I have been completely debt free for a while now and even though getting into debt was a whole lot easier than getting out of it, I wouldn’t change the journey. Again, I am not one of those bloggers who have a crazy/amazing story of how I paid off $100,000 in 6 months. Although I paid off a pretty big chunk quickly, it took me a long time to get to the point where I was focused solely on my finances in order to pay it all off.
How I got the Debt:
When I moved back from University in August 2011, I had $24,000 worth of debt from one student loan. Four weeks later, I applied for a $5,000 loan so I could purchase a bike. Then in March 2012, I applied and was approved for a credit card and quickly maxed it out. For the next two years I was making the minimum payments and then in June 2014, I applied for another loan – $8,000 to be exact. Why? Because I wanted to finish my CPA exams. However, it didn’t work out like that. I was told I would be starting a new job but when my contract with my previous job ended, I still hadn’t received my start date and I didn’t have an emergency fund to keep me afloat. So you guessed it – I used the money to hold me over until I started my new job. After using the money to fund my survival for the next 4 months, I finally started my job. I know… such a stupid decision.
Anyway, between September 2011 and December 2014, I had paid off $15,200 of principal and $2,100 in interest. And after three years and three months, I still had $21,500 in loans and $3,500 on my credit cards to go. I was tired and fed up with the fact that I was giving a portion of my paycheck to the bank every month and it was a constant reminder of the poor decisions I had made. So I decided that 2015 would be the year I paid back every single cent.
How I got rid of it:
Create a game plan
The very first thing that had allowed me to pay off my debt was the boost to my income from the new job (the only thing that place was good for). The increase in my income allowed me to put an extra thousand dollars towards debt every month. From my first two paychecks, I put aside $500 which gave me a cushion and a tiny little sense of security. And from there I worked out when I would make an extra payment and when each balance would be paid off.
The next thing I did was adjust my attitude (should have been the first) towards money and swiping my credit card. I realized I was swiping because of FOMO and because my friends were buying nice clothes and fancy things. And also because of the lifestyle inflation that happened when I went from broke college student to earning a steady income.
Pick a method
There were two options I could have used; snowball or avalanche.
The Snowball Method is for the person who needs a quick win to stay motivated. Basically, you list all of your debts on paper from smallest to the largest. With this method, the interest rates on your debt are ignored. Simply make minimum payments on everything but put any extra money to that smallest balance. Then once that balance is zero, you move on to the next debt on the list. Keep working your way down the list until you are debt-free.
The other option is the Avalanche Method. With this, you list your debts based on the balance with the highest interest rate first and then work your way down to the lowest. It’s very similar to the snowball in principle because once you pay off the first debt you continue to work your way down the list adding the extra money to the next debt. This method is for the person who wants to pay as little interest as possible. With this method, you might lose motivation because the balance your paying off doesn’t give you the feeling of a quick win.
Luckily for me, my largest balance had no interest (thank you parents) which allowed me to pay off the balances that had interest first. So I sorted the remaining balances from highest to lowest interest rates and work on each balance one at a time. By paying off the balance with the highest interest first, I was able to increase my payment on the balance with the highest annual percentage rate while continuing to make the minimum payment on the rest of my balances. I was making the minimum payment on all debts and put extra principal payments on the one debt I wanted to pay off fast. This really helped me make a dent in the balance.
Once I paid off the first balance, I added the extra (minimum payment and extra principal payment) to the second balance and worked on that balance. By the time May rolled around, I had paid off my credit cards and my $8k loan.
Change the habits
This really isn’t something you can do as a step and then move onto the next. It is more of a continual thing. But it played a big role in helping me to pay off this debt. Just like previous habits played a big role in getting me into debt. By continually working on my spending habits, I started to notice what was important to me. I now know the difference between a want and a need and that has been a really big help when it comes to impulse purchases. I can go into a store for one item (that was a need) and walk out with just the item I went in there for. Can you say victory?!
One habit that I had implemented and I’m really proud of and don’t think I will ever stop using is the waiting period. For online purchases, I gave myself a week to think about it and 48 hours for in-store purchases. I used this time to really think about the item. Was it something I needed? How often will I use/wear it? Do I own something that can be used as a substitute for the item? Do I already have it in a different colour? Having this waiting period has allowed me to save myself from a lot of useless purchases.
Another habit that started to form during this time was preparing my lunch more regularly at home. This allowed me to brown bag it to work four times a week and go out on Friday. By doing this I was able to put an extra $320 towards my debt every month. By the end of 2015, this morphed into eating breakfast and dinner at home, with the occasional going out to restaurants to have dinner.
Don’t Give Up
While my friends were out there living and enjoying life, I was staying in and trying to stay away from Amazon, because I knew I wanted better for myself. And I am not going to BS you and say it was this easiest year of my life because it wasn’t. This journey was hard as f**ks. Some days I felt like I was making pretty good progress and while other days I felt like I would never get there. But I kept with the plan. I made the payments when they were due and eventually I owed nothing to no one.
Did you pay off a large amount of debt? How long did it take you? What was the hardest part?