This popular post about how we got out debt in 2008 is still highly relevant today. Enjoy!
If you read the about me section, you might have come by an article that explained where we financially started upon graduation from University. To summarize, we were majorly in debt (but not as bad as these guys). To start, we had a large student loan along with a brand new car loan. Within 4 months of that, we closed on our first home/mortgage with no furniture along with an engagement ring in the works. So needless to say, there was a lot of money spent. The bad part was that it was with mostly borrowed money.
I don’t write a lot about debt as I personally believe in focusing on building wealth instead. However, dealing with debt is a big part of personal finance. We managed to pay off $50,000+ worth of student and consumer debt in 3.5 years after graduation all the while maintaining a principle residence, purchasing a rental property and getting married. In fact, we could have had our debts paid off sooner if we didn’t build a large cash emergency fund.
How did we get out of debt?
Here are there guidelines:
- Be committed to reducing your debt. Focus and set your mind to creating wealth by reducing debt liabilities. This must be top priority before any discretionary spending or even retirement savings.
- Calculate and increase your cash flow. Track your income and expenses to figure out your cash flow. If your cash flow isn’t positive after all expenses including debt servicing, find ways to reduce expenses and/or increase income until you have a positive balance sheet. The higher your positive balance, the faster the debt will be paid off. For the most of us, saving money is easier than finding ways to make more money. We did both – we lived frugally and I got a second job.
- Extra money is used to pay for beer down debt. Any excess cash flow from your budget should be used to pay down debt including unexpected income ie. higher than normal tax returns etc.
- High interest debt is paid first. Debt should be paid off in this order of the highest interest rate -> lowest interest rate (after tax deduction if there is one). Minimum payments should be made on the lower interest rate loans, while pouring all excess cash flow on the highest rate loan.
- Keep it going. Once a loan is paid off, take the old loan payment money and dump it on the next highest interest rate loan. Repeat until all debt is paid off.
If you have consumer debt that you want to get rid of fast, then follow the steps above and you’ll be debt free much sooner than you may realize.
For those of you who have also defeated consumer debt, how did you do it?If you would like to read more articles like this, you can sign up for my free weekly money tips newsletter below (we will never spam you).