3 People Who Beat Their Debt (And How)

Debt is a scary thing. Every year, out-of-control debt causes about 770,000 individuals to file for bankruptcy. But this is a last resort option that can destroy your credit and make life more difficult; often for years to come. Fortunately, there are ways for people to reduce, or even completely eliminate their debt without having to resort to this.

These are three real-life people who beat their debt.

Zina Kumok

Many young people feel the pressures of having to pay off student loans. In fact, the average borrower has over $37,000 in student loans when they graduate college. That’s a sum that can stick around for a long time—especially if you don’t have a plan for paying it down.

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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

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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.

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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!

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.

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6 Ways To Relieve Yourself From Debt

It’s not easy to see your way out from under a mountain of debt. It’s discouraging, frightening and depressing. You might think there is no way you will ever find your way out of this mess, and it’s self-defeating to even try. Don’t lose hope! Even small steps can make a big difference, and if you stick with a plan, it can be a lot simpler than you think. Easy? No. But the end result is a debt-free life and is well worth the effort.

Here are six ways to relieve yourself from debt.

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