I’ve Paid For This Twice Already…

Archive for the ‘debt reduction’ Category

Part of how I got to the point where I’ve really internalized the idea that debt does not have to be a part of our lives (even while it still is) is changing my assumptions and attitudes about certain things.  Over the course of my life, I’ve built up beliefs and convictions and general assumptions that I’ve accepted to be true (such as the you’ll always have a car payment example).  Realizing that they were just assumptions and not absolute truths helped me be able to let go of them.

Some of the changes I’ve made in my own way of thinking and put into action to break free from the assumption of endless debt include:

Debt is not an option

This seems like a simple idea, and it is.  Why it is so tricky to embrace though is because if you pay attention, you’ll find that in the vast majority of cases, debt is given as an option.  From the use of credit cards to adopting a payment plan, debt is everywhere.  I honestly used to not understand when someone said they couldn’t afford something that seemed necessary (like a car repair or home repair).  If I had available credit (and I always did) I could “pay” for it.  But really, I wasn’t paying for it - I was letting someone else pay and paying them back even more than it started as.  Adopting the attitude that debt is not an option gave my entire financial life a whole new set of rules.  Harder rules, but ultimately better ones.

Actions speak louder than words

I can say until I am blue in the face that I don’t believe in debt and that debt is not an option, but unless I put that into action it’ll never become internalized. From not using credit in any form, to designing an action plan (and putting it into practice) of how to eliminate current debt, those actions cemented for me my newfound creed.  Taking those steps to make my plan a reality has made all the difference.

Look for the catch (before accepting the message)

No money down!  12 easy payments!  No interest financing!  All those messages sound attractive, but in most cases, there is a catch (or two).  Make sure you understand all the terms (including late penalties, prepayment penalties, basically anything involving a penalty) and that you have a solid, unshakeable plan to take advantage that can’t be derailed by life before you accept terms.  In our personal world, life still derails things quite often, so we eschew payment plans no matter how nice the terms.

The easy way out is usually the most dangerous

All those commercials that claim to settle your debt for pennies on the dollar - most are scams.  Just like the free laptop that only 1 out of 100000 people manage to make happen, debt consolidation is often a scam.  if you can’t do it yourself, get help, but make sure that help is not for profit and not out to get you.  Sadly, most are preying on vulnerable individuals.

Debt doesn’t have to be an automatic part of life. But breaking free requires more than desire, it requires commitment, planning, and perseverance. We’re not there yet, but every day brings us just a little bit closer.

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I was having a conversation with a friend the other day, and he was talking about car payments.  Specifically, how he had told his son that having a car payment is just part of life - just expect to always have one and then you’d be prepared for it no matter what.

Without even thinking, I said “I used to feel that way too, but now we don’t intend to ever again have a car payment.”   When he asked why, I thought about it for a moment, and all I could come up with was “We don’t believe in debt.”

And basically, that is the truth.  Debt used to be a very basic part of my life.  It was not just a tool I could use to live beyond our immediate needs, it was practically a lifestyle choice.  The amount of money people (people meaning banks, credit cards, etc) would lend me to finance my future was a very real consideration in all the choices I made in the here and now.

But through this debt reduction and ultimately elimination journey, at some point I made a very real, concrete change in my brain.  Although I am not strictly anti-debt, I don’t believe in debt any more as a fundamental part of my life.  I don’t put my faith in the financing of others to create the life that I want to live.

Understanding that debt didn’t actually have to be a part of life has been both a fundamental and incredible realization to make.   And although I didn’t realize I was making that shift when it was happening, it is a very real and important and integral part of how I view money and our lives now.  We may still have debt, but we don’t necessarily have to take on more.  We can make choices that minimize our potential exposure to debt.  And hopefully someday, we’ll be in a position where debt as a whole becomes a choice and not a necessity.

