Monday, December 02, 2013

The Debt Snowball Begins To Avalanche

It's time for another celebration as I just sent off the last check (via Bill Pay) on another loan. I think it'll be fun to see how we're doing.

We started this journey 2 years ago. At the time, we had $78,000 in debt (excluding real estate investments). and we were ready for all of it to be gone. Including our car loan, the minimums totaled $996 and all we could add at the time was an extra $200. It wasn't a ton, but it was enough for us. Then about every 6 months, we would kick in another $1,000 from accumulated savings. My calculations showed it would take us 5 years to pay it all back at this rate. We were OK with that because we knew we could increase that amount over time.

When I got a raise, all of it went towards paying back the loans. When we increased the rent on a unit, the increase went towards paying back the loans. When we moved to a smaller place, we put the difference towards the loans.

In 2 years, we've managed to get our debt down to $44,000... not as fast as some of the Dave Ramsay callers I hear, but good enough for us. That means we've paid $38,000 in payments $34,000 of which was to principle. Because of how snowballing works, more and more goes towards principle over time, and that means we're now on a 4 year track. Woohoo!

In those 2 years we also increased our extra payments by $767 per month, and by snowballing our old payments, we're now doing an extra $1,345 each month (with an extra $1,000 every 6 months or so, as savings allow).

In those 2 years, we've learned some things. Here they are:

Lesson #1
Start where you can. We could only do an extra $200 at first. That's OK. It's important to just get started. The same is true for saving for retirement: just start. Then next year, you can re-evaluate and add more.

Lesson #2
When making extra payments, it really adds up because 100% of it goes towards principle. So even though it may not seem like much at first, it has a huge impact. This is especially true at the beginning of a loan when a majority of your payment goes towards interest.

Lesson #2.5
People get caught in questions about the order: Biggest balance first? Largest Interest rate first? Type of loan first? So many choices! I would argue it doesn't matter. Just pick one. The BIGGEST determination of how fast you pay off our loans is the amount EXTRA you pay. Instead of spending time figuring out the optimal order, spend that time figuring out how to pay just a little extra.

Lesson #3
Make sure to celebrate your small wins. You can brag about it on your blog to show off how awesome you are. Or, like we're also doing, take a trip to Disney World. In January, we're going for a long weekend. Since it's off-season, we saved money on our plane tickets. We're also staying with friends (and running in a 10K race with them... the "official" reason for going), and used my sister's employee/intern discount for park tickets. As such, we were able to keep the cost under $1,345 for the two of us. Celebrating milestones keeps you excited during a very long process.

Lesson #4
Once you see the fruits of paying off your loans, use that excitement to find other ways to add to the pile. It might be cutting back on something that you don't really use, or finding a side job/gig and putting 100% of your earnings there.

Lesson #5
You can pay off your loans with crazy intensity, but you don't have to. In this time, we managed to also buy a car, another investment property and a new home. Though, you'll notice that each of these purchases were designed to improve our monthly cash flow. Despite that, I'm thinking about setting a 2014 goal of not making any large purchases, or doing any large renovations.

So there you go. If you're lucky enough to get a raise/bonus this year, think about kicking off your journey of getting out of debt before spending it on a new iPad Air.

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