As we’ve been paying down out debt faster than we originally anticipated the past few months, I’ve been doing a number of new calculations on what might happen in the future – how much ahead of schedule we might be able to pay off the credit card as well as the entire debt, how much we need to pay each month to maintain out current goals and how that compares to when we started, and how much more than our minimum payments we need to pay each month to keep on track. And I’ve come up with something I’ve decided to call the debt crossover point.
The crossover point, in personal finance terms, refers to the point where the money you earn from investments equals and then exceeds your expenses. At that point, you no longer need an outside source of income (ie, work) to maintain your lifestyle. For most people, if this point is reached it is at or during retirement.
My debt crossover point, as I’ve termed it, is the point where just paying our minimum budgeted payments will allow us to pay off our entire debt according to our goal timetable (December 2010). Our minimum budgeted payments is slightly different than our actual minimum payments, it is a fixed number ($810.41) which is the amount we have firmly budgeted each month to pay towards debt. That number is the actual minimum payment on our car loan and both our student loans plus $200 towards our credit card. It is slightly higher than our actual minimum payments because our credit card minimum payment goes down each month as we pay more of it off (currently about $63).
According to my calculations, once we make our next credit card payment with the windfall snowflake included, the amount we need to pay to debt each month to pay it all off by December 2010 is $895. So we are still about $85 away from reaching that debt crossover point. But we have made enormous progress, for when we started in June 2007 with this concentrated and accelerated debt paydown effort, we had to pay $1050 per month to reach our goal, so we are $155/month closer to that crossover point than we were.
Now, do I intend on just reverting to paying only our budgeted minimum once we reach the point that the budgeted minimum is all that is required to reach the target completion date? NO. Not at all. The faster our debt is paid down, the better. I would LOVE to completely pay down our debt much earlier than December 2010, and will continue to throw everything we can at it month after month. But what I like about approaching the debt crossover point is that it provides security. With my income increasingly variable as I try to start a new contract position as well as explore different alternative income streams, being close to the debt crossover point provides security. If I have a month where I do not earn much money, and we cannot pay much more than our budgeted minimum, then the closer we are to the debt crossover point the less that will affect our overall debt reduction goals. And that is an increasingly comforting feeling.
Don’t worry – I haven’t lost the fire. But it is good to have an extra layer of security. If I keep having good months I might start looking at how feasible a December 2009 goal might be though. Then the debt crossover point will be reset high again. But that’s still a good thing.