This is not to say I think all debt is bad, and that I am 100% anti-debt.  But debt is now seen in our lives as something we can consider carefully and make a choice about its usefulness, instead of a necessary part of our existence.  And that has made all the difference.

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Because if you haven’t, I have a few secrets to tell you - and why, for me, it would be a true last resort.

I’ve had a few comments about saving vs debt and they’ve been all over the map, but a few of them bring up the point that paying off the student loans at faster than minimum when I don’t have a full, 6 month (or more) emergency fund is concerning - because in a true emergency situation, I could get a forbearance on my loans and not have to pay them for a while.  While technically true, it isn’t as rosy as it might sound.

When my spouse became unemployed in 2003 due to the company he worked for practically going under and laying him off, he applied for (and was granted) a forbearance on his student loans.  And he’s said numerous times since, that if he knew then what he knows now, he’d never have done it.

Forbearance is basically temporarily suspending payments on your student loan (usually for a 6 to 12 month period) based on financial difficulty in paying.  There are requirements that need to be met, but if you are approved you will get a hiatus from paying down the loan.  You are not obligated to make payments on your loan during this time, but interest on the loan still accrues.  So your total amount owed will keep going up.   Depending on your interest rate and the total amount owed, you’ll accrue a little or a lot more debt during that time.

Why my spouse would never do it again (although since his loan is paid off, it is a moot point) and why I would only use it as a last resort is that in our case, Sallie Mae reconfigured our loans when they came out of forbearance.  The interest rate was the same, but they treated it kind of like a brand new loan with a different payment plan and a different (longer) length of payments in which, if we hadn’t been paying attention to things (and I wasn’t so good about looking up terms online etc that many years ago) it would have seemed like we were back in the same plan (the payments were similar to what they were before the forbearance) but the actual payoff end date was almost 7 years later than it was when he went into forebearance.  Tricky.

Do I know that every lender does this?  Nope.  No idea.  But my loan is also with Sallie Mae and frankly, Sallie’s gotten enough of my money as it is.

Do I think that it is a great idea to NOT have a 6-month (or more) emergency fund?  No, of course not.  But when you have debt and insufficient savings, you have to make choices (unless you have an unlimited income or source of money), and these are the choices we’ve made so far.  Concentrate on debt elimination, increase savings when we feel its appropriate, and get to a place where the choices are much more straightforward.  Your choices may have a different balance, and that’s okay.  As long as they work for you and you feel (and see) progress being made.  Motivation is one of the keys to progress, and we want to stay motivated.

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There are times for most of us when motivation is lacking.  Be it from our own internal struggles, or the pressures of the world around us, almost everyone could use a little jumpstart now and then. When I need a little more “oomph”, for whatever reason, I start treating debt elimination not just as a journey, but as an actual road trip.  I love road trips, and have taken more than my fair share of them in my life.  Just like I wouldn’t leave out my front door without an idea of where I was headed (well, I did once the summer between high school and college, but that’s another story), successful debt elimination needs a plan of attack - or in this case, a roadmap.   Start your road to debt elimination now by creating a roadmap of your own.

1.  Know where you are

This is, in a way, the easiest step as far as phyiscally completing it, but can be the scariest as well.  The activation energy (the oomph to finally do it) needed can be enormous and overwhelming.  If you are stuck here, take it one step at a time.  Gather up all your financial information into one place.  Then, one piece at a time, go through it.  it doesn’t all have to be looked at at once.  Keep a tally on a piece of paper.  What do I owe (credit cards, loans, other debts)?  What do I have (bank accounts, investments, property)?  What comes in each month?  What goes out each month?

Without a doubt, it is much harder to get to your destination without knowing your starting point.  The time invested in getting an idea of where you are will pay off down the road when creating the path to your destination.

2.  Know what your destination is

This can be very simple, but creating a “debt-free” goal versus a specific payoff amount goal is the difference between saying you want to go to California vs Los Angeles.  One is more vague and harder to create a specific plan for, while the other is more specific and more in depth.  The more specific you can be, the easier to see the steps to get there.

