.  Additionally, when I make any extra money from the blog, I’ll send some extra toward a debt.  My guess is that once the balance gets low enough to where paying it off is achievable, I’ll probably go ahead and do it.

Even then, though, the goal is to take that payment and just add it to the amount we pay extra on the mortgage every month, which is exactly what we did with the monthly payment amount of the original student loan that we paid off last year.

So, while I know it’s not the most concrete strategy, it works for us, and the way I look at it, as long as the balance keeps going down, we’re headed in the right direction!

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

A Four Year Debt-rospective

I use July as the benchmark for looking at the progress on our overall debt.  This practice started in 2007.  Why July 2007?  Simple.  Because that was the time that our debt was at its absolute highest.


July 2007 

Why was our debt highest in this particular month?  Because that’s the month we assumed the 30-year mortgage on our house.  Happy to say it’s been all downhill from there.

At this point in time we had:

  1. Mortgage – 100% of our mortgage balance remained since we hadn’t paid anything yet
  2. Auto Loan – We had about 30 months left on a 48 month car loan
  3. Student Loan 1 – This loan had the higher balance and the higher interest rate and higher monthly payment
  4. Student Loan 2 – This was the other loan we had.  Both loans were 15 year notes starting in 2005.

July 2008

During the first twelve months of living in our house, we did pretty good.  We paid off 5.5% of our debt balance, leaving 94.5% of the original debt amount.  My wife and I were both working so we were able to pay a good chunk extra each month.

All loans were paid with their regular amount except for the auto loan, which we reduced by 97%!

July 2009

My wife had quit working in March in anticipation of being a stay-at-home mom.  As such, we knew that the days of applying a lot of extra money each month to debt would be reduced.  This was sad, but on the upside, we eased into the budget so that the last few months she was working, all of her income went to debt, which allowed us to reduce the balances plus have worries about being able to pay the monthly bills once her paycheck went away.

The tiny bit on the auto loan went away, leaving just the two student loans.  All extra went toward the higher balance student loan.

In this twelve month period, we paid another 5.4% of our debt, reducing our original debt amount by 10.9%

July 2010

With my wife not working and raises on my end being scarce (read: non-existant), the only extra payments we were able to make were by applying a portion of our tax refund, as well as a portion of a small inheritance received from my grandmother who passed in late 2009.  All extra amount again went toward the higher interest rate student loan, but the good news was that we had paid off over 90% of the original balance on that loan!

In this twelve month period, we paid 3.9% of our original.  This was a drop-off but we’d actually anticipated it to be a higher drop-off before applying part of the inheritance, which raised it a few fractions of a percentage point.  All told, we had paid off 14.8% of our original debt balance.

July 2011 (Today)

With another year of no raises, we were able to pay off 3.4% of our original balance.  Again, this is another drop-off, but because the previous years had been helped by an extra income and later supplemented by a one-time influx from the inheritance, this was really along the lines of what we’d been expecting in 2010 and 2011.  The good news is that we paid the first student loan balance in full.  The monthly amount that had been going toward the student loan was added to our mortgage payment, meaning we never even saw the money once the loan was paid.  As of now, we’ve paid off 18.2% of our original debt and we’ve paid off two of the original four loans we started with.  Slow but steady progress.

Looking Forward

I’m hoping that raises finally kick in and that we can apply a little extra from there (we’ll see toward the end of the calendar year).  In addition, I’ve started making a little money from the blog, a portion of which gets applied to either the mortgage or the remaining student loan balance.  Plus, every month we make payments without taking new debt, the amount paid to principle increases steadily.  I think we can start trending the line back upward in terms of what we pay off for the year starting a year from now.

Do you track your debt over a long term period?  Does it encourage you or discourage you?

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