Managing Our Debt - A Review Of How We Live With A Large Debt Burden
Posted on December 19, 2007 by Him and tagged automobile, credit, debt, student_loan
photo: iandavid
Over at The Digerati Life, Silicon Valley Blogger muses about handling large debt loads. Her examples include two bloggers who have large amounts of debt: the always controversial Casey Serin and a newer blogger Debt Kid. She also narrates a story of a man she knew who bought a $1.5 million dollar home, but who had a bunch of contingency plans should things go financially awry.
In our own writings, I have to admit that we can be brazenly blase about the amount of debt that we have and how we're tackling it. I feel that we can do this because we've come up with our own action plan to manage our debt. When we first started this blog, we had $18,054.88 in credit card debt, and $135,966.11 in student loan debt. Many people look at those numbers and tend to freak out; we did too. Fast forward to today and we've eradicated all of the credit card debt, and we're working to accelerate the student loan payment. Here's how we've managed this amount of debt without waking up in cold sweats.
1. We have relatively low rent. This was our first step for our finances after college and has been paramount to freeing up cash. Currently our housing costs are 18% of our take home income (about 10% of our gross).
2. We used the debt snowball for debts with balances of under $1,000. We had a few cards with a few hundred dollars debt on them; each of them demanded a minimum payment every month. One of things I do like about Dave Ramsey's debt snowball is that it frees up cash relatively early in the debt payoff. Even though it made more mathematical sense to pay off the higher balances first, when we paid off the lower balances it freed up more cash in that it was one less minimum payment we'd have to deal with.
3. We applied freed up cash towards the higher interest rate balances. When we first started this blog, I was paying off a debt that was at 20.99%. As soon as a few of the lower balance cards were paid off, the extra cash went towards battling the debts with monster interest rates.
4. We took advantage of great credit card deals. I managed to lower the debt of my credit cards to 0% and 2.99%; Her got all of her debt on a card with 0% interest as long as we made 2 purchases a month on it.
5. Since we started this blog, we increased our income by at least 42%. In these two years, I received three pay raises; Her received two. We also have some income from this site. The extra cash definitely made sleeping at night easier.
6. We have an emergency fund. Yeah, it's not clearly defined, but we know that if there is an emergency that arises we can take money from our savings. After the wedding, we plan on having 6 months of expenses remaining in our savings accounts.
7. Once we paid off the credit cards, we took advantage of another offer to put $11,000 on a card at 1.9%. We put exactly that amount of student loan on there, saving us a lot of cash in the future.
8. We have not incurred any new consumer debt. We vowed to never pay another penny in credit card interest and now take advantage of rewards programs.
9. We are a one car family. Shortly after moving to Chicago I sold my car; it was costing me a lot of money to have it in the city. With the car we do have, we minimize our expenses.
10. We continue to look for ways to increase our income, use leverage and arbitrage to get better interest rates, and make solid decent financial decisions.
For us, it was these actions that showed us the light at the end of the debt tunnel.
Are you under a mountain of debt? How have you managed it? How do you let it not keep you up at night?
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I think you have to be kind of blase about it so it doesn't crush you. Not that you stop caring or looking for ways to snowball towards it, but you also can't be thinking about it all the time.
We've gotten rid of our credit card debt so we just have car and student loans left. We're snowballing the car and we're in a grace period still for the loans so we're holding off on them until Micah's employed. Or until he's out of school and we can get started on them.
We're always really good at getting rid of the credit card debt month over month, but the student loans are still cooking on our end - I don't mind then as much though because it only runs us $300 per month and I can write them off with taxes. Yes, it'd be nice to put that $300 elsewhere, but it's not worth dumping the 30k immediately to get rid of them yet... Nice blog, first time visitor...
hank
MVP | Dec 20, 2007
Just curious, how much do you put toward your student loan debt each month at this point? You guys rocked the cc debt, and it's awesome that you've got a solid emergency fund in place. But are you as dedicated to paying off the other debt, or are you secure with it being at a somewhat low rate?
Him | Dec 20, 2007 | Reply to MVP
We now put 27% of our monthly take home pay towards the student loan debt. It is a little demoralizing that even though we're putting that much towards it, not much of the principle has decreased. We're definitely gunning to pay off the higher rate loans quickly; the other ones we're not so worried about at this stage. Once the high interest ones are paid off we'll refocus.
Jerry | Dec 20, 2007
Great job on crushing the CC debt! My wife and I are facing a similar (even steeper) student loan mountain, thanks to grad school (x2) and medical school (ouch). Still, we feel that if we are willing to live frugally we will have some insurance that we can dig ourselves out... someday. You do have to think that way, or else it would lead you to sheer and utter insanity!
Jerry
CT Mom | Dec 22, 2007
A year ago, we had over $20K in cc debt, due to some bad decisions and also the need to get some tutoring for our older daughter ($6K - ouch!), plus 2 car loans, a business loan and 2 mortgages. A year later, due to a bonus and some hard work, we've paid the cc debt off. Now, we have $12K on a 0% card to refinance a 7.99% business loan. We put $500 - $750/mo on it; once my dh's truck is paid off in February (6 mos early) we'll put that money towards the cc debt. We also put $500 - $1000 a month in savings in addition to retirement, and next spring we're both expecting large bonuses. Bottom line is, by this time next year, we'll be out of cc debt and one car paid off, plus putting extra to pay off the 2nd car and a decent savings. It feels so good to be ahead of the game for a change, rather than trying to figure out how to consolidate the debt so we can free up cash. Our house will be paid off in 10 years, in time for college tuitions and getting ready for retirement. And most importantly, our marriage has survived! Happy Holidays to all!
Joe | Dec 26, 2007
I think people need to use prosper.com. Having personally used it to lower my debt by almost 10 percentage points, I'm shocked that more people are not using it. Give it a try - it worked miracles for me...
I agree with Mrs Micah, you have to be blase to a point to save your sanity. You'll get there. Um, does anyone know anything about the rock in the photo? It looks like the guy just happened on it while out walking. That's all kinds of fab.
Him | Dec 26, 2007 | Reply to guinness416
For info on the boulder, I'd suggest leaving a comment for the guy on the flickr page where I grabbed it from.
The Digerati Life | Dec 19, 2007
Firstly, thanks for mentioning my post! Since the writing of that article, I found another blog by someone who discusses their very large debt load and I have included it in my writeup. The blog is called "Banker Girl" and I've updated my post to reflect this new find! Go check out her site at bankergirl dot com.
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