3.  Draw yourself a map

Just like it is harder to get where you are going without directions, reaching your debt elimination goal is tougher without a clear way to get there.  As I tell my taekwondo students, a goal without a plan is better labeled a dream.

Look at your money coming in and money going out.  Look at where you are as far as assets and liabilities, and start drawing up plans for how to accomplish the debt elimination journey.  Start with a monthly amount you can commit to debt elimination.  As you progress, you can begin to work in plans to earn extra money, or snowflakes, that can also be committed to the cause.  Every journey begins with that single step.

4.  Plan your rest stops

Every journey needs a little pit stop somewhere to regroup, refocus, and re-energize.  You can base rest stops on time, on milestones, or a combination of both.  For us, we use each passing year as a time to really examine our roadmap and determine what we need to change or tweak within it to better accomplish our goals.  And we use specific milestones, such as a certain debt paid off completely, or a certain amount of total debt paid, as a place to build in a little reward for a job well done.

5.  Budget plenty of extra time and resources

Once you know what you’ve got to throw at debt, and how much time based on that it will take you, budget in just a wee bit of wiggle room.  You can always re-evaluate later, if you are far ahead of those original plans.  But life is unpredictable, and may throw you curveballs you just never anticipated.   Leave yourself some wiggle room to deal with unexpected challenges, and you’ll be more likely to stay on course.  When we plan a road trip, we plan an “optimistic” time of arrival as well as a “realistic” one, and we do the same thing with our debt elimination plans.  Budget some room into that realistic arrival time and place.

6.  Enjoy the journey

You may not enjoy being in debt - but take time to enjoy the journey out.  Be it by recognizing milestones, looking at progress, or forecasting new plans for the future, enjoy the steps you take on your ultimate journey to debt freedom.  Each step forward is one step closer to living a debt-free life, so take the time to enjoy those steps and be proud of what you’ve accomplished so far.

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If there is one thing I’ve learned through my very public journey out of debt and towards being a financially responsible individual, it is that getting out of debt, or even just improving your financial health in general, is not a one-size-fits-all proposition.  Although there are several popular approaches, and some are more successful, on average, than others, doesn’t mean there is simply one prescribed way to go about it.

Last week I asked how the current economy is affecting people’s outlooks on paying down debt (if they have it) versus saving money.  I got a wide variety of answers, with some feeling that debt elimination was their best bet, some saving everything they could, and many in between.  Over 18 months ago, when I started blogging about getting out of debt, I was very committed to paying off debt as fast as possible, and threw every penny we had at it.  I did, grudgingly, save a $1000 emergency fund, so I wouldn’t have to create new debt to deal with an emergency.   And over time, I saw the wisdom, for us, of having that emergency fund.  We had to use it several times to deal with house, medical, and auto-related things that happened.

And now, for us, I see the necessity of an even larger emergency fund.  But I’m still not, after all this time, accustomed to the idea of saving money “just in case” without a clear defined purpose in mind.  I’ve tried to tell myself the clear defined purpose is “an emergency” but my brain isn’t accepting that.  I’m looking at our budget and trying to find the money to raise our emergency fund from $1000 to $2500 but it is making me cranky.  I want to throw that money at my student loan.  But no matter how many times I am told a $1000 emergency fund is the right thing to do while you are aggressively paying off debt, I know that isn’t working for us any more.

The idea of saving $1500 a month towards a new car (although it seems kind of impossible to accomplish) doesn’t bother me as much, for some reason.  At least, not yet (but of course I haven’t started doing that yet, so it might irritate me too).  It has a designated purpose, after all.  My brain is an odd place.

Debt elimination isn’t an exact science, and the process is not one size fits all.  With trial, error, and an open mind to evolving as things change, the path that works for you can be found.  Be open to change.  Don’t blindly follow the same path even when everything else changes, unless that path still fits your situation.

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