The Big Guns
We have talked about identifying what is important and what isn’t, so you can shed some clutter, and about real easy things that pretty much everyone can do to cut down on some monthly expenses, but today we will talk about how to kill debt for the long haul. This is a very big sacrifice we have chosen to make, and with our momentum, we will be debt free in about 6 years. Like, completely debt free. We will be only 38, so that is huge. Obviously, we may have some setbacks and things may not go according to plan, but any headway we make is better than no headway at all. We have just one child (thanks to infertility, not for lack of desire), and both of us work, so I realize this is a much more aggressive tactic that may not be even feasible for some families with more kids or a stay-at-home-parent, but if you have the ways and means, then jump on the train now, because adding kids or losing a job to the mix will complicate matters later if you don’t have things under control now.
1: We drive used cars. I bought my car new in 2007 and it was my first ever brand-new car…and likely my last ever. I hated and resented that car payment every month. Cars are not generally investments, people. They depreciate, instantly. They do not appreciate, unless you have a mint-condition fancy car that is in high demand, like a classic Corvette. Do not be fooled and enchanted by the bells and whistles. Buy a used car and either learn basic repairs yourself or befriend a mechanic; you will be SO much better off. I plan on keeping Geoffrey (that is my car) until he falls apart, which is hopefully not for a very long time. He has only needed very minor repairs and maintenance, so we are lucky so far. My husband bought a used Infiniti in cash a year ago—a car that cost $65,000 11 years ago—for $3500, and it is immaculate and way nicer than Geoffrey and will likely outlive him. I shudder when I think of the money the previous owner wasted on the Infiniti. You really can find a good deal on Craigslist or whatever, but buyer beware. Our car has had one owner, no accidents and had all the service records. Even if the Infiniti lasts only another 3 years (which it will last longer, God forbidding accidents), we will have spent only $875 a year on owning it over the course of 4 years, minus gas and regular maintenance, whereas the previous owner spent $6,500 a year while owning it for 10. I don’t like new car smell THAT much.
2: We make extra payments and buy things in cash. You are thinking you have heard this before, right? Like, every day on Yahoo…but wait, there’s more. Learning to manage our income to the maximum benefit of our family is the toughest thing we do. It is where the belt gets really tightened. We get paid every two weeks. Instead of paying bills monthly, we pay every two weeks. There really isn’t much difference in that, but it does accumulate over the course of a year and it has helped us get ahead in lots of ways. I have made a handy, dandy chart that shows exactly what our bills are, where our current debts stand, how much progress we have made, and how much money we have after bills are paid. We pay ALL of the bills due for those two weeks the very day we get paid, then we take out the remaining money as cash and that is it. We pay for mostly everything.in.cash. When it is gone, it is gone…but believe me, when you know that little wad of cash is your gas, groceries and whatever else you need for two weeks, you think twice before parting with it for any reason.
We also pay more than what our minimum payments are on most things, but we do have a system. We decided that paying 30 years for a house and ultimately paying twice what you purchased it for really sucks, and since that is our biggest asset, we decided we needed to squash the bank that was sucking its blood. We started off with first telling ourselves that our $800 mortgage payment was really $1000, and we did that for a while, and were elated to finally see the balance move down for the first time in, um, ever. Then we got really brave: we decided to live off of one income and pay the house with the other. We would also apply any bonuses or income tax returns to the balance. In one year, we decreased our mortgage balance by $28,000, which was 27% of our principal. Once our house is paid off, we plan on turning the cannons at the student loans, of which we now owe more on than our house.
We also attacked our debt from the other side, by paying down all of our little debts on our credit cards . We do have credit cards: we have two very small limit secured credit cards (which are basically small CDs really) and one large-limit credit card in case ish really hits the fan. If we put anything on them, we pretty much pay them off immediately. We use the snowball method: we started paying off the smallest debt by making extra large payments, while maintaining minimum payments or just more than minimum payments on other little debts. Once that was paid off, we used all the money we were paying on the previous debt, plus the money we have been paying on the next smallest debt and killed off that debt, and then so on. We closed out 2 small private loans, 2 store credit cards and paid off the the credit cards we continue to keep open in this manner. We keep our credit in good standing by occasionally purchasing gas or groceries on a credit card and then paying them off right away.
3: We pay ourselves.
Finally, we have made our savings account a bill. We always pay ourselves. We have been able to build up our emergency fund in this manner, so that if something were to happen, we would have enough money in savings to pay all of our bills as we do now for 3 months. Ideally, it is supposed to be six, but we decided 3 would be good because we always pay extra on everything and we could stretch it to six by making minimal payments if we had to. We maintain a certain number pretty much always. We do add to it, but we can also spend that money if we want to, like for a little vacation or remodel on the house, but only to the minimum amount we agree to keep in savings.
We contribute to both traditional 401(k)s and Roth IRAs. We have had mixed reviews from several financial advisors about which account we should contribute more to, so we are still figuring this one out. Currently, we contribute enough to meet the requirements for our company to match our yearly contribution to our traditional 401(k), and then some. It is on an increase of 3% each year, which will be accelerated once our debt is paid down. We also contribute 12% currently to the Roth IRA, which we will also accelerate once our debt is paid. The goal is to max these accounts our for how much we are allowed to contribute, per the IRS, once we have cleared our debt.
There you have it! The De Lara method of managing the financial chaos we wrought upon ourselves in our 20s. I gotta tell ya, just 2 years into my 30s, we have mended a lot of financial fences with this. God willing, we will keep pressing on. Most of the time, I still feel like a little girl that wants my mom, so I feel all adult-y when I look at my monthly budget and the headways we have made from month to month.
Do any of you have any special tactics you would like to share?