I’ve Paid For This Twice Already…

Archive for the ‘debt reduction’ Category

My family has come a long way in the past two and a half years since we started this serious debt elimination journey. When we started, almost half our monthly income went straight to non-mortgage debt, and it had a huge impact on our everyday life. The idea that someday we’d pay off over $30,000 and have less than two hundred dollars a month that *had* to go towards debt was a dream I wasn’t sure we’d realize. But we have, and even though we’re almost done - the journey isn’t over yet.

The final stretch, when you’re at the start, seems like it’ll be the easiest part. As you eliminate debt, more resources become available, and more can be allocated to fight the good fight. Momentum is on your side - the snowball rolls downhill faster and faster until it seems nothing can get in the way.

But, that isn’t always the case. Just as any other part of the debt elimination journey, setbacks can appear at the end as easily as the start. The length of the journey itself can be daunting - that initial adrenaline about completion can only last so long. And as more things creep into sight, debt elimination seems like it might have been the least complex part of the puzzle.

I haven’t completely lost focus - we’re still making progress (which I need to update on the numbers page, we’re closer than that currently reflects). But it has been much easier to get distracted into dealing with other things. As the debt becomes less, it almost seems less urgent - at the beginning, it was so much as to be overwhelming, and put a serious weight on our finances that felt almost inescapable. But as we’ve beaten back that debt monster, the threat of imminent destruction to our finances has become less (or at least, has felt less) because of debt. It has been easier to prioritize other goals before the final debt elimination. It has, in a word, become less urgent. Not in fact, but in feeling.

And the less urgent the debt elimination feels, the easier it is to not focus on it when other things get in the way. And that’s how the home stretch becomes an endless silent struggle. A lot of things have changed for us in the past two years. A lot of good, and some bad as well. But even though there may be other things affecting our lives that we never anticipated, this final debt elimination stretch will not continue to drag on. The refocusing of our finances back to where it began starts now.

First on the list - making this month’s student loan payment and then updating the neglected numbers page. Nothing like a Tell All Thursday to get things back on track. I doubt we will completely eliminate the non-mortgage debt by the end of 2009, but I’d like to beat the original December 2010 goal by as many months as possible. And figuring out where we are is how we’ll get to that point.

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Focusing energy on debt reduction (or elimination, as I like to term it) or savings is an ongoing debate, not only for society at large, but in my own life.  Once I started taking control of my finances, instead of just going with the flow and barely scraping by, I’ve prioritized different things at different times, and it all comes back to which is more important to me at that point  - eliminating debt or putting money into savings?

This seems like it should be a clear cut process with a easily defined answer, but it is not.  Every situation is different, and the factors that come into that situation will vary.  Instead of looking at a cookie cutter one-size-fits-all solution, here are reasons I’ve prioritized debt elimination over savings.  Later I’ll look at the other side of the coin - when savings is prioritized over debt elimination, and then finally, what decisions I’m currently making as well as the future of our financial life.

Debt elimination reduces obligations

The most dramatic and immediate affect of reducing (and eventually eliminating) your debt is reducing the amount of financial obligations you have.  The less you owe, the more of your money is actually yours and not promised to someone else.  The more decisions you actually get to make about your money that aren’t made for you.

Debt elimination has a snowball effect

As you reduce and subsequently eliminate debt, there is more money freed up in your budget that can be applied to remaining debt, producing a snowballing effect.  The more money put towards debt, the less that debt becomes, and if you keep building upon that, the path to debt freedom gets shorter and shorter.

Debt elimination makes an immediate difference

$100, $10, or even $1 paid towards debt is that much more you do no owe, that much more you are no longer paying interest on, and in some loan cases, can immediately reduce the amount you are obligated to pay in a month.  This is a difference that can be immediately felt in your monthly budget, and paired with the snowball effect can have drastic positive consequences.

Debt elimination frees funds for emergencies

Money that is not obligated to pay towards existing debt can be, if needed, used towards other events, emergencies, or obligations.  If you now have to pay out $800 a month vs $1000 a month, that $200 can be, if need arises, diverted to a pressing immediate need.

Of course, many of these reasons can be turned on their head and used to defend a position of savings over debt elimination.  Which is why the path to take is a uniquely personal one.  And Next time I will be doing exactly that - turning things upside down and seeing where that gets us.   I’ve been on both sides of this debate, and mostly somewhere in the middle.  Finding that middle ground that is the right balance for you is the trick.

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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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